The IRS has issued Notice 2011-1, which provides relief from the requirement that non-grandfathered employer-sponsored insured group health plans not discriminate in favor of highly compensated individuals. This is appreciated relief given the potential excise tax of $100 per participant per day that applies to plans that violate this provision.
Background
The Patient Protection and Affordable Care Act (PPACA) provides that an employer-sponsored insured group health plan must satisfy the nondiscrimination rules under section 105(h)(2) of the Code. (Section 105(h) prohibits discrimination in favor of highly compensated individuals, generally the top-paid 25% of employees, under employer-sponsored self-insured group health plans.) PPACA did this by creating a new section 2716 to the Public Health Service Act, which has been incorporated into Code and ERISA. PHSA § 2716 states that “rules similar to the rules contained in paragraphs (3), (4), and (8) of section 105(h) of such Code shall apply.” PPACA § 10101(d). Section 105(h)(3) requires eligibility not be discriminatory, section 105(h)(4) requires benefits not be discriminatory, and section 105(h)(8) applies the controlled group rules under section 414 to this provision.
Although this provision does not apply to grandfathered group health plans (see Interim Final Treasury Regulation § 54.9815-1251T), many employers were concerned that the IRS had not yet issued sufficient guidance on the new nondiscrimination requirement. (The IRS requested comments in Notice 2010-63, 2010 I.R.B. 420 (Sept. 20, 2010), but has not yet issued regulations.)
Relief
Notice 2011-1 provides relief from PHSA § 2716 and states there will be no liability for the excise taxes associated with violating the provision until further guidance is issued. The Notice states:
Because regulatory guidance is essential to the operation of the statutory provisions, the Treasury Department and the IRS, as well as the Departments of Labor and Health and Human Services (collectively, the Departments), have determined that compliance with § 2716 should not be required (and thus, any sanctions for failure to comply do not apply) until after regulations or other administrative guidance of general applicability has been issued under § 2716.
Once the guidance is issued, Notice 2011-1 indicates the Department of the Treasury and IRS do not anticipate that the guidance will be effective until plan years beginning a specified period after the date on which the guidance is issued. This would mean that for calendar year plans the earliest date that the guidance would be effective is January 1, 2012.
Conclusion
The IRS relief is very helpful. This relief allows employers additional time to review their insured group health plans and determine if they are grandfathered, if another exception applies, or if they need to take action to address the restrictions imposed by health care reform. The relief, however, is limited to the nondiscrimination rule under PHSA § 2716 and employers should remember that any other applicable provisions of health care reform continue to apply.
If you have questions about Notice 2011-1, please contact the attorney in the Benefits and Compensation practice group with whom you work.