IRS Pushes Back PPACA Nondiscrimination Compliance Date

Last week, the Internal Revenue Service (IRS) issued Notice 2011-1, which delays until at least 2012 the effective date of nondiscrimination rules made applicable to fully insured non-grandfathered health plans under the Patient Protection and Affordable Care Act (PPACA). On the same day, the Departments of Health and Human Services, Labor and Treasury also released new guidance on the PPACA and the Mental Health Parity and Addiction Equity Act of 2008 (MHPAEA). The most important features of these releases are summarized below.

IRS Notice 2011-1 essentially provides an enforcement safe harbor in that there will be no enforcement of the new nondiscrimination rules for non-grandfathered insured plans until the first plan year after regulations are issued. Since guidance will not be issued prior to 2011, the earliest these provisions could become effective would be January 1, 2012. This also means that employers will not be required to file IRS Form 8928 with respect to excise taxes prior to the date required for compliance with the new nondiscrimination rules.

Note that the IRC’s nondiscrimination rules under 105(h) will continue to apply to self-insured group health plans including grandfathered plans.  The regulatory relief announced in the Notice only affects insured group health plans.

The issuance of Notice 2011-1 means that for health plan provisions, as well as provisions touching on healthcare in employment contracts and separation agreements that extend into 2011, employers will not have to worry about the new nondiscrimination rules. This does not, however, impact plans, employment contracts and separation agreements with insured plan subsidies extending into 2012, nor does this Notice provide any relief from current nondiscrimination rules under self-insured medical benefit plans

Last week, the DOL and HHS also issued Part V of FAQs regarding implementation of the PPACA. The FAQs provide the following guidance:

  • A plan may charge a higher copay for a service provided in an in-network hospital than for the same service provided in an in-network ambulatory center;
  • A plan may make distinctions in coverage based on age without violating the rules on providing dependent coverage to age 26 as long as the distinction applies to all coverage under the plan;
  • In certain cases, an insurer may screen applicants for eligibility for alternative coverage options before offering a child-only policy;
  • Grandfathered health plans that determine cost-sharing based on a percentage-of-compensation formula will not lose grandfathered status if the formula is unchanged even though this may lead to cost increases in excess of the cost increase thresholds in the regulations; and
  • In line with other agency extensions of compliance deadlines due to a lack of regulatory guidance, the FAQs addressed two areas where employers will be provided with some relief. First, the Employee Benefits Security Administration (EBSA) has responsibility for rulemaking for a new requirement that large employers automatically enroll new full-time employees in the employer’s health plan. Until EBSA issues regulations under this new section of the Fair Labor Standards Act, however, employers will not be required to comply with this rule. Second, group health plans will not be required to comply with the 60-day notice requirement for material plan modifications under section 2715 of the Public Health Service Act until the federal agencies provide standards on benefits and coverage explanations.

Health Care Reform Nondiscrimination Rules

The Patient Protection and Affordable Care Act (PPACA) requires non-grandfathered fully-insured plans to follow many of the same nondiscrimination rules that, up until now, have applied only to self-funded plans. Because grandfathered plans are exempt from these nondiscrimination rules, existing plans that are designed to favor HCIs may want to make the effort to retain grandfathered status. If grandfathered status is lost, discriminatory plans will have to be amended or face potential excise tax penalties.

Specifically, PPACA provides that non-grandfathered fully-insured plans must satisfy the requirements of Internal Revenue Code Section 105(h)(2), which prohibit discrimination in favor of highly compensated individuals. To satisfy the nondiscrimination rules, these fully-insured plans must pass two separate nondiscrimination tests: the eligibility test and the benefits test.

A highly-compensated individual for purposes of these rules is an individual who is:

  • One of the five highest paid officers;
    • A shareholder who owns more than 10 percent in value of the stock of the employer; or
    • One of the highest paid 25 percent of all employees (other than an employee excludable as described below).

The rules are effective for these fully-insured plans for plan years beginning on or after September 23, 2010.

Eligibility Test

To pass the eligibility test, a plan must benefit one of the following:

  • At least 70 percent of all employees;
  • At least 80 percent of all employees who are eligible to benefit under the plan (if at least 70 percent of all employees are eligible to participate in the plan); or
  • A nondiscriminatory classification of employees.

In running the eligibility test, an employer may exclude certain employees from consideration. These are employees who:

  • Have not completed three years of service;
  • Have not attained age 25;
  • Are part-time or seasonal;
  • Are collectively-bargained; or
  • Are non-resident aliens who do not receive U.S. earned income.

In order to have a nondiscriminatory classification of employees, there must be a bona fide business reason for the classification and a sufficient ratio of non-HCIs must benefit. Examples of reasonable classifications generally include specified job categories, compensation categories (such as hourly or salaried), and geographic location.

Benefits Test

To pass the benefits test, all benefits provided to the HCIs who participate in the plan must be provided to all other participants as well. Also, all the benefits available for the dependents of HCIs must be available on the same basis for dependents of all other participants. The regulations and IRS guidance indicate that the level of employer contributions should not discriminate in favor of HCIs.

A plan may have a maximum reimbursement limit for any single benefit or combination of benefits, but the maximum limit attributable to employer contributions must be uniform for all participants and their dependents. The limit may not be modified due to a participant’s age or years of service.

There are two components to the benefits test. A plan must not:

  • discriminate on its face in providing benefits in favor of HCIs; OR
  • discriminate in favor of HCIs in actual operation (whether a plan discriminates in operation is determined on a facts and circumstances basis).

A plan will discriminate on its face if the plan document contains discriminatory provisions that favor HCIs. A plan could discriminate in operation if it is amended or terminated so that the duration of the plan (or benefit) favors HCIs, or if the plan approves certain claims for medical expenses for HCIs but denies them for non-HCIs without a permissible reason for treating them differently. However, a plan will not be considered discriminatory just because HCIs participating in the plan use a broad range of plan benefits to a greater extent than do other employees participating in the plan.

As with many areas of health care reform, additional information or regulations regarding these nondiscrimination rules would be helpful. Cook, Hall & Hyde, Inc. will continue to monitor developments in this area and will keep you informed.

This Cook Hall & Hyde, Inc. Legislative Brief is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.

How can employers make the best decision on grandfathering their health plan?

The interim regulations on grandfathered plans under the Patient Protection and Affordable Care Act (PPACA) are designed to allow employers to keep their current plans and at the same time ensure that employees are protected from significant loss of benefits or increased costs. Federal guidance, effective Sept. 23, 2010, attempts to lay down the rules for employers who want to retain grandfathered status.

These restrictions pose a serious challenge to employers who wish to keep their plans under the grandfathering clause. With calendar-year plan renewal season in full swing, many employers are anxious to make decisions. However, various factors — especially a company’s location — make a one-size-fits-all solution for employers unrealistic and impracticable.

This white paper addresses advantages and disadvantages of grandfathered status as a variety of experts share insight about key employer concerns, financial options and seeking guidance. As a UBA Member Firm we are please to offer you this white paper on, How Employers Can Make the Best Decision on Grandfathering Their Health theTheir Health Plans

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