IRS Issues Guidance Delaying Enforcement of Nondiscrimination Rules for Insured Health Plans


On December 23, 2010, the IRS issued Notice 2011-1 regarding the application of the nondiscrimination rules under Internal Revenue Code (Code) section 105(h) to non-grandfathered insured group health plans pursuant to the Patient Protection and Affordable Care Act (PPACA). According to the Notice, the IRS will not require insured plans to comply with nondiscrimination rules until further guidance has been issued. Furthermore, to allow insured plans adequate time to comply with the rules, it is likely that future guidance will not apply until plan years beginning at some time after the date that the guidance is issued. Thus, plan sponsors will not be required to pay excise taxes associated with noncompliance with the nondiscrimination requirements until then. The Notice also requested comments on a number of issues that may be addressed in future guidance.


Code section 105(h), which applies only to self-insured medical expense reimbursement plans, includes two nondiscrimination tests – an eligibility test and a benefits test – that are used to determine if a plan disproportionately favors highly compensated individuals. However, because the 1981 final regulations under section 105(h) were complicated and difficult for plan sponsors to administer, the IRS has taken a “no-ruling” position with respect to the application of the rules to specific arrangements, and enforcement has been limited.

PPACA amended part A of Title XXVII of the Public Health Services Act (PHSA) to add a number of insurance market reforms applicable to group health plans. Among the new reforms enacted by PPACA is section 2716 of the PHSA, which provides that a group health plan that is an insured plan must satisfy the requirements of Code section 105(h)(2), and that rules “similar to” the rules in sections 105(h)(3) (relating to nondiscrimination with respect to eligibility), 105(h)(4) (relating to nondiscrimination with respect to benefits), and 105(h)(8) (applying certain controlled group rules) will apply to insured group health plans. Pursuant to PPACA, PHSA section 2716 is effective for non-grandfathered insured group health plans on the first day of the first plan year beginning on or after September 23, 2010. Noncompliant plans are subject to an excise tax of $100 per day, per affected individual.

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