January 2011, Vol 1

Message From An Actuary
Tim Luedtke, FSA, CFA

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
Principal & Consulting Actuary

Diane Luedtke, FSA
Principal & Consulting Actuary

I'm the Owner and Fully-Insured . . .
What Do You Mean Discrimination Testing
Applies to Me?

Tim Luedtke, FSA, CFA

Discrimination testing under Section 105(h) is coming to fully-insured plans with the introduction of the Affordable Care Act (ACA). Since 1973, self-insured health benefit plans have been required to meet the anti-discrimination requirements under Section 105(h). ACA extended such discrimination tests to fully-insured plans effective October 23, 2010, unless the plan maintains its grandfathering status. In December, with Notice 2011-1, the Internal Revenue Service delayed the rule's application until they provide effective guidance. While this reprieve generated a gigantic sigh of relief from small employers and their brokers, rest assured that such reprieve is only temporary and both brokers and their clients should be planning today for how best to address the new requirement.

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.

The Tests

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:

    1. Are all participants eligible for the same benefits under the plan?
    2. Are all benefits offered under the same conditions to all plan participants?
    3. If optional benefits are offered, can all participants elect each benefit option for the same additional premium?
    4. Are waiting periods the same for all employees?
    5. Do the maximum benefits vary based on age, years of service or compensation?

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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