Public Sector Employers Must Beware of Non-Discrimination Testing On Their Insured Health Care Plans

Some public sector employers provide different health insurance benefits or charge certain employees less for insurance. Sometimes one or two department heads will negotiate special deals as part of an employment contract. Other times, certain bargaining units will have negotiated for lower (or higher) premium or deductible costs in return for other concessions during the normal course of bargaining.

In addition to the problems this causes during interest arbitration, there is a new reason why public employers need to review their practices in this regard. Effective for plan years beginning on or after September 23, 2010, employers who provide health insurance through a non-grandfathered insured plan and who discriminate in favor of highly compensated employees face fines of $100 per day, per non-highly compensated individual. Seyfarth issued an alert on Nondiscrimination in Fully-Insured Group Health Plans which can be obtained by clicking here. 

The new non-discrimination testing provisions for non-grandfathered insured plans will significantly affect operations of public sector employees. While the government has not yet issued guidance on discrimination testing for non-grandfathered plans, if the tests are similar to those used for self-insured plans, some public sector employers may find themselves in violation. Generally, under the existing non-discrimination rules for self-insured plans, a highly compensated employee is defined as an individual who is among the top 25% of compensated employees within the organization. If such a highly compensated individual receives better health insurance benefits than non-highly compensated individuals, an employer may violate non-discrimination testing. Common circumstances that public sector employers should review include:

• A village manager, school district superintendent, or department head who through an individual employment contract pays less for his insurance than non-highly compensated employees.
• A bargaining unit of supervisors, some of who fall into the top 25% of compensated employees, whose collective bargaining agreement provides them better insurance benefits -- whether in terms of deductibles, premium payments, or co-pays.
• A bargaining unit of highly paid employees, such as fire fighters or police officers, who due to overtime they receive have some employees fall into the top 25% of compensated employees, and who also receive better insurance benefits than employees who are not in the top 25%.

Although self-insured plans have been subject to non-discrimination testing for years, one way to avoid tax penalties for self-insured plans was to impute income equal to the fair value of the excess insurance benefits. For insured plans, however, the penalty will be to the employer, and it will be $100 per day per non-highly compensated individual. 

Public employers who offer fully insured health insurance need to determine whether they are providing grandfathered or non-grandfathered plans. (For a copy of the Firm’s alert on the grandfather regulations, please click here). If an insured plan is not grandfathered, then the employer must determine whether it is in compliance with the non-discrimination rules. If the organization is out of compliance, it needs to take steps to comply to avoid these very costly penalties. A fix may include renegotiating contracts or changing employment terms to provide employees additional pay in lieu of the added health insurance benefits. But something must be done to address this situation.

Employers who need assistance determining whether their plans are grandfathered, whether they have a non-discrimination problem, or how to fix a problem should contact any Seyfarth public sector or employee benefits law attorney for assistance.