The nondiscrimination requirement that will apply to new fully funded health care plans as a result of the Patient Protection and Affordable Care Act (PPACA) ultimately might make some special executive health care benefits obsolete.
The nondiscrimination requirement might sound very technical, but it basically boils down to two mandates. First, a new fully funded health plan cannot discriminate in favor of highly compensated individuals as to eligibility to participate, which is a numerical test.
The nondiscrimination test for fully funded plans is similar to the Code Section 410(b) minimum coverage test that applies to qualified retirement plans like 401(k) plans. To satisfy the test, the group health plan must actually benefit:
--At least 70 percent of all employees; or
--At least 80 percent of all eligible employees if at least 70 percent of all employees are eligible to participate; or
--A group of employees that satisfies the nondiscrimination classification test under Code Section 410(b)(1)(B).
Secondly, a plan cannot discriminate in favor of participants who are highly compensated individuals as to benefits that are provided. Antoinette Pilzner, an attorney with McDonald Hopkins in Bloomfield Hills, Mich., said “this means that all benefits made available to highly compensated individuals—and their dependents—must be made available to all other plan participants—and their dependents. Different levels of benefits—including co-pays, deductibles, provider networks, et cetera—cannot be offered to highly compensated participants if those same levels of benefits are not offered to all other participants.”
While self-funded plans have had to comply with the nondiscrimination requirement for years, it will apply to new fully funded plans beginning after Sept. 22, 2010, and for calendar year plans on Jan. 1, 2011. Grandfathered plans won’t have to satisfy this requirement, but there still are many unanswered questions about when a group health plan in existence on March 23, 2010, loses its grandfathered status.
Executive Retiree Health Care
As for new fully funded plans, the most significant impact of the nondiscrimination requirement is expected to be in executive retiree health care, Pilzner remarked.
Before the PPACA, “an employer with a self-insured group health plan for its active employees could have offered retiree health care to only its highly compensated or executive employees as long as the retiree health care was fully insured,” she explained. “A group health insurance policy for a limited group of retired executives was often expensive for the employer but was still a tax-free benefit to the retired executives. In some cases, the employer fully insured health benefits for both its active and retired executives, both to reduce the cost of the insurance for retired executives as well as to provide richer benefits for active executives.”
Pilzner noted that if an employer does not have such discriminatory fully insured coverage in place, it will not be able to do so in the future. “This means the employer will not be able to provide retiree health care for its executives on a fully insured basis unless it also provides retiree health care to non-highly compensated retirees,” she remarked.
However, Pilzner said that there is an exception from the nondiscrimination rules for medical diagnostic procedures, including annual physical examinations. So, employers with new fully insured plans still will be able to offer nontaxable executive annual physicals.
Different Subsidy Levels, Supplemental Coverage
The nondiscrimination requirement also means that employers will be “much more limited in offering different coverage or different employer subsidies for different classes of employees,” noted Sheldon Blumling, an attorney in the Irvine, Calif., office of Fisher & Phillips. He said many employers currently offer one plan or subsidy level to management employees and a less generous plan or subsidy level to lower-level employees. “This type of practice could be severely limited or even prohibited altogether by the new nondiscrimination requirements, depending on the demographics of the employees,” he remarked.
Another common practice has been fully paid, fully insured supplemental coverage to executives when an employer sponsors a self-insured group health plan, Blumling added. “Once fully insured plans are subject to the same nondiscrimination requirements, this technique could become obsolete,” he commented.
Some Discrimination Still Allowed
The nondiscrimination requirement actually does not mean that employers cannot discriminate at all. Instead, “the extent of discrimination can’t exceed rules similar to the rules applicable to retirement plans,” David Weiner, an attorney with Seyfarth Shaw in Chicago, said. “So an insured plan can exclude some non-high-paids, depending on how many high-paids are excluded, and based on whether there are valid business criteria defining who is covered and who is not.” He added that there are rules allowing short-term and seasonal workers to be excluded.
Weiner cautioned that the rules apply “on a controlled group basis, so you have to look across all related businesses.” And he noted that for small companies, the nondiscrimination requirement “could require them to cover more low-paid employees in their plan, even though it’s not executive-only.”
Because executives at some companies are likely to be impacted by the nondiscrimination requirement, Ilyse Schuman, an attorney with Littler Mendelson in Washington, D.C., pointed out that the requirement could affect the way businesses compensate their executives significantly. Because certain special group health care benefits for executives no longer will be available in new fully funded plans, she said, some businesses might increase executives’ base compensation if they do not have grandfathered plans.
The nondiscrimination requirement is “very much an issue” for many of her clients, Schuman remarked, noting that it has resulted in “a lot of focus on grandfathering” and what exactly might trigger the loss of a plan’s grandfathered status. She said employers are waiting for guidance from the U.S. Department of Health and Human Services on what changes do or do not jeopardize a plan’s grandfathered status.
Allen Smith, J.D., is SHRM’s manager of workplace law content.