From An Actuary
This edition of The Actuarial View discusses discrimination testing requirements that have been extended to fully insured health insurance plans under the Patient Protection and Affordable Care Act of 2010.
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Tim Luedtke, FSA, MAAA, CFA
Diane Luedtke, FSA
I'm the Owner and Fully-Insured . . .
Up until ACA, the only test which applied to fully insured health plans was under Section 3121for whether medical insurance payments constituted "wages" when determining the FICA and Medicare taxable wage base. Section 3121 permitted the exclusion of payments made for a class or classes of employees under a plan or system established by the employer to medical or hospitalization expenses. Smaller employers often utilized this class system to enable access to richer medical plans for owners, management, etc. As such, many of today's fully insured plans will fail to meet the discrimination testing requirements of Section 105(h) and necessitate new plan designs for the future.
To complete the tests requires establishing which employees are highly compensated and then applying a two-part test:
a) Eligibility Test - The eligibility test requires: 70% of all employees benefit from the plan, at least 70% of the employees are eligible and 80% of those eligible participate and benefit, or the plan benefits a non-discriminatory class of employees (a highly complex test based upon section 410(b).
b) Benefits Test - The benefits test is more straight-forward, effectively stating that benefits available to highly-compensated employees are available for all employees and are based upon several key questions, with the required answers of 'yes' for all but the last:
These tests can be relatively complex and should be reviewed with your advisors.
Ramifications of Non-Compliance
Significant penalties apply for discriminatory plans. Employers are charged $100 a day for each employee that is discriminated against.
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