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Discrimination testing for small business health plans
by Tony Novak, CPA, MBA, MT
, revised 5/9/2012
Small businesses have not been required to provide employee health benefits in the past and that does not change as a result of the 2010 health reform laws. But for businesses that do elect to provide employee health benefits, a new set of regulations will be in effect beginning in 2014 to ensure that health benefits do not discriminate in favor of some employees.
The new regulation covers only the price of health benefits paid by the employer; there is no requirement that the coverage be similar among employees. This change is a sharp departure from the past where an employee could elect to provide health insurance to any single employee without regard the coverage that may or may not be offered to any other employee.
Larger employers will be required to provide health benefits or pay a penalty fee. Here’s what you need to know if you run a small business.
Who is affected?
All small businesses that provide health benefits to employees, regardless of the size of the employer, will be subject to the additional testing requirements. While there are two exemptions built into the law, we believe that few business will wish to use the exemptions.
What are the exemptions?
Limited exceptions are granted for grandfathered plans but the restrictions placed on these grandfathered plans are expected to make them disappear within a short time.
Grandfathered health plans are exempted. We expect that few of these will survive due to the extensive list of events that will disqualify a grandfathered health plan.
Fully insured health plans are also exempted but we expect that the financial savings available through consumer-directed and partially self-funded health benefits are so significant that fully insured plans will continue to lose popularity.
A small business owner who would be likely to read a financial planning article like this would also be likely to realize that a fully insured health plan is not the best option for the business. Some businesses that are not as financially sophisticated may ignore the savings of non-insured benefit plans and remain in a fully insured plan.
For most small businesses, the change does not become effective until 2014.
What’s the penalty?
Failure makes the value of health benefits taxable compensation to the employee and require wage tax withholding by the employer. As a practical matter, the failure of an employer to file the appropriate documentation will trigger a tax delinquency notice to both the employer and the employee.
What is required?
The requirement involves “double testing” of health insurance for discrimination in the plan design or in the actual benefits provided. The testing concept is similar to the more familiar rules of 401(k) plans and cafeteria benefit plans.
What will it cost?
In the best case, there would be no significant additional cost because discrimination testing is already being done for other existing employee benefit plans. In the worst case, a private accountant or benefits firm would charge a fee not expected to exceed a few hundred dollars.
Who should handle this testing?
Like other employee benefit plan testing, this task should be documented by an independent person not employer by the employer or the health insurance company.
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Opinions expressed are the solely those of the author and do not represent the position of any other person, company or entity mentioned in the article. Information is from sources believed to be reliable but cannot be guaranteed. Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues or a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. Tony Novak operates as an independent adviser under the trademarks “Freedom Benefits“, “OnlineAdviser” and “OnlineNavigator” but is not a representative, agent, broker, producer or navigator for any securities broker dealer firm, federal or state health insurance marketplace or qualified health plan carrier. He has no financial position in any stocks mentioned. Novak does work as an accountant, agent, adviser, writer, consultant, marketer, reviewer, endorser, producer, lead generator or referrer to other companies including the companies listed in the articles on this web site.