Individuals & Families Employers Brokers Physicians Health & Wellness

Non-Discrimination

Timeline of Provisions

Non-Discrimination 105(h) Rules

Provisions to be effective following future regulatory guidance

Summary

Insured group health plans may not discriminate in favor of highly compensated employees under the Internal Revenue Code Section 105(h). This provision previously applied to self funded plans only but will apply to fully insured non-grandfathered plans as well, following future issuance of specific guidance on the rules' application to insured plans.

Based on public comments in response to the earlier notice, Notice 2011-1 was issued on December 22, 2010, which announced that insured plans are not required to comply with the rules until further guidance is provided. Until that time, sanctions for failure to comply with the rules will not apply. Furthermore, the agencies expect that when such guidance is issued, its effective date will be delayed until plan years beginning a certain time after its issuance. Public comments were also requested on 13 specific issues.

More Information

Non-discrimination provision for Section 105(h) management carve-out rules

Frequently Asked Questions

Have the enforcing federal agencies issued any guidance to date on application of the 105(h) rules to insured group health plans?

No formal guidance has been issued to date on specifically how the 105(h) rules will apply to fully insured plans. On September 20, 2010, the Department of Treasury and IRS published Notice 2010-63, which indicated they are considering issuing such guidance and requested public comments on what additional guidance would be helpful. The Notice stated that a plan that fails to comply with the 105(h) rules will be subject to the $100 per day penalty "per individual discriminated against." This indicates the penalty will be based on the number of non-highly compensated individuals that are discriminated against under the discriminatory health plan.

Based on public comments in response to the earlier notice, Notice 2011-1 was issued on December 22, 2010, which announced that compliance with the rules will not be required of insured plans until guidance is provided regarding their application. Until that time, sanctions for failure to comply with the rules will not apply. Furthermore, the agencies expect that when such guidance is issued, its effective date will be delayed until plan years beginning a certain time after its issuance.

How do the new ACA changes, relating to the application of the 105(h) rules to fully insured plans, apply to different benefits offered by an employer to two different classes of employees (e.g., hourly and salaried)?

Section 105(h) of the Internal Revenue Code (IRC) establishes criteria under which plans may be considered to be discriminatory in favor of "highly compensated" individuals. There are two areas of discrimination: (1) eligibility for benefits, and (2) benefits provided. The 105(h) rules once only applied to self-funded plans; however the ACA modifies the rules, to extend application to fully insured plans as well. These "insured plan" nondiscrimination rules do not apply to grandfathered plans or policies that satisfy the grandfather interim final rule.

The term "highly compensated" means –
(1) one of five of the highest paid officers,
(2) a shareholder who owns 10% in value of stock of the employer, and
(3) an employee among the highest paid 25% of all employees.

The term "employee" for purposes of the eligibility test excludes those employees who–

  • have not completed 3 years of service,
  • have not attained the age of 25,
  • are part-time or seasonal,
  • are non-resident aliens, or
  • are members of a collective bargaining unit that has bargained in good faith with respect to benefits provided under the Plan.

Under the amended grandfather rules, the following fully insured plans are not grandfathered and may be impacted by the 105(h) rules:

  • an insured plan sold with a new coverage effective date after March 23 and before Nov. 15, 2010; or
  • an insured plan that was grandfathered on March 23, 2010, and subsequently lost its grandfather status due to changes in the plan; or
  • an insured plan that did not cover at least one individual on March 23, 2010.

If these fully insured nongrandfathered plans (that only cover a class of employees comprised primarily of highly compensated individuals (HCIs) or cover such class at a higher benefit level than another class that does not include HCIs) are class/carve-out plans, they may face compliance issues under the 105(h) rules, depending on how the future guidance takes shape.

The federal agencies have stated that compliance with the 105(h) rules will not be required of insured plans until guidance is provided regarding their application. Until that time, sanctions for failure to comply with the rules will not apply. Furthermore, the agencies expect that when such guidance is issued, its effective date will be delayed until plan years beginning a certain time after issuance.

Customers that have a fully insured nongrandfathered medical plan and have questions about the application of the 105(h) rules to their plan, should review the matter with their tax or legal counsel. Customers concerned that their plan may be considered discriminatory under 105(h) may contact their broker or UnitedHealthcare representative to discuss alternatives. UnitedHealthcare will not provide nondiscrimination testing or consulting services regarding 105(h) compliance.

How do the new ACA changes, relating to the application of the 105(h) rules to fully insured plans, apply to fully insured executive medical plans offered by an employer?

Fully insured executive medical plans, which offer benefits only to highly compensated employees and not to any other employees, may be prohibited under the IRC 105(h) nondiscrimination rules that are applied by the ACA to fully insured plans, unless they are grandfathered or otherwise excepted from the rules. An example of a plan that would be excepted from the 105(h) rules is a retiree only executive medical plan that covers only retired employees. Prior to the ACA, the 105(h) rules applied only to self-insured plans, which is why executive medical plans were established on a fully insured basis. Note that although grandfathered fully insured executive medical plans are not subject to the 105(h) rules as long as they maintain grandfather status, they are subject to other insurance market reform provisions of the Act such as those relating to lifetime and annual dollar limits.

Under the amended grandfather rules, the following fully insured plans are not grandfathered and may be impacted by the 105(h) rules:

  • an insured plan sold with a new coverage effective date after March 23 and before Nov. 15, 2010; or
  • an insured plan that was grandfathered on March 23, 2010, and subsequently lost its grandfather status due to changes in the plan; or
  • an insured plan that did not cover at least one individual on March 23, 2010.

If these nongrandfathered plans are executive medical plans as described above, they may face compliance issues under the 105(h) rules, depending on how the future guidance takes shape.

The federal agencies have stated that compliance with the 105(h) rules will not be required of insured plans until guidance is provided regarding their application. Until that time, sanctions for failure to comply with the rules will not apply. Furthermore, the agencies expect that when such guidance is issued, its effective date will be delayed until plan years beginning a certain time after issuance.

Customers that have a fully insured nongrandfathered executive medical plan, or have questions about the application of the 105(h) rules to their plan, should review the matter with their tax or legal counsel. Customers concerned that their plan may be considered discriminatory under 105(h) may contact their broker or UnitedHealthcare representative to discuss alternatives. UnitedHealthcare will not provide nondiscrimination testing or consulting services regarding 105(h) compliance.