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Health Care Law Expands Non-Discrimination Provision
By Kevin McDonnell

A new requirement created by the Patient Protection and Affordable Care Act (PPACA) mandates that an employer sponsoring a fully-insured health benefit plan, or the plan itself, must not discriminate in favor of highly compensated employees by offering them additional coverage or benefits at more affordable rates compared to other employees covered by the plan. Effective for plan years beginning on or after Sept. 23, 2010, the non-discrimination provision associated with Section 105(h) of the Internal Revenue Code (IRC) now applies to both self-funded and fully-insured health plans.

Generally, the regulations issued pursuant to Section 105(h) apply to employer-sponsored health benefit plans that cover premiums and expenses for qualified medical and other specialty plans. The recent amendments expand the non-discrimination provisions to health benefit plans irrespective of whether they are fully-insured, self-funded or medical reimbursement plans.

For the purposes of IRC subsection 105(h)(5), the term “highly compensated individual” means an individual who is:

  • one of the five 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.

This new law is intended to promote a more level playing field in how employer-sponsored health insurance is offered to employees. As a result, the expanded non-discrimination requirement creates a significant chilling effect on fully-insured, executive medical plans where senior executives would have had access to higher level benefits or reduced cost-sharing arrangements.

Some types of plans are excluded from the new requirements, including “grandfathered” plans— group health plans that were in existence before March 23, when the health care reform was passed—government-sponsored health plans and limited benefit plans.

Testing for Compliance

PPACA provides that non-grandfathered, fully insured plans must satisfy the Section 105 requirements, which prohibit discrimination in favor of highly compensated individuals. To satisfy the non-discrimination rules, health plans must pass several tests.

To comply with the rules, a plan must benefit one of the following:

  • at least 70 percent of all employees;
  • at least 80 percent of all employees who are eligible for benefits under the plan (if at least 70 percent of all employees are eligible to participate in the plan); or
  • a nondiscriminatory classification of employees.

In running the eligibility test pursuant to IRC subsection 501(h)3, an employer may exclude employees who:

  • have three years or less of service at the company;
  • are younger than age 25;
  • are part-time or seasonal, working less than 35 hours per week;
  • are part of a collectively-bargained arrangement; or
  • are non-resident aliens who do not receive U.S.-earned income.

In addition, the benefits provided under the health plan must not discriminate in favor of highly compensated individuals. That can be done by incorporating several design features into the plan that prevent discrimination, such as:

  • a parity in employee contributions for each benefit level;
  • not offering lower copays for highly compensated employees; and
  • not imposing different waiting periods.

The employer sponsoring the health plan also must not discriminate in favor of highly compensated individuals in actual operation. For example, discrimination in operation could arise if a plan administrator approves certain claims for medical expenses under the utilization management process for highly compensated employees while denying them for lower compensated employees.

Kevin McDonnell serves as vice president of Dale Group Benefits & Planning, an insurance brokerage and consulting firm. With more than 14 years of experience in the employee benefits field, Mr. McDonnell has earned a reputation as an impassioned industry thought leader. He is a veteran conference speaker on many employee benefit topics including consumer-driven healthcare/health savings accounts, employee communications and health care reform. In his role with Dale Group, he serves his clients as an employee benefit consultant, broker and advocate. He can be reached at and at 973-377-7000 ext 621.

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The views expressed in articles published in Tax Stringer are those of the authors and not necessarily those of Tax Stringer, unless otherwise indicated. Articles contain information believed by the authors to be accurate as of original publication. The reader should not construe the content included in Tax Stringer as accounting, legal or other professional advice. If specific professional advice or assistance is required, the services of a competent professional should be sought.