NONDISCRIMINATION RULES
NOW APPLY TO INSURED PLANS
ARE YOU READY?
Effective for plan years beginning on or after September 23, 2010 (i.e.
January 1, 2011 for calendar year plans) certain nondiscrimination rules will
apply to insured medical plans that are not "grandfathered" under
the Affordable Care Act. Previously similar
rules applied only to self-insured plans.
This Email Alert will briefly summarize the nondiscrimination rules
and the consequences of failing these rules, as well as how a plan loses its
grandfathered status. What Are the Nondiscrimination Rules?
Broadly speaking, the nondiscrimination rules require that
medical plans not discriminate in favor of "highly compensated individuals" ("HCI")
both as to eligibility to participate
and to the benefits provided under
the plan. To illustrate, a plan may be discriminating as
to eligibility if it excludes certain classes of employees from
participating. Similarly, a plan may be
discriminating as to benefits if it allows the HCI employees to enter
the plan at an earlier date than all other employees, it provides more generous
coverage for HCIs, or it imposes different employee contribution levels. It is not entirely clear how these rules will
apply to insured plans and the Internal Revenue Service, in Notice 2010-63
(issued on September 20, 2010), has requested public comments on what
additional guidance would be helpful.What is clear are the consequences for failing the nondiscrimination
rules. For a discriminatory insured plan,
the employer sponsoring the plan will be subject to an excise tax or civil
penalty in the amount of $100 per day per participant (i.e. up to $36,500 per year
per participant), plus possible civil action by U.S. Department of Labor. In contrast, the consequence for failing the
nondiscrimination rules for a self-insured plan is that the HCI will pay tax on
reimbursements received under the plan; the exact taxable amount will depend
upon whether the violation was as to eligibility or benefits received. What Plans Are Considered
Grandfathered?
A "grandfathered" health plan is a fully-insured or
self-funded health plan with at least one enrollee as of March 23, 2010. In order for a plan to keep its grandfathered
status, the plan must continuously enroll someone in coverage from March 23,
2010 forward. The regulations issued to date make clear that
grandfathered status applies separately to each benefit package available under
a health plan. For example, if a health
plan offers an HMO, PPO and high deductible plan and the HMO loses its
grandfathered status, the other two coverage options will not be affected.
While future regulations may clarify or alter the below,
based on the regulations issued to date, a "grandfathered" health plan will
lose this status, if any of the following changes occur:
Entering into a new policy, certificate or contract of insurance (excluding changes
to a third- party administrator by a self-insured plan);
Elimination of all or substantially all benefits to diagnose or treat a particular
condition, including the elimination of benefits for any necessary element
to diagnose or treat a condition;
Increase in an individual's percentage coinsurance requirement;
Increase in fixed-dollar cost-sharing (such as deductibles) in excess of the rate
of medical inflation since March 23, 2010, plus 15 percentage points;
Increase in co-payments in excess of the greater of (i) the rate of medical inflation,
plus 15 percentage points, or (ii) $5.00, as adjusted for medical
inflation;
Decrease in the employer contribution rate for any tier of coverage by more than 5
percent of its contribution rate in effect on March 23, 2010 (cost of
coverage based on COBRA valuation rules); and
Certain changes to lifetime and annual benefit limits that would be adverse to
plan participants.
What Should Employers Do?
As an initial step, employers should determine if their
health plans would be considered grandfathered.
Given the limitations on design changes, it is expected that most
employers will forgo grandfathered status.
If an insured plan is no longer grandfathered, employers should
carefully review their plans to determine the extent to which the nondiscrimination
rules could apply. Additionally,
employers should carefully review employment agreements and other documents
providing for supplemental health benefits for executives (e.g.
post-termination) as these arrangements have often been provided through
insurance and could now be subject to the nondiscrimination rules. Finally, employers should familiarize
themselves with, and prepare to perform, the applicable nondiscrimination
tests. Nukk-Freeman & Cerra is available to assist employers with
each of the recommended steps noted above.
Please feel free to contact
Liza Hecht (lhecht@nfclegal.com), Christine Gottesman (cgottesman@nfclegal.com) or the
Nukk-Freeman & Cerra attorney with whom you work to discuss this important
compliance matter, or if you have any questions regarding the Affordable Care
Act.
Any tax advice included in this written or electronic
communication was not intended or written to be used, and it cannot be used by
the taxpayer, for the purpose of avoiding any penalties that may be imposed on
the taxpayer by any governmental taxing authority or agency.
|
