Health Care Reform Provides Protection Against Insurance Discrimination
Health care reform of 2010 established mandates to prevent discrimination against employees for group insurance based on health factors and to discourage plans that favor highly compensated employees.
Benefit Exclusions and Limitations
New employer group health plans established on or after March 23, 2010 (plans that have not been "grandfathered"), cannot:
- drop individuals from coverage if they get sick.
- deny coverage to children under age 19 with pre-existing conditions.
- impose lifetime or unreasonable annual limits on essential health benefits.*
What are Essential Health Benefits?
As determined by the Secretary of U.S. Health and Human Services, essential health benefits include ambulatory patient services, emergency services, hospitalization, maternity and newborn care, mental health and substance use disorder services (including behavioral health treatment), prescription drugs, rehabilitative and habilitative services and devices, laboratory services, preventive and wellness services, chronic disease management, and pediatric services (including oral and vision care).
Highly Compensated Employees
The second major non-discrimination mandate of health care reform prohibits discrimination in favor of a company's highly compensated employees (HCEs). This applies only to new employer health plans established on or after March 23, 2010 (plans that do not have "grandfathered" status). Individuals are considered HCEs if they are:
- one of the five highest paid officers of a company.
- a shareholder of more than 10 percent of the company's shares.
- one of the highest paid 25 percent of all the company's employees.
What Does it Mean to "Discriminate" in Favor of Highly Compensated Individuals?
There are two ways an employer's plan can discriminate:
- Eligibility: A plan is considered discriminatory unless it benefits a majority of "specified" employees.
- Benefits: A plan is considered discriminatory unless all the benefits it provides to participants who are HCEs are provided for all other participants.
For insured health plans, employers will be fined $100 per day per person who receives discriminatory benefits. (The value of amounts that a discriminatory plan pays or covers for HCEs is not taxable to such individuals.)
Employers will need to perform non-discriminations tests to avoid being fined. While the rules and regulations for the non-discrimination tests are forthcoming, the tests will be complicated. Employers should contact their tax advisor or legal counsel for more specific guidance.
SIMPLE Cafeteria Plans Provide a "Safe Harbor" from Non-discrimination Testing.
The good news is that the new SIMPLE cafeteria plan regulations provide for a "safe harbor" from non-discrimination testing requirements for small employers that allow employees to contribute to health insurance premiums on a pre-tax basis.
Eligible Employers
Employers with an average of 100 or fewer employees on business days during either of the two preceding years are eligible for the simple cafeteria plan.
- An employer that was previously eligible will remain so for each subsequent year until they exceed an average of 200 or more employees for the prior year.
- For new businesses, eligibility is based on the number of employees the business reasonably expects to employ for the current year.
Employee Eligibility
All employees who worked at least 1,000 hours during the prior plan year must be eligible to participate in the plan and be able to elect any benefit available under the cafeteria plan the same terms and conditions.
An employer can exclude the following from the eligibility requirement:
- Employees under age twenty-one prior to the end of the plan year
- Employees with less than one year of service
- Employees covered under a collective bargaining agreement
- Non-resident aliens
Employer Contribution Requirements
Regardless of whether a qualified employee makes any salary reduction contribution, the employer must make a contribution under the plan on behalf of each qualified employee in an amount equal to:
- a uniform percentage (not less than 2 percent) of the employee's compensation for the plan year, or
- an amount that is not less than the lesser of:
– 6 percent of the employee's compensation for the plan year, or
– twice the amount of the salary reduction contributions of each qualified employee (the rate of matching contribution for HCE or key employees cannot be greater than the rate for NHCEs).
What is a grandfather provision?
A "grandfather provision" delays the time a new rule will apply to some plans or may even provide a complete exemption from the rules for other plans. Plans that provided coverage on or prior to March 23, 2010 are grandfathered. If your plan did not provide coverage until after March 23, 2010, it is not exempt under the Grandfather Provision.
Prohibited eligibility criteria
Effective immediately, new group health insurance plans established on or after March 23, 2010 (non-grandfathered plans) are prohibited from establishing health benefits eligibility criteria based on health status-related factors, such as medical history, physical or mental condition, or claims experience.
Beginning in 2014, health plans are prohibited from denying coverage to individuals of all ages with pre-existing conditions.
Paychex Insurance Agency Can Help
Paychex Insurance Agency is a full-service organization ready to provide information and guidance about this issue. As additional details and guidance become available, we can help you:
- learn more about plan non-discrimination, and other health care reform provisions.
- understand what could cause a health plan to lose its grandfathered status.
- understand how to determine which employees are HCEs and the value of the coverage to be taxed.
- understand how to determine if a non-grandfathered plan violates the non-discrimination rules.
- understand how a SIMPLE cafeteria plan can be used to avoid the non-discrimination testing requirements.
Although we are waiting for additional details and guidance, Paychex Agency is exploring ways we can perform HCE eligibility and benefits compliance testing and/or set up and administer SIMPLE cafeteria plans for clients.
Health Care Reform Updates
An essential partner to over 550,000 businesses nationwide, Paychex closely monitors legislation that affects our clients. With access to legislative and regulatory specialists in Washington, D.C. and utilizing expert, in-house sources of legal and compliance guidance, Paychex Insurance Agency will continue to provide the latest information on health care reform.
Paychex Insurance Agency is ready with the coverage you need, when you need it. To speak with a licensed insurance representative about the right plans for your business, your employees, and yourself, call 877-393-8868 or have an agent call you.
*The Act requires the Secretary of Health and Human Services to determine what benefits constitute essential health benefits and specifies several categories of benefits that must be included in the definition. These essential health benefits are a minimum requirement, and plans may offer benefits beyond this requirement.
The Department of Health and Human Services and the Internal Revenue Service (IRS) continue to provide specifics and guidance on the Health Care Reform Act. Paychex will monitor these regulatory developments and provide updates as appropriate.
The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant. It is provided for informational purposes only. If you require legal or accounting advice, or need other professional assistance, you should always consult your licensed attorney, accountant, or other federally licensed tax professional to discuss your particular facts, circumstances, and business needs.
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