Nondiscrimination requirements for fully insured group health plans

Nov. 03, 2010

In 2011, the Patient Protection and Affordable Care Act (PPACA) will prohibit insured group health plans from discriminating in favor of highly compensated individuals regarding eligibility and benefits. These rules are already in place for self-insured plans.

Blue Cross Blue Shield of Michigan and Blue Care Network are awaiting further clarifications from the Department of Health and Human Services (HHS) and the Department of Treasury, but we do know the following:

Fully insured group plans must meet both an eligibility test and a benefits test to not be considered discriminatory:

The eligibility test is passed if any of the following apply:

• The plan benefits at least 70 percent or more of all employees; or
• At least 70 percent of all employees are eligible for the plan, and at least 80 percent of these eligible employees will benefit from the plan’s coverage; or
• The plan benefits employees in a manner that is deemed not to be discriminatory in favor of highly compensated individuals using complex IRS rules.

The benefit test is passed if all benefits provided to the highly compensated individual are provided to all participants.

"Highly compensated individuals" include:

• The 5 highest paid officers
• Shareholders with 10 percent or more stake in the company
• Individuals among the top 25 percent highest paid of all non-excluded employees

When employers' determine whether their benefits are discriminatory, they can exclude or disregard the benefits offered to certain employees. Employees that can be excluded are:

• Those who have been with the company for 3 years or less
• Part-time or seasonal employees
• Employees in a collective bargaining unit
• Employees under age 25
• Nonresident non-citizens

These requirements are effective for non-grandfathered plans with plan years beginning on or after Sept. 23, 2010. Grandfathered plans or stand-alone dental and vision plans are not affected by these requirements.

While the PPACA nondiscrimination rules use the standards already in place for self-funded plans, PPACA does not incorporate the same penalties. The PPACA penalties imposed for failure to comply with nondiscrimination rules related to insured health plans are different than the penalties related to noncompliance with the rules related to self-funded health plans. If an insured group health plan fails to comply with the nondiscrimination rules, the employer/plan sponsor is subject to a penalty of $100 per day for each participant not receiving the discriminatory benefit, whereas under the self-funded plan rules highly compensated individuals in a discriminatory self-funded plan are taxed on medical expenses actually paid.

UPDATED: Dec. 29, 2010

The IRS released additional regulations on the nondiscrimination requirements in favor of highly compensated individuals. The guidance states that fully-insured group plans are not required to comply with the nondiscrimination requirements until further regulations or other administrative guidance has been issued. Fully-insured group plans should look for additional guidance in the near future.

The information on this website is based on BCBSM's review of the national health care reform legislation and is not intended to impart legal advice. Interpretations of the reform legislation vary, and efforts will be made to present and update accurate information. This overview is intended as an educational tool only and does not replace a more rigorous review of the law's applicability to individual circumstances and attendant legal counsel and should not be relied upon as legal or compliance advice. Analysis is ongoing and additional guidance is also anticipated from the Department of Health and Human Services. Additionally, some reform regulations may differ for particular members enrolled in certain programs such as the Federal Employee Program, and those members are encouraged to consult with their benefit administrators for specific details.