Cox Smith Employee Benefits E-Alert
Health Reform: Discrimination Testing Relief
The government has postponed the application of the new nondiscrimination rules to fully insured health plans pending further guidance.
Under health care reform legislation passed in March, for plan years beginning on or after September 23, 2010, non-grandfathered insured plans are subject to rules "similar to" the existing discrimination rules applicable to self-insured group health plans. But the consequences are different. Under a discriminatory self-insured plan, benefits provided to highly compensated individuals are taxable. Under the new scheme, discriminatory insured plans would result in far worse tax consequences, although confusing drafting of the new statute made the exact scope of those consequences unclear. Under one interpretation, fully insured plans that fail to comply with the new discrimination rules are subject to an excise tax of $100 per participant per day and (for ERISA plans) possible civil action. Plan sponsors have been awaiting regulatory guidance to clarify how "similar to" the existing rules the new discrimination testing will be.
IRS Notice 2011-1 acknowledges that it would be impractical to comply with the new discrimination rules before detailed guidance is issued. Consequently, fully insured non-grandfathered plans will not be required to comply with the new discrimination testing until further guidance is issued. Furthermore, the future guidance will apply only to plan years beginning some future time after the guidance is issued.
Please contact any of the employee benefits lawyers listed if you would like to discuss grandfathered status or any other health care reform changes in more detail.