Carlton Fields tax attorney Lowell Walters discusses issues that can arise when employers with group health plans increase the premiums paid by employees midyear, which we might see more of since certain grandfathered health plans will have greater flexibility to increase employee costs.
This article is directed to employers that offer group health insurance to employees. On December 15, 2020, the IRS, DOL, and HHS released regulations allowing group health plans that qualify for “grandfathered” status under the Affordable Care Act to increase premiums, effective June 15, 2021 (85 FR 81097-01). Normally, group health plans increase premiums annually, and employees are notified during open enrollment. Mid-Year premium increases are permissible, but raises certain cafeteria plan concerns. That is the focus of this article – important considerations all employers should take if increasing premiums in the middle of a health plan year. Since the regulations are effective June 15, 2021, and will be affected by the timing of future agency releases, it is unclear when grandfathered group health plans will be able to take advantage of this opportunity, but since most group health plans operate on a calendar year basis, employers looking to take advantage of this opportunity immediately may need to consider how to address employee cafeteria plan elections that may not be changed without a divorce, marriage, change in hours, or other situations triggering an election change opportunity.
Grandfathered group health plans are plans that have been restricted from making certain changes since the Affordable Care Act was enacted on March 23, 2010, including premium or other cost sharing increases beyond a maximum percentage or $5.00 as adjusted for medical inflation, and decreases in employer costs by more than 5%. Because of these restrictions, employers with grandfathered group health plans should regularly reanalyze every few years whether to continue maintaining grandfathered status. The three reasons most employers keep grandfathered status is to avoid having to provide preventative care without cost sharing; not being subject to expanded appeals rights and obligations; and, not being subject to annual cost limitations.
The new regulation increases the $5 limit on fixed cost sharing, but does not change the allowable increases based on percentages. The regulation allows the $5 limit to adjust based on the greater of medical inflation or a newly created “premium adjustment percentage” that the agencies are going to publish annually and is expected to increase faster than medical inflation. The new regulation also allows grandfathered high deductible health plans to increase cost sharing as needed to maintain high deductible health plan status. The regulation does not affect employers whose group health plans lost grandfathered status.
Midyear election changes are restricted in cafeteria plans, and absent a specific exception, an employee who agreed to have $20.00 per pay period deducted from paychecks to pay for Medical Insurance may not increase that election. Fortunately, there is an exception that allows participant elections to be adjusted, but only if the applicable documentation permits the change. Most cafeteria plan documents allow these election changes, but the question comes down to whether the increased premium allows the company to automatically increase pretax deductions, or whether participants must be given a choice, including the option to drop coverage altogether. In short, if the premium increase is not “significant,” then election increases can be automatically applied (if allowed by the plan document). For example, if the premium is changing from $200.00 per pay period to $202.00 per pay period and that is insignificant, then employers should communicate with its employees so they are not surprised, but should not provide employees with a new election opportunity. However, if the election change is significant, most cafeteria plan documents require employees to receive a new election opportunity that may be similar to open enrollment in that employees can choose between increasing their elections to keep the same coverage, switch to another coverage, or drop coverage (if there is no similar coverage option available). For example, employers offering a high deductible health plan option and an HMO option that increase the premiums for both plans significantly may need to offer employees in the more expensive plan (which is probably the HMO) the choice to increase their Cafeteria Plan deductions by the amount necessary to stay in the HMO or switch to the less expensive plan (probably be high deductible health plan).
This cafeteria plan rule does not apply to Health Flexible Spending Accounts. It is not unusual for there to be a mid-year cost increase and then an employee comes and says “hey, you know, now that I am going to be spending this much more for group health insurance I want to reduce what is going into my Health FSA”-sorry cannot allow changes to the Health FSA under these rules.
What also makes this analysis difficult is that there really is minimal guidance on whether a cost change, whether a premium increase is significant or insignificant. What we know is that it’s based on the facts and circumstances and we know that a cost increase can be significant for some employees and insignificant for others, and this makes sense. Let’s say there’s going to be a premium increase of $10.00 per pay period. For your lower paid employees that could be a significant cost increase whereas for your highly compensated individuals it might be insignificant, all right. It makes sense but it also highlight the fact that this analysis is really a subjective analysis, which should make you uncomfortable because subjective analysis can be second-guessed by employees, by boards, by the IRS, DOL, HHS so, it is a reason to act carefully and to be concerned. So, my recommendation is to consult with an advisor or an attorney and then run some comparisons. Take that hard dollar increase and convert it to a percentage-a percentage of the premium. Next, convert it and compare it to employee’s compensation, all right. Have your employees been paying 3% of their compensation towards health insurance and now they are going to have to pay 5% of their compensation towards health insurance coverage or alternatively have they paying 3% and it’s now going to be a bumped up to 3-1/4%?
Once you’ve done those analysis you have those comparisons in front of you-do those comparisons make you think, “Gosh – it is not fair to do this to our employees without giving them some sort of a choice, some sort of option?” If you don’t think it would be fair to do this without giving employees some sort of say, that’s indicative of significance and it may warrant further scrutiny by an advisor, all right. If you think the increase is so small that the reaction would be “Well, of course, increase it by that amount. I’m not happy about it but just go ahead and do it.” That’s indicative of an insignificant change that might warrant an automatic increase in the Cafeteria Plan elections.
Last thing I want to mention is that COBRA will not generally apply to this issue. You’ve done your analysis, you’ve determined that a cost increase is significant, you’ve determined that there is not a similar option available, so you’ve allowed your employees to elect to increase their Cafeteria Plan elections or drop coverage altogether, and certain employees have dropped coverage altogether. COBRA does not apply to that group of employees that have dropped coverage. Simply put; they did not have a change in status that would give rise to a qualifying event. There was no termination of employment, there was no reduction of hours, there wasn’t even any loss of eligibility for coverage-it was a cost increase and a cost increase by itself is not a COBRA event. So these employees would not be entitled to COBRA coverage.
So, I do appreciate your tuning in today. If you have any questions about this topic or another employee benefit topic or you have suggestion for a future video, please send me an email at . Thank you very much.