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Employee Benefits Tip of the Week: Group Health Benefits

04.30.2010

Do you occasionally allow former employees to remain covered under your group health plan after their employment for a period of time?

Generally, Section 105(h) of the Internal Revenue Code of 1986, as amended (the “Code”) prohibits a self-insured medical reimbursement plan from discriminating in favor of highly compensated individuals with respect to eligibility or benefits.  However, the new health care laws (i.e., the Patient Protection and Affordable Health Care Act (PPACA) coupled with the Health Care and Education Reconciliation Act (HCERA)) have amended the Public Health Service Act (the “PHSA”) by adding new Section 2716 which provides that a group health plan (whether self-insured or fully insured) must satisfy the non-discrimination requirements of Code §105(h). 

So why does this matter given that generally the PHSA applies to governmental plans and not to employer sponsored plans?  Well, the new health care law has also amended the Code and the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), to provide that several provisions of the PHSA (including this new Section 2716 referenced above) shall apply to group health plans subject to the Code and ERISA, and a failure to comply can result in an excise tax under Code §4980D of $100 per day of noncompliance, as well as ERISA civil enforcement mechanisms. 

The provision of the health care laws adding the PHSA non-discrimination requirement is generally effective for plan years beginning on or after September 23, 2010.  However, for plans where an individual was enrolled on March 23, 2010 (a “grandfathered plan”), the new non-discrimination requirement does not apply.  Unfortunately, it is not clear whether the non-discrimination requirement could ever apply to a “grandfathered plan.”  For example, it is not clear whether a “grandfathered plan” may cease to be a “grandfathered plan,” and, if so, whether such plan would become subject to the non-discrimination requirement. 

Often, employers with fully insured group health plans have provided certain highly compensated separating employees with post-termination coverage or have paid (on a pre-tax basis) their COBRA premiums.  Situations such as these may well run afoul of the non-discriminatory requirements of Code §105(h), but, in the past, if group health benefits were fully insured, there was no concern because the Code §105(h) non-discrimination requirements only applied to self-insuredmedical reimbursement plans.  But, now, under the new health care laws, the Code §105(h) non-discrimination requirements will apply to fully insured group health plans also, and, if those plans are noncompliant, there are stiff excise taxes that may be imposed.

Employers with fully insured group health plans (as well as those with self-insured group health plans) should carefully consider allowing plans to provide any medical coverage for terminating employees to ensure that such situations do not (and will not in the future) violate the PHSA non-discrimination prohibition.  Such employers with grandfathered plans exempt from the non-discrimination requirement will want to pay careful attention to upcoming guidance on grandfathering issues to determine whether and when their grandfathered plans might lose their grandfathered status.