This is an excerpt from a post done by
Michael Arnold of Mintz Levin:
[PPACA] added Public Health Service Act § 2716, the provisions of which are incorporated into the Internal Revenue Code and ERISA. Enforcement of these new group health plan non-discrimination rules has been delayed indefinitely, however, by IRS Notice 2011-1....
In 1978, when Congress first turned its attention to group health plan non-discrimination, it was of the (subsequently discredited) view that carrier underwriting rules would be sufficient to curb discriminatory plan designs in the case of fully-insured arrangements. Congress had a change of heart, and in the Tax Reform Act of 1986 added the now infamous “Code § 89,” which established a mind-numbingly complex set of nondiscrimination rules that applied to a broad range of welfare and fringe benefit plans, including employer-provided group health plans. Proposed regulations issued in 1989 were the subject of intense criticism. Despite some delays in the effective dates, and in spite of an earnest attempt at simplification, intense lobbying pressure (particularly by small business interests) ultimately doomed the measure. Code § 89 was repealed in 1992 (retroactive to 1989). In the process of writing rules under the ACA, the regulators are no doubt mindful of the frosty reception given the 1989 proposed rules.
For a comprehensive discussion of the issues that confront the regulators as they craft non-discrimination rules under Public Health Service Act § 2716, please see the August 3, 2012 comment letter submitted by the American Bar Association Tax Section and a separate outline on the subject prepared by Helen Morrison, Ernst & Young LLP and Linda Mendel, Vorys, Sater, Seymour and Pease LLP.
Self-funded Group Health Plans
Self-funded group health plans are a different matter. Since 1978, Code § 105(h) has imposed rules governing discrimination on the basis of eligibility or benefits. Failure to follow these rules results in the taxation of “excess benefits” in the hands of highly compensated participants. (For a summary of the Code § 105(h) non-discrimination rules, click here.) But an understanding of these rules, no matter how thorough, comprehensive, or accurate, obscures the practical reality: the rules are rarely followed or enforced. And where employers do attempt to follow them, the compliance testing methods adopted by one employer are unrecognizable to another employer following the same rules! This too is likely to change once the regulators turn their attention to group health plan non-discrimination issues generally.
