Most employers are familiar with the Affordable Care Act (ACA) provision that sets upper limits on the out-of-pocket (OOP) maximums that non-grandfathered group health plans may apply to essential health benefits. (We’re referring to these as the “ACA cost-sharing limits.”) Details on these limits are available in our Jan. 22, 2014 Alert.) The ACA cost-sharing limits are effective for plan years beginning in 2014 and are set at $6,350 for self-only coverage and $12,700 for other coverage units for 2014 plan years.

Last week’s announcement of 2015 inflation-adjusted limits for health savings accounts (HSAs) and high-deductible health plans (HDHPs) reminded us that the initial ACA cost-sharing limits for 2014 plan years were keyed to the 2014 maximum OOP limits for HDHPs. The ACA provision called for the 2014 ACA cost-sharing limits to be the same amount as the 2014 maximum OOP limits for HDHPs. So, for plan years starting in 2014, the limits are the same: $6,350 for self-only coverage and $12,700 for other coverage units.

Given this linkage between the initial ACA cost-sharing limits and the maximum HDHP OOP limits, it would have been reasonable to expect that last week’s IRS announcement of inflation adjustments to the maximum HDHP OOP limits would also affect the ACA cost-sharing limits. But that’s not the case. The ACA cost-sharing limits are adjusted each year using the “premium adjustment percentage” (an estimate of the average change in health insurance premiums), calculated by the Department of Health and Human Services (HHS), while adjustments to the maximum HDHP out-of-pocket limits are tied to the Consumer Price Index.

Because increases in health insurance premiums are outstripping increases in the cost of other items, common sense suggests a widening gap between ACA cost-sharing limits and maximum HDHP out-of-pocket limits over time as adjustments occur. Indeed, HHS has indicated that the ACA cost-sharing limits for plan years beginning during 2015 will be $6,600 for self-only coverage and $13,200 for other coverage units. These limits are, respectively, $150 and $300 higher than their HDHP counterparts for 2015 plan years.

HHS has also said the ACA’s cost-sharing limits do not affect the maximum HDHP OOP limits set by the IRS. Therefore, for 2015, HDHP out-of-pocket limits cannot exceed the amounts announced last week by the IRS ($6,450 for self-only coverage and $12,900 for other coverage units). That is, a health plan with higher out-of-pocket limits is not an HDHP and will not provide the coverage required for an individual to be eligible for HSA contributions. At the same time, the out-of-pocket limits of non-grandfathered, non-HDHP group health plans may be as high as $6,600 for self-only coverage and $13,200 for other coverage units.

We anticipate that this differential will cause considerable confusion.

P.S.: The Premium Adjustment Percentage Applies to Play or Pay Penalties, Too

The issue noted above illustrates the difference the index chosen for adjustments can make. And unless there’s a major shift in the industry, an index based on changes in the cost of health coverage will result in relatively larger increases. HHS noted in its guidance that this particular index, based on health coverage cost changes, will be used for one additional purpose: adjustment of the employer play or pay penalties. The first adjustment of those penalties will occur on schedule, applying to 2015. Therefore, the $2,000 and $3,000 annualized penalty amounts we have been discussing since 2010 will be more like $2,080 and $3,120 when they first become applicable in 2015. (Please note: The IRS has not announced the specific penalty amounts that will apply for 2015, but these are the amounts that result from applying the formula in the statute with the premium adjustment percentage set by HHS.)