Nondiscrimination rules for insured plans
Smart first steps
Insured group health plans, except for grandfathered health plans, will be subject to the same nondiscrimination rules that historically have applied only to self-insured plans. These rules will prohibit insured group health plans from discriminating in favor of highly compensated individuals with respect to eligibility to participate and benefits.
A highly compensated individual is generally defined as any individual who is –
- One of the 5 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.
Insured “executive only” plans benefitting only highly compensated individuals will clearly violate these rules, unless they are grandfathered health plans. Other insured plans may be vulnerable as well if, for example, less than 70% of all employees are eligible to participate or certain benefits are available only to highly compensated individuals.
The penalty for violating these nondiscrimination rules for insured plans is an excise tax on the employer of up to $100 per participant per day, subject to an annual maximum of $500,000 or 10% of the aggregate amount the employer pays for all group health plans, whichever is less. The participants included in the penalty calculation are those being discriminated against – i.e., the non-highly compensated individuals who are not eligible to participate in or to receive certain benefits from the plan.
This is different from the penalties that have applied, and will continue to apply, to self-insured group health plans violating the nondiscrimination rules. In that case the only penalty is on the highly compensated individuals participating in the plan, who will have some or all of their benefits treated as taxable income.
Effective date: Plan years beginning on or after September 23, 2010. Does not apply to grandfathered health plans.
Key Implication: Plan design
Employers will no longer be able to maintain insured group health plans that discriminate in favor of highly compensated individuals unless those plans are grandfathered health plans. If and when grandfathered health plan status is lost, employers will have to choose between eliminating the plan, converting it to a self-insured plan, or making it available on a non-discriminatory basis.
Key Implication: Cost
Maintaining discriminatory insured health plans as grandfathered health plans will have cost implications because employers will have less flexibility to manage future cost increases by eliminating certain benefits, increasing employee cost-sharing, or reducing the employer’s premium contribution.
Key Implication: Executive Recruitment and Retention
Special health benefits can be an incentive for executives to join and stay with an organization, especially if the promised benefits are to continue past retirement. In some cases employers may be forced to re-negotiate existing contracts to avoid penalties if they cannot maintain the plans indefinitely as grandfathered health plans.
Smart First Steps for Employers to Consider
Plan design: Analyze the potential cost of maintaining existing insured group health plans that would otherwise violate these nondiscrimination rules as grandfathered health plans. Remember to take into account the effect of changes that will have to be made to these plans notwithstanding their grandfathered status. These include, for example, eliminating lifetime dollar limits on benefits and allowing participants’ children to remain enrolled until age 26. It is important to note also that grandfathered status will be lost if a new insurance contract is executed, even if the plan benefit provisions remain the same.
Also analyze the cost of maintaining the plan as a nondiscriminatory plan. This probably will not be a viable option for “executive only” plans, but may be an alternative for plans that benefit a larger group of both highly compensated and non-highly compensated individuals.
The results of these cost analyses will help inform the decision about how long these plans can be maintained as grandfathered health plans, and what to do with them when grandfathered status is lost.
As used in this document, “Deloitte” means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.