Unintended Consequences of Losing "Grandfather"

As President Barrack Obama stated in his push for federal healthcare reform, "If you like your current coverage, you can keep it."   This pledge has been upheld as employers who offer group health coverage grapple with the decision to essentially freeze their coverage provisions to maintain "grandfathered" status or make greater changes to keep their programs affordable.   The first plan sponsors to make this decision are those with ERISA plans with October 1, 2010 anniversary dates. As we have been counseling our clients using our company's Actuarial  Reform Modeling and Compliance Forecaster, most employers cannot afford to maintain "grandfathered" status in this economy and are electing to move ahead with reform's 2010 provisions.   We feel certain grandfathered plans will become rarer than living survivors of the Titanic, but for the majority of employers who lose grandfathered status it is important to understand the new guidelines.

I must give credit to Strasburger & Price, LLP's esteemed ERISA attorney, Gary Lawson, J.D. for pointing out one such guideline at the law firm's Annual Tax Symposium on Monday, August 23rd at The Westin Galleria Dallas.   Gary reminded the attendees that non-discrimination rules (IRS Sec. 105(h) that prohibited favorable treatment for highly compensated employees for eligibility and benefits would now be applicable to fully insured plans that lose grandfathered status.   The example he Gary illustrated is commonly used in mergers and acquisition situations when severance packages are awarded to an executive.   The common practice would allow the company to pick up all or a portion of the the cost of COBRA for the executive, as negotiated in the severance agreement.   This practice will now be prohibited under a health plan that loses grandfathered status.

If you forego the new rules, the penalty is equivalent to $100 per day / per participant.   So saying goodbye to "grandfather" will also mean saying goodbye to executive perks that could get expensive if we neglect the fine print of PPACA.