November 4, Submitted electronically via to

Transcription

1 Aon Hewitt 100 Half Day Road Lincolnshire, IL Tel Fax aonhewitt.com Submitted electronically via to CC:PA:LPD:PR (Notice ) Room 5205 Internal Revenue Service P.O. Box 7604 Ben Franklin Station Washington, DC Dear Sir or Madam: Subject: Notice Request for Comments on Requirements Prohibiting Discrimination In Favor of Highly Compensated Individuals in Insured Group Health Plans Aon Hewitt welcomes the opportunity to submit for consideration our comments relating to Notice requesting comments regarding the application of rules prohibiting insured group health plans from discriminating in favor of highly compensated individuals. Who We Are Aon Hewitt is the global leader in human capital consulting and outsourcing solutions. The company partners with organizations to solve their most complex benefits, talent, and related financial challenges, and improve business performance. Aon Hewitt designs, implements, communicates, and administers a wide range of human capital, retirement, investment management, health care, compensation, and talent management strategies. With more than 29,000 professionals in 90 countries, Aon Hewitt makes the world a better place to work for clients and their employees. Transitional Relief As the Internal Revenue Service (IRS) and Treasury are aware, there are numerous unresolved issues regarding the application of Internal Revenue Code ( Code ) Section 105(h) to group health plans, and it is very likely that any guidance issued will require plan design changes for group health plans on a going forward basis. Therefore, Aon Hewitt respectfully requests a transition and/or nonenforcement period through and until the end of the first plan year beginning six months after proposed regulations are issued. Aon Hewitt further requests that good faith compliance be allowed until the agency releases final regulations. This transitional period will allow the Treasury adequate time to consider all relevant information prior to publishing proposed regulations. It will also afford employers a reasonable time to design their plans to be compliant with the new regulations. Most large employers make plan design decisions six months or more before the beginning of the plan year. This is done to ensure adequate time for an employer s third-party administrator to make programming changes and conduct necessary quality tests prior to annual enrollment (which typically occurs in October or November for most large employers with calendar year plans). Without the full six months to institute design changes prior to the beginning of the plan year, an employer s vendor will not have time to fully test and implement the new procedures, dramatically increasing the likelihood of administrative errors.

2 Page 2 Who Is the Employer for Testing Purposes? When performing nondiscrimination testing, the starting point is identifying the proper testing group. As a general rule, the Code requires employers to conduct such testing on a controlled group basis to ensure employers do not use corporate structure as a mechanism to avoid the application of the requirements. Even where the control group rules apply, there are exceptions in the retirement plan rules, as follows: Qualified separate lines of business under Code Section 414(r); Transitional relief for newly acquired corporations under Code Sections 410(b) and 401(a)(4); and Permissive disaggregation for plans that separately pass coverage under Code Section 410(b). In order to keep the applicable nondiscrimination rules consistent, Aon Hewitt recommends the specific extension of these principals to Section 105(h), with the following qualifications to reflect the unique differences that apply to health and welfare plans: Qualified Separate Lines of Business ( QSLOB ) The QSLOB rules should apply to Section 105(h) regardless of whether an employer applies those rules to their qualified retirement plan. If an employer can demonstrate that an entity qualifies as a QSLOB, an employer should be able to treat that entity as a separate line of business regardless of whether the entity applies the QSLOB rules to their qualified retirement plan. Even though consistency is an understandable goal, the considerations that apply to health plans are very different from those that apply to qualified retirement plans. Those considerations include: Cost Considerations An employer s decision to treat an entity as a QSLOB for qualified retirement plan purposes may have a $2,000 to $3,000 per participant cost, while the same decision for health plan purposes may be a $12,000 to $18,000 per participant cost. Therefore, the decision to treat a subsidiary or other entity required to be aggregated for testing purposes as a QSLOB is a very different economic decision. Coverage Differences While the benefit remains very similar for participants in a qualified retirement plan, regardless of geography, for health plan purposes, the coverage available in different parts of the country may differ from location to location by necessity. In some areas where a company has a subsidiary, the employer may not be able to offer coverage to employees that are located in different geographic locations. Also, the cost of providing similar coverage in different regions may be very different from location to location. Further, it is unclear at this time whether states will allow large multistate employers to participate in the exchanges beginning in 2017, so any coverage offered will have to be outside of the exchanges. Transitional Relief for Mergers and Acquisitions Consistent with the rules that apply to qualified retirement plans, Aon Hewitt recommends that employers be given a transition period to separately test newly acquired entities. This rule is even more important in the health plan arena, where participants accrue credit toward deductibles and out-of-pocket maximums throughout the plan year. If an acquired company is not allowed to keep its existing health plan in place through the remainder of the plan year, there will be a potential significant adverse impact on individuals who have already satisfied their deductible prior to an acquisition. In addition, if the transaction occurs late in the year, the employer will not have time to adequately incorporate the new population into their plans for

3 Page 3 the coming year. As a result, the same transition period that applies to qualified retirement plans under Code Section 410(b)(6)(C) should be extended to group health plans being tested under Section 105(h). Permissive Disaggregation While it appears to be currently allowable, Aon Hewitt requests that the proposed regulations specifically allow employers to test groups that qualify as a reasonable classification of employees to be tested separately for Code Section 105(h) purposes. Dates for Determining Testing Population Current rules for 105(h) nondiscrimination testing appear to require employers to consider all employees that are eligible at any time during the plan year for testing purposes. However, this approach substantially limits an employer s ability to conduct preliminary testing prior to the beginning of a plan year. Because the Section 105(h) nondiscrimination requirements are design-based, the inability to define the testing population until the end of the plan year significantly impairs an employer s ability to develop plan designs that will comply with the applicable requirements before the plan year begins. In order to give employers the opportunity to conduct preliminary testing and provide an opportunity to avoid testing failures, Aon Hewitt recommends that employers be allowed to use a snapshot in time of the employer s population on any day during the prior plan year. Highly Compensated Individuals In performing nondiscrimination testing, employers must identify highly compensated individuals ( HCIs ) for Code Section 105(h) testing purposes. In this regard, Aon Hewitt has the following comments: Definition of Pay Currently, consistent with Code Section 415(c)(3), it appears that any reasonable method of compensation can be used to identify HCIs for Code Section 105(h) testing purposes. Aon Hewitt recommends that the Treasury continue this flexible rule. Calendar Year Plans As a practical matter, current Code Section 105(h) regulations are design driven, and passing or failing hinges heavily upon the plan design. Therefore, Aon Hewitt recommends that employers be allowed to use compensation from the calendar year that ends one year before the beginning of the plan year for purposes of testing a plan design before a plan year begins and to avoid testing failures. For example, for testing in the 2011 calendar/plan year, an employer should be able to use 2009 compensation. Since employees with less than three years of service can be excluded for Code Section 105(h) testing purposes, Aon Hewitt considers this definition of pay to be reasonable, and provides employers with a reasonable opportunity to design their plans to comply with Code Section 105(h) before the beginning of a plan year. Off-Cycle Plan Year Issues Typically, when testing a plan with an off-cycle plan year, compensation for the first calendar year in which the plan year begins is used. As provided above, meeting the requirements of Code Section 105(h) is driven by plan design, making the current rule on using compensation for the first calendar year in which the plan year starts unreasonable for employers that need to have the ability to test a plan design with reasonable accuracy before a plan year starts. Consequently, Aon Hewitt recommends that the proposed regulations provide that it is reasonable for employers to use compensation for the calendar year before the off-cycle plan year begins to test such plans.

4 Page 4 Change HCI Definition Aon Hewitt believes that the current definition of an HCI should be amended. This is because the current rules often treat employees with incomes of less than $50,000 as HCIs for Code Section 105(h) testing purposes. Even with all the allowable exclusions, the current definition of HCI unfairly impacts national employers that must treat employees with compensation as low as $35,000 annually as HCIs under current law. Aon Hewitt recognizes that this would likely require a legislative change but believes that such a change would result in more equitable treatment for employers with a preponderance of lower paid employees. Excludable Employees Section 105(h) allows employers to exclude: Employees who have not completed three years of service; Employees who have not attained age 25; Part-time or seasonal employees; Employees not included in the plan who are included in a unit of employees covered by an agreement between employee representatives and one or more employers which the Secretary finds to be a collective bargaining agreement, if accident and health benefits were the subject of good faith bargaining between such employee representatives and such employer or employers; and Employees who are nonresident aliens and who receive no earned income (within the meaning of Section 911(d)(2)) from the employer that constitutes income from sources within the United States (within the meaning of Section 861(a)(3)). In this regard, Aon Hewitt makes the following recommendation to clarify the exclusions: Part-Time or Seasonal Employees Current regulations define part-time employee as any employee regularly working less then 35 hours per week as long as other employees performing similar work are required to work substantially more than 35 hours per week. The current regulation goes on to state that employees who are regularly scheduled to work less than 25 hours a week or less than seven months a year are excludable. To simplify this approach, Aon Hewitt recommends that the proposed regulations provide that any current employee who is characterized as a part-time employee and who worked less than 1,500 hours in the last full calendar year that ended one full year prior to the beginning of the plan year for calendar year plans can be excluded for testing purposes. As indicated above, since plans can already exclude employees who work less then three years, using data from this time will only directly impact current part-time employees, as employees who work less than three years will already be excluded, and employees who are full-time employees in the current year will not be excluded. Thus, the only way an employee would be excluded under this proposed rule is if he or she has more than three years of service, is currently a part-time employee, and had less than 1,500 hours of service in the calendar year that ended one full year before the beginning of the current plan year. For off-cycle plan years, employers would exclude current part-time

5 Page 5 employees who worked less than 1,500 hours in the last full calendar year that precedes the beginning of the current plan year. A bright line approach would eliminate the interpretative nature of the current regulations. Three Years of Service Current regulations allow employers to exclude employees who have less than three years of service on any reasonable and consistent basis. Aon Hewitt recommends that the proposed regulations specifically allow employers to require 1,000 hours of service in the three consecutive years immediately preceding the plan year but should not require employers to consider any other service, including any service completed prior to the beginning of the three-year period. Requiring the consideration of such prior service is cost prohibitive and administratively impracticable. Union Employees Union employees subject to a collective bargaining agreement ( CBA ) had a right to bargain and agreed to their group health benefit structure. Therefore, Aon Hewitt recommends that union employees subject to a CBA should be excluded from Section 105(h) nondiscrimination testing. Further, group health plans covering only union employees covered by a CBA should automatically be deemed nondiscriminatory. Retiree-Only Fully Insured Group Health Plans The regulatory agencies have clarified that the insurance market reforms enacted as part of the Patient Protection and Affordable Care Act do not apply to group health plans that cover less than two participants who are current employees (i.e., retiree-only plans). The prohibition on discrimination in favor of HCIs is part of those insurance market reforms. Therefore, it logically follows that the Section 105(h) testing requirement should not apply to retiree-only fully insured group health plans. Aon Hewitt believes that it would be helpful if the proposed regulations explicitly stated this conclusion. The Required Code Section 105(h) Nondiscrimination Tests In general, to perform the Code Section 105(h) nondiscrimination tests, an employer must demonstrate compliance with the eligibility and benefits tests. In connection with these tests, Aon Hewitt has the following comments: The Eligibility Test The intent of the eligibility test appears to be to ensure that employers have designed their plans so that enough employees have the opportunity to participate on equal terms (the same benefit, same employee cost share, and same waiting period), and where certain employees are given a preferential benefit (better benefit option, lower cost share for the same benefit others are required to pay more for, or shorter waiting period than is required for other employees), the employer must demonstrate that the group of employees being treated in a preferential manner includes enough non-highly compensated individuals (NHCIs). What Does It Mean to Benefit? In performing the eligibility test, some have interpreted the current law and regulatory guidance in a manner that requires the eligibility test to consider as eligible only those employees who actually participate in the group health plan. They have arrived at this conclusion by focusing on the word benefit and the fact the first two prongs of the test require actual participation to pass. However, the Code also has provisions that apply to qualified retirement plans that treat the right to participate as benefiting employees. In addition, the proposed cafeteria plan regulations focus on the right to participate in conducting the eligibility test.

6 Page 6 In performing the eligibility test under the reasonable classification test, Aon Hewitt contends that the eligibility test should focus only on the right to participate. While the first two prongs of the test do appear to focus on actual participation, they appear to be safe harbors and easy-to-perform tests for employers that have a one-size-fits-all plan design and have very few employees who opt out of coverage. For larger employers, this type of plan design is not prevalent, and in many cases is not even possible where employees are dispersed throughout the country. In addition, the first two prongs of the test should not be read to require that the third prong requires actual participation. To require actual participation would impose a benefits requirement on the eligibility test. Further, the generally accepted definition of eligible is limited to the right to participate. Therefore, if actual participation is used, this should be measured through the benefits test, not the eligibility test. Permissive Disaggregation Once an employer has demonstrated that a group of employees is a reasonable classification of employees in that it covers enough NHCIs to be considered nondiscriminatory, the employer should be able to test that group separately for benefits testing purposes. Measuring whether enough employees are participating should be limited to the group of employees covered under that benefit option that is being offered to a group that is a reasonable classification of employees. Employers should not have to first demonstrate enough employees have a right to participate on equal terms, and then determine if enough people are benefiting under the option based upon the entire population. This approach would limit a national employer s ability to offer different benefit options throughout the country to different groups of employees (because of the coverage variations as discussed in the QSLOB comment above), where there is no intention to treat employees in a materially different manner. Allow Either Fair Cross-Section or Ratio Percentage Test Aon Hewitt recommends that employers be allowed to apply the reasonable classification test using either the fair cross-section test that applied prior to the Tax Reform Act of 1986 or the ratio percentage test. Benefits Test Although the current law and regulation attempts to make the benefits test simple, in operation, it is a very rigid test that does not consider the realities of a large, national employer. The rules on their face require every employee to receive the same exact benefit options, at the same cost share, with the same waiting period, or the plan automatically fails the applicable test. As provided above, once an employer has demonstrated that enough employees have the right to participate on equal terms, the employer then should be able to measure actual participation and whether all employees are being treated equally based upon that group alone, subject to the following qualifications: Insignificant Benefit and Cost Differences for Different Geographic Locations Should Be Allowed It is very difficult, and in many cases impossible, to provide the same exact benefit plan for the same price in different geographic locations. Therefore, Aon Hewitt suggests that employers be allowed to treat different options that have minor differences in benefits or employee cost share but are similar in value as a single benefit plan for testing purposes. In addition, Aon Hewitt believes that employers should be free to negotiate the best deal in each location without worrying that slight benefit or cost differences will require them to test each option as a separate plan. This will allow employers to offer health benefits to their employees on a cost-effective basis. Geographic-Specific Options In many locales, there are region-specific plans that are able to offer better coverage for a lower rate because of the strength of their network in the area. In cases where

7 Page 7 employers offer such options in an effort to offer coverage on a more cost-effective basis to its employees, Aon Hewitt believes that the geographic specific option should not be considered a separate plan for testing purposes where the benefit structure or value is similar to other options offered by the employer. Moreover, there is no reason why employers should be prevented from being able to take advantage of better benefits or better pricing in those locations where higher quality plans or lower premiums can be obtained merely for the sake of meeting nondiscrimination testing requirements. Flex Credits Based Upon a Percentage of Compensation To be consistent with Section 125 regulations, Aon Hewitt recommends that flex credits based upon a percentage of compensation be specifically allowable, as well as employer subsidies based upon a percentage of compensation. Flex Credits Based Upon Age or Years of Service Aon Hewitt recommends that employers be able to provide flex credits that can be used by employees to purchase health insurance though a cafeteria plan. Clarification of Excise Tax Notice indicates that non-grandfathered fully insured group health plans that fail Section 105(h) testing will be subject to an excise tax of $100 per day per individual discriminated against. However, it is unclear how these individuals will be identified. Aon Hewitt recommends that the proposed regulations clarify that the excise tax applies only to NHCIs who are non-excludable and actively employed by the employer when the violation is identified. In addition, Aon Hewitt recommends that the proposed regulations clarify what is meant by due to reasonable cause and not willful neglect and what will be considered willful neglect. Finally, Aon Hewitt recommends that the proposed regulations create a safe harbor from the excise tax if employers can demonstrate that they exercised reasonable diligence in accordance with steps outlined in the proposed regulations. Small Employer Exception The excise tax provision includes an exception for employers that have at least two employees but no more than 50 employees. Additionally, the Patient Protection and Affordable Care Act includes provisions to create simple cafeteria plans that, if complied with, are also excepted from the Section 105(h) rules. Consequently, Aon Hewitt recommends that the proposed regulations indicate that employers that qualify and comply with the simple cafeteria plan rules are deemed to meet the Section 105(h) requirements regardless of whether the employer has more than 50 employees in the preceding calendar year. Closing If you have any questions or comments, please contact the undersigned at the telephone number or address provided below. Sincerely, Aon Hewitt J. Scott Sims (847) scott.sims.2@hewitt.com