PPACA Extends Nondiscrimination Rules to Insured Benefits – Part IIJanuary 13, 2011, 02:21 PM
Details of the Nondiscrimination Requirements Internal Revenue Code 105 and 106 permit employers to offer certain health benefits on a tax-free basis. Prior to the passage of the Patient Protection and Affordable Care Act (the PPACA), P.L. 111-148, the nondiscrimination provisions in 105(h) of the Internal Revenue Code (the Code) applied only to self-insured health plansall employment based health plans (medical, dental, and vision) where the risk was not transferred to an insurance company. These self-insured health plans include administrative services only and cost-plus arrangements, minimum premium plans, and medical reimbursement plans provided through Code 125. In order to maintain the tax deductibility of benefits provided to employees under the plan, 105(h) required self-insured plans to satisfy Nondiscrimination Tests in order to demonstrate that the plans coverage did not discriminate in favor of certain highly compensated individuals (the HCIs). Under Code 105(h), the highly compensated individuals of a company are:
- The five highest paid officers;
- Shareholders owning (actually or constructively) more than ten percent of the companys stock; and
- The highest paid twenty-five percent of all employees.
These categories are not mutually exclusive and an individual may qualify for more than one. The PPACA creates a new Code 9815 extending Code 105(h) nondiscrimination requirements to insured health plans effective the first plan year after September 23, 2010, or January 1, 2011 for calendar year plans. Now, health plans that shift the risk to insurance companies or to another third party unrelated to the employer must comply with the nondiscrimination provisions. Nondiscrimination Tests Code 105(h) contains two separate tests that a plan must satisfy to be deemed nondiscriminatory: Nondiscriminatory as to Eligibility A plan may qualify as nondiscriminatory as to eligibility if coverage under the plan benefits either:
- Seventy percent (70%) or more of all employees under the planincluding all entities under the employer;
- Eighty percent (80%) of eligible employees, if seventy percent (70%) of all employees are eligible; or
- The plan benefits a nondiscriminatory classification of employees.
Therefore, the eligibility test requires that eligibility to participate in the health plan must be extended to at least 70% of the employers workforce. This does not require that all of those employees must in fact participate, however at least 80% of those offered coverage must participate. Certain employees may be excluded from the eligibility test, including:
- Employees with less than three years of service at the beginning of the plan year;
- Employees younger than twenty-five at the beginning of the plan year;
- Part-time or seasonal employees;
- Employees who are covered under a collective bargaining agreement; and
- Nonresident aliens who receive no income from a U.S. source.
Nondiscriminatory as to Benefits In order for a plan to be nondiscriminatory as to benefits, the plan must satisfy both:
- All benefits provided for all HCI participants must also be provided to all other participants; and
- Any required employee contributions are no greater for non-HCIs than for HCIs.
The nondiscrimination test is applied to the benefits subject to reimbursement under the health program and not the actual payments or claims made. —Christopher L. McLean