Common Questions under the Health Care Reform Laws – Part 3

Larry Grudzien

December 3, 2010

 

If an employer reduces its contributions to its health plan by more than five (5%) percentage, it can lose the grandfathered status for the health plan. How is the contribution rate determined for this purpose?

With respect to employer contributions, the interim final regulations include a standard for changes that would result in cessation of grandfather status. Specifically, they limit the ability of an employer or employee organization to decrease its contribution rate for coverage under a group health plan or group health insurance coverage.

Two different situations are addressed. First, if the contribution rate is based on the cost of coverage, a group health plan or group health insurance coverage ceases to be a grandfathered health plan if the employer or employee organization decreases its contribution rate towards the cost of any tier of coverage for any class of similarly situated individuals by more than 5 percentage points below the contribution rate on March 23, 2010.

For this purpose, contribution rate is defined as the amount of contributions made by an employer or employee organization compared to the total cost of coverage, expressed as a percentage. The interim final regulations provide that total cost of coverage is determined in the same manner as the applicable premium is calculated under the COBRA continuation provisions of section 604 of ERISA, section 4980B(f)(4) of the Code, and section 2204 of the PHS Act. In the case of a self-insured plan, contributions by an employer or employee organization are calculated by subtracting the employee contributions towards the total cost of coverage from the total cost of coverage.

Second, if the contribution rate is based on a formula, such as hours worked or tons of coal mined, a group health plan or group health insurance coverage ceases to be a grandfathered health plan if the employer or employee organization decreases its contribution rate towards the cost of any tier of coverage for any class of similarly situated individuals by more than 5 percent below the contribution rate on March 23, 2010.


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