Health Plan Non-Discrimination Testing Guide for Fully Insured Plans

Transcription

1 FOR PRODUCERS AND EMPLOYERS Prepared by Principal Life Insurance Company Health Plan Non-Discrimination Testing Guide for Fully Insured Plans

2 Table of Contents Introduction...2 General Overview...3 Applicable Plans...4 Details of the Tests...5 Eligibility Test...5 Benefits Test...7 Consequences Of failing the PHSA Section 2716 non-discrimination tests...7 Potential adjustments if the tests are failed...8 Exhibit A...8 Exhibit B...8 Exhibit C...9 Exhibit D...10 Exhibit E...12

3 Introduction On March 23, 2010, President Obama signed the Patient Protection and Affordable Care Act of 2010 (PPACA) 1. Section 1001 of PPACA adds new Section 2716 to the Public Health Service Act (PHSA), which generally prohibits fully insured, non-grandfathered group health plans from discriminating in favor of highly compensated individuals in accordance with principles set forth in Internal Revenue Code (Code) Section 105(h) that were previously only applicable to selfinsured group health plans. Our guide has two purposes: Provide an overview of the applicable non-discrimination rules as applied to fully insured plans by Section 2716 Assist with assessing employers fully insured group health plans for compliance with the new rules NOTE: Failure to comply with the new non-discrimination rules under PHSA Section 2716 may result in liability for the plan and plan sponsor, including but not limited to excise taxes imposed under Code 4980D. Nondiscrimination testing is an area of great uncertainty. There is very little guidance under Code Section 105(h) and neither official guidance nor regulations have been issued under new PHSA Section 2716 (which refers to Code Section 105(h)). CONSEQUENTLY, WE STRONGLY RECOMMEND THAT EACH PLAN SPONSOR CONSULT WITH QUALIFIED LEGAL ADVISORS REGARDING COMPLIANCE WITH THIS NEW RULE. THIS GUIDE IS NOT INTENDED TO BE, NOR SHOULD IT BE CONSTRUED AS, LEGAL OR TAX ADVICE. PRINCIPAL LIFE INSURANCE COMPANY IS NOT AUTHORIZED NOR DOES IT PURPORT TO PROVIDE TAX OR LEGAL ADVICE AND THIS GUIDE SHOULD NOT BE VIEWED AS A SUBSTITUTE THEREOF. It is intended merely as an educational tool. If you have questions, please contact your Principal Life representative. 1 The same provision was also incorporated into new ERISA Section 715 and new Internal Revenue Code 9815 by reference. 2

4 General Overview Generally, new PHSA Section 2716 prohibits fully insured group health plans that are otherwise subject to PPACA s health insurance reforms from discriminating in favor of highly compensated individuals. See Applicable Plans below for more a more detailed discussion of the plans subject to PPACA s health insurance reforms. PHSA Section 2716 doesn t actually prescribe the specific rules regarding non-discrimination. Instead, new PHSA Section 2716 requires fully insured group health plans to comply with the requirements of Code Section 105(h)(2), (3), (4), (5) and (8). Code Section 105(h) are the applicable non-discrimination tests for self-insured group health plans. To fully understand the new requirements imposed on fully insured group health plans, you must fully understand the requirements imposed by each of the Code Section 105(h) sections referenced in PHSA First, Code Section 105(h)(2) identifies the fundamental non-discrimination requirements. Generally, Code Section 105(h)(2) prohibits group health plans from discriminating in favor of highly compensated individuals as to eligibility to participate in the plan and benefits provided under the plan. Second, Code Section 105(h)(3) and (4) prescribe the following two tests for determining whether the plan satisfies the fundamental non-discrimination requirements set forth in Code Section 105(h)(2): 1. Eligibility Test (Objective, quantitative test): See page 5 of this document for more on the Eligibility Test. 2. Benefits Test (Subjective, facts and circumstances test): See page 7 of this document for more on the Benefits Test. PRACTICE POINTER: For purposes of the Eligibility Test, employers may exclude certain categories of employees (e.g., part-time employees) who are not otherwise participants in the plan. See Exhibit A for a more detailed discussion of the applicable categories of excludable employees. Third, Code Section 105(h)(5) describes a highly compensated individual. A highly compensated individual is defined generally as an employee who is among the top 25 percent highest paid employees of the employer. See Exhibit B for a more detailed discussion of the highly compensated individual. Fourth, Code Section 105(h)(8) indicates that all employees of employers in the same controlled group or affiliated service group determined in accordance with Code Section 414(b), (c) or (m) are considered employed by the same employer. PRACTICE POINTER: The controlled group rules referenced in Code Section 105(h)(8) will have a significant impact on the Eligibility Test results because employees of another employer in the same controlled group must be considered in your calculations even though they are not eligible for the plan being tested. See the Eligibility Test on page 5 for a more detailed discussion. See Exhibit C for a high level overview of the controlled group rules. 3

5 Applicable Plans General Only fully insured, non-grandfathered group health plans that are subject to PPACA s health insurance reforms (HIRs) are subject to the new non-discrimination requirements set forth in PHSA Section Simply put, HIRs were added to the HIPAA subparts of the Public Health Service Act (PHSA), ERISA, and the Internal Revenue Code. The HIPAA subparts of the PHSA, ERISA, and the Code are virtually the same and they include provisions such as HIPAA special enrollment, non-discrimination based on health status, and mental health parity, among others. The HIPAA subparts, and the HIRs, apply to all group health plans (including plans subject to collectively bargained agreements) other than those arrangements that are limited to excepted benefits or otherwise meet the small plan exception (for plans that have fewer than two current employees). The application analysis is simple: A. Is the plan a group health plan? If NO, STOP! It is not subject to the HIRs. If YES, go to B. B. Is the plan an excepted benefit? If YES, STOP! It is not subject to the HIRs even though it is a group health plan. If NO, go to C. C. Is the plan a small plan? If YES, STOP! It is not subject to the HIRs, even though it is a group health plan. If NO, the plan is generally subject to the HIRs. See Exhibit D for a more detailed discussion of what constitutes a group health plan and which benefits qualify as excepted benefits. What is a fully insured plan for purposes of Section 2716? Although not crystal clear, it would appear that a plan subject to new PHSA Section 2716 would include plans and any portion of a plan for which health insurance coverage is issued by a health insurance issuer. Health insurance coverage is defined in PHSA Section 2791(b)(1) as follows: The term health insurance coverage means benefits consisting of medical care (provided directly, through insurance or reimbursement, or otherwise and including items and services paid for as medical care) under any hospital or medical service policy or certificate, hospital or medical service plan contract, or health maintenance organization contract offered by a health insurance issuer (emphasis supplied). The term health insurance issuer is defined in PHSA Section 2791(b)(2) as follows: The term health insurance issuer means an insurance company, insurance service, or insurance organization (including a health maintenance organization, as defined in paragraph (3)) which is licensed to engage in the business of insurance in a State and which is subject to State law which regulates insurance (within the meaning of section 514(b)(2) of the Employee Retirement Income Security Act of 1974). Thus, the portion of a group health plan s benefits that are provided pursuant to an insurance policy or certificate offered by a health insurance issuer is subject to new PHSA Section 2716 non-discrimination testing. PRACTICE POINTER: Stop loss is generally not considered health insurance coverage unless regulated by the state as such. 4

6 Details of the Tests Eligibility Test General To satisfy the non-discriminatory Eligibility Test set forth in Code Section 105(h)(3), a plan must satisfy at least one of the three subtests set forth below. Subtest A. The plan must benefit 70 percent of all non-excludable employees (i.e., 70 percent of all non-excludable employees must participate); Subtest B. 70 percent of all non-excludable employees are eligible and at least 80 percent of all those that are eligible for the plan actually benefit under the plan; or Subtest C. Each classification of employees eligible for the plan is a non-discriminatory classification. The Non-Discriminatory Classification Test has two parts: 1. The classification(s) of employees eligible for the plan must be reasonable. 2. The classification(s) must be non-discriminatory under a safe harbor test. See Non-Discriminatory Classification Test below for a more detailed discussion of this subtest. Non-Discriminatory Classification Test (i) Reasonable Classification In order to pass this test, each eligibility classification must be reasonable, at a minimum. A reasonable classification is established by the employer if it is established under objective business criteria that identify the category of employees who benefit under the plan. Examples of objective business criteria are as follows: Salaried Hourly Full-time Part-time Type of job (e.g., mechanics, management, etc.) Geographic location Although this portion of the test requires objective business criteria, it is still a subjective, facts and circumstances test. You should consult with your legal or tax advisor when using this test, particularly if the eligibility classifications under the plan do not fall under one of the above mentioned objective business criteria. (ii) Safe Harbor Test In addition, the reasonable classification must pass the Safe Harbor Test. The Safe Harbor Test compares the percentage of non-excludable non-highly compensated employees who are benefiting under the plan with the percentage of nonexcludable highly compensated employees who are benefiting under the plan. 5

7 The following is a summary of how to conduct the safe harbor portion of the non-discriminatory classification test: 1. Determine the benefiting percentages for each group of employees. The eligibility percentage for each group is determined by dividing the number of employees in the group that are benefiting by the total number of employees in that group. For purposes of this guide, HCI refers to highly compensated individuals and NHCI refers to non-highly compensated individuals. EMPLOYEE GROUP BENEFITING PERCENTAGE Highly compensated employees Non-highly compensated employees HCIs benefiting Total non-excludable HCIs NHCIs benefiting Total non-excludable NHCIs 2. Determine the plan s ratio percentage. A plan s ratio percentage is: NHCI benefiting percentage HCI benefiting percentage 3. Determine the plan s non-highly compensated employee concentration percentage, which is the percentage of the employer s non-excludable employees that are non-highly compensated. Total non-excludable NHCIs Total non-excludable employees 4. Once the plan s NHCI concentration percentage has been determined, the safe harbor and unsafe harbor percentage is identified using the Non-Discriminatory Classification Chart (see Exhibit E). The safe and unsafe harbor percentages correspond to the plan s NHCI concentration percentage. If the plan s ratio percentage is equal to or greater than the safe harbor percentage, then the plan s employee classification is deemed non-discriminatory. If the ratio percentage is less than the safe harbor percentage but more than the unsafe harbor percentage, then the plan may still pass if it passes the facts and circumstances test. Some facts and circumstances to be considered are: The underlying business reasons for the classification. The greater the business reason, the more likely the eligibility classification is non-discriminatory; The percentage of the employer s employees eligible for the plan. The higher the percentage, the more likely the classification is non-discriminatory; Whether the number of employees benefiting under the plan in each salary range is representative of the number of employees in each salary range of the employer s workforce; The difference between the plan s ratio percentage and the safe harbor percentage. The smaller the difference, the more likely the classification is non-discriminatory. What is benefiting for purposes of this test? There is much debate over the definition of benefiting for purposes of the Non-Discriminatory Classification Test. One interpretation is that benefiting means participating in the plan. This is based on the two subtests that precede the Non-Discriminatory Classification Test, both of which define benefiting to mean participating. On the other hand, this test is based on a similar pension discrimination test established in Code Section 410(b). Under Section 410, benefiting means merely eligible. 6

8 Benefits Test The subjective Benefits Test has two parts. Part One: All benefits provided for HCIs who participate in the plan must be available to all NHCI participants. In essence, all employees (both highly compensated and non-highly compensated) who participate in the plan must receive the same benefits on the same terms and conditions. Part Two: The maximum benefit attributable to employer contributions must be uniform for all participants and may not be based on a participant s age, years of service, or compensation. The following facts and circumstances are indicators that a plan may violate the Benefits Test: Management employees can elect a higher annual reimbursement amount. Employer credits are higher for management, salaried, or full-time employees. The annual reimbursement amount is higher for individuals who have more years of service (discounting any carryover amounts under an HRA to the extent that the employer contributions each year were the same for each similarly situated participant). One group of employees is not subject to a waiting period (or a short waiting period) while another group is subject to a waiting period (or a longer waiting period). Consequences of failing the PHSA Section 2716 non-discrimination tests The penalty associated with fully insured plans that fail to satisfy the PHSA Section 2716 requirements differs from the penalty associated with self-insured plans that fail to satisfy the Code Section 105(h) requirements. Under Code Section 105, if a self-insured plan is discriminatory, HCIs are taxed on the excess reimbursements received from the plan. NHCIs are not affected. However, the penalty associated with PHSA 2716 arises under different sections of the various statutes and is not an income tax penalty on the HCIs as it us under Code Section 105. Generally, if the plan sponsor is a private employer, participants may sue the plan to enforce their rights under the plan and the IRS may impose an excise tax of $100 per day for each individual affected. See the chart below for more detail. ERISA Code PHSA (e.g,. non-federal governmental plans) The plan is subject to claims for damages from participants with respect to benefits that should have been received if the plan had complied with PHSA 2716; however, there is no penalty imposed by the DOL. Presumably, NHCIs would bring suit to require benefit adjustments so that the plan no longer discriminates. There is a $100 per day excise tax for each individual impacted by the failure. The penalty may not apply if due to reasonable cause and corrected within 30 days of the date the entity first knew or should have known (exercising reasonable due diligence) of the failure. The minimum excise tax for de minimis failures after notice of examination is $2,500 and $15,000 if the violations after notice of examination are more than de minimis. The maximum excise tax for unintentional failures is the lesser of 10 percent of the amount of benefits paid by the plan during the preceding tax year or $500,000. NOTE: It isn t currently clear who the affected individuals are in the case of a PHSA 2716 violation. Presumably it is the NHCIs but additional clarification from the IRS is needed. CMS may impose an IRS-like penalty $100 per day for each affected individual. 7

9 Potential adjustments if the tests are failed All plans should test during the plan year so that adjustments can be made. The following is a brief overview of the possible adjustments that can be made to reverse the results of a failed test. TEST POTENTIAL ADJUSTMENTS 1. Eligibility Test There are very few adjustments that can resolve an Eligibility Test failure. Essentially, the employer must increase the number of NHCIs that benefit or decrease the number of HCIs that benefit. In some cases the employer may have to do both. Also, the manner in which the plan sponsor interprets the term benefiting (i.e., actually participating or merely eligible) will dramatically impact the results and the options available if the employer fails. 2. Benefits Test If the agencies issue guidance/regulations consistent with the Code Section 105(h) rules and regulations, then the employer should be able to separate the different classifications of employees into separate plans for purposes of testing. For example, if hourly employees are required to contribute less than salaried employees, the employer can segregate hourly and salaried employees into separate plans for purposes of testing. Then, if each plan passes the Eligibility Test, then the plan as a whole passes the tests. Exhibit A Excludable Employees The following employees may be excluded from the data used to conduct the Eligibility Test to the extent that they are actually excluded from participating in the plan. Employees who have not completed three years of service prior to the beginning of the plan year; Employees who have not attained age 25 prior to the beginning of the plan year; Part-time (less than 25 hours per week or up to 35 hours where full-time employees doing similar work in the same industry and location work substantially more hours) or seasonal employees (less than 7 months per year or 9 months where similar employees work substantially more months); Non-resident aliens with no U.S. source income; or Collective bargaining employees (may be excluded whether eligible to participate or not). Exhibit B Highly Compensated Individuals For purposes of Code Section 105(h)(5), a highly compensated individual is any individual who is: One of the five highest paid officers during the current year; or A shareholder who owns more than 10 percent of the value of stock of the employer s stock (at the time a benefit is provided during the year); or An employee that is in the highest paid 25 percent of all non-excludable employees. PRACTICE POINTER: See Exhibit A for a list of the excludable employee categories. In determining employees in the top 25 percent of pay, one interpretation is that only the current year s compensation should be used for Code Section 105(h) purposes. On the other hand, the legislative history to Code Section 105(h) indicates that a look back determination (as used in the definition of HCI for other Code sections, such as Code 8

10 Section 414(q)) is required. Employers should discuss the appropriate approach with legal counsel. Compensation is defined as set forth in Code Section 415(c)(3). Under Code Section 415(c)(3), Compensation includes any amounts included as gross income on the participant s W-2 as well as the following amounts not included in gross income: Pre-tax salary reduction amounts under the Code Section 125 cafeteria plan. Salary reduction amounts mean not only the employee contributions that are withheld from pay, but also any cashable employer credits up to the amount of credits that can be cashed out. For example, assume an employer gives each employee $800 to spend on benefits. The employee may either use the amount to purchase benefits or may waive benefits and receive $400 in cash. The potential cash out amount, $400, should be treated as compensation whether received in cash or not. Pre-tax salary reduction amounts under the Code Section 132 transportation fringe benefit plan. Pre-tax salary reduction amounts under the employer s 401(k) plan. Whether an individual is an officer should be determined upon the basis of all the facts including, for example, the source of his or her authority, the term for which the employee is elected or appointed, and the nature and extent of his or her duties. The term officer implies continuity of service, exclusive of those employed for a special or single transaction. An employee who has the title of an officer but not the authority of an officer is not an officer for these testing purposes. Likewise, an employee who does not have the title of an officer but the authority of an officer is an officer for testing purposes. Typically the term officer would include the president, vice presidents, general manager, treasurer, secretary and comptroller of a corporation, and any other person who performs duties corresponding to those normally performed by persons occupying such positions. Exhibit C Overview of Controlled Group Rules A parent/subsidiary controlled group consists of a parent corporation and one or more subsidiary corporations. A parent/subsidiary controlled group exists if the members of the group (other than the common parent) are at least 80 percent owned by other members of the group, and if the common parent owns at least 80 percent of at least one of the member corporations. Example: The outstanding stock of Company D is owned 50 percent by Company C and 50 percent by Company B. Company A owns 100 percent of Company B and C. A, B, C, and D are all members of the same parent subsidiary controlled group. Brother/sister controlled groups of employers will be deemed to be a controlled group of employers where five or fewer shareholders control the corporations. For this purpose, control is defined as: (i) ownership of at least 80 percent of the entity and (ii) ownership of more than 50 percent of the entity, taking into account the stock ownership of each such person only to the extent that such stock ownership is identical with respect to each such corporation. 9

11 Example: Corporation A and B are owned by the following individuals. SHAREHOLDER CORPORATION A OWNERSHIP PERCENTAGE CORPORATION B IDENTICAL OWNERSHIP Bob 20% 20% 20% John 15% 15% 15% Mike 10% 10% 10% Julie 30% 25% 25% LLC Corp. 25% 30% 25% TOTAL 100% 100% 95% Corporation A and Corporation B are a brother/sister controlled group because: (i) five or fewer shareholders own 50 percent of both corporations taking into account identical ownership interests with respect to each corporation; and (ii) the same five or fewer shareholders own 80 percent of each corporation. An affiliated service group is defined generally as a service organization that regularly performs services in certain professional fields, such as health, law, engineering, for the first service organization and is a shareholder or partner in the first service organization. Example: ABC Corporation, an S corporation, is owned equally by unrelated individuals, A and B. A owns a stock brokerage business, Investments R Us, Inc., with 10 other individuals. ABC Corporation exists solely to service Investments R Us, Inc. For example, ABC maintains the office space, telephone systems, administrative employees, etc., for Investments R Us, Inc. In this example, it would appear that ABC and Investments R Us are in the same affiliated service group.. Exhibit D Group Health Plan and Excepted Benefits What is a group health plan? The definition of group health plan for purposes of the health insurance reforms (including but not limited to new PHSA Section 2716) is the same as the definition of group health plan for purposes of the HIPAA portability rules. The definition varies by statute, but is ultimately broad enough to include all group health plans that provide reimbursement, directly or indirectly, for medical care. More specifically, ERISA and the PHSA define group health plans as follows: [A]n employee welfare benefit plan [as defined in ERISA 3(1)] to the extent that the plan provides medical care (including items and services paid for as medical care) to employees or their dependents (as defined under the terms of the plan) directly or through insurance, reimbursement, or otherwise. Thus, a group health plan for HIPAA purposes under ERISA and the PHSA generally must be a welfare benefit plan (as defined by ERISA) that provides reimbursement for medical care. PRACTICE POINTER: A plan that would be an ERISA plan but for the fact that it covers partners in a partnership is considered a welfare plan for purposes of the health insurance reforms. 10

12 The Code defines group health plan a little differently. The Code defines group health plan by reference to Code Section 5000, which also serves as the definition of health plan for purposes of COBRA. Code Section 5000 defines group health plan as follows: [A] plan (including a self-insured plan) of, or contributed to by, an employer (including a self-employed person) or employee organization to provide health care (directly or otherwise) to the employees, former employees, the employer, or others associated or formerly associated with the employer in a business relationship, or their families. The Code s definition of group health plan is broader than the definition of group health plan in ERISA/PHSA and presumably would include plans or policies that are otherwise not welfare plans under ERISA (e.g., includes plans contributed to by a self-employed individual, such as a partner in a partnership). What are excepted benefits? Group health plans that provide excepted benefits are exempt from HIPAA s portability requirements. There are essentially five subcategories of excepted benefits excluded from HIPAA s portability rules. Those categories are: 1. Benefits that are excluded under all circumstances: Accident or disability income insurance Liability insurance, including general liability and auto liability insurance Workers compensation Automobile medical payment insurance Credit only insurance Coverage for on-site medical clinics 2. The following benefits are exempt when offered through a separate policy or, alternatively, if they do not otherwise constitute an integral part of the plan. For this purpose, a benefit is not an integral part of the plan if the participant has the right to elect the coverage separately from medical and if the participant elects to receive the coverage, the participant is charged a separate premium or contribution. Limited-scope dental or vision benefits. Limited-scope dental coverage is defined as coverage substantially all of which consists of treatment of the mouth. Likewise, limited-scope vision coverage is defined as coverage substantially all of which is treatment for the eyes. Long-term care Nursing home care Home health care Community-based care PRACTICE POINTER: Dental or vision benefits offered under the same plan as medical benefits may still be limited-scope as long as the coverage is voluntary, and the dental and/or vision benefits can be elected separately and a separate contribution is required. 3. Limited-scope specified disease and hospital (or other fixed) indemnity coverage is exempt from HIPAA provided that: Such coverage is provided under a separate policy, certificate or contract of insurance; No coordination exists between the provision of such benefits and any exclusion under any plan maintained by that employer; Benefits are paid for an event regardless of whether benefits are provided under any group health plan maintained by the same plan sponsor. 11

13 PRACTICE POINTER: The regulations clarify that hospital indemnity insurance will qualify as an excepted benefit only if it provides a fixed amount of benefits per day (or other period) for each day the individual is in the hospital, regardless of the amount of expenses. If the policy provides benefits other than a fixed amount per day for hospitalization, the plan fails to qualify as an excepted benefit. For example, if the plan provides benefits only for a fixed percentage of hospital expenses up to a fixed maximum (e.g., 75 percent up to $100 per day), the plan is not an excepted hospital indemnity plan. 4. The following types of benefits if offered under a separate policy or contract: Medicare supplemental policy; TRICARE supplemental policy; Coverage providing similar supplemental coverage to a group health plan. The final regulations clarify that the exception for similar supplemental coverage is limited to coverage that is specifically designed to fill gaps in the primary health coverage such as coinsurance or deductibles (e.g., such as a Medi-Gap or CHAMPUS/TRICARE supplement plan). Coverage that is supplemental only because of the plan s coordination provisions is not similar supplemental coverage. Exhibit E Safe Harbor Table Comparative Coverage Ratios NHCE Concentration Percentage Safe Harbor Percentage Unsafe Harbor Percentage NHCE Concentration Percentage Safe Harbor Percentage Unsafe Harbor Percentage

14 WE LL GIVE YOU AN EDGE Principal Life Insurance Company, Des Moines, Iowa , This summary is an overview of the impact of federal health care reform on self-funded and insured medical customers of Principal Life Insurance Company. It is not a complete statement of the impacts or changes that may result from federal health care reform. State mandates may result in additional benefits not described here. This analysis does not include changes to conversion or state plan designs. This summary is provided for informational purposes only, and is distributed with the understanding that the Principal Financial Group is not rendering legal, accounting, or tax advice. Future guidelines and clarification on Federal Health Care Reform may modify the information provided. GP / Principal Financial Services, Inc.