For many employers, the main reason to grandfather their health plan was to “get out of” being subject to the new non-discrimination rules that apply to fully insured health plans. Pursuant to Section 2716 of the Healthcare Reform Act, the non-discrimination rules under Section 105(h) of the Internal Revenue Code (“Code”) are generally applicable to group health insurance plans for plan years beginning on or after September 23, 2010. Under Section 105(h) of the Code, this means that a plan must not discriminate in favor of highly compensated individuals as to eligibility to participate or benefits. The consequences for failing such non-discrimination requirements include a $100 penalty per day per non-highly compensated employee that was discriminated against (subject to certain exceptions).

The law has been very unclear as to how these non-discrimination rules apply to group health plans, but with such steep penalties, employers have been scrambling. But on December 22, 2010, the Internal Revenue Service issued Notice 2011-1 which provides that compliance with Section 2716 of Healthcare Reform Act is not required until after either regulations or other guidance has been issued. Once this guidance is issued, it is anticipated that non-grandfathered health plans will have some time to comply with the non-discrimination rules. Until then, the delay gives employers some additional time to look at their non-grandfathered health plans and look to alternative arrangements, if necessary.

Source: Healthcare Reform Update