20436365 Non-Discrimination Rules Under PPACA September 2010 Stacy H. Barrow [email protected]...

20436365

Non-Discrimination Rules Under PPACA

September 2010

Stacy H. [email protected]

617.526.9648

September 2010 © Proskauer1

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Today’s agenda

• Brief Overview of PPACA Grandfather Rules

• Discussion about Code Section 105(h) application to fully insured plans under PPACA

• Review of Cafeteria Plan nondiscrimination rules

• Review of Group Term Life Insurance nondiscrimination rules

• Discussion of “Simple” Cafeteria Plans under PPACA

• Note: Materials are up-to-date as of September 15, 2010

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What are “grandfathered” health plans?

• If a plan/benefit option is grandfathered, there are certain mandates that do not apply to it

• But grandfathered status is NOT a free pass. Many requirements, including many of those that are “in the press” still apply!

• Grandfathering does not apply to all of health reform – the employer play-or-pay mandate and other revenue-raising provisions apply regardless of grandfathered status

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How do we know if a plan is grandfathered?

• To be grandfathered, plan must have enrolled individuals continuously since March 23, 2010

• Do not have to be the same individuals

• Plan may add new employees (newly hired or newly enrolled) and retain grandfathered status

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How long does grandfathered status last?

• Changes that terminate grandfathered status :

1. Switching carriers

2. Elimination of benefits (includes the elimination of necessary element to diagnose or treat a condition)

3. Any increase to coinsurance percentage

Example: Grandfathered health plan has a coinsurance requirement of 20% for inpatient surgery. Plan amended to increase the coinsurance requirement to 25%. Increase in percentage causes loss of grandfathered status

4. Increase to copayment, deductible, or out-of-pocket maximum

If increase is to a deductible or out-of-pocket maximum, cannot exceed medical inflation plus 15 percentage points

If increase is to a copayment, cannot exceed greater of

• Medical inflation plus 15 percentage points or

• Medical inflation plus $5 (e.g., $5 + ($5 × medical inflation))

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5. Decrease in employer’s contribution rate

A decrease of more than 5% below the contribution rate that was in effect on March 23, 2010 will end grandfather status

Measured based on each “tier” of coverage (e.g., self-only, family)

Determine contribution rate based on applicable COBRA premium (without the 2% surcharge)

6. Changes to overall annual dollar limit

Addition of a new overall annual limit on the dollar value of benefits will end grandfather status

Decrease in an existing annual limit will end grandfather status

Change a lifetime limit to an annual limit will end grandfather status if the annual limit is lower than the lifetime limit

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7. Changes made in disregard of anti-abuse rules

Merger/acquisition: Grandfathered status lost if the principal purpose of a transaction is to cover new individuals under a grandfathered plan

Employee transfer: Grandfathered status lost, if

1. employees are transferred from a grandfathered plan;

2. the “change” to transferor plan (if made as an amendment) would have caused a loss of grandfathered status; and

3. there was no bona fide employment-based reason for the transfer (an employer’s concerns over cost of coverage is not considered an employment-based reason)

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Documenting grandfathered status

• Must provide notice in all plan materials that plan “believes” it is grandfathered

• Must explain what grandfathering means and that it can be lost

• Regulations include model notice

• Must maintain records documenting plan grandfathered status

• Must make records available upon request

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Nondiscrimination for Insured Plans Determined Under IRC 105(h)

Applies later of (i) first plan year beginning on or after September 23, 2010 or (ii) when plan loses its grandfathered status

Already applies to self-funded plans

For insured plans, however, the penalty is $100/day with respect to each individual to whom the failure relates, not taxation of benefit payment, capped at the lesser of 10% of premium costs in the prior year or $500,000

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• Under Code §105(h): a plan cannot discriminate in favor of highly compensated individuals (“HCEs”) as

to eligibility to participate (referred to as the “Eligibility Test”); and the benefits provided under the plan cannot discriminate in favor of participants

who are HCEs (referred to as the “Benefits Test”)

• An individual is an HCE if he or she is: One of the five highest paid officers; A shareholder who owns more than 10 percent of the employer’s stock; or Among the highest paid 25 percent of all employees (other than excludable

employees who do not participate in any plan sponsored by the employer)

• Assessment of HCE and Testing Performed on a Controlled Group Basis Look for subsidiaries, brother-sister controlled group, affiliated service groups Note:Note: Don’t believe the myth—separate EIN is meaningless

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• ELIGIBILITY TEST Three alternative tests:

the 70% test; the 70%/80% test; or a nondiscriminatory reasonable classification test

For testing, employers may exclude employees who: Have less than three years of service; Are under age 25; Are “part-time” or “seasonal employees”; and Belong to a union or who are nonresident aliens Note: Part-time employees for this purpose are those whose customary

weekly employment is less than 35 hours, if other employees have substantially more hours; provided, however, that any employee whose customary weekly employment is less than 25 hours may be considered as a part-time employee.

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• ELIGIBILITY TEST The 70% test:

The plan benefits 70% or more of all non-excludable employees e.g., 100 non-excludable employees, at least 70 must be covered

The 70%/80% test: The plan “benefits” 80% or more of all non-excludable employees who are

eligible to benefit under the plan and 70% or more of all non-excludable employees are eligible to benefit under the plan

e.g., 100 non-excludable employees, at least 70 must be eligible for coverage and at least 80% of those employees (56) are covered

Reasonable Classification test: The plan benefits a classification of employees set up by the employer

which is found by the Internal Revenue Service not to be discriminatory in favor of HCEs

In general, made based upon the facts and circumstances of each case, applying the same standards as are applied under section 410(b)(1)(B)

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• Example Employer sponsors a self-insured HMO in which its rank and file participate Employer establishes an executive-only fully insured plan which is a POS plan and

in which only the executives of the Company may participate There are 100 employees; only 10 executives are eligible to participate Result:

Once executive plan loses its grandfathered status, this arrangement will fail the Eligibility Test, as only 10% of the workforce is eligible to participate.

Penalty of $100 per day will apply

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• BENEFITS TEST All benefits provided to any one HCE are provided to all non-HCES on the same

basis; and The plan must also not discriminate in favor of HCEs in actual operation Essentially, if any benefit is provided to an HCE that any non-HCEs do not receive,

the plan will fail the benefits test

Myth BusterMyth Buster: Benefits are not only those benefits included in the plan—IRS has ruled that benefits include any premium contribution that is greater for HCEs, shorter waiting periods, longer COBRA, etc. are all benefits

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• BENEFITS TEST Example:

If an employer pays a greater percentage of premium for any of its HCEs than for all of its non-HCEs, the plan will fail the Benefits Test

Similarly, if an employer extends the post-termination COBRA or other coverage for an HCE and does not provide the same extension to all non-HCEs, the plan will fail this test

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• ObservationsAre executive insurance products dead?Under 50 exclusion from penaltyPotential work arounds for other practices

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Nondiscrimination Rules for Cafeteria Plans

The proposed cafeteria plan regulations released in 2007 reinforce that nondiscrimination testing must be performed annually for all cafeteria plans.

Testing must be performed as of the last day of the plan year and must take into account all non-excludable employees (and former employees) who were employed on any day during the plan year.

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• There are three cafeteria plan nondiscrimination tests 1. Key Employee Test If a plan provides nontaxable benefits to key employees (as

defined under Code section 416(i)(1)) in excess of 25% of the aggregate nontaxable benefits provided to all employees through the cafeteria plan, key employees will be taxed on the amounts that have been deducted from their pay on a pre-tax basis

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• There are three cafeteria plan nondiscrimination tests 2. Eligibility Test A cafeteria plan must not discriminate in favor of HCEs as to

eligibility to participate. An HCE is any employee who, for the prior year (or current year if a new employee) is an officer, 5% shareholder, or an employee who received compensation greater than $110,000 in 2010 (indexed for inflation) and is among the top 20 % of the employees ranked by compensation.

Note:Note: This is a different definition of HCE than is used for purposes of 105(h)

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• There are three cafeteria plan nondiscrimination tests 3. Contributions and Benefits Test A cafeteria plan must not discriminate in favor of HCEs as to

contributions and benefits. This means that a plan must: give each similarly situated participant a uniform opportunity

to elect qualified benefits, and the actual election of qualified benefits through the plan must not be disproportionate by HCEs; and

give each similarly situated participant a uniform election with respect to employer contributions, and the actual election with respect to employer contributions for qualified benefits through the plan must not be disproportionate by HCEs

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• Nondiscrimination in Actual Operation In addition to not discriminating as to either benefit availability or

utilization, a cafeteria plan cannot discriminate in favor of HCEs in actual operation

For example, a particular nontaxable benefit offered through the plan for a period during which only HCEs would utilize the plan or benefit

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• “Safe Harbor” for Cafeteria Plans providing health benefits A safe harbor test is available for plans that provide health

benefits (excluding health care FSA coverage) The safe harbor from the contribution and benefits test exists if

contributions for each participant include an amount that either: equals 100% of the cost of the benefits selected by the

majority of similarly situated HCEs; or is at least 75% of the cost of the highest cost benefits

selected by any similarly situated participants Note that any contributions above the safe harbor must be

proportionate to participants’ compensation

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• “Safe Harbor” for premium-only plans A cafeteria plan that offers the same benefits at the same cost to

all HCEs and non-HCEs is deemed to meet the nondiscrimination requirements

This safe harbor is not available for plans offering a health care FSA

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• Anti-abuse rule for cafeteria plan nondiscrimination testing A plan will not be treated as satisfying the applicable

nondiscrimination requirements if there are repeated changes to testing procedures or plan provisions that have the effect of manipulating the nondiscrimination testing requirements “if a principal purpose of the changes was to achieve this result”

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Nondiscrimination Rules for Group Term Life Insurance Plans

• Nondiscrimination for Group Term Life (GTL) Plans If employer-provided group term life insurance is discriminatory,

key employees lose the exclusion from income for the first $50,000 of coverage.

Additionally, the key employees’ coverage will be taxed at the greater of the “table value” (i.e., the value determined using the Table I rates) or the actual cost

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• Group Term Life Insurance Eligibility Test Employer-provided group term life insurance cannot discriminate in favor

of key employees as to eligibility to participate. This test is passed by meeting one of four alternative tests:

1. the Cafeteria Plan Piggyback Test;

2. the 70% Test;

3. the 85% Test; or

4. the Reasonable Classification Test

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• Group Term Life Insurance Eligibility Test1. the Cafeteria Plan Piggyback Test

A group term life insurance plan does not discriminate as to eligibility if it is part of a cafeteria plan that meets the requirements of Code §125

This provision simplifies nondiscrimination testing for employers that offer group term life insurance coverage through their cafeteria plans, because only one eligibility test (the cafeteria plan eligibility test) must be run

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• Group Term Life Insurance Eligibility Test2. the 70% Test

A group term life insurance plan does not discriminate as to eligibility if the plan benefits 70% or more of all employees of the employer, including employees of controlled group members and leased employees

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• Group Term Life Insurance Eligibility Test3. the 85% Test

A group term life insurance plan does not discriminate as to eligibility if at least 85% of all employees who are participants under the plan are non-key employees.

There is some data collection involved in this test, and a mathematical comparison between the number of key employees and non-key employees participating is required, but this is a relatively simple test to run

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• Group Term Life Insurance Eligibility Test4. the Reasonable Classification Test

A group term life insurance plan does not discriminate as to eligibility if it benefits a classification of employees set up by the employer which is found by the Internal Revenue Service not to be discriminatory in favor of HCEs

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“Simple” Cafeteria Plans under PPACA

• Simple Cafeteria Plans

Effective January 1, 2011, PPACA provides eligible small employers with a safe harbor from the nondiscrimination requirements for cafeteria plans, group term life insurance, and health care and dependent care FSAs

Under the safe harbor, the plan will be treated as meeting the specified nondiscrimination requirements if the cafeteria plan satisfies minimum eligibility and participation requirements and minimum contribution requirements

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• Simple Cafeteria Plans – Eligible Employer An eligible employer is an employer who employed an average of 100 or

fewer employees on business days during either of the two preceding years.

If an employer was an eligible employer for any given year, then the employer remains an eligible employer until the employer employs an average of 200 or more employees during any year preceding any such subsequent year.

Tax-controlled group rules apply

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• Simple Cafeteria Plans – Eligibility Requirement The eligibility requirement is met only if all employees (other than

excludable employees) are eligible to participate, and each employee eligible to participate can elect any benefit available under the plan

Excludable employees for purposes of a simple cafeteria plan are those who:

have not attained age 21 before the end of the plan year; have fewer than 1,000 hours of service in the preceding

year; have not completed one year of service as of any day

during the plan year; or are covered under a CBA or are nonresident aliens

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• Simple Cafeteria Plans – Minimum Contribution The minimum contribution requirement is met if the employer provides a

minimum contribution for each non-HCE in addition to any salary reduction contributions made by the employee

The minimum must be able to be applied toward the cost of any qualified benefit (other than a taxable benefit) offered under the plan

The contribution must be equal to:

A uniform percentage (not less than 2%) of the employee’s compensation for the plan year, or

An amount which is not less than the lesser of: 6% of the employee’s compensation for the year, or 2x the amount of employees’ salary reductions

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Questions?September 2010Stacy H. Barrow

[email protected]

20436365 Non-Discrimination Rules Under PPACA September 2010 Stacy H. Barrow [email protected]...

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