Health Care Reform University

Transcription

1 Health Care Reform University

2 Nondiscriminatory Plan Designs Before and After Health Care Reform Erin Ziaja, Vice President, Counsel Chase Cannon, Vice President, Counsel, Benefits Compliance

3 Health Care Reform University First Session on July 11, 2012: PPACA s Status in 2012: The Effect of the Supreme Court Decision and National Elections on PPACA s Implementation

4 Health Care Reform University Second Session on August 15, 2012: Examining PPACA s Impact on Employers and Employees in 2013 and 2014

5 Nondiscrimination: IRC Sections 105 and 125

6 In this session, we will discuss: The nondiscrimination rules under 105(h) and 125 The PPACA nondiscrimination rules for fully insured plans The required nondiscrimination tests under 105(h) and 125 The consequences of violating the nondiscrimination rules Various plan designs that may have discrimination issues Plan of action for employer-sponsored group health plans

7 Nondiscrimination Rules Generally

8 105(h) versus 125 Similarities Both generally prohibit plans from discriminating in favor of Highly Compensated Individuals (HCIs) with respect to plan eligibility and benefits Both allow plans to vary eligibility and benefits based on a bona fide business classification Controlled group rules apply to both

9 Controlled Group Rules IRC section 414 Rules Apply to both 105(h) and 125 Companies under common control are treated as a single employer for purposes of nondiscrimination testing Brother/Sister Controlled Group Five or fewer people own 50% or more of related companies Parent/Subsidiary Controlled Group Parent owns 80% or more of a subsidiary Result of 414 All employees of controlled group are included in nondiscrimination testing

10 105(h) versus 125 Differences Different definitions of HCI Section 125 includes a third discrimination test called the Key Employee Concentration Test Different excludable employees

11 Definition of HCI under 105(h) is Different than under 125 Under 105(h) Under 125 One of the five highest paid officers Any officer More than 10% shareholder More than 5% shareholder Among highest-paid 25% of all employees Compensation greater than $115,000 (for 2012)

12 Highly Compensated Individuals Officers Not defined in the regulations Administrative executive Continuity of service Responsibility not title Look only at current year compensation ( 105h) Shareholders Corporations = stock Partnerships = profits Constructive ownership rules apply Highly paid Does not include excludable employees Includes all compensation

13 Section 125 Nondiscrimination Rules

14 Section 125 Nondiscrimination Testing Three Tests Must Be Satisfied 1) Eligibility Test 2) Benefits and Contributions Test 3) Key Employee Concentration Test

15 Section 125 Eligibility Test Excludable Employees Employees covered by a collectively-bargained plan Non-resident aliens with no U.S.-source income from the employer Employees who are COBRA participants Includable Employees Part-time employees Seasonal employees

16 Eligibility Test Three Alternatives to Pass the Eligibility Test Alternative #1 Plan must actually benefit 70% or more of all employees Alternative #2 70% or more of all employees are eligible to participate, and of those eligible to participate at least 80% must actually benefit under the plan Alternative #3 Reasonable and Nondiscriminatory Classification Based on bona fide business purpose Satisfies ratio percentage test in IRS regulations

17 Section 125: B & C Test Benefits and Contributions Test: Two prongs 1) Availability Prong: Are employer contributions available on a nondiscriminatory basis? Are benefits available on a nondiscriminatory basis? 2) Utilization Prong: Actual election of benefits must not be disproportionate by HCIs

18 Section 125: B & C Test Example Plan offers 100% employer contribution for EEs at Location X, where executives work. Plan offers 20% employer contribution for EEs at Location Y, which is a warehouse. Plan also offers coverage of cancer and infertility, at an additional cost, to EEs at Location X. 80% of Location X EEs elect coverage, while 30% of Location Y EEs elect coverage. 1) Availability Prong: Are employer contributions available on a nondiscriminatory basis? NO Are benefits available on a nondiscriminatory basis? NO 2) Utilization Prong: Actual election of benefits must not be disproportionate by HCIs NO

19 Section 125: B & C Test Safe Harbors Safe Harbor #1 ER contributions for all participants equal 100% of the cost of the plan s coverage for majority of similarly-situated HCIs Step 1: Determine cost of coverage for similarly-situated HCIs Step 2: Determine if ER contributions for all other participants is equal to that cost Safe Harbor #2 ER contributions for non-hcis equal 75% of the cost of most expensive health benefit coverage option Step 1: Determine most cost of most expensive coverage option Step 2: Determine if ER contributions for all participants is equal to 75% of that cost

20 Section 125: Key Employee Concentration Test Key Employees Defined Officers with compensation in excess of $165,000 (for 2012) More-than-5% owners More-than-1% owners with compensation in excess of $150,000

21 Section 125: Key Employee Concentration Test Nontaxable benefits provided to Key Employees must not exceed 25% of the total benefits provided for all employees under the plan: Benefits to Keys = Cannot exceed 25% Benefits to all employees

22 Key Employee Concentration Test Example Cost of health coverage = $3,600 for self; $7,200 for family Key EE elects family health coverage 3 non-key EEs elect self health coverage Number of Employees Employee Pre-Tax Contribution Total Nontaxable Benefits Key 1 $7,200 $7,200 Non-Key 3 $3,600 + $3,600 + $3,600 $10,800 $18,000 $7,200/$18,000 = 40% = Key EE Concentration Test Failure

23 Section 125: Consequences of Discriminatory Plan IF Plan Fails Any One of These Three: Eligibility Test Contributions and Benefits Test Key Employee Concentration Test THEN The Following Consequences Occur: Prohibited Group Members (HCIs and Keys) are taxed on coverage and benefits provided under the cafeteria plan Non-HCIs maintain favorable tax treatment Plan s qualified tax status not jeopardized

24 Scenario Employer A, based in Texas, sponsors a self-insured, pretax plan. Employer A wants to acquire a subsidiary that is located in Oklahoma. The subsidiary sponsors its own selfinsured pre-tax plan, which is richer in benefits than is Employer A s Texas plan. Employer A wants to continue the subsidiary s plan after the acquisition, thus offering different plans to different locations. Is this discriminatory?

25 Issues to Consider Employer A, based in Texas, sponsors a self-insured, pretax plan. Employer A wants to acquire a subsidiary that is located in Oklahoma. The subsidiary sponsors its own selfinsured pre-tax plan, which is richer in benefits than is Employer s A Texas plan. Employer A wants to continue the subsidiary s plan after the acquisition, thus offering different plans to different locations. Is this discriminatory? Issues: Controlled group rules Varying plan eligibility based on geographic location B&C and Key EE Concentration Tests Nondiscrimination rules in context of a merger/acquisition

26 Section 105(h) Nondiscrimination Rules

27 Section 105(h): Excludable Employees Section 105(h) excludes certain individuals from highestpaid 25% of employees Not completed 3 years of service Under 25 years old Part-time Seasonal Collectively bargained employees and Nonresident aliens who receive no U.S. source earned income from employer

28 105 Nondiscrimination Testing Two-part analysis Eligibility Test Benefits Test

29 The Eligibility Test: Are enough non-hcis benefiting from the plan? Must answer the following questions Who is an HCI? What level of participation by non-hcis is enough? What does it mean to benefit from the plan? Who must be included for testing? What combination of entities constitutes the employer?

30 The Eligibility Test A plan may pass under any one of three alternative tests: 70% Test The plan benefits 70% or more of all non-excludable employees Individual actually covered by the plan Employer can choose which employees participate Certain employees can be excluded presuming they are not actually participating in the plan Example: Consultants, Inc. has ten employees: Five highly paid consultants, two office managers and three secretaries. Firm establishes self-insured medical plan and provides coverage to consultants and office managers but excludes secretaries. This plan satisfies the 70% test.

31 Eligibility Test The 70%/80% Test The plan benefits 80% or more of all eligible employees if 70% of employees are eligible to benefit under the plan Step one: Determine whether at least 70% of employees are eligible under the plan Step two: Determine whether at least 80% of those eligible employees are actually participating in the plan Example: One of the office managers opts out of coverage under Consultants, Inc. s plan. The plan satisfies the 70%/80% test. 70% of employees were eligible to participate and 86% of eligible employees actually elect coverage.

32 The Eligibility Test Nondiscriminatory Classification Test Plans may vary eligibility based on bona fide business classifications, so long as plan passes benefits test Part A: Classification must be based on a bona fide business purpose including: Part-time versus full-time Current versus former employees Different geographic location or business lines Occupation type or title Part B: Classification must satisfy certain safe harbor percentage ratio found in IRS regulations Must look at actual numbers

33 Section 105(h): The Benefits Test Are all participants eligible for the same benefits? Are all benefits offered under the same conditions to all participants? If optional benefits are offered, are all participants able to elect each benefit option for the same additional contribution? Are disparate waiting periods being used? Do benefits vary based on age, years of service or compensation? Note Under 105(H)(4) a self-insured medical reimbursement plan does not meet the Benefits Test unless all benefits provided for participants who are HCIs are provided for all other participants

34 Benefits Test: No Discrimination on Face of Plan The plan must have the following characteristics to be considered nondiscriminatory on its face: Required employee contribution for different benefit levels must not discriminate in favor of HCIs Participant contributions will be considered Maximum benefit level that can be elected must not vary based on percent of compensation, age or years of service The type of medical expenses reimbursable must be identical for all participants Applied to benefits subject to reimbursement rather than actual benefit payments Disparate waiting periods cannot be imposed Severe consequences

35 Red Flags in Plan Design Better coverage (more covered conditions, procedures, medications, etc.) Lower copayments, deductibles, out-of-pocket maximums, etc. Higher employer contributions to premiums Longer coverage (employer-paid COBRA) Shorter waiting periods Management-only health coverage

36 Scenario Employer B sponsors a self-insured medical expense reimbursement plan. The office employees are allowed to enroll in the medical plan after 30 days of employment, while the warehouse employees must wait 90 days. All employees are reimbursed for medical expenses for each plan year up to maximum amount of 5% of employee s gross salary for plan year.

37 Issues to Consider Employer B sponsors a self-insured medical expense reimbursement plan. The office employees are allowed to enroll in the medical plan after 30 days of employment, while the warehouse employees must wait 90 days. All employees are reimbursed for medical expenses for each plan year up to maximum amount of 5% of employee s gross salary for plan year. Issues: Benefits tests Varying waiting periods: severe consequences Discriminatory Consequences: Benefits paid to HCI under plan will be excess reimbursement and be includible in individuals gross income to extent benefits paid to such individuals during plan year exceed maximum benefits payable for such year to lowest paid employee in plan.

38 Benefits Test: Discrimination in Operation Discrimination in operation may occur when: Duration of a particular benefit coincides with the period during which an HCI would utilize such benefit If a medical plan or a benefit provided by a medical plan is amended or terminated such that the duration of the plan or benefit favors HCIs Example: A company has a 75% shareholder. The shareholder s spouse undergoes a series of costly in vitro fertilization procedures, which are covered by the plan. After shareholder and spouse have the child, plan is amended to exclude coverage for fertility treatments. Any way in which HCIs actually receive better benefits than non- HCIs through plan design or operation Plan administrator approves certain claims for HCIs but denies for non-hcis

39 105(h) Exemptions Executive Physicals Reimbursement paid for medical diagnostic procedures for HCI Allowable procedures include: Routine medical exams, blood tests and X-rays Retired Employees Employer providing benefits to retired employee that is excludable from gross income is not discriminatory so long as type and dollar limitations of benefits provided to retired HCIs are the same for all other retired participants HMOs

40 Penalties for Noncompliance For self-insured plans under 105(h) Adverse consequences for HCIs HCIs taxed on excess contributions Formula for determining HCI s excess reimbursement varies according to whether the benefits paid to HCIs were the result of discriminatory coverage or discriminatory benefits Discriminatory coverage = Eligibility Test Example: ABC, Inc. employs 100 employees, 40 of whom are covered. The plan fails the Eligibility Test. For that plan year, the plan paid $50,000 in benefits to all participants, $30,000 of which were paid to HCIs. If HCI incurred medical expenses of $4,500, s/he would have $2,700 in excess reimbursements ($30,000/$50,000 x $4,500).

41 Penalties for Noncompliance Discriminatory Benefits Benefits are available to HCIs but not to all other participants in the plan If benefit is available only to an HCI, then the total amount reimbursed to the HCI for that benefit is includible in gross income If benefit is available to non-hci in lesser amount, then the amount available to the HCI will be offset by amount available to the non-hci. Example: Smallco s plan imposes a $5,000 maximum limit on the amount of benefits subject to reimbursement for officers and $1,000 limit for all other participants. One of Smallco s five highest-paid officers received reimbursements of $4,000. S/he will be taxed on $3,000.

42 Penalties for Noncompliance For fully-insured plans under 105(h) and PPACA Adverse consequences for the plan Civil penalty = $100 per day/per individual discriminated against Civil action to compel provision of nondiscriminatory benefits

43 Nondiscrimination Rules for Insured Plans under PPACA Insured group health plans generally required to satisfy nondiscrimination rules in 105(h) Insured benefits excepted from HIPAA portability rules are excepted from PPACA nondiscrimination rules Not applicable to fully-insured grandfathered plans Delayed enforcement and suspension of penalty

44 Plan Design Scenarios

45 Scenario #1 Employer C, based in California, employs 15 employees and sponsors a fully insured, non-gf, pre-tax plan. Employer C wants to limit eligibility to only those employees working full-time, defined as those working 35 hours or more per week. Is this discriminatory?

46 Scenario #1: Issues to Consider Employer C, based in California, employs 40 employees and sponsors a fully insured, non-gf, pre-tax plan. Employer C wants to limit eligibility to only those employees working full-time, defined as those working 35 hours or more per week. Is this discriminatory? Nondiscrimination Issues: Eligibility definition Eligibility test Other Issues: State law PPACA s employer mandate

47 Scenario #2 Employer D, based in Massachusetts, sponsors a full insured, non-gf pre-tax plan. Employer D wants to implement a 1-year eligibility waiting period for all employees. Employer D also wants to vary employer contributions based on years of service. Is this discriminatory?

48 Scenario #2: Issues to Consider Employer D, based in Massachusetts, sponsors a full insured, non-gf, pre-tax plan. Employer D wants to implement a 1-year eligibility waiting period for all non-executive employees. Employer D also wants to vary employer contributions based on years of service. Is this discriminatory? Issues: Varying benefit eligibility based on executive classification 105(h) s prohibition on ER contributions based on years of service 105(h) s delayed application to fully insured plans 125 s current application Other Issues: PPACA s prohibition on excessive waiting periods

49 Scenario #3 Employer E, based in Florida, sponsors a fully insured, grandfathered, employer-pay-all executive carve-out plan. Is this discriminatory?

50 Scenario #3: Issues to Consider Employer E, based in Florida, sponsors a fully insured, grandfathered, employer-pay-all executive carve-out plan. Is this discriminatory? Issues: Likely testing failures under both 105 and 125 But GF status and employer-pay-all status may exempt plan Alternative: Grossing up salaries Other Issues: PPACA s employer mandate in 2014

51 Scenario #4 Employer F, based in Illinois, sponsors a self-insured pretax plan. Employer F currently allows certain retirees to participate in the plan. Those retirees, when actively employed, were HCIs. Is the plan discriminatory?

52 Scenario #4: Issues to Consider Employer F, based in Illinois, sponsors a self-insured pretax plan. Employer F currently allows certain retirees to participate in the plan. Those retirees, when actively employed, were HCIs. Is the plan discriminatory? Issues: Retiree participation in active plan s effect on 105 and 125 Eligibility definition in plan document Alternatives: Retiree-only stand-alone plan

53 Plan Designs that Avoid Discrimination Issues Offer broad coverage, equal benefits, and equal cost to all employees Switch to self-insured plan and have HCIs pay for coverage with after-tax dollars Keep insured plan grandfathered as long as possible Offer retiree coverage under a separate plan Limit discriminatory coverage to excepted benefits

54 Final Health Care Reform University Session September 19, 2012: Understanding Medical Loss Ratio Rebates, the Employer Mandate and the Health Insurance Exchanges Suzanne Spradley, SVP, Sr. Counsel, Legal & Compliance Ford Darger, AVP, Counsel, Benefits Compliance

55 Thank you for attending! National Financial Partners Corp. and its subsidiaries do not provide legal or tax advice. Compliance, regulatory and related content is for general informational purposes and is not guaranteed to be accurate or complete. You should consult an attorney or tax professional regarding the application or potential implications of laws, regulations or policies to your specific circumstances.