Under Section 10101(d) of the Patient Protection and Affordable Care Act (PPACA), which became law in March 2010, insured group health plans will soon be subject to nondiscrimination rules that are similar to those that have been applicable to self-insured plans for the past 30 years. In other words, insured plans will be prohibited from discriminating in favor of highly compensated individuals. Such nondiscrimination rules will apply to calendar year plans beginning January 1, 2011.

The application of new nondiscrimination rules to insured health plans will likely affect certain welfare benefits that employers often provide to executives and other highly compensated individuals. Under the current rules, employers may adopt fully-insured executive-level welfare plans that offer medical, dental and vision benefits that are over and above the coverage provided to rank and file employees. Employers also sometimes purchase insurance policies to satisfy obligations associated with post-termination or retirement health care benefits provided to certain former executives. However, when insured health plans become subject to nondiscrimination requirements, providing such benefits to only a select group of employees will likely result in adverse tax consequences to both the executive and the employer.

Because the PPACA is new, it is currently unclear how the new nondiscrimination rules will be enforced and what consequences will apply if discrimination exists. However, given that the law may begin to be enforced in the near future, employers should examine their insured plans for evidence of discrimination, and determine what must be done to avoid continuation of any discriminatory plans into 2011.

The Text of the PPACA can be found here.