336 / What nondiscrimination requirements apply to employer provided health insurance plans?

Editor’s note: Under current law, other than rules concerning discrimination based on health status under HIPAA ’96 that generally apply to both insured and uninsured plans, a plan that provides health benefits through an accident or health insurance policy need not meet the nondiscrimination requirements of IRC Section 105(h) for covered employees to enjoy the tax benefits described in Q 334. For plan years beginning on or after September 23, 2010, which was six months after the date of enactment of the ACA, insured plans that are not grandfathered were expected to be subject to the same nondiscrimination requirements as self-insured plans. Compliance with nondiscrimination rules for health insurance plans was delayed under Notice 2011-1 until regulations or other administrative guidance had been issued. The IRS indicated that the guidance will not apply until plan years beginning a specified period after guidance is issued.

ACA Rules

Under the ACA, a group health plan other than a self-insured plan must satisfy the requirements of IRC Section 105(h)(2). More specifically, the ACA states that rules similar to the rules in IRC Section 105(h)(3) (nondiscriminatory eligibility classifications), Section 105(h)(4) (nondiscriminatory benefits), and Section 105(h)(8) (certain controlled groups) apply to insured plans. The term highly compensated individual has the meaning given that term by IRC Section 105(h)(5).¹

An accident or health insurance policy may be an individual or a group policy issued by a licensed insurance company, or an arrangement in the nature of a prepaid health care plan regulated under federal or state law including an HMO. Unless a policy involves shifting of risk to an unrelated third party, a plan will be considered self-insured.

A plan is not considered self-insured merely because prior claims experience is one factor in determining the premium.² Furthermore, a policy of a captive insurance company is not considered self-insurance if, for the plan year, premiums paid to a captive insurer by unrelated companies are at least one-half of the total premiums received and the policy is similar to those sold to unrelated companies.³

Likewise, a plan that reimburses employees for premiums paid under an insured plan does not have to satisfy nondiscrimination requirements.