Non-Discrimination in Insured Health Care Plans, No More Executive Health Benefit Plans?


The provision of the PPACA is deceptively simple: "A group health plan (other than a self insured plan) shall satisfy the requirements of section 105(h)(2) of the Internal Revenue Code of 1986 (relating to prohibition on discrimination in favor of highly compensated individuals)." *** "Rules similar [my emphasis] to the rules contained in paragraphs (3),(4) and (8) of section 105(h) of such Code shall apply."

With a probable effective date of the first plan year beginning six months form the date of enactment (Sept. 23, 2010), many insurance companies have told their clients that executive health benefit plans are no longer allowed beginning Sept. 23, 2010.

Because this provision is added into the Code by reference under Section 9815, as an amendment to the Public Health Service Act, it is apparent that rather than having the penalty for violation spelled out in Section 105(h), that is, the taxation of some or all of the benefits to the highly compensated, the penalty will be the $100/day excise tax under Code Section 4980D.

Since 105(h)(5) is incorporated directly at least we know that a highly compensated individual is (A) one of the highest 5 paid officers, (B) a 10 percent shareholder, or (C) among the highest paid 25 percent of all employees.

Like almost all of PPACA, the devil is in the details and what the regulators say the law means. One of the rules which is to be applied in a fashion "similar to" the Code is 105(h)(3) which defines what a nondiscriminatory group is. So does the 70/80 test apply or is it modified in some fashion? Will employers be able to set up classes of employees in which benefits differ but there is a reasonable business justification even if those classes may contain some highly compensated employees but were not set up to benefit just highly compensated employees?

If a highly compensated individual pays the entire premium or as a professional it is charged to his overhead which reduces his compensation does that remedy the possible discrimination issue?

It appears the only safe course at this time is to eliminate insured plans designed to benefit highly compensated employees as defined in 105(h)(5). How much further one needs to go is anyone's guess.

-- Jeffrey Clayton