Agencies Delay Enforcement of Nondiscrimination Rules for Insured Health Plans

Recognizing that further guidance is needed to help health plan sponsors comply with certain health care reform rules, today the IRS released Notice 2011-1, which delays new health care reform nondiscrimination rules until such time as regulatory guidance may be issued. Absent this Notice, the new nondiscrimination rules would have been effective for the first plan year beginning on or after September 23, 2011 (January 1, 2011 for calendar year plans).

We briefly discussed the new rules in earlier posts, here and here. The Affordable Care Act requires insured health plans not retaining grandfather status to comply with rules, similar to those already in place for self-insured plans, prohibiting discrimination in favor of highly compensated participants. In a departure from the nondiscrimination rules for self-insured plans, however, the Affordable Care Act subjects non-compliant insured health plans to an excise tax of $100 per day per person discriminated against, civil monetary penalty, and civil action to compel nondiscriminatory benefits. (Employers whose self-insured plans fail to comply with nondiscrimination rules simply lose a deduction and face angry executives whose medical benefits become taxable.)

As explained in the Notice, Treasury, Labor, and HHS have agreed to delay enforcement activities until after regulations or other guidance address essential elements of the new nondiscrimination rules. The Notice also includes a request for comments (with more than a dozen specific questions), offering insight into the issues the agencies are considering, such as:

• Which Internal Revenue Code tests should apply?
• Should there be an alternative method of compliance, including a safe harbor?
• What individuals should be considered highly compensated?
• Should the tests be applied separately to different geographical locations?
• Should any coverage provided on an after-tax basis be disregarded for purposes of the test?

Comments on the new rules are due by March 11, 2011. Meantime, the delay in enforcement will be welcome news for many employers who sponsor insured health plans, although given the late date of the Notice employers may already have taken measures to comply with the new rules.