Health Insurance Info for Colorado

news & commentary on health insurance and benefits

nondiscrimination rules for fully insured group health plans

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Employers may want to carefully review their fully-insured group health insurance plans given the changes wrought by The Patient Protection and Affordable Care Act (PPACA).

A fully insured health insurance plan sold on or after September 23, 2010 is not “grandfathered” under the current grandfather regulations, and is immediately subject to IRS Code Sec. 105(h) rules, which prohibit employers from discriminating in favor of highly compensated individuals, relative to other employees in eligibility and benefits under a group health plan. Non-grandfathered class/carve-out plans that only cover a class of employees, or cover such a class at a higher benefit level than another class, are prohibited under these new rules, and are subject to a $100 per day per failure penalty.

Plans sold after March 23, 2010 and before September 23, 2010, are also non-grandfathered, and are subject to the new 105(h) rules on the first day of its next plan year.

Lastly, a fully insured plan that was grandfathered on March 23, 2010, and subsequently loses its grandfathered status due to changes in the plan will be subject to 105(h) rules when the grandfathered status is lost, and may not be in compliance with the 105(h) rules.

So, what is a grandfathered plan? I thought you’d never ask! If coverage was provided by a group health plan in which an individual was enrolled on March 23, 2010, the coverage is grandfathered. To keep grandfathered status, the health plan must continuously enroll someone from March 23, 2010, onward (the plan must continuously cover someone since March 23, 2010).

There are a number of rules which affect a grandfathered health plans status; any one of these rules serve as a means to lose grandfathered status. Plan modifications to grandfathered health plans could cause loss of status; these modifications could include benefit eliminations, an increase in coinsurance percentage, increased cost-sharing, increased deductibles,  increased copayments, a decrease in an employers’ contribution by more than 5%, or any change in overall annual dollar limits.

(While it was originally ruled that changing a group health plan carrier would trigger loss-of-grandfathered status, federal regulators recently ruled that an employer may change carriers if the new plan is similar enough to the old plan to qualify for grandfathered status.)

A fully insured group health plan with a class/carve-out must maintain it’s grandfathered status or be in violation of the nondiscrimination rules under 105(h). For some employers, this is critical. Luckily, grandfathered health plans will be able to make routine changes to their policies and maintain their status. For instance, making modest adjustments to existing benefits, adopting new consumer protections under the new law, or making changes to comply with state and federal laws are allowed. Premium changes are not taken into account when determining whether or not a plan is grandfathered.

Caution: To maintain status as a grandfathered health plan, a plan or health insurance coverage must include a statement, in ANY plan materials provided to a participant, subscriber, or beneficiary describing the benefits provided under the plan or health insurance coverage, that the plan or coverage believes it is a grandfathered plan within the meaning of Section 1251, PPACA. Model language satisfying this disclosure requirement is available on-line. Employers need to be certain this information is distributed, or risk loss of their grandfathered status due to non-disclosure. Don’t assume that your health insurer is doing this!

Lastly, don’t forget that these new rules are largely intended to eliminate any discrimination in insured benefits. Given the new $100 per day, per participant excise tax penalty for nondiscrimination violations, a thorough review of employment agreements, offer letters and other documents providing for extended health coverage, as well as long term care insurance, for key employees or anyone highly compensated under Section 105(h), is highly recommended.

BYA: Credit for small employer health insurance premiums

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Q: “Would you mind enlightening me on the credit given to employers after March 2010 for up to 35% of employee health premiums if under 10 employees? I want to make sure I understand it correctly. Is this done by the insurance company or is this something the employer must do on their 941 report..”

Excellent question! The credit for small employer health insurance premiums was part of the Affordable Care Act passed earlier this year, and gives a tax credit to certain small employers that provide health care coverage to their employees, effective with tax years beginning in 2010, or, in IRS-speak in Notice 2010-82, “the credit is available for taxable years beginning after December 31, 2009”. The credit is, generally, 35% of premiums paid, claimed on Form 3800, General Business Credit.

The regulation deals with Form 8941, which allows some small employers a credit on a percentage of health insurance premiums paid for by the employer. That’s the easy part – the difficulty is in the details, which are described, based on the notice guidance, here. A summary flier is available, as well.

An “eligible small employer” uses Form 8941 to figure the credit. An eligible small employer must meed the following three requirements:

  1. You paid premiums for employee health insurance coverage under a “qualifying arrangement”.
  2. You had fewer than 25 “full-time equivalent employees” (FTEs) for the tax year.
  3. You paid average annual wages for the tax year of less than $50,000 per FTE.

FYI: A “qualifying arrangement” is generally considered to be a fully-insured health insurance policy that requires you to pay a uniform percentage, not less than 50%, of the premium cost for each enrolled employee’s health insurance coverage.

Note that, for a tax-year beginning in 2010 only, “a qualifying arrangement includes any arrangement that requires you to pay at least 50% of the premium cost for single (employee-only) coverage for each employee enrolled in any health insurance coverage you provide to employees, whether or not you pay a uniform percentage of the health care premium cost for each enrolled employee”. For tax years after 2010, you must pay at least 50% of the enrolled employees health insurance coverage, not excluding dependents.

In your question, you mention 10 employees as a limit. Actually, what happens is that the credit is reduced if you had more than 10 FTEs; if you had more than 25 FTEs for the tax year, your credit is reduced to zero. There is also an average annual wage limitation which further reduces your credit if  you paid average annual wages of more than $25,000 for the tax year. The exact details and worksheet for figuring the credit are in the instruction for Form 8941, linked above.

So, who isn’t an employee for purposes of this credit?

  1. The owner of a sole proprietorship,
  2. A partner in a partnership,
  3. A shareholder who owns, generally, more than 2% of an S Corp,
  4. A shareholder who owns more than 5% of the outstanding stock in a non-S Corp

Note that there are additional details that expand on the above limitations in the Notice and instructions, and there are additional limitations on leased employees, seasonal employees, household and other non-business employees (although you do not have to be in a business or a trade to qualify for the credit), and Ministers.

For employers who are offering HRA’s or HSAs, there could be confusion. The guidance allows high-deductible health insurance plans (HDHPs) as health insurance coverage; it does not allow payments to HSA accounts, as defined under Sec. 223(d)(1) of the IRS Code. Similar restrictions on FSAs and other self-insured plans apply to the credit.

Lastly, if you reward your employees with a richer health insurance plan than average, you credit is further reduced for tax years beginning in 2010. Example: for Colorado employers, the average annual premium must not exceed $4,972 for employee-only coverage, or $11,437 for family coverage.

UPDATE: IRS guidance on small business health care tax  credit

DISCLAIMER: I am not a tax consultant, and this information is considered to be general in nature. Check the links above to download the Notice, Form, and Instructions. Always check with a tax professional, as the above information may change.

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