The Patient Protection and Affordable Care Act (“PPACA”) amends section 2716 of the Public Health Service Act (“PHSA”) to apply certain nondiscrimination requirements of § 105(h) of the Internal Revenue Code (the “Code”) to fully insured group health plans. PPACA also incorporates these new requirements into the Code and the Employee Retirement Income Security Act (“ERISA”).
What guidance is provided in the Notice?
The Notice addresses PPACA’s prohibition (in new PHSA § 2716 and conforming amendments to chapter 100 group health plan requirements in the Code and part 7 of ERISA) against discrimination in favor of highly compensated individuals in insured group health plans. The Notice states that PHSA § 2716 incorporates the substantive nondiscrimination requirements of Code § 105(h) that apply to self-insured plans — but not the taxes on highly compensated individuals in Code § 105(h)(1) – and applies them to insured group health plans. The main purpose of the Notice is to solicit comments and announce the November 4, 2010 deadline for submitting such comments. The Notice does, however, include several clarifying points concerning the application of PHSA § 2716 and related penalties.
What specifically does the Notice provide regarding the penalties for violating the new nondiscrimination rules?
The Notice makes clear that the consequences of violating Code § 105(h) that apply to discriminatory self-insured health plans do not apply to insured plans that are subject to the substantive requirements of Code § 105(h) pursuant to PHSA § 2716. More specifically, it makes clear that the highly compensated individuals involved are not required to include all or a portion of the benefits received in income as they are in self-insured plans under Code § 105(h). Rather, the following penalties apply in the case of a violation under a fully insured arrangement:
- The Code: There is a $100 per day per individual excise tax in Code § 4980D that applies to violations of the chapter 100 group health plan requirements (capped at 10 percent of the aggregate amount paid or incurred by the employer during the preceding taxable year for the group health plan or $500,000, whichever is less). The Notice makes clear that this tax applies with respect to individuals who are discriminated against for each day the plan does not comply with the requirement (i.e., individuals who are not eligible for coverage under a plan). The excise tax is imposed on the employer or, in the case of a multiemployer plan, on the plan, and does not apply to small employers with between 2 and 50 employees. Employers have an affirmative obligation to report this tax liability on Form 8928.
- ERISA: There is an ability to bring a civil action to enjoin a noncompliant act or practice or for appropriate equitable relief under part 7 of ERISA. Thus, DOL may enforce this provision against a group health plan. In addition, participants, beneficiaries, and fiduciaries may sue to enforce this provision.
- PHSA: There are civil money penalties of $100 per day per individual discriminated against for each day the plan does not comply with the requirement (capped at 10 percent of the aggregate amount paid or incurred by the employer during the preceding taxable year for the group health plan or $500,000, whichever is less). This penalty appears to be limited in this context to non-federal governmental group health plans.
Does the IRS intend to issue any additional guidance regarding the specific nondiscrimination testing rules that will apply to insured plans?
In its request for comments, the Notice notes that the final regulations under Code § 105(h) were issued in 1981. It then states that the Department of Treasury and the IRS are considering issuing guidance on the extension of the Code § 105(h)(2) requirements to insured group health plans, and requests comments on what additional guidance relating to the application of Code § 105(h)(2) would be helpful. This suggests that any such additional guidance will supplement and/or amend the guidance contained in the final regulations issued in 1981. (It also suggests that Treasury/IRS may not intend to revise/clarify the rules under Code § 105(h) generally.)
The final regulations that were published in 1981 (Treas. Reg. § 1.105-11) leave many questions unanswered. As a result, it is often necessary to look to other, lesser forms of
guidance (e.g., private letter rulings, informal IRS internal advice memorandums, and
informal statements made by IRS officials) for clarification on basic issues. Obtaining certainty in this area is further complicated by the fact that the IRS will not issue private letter rulings on issues involving Code § 105(h). See Rev. Proc. 2010-3, § 3.01(10).
What reporting requirements apply to nondiscrimination testing failures?
If there is a failure to comply with the new nondiscrimination requirements applicable to insured plans, there is an affirmative reporting requirement (Form 8928) that requires an employer to report any violations of Code § 4980D and to pay associated excise tax to the IRS. In general, the excise tax and Form 8928 are due on or before the due date for filing the employer's federal income tax return (without extension). An extension to file the employer's federal income tax return does not extend the date for paying the excise tax and filing Form 8928. For multiemployer plans and multiple employer health plans, the return is due on or before the last day of the seventh month after the end of the plan year.
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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.