Health Care Reform:
NondiscriminationTesting for Insured Plans
The BIG Change For plan years beginning on or after September 23, 2010,insured health plans will be subject to the nondiscrimination rules contained in the Internal Revenue CodeSection 105(h) prohibiting a group health plan from discriminating in favor ofhighly compensated employees as to eligibility to participate in a plan or tothe benefits provided under the plan. Please refer to the Attachment for a copyof the actual HCR provision. This new rule will not apply to grandfatheredplans until and at such time the plan loses its grandfathered status (e.g. dueto a change in plan design).
Past Practices Historically, a number of employers purchased a specialgroup health policy covering the employers executive staff only. The policyprovided benefits supplementing the underlying group health plan by coveringdeductibles, copays, and excess over plan limits, as well as qualifying benefitsnot available through the basic health (including dental and vision) plans. Nonhighly compensated employeestypically would be ineligible to participate in the plan. Since insured grouphealth plans were exempt from the discrimination testing rules applicable toselffunded plans, the policy could be limitedto executives without IRS scrutiny.
Other ImpactsThis new rule also may impact multistateemployers who have different benefit levels, eligibility rules, andcontribution requirements based on business location. For example, a companybased in Connecticut may have a rich health plan withno employee contributions for Connecticut employees and a plant in Californiawith a modest health plan and high employee contributions achieving parity withwhat California employers offer as benefits in the same industry. The nondiscrimination testing rules mayrequire a more uniform level of benefits and contributions for all employeesregardless of their business location.
The Tax Effect Insured group health plans must pass the tests describedbelow. If they do not, the actual benefits provided (claims paid) becomeordinary income to the employee. For example, in a discriminatory plan, theactual dollars paid out in connection with a hospital stay, dental surgeries,or even the purchase of prescription lenses for the employee or covered familymember would be income to the highly compensated employee in the year thebenefit amount is paid. The nonhighly compensated employees remain exempt from taxation ofbenefits paid out.