One of many important changes made by the Patient Protection and Affordable Care Act ("Affordable Care Act") is the application of new rules prohibiting discrimination in favor of highly compensated individuals to insured group health plans.  Effective for plan years beginning on or after September 23, 2010, an insured group health plan that fails to comply with Code Section 105(h)’s nondiscrimination requirements is subject to taxes, remedies, and potentially significant penalties. 

On September 20, 2010, the Internal Revenue Service (IRS) released Notice 2010-63 (pdf), which invites public comment on what additional guidance would be helpful with respect to the extension of nondiscrimination rules to insured group health plans.  The Notice further details the dramatically different penalties to which group health plans will be subject depending on the type of plan funding. 

Specifically, if a self-insured plan fails to comply with Code Section 105(h), highly compensated individuals lose a tax benefit.  If, however, an insured group health plan fails to comply with Code Section 105(h), the plan is subject to a civil action to compel it to provide nondiscriminatory benefits and the plan or plan sponsor is subject to an excise tax or civil money penalty of $100 per day per individual discriminated against for each day the group health plan fails to comply with the nondiscrimination requirements.

It is important to note that rules prohibiting discrimination in favor of highly compensated individuals by insured group health plans do not apply to grandfathered health plans.  However, the rules of Section 105(h) of the Code continue to apply to any self-insured medical reimbursement plan regardless of whether the plan is a grandfathered health plan. 

Comments are due to the IRS by November 4, 2010.

Russell D. Chapman and Andrea Jackson co-authored this entry.