Common Questions under the Health Care Reform Laws – Part 5

Larry Grudzien

December 17, 2010

If nongrandathered insured health plan fails the nondiscrimination tests under Code Section 105(h), it will subject to penalties.  What are penalties? Will “small employers” be exempt from any of the penalties?

A nongrandfathered insured health plan that fails to comply with Code Section 105(h) will be subject to an excise tax penalty of $100 per individual discriminated against for each day the plan does not comply. The penalty is capped at $500,000. Plan sponsors are required toself-report the excise tax on Form 8928. A nongrandfathered insured health plan also  be subject to a civil action to compel it to provide nondiscriminatory benefits.

Small employers may be exempt from the excise tax penalty in limited circumstances. For  these purposes, a “small employer” is an employer who employed, on average, between two and fifty employees on business days for the preceding calendar year and who employs at least two employees on the first day of the plan year. Where a small employer provides health insurance coverage solely through an insurance contract with a health insurance issuer, no excise tax penalty will be imposed on the small employer for a failure to meet the nondiscrimination rules if the failure is solely the fault of the issuer. Thus, if the health insurance issuer offered discriminatory benefits, the issuer would be subject to a civil money penalty but the small employer would not be subject to the excise tax. However, if the issuer offered nondiscriminatory coverage but the small employer provided the coverage to its employees in a discriminatory manner, then the small employer would be subject to theexcise tax penalty. For example, if the issuer offered the same benefits to all employees in the group, but the employer charged its highly compensated employees a lower contribution for the coverage than its non-highly compensated employees, any penalty would beimposed on the employer rather than the issuer.

The penalties for noncompliance imposed on nongrandfathered insured plans are markedly different than those for self-funded plans. Whereas noncompliant nongrandfathered insured plans are subject to tax or money penalties, noncompliant self-funded plans are subject to no penalty. Instead, the benefits the self-funded plan provides to highly compensatedindividuals lose their beneficial tax status and are included in the individuals’ gross income.

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