Common Questions under the Health Care Reform Laws – Part 2
November 26, 2010
If an insured health plan losses grandfathered status, it must now pass the nondiscrimination tests under Code Section 105(h) for plan years beginning after September 23, 2010. What are these tests?
Non-grandfathered insured health plans must pass two tests under Code Section 105(h), the Eligibility Test and the Benefits Test. The purpose behind these tests is to prohibit discrimination in favor of the prohibited group, highly compensated individuals or HCIs,
An individual is an HCI for these purposes if he or she is (a) one of the five highest-paid officers; (b) a more-than-10% shareholder; or (c) among the highest-paid 25% of all employees (other than excludable employees who are not participants).
Health Plans may not discriminate in favor of HCIs as to eligibility to participate-i.e., an employer must cover more than just the top earning employees to the plan. Certain employees may be excluded-e.g., those who have not completed three years of service; have not attained age 25; are part-time or seasonal, are collectively bargained, or are nonresident aliens who receive no U.S. source earned income. Permitted exclusions must be applied uniformly, and not just for testing.
To satisfy eligibility criteria, a plan must benefit one of the following: (1) 70% or more of all non-excludable employees; (2) 80% or more of all employees who are eligible to benefit, if 70% or more of all non-excludable employees are eligible to participate under the plan; or (3) employees qualifying under a classification that does not discriminate in favor of HCIs (the nondiscriminatory classification test).
Exactly what “to benefit” means in a health plan is not clear. Does it mean that someone is merely eligible to elect health plan coverage, or does it mean that the person has actually elected such coverage? Many employers take the approach that being eligible to elect health plan coverage is enough. This interpretation makes it easier to pass the test (e.g., if more than 70% of all employees are eligible, but only 25% of employees elect health plan coverage, the test would be passed). However, the more cautious approach is that in order to benefit, an employee must have elected health plan coverage or have been provided free health plan coverage by plan design.
Under the benefits test, the benefits provided to HCIs under the plan must be provided to all other participants. Required contributions should be identical for each benefit level. The maximum benefit level that can be elected cannot be based on percent of compensation, age, or years of service. The type of benefits reimbursable must be identical for all participants. The health plan must not have different waiting periods.
Penalties for Noncompliance
The consequences of an insured plan’s failure to comply with the nondiscrimination rules are different from the consequences for a plan that is self-insured. An insured plan that fails to comply with the nondiscrimination rules is subject to a civil action to compel it to provide nondiscriminatory benefits and, for each day that the plan fails to comply, the plan or plan sponsor is subject to excise taxes or civil money penalties of $100 per day per individual discriminated against. In contrast, if a self-insured plan fails to comply with the rules, then amounts paid to HCIs that are considered to be “excess reimbursements” will be taxable. This difference in penalties exists because the Code provision under which HCIs are taxed was not made applicable to insured plans by the health care reform laws.