Prior to health care reform, Internal Revenue Code section 105(h) prohibited self-funded health plans from discriminating in favor of highly compensated individuals and offering more generous benefits to this group. But the prohibition did not apply to insured benefits, so some employers bought insurance policies for executives, which generally was permissible. However, section 2716 of the Patient Protection Affordable Care Act (PPACA) extended the prohibition to insured plans as well, beginning for plan years starting on or after September 23, 2010 (January 1, 2011 for calendar year plans).
Exception for Certain Executive Physical Programs
Existing regulations under Code section 105(h) contain an exception that allows benefits for “medical diagnostic procedures” to be paid to highly compensated individuals without providing the same benefits to non-highly compensated individuals. Treas. Reg. § 1.105-11(g). This section provides that reimbursements paid under a plan for medical diagnostic procedures for an employee are not considered to be part of a plan for purposes of the Code section 105(h) nondiscrimination rules, if the following conditions are satisfied:
- The procedures are performed at a facility that only provides medical or ancillary services;
- The procedures are for routine medical examinations, blood tests, and X-rays, or similar tests; and
- The procedures do not include expenses incurred for the treatment, cure, or testing of a known illness or disability, or treatment or testing for a physical injury, complaint, or specific symptom of a bodily malfunction.
This means that an executive physical program featuring routine medical examinations, blood tests, and X-rays may not be subject to the nondiscrimination rules under Code section 105(h). However, if the services extend to treatment, cure, or testing of a known illness or disability, the nondiscrimination rules likely will apply. The regulations provide an example where a routine dental examination with X-rays is considered a medical diagnostic procedure (so excepted from the nondiscrimination rules), but X-ray and treatment for a specific complaint are not simply diagnostic procedures so would fall outside the exception.
Late Breaking News on Section 105(h)
Right before Christmas, the IRS issued Notice 2011-1, which explains that the agencies are still working on regulations and guidance on how the new section 2716 requirement under PPACA should be implemented (see IRS Pushes Back PPACA Nondiscrimination Compliance Date). The Notice states that compliance with the new rule will not be required, and sanctions for failure to comply will not apply, until after regulations or other administrative guidance has been issued. Further, the agencies anticipate that the guidance will not apply until plan years beginning a specified period after issuance.
Got a health-care reform question? You can ask YOUR health-care reform legislation question online at http://www.surveymonkey.com/s/second_opinions
You can find a handy list of Key Provisions of the Patient Protection and Affordable Care Act and their effective dates at http://www.groom.com/HCR-Chart.html
Christy Tinnes is a Principal in the Health & Welfare Group of Groom Law Group in Washington, D.C. She is involved in all aspects of health and welfare plans, including ERISA, HIPAA portability, HIPAA privacy, COBRA, and Medicare. She represents employers designing health plans as well as insurers designing new products. Most recently, she has been extensively involved in the insurance market reform and employer mandate provisions of the health-care reform legislation.
Brigen Winters is a Principal at Groom Law Group, Chartered, where he co-chairs the firm’s Policy and Legislation group. He counsels plan sponsors, insurers, and other financial institutions regarding health and welfare, executive compensation, and tax-qualified arrangements, and advises clients on legislative and regulatory matters, with a particular focus on the recently enacted health-reform legislation.
PLEASE NOTE: This feature is intended to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.