Rules Change for Group Health Plans
Another consequence of health care reform: Firms that offer better health care for execs than others face stiff penalties.
Employers that offer an insured group health plan and discriminate in favor of highly paid employees can be slapped with an excise tax of $100 per day per worker discriminated against. Moreover, they’re subject to being sued for not complying with antidiscrimination rules. But existing plans are grandfathered unless they are substantially changed.
Previously, the nondiscrimination rule applied only to self insured health plans. But a little-publicized provision in the new health care reform law extended these requirements to insured group medical plans, effective for plan years starting after Sept. 22, 2010. Thus, for a calendar year health plan the nondiscrimination rules will have to be satisfied beginning with the 2011 plan year, unless the plan is grandfathered.
Generally, to satisfy the nondiscrimination rules a plan must benefit 70% or more of employees, not including workers with fewer than three years of service, those under age 25 and part-time workers. Also, all health benefits provided to highly compensated individuals -- those among a firm’s five highest paid officers or the top 25% of paid workers or a person holding 10% or more of the firm’s shares -- must be given to rank-and-file employees.
It’s a good bet that the Internal Revenue Service will issue additional guidance to help employers understand the rules.
Among the events that can trigger the loss of grandfathered status for insured group health care plans in existence as of March 23, 2010:
• Decreasing the employer’s contribution rate toward the cost of coverage by more than five percentage points below the contribution rate for the coverage period that includes March 23, 2010.
• Boosting the employee’s co-insurance percentage requirement.
• Increasing fixed amount deductibles or out-of-pocket limits by more than 15 percentage points plus the rate of inflation for health care.
• Eliminating benefits for diagnosing or treating particular conditions such as AIDS, diabetes and cystic fibrosis.
• Imposing annual limits on the dollar value of all benefits for plans that didn’t otherwise have such a limit on March 23, 2010.
Note that employers can switch carriers without losing protected grandfathered status, as long as the change in insurers doesn’t significantly increase workers’ costs or reduce benefits available to them.
Employers should act quickly to review their plans to make sure they’re up to snuff. Also, take the time to review employment and severance agreements and retiree medical plans that may provide or extend more favorable health benefits or coverage to executives or managers than to rank-and-file employees.
For example, providing continued medical coverage on a free or subsidized basis to a terminated executive as a severance benefit or as part of a retirement package might run afoul of the nondiscrimination rules. Moreover, agreements to pay COBRA benefits for some employees and not others may be suspect.