Editor: Mark G. Cook, CPA, CGMA
The comprehensive health care reform law signed in March 2010, the Patient Protection and Affordable Care Act, P.L. 111-148, better known as the Affordable Care Act (ACA), was passed with the intention of extending health insurance coverage to millions of uninsured Americans. Under the ACA, health insurance carriers are required to include certain provisions for all policyholders. However, Section 1251 of the ACA allows for group health plans or group health insurance coverage to be considered grandfathered and therefore not subject to certain provisions of the ACA for as long as grandfather status is maintained.
Regs. Sec. 54.9815-1251 defines a grandfathered health plan as coverage provided by a group health plan, or a health insurance issuer, in which an individual was enrolled on March 23, 2010. A group health plan or group health insurance coverage will not lose grandfather status simply because one, some, or even all individuals enrolled on March 23, 2010, cease to be covered. The plan must merely have continuously covered at least one individual since March 23, 2010. There are a number of benefits to maintaining grandfather status, including the cost of premiums, benefits, and provider network options. It is estimated that plan participants could experience premium increases from 10% to 40% if they were to transition to a nongrandfathered group health plan. The provider networks are also often more robust, and participants transitioning to nongrandfathered group health plans would potentially be unable to continue receiving care from their current in-network providers.
For a plan to continue its status as grandfathered health plan coverage, Regs. Sec. 54.9815-1251 lists specific requirements that must be met:
- The "maintenance of grandfather status" requirements are met;
- The plan has covered at least one individual continuously since March 23, 2010;
- If the plan covers some individuals because of mergers or transfers, the mergers or transfers were made for bona fide reasons;
- No changes of a specified type are made to the terms of the plan or coverage; and
- If the plan or coverage is provided under a collective bargaining agreement that was ratified before March 23, 2010, either the agreement has not terminated or the plan or coverage otherwise has met the rules for retaining grandfather status.
In addition to these requirements, Regs. Sec. 54.9815-1251 lists six types of changes that will cause a group health plan or health insurance coverage to lose grandfather status. These changes are:
- 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 contributions rate by an employer or employee organization toward the cost of coverage by more than five percentage points below the contribution rate for the coverage period that includes March 23, 2010; and
- The imposition of annual limits on the dollar value of all benefits for group health plans and insurance coverage that did not impose such a limit before March 23, 2010.
These rules are intended to ensure that participants' financial obligation cannot be significantly altered. However, increases to cost-sharing requirements are allowed as long as the increases stay within the thresholds of the 2015 rules. For example, modifying a fixed-amount cost-sharing obligation may be reasonable to keep pace with rising medical costs. An increase in a coinsurance obligation would not be reasonable, though, as a coinsurance obligation necessarily rises as the cost of health care benefits increases. Therefore, any increase in a percentage cost-sharing requirement will result in a loss of grandfather status. For any change that causes a loss of grandfather status, the plan or coverage ceases to be a grandfathered plan when the change becomes effective. Once lost, grandfather status cannot be reestablished.
Regarding increases in fixed-amount cost-sharing requirements, there is one standard for permitted increases for copayments and a second standard for permitted increases for fixed-amount cost-sharing requirements other than copayments (such as deductibles). For increases in fixed-amount copayments, an increase that exceeds the greater of the maximum percentage increase or $5 increased by medical inflation will cause loss of grandfather status. For increases to fixed-amount cost-sharing requirements other than copayments, any increase that exceeds the maximum percentage increase will cause a loss of grandfather status. Regs. Sec. 54.9815-1251 defines the maximum percentage increase as medical inflation from March 23, 2010, plus 15 percentage points. For purposes of this, standard medical inflation is defined by reference to the overall medical care component of the Consumer Price Index, unadjusted (CPI-U).
In response to Executive Order 13765, "Minimizing the Economic Burden of the Patient Protection and Affordable Care Act Pending Repeal," the IRS and other U.S. government departments solicited responses from the public on the challenges that group health plans and group health insurance issuers face in preserving grandfather status. In response to the comments and suggestions submitted, the departments have issued proposed regulations that would amend Regs. Sec. 54.9815-1251 to allow greater flexibility for grandfathered group health plans to make certain changes without losing grandfather status. The goal of these proposed regulations is to allow grandfathered health plans a greater ability to respond to rising health care costs while still offering affordable coverage. It should be noted that the proposed regulations provide no authority for nongrandfathered plans to become grandfathered, so there is no opportunity for plans that have ceased to be grandfathered to have that status reinstated as a result of the proposed regulations.
In response to commenter concerns that the current rules may prevent grandfathered group health plans from making changes to cost-sharing requirements that are necessary to maintain status as a high-deductible health plan (HDHP) and thus precluding individuals covered by this plan from contributing to a health savings account, the proposed rules include a new paragraph — Prop. Regs. Sec. 54.9815-1251(g)(3). This rule would allow grandfathered group health plans and grandfathered group health insurance coverage that are also HDHPs to make changes to fixed-amount cost-sharing requirements without losing grandfather status, but only to the extent that the changes are necessary to comply with the requirements under Sec. 223(c)(2) for HDHPs.
Another concern expressed by commenters was that the use of the medical component of the CPI-U for purposes of inflation adjustments to the maximum percentage increase is too restrictive and does not reflect the increase in health care costs. In response, a revised definition of "maximum percentage increase" has been included in Prop. Regs. Sec. 54.9815-1251(g)(4). This revised definition uses the methodology to calculate the premium adjustment percentage, which commenters advised is a better reflection of an increase in health care costs, and it is tied to the increase in premiums for health coverage.
The premium adjustment percentage is a measure of growth that the ACA directs the secretary of Health and Human Services to calculate to reflect the cumulative historic growth in premiums from 2013 through the preceding year. The percentage is determined by calculating the percentage by which the average per capita premium for health insurance coverage for the preceding calendar year exceeds the average per capita premium for health insurance for 2013 and then rounding the resulting percentage to 10 digits. As the premium adjustment percentage is tied to several provisions in the ACA, using this calculation to determine the maximum percentage increase for grandfathered plans is more consistent with the ACA's methodology.
Though the number of grandfathered group health plans and group health insurance policies has declined each year since the ACA was passed, a 2018 Kaiser Family Foundation survey found that one in five firms that offered health insurance coverage offered a grandfathered plan and 16% of covered workers were enrolled in a grandfathered health plan. This suggests that firms and participants have found value in preserving grandfather status. As such, the proposed changes to Regs. Sec. 54.9815-1251 are under consideration to provide methods of preserving grandfather status to the benefit of plan participants, beneficiaries, employers, and employee organizations.
Mark G. Cook, CPA, CGMA, MBA, is the lead tax partner with SingerLewak LLP in Irvine, Calif.
For additional information about these items, contact Mr. Cook at 949-261-8600 or firstname.lastname@example.org.
All contributors are members of SingerLewak LLP.