New Non-discrimination Rules for Health Insurance Plans

Fully insured health plans have not been subject to any the nondiscrimination requirements. Those plans could discriminate on eligibility, contributions, and benefits, without triggering adverse tax consequences to either the plan or the plan participants.

The Patient Protection and Affordable Care Act (Affordable Care Act or Obamacare) has changed that. Fully insured group health plans that are not grandfathered under the Affordable Care Act or that do not meet the exception for small employer plans will have to comply with the nondiscrimination rules of Code Section 105(h)(2). Accordingly, plans that are now subject to the nondiscrimination rules cannot discriminate regarding either eligibility to participate in the plan or the benefits provided under the plan. Plans that discriminate in favor of highly compensated individuals will face severe penalties.

Implementation of the new rules has been delayed. The IRS, Department of Labor (DOL), and Department of Health and Human Services (HHS) will not require compliance with these rules until additional guidance is issued. And, at this point, we have no indication of when that guidance will be issued. So, compliance with the rules is delayed indefinitely. But, any fully insured group health plan offered by your business will eventually have to be examined to determine whether it must and, if so, whether it will pass the nondiscrimination rules.

A fully insured plan that is found to be discriminatory faces severe penalties. It may be subject to a civil action to compel it to provide nondiscriminatory benefits. Additionally, the plan or plan sponsor could be subject to an excise tax of $100-per-day for each individual who was discriminated against (i.e., for all participants who do not meet the definition of a highly compensated individual).

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