Firm Comments on Guidance on Nondiscrimination Rules for Insured Group Health Plans

 

1. In items 1. And 2. of Part IV. of Notice 2011-1, you requested comments concerning both the determination of what constitutes nondiscriminatory benefits under IRC Sec. 105(h)(4), and on previous comments received suggesting there should only be a coverage test.

In item 6. of our letter to you dated October 26, 2010, we suggested that any future guidance with respect to nondiscrimination of group health plans focus only on eligibility to participate because we were unaware of any health insurance plans that by their terms discriminate in favor of highly compensated employees.

Nondiscrimination rules requiring that 1) eligibility waiting periods must generally be the same for highly and non-highly compensated employees, and 2) the cost or method used for determining the rate of the employer contribution portion of health insurance premiums must not discriminate in favor of highly compensated employees, could be structured as nondiscrimination rules dealing with eligibility to participate. Then, it appears there would be no need to have any additional nondiscrimination rules with respect to "benefits provided under the plan" (as contained in IRC Sec. 105(h)(2)(B).

An analogy would be that of a qualified profit sharing plan that meets minimum coverage testing under IRC 410(b) and provides each plan participant with a retirement plan contribution equal to the same dollar amount. The plan would pass safe harbor nondiscrimination testing under Reg. Sec. 1.401(a)(4)-2(b)(2).

2. In item 4. of Part IV. of Notice 2011-1, you requested comments concerning using the IRC Sec. 414(q) qualified plan definition of highly compensated employees (HCEs) for insured group health plan nondiscrimination testing.

In item 2. of our letter to you dated October 26, 2010, we suggested using a definition of HCEs that would include those individuals among the highest paid 25% of all non-excludable employees only if their compensation would exceed the $110,000 compensation limit (as adjusted for cost-of-living increases) of IRC Sec. 414(q)(1)(B)(i).

It appears that for administrative convenience, especially for large employers, it would be easier to simply adopt the IRC Sec. 414(q) definition of highly compensated employees without regard to the highest paid 25% of all eligible employees (as is contained in Reg. Sec. 1.105-11(d)(3)).

3. In item 5. of Part IV. of Notice 2011-1, you requested comments concerning the application of nondiscrimination standards to employers sponsoring insured group health plans in distinct geographic locations.

We agree with the concept in previous comments you received that nondiscrimination standards should be applied separately to employers with business divisions or subsidiaries in distinct locations.

We believe that many insured group health plans of large (and not so large) employers with multi-state operations could not pass the 70% and 80% eligibility participation tests set forth in Reg. Sec. 1.105-11(c)(2)(i).

Therefore, it appears that the only eligibility test these plans could satisfy is a reasonable classification test in the nature of Reg. Sec. 1.105-11(c)(2)(ii). However, we believe that the current guidance provided by Reg. Sec. 1.105-11(c)(2)(ii) should be greatly expanded for purposes of insured group health plans meeting eligibility requirements.

Specifically, Reg. Sec. 1.105-11(c)(2)(ii) states in part: "A plan satisfies the requirements of this subparagraph if it benefits such employees as qualify under a classification of employees set up by the employer which is found by the Internal Revenue Service not to be discriminatory in favor of highly compensated individuals. In general, this determination will be made based upon the facts and circumstances of each case, applying the same standards as are applied under section 410(b)(1)(B) (relating to qualified pension, profit-sharing and stock bonus plans) . . ."

Unfortunately, IRC Sec. 410(b)(1)(B) limited to the ratio percentage test whereby the percentage of an employer's non-excludable non-highly compensated employees who benefit under a plan must equal at least 70% of the percentage of an employer's non-excludable highly compensated employees who benefit under the plan.

We believe that future guidance should establish additional reasonable classification tests. For example:

4. In item 11. of Part IV. of Notice 2011-1, you requested comments concerning the treatment of employees who voluntarily waive employer coverage in favor of other coverage.

Our opinion on this subject, as stated in item 3. of our letter to you dated October 26, 2010, is (and was) as follows:

"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)."

5. In item 12. of Part IV. of Notice 2011-1, you requested comments concerning potential transition rules following a merger, acquisition, or other corporate transaction.

In this regard, we believe that rules should be established designating a transition period similar to the rules contained in IRC Secs. 410(b)(6)(C) or 408(p)(10).

For example, if an acquisition were made of a business whose insured group health plan met applicable nondiscrimination requirements immediately before the acquisition, those requirements should be considered as being met for the year of the acquisition and the following plan year or two.

6. In item 13. of Part IV. of Notice 2011-1, you requested comments concerning "The application of the sanction for noncompliance . . ."

In this regard, we provided the following comments in item 4. of our letter to you dated October 26, 2010:

"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."

7. Additionally, we believe that future guidance should specify whether or not stop-loss insurance under a self-insured health plan is considered group health insurance coverage for purposes of IRC Sec. 4980D.

Our specific comments per our letter to you of October 26, 2010 are as follows:

"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 nondiscrimination rules concerning eligibility to participate, but will not be subject to any nondiscrimination rules with respect to benefits."

Sincerely,

 

 

James A. Derzon, CPA

 

Employee Benefits Specialist

 

Schenck