Health Care Reform Provides Protection Against Insurance Discrimination

Health Care Reform established mandates to prevent discrimination against employees for group insurance based on health factors and to discourage plans that favor highly compensated individuals (HCIs).

Benefit Exclusions and Limitations

New employer group health plans established on or after March 23, 2010 (plans that are not "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?

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). Additional guidance is expected from the Secretary of Health and Human Services.

Highly Compensated Individuals

The second major non-discrimination mandate of Health Care Reform prohibits discrimination in favor of a company's HCIs. Although these non-discrimination rules already existed for self-insured plans, this mandate now applies these rules to fully insured employer health plans established on or after March 23, 2010 (plans that do not have "grandfathered" status). Originally effective for plan years beginning on or after September 23, 2010 (January 1, 2011 for calendar year plans), the non-discrimination provision applicable to fully insured plans is now not required until after additional guidance is issued. The penalties for failure to comply will not apply until that time.

Individuals are considered HCIs 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 (taking into account attribution rules).
  • One of the highest paid 25 percent of all the company's employees.

SIMPLE Cafeteria Plans Provide a "Safe Harbor" from Non-discrimination Testing

SIMPLE cafeteria plan regulations provide for a "safe harbor" from non-discrimination testing requirements for small employers. Another benefit that SIMPLE cafeteria plans provide is the ability to avoid S125 testing requirements such as the 25% Key Employee Test, the 55% Average Benefits Test, etc. that would be required under a Cafeteria Plan.

Eligible Employers

Employers eligible for the SIMPLE cafeteria plan would be those who employed an average of 100 or fewer employees on business days during either of the two preceding years.

  • An employer who was previously eligible under these rules will remain eligible for the SIMPLE cafeteria plan 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.

Note: For professional employer organization (PEO) participants like Paychex HR Solutions clients, the SIMPLE Cafeteria Plan eligibility requirements are determined at the client level and not at the PEO level.

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 for the same terms and conditions.

The plan can exclude the following from this 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.
  • Nonresident 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 two percent) of the employee's compensation for the plan year, or
  • An amount that is not less than the lesser of:
    – Six 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 HCI or key employees cannot be greater than the rate for NHCIs).

What Is a Grandfather Provision?

A "grandfather provision" delays the time a new rule will apply to some plans or may even provide exemption from some, although not all, provisions of Health Care Reform. 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 a grandfathered plan.

Prohibited Eligibility Criteria

Beginning in 2014, health plans are prohibited from denying coverage to individuals of all ages with pre-existing conditions.

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.

Paychex Insurance Agency Can Help

Paychex Insurance Agency is a full-service organization that has taken a leadership role in transforming how businesses like your adapt to and benefit from the rapidly changing insurance industry. We're ready to offer information and assistance to help you navigate the recent Health Care Reform initiatives.

We can help:

  • Learn more about plan non-discrimination, and other Health Care Reform provisions.
  • Understand what could cause a health plan to lose its grandfather status.
  • Understand how to determine which employees are HCIs 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.

Health Care Reform Updates

With access to legislative and regulatory specialists in Washington, D.C. and expert, in-house sources of legal and compliance guidance, Paychex Insurance Agency is your source for Health Care Reform knowledge, tools, and resources.

Whether you're looking for a Business Owner Policy, Workers' Compensation insurance or group health and life insurance, Paychex Insurance Agency offers flexible, scalable insurance solutions for you, your business and your employees. To learn more about how we can meet your insurance needs, 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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