Firm Comments on Nondiscrimination Rules Affecting Group Health Plans and Highly Compensated Individuals

 

1. We believe that no penalties should be assessed under IRC Sec. 4980D, Failure to meet certain group health plan requirements, with respect to plan years that commence prior to the issuance of the subject guidance.

2. For administrative convenience, we suggest that the definition of "highly compensated individual" under IRC Sec.105(h)(5) be modified so that individuals (other than more than 5% owners) will only be considered highly compensated in the event their compensation exceeds a certain dollar amount (adjusted for cost-of-living increases), such as the $110,000 threshold currently used in the definition of a highly compensated employee under IRC Sec. 414(q).

In other words, individuals among the highest paid 25% of all non-excludable employees would only be considered "highly compensated" if their compensation exceeded $110,000.

3. In group health plans, employees who are eligible for employer-sponsored coverage may optionally opt out of that coverage to participate in a spouse's health plan, Medicare, or for other reasons.

We believe that employees who optionally opt out of employer sponsored coverage should be considered as benefiting under the employer's group health insurance plan for purposes of the nondiscrimination tests of Reg. Sec. 1.105-11(c)(2) with respect to eligibility to participate.

Note that this treatment is consistent with respect to employees benefiting under a 401(k) plan under Reg. Sec. 1.410(b)-3(a)(2)(i).

4. Under IRC Sec. 4980D(d), the tax on failure to meet certain group health plan requirements does not apply to group health insurance plans of small employers who employed an average of at least 2, but not more than 50 employees during the preceding calendar year and who employ at least 2 employees on the first day of the plan year.

Some of these small employers do not maintain group health plans. Instead, they may pay for individual health insurance coverage (directly or through reimbursement) covering one or more selected key employees, or perhaps for several employees.

This type of health insurance coverage is considered non-taxable employer-provided coverage under IRC Sec. 106 per Rev. Rul. 58-90 and Rev. Rul. 61-146.

Since it is treated as employer-provided health insurance coverage for income tax purposes, we suggest that such individual coverage also be treated as group health insurance coverage for purposes of the tax exclusion provided by IRC Sec. 4980D(d), and that this issue be specifically addressed in future guidance.

5. Employers with self-insured health plans may purchase related stop-loss insurance. When employers purchase such stop-loss insurance with premiums paid out of its general assets and benefits payable only to the employer, we believe that any future guidance should specify that such stop-loss coverage is not considered group health insurance subject to the new nondiscrimination rules.

In the event that a self-insured health plan has stop-loss insurance that actually pays benefit claims to plan participants, we believe that any future guidance specify that either 1) the stop-loss coverage is not considered group health insurance subject to the new nondiscrimination rules because it is secondary to the plan's self-insurance provisions, or 2) the stop-loss coverage will be subject to non-discrimination rules concerning eligibility to participate, but will not be subject to any nondiscrimination rules with respect to benefits.

6. IRC Sec. 105(h) and Reg. Sec. 1.105-11 specifically apply to self-insured medical reimbursement plans defined and described in IRC Sec. 105(h)(6), Reg. Sec. 1.105-11(b), and Reg. Sec. 1.105-11(k)(2).

The regulations, written in 1981, don't appear to translate well in an application to group insured health plans, particularly with respect to nondiscriminatory benefits where income taxation is not an issue.

Accordingly, we suggest that any future guidance with respect to nondiscrimination of insured group health plans focus only on eligibility to participate. We are unaware of any health insurance plans that by its terms discriminate in favor of highly compensated employees.

Sincerely,

 

 

James A. Derzon, CPA

 

Employee Benefits Specialist

 

Schenck