A January 18th New York Times article (Rules for Equal Coverage by Employers Remain Elusive Under Health Law) reported on the progress, or lack thereof, of the adoption of group health plan non-discrimination regulations under the Affordable Care Act’s insurance market reforms. Though originally slated to take effect in plan years beginning after September 23, 2010, the IRS delayed enforcement of the Act’s non-discrimination rules as applied to fully-insured group health plans to provide time to write regulations. (For an explanation of the delay, please see our January 13, 2011 advisory.)
There is no requirement that the same group health plan benefits be offered to all employees. That is, employers are generally free to cover some groups of employees and not others and to offer different types of benefits with differing employer contributions. In the case of self-funded plans, there have (since 1978) been rules barring discrimination on the basis of eligibility or benefits in favor of a “prohibited group”—here, highly compensated participants. But before the Act (and except for a brief period of time almost 30 years ago) there were no non-discrimination rules that applied to fully-insured plans.
In choosing to impose non-discrimination rules on fully-insured plans, Congress directed regulators to develop standards “similar to” those that apply to self-funded plans. Congress appears to have assumed that the rules that apply to self-funded plans are well understood and well settled. But that is not the case. Regulations implementing the 1978 law (issued in 1980) have failed to keep pace with group health plan evolution and with changes in the U.S. and global business environment. (For example, in 1980, most plans were fully paid by the employer.) Kathryn Wilber, a lawyer at the American Benefits Council who is quoted in the article said it best, when she characterized the existing rules as “outdated, inadequate and unworkable.”
There is another important difference: the rules governing self-funded plans are in the tax code, and violations trigger tax penalties that fall principally on affected prohibited group members. But the Affordable Care Act’s non-discrimination rules governing fully-insured plans take the form of amendments to the Public Health Service Act that are incorporated into the tax code and ERISA. The penalty for violating the latter rule is $1,000 per day for each individual with respect to which there is a failure to comply, i.e., each individual who is discriminated against.
The IRS solicited comments on more than a dozen questions relating to the Act’s insured plan non-discrimination rules (see Notices 2010-63 and 2011-1). With some license, and glossing over some of the underlying technical issues, the most pressing regulatory challenges are:
(1) Is testing to be based on plan design? Or is it to be based on the “take-up” (i.e., actual enrollment) rate?
One would hope that the regulators prescribe a non-discrimination test that is design-based. A utilization-based test would impose enormous compliance burdens, including quantitative (numerical testing) burdens. The problem is that the rules that apply to self-funded plans appear to impose a utilization-based test, which the regulators may feel that they are bound to follow. If there is one pivotal regulatory issue, this is it.
(2) How does one test a plan that has multiple options?
The Times article put it this way:
“One of the questions facing the I.R.S. is whether an employer violates the law if it offers the same health insurance to all employees but large numbers of low-paid workers turn down the offer and instead obtain coverage from other sources, like a health insurance exchange.”
Simply put, the question is: Should a plan that has, say, high, medium and low options, be able to be tested as a single plan—even if (as is likely to be the case) the prohibited group disproportionately elects the “high” option and the rank-and-file group disproportionately elects the “low” and “medium” options? Or should each option be tested as a separate plan? Plans with multiple tiers reflect bona fide, underlying market conditions and life exigencies. So one would hope that the regulators choose the former. The answer to this question is critically important to the operation of private exchanges.
(3) What is the prohibited group?
The Internal Revenue Code has a number of different non-discrimination rules that apply to different types of benefits. The prohibited group definition that applies to self-insured group health plans is different from the prohibited group definition under 401(k) retirement plans, for example. It would greatly simplify administration if the regulators opted to apply the retirement plan definition. But since the definition of what constitutes the prohibited group under the Act’s insured group health plan non-discrimination rules is cross-referenced in the law itself, it might prove difficult for the regulators to adopt some other definition.
Irrespective of when these questions are answered, there are a handful of predictions that are either safe or pretty close to safe:
The focus on non-discrimination in the context of fully-insured plans will likely lead the IRS to circle back and revisit and enforce the rules governing self-insured plans.
It will no longer be possible for employers to provide group health plan coverage only to highly-paid employees.
Employers will not be able to provide more generous contribution rates on the part of prohibited group members, nor will employers be able to limit dependent coverage to prohibited group members.
There is no indication that these rules are anywhere near being issued. In the notice announcing the enforcement delay, the IRS promised that there would be ample time to come into compliance once final rules are issued. So it may be that these rules will not take effect until 2016, or even later.