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Is My Health Plan Discriminatory? Insured Plans and PPACA

Posted in Plan Administration, Welfare Plans

With all of the recent talk about calculating the number of employees and determining whether they are subject to PPACA compliance, employers are more and more asking whether they have to worry about discrimination in their health plans.  Under PPACA, IRS Code Section 105(h) will apply to insured health plans (like it always has for self-funded plans), so let’s take a look at what that means.

First, the IRS has issued two notices, 2010-63 and 2011-1, that address the timing of non-discrimination rules.  The general rule is that compliance with this non-discrimination feature will not have to take place until AFTER regulations have been issued (which has not happened) and not until AFTER the beginning of a plan year AFTER the regulations are issued.  So while January 1, 2014 is generally accepted as the date to expect this to go into effect, until there are regulations written, we can’t say for certain when employers will have to comply or how they will have to revise their plans to comply.

Second, some practical questions:

  1. Can I offer different plans to different classes of employees?  Generally, yes.  Under the current state of the law, you can continue to offer (or not offer) insured coverages to different class of employees.  And you can make different classes of employees make different levels of contribution so long as you are dealing with an insured plan. 
  2. What will "discrimination" mean? The assumption is that the rules (when written) will require that a plan cannot favor highly compensated employees.  It has to (1) benefit 70% or more of all employees, (2) benefit 80 percent or more of all employees who are eligible for benefits, or (3) benefit a group of employees set yup by the employer as a class that are not highly compensated employees. 
  3. What is a highly-compensated employee?  One of the 5 highest paid officers, a shareholder owning more than 10% of the stock or someone amongst the highest paid 25% of all employees.  For most employers, look at the top 25% of your payroll and chances are, these will be "HCEs" for testing purposes.
  4. Are there penalties for non-compliance?  You bet.  $100 a day for every day an individual is discriminated against, which can get expensive if you discriminate against a large class of employees.  The cap is $500,000 which is a fairly hefty penalty.
  5. What should I do now?  The short answer is nothing because we don’t have rules.  But the practical answer is to look at your population and see who is eligible and who is not and then self-test to see if you would pass the current non-discrimination rules.  If you fail, chances are you will fail once the rules are written.  So plan ahead.

In a prior entry, I suggested that employers should keep doing what they are doing until they tell us otherwise.  I think that is still the case, but with the caveat that you should at least know whether or not what you are doing now is going to create a potential problem.  So prepare for a change, but before changing to comply with anything, check with your attorney at Fox Rothschild.