The U.S. Department of Health and Human Services has (finally) issued nondiscrimination rules as part of the Affordable Care Act. Because these new rules don’t apply to most employers (they’re applicable to certain insurers and third-party administrators (TPAs), they could create confusion with other ACA nondiscrimination rules that may soon become applicable to employers sponsoring fully insured health plans.
Understanding Section 1557
The new rules implement Section 1557 of the ACA, and prohibit discrimination in certain “health programs and activities” (including the ACA’s exchanges) on the basis of race, color, national origin, age, disability and sex. Notably, sex discrimination is interpreted broadly to include discrimination based on pregnancy, gender identity and sex stereotyping.
Specifically, the new regulations prohibit:
· Denying, canceling, limiting, or refusing to issue or renew policies;
· Using discriminatory benefit designs;
· Denying or limiting coverage of a claim; and
· Imposing additional cost-sharing or other coverage limitations on the grounds of race, color, national origin, sex, age and disability.
These regulations apply only to health programs and activities funded or administered by HHS, such as federal and state exchanges, and insurance carriers that participate in the exchanges. They can also apply to insurance carriers in their role as TPAs for employer-sponsored group health plans, as well as to employee health benefits for healthcare-oriented employers that receive federal financial assistance, such as nursing homes and hospitals.
These rules also require exchange insurers and other covered entities to provide individuals with notice of their rights in “significant publications” and “significant communications.”
The new rules go into effect July 18, 2016.
IRS nondiscrimination rules
These new regulations from HHS should not be confused with another set of ACA nondiscrimination rules expected to be released soon by the U.S. Treasury and Internal Revenue Service. The IRS has said that employers don’t need to comply with these ACA nondiscrimination requirements (under Section 10101(d)) until official rules or guidance are released.
These other nondiscrimination rules involve Section 105(h) of the Internal Revenue Code, and the focus is not gender or race, but rather on ensuring that employer-sponsored fully insured health plans don’t discriminate based on employees’ compensation — essentially, these rules ensure that a health plan doesn’t create two classes of employees.
These rules – which haven’t been released yet – are expected to be designed to ensure that highly compensated employees and rank-and-file employees receive benefits that are relatively equal in value. Currently, it’s fairly common in fully insured plans for highly-compensated employees to receive benefits that far exceed the value of what other employees receive.
For purposes of these nondiscrimination rules, “highly compensated individuals” are defined as one of five highest paid officers in the organization, a shareholder who owns more than 10% of the value of the stock, or as one of the highest paid 25% of all employees.
We’ve been waiting for rules or guidance from the IRS on this matter for more than six years, but indications are that we can expect to see some actual rules soon. While many HR professionals and benefits managers have stopped holding their breath, several Treasury officials have commented informally that they could be released before the end of 2016. While compliance is not required now, employers should be preparing for this change.
The best course of action is to avoid providing significantly more favorable health insurance benefits to highly compensated employees, and employers that do provide “discriminatory benefits” should, at the very least, reserve the right to cancel or stop providing these benefits.
One thing that we do know is that the new penalties under the ACA are expected to be higher than the previous nondiscrimination rules applicable to self-insured health plans. Currently, when a self-insured plan discriminates, the value of the discriminatory benefits is treated as taxable income. Under the ACA, a fully insured plan that fails to comply with the nondiscrimination rules will be subject to a civil action to compel it to provide nondiscriminatory benefits. Additionally, for each day the plan fails to comply, the employer will be subject to a penalty of $100 per day per individual discriminated against.
As with many aspects of the ACA, HR professionals and benefits managers need to pay strict attention in order to keep up with the many tweaks and changes to the rules and regulations. Discrimination in any form is a serious matter, and it’s vitally important for employers to understand these two different sets of nondiscrimination rules.
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