Notice 2011-1 states that the Treasury Department and the IRS, as well as the Departments of Labor and Health and Human Services (collectively referred to as the "Departments"), have determined that compliance with new nondiscrimination rules under Section 2716 of the Public Health Service Act ("PHS Act") will not be required until plan years beginning after regulations or other administrative guidance has been issued. The Departments issued Notice 2011-1 in response to concerns raised regarding a plan sponsor's ability to implement the new nondiscrimination rules without such guidance, and specifically held that a plan sponsor of a non-grandfathered fully insured group health plan would not be subject to the excise taxes for failure to comply with such new nondiscrimination rules, nor be required to file IRS Form 8928 until plan years beginning after the guidance has been issued.

The Patient Protection and Affordable Care Act (the "Affordable Care Act") added Section 2716 of the PHS Act, which prohibits a fully insured, non-grandfathered group health plan from discriminating in favor of highly compensated individuals as to eligibility to participate in such plan, as well as to benefits offered to participants under the plan in accordance with the rules similar to the ones set forth under Code Section 105(h). Under Code Section 105(h), highly compensated individuals generally include the five highest-paid officers, employees at any time during the plan year with more than a 10 percent ownership, and all other employees who are among the highest-paid 25 percent of all employees. If a fully insured, non-grandfathered group health plan discriminates in favor of highly compensated employees as to eligibility to participate or as to providing benefits to participants, the employer will be the party to suffer the consequences. Specifically, the Affordable Care Act imposes an excise tax on employers that do not satisfy the market reform and consumer protection provisions of the Affordable Care Act equal to $100 per day for each affected participant, up to a maximum fine for unintentional failures of $500,000 per taxable year. The IRS (or HHS) has discretion to waive the tax in whole or in part to the extent the failure was due to reasonable cause and not to willful neglect, and small employers with no more than 50 employees may be exempt from such tax with certain exceptions. An employer also may be subject to a civil lawsuit filed by non-highly compensated employees. Until guidance is issued stating otherwise, it does not appear that highly compensated individuals will be subject to any adverse income tax consequences on the value of health benefits provided under a discriminatory fully insured, non-grandfathered group health plan. 

If a fully insured group health plan maintains its grandfathered status (within the meaning of Section 1251 of the Affordable Care Act and the Departments' grandfathered regulations), then it is exempt from these new nondiscrimination requirements. A group health plan has grandfathered status only if it existed as of March 23, 2010, and it does not make plan design changes above certain threshold amounts set forth in the grandfathered plan regulations. Additionally, certain HIPAA-excepted benefits are not subject to the new nondiscrimination requirements, including a limited-scope dental or vision plan that is offered through a different insurance carrier than the medical plan or is offered separately to employees for an additional premium cost. Unless future guidance provides otherwise, HIPAA-excepted benefits that are not subject to the new nondiscrimination rules also may include a stand-alone retiree-medical plan that covers only former employees of an employer (and does not cover active employees).

Before the enactment of the Affordable Care Act, the nondiscrimination requirements under Code Section 105(h) only applied to self-insured group health plans. A self-insured plan is one in which the employer pays for the benefits out of its general assets as opposed to paying through a fully insured policy. IRC Section 105(h) prohibits a self-insured plan from discriminating in favor of highly compensated employees as to eligibility to participate or in favor of highly compensated participants as to benefits provided under such self-insured plan. A discriminatory self-insured plan produces adverse tax consequences to the highly compensated employees / participants (e.g., all benefit reimbursements made under a discriminatory plan will be taxable to such highly compensated individuals rather than any excise taxes on the employer).

The Departments have requested additional comments on PHS Act Section 2716 by March 11, 2011, and Notice 2011-1provides specific issues on which the Departments would like additional comments as a follow-up to the public comments received in response to IRS Notice 2010-63.