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Health Care Reform & Grandfather Status Rules - 8/4/10
By Chuck Hudspeth, Hudspeth Benefits Group, Representative ABC Merit Choice
By now, I think that everyone is aware that the Patient Protection and Affordable Care Act (PPACA) has been passed and signed into law.
Assuming the law is not repealed or changed, in 2014 pre-existing conditions limitations will be eliminated, health insurance policies will be guaranteed issue both for individuals and for businesses. Individuals and some employers will be mandated to purchase health insurance. In addition to this, a complex system of new taxes, penalties, regulations, & subsidies will also be put into place “ostensibly” to make the cost of coverage affordable for everyone.
2014 is still a few years away so it may seem appealing to put off worrying about this for a while. Unfortunately there is an issue that every employer currently providing group health insurance needs to consider and that is whether to keep your “Grandfathered Status” under the new rules.
Although most of the big changes in the law take effect in 2014, some parts go into effect this year. After September 23, 2010, all health plans are required to include certain new benefits such as no lifetime limits, coverage for dependents up to age 26. Plans that are NOT “Grandfathered” will be required to offer additional benefits such as no cost sharing for certain preventive services and guaranteed access to OB-GYNs and pediatricians.
New Non-Discrimination Rules
Here the part you need to pay attention to. Under prior law, employers providing health insurance through FULLY INSURED plans have been permitted to discriminate by class which means that employer could do the following:
- Cover only certain classes of employees such as owners, managers, salaried employees, etc.
- Discriminate in favor of highly compensated employees. (ie the employer could pay 100% for owners/executives but 75% for everyone else or have a richer benefit for the highly compensated employees.)
Under Sec. 2716 of the PPACA, fully insured health plans shall satisfy rules SIMILAR to certain sections of IRS code sec. 105(h). Section 105(h) is a set of non-discrimination rules that have been in existence for years but only apply to self-funded health plans. Under section 105(h) employers are essentially required to cover all full time employees with certain exceptions.
Although Sec 105(h) provides some guidance as to what might be discriminatory, you should not rely on the code itself. The PPACA says that fully insured plans will be subject to rules SIMILAR to 105(h). The Department of Health & Human Services (HHS) has been given the task of defining the actual rules and as of today (8/3/10) they have not been promulgated.
Grace Period for Certain Plans
On June 15, 2010 HHS did promulgate proposed regulations and indicated that “Grandfathered” plans will not be subject to the new non-discrimination rules; however, once a plan loses its “Status” it cannot get it back.
Plans that are NOT “Grandfathered” that fail to meet the new non-discrimination rules (which have not been published) can be subject to enforcement by HHS as well as the department of Labor starting September 23, 2010. This includes fines of up to $100/day times the # of highly compensated employees covered under the non-compliant plan for each day the plan is not in compliance subject to certain limitations. The fines can be found the Public Health Service Act (42 USC 300gg) which was amended by the PPACA to be applicable to fully insured health plans. It is my understanding that employers with 50 or more employees will be subject to these penalties. Employers with fewer than 50 employees will not be subject to the penalties but are still expected to comply.
Although the law went into effect on March 23, 2010, HHS did not publish the regs relating to grandfathered status until 6/15/2010. Because of this, employers may have inadvertently made changes to their plans between 3/23 and 6/15 that would otherwise cause them to lose their status. In these instances, HHS is giving these employer until their next plan anniversary following September 23, 2010 to correct their plans.
Employers that make changes to their plans after 6/15/2010 that cause them to lose their status, lose it irrevocably.
What Causes a Plan to Lose its Status?
- Cannot Significantly cut or reduce benefits (ie remove or reduce coverage for a particular condition).
- Cannot Raise coinsurance charges – Reduce the coinsurance % from 80% to 70%.
- Cannot Significantly Raise Copayment Charges – Copays cannot be increased by more than the lesser of $5 (adjusted annually for medical inflation) or a percentage equal to medical inflation plus 15%.
- Cannot Significantly Raise Deductibles – Cannot be raised by more than medical inflation plus 15%.
- Cannot significantly lower Employer Contributions – Employers cannot increase the employee’s share by more than 5 percentage points. (ie the employee’s share cannot be increased from 15% to 25%).
- Cannot Change Insurance Companies
In the proposed regulations the HHS indicated that it is also considering the possibility that changing PPO networks or RX formularies may also cause a plan to lose its status as well.
Should I Care?
Since the non-discrimination regulations have not been promulgated this is somewhat speculative however here are some hypothetical cases where I think losing status could be a disaster and other cases where I don’t think it’s a factor.
Keeping Status Very Important (Almost Critical)
- Employer has 200 full time employees but only covers 50 owners/managers/salaried employees. Has 150 hourly paid FT employees that are not offered any coverage. In this case losing status would require to the employer increase the # of eligible employees by a factor of 4 thus increasing its costs on the order of 400%. This employer would also be subject to the penalties mentioned earlier.
Keeping Status Important (But perhaps not critical)
- An employer has 200 full time employees, offers coverage to everyone but pays 100% for owners & executives and 75% for everyone else. If this plan lost its status, the employer subsidy would probably fail to meet the non-discrimination rules. The employer could correct this by simply paying the same subsidy for everyone.
- An employer has 200 full time employees, offers coverage to everyone, pays 50% for everyone but offers multiple plans. I’m theorizing since I have not seen the new non-discrimination rules; however, this might also be discriminatory if the highly compensated employees were all covered under the best plan.
- Employer has 25 employees but only covers 5 owners/managers/salaried, etc. Again, losing status would cause the employer to fail the new non-discrimination rules. There appear to be no penalties under the law for a small employer; however, the gov’t may still have some power to force a small employer to comply.
Keeping Status Not Important
- An employer of any size that offers a single benefit plan to all full time employees and has a subsidy that is the same for all employees including the owners, executives, etc.
- An employer of any size that does not offer health insurance to its employees. (Until 2014, there is no employer mandate to provide health insurance).
If you are an employer currently offering health insurance to your employees, you must make a decision by your next policy renewal to determine whether you want to maintain your grandfather status. If you want to keep your status, you will need to notify both employees and your insurance carrier.
Losing your status could cost you a fortune, if you are a large employer and cover only a small portion of your full time employees. In other cases it could cause you to be subject to certain penalties and require that you change how you offer coverage to your employees.
In other cases, losing your status will have little or no impact on what you are doing.
Make sure to consult as many trusted advisors as you can find before you make any significant changes to your health plan.
Here are some links on the subject that you may find useful.
The regulation can be found at: http://www.regulations.gov/search/Regs/contentStreamer?objectId=0900006480b03a90&disposition=attachment&contentType=pdf
If you have any questions, you can also reach me at 901-763-2021 or firstname.lastname@example.org.
Hudspeth Benefits Group
Representative ABC Merit Choice
Ph: (901) 763-2021
Fax: (901) 761-1488