Focus on Health Care Reform: Non-Discrimination Testing for Health Plans

The NCMS has received questions in recent weeks regarding the impact of the Affordable Care Act (ACA) on non-discrimination testing for employer-sponsored health plans. Section 1001 of the ACA amends Sec. 2716 of the Public Health Service Act, extending IRS non-discrimination requirements (IRS Code 105(h)) that previously only applied to self-insured plans to all fully insured, non-grandfathered plans beginning as they renew on or after September 23, 2010.

This means that health plans cannot discriminate in favor of “highly compensated individuals” regarding eligibility to participate in a plan or the benefits offered by plans. The term “highly compensated individual” is defined in the Internal Revenue Code.

For a plan to be considered non-discriminatory with respect to eligibility, it must pass one of three tests.

  • 70% of all employees must benefit under the plan
  • The plan benefits 80% of eligible employees and 70% of all employees are eligible.
  • The plan benefits a non-discriminatory classification of employees.

(Some employees are excluded from these tests, including those who have less than 3 years of service, are younger than 25, are part-time or seasonal employees, those covered under a collective bargaining agreement or non-resident aliens.)

The Internal Revenue Code indicates that a plan must provide the same benefits for both highly compensated and non-highly compensated employees.  A plan is considered to discriminate in terms of benefits unless all benefits provided for highly compensated participants are provided to all other participants.  All dependent benefits available for highly compensated employees must also be available for all other employee dependents. Plans cannot make benefit reimbursements proportional to compensation and the eligibility tests apply to benefits subject to reimbursement not to actual payments or claims.

If optional benefits such as dental and vision plans are offered, they must be offered to all employees with the same or no premium.

Compliance regulations are expected to come from the Dept. of Labor and IRS regarding tax consequences for violation.

 
 

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