News & Information

• an expanded internal claim and review process,
• first dollar coverage for certain preventative care benefits,
• emergency care access,
• provider choice,
• application of the discrimination rules.

All of the above are generally incremental in nature, except for the application of the discrimination rules to insured health care plans, which is a more revolutionary change.

Historically, insured plans have been exempt from the discrimination rules. This allowed plan sponsors to design plans with practical and sometimes aggressive exclusions based on residence (Michigan residents covered but out-of-state residents not covered), full-time status (coverage for those working 35 or more hours per week), other work characteristics (salaried but not hourly employees), or special post-employment coverages (extended coverage for some employees eligible for severance but not to all termination circumstances).

In the past, Internal Revenue Code Section 105(h) applied to self-insured plans. This also included health reimbursement accounts and the type of "mini self-insured plans" that have sprung up in the past several years to protect employees from increased deductibles. These plans will continue to be subject to 105(h). Historically, Section 125 plans (also known as cafeteria or flexible benefit or FSA plans) were subject to another set of rather inflexible discrimination rules. HSA contributions are subject to their own set of rules, but these rules are generally avoided if the HSA contributions are made within the framework of a Section 125 plan.

In an insured plan setting, sponsors could often avoid or satisfy the Section 125 rules (and therefore can be very selective in coverage decisions) by excluding one or more of the highly compensated employees (HCEs), sometimes making up the benefit loss through other means. With several small employers, and most government and tax exempt employers, this rule could be avoided altogether if the employer has no HCEs (employees making more than $110,000 per year).

The new challenge of Section 105(h) discrimination is that it distinguishes between participants on a relative basis and not an absolute basis as with the Section 125 rules. That is, benefits provided to employees in the highest paid 25% of all employees of the employer must be provided to those in the lowest paid 75%, with some exceptions for part-time, seasonal and new employees. Violation of this rule will result in loss of tax benefits for employees in the highest paid 25% group.

The first suggestion is that employers not be pennywise and pound foolish. That is, don't suffer from paralysis out of fear of losing grandfather status in an uncritical manner. Look instead at the internal components of the proposed change, and the cost savings, and compare the expected savings from the design change to the added costs of the loss of grandfather status. For most group health insurance plans, the grandfather protected changes (other than the discrimination rule) might not be significant and might be inevitable. Prepare a careful comparison of the cost savings of a proposed change and the cost increases due to the added PPACA burden.

On the other hand, do not carelessly adopt a change that may have "obvious" cost savings but that may have hidden costs. For example, increasing a co-payment amount from $10 per service to $20 per service will save costs on that particular service, but it could cause the plan to add several PPACA attributes (such as compliance with the discrimination rule) that may have a cost far in excess of the anticipated savings of some "simple" changes.

You should be aware of surprise consequences. At times, insurance companies will present the same insurance policy for renewal. But buried within the "same" policy there may be a change in one of the partners of the insurance program that has subtle, but significant effects, or a continuing partner may change characteristics in a way that significantly changes the value of the health insurance contract. A pharmacy benefit manager (PBM) is often a partner in that role. Increasingly, insurance companies are not administering the prescription drug elements of the coverage but are subcontracting that function to a PBM. The identity of the PBM can change from year-to-year, usually for good business reasons. A PBM may make internal changes to deductible features or drug formularies that independently make sense, but that could cause a loss of grandfathered status. A change of this nature could cause a loss of grandfathered status. If changes can be avoided and thereby protect a valuable characteristic (such as avoidance of the discrimination rule) then do so. If not, then prepare to comply with a wider range of PPCA changes that would otherwise be avoided.

Return for a moment to the discrimination rules under Code Section 105(h). Assume that the plan covers 10 out of 20 total employees. What impact will the loss of grandfather status have on this plan? Compliance with the discrimination rule may force the employer to extend coverage to 14 or 15 employees, rather than 10. Chances are that the cost of the loss of the grandfathered status in this example will be far greater than the savings associated with an increase in a deductible or co-pay.

In general, grandfather status can be retained simply by avoiding making any changes to a plan from year-to-year. On June 17, 2010, the Departments of Treasury, Labor and Health and Human Services jointly issued guidance in the form of interim final rules describing many changes that can be made to a plan without losing grandfathered status. In general, a plan can make an improvement to voluntarily comply with PPACA or make minor, cost of living or similar adjustments to a plan without loss of grandfather status. We recommend making no changes to a plan without first carefully reviewing the new guidance.

We recommend evaluating three issues:

• How does the sponsor test the plan so that it knows whether it passes the discrimination test?
• Will proposed changes to the plan design cause the plan to lose grandfathered status?
• What is the cost or other consequence of losing grandfathered status?

If you have questions about grandfathered status, discrimination rules or other questions about PPACA and health care plan operations, please call one of the labor and employee benefit lawyers of Mika Meyers Beckett & Jones PLC.