HRA impact on post-retirement medical plans

The new healthcare legislation imposes penalties on employers that have group health plans that discriminate in favor of the highly compensated (e.g., any of the 25% most highly-compensated employees) in eligibility for benefits or in the amount of benefits.  The penalty is $100 per day for each employee discriminated against, up to $500,000 per year.  The legislation and first set of regulations leave many questions unanswered.  As we continue our research, we have determined as follows:

  1. Grandfathering.  Plans in effect prior to March 23, 2010 are grandfathered.  Grandfathered plans can adjust for increasing premiums without losing grandfathering, but other provisions should not be changed without careful review.  In the case of a PRM provision contained in an employment agreement, the agreement could be updated, but the wording of the PRM provision should expressly not be changed.
  2. Single Participant Plans.  Group health plan does not include any arrangement “that has fewer than two participants who are current employees.”  This language would exempt an arrangement only for a single current employee, such as the CEO.  The language may also exempt arrangements for a broader group if “participation” means actually receiving coverage, versus being under the promise of receiving such coverage in the future.  Future clarification will be needed to determine if PRM for more than a single executive is exempted under this provision.
  3. Group Health Plan.  PRM may also be excluded from the basic concept of a group health plan.  The participant is often tasked with finding his or her own coverage, and the employer’s only involvement is to pay the premium to the carrier or to reimburse the participant’s premium payments.  There is no group underwriting in such cases.  These distinctions may be a basis for excluding PRM for broader groups, but additional guidance is required to confirm that result.
  4. Long-Term Care.  LTC is not subject to these new rules so long as the LTC is provided under a separate contract from the employer’s group health plan and there is no coordination of benefits between the two.  This is a significant relief as LTC is treated as health coverage for tax purposes generally.  The healthcare regulations contain a specific exemption for LTC provided under a separate contract.  Therefore, employers can continue to offer LTC to a select group of employees.