Employee Benefits Blog

Posts tagged Nondiscrimination

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Waiting In The Wings: Obamacare’s Nondiscrimination Rules for Insured Group Health Plans

During the past several months, numerous provisions of the Affordable Care Act have taken their turn on center stage.  For example, starting in early July we have had constant reminders of first the one-year delay in the employer mandate, then the Patient Center Outcomes Research Institute (PCORI) fee, then the exchange notices, and most recently the possibility of a government shutdown over funding the ACA.  There is another ACA provision that has received very little attention to date that may turn out to be among the Act’s most significant changes: the new nondiscrimination rules applicable to insured group health plans.

One of the traditional quirks in the taxation of employee benefits is that, whereas self-insured health plans are subject to significant and potentially punitive nondiscrimination rules under Code Section 105(h), health plans funded through commercial insurance are subject to no discrimination rules.  (In general, Section 105(h) prohibits discrimination as to either eligibility or benefits in favor of highly compensated employees.  For this purpose, the definition of “highly compensated employee” is very broad, in that it includes the highest paid 25% of all employees.)  Thus, employers have been free to provide very rich insurance coverage to certain employees and far inferior coverage to others.  Congress attempted to address this discrepancy in the late 1980’s by enacting Code Section 89.  However, this section was so convoluted and controversial that it was repealed before it came into effect.