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Avoiding Discrimination in Plan Design Under PPACA

06/06/2016

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Nondiscrimination: a potential feature of plans that often goes without discussion.

Due to some potentially damaging rules in PPACA, nondiscrimination must be at the forefront of every employer’s mind when deciding on the proper plan.

As always, the LBMC team is prepared to assist with specific questions and inquiries. For more on this and other issues, contact us using the form or you can call 615.377.4600.

It may seem inevitable that some sort of plan design will be necessary to build an efficient plan for PPACA. Indeed, some design work is required; however, the shape of that design may take many different forms, depending on an individual employer’s goals and obligations. For instance, denial and delaying of coverage may be of higher interest to employers facing increased coverage issues, while efficiently offering a similar range of benefits may better favor an employer with an improved coverage issue.

Ultimately, however, all employers must design a plan that best serves them to maintain flexibility and efficiency with respect to PPACA. With design comes unexpected issues. Chief among them is nondiscrimination.

Nondiscrimination occurs when an employer favors one class of employees over another. Note that not all nondiscrimination is non compliant. Some nondiscrimination is natural in a health plan and to be expected. After all, employees are offered benefits to attract, retain, and motivate those employees. Some employees or classes of employees require greater attraction, retention, or motivation than others, leading to nondiscrimination by necessity (or a fruitless waste of extra benefits on other employee classes).

The nondiscrimination on which to focus is that which causes compliance issues. Some of these nondiscrimination issues are historical and relatively unchanged by PPACA. These issues include gender discrimination, age discrimination, racial discrimination, mental health discrimination, orientation discrimination in some areas of the country, and genetic information discrimination. Statutes such as ADA, MHPA, and GINA exist to prevent these forms of discrimination.

Though the above list is of paramount concern, our attention at present will be focused on PPACA design-related nondiscrimination issues. These issues concern discrimination based on an individual’s status as “highly compensated” or not and affordability discrimination. Each will be analyzed in turn.

Highly compensated discrimination can occur in three different forms at present: self-insured discrimination, HRA discrimination, and fully-insured discrimination.

Self-Insured Discrimination

Self-insured health plans are those for which the employer is ultimately responsible for payment of claims, not an insurance company. Though insurance can be purchased for self-insured plans, it comes in the form of reinsurance. Typical reinsurance plans include medical stop loss and employer indemnification.

Self-insured discrimination is regulated by the tax code more than PPACA. Self-insured discrimination means that in a self-insured plan, excess amounts of benefits granted to highly compensated individuals are includable as gross income for the individual. Normally, individuals do not pay taxes on the health benefits they receive. However, the penalty for self-insured nondiscrimination means that affected highly compensated individuals will pay some taxes on their health benefits.

Many features of this rule are noteworthy. First, this penalty does not necessarily affect the employer adversely. The penalty is on the highly compensated individual, not their employer. That being said, to avoid an angry employee, most employers facing this issue will “gross up” the penalty, paying it on behalf of the employee in a tax neutral manner.

For self-insured discrimination, a highly compensated individual can fall into any of the following categories:

  • One of the top five paid officers
  • A 10% or greater shareholder
  • Or, the top 25% highest paid employees 

Health Reimbursement Arrangement Discrimination

A subset of self-insured discrimination occurs through Health Reimbursement Arrangements, or HRAs. HRAs are employer-funded accounts which participants can use to spend on certain medical expenses. Naturally, HRAs tend to be self-insured, as insurable risk can difficult to identify in a funded account.

HRA discrimination occurs when highly compensated individuals are given a greater amount of money in their HRA than non-highly compensated individuals. The penalty, like self-insured discrimination, is that the highly compensated individuals will pay taxes on the “excess reimbursement.”

HRA discrimination has a unique set of rules to determine if HRA discrimination has occurred. These rules include the following tests: two percentage tests and the classification test. The first percentage test requires HRAs to be accepted by at least 70% of employees. The second percentage test requires HRAs to be accepted by at least 80% of eligible employees, so long as at least 70% of all employees are eligible. One of the two percentage tests must be satisfied. The IRS could also make a special determination, known as the classification test, that the HRA is not discriminatory, however these applications are more costly and rare.

HRA discrimination is increasingly important to employers due to the rise of “defined contribution” health plans. These plans, advertised as a solution to PPACA, permit employers to fund accounts for employees to use on health benefits. Though not every salesperson deems these arrangements HRAs, the resemblance is telling. Though not yet challenged by the federal government, litigation is probable given some of the advertised uses of these HRAs. Most glaring being that the arrangement itself satisfies the employer mandates. Imagine an employer funding an HRA that provides $0.01 to each employee for health benefits. Would that arrangement seem compliant with PPACA?

Though not all HRAs are non compliant, and indeed HRAs can play a valuable role in an employer’s plan design, we urge caution and consultation with independent experts before sponsoring an HRA or any other “defined contribution” health plan. The penalties for non compliance could include HRA discrimination penalties as well as PPACA violation penalties of up to $100/employee/day.

Fully-Insured Discrimination

Fully-insured plans are those plans for which insurance companies are ultimately liable for the payment of claims. Traditional medical plans are almost always fully insured.

In the past, most employers offered health plans only to executive or management-level employees. Under PPACA, these arrangements are likely discriminatory. Unfortunately, the PPACA penalty is not extra taxes for the affected employees. Instead, the penalty is the general PPACA violation penalty of $100/employee/day on the employer, which can continue to be an issue. 

Why does fully-insured discrimination not make the news or come up for discussion now? The simple answer is that it is not being enforced yet. In 2011, the IRS published a notice stating that fully-insured discrimination would need tests (similar to the HRA tests above). However, since existing tests did not comprehensively cover issues with fully insured plans, the IRS was delaying enforcement of fully insured discrimination until further regulations were released. Though delays in PPACA enforcement are not necessarily unique, this delay represents one of the first and longest-running enforcement delays in PPACA, because new rules have yet to be proposed on fully insured discrimination. Thus, while the issue could be front page news one day, for now it remains only a consideration for future plan years.

Note that since fully-insured discrimination is permitted at present, employers should utilize it whenever advantageous. Consider the following plan design: self-insured, low benefit, low risk plan for base level employees. Fully-insured, high benefit, higher risk plan for management and executive level employees. This simple two-plan design avoids discrimination by ensuring no highly compensated individual is enrolled in a self-insured plan. Furthermore, costs are controlled by offering the likely larger pool of base level full-time employees a less expensive plan, while employees requiring greater attraction, retention, and motivation are offered a more robust plan. In this plan design, flexibility is maintained, as well as efficiency compared to offering all employees one very expensive, robust plan.

Affordability Discrimination

Many PPACA educators in the market tout the “9.5%” rule: an employer cannot charge an employee more than 9.5% of his or her monthly adjusted gross income per month for the premium payment of the health plan. If more than 9.5% is charged, the plan will not have “affordability,” which could lead to employer mandate violations.

The response to the 9.66% rule by many consultants and employers has been to create a percentage-based premium cost for sponsored health plans. In other words, employees will pay 9.66% of their monthly adjusted gross income for their premium payment.

The problem with this arrangement is that violates affordability nondiscrimination rules, which carry the ever-present general PPACA violation penalty of $100/affected employee/day. Affordability discrimination states that different premiums cannot be charged to “similarly situated” employees. Of course, when premiums are not a flat dollar amount per employee but a percentage, the almost guaranteed outcome is that similarly situated employees will wind up paying different amounts. Even if these amounts differ by pennies, the penalty remains $100/affected employee/day. Thus, while the strategy outlines above is economically efficient, it is not compliant, and it should never be enacted. Furthermore, the strategy is a litmus test of sorts for “PPACA experts.”

Conclusion

When designing a health plan solution, employers must be cautious of the unforeseen and often ignored issue of discrimination. Discrimination can come in many forms, but compliance with discrimination rules can lead employers to more flexible and efficient arrangements than perhaps previously thought. Thus, attention to discrimination regulations can actually benefit employers in unexpected ways, and such attention is encouraged.

LBMC can help you navigate through the extensive ACA requirements, determine any penalty exposure, and develop strategies to eliminate or reduce future penalty exposure. Learn about our ACA Compliance Consulting and Tracking services.

External PPACA Resources: