What About the Nondiscrimination Testing Exception for Smaller Employers?

February 8, 2011 (PLANSPONSOR.com) –  This week a reader asks about the nondiscrimination testing exemption for smaller employers.


“The 10/5/10 Plan Sponsor article regarding nondiscrimination testing indicates that employees between 2 and 50 employers are exempt from the excise tax imposed on a discriminatory plan (see What Are the New Insured Plan Nondiscrimination Rules?).  Where is the reference in the law to this exemption?”


Internal Revenue Code section 4980D imposes an excise tax of $100 per day on group health plans that fail to satisfy the group health plan requirements in chapter 100 of the Code.  The nondiscrimination rules applicable to insured group health plans are incorporated into chapter 100 of the Code.  IRS Notice 2010-63 clarifies that the excise tax applies with respect to individuals who are discriminated againstfor each day the plan does not comply with the requirements.

Code section 4980D(d) provides generally that a small employer that employs an average of 2-50 employees (including employees in the employer’s controlled group) during the preceding calendar year that provides health insurance coverage solely through a health insurance contract is not liable for the excise tax on any failure that is “solely because of the health insurance coverage” offered by the insurer.  Treasury and IRS officials have indicated in informal comments in recent months that they may interpret this small employer exemption narrowly such that it would only apply in instances where a violation is exclusively due to the health insurance policy itself and not due to actions taken by the employer (e.g., in determining eligibility for the insurance coverage).

Please also note that on December 23, 2010, the IRS issued Notice 2011-1, which generally provides relief from compliance with the new PPACA nondiscrimination rules applicable to insured plans until after regulations or other guidance of general applicability has been issued (see January 18 Plan Sponsor article for more information on Notice 2011-1).


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.