The Affordable Care Act (ACA) includes a ban on discrimination in insured group health plans. This prohibition on discrimination has applied to self-insured plans for years pursuant to Section 105(h) of the Internal Revenue Code. The ACA extends that prohibition to insured group health plans which can no longer favor highly compensated employees in terms of eligibility for benefits or the value of such benefits. The intent is to prohibit employers from offering enhanced or subsidized health care benefits to highly compensated management employees while at the same time not providing equivalent health benefits to all other covered employees.
Enforcement of the new ACA provisions, which contain severe financial penalties for non-compliant insured plans, was suspended until publication of new IRS regulations. The IRS apparently has come to grips with some of the difficult issues presented, including the thorny issue of whether an employer violates the ACA non-discrimination rules if it offers the same coverage to all employees and rank and file employees choose to obtain coverage elsewhere, such as through a government sponsored health insurance exchange. Those regulations are now expected to be issued by the IRS sometime during 2016.
Employers with either self-insured or fully insured plans should avoid taking action that is likely to violate the current rules or the expected ACA regulations. Such inadvisable conduct would include:
- offering executives free, subsidized or enhanced health coverage
- providing health coverage only to management employees (that also is likely to be a problem under the ACA’s “employer mandate”)
- providing benefits to dependents of highly paid executives that are not available on equivalent terms to dependents of other covered employees
- offering continued group health coverage (other than as required by COBRA) to departing executives as part of a severance package. This practice not only violates the ACA non-discrimination rules that the IRS is likely to finalize but also ignores the terms of the applicable group health insurance contract, which typically extend coverage only to employees who satisfy an active employment requirement.
Recommendations: At this point, we cannot count on any protection from a grandfather provision in the forthcoming ACA regulations. Until we know more about those regulations, employers should minimize their exposure by not entering into any of the arrangements outlined above. See your benefits professional with questions about the new rules and how they may apply to your group health plan.