New penalties for fully insured plans that favor highly compensated employees
Although employers can be forgiven for focusing on the more pressing elements of the Patient Protection and Affordable Care Act (PPACA) that take effect in January 2014, there is another provision of the law that is not yet getting much attention—and it should.
The provision is a short one. Fully insured health plans that have not retained grandfathered status under the PPACA will be subject to the same nondiscrimination rules that have long applied to self-insured plans. The penalties warrant notice, as they are considerable and could cost employers up to $500,000 if they don’t comply with the provision.
The new provision also has implications for benefits strategy. “Historically, if an employer wanted to offer [certain employees or owners] medical coverage that was different, richer or received a greater subsidy, the solution was always to offer insured plans because they weren't subject to the same nondiscrimination rules as self-insured plans,” said Andy Anderson, a partner at law firm Morgan, Lewis & Bockius in Chicago. “Now that historic calculus has been changed by the [PPACA].”
Like the nondiscrimination rules for self-insured health plans, cafeteria benefit plans and various retirement plans, the PPACA provision is designed to penalize companies that discriminate in favor of highly compensated employees when it comes to offering certain benefits—in this case, fully insured health plans. This discrimination can take the form of favoring highly compensated employees when it comes to eligibility to participate in the plan or in terms of the benefits provided. In general, highly compensated employees meet any of the following criteria:
- A shareholder who owns more than 10 percent of the company.
- An individual who is among the five highest-paid employees in the organization.
- An individual who is among the top 25 percent of employees in terms of compensation.
Once the federal government starts enforcing the provision, employers could face an excise tax of $100 for each day the plan is not in compliance for each non-highly compensated employee who is not eligible for the health plan, up to a maximum penalty of $500,000.
Anderson noted that the biggest difference between these PPACA nondiscrimination rules and the nondiscrimination rules for other types of benefits lies in the penalty calculation. In short, the penalties for noncompliance under the PPACA are calculated based on the number of people who are discriminated against. For example, a business with 100 employees that offers a discriminatory fully insured health plan for 10 highly compensated employees would pay a penalty based on the 90 employees who are facing discrimination. “That is the exact opposite of how nondiscrimination rules have been historically considered,” Anderson explained. “In a self-insured arrangement the tax consequences are based on discriminatory coverage received by the highly paid individuals.”
When to Comply?
The key question is, when will the federal government release the guidance necessary for employers to comply with the provision? “Apparently, [issuing this guidance] is not a huge priority in Washington right now,” observed Bonita Hatchett, a partner at law firm Barnes & Thornburg in Chicago. The IRS postponed enforcement of the provision at the end of 2010, noting that employers need guidance on exactly how these rules should apply to fully insured plans. Since then, there has been little indication of when this guidance might arrive.
Seeing as there are already nondiscrimination rules for self-insured and cafeteria plans, Anderson speculates that “regulators will attempt not only to make sense of rules in the PPACA, but perhaps they will attempt to synthesize all of those [nondiscrimination] rules so that they begin to operate in a more consistent way.”
Whatever the final result, it is unlikely that guidance will be released in the near future, given the flurry of regulations being issued as we move closer to 2014. The IRS has said it will hold off on enforcement until that guidance has been released, which may be in 2014 or even 2015.
Preparing for Guidance
Although the timing of forthcoming guidance is a question mark, the nature of the issue is not. “Most employers have a pretty good idea whether they have any potential discrimination issues lurking in their health plan structures,” Anderson said. “They might only offer health coverage to a limited number of people. They may offer free health coverage only to executives or owners.”
The point of the nondiscrimination provision is to ensure that everyone is eligible for the same benefits. To make sure their organizations are prepared when guidance comes out and enforcement begins, HR and benefit managers should do the following:
- Take a close look at current plans. The first step is to take an inventory of fully insured health plans that the organization currently offers. In addition, as employers develop and execute their 2014 compliance approach, they should make sure that any new health plan design is not discriminatory.
- Know who is highly compensated. “Employers should always know who is highly compensated and who is not,” said Hatchett. In fact, businesses may already keep that information for retirement plan testing purposes.
- Keep nondiscrimination rules in mind when hiring. If the organization is recruiting an executive or any other individual who could meet the highly compensated criteria, employers need to tread carefully when offering or designing any type of special health insurance arrangement for that individual. “If employers want to continue offering special benefits for executives, they should try to do so in a tax-neutral way,” Anderson advised.
- Be prepared to act when the time comes. Even if employers do not want to change potentially discriminatory plans right now, they should be aware of the issues. If they address these proactively, they can avoid a rush to comply once the guidance is released. More important, they will have time to communicate the issues and any resulting changes to the affected employees.
Joanne Sammer is a New Jersey-based business and financial writer. To read the original article on shrm.org, please click here.