On December 22, 2010, the Internal Revenue Service released IRS Notice 2011-1 (to be published in the Internal Revenue Bulletin on January 10, 2011) delaying the implementation of new nondiscrimination rules for fully insured medical plans. As discussed in an earlier Baker Hostetler Executive Alert (IRS Provides Initial Guidance on Application of Nondiscrimination Rules to Fully Insured Plans), Section 2716 of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act extended the nondiscrimination rules under Internal Revenue Code Section 105(h) to fully insured medical plans. Previously, these rules have applied only to self-insured medical plans. As a result of the Health Care Reform legislation, “similar” nondiscrimination rules now will apply to fully insured employer-sponsored medical plans, unless those plans have been grandfathered under the Health Care Reform legislation. The change is effective for plan years beginning on and after September 23, 2010 (i.e., calendar years beginning on or after January 1, 2011, for most plans). Failure to comply with the new nondiscrimination requirements will result in an employer excise tax equal to $100 per day for each individual to whom the failure relates.
In Notice 2011-1, the IRS has announced that compliance with the requirements of Section 2716 will not be required until the Treasury Department, the Department of Labor and the Department of Health and Human Services issue regulations indicating how the Code Section 105(h) nondiscrimination rules will be applied to fully insured plans. Among the guidance to be provided by those regulations will be an explanation of where insured plans will be subject to “the same” statutory provisions that apply to self-funded plans under Code Section 105(h) and where insured plans will be subject to “a different (although ‘similar’)” application of the nondiscrimination requirements. The IRS has indicated that compliance with Section 2716 and with that regulatory guidance will likely only be required for plan years beginning after the issuance of the regulatory guidance. This would suggest that for calendar year plans, compliance with the nondiscrimination rules will not be required until January 1, 2012, at the earliest (assuming guidance is released in 2011).
In addition, Notice 2011-1 seeks additional public comments on the issues to be addressed in that future regulatory guidance, including, but not limited to:
Comments must be submitted to the IRS no later than March 11, 2011.
As we have noted earlier, many questions regarding these new requirements remain to be answered. The delay of the implementation of the insured plan nondiscrimination rules is welcome news to employers who have struggled to apply the self-funded nondiscrimination rules of Code Section 105(h) to insured arrangements. Employers who maintain insured medical coverage for some or all of their employees should continue to work with their attorneys or advisors to monitor developments in this area.
If you have any questions concerning this guidance or any other provisions under the Health Care Reform legislation, please contact John W. Boyd (216.861.7910 or ), Deborah Bracy (216.861.7354 or ) or any member of Baker Hostetler’s Health Care Reform Team.
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