IRS Issues Final Rule on ACA Group Plan Grandfathering

On Tuesday, the Internal Revenue Service Employee Benefit Security Administration (‘EBSA’), and the Department of Health and Human Services jointly issued a Final Rule via the Federal Register regarding grandfathered group health plans and grandfathered group health insurance coverage. The new rule, effective January 14, 2021, specifically focuses on health plans and coverage that was exempted from requirements of the Patient Protection and Affordable Care Act (ACA) so long as the plans met certain funding and maximum increase in cost changes. If the plans do not meet those requirements, the plan loses the grandfathered status and must comply completely with the PPACA.

Under the grandfathering rules of the ACA, a grandfathered health plan must abide by five conditions may not:

  • eliminate all or substantially all benefits to diagnose or treat a particular condition,
  • increase the percentage cost-sharing requirement (such as coinsurance),
  • increase the fixed-amount cost-sharing requirement (such as a deductible or out-of-pocket maximum) that exceeds certain thresholds,
  • increase the fixed-amount copayment that exceeds certain thresholds,
  • decrease the 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, or
  • impose annual limits on the dollar value of all benefits for group health plans and insurance coverage that did not impose such a limit prior to March 23, 2010.

These limitations prevent a grandfathered health plan from demanding a higher cost from any subscriber without also providing the additional mandated benefits that are a part of the ACA.

The threshold requirements mentioned in the third and fourth requirements are tied to the Consumer Price Index for All Urban Consumers (CPI-U), which is promulgated by the Department of Labor. However, both of these requirements have a maximum percentage in the current regulations as well. The issue in these calculations is that sometimes the threshold indicated by the CPI-U, which is tied to inflation, permits a greater increase in costs than the maximum percentage indicated in the regulations. This means that a grandfathered health plan could not properly increase the patient shares to match inflation without running afoul of the maximum cap.

Per the guidance of the final rule, grandfathered plans can now increase their patient payments in the forms of copays, deductibles, and out of pocket maximums to reflect up to the percentage indicated by the CPI-U without losing their protected status, resulting in a greater direct cost to members of these plans. As noted in the rule, there is concern among the official comments that were made when the proposed rule was set for comment that this could result in Americans with these plans experiencing higher medical costs during a pandemic, as well as concerns that this permits the grandfathered plans to unfairly compete in the health insurance marketplace with plans that are compliant with the higher level benefits mandated under the ACA.