IRS Delays Enforcement of Highly Compensated Individual Provisions in Health Care Law; Seeks Comment on Future Guidance

Internal_Revenue_Service_logo.pngDue to continued confusion regarding the provisions in the Affordable Care Act that prohibit insured group health plans from discriminating in favor of highly compensated individuals, the IRS has decided to delay enforcement of this section until further guidance is issued. IRS Notice 2011-1 – Affordable Care Act Nondiscrimination Provisions Applicable to Insured Group Health Plans (pdf) – explains that the agency anticipates drafting regulations on section 2716 of the Public Health Service (PHS) Act, which was added by the new health law. In essence, section 2716 prohibits discrimination in favor of highly compensated individuals in insured group health plans. This section does not apply to grandfathered health plans. Failure to comply with this section could result in monetary fines of up to $100 per day per individual for each day the plan does not comply with this requirement.

According to the IRS, plan sponsors have voiced uncertainty as to how to apply these nondiscrimination provisions, and also expressed concern about other aspects of compliance. “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.” Additionally, in order to provide insured group health plan sponsors time to implement any changes required as a result of the regulations or other guidance, the Notice explains that the agencies anticipate that any new guidance will not apply until plan years beginning a specified period after guidance is issued.

In order to formulate regulations on section 2716, the agencies seek public comment on the following issues, a number of which echo comments submitted by Littler in response to the initial request:

  1. The basis on which the determination of what constitutes nondiscriminatory benefits under § 105(h)(4) should be made and what is included in the term “benefits.” For example, is the rate of employer contributions toward the cost of coverage (or the required percentage or amount of employee contributions) or the duration of an eligibility waiting period treated as a “benefit” that must be provided on a nondiscriminatory basis?
  2. The suggestion made in previous comments that the Departments have the authority to provide for an alternative method of compliance with § 2716 that would involve only an availability of coverage test.
  3. The application of § 2716 to insured group health plans beginning in 2014 when the health insurance exchanges become operational and the employer responsibility provisions (§ 4980H of the Code), the premium tax credit (§ 36B of the Code), and the individual responsibility provisions (§ 5000A of the Code) and related Affordable Care Act provisions are effective.
  4. The suggestion in previous comments that the nondiscriminatory classification provision in § 105(h)(3)(A)(iii) could be used as a basis to permit an insured health care plan to use the highly compensated employee definition in § 414(q) of the Code for purposes of determining the plan’s nondiscriminatory classification.
  5. The suggestion in previous comments that the nondiscrimination standards should be applied separately to employers sponsoring insured group health plans in distinct geographic locations, and whether application of the standards on a geographic basis should be permissive or mandatory.
  6. The suggestion in previous comments that the guidance should provide for “safe harbor” plan designs. Specifically, comments are requested on potential safe and unsafe harbor designs that are consistent with the substantive requirements of §105(h).
  7. Whether employers should be permitted to aggregate different, but substantially similar, coverage options for purposes of § 2716 and, if so, the basis upon which a “substantially similar” determination could be made.
  8. The application of the nondiscrimination rules to “expatriate” and “inpatriate” coverage.
  9. The application of the nondiscrimination rules to multiple employer plans.
  10. The suggestion in previous comments that coverage provided to a "highly compensated individual" (as defined in § 105(h)(5)) on an after-tax basis should be disregarded in applying § 2716.
  11. The treatment of employees who voluntarily waive employer coverage in favor of other coverage.
  12. Potential transition rules following a merger, acquisition, or other corporate transaction.
  13. The application of the sanctions for noncompliance with § 2716.

Comments must be submitted by March 11, 2011 and sent to: Internal Revenue Service, CC:PA:LPD:RU (Notice 2011-1), Room 5203, PO Box 7604, Ben Franklin Station, Washington, DC 20224. Hand-delivered comments may be made Monday through Friday between the hours of 8 a.m. and 4 p.m. to the Courier’s Desk, 1111 Constitution Avenue, NW, Washington, DC 20224, Attn: CC:PA:LPD:RU (Notice 2011-1), Room 5203. Submissions may also be submitted via email to: Emailed comments should include the notice number (Notice 2011-1) in the subject line.

This entry was written by Ilyse Schuman.

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.