• Nondiscrimination Requirements for Insured and Self-Insured Plans
  • January 2, 2013
  • Law Firm: Boardman Clark LLP - Madison Office
  • In the wake of Act 10, school districts have been replacing their collective bargaining agreements with employee handbooks. As part of these handbooks, school districts often adopt provisions regarding employee benefits and post-employment benefits, such as health insurance, health reimbursement arrangements (HRAs), and the like. School districts may, however, encounter unintended consequences when adopting such provisions. This is especially true when districts adopt the same benefits provisions that were contained in their collective bargaining agreements, which may have provided different benefits for different classifications of employees. This FYI will discuss potential problems and consequences surrounding districts’ adoption of certain self-insured plan and insured plan medical benefits provisions.

    Self-Insured Plans. A self-insured plan is a plan that reimburses employees for expenses for medical care for which reimbursement is not provided under a policy of accident and health insurance and that is not insured. Benefits under a self-insured plan include reimbursements made directly to employees as well as payments made by the plan directly to service providers. An HRA that may be used by an employee for reimbursement of medical expenses is a self-insured plan.

    There are requirements that prohibit discrimination in favor of highly compensated employees for self-insured plans that are currently in effect. In the past, school districts often relied on an exemption from the non-discrimination requirements for self-insured plans. Benefits provided under a collective bargaining agreement are exempt as it relates to employees subject to that agreement so long as the collectively bargained employees do not participate in the plan. Many interpreted this exemption to apply to collectively bargained employees more generally. Under Act 10, however, these benefits are no longer a subject of bargaining, and therefore, that exemption or interpretation may not be available. As a result, if a district provides self-insured plan benefits that discriminate in favor of highly compensated employees, the highly compensated employees must pay tax on the “extra” benefit received. Highly compensated employees are the top 25% of employees ranked by pay. Typically, administrators and teachers are the employees who fall within the category of highly compensated employees in a school district.

    The regulations governing non-discrimination for self-insured plans state that these plans cannot discriminate in favor of highly compensated individuals with respect to eligibility or benefits. A self-insured plan may pass the eligibility requirement by satisfying one of three tests. In addition to the requirement that self-insured plans pass one of three eligibility tests, self-insured plans also must pass the benefits test. The benefits test includes the requirement that all benefits provided to highly compensated individuals who are participating in the plan must be provided to all other participants. Further, the required employee contributions must be the same for each benefit level. Additionally, the maximum benefit level cannot vary based on age, years of service, or compensation. Also, the type of medical expenses reimbursable must be available to non-highly compensated individuals on at least as favorable terms as they are for the highly compensated individuals. Self-insured medical plans may not impose disparate waiting periods for different categories of employees.

    The easiest way to avoid problems with the non-discrimination requirements for self-insured plans is to treat all employees the same (however, districts may pass non-discrimination testing without doing so). Treating all employees the same includes providing all employees or retirees with the benefit in accordance with the requirements of the benefits test above. While providing all employees with the same benefit and benefit structure is an easy solution if districts currently do not have self-insured plan benefits in place, in considering how to change existing benefits structures, districts will need to be mindful of obligations in individual contracts, vested benefits of retirees, and whether a unilateral change in benefits is appropriate at this time given the uncertainty surrounding Judge Colas’ decision in Dane County regarding the obligation to bargain over “wages.” Further, districts that wish to differentiate compensation packages amongst employee groups may do so through salary or tax sheltered annuity contributions or both.

    Insured Plans. As part of the Health Reform Act, insured health plans are subject to the Internal Revenue Code section that pertains to nondiscrimination of self-insured plans. This section prohibits plan discrimination in favor of highly compensated employees (the top 25% of employees ranked by pay). An insured plan is a plan that is provided under a policy of accident and health insurance. At this time, it is unclear how the nondiscrimination requirements for self-insured plans will be applied to insured plans. However, it is clear that, if there is insured plan discrimination, the penalty will be $100 per day per non-highly compensated person discriminated against.

    The Internal Revenue Service (IRS) has issued guidance that it will not enforce the non-discrimination requirements for insured plans until it releases new regulations. The regulations will provide employers with a grace period to come into compliance with the new regulations. The non-discrimination requirements are concerned with discrimination in favor of highly compensated employees. While the IRS has not issued new regulations, districts that provide a greater insured plan benefit to highly compensated employees than non-highly compensated employees may need to make changes to comply with the new regulations once these regulations are released. Because the new regulations have not been released, these districts should, for now, prepare themselves to transition to different benefit structures. This preparation may include nonrenewing or mutually modifying individual contracts in order to amend or eliminate existing benefits, or preserving the right to do so in the future.

    Conclusion. Currently, there is significant uncertainty surrounding insured plan benefits and how to modify such benefits when there are no regulations to provide guidance in this area. Additionally, the changes made by Act 10 have impacted self-insured plan benefits in school districts. Each district that provides different benefits for different classifications of employees may face problems regarding non-discrimination for insured plans or self-insured plans or both. As a result, districts should seek legal counsel for assistance in determining how to proceed at this time.