Insured Plans Must Comply With Nondiscrimination Rules

(Note : For the next few weeks, Health Reform Talk will focus on detailed explanations for specific provisions in the new health reform law.)

So what’s included in Sec. 10105 and 10101(d) of the Affordable Care Act, concerning new nondiscrimination rules for insured plans?

Insured group health plans now must comply with the nondiscrimination requirements for self-funded plans, including rules that the plan does not discriminate in favor of highly compensated individuals as to eligibility to participate. In addition, the benefits provided under the plan may not discriminate in favor of participants who are highly compensated individuals.

Rules for nondiscrimination. Rules similar to those for self-funded plans are to be applied to insured group health plans, including rules for eligibility, benefits, and controlled groups.

A plan satisfies the eligibility requirements if the plan benefits

(1)	70 percent or more of all employees, or
(2)	80 percent or more of all the employees who are eligible to benefit under the plan if 70 percent or more of all employees are eligible to benefit under the plan.

Alternatively, a plan meets the eligibility requirements if it covers a classification of employees that does not discriminate in favor of highly compensated individuals.

Second Test

The second percentage test requires a minimum of 56 percent of employees (80 percent multiplied by 70 percent). The nondiscriminatory classifications test follows the rules of pension plans, which notes that reasonable classifications generally include specified job categories, compensation categories such as hourly or salaried, and geographic location. and similar bona fide business criteria. Identifying employees by name is not a reasonable classification.

Certain employees may be excluded from the eligibility tests, including employees who have not completed three years of service; employees under age 25; part-time or seasonal employees; union employees; and employees who are nonresident aliens and who receive no earned income.

In addition to the eligibility rules, all benefits provided to highly compensated employees must be provided to all other participants.

The controlled group rules for pension plans apply. These rules specify that employees of controlled groups of corporations and partnerships and employees of affiliated service groups are to be treated as employees of a single employer.

Highly compensated individual. Using the same definition as for self-funded plans, a highly compensated individual is defined as one of the five highest paid officers, a shareholder who owns more than 10 percent in value of the stock of the employer, or among the highest paid 25 percent of all employees.

Implications

Since the discrimination rules for self-funded plans were issued in 1980, employers have adopted fully insured plans to provide executives and key employees with tax-free reimbursements for out-of-pocket medical, dental, and vision expenses. These new prohibitions against discrimination in fully insured plans will compel employers to use other methods to reward executives.

Effective date. The provision is effective for plan years beginning on or after the date that is six months after the date of enactment (Sept. 23, 2010).

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