Requiring Premium Payments Outside Cafeteria Plan

[Chaz]

Does anyone have any thoughts on whether a change in plan design for 2011 to require participants to pay for medical coverage outside a cafeteria plan (i.e., on an after-tax basis) might somehow cause the plan to lose grandfathered status under PPACA? I don't think it would but I wonder if an argument can be made to the contrary.

(This possible change is an attempt to get around the cafeteria plan eligibility nondiscrimination tests, which would likely be failed on a control group basis.)

[lvena]

My initial thoughts are that it would cause the plan to lose it's grandfather status.

The law is not very specific about what is meant by increasing the cost to employees, other than to say vauge words such as "reasonable". (Most of what I have seen/heard is a 5% change) But what is reasonable? Now, look at some of the language and interim final rulings of late and they appear to be much more restrictive that we were lead to believe...remember "you can keep your own health plan" statements?

With the premiums being paid outside the 125 plan, we all agree that the cost to the employee will rise by some %. Is this enough for the plan to lose it's grandfather status? I don't know for sure, but it sure smells like it does. Just my two cents.

[oriecat]

I personally don't see how that could be considered a change in cost. Whether you pay a $20 premium pre-tax or after-tax, it is still a $20 premium. What changes are your taxes.

[lvena]

I personally don't see how that could be considered a change in cost. Whether you pay a $20 premium pre-tax or after-tax, it is still a $20 premium. What changes are your taxes.

Most of the wording I see is "cost-sharing", not premium. Let's look at an example. The cost for my share of medical family premium is $400 per month and my tax is 20%, so my savings is $80 per month. If the pre-tax feature is eliminated, my "cost-sharing" just rose by $80 per month.

Yes my taxes changed, but so too did my "cost-sharing" for the medical plan.

I am not an expert, and clear regulations have not been provided, which is why I cautioned that this is my own 2 cents.

[Chaz]

I personally don't see how that could be considered a change in cost. Whether you pay a $20 premium pre-tax or after-tax, it is still a $20 premium. What changes are your taxes.

Most of the wording I see is "cost-sharing", not premium. Let's look at an example. The cost for my share of medical family premium is $400 per month and my tax is 20%, so my savings is $80 per month. If the pre-tax feature is eliminated, my "cost-sharing" just rose by $80 per month.

To play devil's advocate by using a somewhat ridiculous example, if premiums were paid after-tax before PPACA and the employer gives the employee a raise such that the employee is in a higher tax bracket causing the employee's "cost-sharing" to go up, would that cause the plan to lose grandfathered status?

[Chaz]

Another thought is that in my scenario it is not the medical plan that is being changed; it is the cafeteria plan, which is not a group health plan under PPACA or the interim final grandfathered plan regulations.

[lvena]

I personally don't see how that could be considered a change in cost. Whether you pay a $20 premium pre-tax or after-tax, it is still a $20 premium. What changes are your taxes.

Most of the wording I see is "cost-sharing", not premium. Let's look at an example. The cost for my share of medical family premium is $400 per month and my tax is 20%, so my savings is $80 per month. If the pre-tax feature is eliminated, my "cost-sharing" just rose by $80 per month.

To pay devil's advocate by using a somewhat ridiculous example, if premiums were paid after-tax before PPACA and the employer gives the employee a raise such that the employee is in a higher tax bracket causing the employee's "cost-sharing" to go up, would that cause the plan to lose grandfathered status?

Don't know for sure, as I mentioned earlier, and again, this is my own opinion. My guess is that "cost-sharing" would be defined along the lines of "what an employee's cost would be after the employer contribution". It would more than likely exclude any "raise" to offset the additional cost to me. By the way, again my own opinion, but I doubt very much if many fully-insured plans will keep their grandfathered status too long. Forget changes in benefits or costs, as it appears now if the employer simply changes carrier, it loses grandfather status. Or if the carrier changes health plans, that will cause group to lose grandfather status.

[LRDG]

For most EEs taxes paid or saved via existence of a Section 125 is approx. 22.65%, representing Federal tax rate of 15%, FICA total tax rate of 7.65% (6.2% FICA on earnings up to $106,800; 1.45% Medicare on all earnings), assuming there is no State or Municipal Income Tax.

Eliminating Sec. 125 does not raise premiums, taxes increase but the premium remains the same. While the premium does cost more based on the taxes paid on the premium amount. There is no increase in premium rate or decrease in ER subsidy that resulted in the increase in the cost.

[lvena]

For most EEs taxes paid or saved via existence of a Section 125 is approx. 22.65%, representing Federal tax rate of 15%, FICA total tax rate of 7.65% (6.2% FICA on earnings up to $106,800; 1.45% Medicare on all earnings), assuming there is no State or Municipal Income Tax.

Eliminating Sec. 125 does not raise premiums, taxes increase but the premium remains the same. While the premium does cost more based on the taxes paid on the premium amount. There is no increase in premium rate or decrease in ER subsidy that resulted in the increase in the cost.

All true, but what I am pointing to is not the premium increase, but the "cost-share" increase. I could envision an argument "that since the 125 went away, the acual cost of the coverage was therefore increased to the emplyoee", and the govt agreeing.

[GMK]

This article (bottom of page 20, top of page 21):

http://bingaman.senate.gov/policy/crs_privhins.pdf

indicates that cost-sharing is deductibles and co-pays. Hmmm.

[Chaz]

Note that the IFRs state that a plan loses GF status if the employer "decreases its contribution rate based on the cost of coverage" and does not discuss an increase in the employee's share of the cost (except perhaps by implication).

More and more I am convincing myself that this is not an issue, lvena's well-taken thoughts notwithstanding.

This situation arises, by the way, with respect to a plan that disproportionately benefits HCIs, so there is an incentive for the employer to keep the plan grandfathered as long as possible so that it won't be subject to the new nondiscrimination tests.