As the healthcare industry grapples with the impact of the 2025 Comprehensive Reform Act, which was signed into law on July 4, 2025, offering benefits to its own employees continues to be both a tool for employee retention and an area of additional regulatory complexity. Healthcare industry employers, in their role as plan sponsor, combat an increasingly complex terrain. This includes compliance with the Affordable Care Act (“ACA”) and health plan nondiscrimination rules. At the same time, with ever increasing hospital and health care provider affiliations and acquisitions, these employers must oversee the integration of personnel and benefits in hospital affiliations and acquisitions.
What You Need to Know:
- Healthcare industry employers in their role as plan sponsors continue to face an evolving area of regulatory complexity with respect to their own benefit plans.
- As hospital affiliations and mergers increase, employers must remain aware of challenges of benefits integration and liabilities associated with plans which may become the responsibility of the surviving entities.
This article highlights a few areas where healthcare employers are facing compliance challenges as plan sponsors. Although the issues below are common to all employer plans, we see the issues below occur frequently in the healthcare industry space.
1. Fiduciary Risk Due to Retirement and Health Plan Oversight
Plan sponsors have generally acted to support fiduciary compliance with respect to retirement plans by appointing fiduciary committees and adopting practices or charters that outline the duties and obligations of each fiduciary, including, for example, the frequency of committee meetings. Employers have been slower to document fiduciary processes in relation to their sponsorship of group health care plans. These processes are especially important if a plan sponsor maintains a self-funded group health care plan. There have been constant changes to the plan sponsor’s compliance obligations in the health and welfare space, as well as increased litigation alleging a breach of fiduciary duties related, for example, to the selection of and fees charged by group health care vendors. Recently this fiduciary litigation has been related to pharmacy benefit management agreements.
The board of the health care organization can delegate to its health and welfare plan committee responsibility for the review of claims, benchmarking service agreement costs and services, and compliance with new legal requirements. The formation of a health and welfare plan committee and delegation of fiduciary duties also better insulates the board from fiduciary liabilities. The formation of a health and welfare plan committee streamlines and organizes group health plan responsibilities, designates a specific fiduciary body, and demonstrates that a fiduciary process has been put in place. This is increasingly important given the complexity of the health and welfare plan area and the shift of excessive fee litigation towards the health plan space.
2. ACA Compliance Continues to be a Struggle
The Internal Revenue Service (“IRS”) has continued enforcement efforts with respect to the employer mandate provisions and reporting obligations under the ACA. Plan sponsors, such as many health care providers, who use flexible, part-time, or per-diem work arrangements will need to establish recordkeeping methods and will often apply a look-back measurement method to measure whether an employee working a variable schedule must be offered group health care coverage under the organization’s group health plan. ACA regulations do not explicitly require documentation when applying the look-back measurement method, but the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) contains regulations requiring disclosure of participant eligibility rules. Plan sponsors who document their look-back measurement methodology help to ensure that the organization: (1) will meet its ERISA disclosure obligations, (2) will be better prepared in the event of IRS audit, and (3) has a written description of how eligibility is determined and when coverage must be offered to share with plan service providers. Developing a written description of the employer’s look-back measurement method helps protect employers from risks related to ERISA disclosure obligations, IRS audits, and the inadvertent failure to offer coverage to full-time employees due to miscommunication with service providers.
3. Nondiscrimination Rules: Sections 105(h) and 125 of the Code
Healthcare employers may opt to maintain self-insured plans. While this type of plan funding is more popular with larger employers, smaller employers are now exploring these plans due to self-insured programs, such as level-funded plans, being marketed as a method to reduce costs to the plan sponsor. To expand benefit offerings and motivate employees to become more engaged with reducing medical expenses, plan sponsors may also utilize health flexible spending accounts or health savings accounts.
Self-insured offerings are subject to Code Section 105(h) nondiscrimination rules. Code Section 125 plan nondiscrimination testing (also referred to as cafeteria plan nondiscrimination rules) will generally apply to qualifying benefits, including major medical offerings, and flexible spending accounts and health savings accounts offered through a Section 125 plan. Creating benefit structures that favor one group of employees, such as physicians, can cause plans to fail under the applicable nondiscrimination rules. Plan sponsors should work with their payroll companies, third-party plan administrators, or nondiscrimination testing vendors, to test offerings annually to ensure continued compliance. Failure of these tests can result in negative tax consequences for higher earning participants.
4. Benefits Issues Going Unreviewed in Mergers and Affiliations
The prevalence of Hospital affiliations and acquisitions continues to increase. Not only does a carefully planned benefit transition foster good employee relations, it also avoids unexpected and expensive surprises. Performance of extensive due diligence may avoid learning late in the transaction that stop loss will not cover excess claims incurred after a plan termination or missing a termination notice to a plan vendor. Human resources on the sell-side should consult directly with deal legal counsel to ensure the full suite of benefits and historical plans are understood and disclosed.
Although there are other issues on the health and welfare side that may trigger large liabilities and require comprehensive diligence review, such as retiree medical plans, employers will also want to pay special attention to retirement plans. In addition to general nondiscrimination testing review, employers may have to cope with a partial termination of a 401(k) or 403(b) plan, discovery of a 403(b) plan with no written plan document, collective bargaining obligations including contributions or withdrawal liability to a multiemployer pension plan, or a frozen or active defined benefit plan.
Conclusion
Although healthcare employers may be facing budget restrictions and pressure to create more cost-effective benefit programs, a few steps can help them avoid noncompliance penalties. Further, in the case of hospital affiliations or mergers and acquisitions, diligence and early conversations with benefits counsel can help to avoid or mitigate unexpected costs.
