Insured Plan Nondiscrimination
Fully-insured, non-grandfathered health plans may not discriminate in favor of highly compensated individuals. (Self-funded health plans are subject to similar nondiscrimination rules, whether grandfathered or non-grandfathered.) This provision may require plan sponsors of insured plans to perform annual nondiscrimination testing.
Health Care Reform imposes this requirement for plan years beginning on or after September 23, 2010. However, the IRS delayed enforcement of this provision until after regulations are published.
Note: The nondiscrimination rules only apply to certain types of health plans, such as major medical insurance. They do not apply to HIPAA excepted benefits, such as disability, cancer, hospital indemnity, or accident insurance. Click here for more information about the types of benefits that are exempt from the Health Care Reform plan design mandates.
Insured Plan Nondiscrimination Hot Topics & FAQs
- Is the new nondiscrimination rule the same as the one that was in effect for self-funded plans prior to enactment of Health Care Reform?
Answer: The rule for insured plans is expected to be similar but is not the same as the rule for self-funded plans. Self-funded health plans are subject to the nondiscrimination rule in Internal Revenue Code (Code) section 105(h). Health Care Reform directs the federal agencies such as the Department of Treasury to adopt a rule similar to Code section 105(h) that will apply to fully-insured plans. Therefore, the rules are likely to be similar but not exactly the same.
One key difference is the penalty. If a self-funded plan is found to be discriminatory, the consequence is that benefits will be treated as income for the impacted highly compensated individuals. Under the new provision applicable to insured plans, the penalty is $100 per non-highly compensated person per day that the plan does not comply with the rule.
- Does a grandfathered executive health plan violate the nondiscrimination requirements?
Answer: No, so long as a plan that was providing benefits on March 23, 2010 maintains its grandfathered status, it is not subject to the new nondiscrimination rules. An executive health plan that is designed to benefit only highly compensated individuals is very likely to run afoul of the nondiscrimination requirements unless it maintains grandfathered status. Therefore, the employer sponsoring such a plan may want to take care not to make changes that would jeopardize grandfathered status.
American Fidelity Assurance Company does not provide tax or legal advice.