April 1, 2015

Can Multiple Plans be Offered?

Dear Jon,

I have a question about health insurance for our employees:  We had to get a plan for all the employees and we already had a plan in place for our full-time crews.  Can we still maintain those plans for the full-time employees and offer the new employees the new plan?

Multiple Plan Problems in Prunedale


Dear MP3,

You are not alone in your confusion; this question comes up almost daily.  Essentially, what you’d like to know is:


Am I required to offer the same group health insurance coverage on the same terms to all my full-time employees?


Your question is governed by the nondiscrimination requirements contained in Internal Revenue Code Section 105(h) and Public Health Service Act Section 2716.  This inquiry is especially important to employers like you who did not offer a health benefit plan to all employees prior to the Patient Protection and Affordable Care Act (ACA) enactment.  Now that the large employer mandate is looming, you and employers like you are facing this important dilemma.

The answer to your question—for the time being—depends on whether you have a fully-insured plan or a self-funded plan.  Currently, fully-insured plans are not subject to nondiscrimination requirements; once new regulations are finalized they will be.


Fully-insured Group Health Benefit Plans

So that begs the question, what is a fully-insured plan?  A fully-insured plan is one in which the risk of loss is almost entirely borne by an insurance company in exchange for a premium typically shared by an employer and its employees.  In most fully-insured plans, the participating employees are responsible up to a maximum amount of in-network charges, commonly referred to as the out-of-pocket limit (includes co-pays, deductibles, and coinsurance).  The premiums are fixed for a year and paid to the insurance company, who in turn pays medical claims.

Prior to the ACA’s enactment, fully-insured plans were not subject to nondiscrimination rules.  The ACA does require fully-insured plans to be nondiscriminatory, eventually.  Currently, there is an indefinite safe-harbor for fully-insured plans that protects them from the nondiscrimination rules’ impact.  Until the new regulations are provided, fully-insured plans need not concern themselves with this issue.

If your plan is fully-insured, you may offer different plans to different employees without fear of running afoul of the ACA’s new —as yet unwritten—full-insured nondiscrimination rules.


Self-funded Group Health Benefit Plans

Self-funded plans are, on the other hand, currently subject to the nondiscrimination rules under Section 105(h), which has been on the books since 1978.  Self-funded plans are those that are sponsored by an employer or group of employers that pay for the health benefits costs incurred by its employees directly out of its general assets or from a trust.  Often self-funded plans purchase a type of insurance that covers high dollar health benefits claims called stop-loss insurance.  Western Growers Assurance Trust is a self-funded multiple employer welfare arrangement and each participating employer is required to comply with the nondiscrimination rules in 105(h).  The ACA does not change this.


What does Section 105(h) Require?

Section 105(h) of the Internal Revenue Code prohibits a self-funded medical plan from discriminating in favor of highly compensated individuals with respect to eligibility, benefits and utilization.  Self-funded health plans may not discriminate by providing benefits to highly compensated individuals (“HCIs”) or their dependents that are not available on the same basis to other participants and their dependents.

In addition to being barred from discriminating in eligibility and benefits, a self-funded plan is prohibited from discriminating through its effect or operation (i.e. utilization). Whether a plan discriminates in the way it operates depends on the circumstances; however, the fact that HCIs make greater use of benefits does not make a plan discriminatory.

An example of discriminatory operation is when a medical plan includes coverage for some rare condition that only the chief executive officer has.  Although the benefit may be available to all employees, in effect the other employees do not benefit — and are unlikely to benefit — because of the type of coverage.  Another example would be where cosmetic surgery is included as a benefit, but the benefit is terminated after the chief operating officer has taken advantage of it and no longer needs it.  Although the benefit may have been available to non-HCIs on a nondiscriminatory basis, in effect they really received no benefit.

If you participate in Western Growers Assurance Trust (or another self-funded group health benefit plan), it’s imperative you ensure that the multiple plan designs you offer do not discriminate in favor of HCIs with respect to eligibility, benefits and utilization.  That is, ensure that HCIs are not receiving better benefits or more advantageous eligibility requirements as compared to lower-compensated employees.  A full description of the nondiscrimination rules and the testing methodologies are beyond the scope of this article; however, an HCI under section 105(h) is an individual who is either:


•   One of the five highest paid officers;

•   A shareholder who owns more than 10 percent of the value of stock of the employer’s stock; or

•   Among the highest-paid 25 percent of all employees.


For more information about this article or if you have other questions about health care reform, contact our Health Care Reform team today at [email protected] or 800-333-4WGA. Write to Dear Jon at [email protected].  For more information and resources on Health Care Reform, visit www.wgat.com/health-care-reform.