As part of PPACA, there are new nondiscrimination rules for fully-insured insurance plans that must be complied with upon renewal or when getting a new insurance plan. While we are still waiting for further guidance from HHS, there is a lot we do know and it will affect many businesses who offer insurance benefits. The new laws are to protect against discrimination in favor of highly-compensated employees.
WHO IS HIGHLY COMPENSATED?
A highly compensated employee (HCE) is defined as either being (1) one of the five highest-paid officers, (2) a shareholder owning (actually or constructively) more than 10% of the company’s stock, or (3) among the highest paid 25% of all employees.
Types of Discrimination
The new laws prohibit offering insurance benefits to highly compensated employees (HCEs) and not to non-HCEs. This also means that you cannot offer different, better benefits to HCEs than non-HCEs. This prohibits manager-carve-out plans (assuming the managers are HCEs), Long-Term Care plans for only execs, and a different health plan for retired execs that other retirees don’t get.
There are two other scenarios that may be prohibited that would affect a lot more businesses. HHS needs to still provide further definitions to know for sure if these scenarios will be prohibited. The first one is more likely to be prohibited; it is having the employer pay for a higher amount of the premium for HCEs than for non-HCEs. The second scenario is more questionable as to whether it will be prohibited or not; it is having a shorter new-hire waiting period for HCEs than for non-HCEs. Both of these practices are used quite often and will thus effect many more businesses.
There are three eligibility tests that can be used to determine if your company is nondiscriminatory. Only one of any of the tests need to be passed — not all three. Before I list the three tests, keep in mind that there are many employees that can be excluded when performing these tests.
Employees that can be excluded from the eligibility tests include:
- employees who have less than 3 years of service at the beginning of the plan year;
- employees who are younger than age 25 at the beginning of the plan year;
- part-time or seasonal employees;
- employees who are covered under a collective bargaining agreement;
- and nonresident aliens who receive no income from a U.S. source.
The three nondiscrimination eligibility tests are:
- 70% of all employees (except excluded employees) benefit under the plan;
- the plan benefits 80% of eligible employees and 70% of all employees (except excluded employees) are eligible;
- the plan benefits a nondiscriminatory classification of employees (non-HCEs)
Plans that do not comply with the new nondiscrimination requirements may face excise taxes of $100 per day for each employee whose benefits are not in compliance; capped at 10% of the cost of the group plan or $500,000, whichever is less. So, as you can see, the penalties could be steep. Thus, you will want to stay in compliance.
Some have thought that an easy loophole would be to have a separate business entity for mangers, or HCEs. But, the rules will apply on a controlled group basis. Meaning, plans from related businesses will, generally, be required to be tested as if they are a single employer.
These new nondiscrimination rules do not apply to Grandfathered Plans. For more information on Grandfathered Plans, please read my previous post.
With these new rules, it is important to review your current contracts and benefits rules. As well, you may want to review negotiated contracts of hired employees if the negotiations included insurance benefit offerings that may be different from your normal procedures.