PPACA Extends Nondiscrimination Rules to Insured Benefits Part I

January 5, 2011, 11:14 AM

The Patient Protection and Affordable Care Act (the PPACA), P.L. 111-148, contains a new requirement that insured health plans must comply with the nondiscrimination benefit rules. Previously, self-insured (or self-funded) plans were subject to the nondiscrimination provisions in Internal Revenue Code (the Code) Section 105(h), prohibiting discrimination with regard to eligibility in favor of highly compensated individuals (HCIs).

Now, insured group health plans, with plan years beginning on or after September 23, 2010, must comply with the nondiscrimination requirements applicable to self-insured plans. Insured plans must not discriminate in favor of HCIs regarding eligibility to participate or benefits provided under the plan. To the extent that an insured plan began before March 23, 2010, it will be grandfathered and not subject to these nondiscrimination provisions so long as it maintains its grandfathered status (see The Basics of Grandfathered Health Plans Under the PPACA by K. Davenport, published November 5, 2010).

A self-insured health plan that discriminates in favor of HCIs causes the benefitted HCIs to include some or all of the value for the received benefit in their taxable income. The imputed income is subject to federal income taxes (excluding Social Security and Medicare taxes) and state liability for taxes if such states rules calculate liability pursuant to federal rules. The PPACA implemented this change by including the nondiscrimination provisions in the Public Health Services Act and ERISA, as well as in the Code.

However, unlike the self-insured nondiscrimination rules located in the income tax provisions of the Code, the nondiscrimination provisions for insured plans are located in the excise tax provisions. Therefore, the PPACA does not tax HCIs covered by insured plansas those HCIs are taxed under discriminatory self-insured plans. Rather, an employer failing to meet the nondiscrimination requirements for insured plans will be subject to an excise tax of $100 per day per affected employee.

The purpose of this change is to minimize the existence of executive medical plans for those employers maintaining programs for all employees with supplemental insured executive medical plans. These programs permitted employers to provide additional benefits to executives in a discriminatory fashion since such programs were insured, rather than self-insuredavoiding 105(h) imposition of income tax. However, this new expansion of Code 105(h) under the PPACA eliminates this practice by imposing an excise tax directly on the employer. --Christopher L. McLean