Management Carve Out’s (MCO) Plans

Higher  benefits to high earners? Similarly Situated Individuals?    

Management Carve Outs?

 

Management Carve Out’s (MCO) Plans, Executive Medical  – is where managers, owners and key employees can get better coverage than other workers – similarly situated individuals – employees. 

In the past there must have been bona fide employment-based classifications. 

It’s a very complex issue as  Health Care Reform §2716 Salary Discrimination appears to totally prohibit MCO’s.  This includes a single employer or affiliated companies (common ownership).  

However,  Notice 2011-1 states that §2716 will not be enforced until final rules are issued.

Health Insurance and most employee benefits the premiums are Tax Deductible with  no taxation on the benefits, under IRS  Section §106.

♦ Aetna FAQ’s & Explanation is an excellent reference source, including information on Grand Fathered plans.

We do not know of any Insurance Companies that will do a Carve Out for other than Union/Non Union employees, where the union employees have coverage through their union  Email dated 1.9.2016 11:58 AM    Participation rules and all. 

Long Term Care,  dental & vision and other coverages are still OK. 

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Can we give better benefits to #higher wage employees & officers?

 

Employers will no longer be able to exclude employees or give better benefits to high wage employees based on salary  under §2716, except for Grandfathered Plans (Plans in effect prior to ObamaCare)

Prior to Health Care Reform, Federal Tax Rules prohibiting Salary Discrimination for Similary Situated Employees only applied to Self Insured Plans under 26 USC §105 h.

However, the IRS is not enforcing this rule as final regulations have not been issued. (Notice 2011-1)  I googled & googled and as of 1.9.2018, still do not find ANY final regulations!  Trumps Executive Order #13765 to minimize the burden of the ACA – Obamacare and #13771 to minimize regulations – one in two out, I guess mean that regulations won’t happen.

Check out Long Term CareDental & Vision and Life Insurance
where Executives can STILL have benefits the others don’t!

Section §106 is the biggest break there is in the Tax Code, even more than Mortgage Interest.

§2716  PROHIBITION OF DISCRIMINATION BASED ON SALARY.

§2716 (a) IN GENERAL. The plan sponsor of a group health plan (other than a self-insured plan) may not establish rules relating to the health insurance coverage eligibility (including continued eligibility) of any full-time employee under the terms of the plan that are based on the total hourly or annual salary of the employee or otherwise establish eligibility rules that have the effect of discriminating in favor of higher wage employees.

(b) LIMITATION. Subsection (a) shall not be construed to prohibit a plan sponsor from establishing contribution requirements for enrollment in the plan or coverage that provide for the payment by employees with lower hourly or annual compensation of a lower dollar or percentage contribution than the payment required of similarly situated employees with a higher hourly or annual compensation.  (Patient Protection & Affordable Care Act  *  SEC. 2716. Section 2716 HR 3590 Page 17)

Latest Attorney Interpretations of pending final regulations & Guidance

Please note that the “Final Rule” (2.27.2013 13416 Federal Register Vol 78)  allows an Open Enrollment Period where a Small Group can enroll without meeting participation or contribution requirements.   

What and when is a Rule Final??? 33 CFR 1.05-50 –

What is and how do I know if my plan is Grand Fathered?

What are the nondiscrimination rules under Code §105(h) that will apply to our insured plans if they lose grandfathered status?

Eligibility Test

Satisfy at least one of the following nondiscriminatory participation requirements:
 At least 70% of all nonexcludable (see below) employees must actually participate in the plan; or
 If at least 70% of all nonexcludable employees are eligible to participate, then 80% or more of the eligible employees actually participate in the plan; or
 The plan must benefit a classification of employees that the IRS has determined does not discriminate in favor of HCEs using standards that are applied under Code §410(b)
There are certain employees who can be excluded from consideration when determining if the plan passes the eligibility tests described above, if they are not eligible for coverage and:
 Have not completed at least 3 years of service at the beginning of the plan year.
 Have not attained age 25 at the beginning of the plan year.
 Are part-time or seasonal employees.
 Are covered under a collective bargaining agreement if the benefits are subject to good faith bargaining.
 Are nonresident aliens who receive no income from sources within the US.

Benefits Test

Under the subjective nondiscriminatory benefits test, the types and amounts of benefits provided to highly compensated  individuals must be provided to all participants. The rule also implies that contributions must be the same for each participating employee. In addition:

 Maximum benefit levels cannot vary based on age, years of service, or compensation.   AJG.com *  

Check our webpage on Insurance Company Participation & Contribution Requirements  

“Salary Discrimination §2716 – Not enforced”

  1. In your webpage above, you state that the IRS is still in a non-enforcement period on this issue until the rules are clarified.
    Is this still true or is that dated information?
    If we are currently in a non-enforcement status, can penalties be assess retroactively if we are no longer exempt once the rules are clarified?
     
    • Your question is beyond our pay grade. If you get a plan with us, we will check it out with the Insurance Company, etc. In the meantime, try the Art Gallagher FAQ’s above
       
  2. we converted to an individual plan for the remaining employee. The plan stayed with the same insurance co. but not in our companies name.
    So, would this still be be considered “grandfathered?
    ***I doubt it. See our response in the grandfathering section.
    thanks

What are Similarly #Situated Individuals?

 

Similarly Situated Individuals  means that  when employees enroll in a employer group health plan if there is any difference in benefits or contribution it must be based on bona-fide employment-based classifications consistent with the employer’s usual business practice, which cannot include any health factors (§1182) or Salary  §2716

For example, part-time and full-time employees, employees working in different geographic locations, and employees with different dates of hire or lengths of service can be treated as distinct groups of similarly situated individuals, with different eligibility provisions, different benefit restrictions, or different costs, provided the distinction is consistent with the employer’s usual business practice. The plan also may distinguish between beneficiaries based on, for example, their relationship to the plan participant (such as spouse or dependent child) or based on the age or student status of dependent children.   In any case, a plan cannot create or modify a classification directed at individual participants or beneficiaries based on one or more of the health factors or Salary §2716.  (dol.gov)

29 CFR  2590.702 Health Factors

Society for HR Management Q & A

 The EEOC Compliance Manual of Employee Benefits, Section 3

Criteria of  “similarly situated employee

• The work performed

• The responsibility level

• The skills and qualifications required for the respective positions.

In order to ensure the same criteria are used to determine if the employees are similarly situated, employers must standardize the actual facts regarding employees’:

• Work activities

• Responsibilities

• Skills

• Qualifications.

In order to effectively evaluate possible differences in similarly situated employees’ compensation, the legitimate factors that influence compensation may include:

• Education

• Experience

• Performance

• Productivity

• Location.World At Work.org/

Even before health care reform there were generally the same protections for similarly situated individuals under AB 1672 (1992).

Employer Application for Health Insurance –
Eligibility 

Eligibility section of employer application

Who is Similarly Situated? VIDEO

 

More on Management Carve Outs…

 

Participation and Contribution Requirements

Insurance Company Employer Health Insurance Applications

Section 106 Tax Deductibility of Health Insurance Premiums

Misc.

similarly situated means adj. with the same problems and circumstances, referring to the people represented by a plaintiff in a “class action,” brought for the benefit of the party filing the suit as well as all those “similarly situated.” To be similarly situated, the defendants, basic facts, and legal issues must be the same, and separate lawsuits would be impractical or burdensome. legal-dictionary

 

To qualify as an accident and health plan, payments under which are excludable from gross income in computing federal income tax liability, a “plan” must benefit all employees or some identifiable class of employees; a plan can be for as few as one employee but there must be some rational basis other than ownership of the corporation to discriminate among employees. American Foundry v. C. I. R., C.A.9 1976, 536 F.2d 289. Internal Revenue 3161

Similarly Situated Non-COBRA Beneficiaries

The group of covered employees, their spouses or dependent children who are covered under a group health plan maintained by the employer or employee organization. This group is receiving their benefits under the group plan and not through COBRA continuation coverage. They are most similarly situated to the circumstances of the qualified beneficiary immediately before the qualifying event.  (www.dol.gov/)

“Similarly Situated Employees”

  1. My employer offers drastically different plans based on where employees live. Which business practices must this be consistent with in order to be bona fide? For instance, someone living in Massachusetts has much better coverage than someone living in Connecticut, but I can’t think of a single other business practice that differentiates us.
    Thank you!
     
    • See the above reference to different geographical locations. We’ve updated this page, so that you can check out other references. Geographical Locations appears to be perfectly legal. Check with your HR department.
       
  2. May an ERISA medical benefits plan reimburse retirees under age 65 at a higher amount than retirees aged 65 and older in the same plan and under the same claim situation?
    The issue is tied to the Medicare-eligible retiree vs the retiree dependent under age 65 who is also a participant in another plan.
     

Top 5 - 10 causes of Long Term Disability Claims 

Lower back disorders  ♦   Depression  ♦ Coronary heart disease, arthritis and pulmonary diseases  (Met Life♦  Disability Can Happen    CDC Statistics

Top 5 causes of Disabilty
 

Click here to visit our website on Disability Payments - Insurance 

Consumer Links

Technical Links

Tax Facts on Life & Health Insurance  & 2016 Health Reform Facts —  Rules on Corp. Officer and Highly Compensated Employees Discrimination, etc.  Send us your questions and we can look up the codes and interpretations, but cannot give you tax or legal advise.

Relevant Codes – mentioned on Salary Discrimination – Management Carve Outs – Executive Medical

Historical

Cannot write a carve-out class of a Small Employer Group in the states of Indiana, North Carolina, Ohio, South Carolina, Texas Virginia, Wisconsin or Wyoming (expressly prohibited by their state law). compass consulting inc

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