The Mid-Year ACA Change and the Grandfathered Plan
Pinecrest Health Systems sponsors a self-insured group health plan that has been grandfathered under the ACA since 2010. In March of the current plan year, Pinecrest's benefits committee approves three changes: (1) increasing the office visit copay from $25 to $40; (2) adding a new wellness program that requires employees to complete a health risk assessment and imposes a $600 surcharge on employees who do not complete it; and (3) changing the plan's prescription drug formulary to exclude a class of specialty drugs. The plan also has a COBRA obligation for 45 terminated employees. The committee chair asks whether these changes affect grandfathered status and whether the wellness surcharge is permissible.
1. Determine whether each of the three changes causes the plan to lose grandfathered status.
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Grandfathered status is lost if the plan makes certain prohibited changes under the ACA grandfathered plan regulations. Each change must be analyzed separately.
(1) Office visit copay increase from $25 to $40. This is a cost-sharing increase. A grandfathered plan may increase cost-sharing only within a permitted margin: the increase cannot exceed the greater of $5 (adjusted for medical inflation) or 15 percentage points plus medical inflation. The $15 increase exceeds the $5 threshold and likely exceeds the 15-percentage-point margin depending on medical inflation. This change alone would cause loss of grandfathered status unless the plan can show the increase falls within the permitted margin.
(2) Wellness program with a $600 surcharge. A wellness program that requires a health risk assessment and imposes a surcharge is a health-contingent wellness program subject to HIPAA nondiscrimination rules. The surcharge cannot exceed 30% of the cost of coverage (or 50% for tobacco-related programs). The $600 surcharge must be tested against the total cost of coverage. If the annual premium is $6,000, the surcharge is 10%, which is within the limit. However, the program must satisfy the five requirements for health-contingent programs: reasonable chance to qualify, uniform availability, reasonable alternative standard, notice of the alternative, and the program must be reasonably designed to promote health. A program that merely imposes a surcharge without a reasonable alternative standard would violate HIPAA. The wellness program itself does not automatically cause loss of grandfathered status, but the surcharge must be analyzed as a cost-sharing change.
(3) Formulary change excluding a class of specialty drugs. A grandfathered plan may change its formulary, but if the change eliminates a drug class or reduces benefits in a way that is a significant reduction in benefits, grandfathered status is lost. The regulations permit formulary changes that are not significant. Excluding an entire class of specialty drugs is likely a significant reduction and would cause loss of grandfathered status.
2. Analyze the COBRA obligations for the 45 terminated employees, including the timing of notices and the maximum coverage period.
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COBRA requires the plan to offer continuation coverage to qualified beneficiaries who lose coverage due to a qualifying event. Termination of employment (other than for gross misconduct) is a qualifying event.
Notice timing. The employer must notify the plan administrator of the termination within 30 days of the event. The plan administrator must then notify the qualified beneficiaries of their COBRA rights within 14 days after receiving notice from the employer. The qualified beneficiary has 60 days from the later of the date coverage would otherwise end or the date of the COBRA election notice to elect coverage. If the employer fails to provide timely notice, the plan may be liable for penalties under ERISA section 502(c) (up to $110 per day per violation, adjusted annually).
Maximum coverage period. For termination of employment, the maximum COBRA coverage period is 18 months. The period may be extended to 29 months if the qualified beneficiary is disabled at the time of termination or within the first 60 days of COBRA coverage, and to 36 months for certain other qualifying events (such as divorce or death of the covered employee).
Premium. The plan may charge up to 102% of the applicable premium for the 18-month period. For the 29-month disability extension, the plan may charge up to 150%.
Practical issue. The 45 employees must receive individualized election notices. The plan should also confirm whether any of the 45 are disabled (which would trigger the 29-month extension) and whether any have dependents who are separate qualified beneficiaries. The plan should document the date each notice was sent to avoid section 502(c) exposure.