For a full three decades, employers with fully insured health plans have been able to provide tax-free medical benefits just to executives because discrimination laws are different for insured plans than for self-funded plans. However, under the Patient Protection And Affordabke Care Act (which adds a new Sec. 2716 to the Public Health Service Act), this plan design will be prohibited.
Because of the preemption provisions of ERISA, there had been no federal laws for fully insured health plans that prevent discrimination in favor of the highly compensated (ERISA Sec. 514(a)). Insured health care plans do have to comply with applicable state insurance laws, and general discrimination laws regarding age, gender, race, and disability apply.
In other words, employers couldestablish fully-insured medical reimbursement plans for a select group of employees, such as key employees.
Self-insured health care plans are different—they have been subject to nondiscrimination rules since 1980. Health plans that are not insured (or are partially insured) must comply with the nondiscrimination requirements that limit discrimination in favor of highly compensated employees. In any "self insured medical reimbursement plan" that fails to meet the nondiscrimination requirements, highly compensated employees lose their tax advantages.
New Provision Would Eliminate Discrimination
Under the health reform law, insured group health plans must comply with the nondiscrimination requirements for self-funded plans (IRC Sec. 105(h)(2)), including rules that the plan does not discriminate in favor of highly compensated individuals as to eligibility to participate or to benefits provided under the plan.
Since the discrimination rules for self-funded plans were issued in 1980, employers have adopted fully insured plans to provide executives and key employees with tax-free reimbursements for out-of-pocket medical, dental, and vision expenses. These new prohibitions against discrimination in fully insured plans will compel employers to use other methods to reward executives.
This is one of the few provisions in the health reform proposal that takes effect almost immediately (plan years beginning on or after September 23, 2010).
It’s about time.