Final Rule Allows for More Flexibility with Grandfathered Health Plans
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In December 2020, the Departments of Labor, Health and Human Services, and Treasury (including the IRS) issued a final rule regarding ACA grandfathered health plans.
Grandfathered health plans are healthcare plans that pre-date the ACA’s enactment on March 23, 2010, and are exempt from some of the ACA market reforms including “coverage of preventative services, internal claims and appeals and external review, and patient protections.” Health plans may lose their grandfathered status in several ways, including certain increases in cost-sharing arrangements such as coinsurance and deductibles.
The final rule allows for more flexibility for grandfathered group health plans and includes two changes. The first change relates to plans with the dual statuses of being 1) grandfathered plans and 2) High Deductible Health Plans (HDHPs).
HDHPs, as their name suggests, have higher deductibles than traditional health plans. The benefits of HDHPs generally include lower premiums and the ability to contribute to a Health Savings Account (HSA), which is essentially a tax-advantaged personal savings account for medical expenses. HSAs help offset the costs of the higher deductibles associated with the HDHPs. On a regular basis, the IRS adjusts HSA and HDHP limits to account for inflation. So, these plans with dual-status face the catch-22 of losing their grandfathered status if they adjust the HDHP and HSA limits.
Thankfully, this tension is resolved under the final rule, which allows grandfathered HDHPs to increase cost-sharing requirements to maintain HDHP status (and continue to allow eligible individuals to contribute to HSAs), while also maintaining their grandfathered status.
The second change of the final rule provides an alternative method for measuring permitted increases in cost-sharing arrangements. As noted above, a grandfathered plan could lose its status if, for example, deductibles are raised beyond specified limits. The alternative measurement method gives grandfathered plans further flexibility to respond to the changing costs of healthcare.
Together the two changes amend the rules for grandfathered group health plans to prevent scenarios where plans would lose their grandfathered status and in turn, helps employers better manage the rising costs of healthcare. The regulations went into effect on January 14, 2021, and will be applicable to plans beginning June 15, 2021.
Acting Assistant Secretary for the Department of Labor’s Employee Benefits Security Administration (EBSA) Jeanne Klinefelter Wilson said in a press release that the “final rule equips many employers with an important tool to respond to rising healthcare costs.” She adds that “employers are now better positioned to continue to offer affordable healthcare options that best meet their employees’ needs.”
Grandfathered plans also do not require transitional relief because they can exist indefinitely, so long as they retain grandfathered status eligibility and comply with certain disclosure and documentation requirements. According to the federal registrar, there are six possible scenarios that will cause a health plan to lose its grandfathered status. As cited from the federal register:
- The elimination of all or substantially all benefits to diagnose or treat a particular condition
- Any increase in a percentage cost-sharing requirement (such as coinsurance)
- Any increase in a fixed-amount cost-sharing requirement (other than a copayment, such as a deductible or out-of-pocket maximum) that exceeds certain thresholds
- Any increase in a fixed-amount copayment that exceeds certain thresholds
- A decrease in contribution rate by an employer or employee organization toward the cost of coverage of any tier of coverage for any class of similarly situated individuals by more than five percentage points below the rate for the coverage period that includes march 23, 2010
- The imposition of annual limits on the dollar value of all benefits for group health plans and insurance coverage did not impose such a limit prior to March 23, 2010
The Kaiser Family Foundation (KFF) reported in 2019 that 22% of employers offer at least one grandfathered plan. These plans allow employers to offer health plans that do not necessarily meet all of the components set forth under the ACA’s Employer Mandate.
Under the ACA’s Employer Mandate, Applicable Large Employers (ALEs) organizations with 50 or more full-time employees and full-time equivalent employees) are required to offer Minimum Essential Coverage (MEC) to at least 95% of their full-time workforce (and their dependents) whereby such coverage meets Minimum Value (MV) and is Affordable for the employee or be subject to Internal Revenue Code (IRC) Section 4980H penalties.
Employers that still provide grandfathered health plans should consult experts in ACA compliance to ensure their plans can still technically be classified as grandfathered and verify that they are in compliance with the ACA’s Employer Mandate.
The IRS is currently issuing Letter 226J penalty notices to employers identified as having failed to comply with the ACA’s Employer Mandate for the 2018 tax year. With the 2020 deadline for reporting annual ACA information to the IRS now behind us, the agency is also issuing penalty assessments to employers that file late and for not complying with state reporting requirements.
For information on ACA penalty amounts, affordability percentages, important filing deadlines, steps for responding to penalty notices, and best practices for minimizing IRS penalty risk, download the ACA 101 Toolkit.
