The Patient Protection and Affordable Care Act (PPACA) was enacted on March 23, 2010. Many of the provisions of PPACA are effective for plan years beginning after September 23, 2010 while others aspects of the law will become effective over the next eight years. Under the PPACA, employers that have fully insured, non-grandfathered, group health insurance coverage for their employees are subject to significant penalties if they provide coverage that discriminates in favor of highly compensated individuals. Plans in effect as of March 23, 2010 may be considered by the law to be “grandfathered.”
As stated in Section 2716 of the Patient Protection and Affordable Care Act (PPACA), effective for plan years beginning on or after Sept. 23, 2010, the nondiscrimination rules of IRC Section 105(h) will now apply to fully insured, non-grandfathered, group health plans. For purposes of PPACA, a discriminatory insured group health plan is defined as one that fails to satisfy the requirements of section 105(h)(2) relating to discrimination in favor of highly compensated individuals. These plans are sometimes also known as “carve-outs.”
The group health coverage that you provide your employees might be considered discriminatory if, for example, you provide health insurance only to a select group of management employees or if you provide better health insurance to management employees than you provide to other employees. These are only illustrations. In general, you can only tell if your coverage is discriminatory by applying certain numerical and subjective tests that are set out in federal income tax regulations. If you are uncertain whether your coverage is discriminatory, you should check with your tax counsel or accountant. It’s important for you to know this because your group health insurance policy with your current fully insured health carrier will mostly likely be changing to a non-grandfathered plan design very soon. This means that if the group health coverage you provide your employees does discriminate in favor of highly compensated individuals, your company may have to pay substantial penalties.
Your group health insurance carrier cannot and will not determine whether your group health coverage is discriminatory, and will not accept liability for penalties and other losses that might result if your offer discriminatory group health coverage. If you determine that your group health insurance plan does discriminate in favor of highly compensated individuals, contact your agent and/or insurance carrier for further details and to discuss suitable alternatives.