The purpose of this posting is to point out to you some legal issues which have surfaced concerning implementation of the Affordable Care Act by school districts which impact the salaries of the five (5) top paid employees of the school district.
The Patient Protection and Affordable Care Act, public law #111-148, as amended by the Health Care and Education Reconciliation Act, hereinafter referred to as “The Affordable Care Act,” contains provisions that indicate a need to reevaluate the health insurance benefits paid for the five (5) top paid employees of the school district. The federal health care reform law specifically addresses benefits provided to the highest paid employees of a school district.
Self-funded health care plans are already subject to federal non-discrimination rules. The Affordable Care Act extends these non-discrimination rules to apply to employers with fully-insured plans. At present, it is unclear whether school districts that participate in
TRS-ActiveCare are considered self-insured or fully-insured plans. This is because while
TRS-ActiveCare is a self-insured program, the districts themselves are not self-insured. By extending non-discrimination rules to fully-insured plans, it appears that the Affordable Care Act now answers the question and applies all of the non-discrimination rules to all school district plans. TRS-ActiveCare is not grandfathered and therefore is not exempt from the non-discrimination rules.
Before the Affordable Care Act, it has been a common practice for Texas school districts to pay medical insurance premiums for Superintendents and to treat such premium payments as non-taxable income. While school districts have been trained in avoiding discrimination based on race, gender, age, disability, and other protected classifications, there has previously not been a non-discrimination provision in any federal health care law. The Affordable Care Act now contains a provision that prohibits discrimination in favor of highly-paid employees. The Affordable Care Act extends rules that previously applied to self-funded health plans to employers with fully-insured health plans.
Specifically, the Affordable Care Act prohibits discrimination by fully-insured plans in favor of highly-compensated employees. While the term “highly-compensated employees” has not yet been defined, it is expected that it will define when the federal regulations implementing the Affordable Care Act are adopted. However, all of the commentators that I have reviewed believe that the federal regulations will define a highly-compensated employee as: one (1) of the five (5) highest paid officers of the employee; or an employee in the top 25% highest paid employees.
In a situation where the school district pays some part of the health insurance premiums for its employees, but pays all of the premiums for the Superintendent, the school district must treat the excess premium payments made for the Superintendent as taxable income to the Superintendent in order to avoid violation of the non-discrimination rule.
It appears that school districts who have agreed to pay the superintendent’s excess premiums will have two options: 1) to convert the superintendent’s excess premium payments into additional salary; or 2) to start treating the excess payment as taxable income to the Superintendent subject to withholding.
The penalty for violation of the non-discrimination rules is harsh. Although not in final regulations as yet, the IRS has suggested that if a fully-insured plan violates the non-discrimination rule, a penalty should be imposed on the employer of $100.00 per employee discriminated against (think everyone other than the Superintendent) per day. This means that, for a district with approximately 1,000 or more full time employees, other than the Superintendent, the proposed penalty would be $100,000.00 per day for each day that the discrimination continued.
The penalties will not be in effect until the regulations implementing the Affordable Care Act are adopted. The district needs to be prepared for this. I recommend that we immediately begin a discussion to modify the terms of the employment contracts of the five (5) top paid employees of the district to address which alternative the district prefers for avoiding the penalties associated with the non-discrimination rules.
While not an immediate issue, it is speculated that the district will have to be in compliance by September 1, 2014 to avoid the penalty provisions of the new law. My advice is that this issue should be addressed and resolved as soon as possible and preferably in early July of 2013.
Please contact the Haglund Law Firm, P.C. as soon as possible should you require any assistance.
Posted on 06/24 at 10:05 AM