Thursday, December 30, 2010

IRS Defers Application Of Nondiscrimination Rule To Insured Group Health Plans — Notice 2011-1, 2011-2 IRB

In a new Notice, IRS says that compliance with a rule prohibiting insured group health plans from discriminating in favor of highly compensated individuals should not be required (and thus, any sanctions for failure to comply will not apply) until after regs or other administrative guidance of general applicability have been issued. The rule was enacted by Sec. 10101(d) of the Health Care and Education Reconciliation Act (the Reconciliation Act, P.L. 111-152).

Background. Under Code Sec. 105(b), there's an exclusion from gross income for amounts paid through employer-sponsored health care coverage. However, the exclusion does not apply to amounts paid to a highly compensated individual under a self-insured medical reimbursement plan that does not satisfy the requirements of Code Sec. 105(h)(2) for a plan year, to the extent the amounts constitute an excess reimbursement of the highly compensated individual. (Code Sec. 105(h)(1)) Code Sec. 105(h)(2) provides that a self-insured medical reimbursement plan must not discriminate in favor of highly compensated individuals as to eligibility to participate or regarding benefits provided under the plan. If a self-insured medical reimbursement plan is discriminatory because it fails to satisfy either the nondiscriminatory eligibility rules or the nondiscriminatory benefit rules, then an employee who is considered a highly compensated individual must include amounts which represent “excess reimbursements” in gross income. (Code Sec. 105(h)(1))

Sec. 10101(d) of the Reconciliation Act provides: that a group health plan (other than a self-insured plan) must satisfy the Code Sec. 105(h)(2) requirements; that rules “similar to” the rules of Code Sec. 105(h)(3) (nondiscriminatory eligibility classification), Code Sec. 105(h)(4) (nondiscriminatory benefits), and Code Sec. 105(h)(8) (certain controlled groups) apply; and that the term “highly compensated individual” has the meaning given by Code Sec. 105(h)(5). These requirements for insured group health plans are effective for plan years beginning on or after Sept. 23, 2010.

Code Sec. 9815 incorporates by reference the requirements of Sec. 2716 of the Public Health Service (PHS) Act into chapter 100 of the Code. Code Sec. 4980D provides that group health plans failing to satisfy the requirements of chapter 100 are subject to an excise tax.

How the Code Sec. 105(h)(2) nondiscrimination rule applies to insured group health plans. Sec. 2716 of the PHS Act (PHSA) incorporates the substantive nondiscrimination requirements of Code Sec. 105(h) (but not the taxes on highly compensated individuals in Code Sec. 105(h)(1)) and applies them to insured group health plans. An insured plan failing to comply with Code Sec. 105(h) may be subject to a civil action to compel it to provide nondiscriminatory benefits (under part 7 of ERISA), and may be subject to an excise tax of $100 per day per individual discriminated against for each day the plan does not comply with the requirement (under Code Chapter 100) or a civil money penalty of $100 per day per individual discriminated against (under title XXVII of the PHSA).

If a self-insured plan fails to comply with Code Sec. 105(h), highly compensated individuals lose a tax benefit; if an insured group health plan fails to comply with Code Sec. 105(h), it is subject to a civil action to compel it to provide nondiscriminatory benefits and the plan or plan sponsor is subject to an excise tax or civil money penalty of $100 per day per individual discriminated against.

The rules prohibiting discrimination in favor of highly compensated individuals by insured group health plans do not apply to “grandfathered health plans”. But the Code Sec. 105(h) rules continue to apply to any self-insured medical reimbursement plan regardless of whether the plan is a “grandfathered health plan.”

In Notice 2010-63, 2010-41 IRB, IRS said it was thinking of issuing guidance on the extension, through Sec. 2716 of the PHSA and Code Sec. 9815, of the Code Sec. 105(h) requirements to insured group health plans, and requested comments on how this guidance should be formulated.

Deferral of new nondiscrimination rule. Because regulatory guidance is essential to the operation of the new statutory provisions, Treasury, IRS, and the Departments of Labor and Health and Human Services (the Departments) have determined that compliance with PHSA Sec. 2716 should not be required (and thus, any sanctions for failure to comply do not apply) until after regs or other administrative guidance of general applicability have been issued under PHSA Sec. 2716. To provide insured group health plan sponsors time to implement any changes required as a result of the regs or other guidance, the Departments anticipate that the guidance will not apply until plan years beginning a specified period after issuance. Before the beginning of those plan years, insured group health plan sponsors will not be required to file IRS Form 8928 (Return of Certain Excise Taxes Under Chapter 43 of the Internal Revenue Code) with respect to excise taxes resulting from the incorporation of PHSA Sec. 2716 into Code Sec. 9815. (Notice 2011-1, 2011-2 IRB, Sec. III)

The Departments also solicit additional public comments on various aspects of the application of the new nondiscrimination rule to insured group health plans. (Notice 2011-1, 2011-2 IRB, Sec. 4, Sec. III)

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