The Department of Treasury, Labor, and Health and Human Services recently released final rules (“Final Rules”) on grandfathered health plans, which provide greater flexibility for certain plans to increase cost-sharing without losing their grandfathered status. The regulations go into effect on June 15, 2021.

What are grandfathered group health plans?

Generally, a group health plan is considered “grandfathered” if it was in existence and has continuously provided coverage for an individual since March 23, 2010 (the date the Affordable Care Act (ACA) was enacted), provided that the plan sponsor has not taken certain actions that would result in the plan losing its grandfathered status. Grandfathered plans are not subject to certain provisions of the ACA for as long as they maintain their status as a grandfathered plan. For instance, grandfathered plans are not subject to the ACA requirement to cover certain preventative services without cost sharing or the annual limitation on cost sharing. Once a plan loses its grandfathered status, the plan would be required to comply with both provisions, in addition to other ACA obligations.

How do plans lose grandfathered status?

The 2015 rules on grandfathered plans outline what changes made to a plan would cause it to lose its grandfathered status. Changes affecting grandfathered status include certain changes to benefits, cost-sharing requirements, and contribution rates. Generally, grandfathered plans cannot increase fixed copayments and other fixed cost-sharing requirements (e.g., deductibles, out-of-pocket maximums) more than the permitted “maximum percentage increase.”

Maximum Percentage Increase

The maximum percentage increase is the “change in medical inflation” plus 15%. The “change in medical inflation” is the percentage change in medical care from the cost in March 2010 (i.e., 387.142), based on the Consumer Price Index for All Urban Customers (CPI-U). The following formula can be used to calculate the change in medical inflation:

Change in Medical Inflation= [CPI-U in the 12 months prior to a plan change] – 387.142 / 387.142
Maximum Percentage Increase = Change in Medical Inflation + 15%

The final rules change how “maximum percentage increase” is calculated and provides a special rule for grandfathered high deductible health plans (HDHP), discussed below.

What changes were made by the Final Rules?

New Calculation Method for “Maximum Percentage Increase”

Under the new Final Rule, the “maximum percentage increase” is the greater of “change in medical inflation” plus 15% (the current standard, outlined above) or the “change in the premium adjustment percentage” plus 15%. This new calculation applies to increases in cost-sharing that are effective after June 15, 2021. This change makes it easier for grandfathered group health plans to increase cost-sharing without losing their status, since the “change in premium adjustment percentage” is typically higher than the “change in medical inflation.”

The final rules provide the following examples:

Example 1: On March 23, 2010, a grandfathered plan has a copayment requirement of $30 per office visit for specialists. The copayment was increased to $45 (effective before June 15, 2021). Within the 12-month period before the $45 copayment takes effect, the greatest CPI-U is 475.

  • Increase in copayment from 30 to 45 = 50%
  • Maximum Percentage Increase = 40.27%
    • Medical Inflation = (CPI-U in 12 months prior to change – 387.142)/387.142
    • (485 – 387.142)/387.142 = 25.27%
    • 25.27% +15% = 40.27%

Because the percentage increase in the fixed copayment of 50% is more than maximum percentage increase of 40.27%, the increase in copayment would cause the plan to lose grandfathered status.

Example 2: Same facts in example 1 except the increase in copayment is effective after June 15, 2021. In the calendar year where the increase takes place, the premium adjustment percentage is 36%. Since the change takes effect after June 15, 2021, the maximum percentage increase can be calculated using the current method (as outlined in example 1) or can be calculated based on the premium adjustment percentage.

  • Increase in copayment from 30 to 45 = 50%
  • Maximum Percentage Increase = 40.27% or 51%
    • Based on Medical Inflation= 40.27 % (see above for calculation)
    • Based on Premium Adjustment Percentage= 36% + 15% = 51%

Because the increase in copayment of 50% is less than the maximum percentage increase of 51% (by using the premium adjustment percentage method), the increase in copayment does not cause the plan to lose grandfathered status.

Special Rule for Grandfathered High Deductible Healthcare Plans (HDHPs)

The final rule also allows a special rule for grandfathered HDHP plans, which allows these plans to increase the fixed amount of cost-sharing if it is necessary to maintain its status as a HDHP under IRS regulations (which requires certain minimum deductibles to maintain HDHP status).

Employer Action Items

  • Employers that do not sponsor grandfathered plans are not required to act.
  • Employers with grandfathered plans have additional flexibility to increase certain cost-sharing (effective June 15, 2021) under the new Final Rules.
    • Self-insured employers should work with their third-party administer (TPA) or vendor to ensure increases in cost-sharing are within the permissive levels and do not cause any plans to lose grandfathered status.
    • Fully insured employers should reach out to their insurance carriers for any grandfathered plans to determine if their plans will increase cost-sharing.

Additional Resources

Disclaimer: This content is intended for informational purposes only and should not be construed as legal, medical or tax advice. It provides general information and is not intended to encompass all compliance and legal obligations that may be applicable. This information and any questions as to your specific circumstances should be reviewed with your respective legal counsel and/or tax advisor as we do not provide legal or tax advice. Please note that this information may be subject to change based on legislative changes. © 2021 Sequoia Benefits & Insurance Services, LLC. All Rights Reserved

Emerald Law – Emerald is a Client Compliance Consultant for Sequoia, where she works with our clients to optimize and streamline benefits compliance. In her free time, Emerald enjoys stand-up comedy, live music and writing non-fiction.