Under healthcare reform, employers are now required to make sure they are not discriminating in favor of highly compensated individuals, or (HCIs) in terms of who’s covered and by contribution amounts. The rules apply to non-grandfathered fully-insured plans only and have been in effect since September 23, 2010. We take a look at the 3 main components with the new rules beginning with :1) Nondiscrimination Rules, 2) Eligibility Test, and 3) The Benefits Test.
Non-discrimination Rules— Simply, if because grandfathered plans do not apply from the new rules, HCIs will have to follow the discriminatory plans or face tax penalties. Under the Patient Protection and Affordable Care Act (PPACA), the non-grandfathered fully-insured plans must abide by and satisfy the IRS Code Section 105 (h)(2), which says discrimination in favor of HCIs’ is prohibited. To follow the rules, fully-insured plans must pass the eligibility test and the benefits test.
An HCI is defined under the rules as an individual who is
- 1 of the 5 highest paid officers,
- A shareholder who owns more than 10 percent in value of the stock of the employer, or
- 1 of the highest paid 25 percent of all employers (other than an employee excludable as described below).
Eligibility Test– To pass the test, a plan must benefit one of the following:
- At least 70 percent of all employees;
- At least 80 percent of all employees who are eligible to benefit under the plan, or
- A nondiscriminatory classification of employees.
Note: An employer may exclude certain employees from consideration. These are employees who:
- Have not completed three years of service;
- Have not attained age 25;
- Are part-time or seasonal;
- Are collectively-bargained; or
- Are non-resident aliens who do not receive US earned income.
Note: Nondiscriminatory employees shall be defined when there is a business reason for the classification and a sufficient ratio of non-HCIs must benefit. Such examples of these classifications includes compensation categories (such as hourly or salaried), and geographic location.
Benefits Test– In order to pass this test, all benefits provided to the HCIs who participate in the plan must be provided to all other participants as well. Also, the maximum limit with regards to employer contributions must be in par for all participants, and their dependents. The 2 components of the benefits test says a plan must not:
- discriminate on its face in providing benefits in favor of HCIs; OR
- discriminate in favor of HCIs in actual operation (whether a plan discriminates in operation is determined on a facts and circumstances basis).
Lastly, a plan is deemed to be “discriminatory” if for actual obvious reasons or length of duration it favors HCIs.
Credit Source: Benefit Logic Inc, 9/17/10.