Affordable Care Act: Non-discrimination Provisions Applicable to Insured Group Health Plans
The
days of being able to carve out a certain employee population group to
provide richer benefits are numbered and in fact will carry some heavy
fines and penalties for companies who engage in such practices. The
additon of Section 105(h) ammends the internal revenue code which
provided guidance to self-insured health plans to prohibit
discrimination treatment to highly compensated employees in the past to
now include all fully insured plans as well. A summary of the rules
are as follows:
Among the many health insurance and benefits law changes made by the Patient Protection and
Affordable
Care Act (PPACA, P.L. 111-148) is a new requirement for fully insured
health/medical plans to comply with nondiscrimination benefit rules that
previously only applied to self-funded employer plans.Effective for
plan years beginning on or after September 23, 2010, fully insured group
health plans now must comply with the nondiscrimination requirements
for self-funded plans, including rules that the plan does not
discriminate in favor of highly compensated individuals as to
eligibility to participate. In addition, the benefits provided under the
plan may not discriminate in favor of participants who are highly
compensated individuals. This does NOT apply to “grandfathered” health
plans.
Though
compliance regulations are expected from the Department of Labor, IRS
and other federal agencies, rules similar to those for self-funded plans
are expected to be applied to insured group health plans, including
rules for eligibility, benefits, and controlled groups. Unlike
discriminatory self-insured plans, for which highly compensated
employees get taxed, the PPACA does not tax highly compensated employees
covered by discriminatory fully-insured plans. It appears likely that
the tax consequence of any violations would be similar to the HIPAA
group health plan $100/day excise tax, not taxation of benefits. The
PPACA, Sec. 1001 as amended by Sec. 10101 (new Public Health Service Act
Sec. 2716) provides that a group health plan shall satisfy the
requirements of section 105(h)(2) of the Internal Revenue Code (relating
to prohibition on discrimination in favor of highly compensated
individuals). Rules similar to the rules contained in paragraphs (3),
(4), and (8) of section 105(h) of the Code shall apply, and the term
“highly compensated individual” has the meaning given such term by
section 105(h)(5). Non-Discrimination Rules and IRC Sec. 105(h) for
Self-Insured Plans Internal Revenue Code (IRC) Sec. 105 and Sec. 106
permit employers to offer certain health benefits on a tax-free basis.
However, these rules can be different for highly compensated employees
(HCEs) if the health plan is self-insured and eligibility for benefits
or benefits payable to the HCE is discriminatory. For purposes of IRC
Sec. 105(h), an HCE (determined in the plan year for which the
reimbursement was made) is:
• One of the five highest-paid officers;
• A shareholder owning (actually or constructively) more than 10 percent of the company’s stock;
• Among the highest paid 25 percent of all employees.
These
requirements are not mutually exclusive. The five highest paid officers
may also be among the highest paid 25% of all employees. However, if
one of the top five officers is not in that pay range, that officer
still needs to be included in the highly compensated individual
category. IRC Sec. 105(h) applies to all employment-based health plans
(medical, dental, and vision) in which the risk has not been shifted to
an insurance company, including administrative services only (ASO) and
cost-plus arrangements, possibly minimum premium plans, and medical
reimbursement plans provided through an IRC Sec. 125 plan (collectively
referred to as “self-insured health plans”). 1 Sec. 1001 of the PPACA as
amended by Sec. 10101; new Sec. 2716 of the Public Health Service Act If such a self-insured health plan discriminates in favor of HCEs, the
affected HCEs must include some or all of the value of the benefits
received in their taxable income. This imputed income is subject to
federal income taxes (but not to Social Security or Medicare taxes), and
state tax liability if such liability is calculated pursuant to federal
rules.
Eligibility
Test—For a plan to be considered nondiscriminatory with respect to
eligibility to participate, it must pass one of the three coverage
tests:
• Seventy percent of all employees benefit under the plan;
• The plan benefits 80 percent of eligible employees and 70 percent of all employees are eligible;
• The plan benefits a nondiscriminatory classification of employees.
The
IRS regulations indicate that the plan must provide the same benefits
for both highly compensated and non-highly compensated employees. If a
plan provides different benefits to different groups of employees (e.g.,
differences in waiting periods), each benefit structure is treated as a
separate plan for purposes of the eligibility test described above.
A
self-insured health plan discriminates as to benefits unless all
benefits provided for participants who are HCEs are also provided to all
other participants. All benefits for dependents of HCEs must also be
available on the same basis for the dependents of all other employees.
The self-insured health plan will also be considered discriminatory as
to benefits if it covers HCEs and the type or amount of benefits subject
to reimbursement is offered in proportion to compensation. The
nondiscrimination test is applied to the benefits subject to
reimbursement under the medical program and not to the actual payments
or claims made. Further, a self-insured plan is not considered
discriminatory just because HCEs utilize benefits to a greater extent
than other participants.
If
there are optional benefits available (e.g., vision and dental), these
benefits will also be considered nondiscriminatory if all eligible
employees can elect any of the benefits and either there is no required
premium by the employee or the premium charged is the same for all
employees.
Certain employees may be excluded from the eligibility tests, including:
• Those who have less than three years of service at the beginning of the plan year;
• Those who are younger than age 25 at the beginning of the plan year;
• Part-time or seasonal employees;
• Those who are covered under a collective bargaining agreement;
• Nonresident aliens who receive no income from a U.S. source.
In addition to the eligibility rules, all benefits provided to highly compensated employees must be
provided to all other participants.
Since
the discrimination rules for self-funded plans were issued in 1980,
employers have adopted fully insured plans to provide executives and key
employees with tax-free reimbursements for out-of-pocket medical,
dental, and vision expenses. The new PPACA prohibitions against
discrimination in fully insured plans will compel employers to consider
other methods in compensating higher earning employees.
Year-End Health Plan Renewals: Are You Ready?
It's hard to be in the company of any small business owner today and not
have the discussion of health insurance crop up. Much of that
discussion seems to be centered around a high level view of the Patient
Protection and Affordability Care Act, enacted into law earlier this
year. Many of those major provisions went into effect on September 23rd
and missed the radar screen of many small business owners in the Lehigh
Valley. Many of those provisions are part of the consumer protections
that the President proudly touts as its major accomplishments. At the
pinnacle of the problem, in my view, is that so many employers are just
putting their head in the sand and taking the posture that we'll wait
until 2014 when the full breadth of this legislation takes effect. That
will be too late!
Many insurance carriers estimate that the direct cost of this initial
compliance with PPACA with be around 3 to 4 percent increase in premiums
- that's aside from any natural increase that will occur from medical
claims throughout the year. After many discussions with average business
owners about what there level of knowledge is regarding this huge
legislation, the response is surprisingly very little. Employers don't
have the luxury of just waiting until 2014 to see how this will impact
them. They need to act now in light of all the penalties and new taxes
that will result for non-compliance. My strong recommendation is to
make sure that you're with a health broker that you're confident in
there ability to help you wade through the maze of complexity. The role
of a trusted health insurance advisor will be more important than
ever. Here are some practical tips to help you better prepare for your
health insurance renewal:
- Give yourself plenty of time before your actual effective date. Don't let your broker dictate that pace. Your insurance carrier may
take a little longer this year to get out renewal rates because they've
been busy complying with PPACA but it's still wise to start discussion
about potential tweaks to your plan or identifying other carriers that
might suite your needs better.
- Your plans deductible is the only real way to make significant
impact on your monthly premiums so start discussions about what would be
palatable for your employees.
- With the prospect of raising deductibles, discuss with your broker
what suite of supplemental/voluntary benefits would best fill the gaps
left by larger deductibles.
- Start looking for a broker and an insurance carrier that has a
robust health and wellness component to their plans. The unhealthy
lifestyles of your employees will continue to be the largest
contributing factor to escalating health premiums so you need to take a
proactive approach to stem that tide.
- Discuss implementing a defined contribution plan versus a defined
benefit plan. So, for example, the single rate on your plan is $250 per
month. If you establish a policy going forward that you will hold that
contribution steady at $250, your cost becomes a fixed instead of a
variable. Now, having said that, you do have to be careful of one
possible pitfall. Most group health plans require the employer to pay a
minimum of 60% and up towards the single rate. So, you have to monitor
going forward that you don't violate that provision.
- Depending on the size of your group, consider researching
self-insured plans for both medical and dental. Many of the new health
reform compliance provisions don't apply to self-insured plans.
I trust that this information has been helpful. If
you only see your broker once a year around renewal time and there's no
strategic planning discussions about the future and direction of your
companies employee benefits then maybe it's time to look into someone
else. I'd be glad to speak with you by contacting me at bknauss@employeemployersolutions.com visit my website at www.employeemployersolutions.com or call my office at 484-892-3314. Thanks
Promoting Health & Wellness in Health Care Reform
I must admit, there's not a whole lot in the over 2,000 page piece of
health reform legislation that I do like - except for one area. It
happens to be in the area of promoting health and wellness. There is a
provision in this bill that allows for grants to be doled out to small
businesses who set-up and encourage health and wellness programs at the
worksite. The thing I like most about grants versus loans is they don't
have to be paid back.
I firmly believe that, if we do nothing else while implementing this
huge new entitlement program, we must get a handle on healthy lifestyle
choices for our employees. Just by way of example, obesity health care
related costs in this country have reached a staggering 146 billion
dollars a year. If we make health insurance available and affordable
for all Americans and don't do anything to address controllable health
issues - we're just throwing good money after bad. This bill allows for
grants to start flowing in 2011 and continuing for 5 years. The
specifics haven't been revealed yet but there's another dimension to
this provision that is well worth mentioning. For employers who
implement health and wellness programs and for the employees who
participate in them - there is a percentage reduction in the amount of
premium paid in the form of reward or incentive.
Never before, that I can remember, is there a process that says if you
do this you receive a discount on your premiums. We don't yet know what
the benchmarks or criteria will be but I am very encouraged about the
possibilities of creating healthier lifestyle choices for American
workers. We will all benefit from that - not just the participants in
the program. Here are some of the highlights of this initiative:
- Provide grants for up to five years to small employers that
establish wellness programs. (Funds appropriated for five years
beginning in fiscal year 2011)
- Provide technical assistance and other resources to
evaluate employer-based wellness programs. Conduct a national worksite
health policies and programs survey to assess employer-based health
policies and programs. (Conduct study within two years following
enactment)
- Permit employers to offer employees rewards—in the form of
premium discounts, waivers of cost sharing requirements, or benefits
that would otherwise not be provided—of up to 30% of the cost of
coverage for participating in a wellness program and meeting certain
health-related standards. Employers must offer an alternative standard
for individuals for whom it is unreasonably difficult or inadvisable to
meet the standard. The reward limit may be increased to 50% of the cost
of coverage if deemed appropriate. (Effective January 1, 2014) Establish
10-state pilot programs by July 2014 to permit participating states to
apply similar rewards for participating in wellness programs in the
individual market and expand demonstrations in 2017 if effective.
Require a report on the effectiveness and impact of wellness programs.
(Report due three years following enactment)
If you would like to take advantage of implementing a health and wellness initiative at your company then email me at bknauss@employeemployersolutions.com or visit my website at www.employeemployersolutions.com
