Legislative Alert: PPACA’s Nondiscrimination Provisions
Section 2716 of the Patient Protection and Affordable Care Act (PPACA) contains a
provision that applies the “non-discriminatory” requirements of Section 2716 of the
Public Health Services Act (PHSA) [Section 105(h) of the Internal Revenue Code] to all
non-grandfathered health plans issued on or after September 23, 2010. This provision
prohibits health plans from discriminating in the way benefits or costs are allocated and
shared among classes of employees.
The implementation of the nondiscrimination requirements continues to be delayed. On
January 10, the Internal Revenue Service (IRS) issued Notice 2011-2, which states that
compliance with PPACA is once again delayed for insured group health benefit plans until
at least March 11.1
There is significant confusion surrounding the nondiscrimination requirements. The
following information details the timeline of the attempts on the part of the federal
regulators to clarify these issues.
Provision and Scope
SEC. 2716. PROHIBITION OF DISCRIMINATION BASED ON SALARY.
"(a) IN GENERAL – The plan sponsor of a group health plan (other than a selfinsured plan) may not establish rules relating to the health insurance coverage
eligibility (including continued eligibility) of any full-time employee under the
terms of the plan that are based on the total hourly or annual salary of the
employee or otherwise establish eligibility rules that have the effect of
discriminating in favor of higher wage employees.2”
Generally, the regulations issued pursuant to Section 105(h) apply to employersponsored health benefit plans that cover premiums and expenses for qualified medical
and other specialty plans.3 The recent amendments expand the nondiscrimination
provisions to health benefit plans irrespective of whether they are fully-insured, self
funded or medical reimbursement plans. Some types of plans are excluded from the
new requirements, including “grandfathered” plans, government-sponsored
health plans and limited benefit plans.
The “benefits” provided under the health plan must not discriminate in favor of highly
compensated individuals. The health plan should incorporate several design features in
order to be non-discriminatory. For example, plans should:
1. Establish parity in employee contributions for each benefit level
2. Preclude offering lower co-pays for highly compensated employees
3. Not impose different waiting periods
The employer sponsoring the health plan also must not discriminate in favor of highly
compensated individuals in actual operation. For example, discrimination in operation
could arise if a plan administrator approves certain claims for medical expenses under
the utilization management process for highly compensated employees while denying
them to lower compensated employees.
As the regulation is developed, the definition of terms such as “benefit” and “highly
compensated” will continue to be addressed in the provision development.
Comments and Timelines
Currently, implementation of the anti-discrimination provision continues to be delayed
due to several outstanding issues that need to be addressed. The Department of
Treasury, along with the Departments of Labor (DOL) and Health and Human Services
(HHS), has released a series of public notices to gain guidance on how to best
implement this provision.
Notice one: IRS Bulletin 2010-634
The first notice to address Section 2716 was issued on May 17, 2010. “This notice
invites public comments concerning the application of rules prohibiting insured group
health plans from discriminating in favor of highly compensated individuals. The United
States Department of Labor and the United States Department of Health and Human
Services have reviewed this notice and have advised the Department of the Treasury
and the Internal Revenue Service (IRS) that they agree with it.”
Previous Request for Comments
“The final regulations under section 105(h) of the Code, prohibiting discrimination
in favor of highly compensated individuals under self-insured medical expense
reimbursement plans, were issued in 1981. The Department of the Treasury and
the IRS are considering issuing guidance on the extension, through section 2716
of the PHSA and new section 9815 of the Code, of the requirements of section
105(h)(2) to insured group health plans. The Department of the Treasury and the
IRS request comments on what additional guidance relating to the application of
section 105(h) (2) would be helpful with respect to insured group health plans.”
Comment due: November 4, 2010
Notice two: IRS Bulletin 2011-15
The second notice to address Section 2716 was issued on December 22, 2010. Notice
2011-1 which states compliance with the nondiscrimination provisions of the PPACA are
suspended for insured group health benefit plans until an undefined date.
Request for Comments
“Comments submitted in response to Notice 2010-63 maintained that, without
regulations or other administrative guidance under Section 2716, plan sponsors
are uncertain how to apply the nondiscrimination provisions. In addition to what is
meant by rules 'similar to,' comments raised a number of other issues regarding
the application of Section 2716. Comments suggested that guidance address the
application of Section 2716 before plan years beginning in 2014 (when the State
Exchanges, employer responsibility and penalty provisions, and related provisions
take effect) and also in and after 2014. The Departments recognize that the
guidance under Section 2716 must take into consideration the Exchange
operations and individual and plan sponsor requirements that go into effect after
2013.”
Notice three: IRS Bulletin 2011-26
The IRS continued to delay the implementation of Section 2716. The agency reissued
Notice 2011-1 on January 10, 2011 to gain additional guidance.
Additional Request for Comments
Notice 2011-1 asks 13 key questions that need to be address to successfully implement
Section 2716:
1. The basis on which the determination of what constitutes non-discriminatory
benefits under Section 105(h)(4) should be made and what is included in the
term “benefits.” For example, is the rate of employer contributions toward the
cost of coverage (or the required percentage or amount of employee
contributions) or is the duration of an eligibility waiting period treated as a
“benefit” that must be provided on a non-discriminatory basis?
2. The suggestion made in previous comments that the Departments have the
authority to provide for an alternative method of compliance with Section 2716
that would involve only an availability of coverage test.
3. The application of Section 2716 to insured group health plans beginning in 2014
when the health insurance exchanges become operational and the employer
responsibility provisions (Section 4980H of the Code), the premium tax credit
(Section 36B of the Code), and the individual responsibility provisions (Section
5000A of the Code) and related Affordable Care Act provisions are effective.
4. The suggestion in previous comments that the non-discriminatory classification
provision in Section 105(h)(3)(A)(iii) could be used as a basis to permit an
insured health care plan to use a highly compensated employee definition in
Section 414(q) of the Code for purposes of determining the plan’s nondiscriminatory classification.
5. The suggestion in previous comments that the nondiscrimination standards
should be applied separately to employers sponsoring insured group health plans
in distinct geographic locations and on whether application of the standards on a
geographic basis should be permissive or mandatory.
6. The suggestion in previous comments that the guidance should provide for “safe
harbor” plan designs. Specifically, comments are requested on potential safe and
unsafe harbor designs that are consistent with the substantive requirements of
Section 105(h).
7. Whether employers should be permitted to aggregate different, but substantially
similar, coverage options for purposes of Section 2716 and, if so, the basis upon
which a “substantially similar” determination could be made.
8. The application of the nondiscrimination rules to “expatriate” and “inpatriate”
coverage.
9. The application of the nondiscrimination rules to multiple employer plans.
10. The suggestion in previous comments that coverage provided to a “highly
compensated individual” (as defined in Section 105(h)(5)) on an after-tax basis
should be disregarded in applying Section 2716.
11. The treatment of employees who voluntarily waive employer coverage in favor of
other coverage.
12. Potential transition rules following a merger, acquisition or other corporate
transaction.
13. The application of the sanctions for noncompliance with Section 2716.
Comments due: March 11, 2011
Next Steps
To ensure the smooth implementation of Section 2716, the federal agencies reviewing
comments have stated that the request for public comment and guidance is critical.
Unfortunately, the anti-discrimination provisions, along with many other PPACA
requirements, are difficult to implement due to limited or poor statutory language
construction.
Comments are due on March 11, 2011 for Notice 2011-17, and analysis by HHS, DOL
and the IRS will take place over the next few months. Karen Levin out of the Office of
Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities) will be
the main drafter of the next notice.