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One component of the Affordable Care Act (ACA) that has not been receiving a lot of attention is the new nondiscrimination requirement applicable to insured group health plans. At the end of the day, however, this requirement could affect the structure of employer-provided coverage more than any other ACA rule.
By way of background, self-insured medical plans (including medical expense reimbursement accounts of the type often maintained by small employers) have long been subject to rules prohibiting discrimination in favor of highly compensated employees (HCEs) under Section 105(h) of the Internal Revenue Code. Prior to the ACA, however, no such requirement applied to insured group health plans. Therefore, an employer was free to provide one level of coverage under an insured plan to executives, and no coverage or a lesser level of coverage to “rank-and-file” employees.
The ACA includes a provision which essentially extends the nondiscrimination requirement to insured plans. Therefore, insured plans will no longer be permitted to discriminate in favor of HCEs with regard to eligibility to participate or in terms of benefits provided. For this purpose, an HCE is any shareholder who owns more than 10% of the company, or is among the five highest-paid employees or the top 25% of employees based on compensation.
Although the new nondiscrimination rules applicable to insured plans will generally be similar to those applicable to self-insured plans, the consequences of a compliance failure are drastically different. In the case of a self-insured plan failure, the only penalty is taxation of the value of the coverage to the HCE. In the case of an insured plan, the employer will be subject to a penalty based on the number of employees against whom the discrimination occurs. Specifically, the penalty is $100 per day per Non-HCE who is not eligible for the same benefits, up to maximum of $500,000 per year. For example, if an employer with 50 Non-HCEs is out of compliance for a period of just 100 days, the maximum penalty of $500,000 would be reached. (50 x $100 x 100 = $500,000.)
Under the ACA, the new nondiscrimination requirement was to be effective January 1, 2011, but recognizing that employers had no guidance on how to apply the rules, the IRS issued a notice in December 2010 indicating that the rules will not be enforced until after regulations have been issued and employers have had some period of time to bring their plans into compliance. To date, there has been little indication from Washington as to when this guidance might be issued, as the regulatory focus appears to be on other ACA concerns. Most likely, the new requirement will not be enforced before 2015 at the earliest, and could in fact end up being delayed for several more years.
The delayed effective date does not mean that employers should simply ignore the nondiscrimination requirement at this time. Prior to the issuance of regulations, the following are a few steps that employers should be taking in anticipation of the new requirement:
When a company is recruiting an executive (or any individual who could meet the HCE criteria), the company often makes contractual promises concerning the benefits to be provided, including insured health plan coverage. It is not unusual, for example, to promise family coverage to an executive even though the company pays only for single coverage for employees in general. In light of pending nondiscrimination requirements, employers should make such contractual promises contingent on their ability to do so without running afoul of ACA rules.
Employers often craft severance agreements to provide that the company will pay all or a portion of the health care premiums for a retiring or separating executive (either directly to the insurer or as reimbursements for COBRA). As in the case of new employees, contractual promises of this nature should be made subject to the company’s ability to continue to make these payments without incurring ACA discrimination penalties. While the regulations might grandfather existing obligations, the extent of any such protections and their applicability (e.g., obligations in place when ACA was passed versus obligations in place when the regulations are issued) remain unknown at this time.
An employer that currently provides disparate coverage or benefit levels depending on employee classes should begin to consider the effects the ACA nondiscrimination requirement might have. For example, if a company does not intend to reduce the level of benefits provided to HCEs, the cost of providing similar benefits to Non-HCEs should be projected. In many cases, employers may need to “go back to the drawing board” in designing a plan that makes sense for the company as a whole.
As soon as the nondiscrimination regulations are issued, Houston Harbaugh will provide further information and will be available to advise employers with regard to their specific circumstances.
