There seems to remain a lot of misinformation in the market regarding a provision of the Affordable Care Act (ACA) – a provision that received lots of attention when it passed but has since laid dormant for 8 years. Discrimination testing, and by extension, the need for plan grandfathering.
One of the great “achievements” of the law was that it was supposed to herald in a new era of equality for health insurance programs by introducing discrimination testing for insured medical plans. There had already been rules in the market for self-funded medical plans (Section 105h testing) but supposedly those too were scheduled to be overhauled as the new discrimination rules were introduced.
As a result, employers who wanted to continue “discriminating” in favor of highly compensated employees needed to grandfather those plans in order to ensure they would not be subject to the new ACA standard of plan equitability.
However, as we’ve advised clients for several years the Internal Revenue Service (IRS) has not written or indicated an intent to write these new discrimination rules. And even if they had, I continue to see employers make all sorts of mistakes in interpretation – believing their self-funded plans needed to be grandfathered to avoid discrimination testing (not true; they were already subject to testing) and that plans offered to K1 partners need to be grandfathered (not true in all likelihood; they typically aren’t considered employees for purposes of plan offerings).
This misinformation continues to cost clients money as they fail to make much needed design changes in order to comply with a phantom reality. If you aren’t sure about the various considerations associated with grandfathering and discrimination testing, please reach out to us – we recently released compliance updates on nondiscrimination rules for Section 105(h) and Section 125. We are here to set the record straight.