IRS Delays Application of Affordable Care Act Nondiscrimination Requirements For Insured Health Plans

As most readers are likely aware, the Affordable Care Act ("ACA") extended to insured group health plans the nondiscrimination requirements that previously applied only to self-insured plans. The nondiscrimination provisions generally prohibit favoring Highly Compensated Employees in benefits and eligibility considerations for group health plans. The restrictions were to apply to non-grandfathered insured group health plans effective January 1, 2011. In September, the IRS requested comments regarding the new requirement in Notice 2010-63. In Notice 2011-1, which was issued December 22, 2010, the IRS disclosed that the prevailing comment was that there was simply insufficient guidance for plan sponsors to know how to apply the nondiscrimination requirements. In response to the commenters' concern, the IRS delayed application of the nondiscrimination requirements until after regulatory guidance is in place and employers are afforded an opportunity to bring their practices into compliance.

The Notice includes a list of thirteen specific areas for which comments are requested based on the comments submitted in response to the earlier notice. The first listed category is for guidance as to what constitutes a "benefit" for which discrimination is prohibited. As we have counseled our clients related to compensation and benefits planning for 2011, the nondiscrimination regulations do not expressly prohibit discriminatory employer contributions toward health plan premiums. Employers have commonly paid all or a higher percentage of the premiums for their executive employees as a perquisite of the executive position. That practice continues to be valid for 2011, at least until new regulations are issued and become effective thereafter. Additional areas for comment include whether a "safe harbor" plan design, presumably something less than completely identical insurance arrangements throughout the workforce, might satisfy the nondiscrimination requirements.

Comments regarding what the regulations should require are due to the IRS on or before March 11, 2011. The IRS will then consider those comments as part of its rule-making process and, as a bottom line, the nondiscrimination requirements and the penalties and private causes of action, etc. created by the ACA, will not be applicable until some time after the final regulations are issued and employers and plan sponsors are afforded an opportunity to come into compliance with those requirements are defined.

If you have questions about this Advisory, would like assistance in filing a comment on the proposed rule, or have any other question of labor, employment or benefits law, please contact your LMV attorney at (205) 326-3002.