Dec. 10, 2010

PPACA Requires Fully Insured Groups To Meet Nondiscrimination Requirements

The Patient Protection and Affordable Care Act prohibits fully insured employee groups from discriminating in favor of highly compensated employees in terms of specialized health benefits. These requirements are effective for non-grandfathered groups beginning with renewals Oct. 1, 2010.

Below are general guidelines regarding this provision; however each group is different and we recommend they consult with their tax advisor before making such changes.

Salary Nondiscrimination Rules and Regulations:
Insured groups must now comply with nondiscrimination rules that previously applied only to self-funded groups. Fully insured group plans must meet both an eligibility test and a benefits test to not be considered discriminatory:

Testing failure may mean that the group will have to pay very high excise tax penalties. If an insured group health plan fails to comply with the nondiscrimination rules, the employer/plan sponsor is subject to a penalty of $100 per day for each participant not receiving the discriminatory benefit.

Tax penalties only apply to non-grandfathered groups and apply each day for every affected employee. For example, if you are a  100-member, non-grandfathered group that insures only 20 management-only employees, then that group may be charged excise taxes of $8,000 (80 affected employees X $100/day) for every day they continue this discriminatory practice.

Groups must understand that performing the following non-exclusive acts could subject
them to nondiscrimination testing under section 105(h) of the Internal Revenue Code.

  • Failure to offer coverage to all eligible employees
  • Having too many highly compensated or key employees on the plan relative to rank-and-file employees
  • Failure to provide the same waiting periods to all eligible employees
  • Treating employees differently based on age, years of service, or compensation
  • Contributing a different percentage of premium for different classes of employees
  • Providing different benefits for different classes of employees
  • Creating any differences in coverage or cost of coverage for any class of employee
  • The insurance carrier does not perform nondiscrimination testing. The group assumes all obligations of testing and is responsible for any resulting tax penalties.

Salary Nondiscrimination Rules and Regulations impacts to Grandfathered Status:
Grandfathered groups violating salary nondiscrimination rules and regulations will not lose their grandfathered status and are not subject to any tax penalties. Grandfathered groups violating salary nondiscrimination rules and regulations that become non-grandfathered will become subject to the tax penalties at the point they lose grandfathered status. This still applies only to groups with 50 or more employees.