IRS Issues Notice Delaying Application of Nondiscrimination Rules to Insured Group Health Plans: IRS, Treasury and Departments of Labor and Health and Human Services Will Not Enforce Statutory Prohibition against Discrimination in Insured Group Health Plans in Favor of Highly Compensated Individuals until Regulatory or Administrative Guidance Is Issued

Sullivan & Cromwell LLP - December 23, 2010

The Patient Protection and Affordable Care Act (the “Act”) added provisions to the Internal Revenue Code (the “Code”), the Employee Retirement Income Security Act (“ERISA”) and the Public Health Service Act (“PHS Act”) prohibiting insured group health plans (“Group Plans”) that are not grandfathered health plans under the Act from discriminating in favor of “highly compensated individuals”, exposing noncompliant Group Plans to very substantial penalties. The prohibition was accomplished by extending to Group Plans certain nondiscrimination rules under the Code (which prohibit discrimination in favor of highly compensated individuals under self-insured plans) along with certain “similar” provisions. On Wednesday, December 22, 2010, the Internal Revenue Service (the “IRS”) issued Notice 2011-1, explaining that the IRS, the Treasury Department and the Departments of Labor and Health and Human Services (together, the “Departments”) have jointly determined that compliance with these rules for Group Plans “should not be required (and thus, any sanctions for failure to comply do not apply) until after regulations or other administrative guidance of general applicability has been issued”. Notice 2011-1 further stated that the Departments anticipate that subsequent guidance will not apply until plan years beginning a specified period after issuance of the guidance.