IRS Delays New Nondiscrimination Rules for Insured Health Plans

One of the more frustrating changes in the health care reform law (the Patient Protection and Affordable Care Act or PPACA) has been the extension of nondiscrimination rules under Internal Revenue Code Section 105(h) to insured group health plans. Those rules, which previously applied only to self-insured plans, were to begin applying to non-grandfathered insured plans effective for plan years beginning on or after September 23, 2010 (January 1, 2011, for calendar year plans). PPACA does not provide guidance on how those rules would be applied to insured plans, but regulators did suggest that some aspects of the rule would be different.

In September 2010, the IRS issued a notice requesting public comments on the guidance required to implement these new rules. Initial comments reflected the many difficulties for plan sponsors in determining how to apply these new standards in the absence of regulatory guidance. In response, the IRS has issued Notice 2011-1, which delays implementation of the new nondiscrimination requirements pending the issuance of further regulatory guidance. The Notice states that "because regulatory guidance is essential to the operation of the statutory provisions," compliance with the new nondiscrimination requirements "should not be required (and thus, any sanctions for failure to comply do not apply) until after regulations or other administrative guidance of general applicability has been issued." The Notice also indicates that once guidance is issued, it is likely to apply only prospectively to plan years beginning a specified period after issuance.

The Notice was accompanied by yet another IRS request for comments. The request identified certain issues of particular concern, including:

• The basis on which to determine what constitutes discriminatory benefits (for example, should differences in employer contributions or waiting periods be relevant or ignored);
• Whether guidance should offer possible alternative methods of compliance;
• How the rules will apply once health insurance exchanges become operational in 2014;
• Whether the requirements should apply separately to distinct geographic locations in which an employer operates; and
• Whether the guidance should recognize safe harbor plan designs.

Of particular interest to some employers, the IRS also seemed to raise the possibility that coverage provided to a "highly compensated" employee on an after-tax basis might be disregarded for purposes of applying these new requirements. There is also some suggestion that the IRS might be rethinking its previously announced approach to calculating the sanctions for non-compliance. You may recall that earlier IRS guidance indicated that the applicable excise taxes would be calculated using a method that would produce exorbitant penalties for violations of the rules ($100 per day for every non-highly compensated employee who does not receive a benefit provided to any highly compensated employee). Employers would welcome a less punitive approach to that issue. Stay tuned for additional details.