Federal Agencies Issue Regulations on Grandfathered Health Plans
Under Health Care Reform Acts
June 18, 2010
The U.S. Departments of Treasury, Labor, and Health and Human Services have jointly published important guidance addressing the preservation of “grandfathered health plan” status and the protections available to grandfathered plans under the Patient Protection and Affordable Care Act, as modified by the Health Care and Education Reconciliation Act of 2010 (together the “Health Care Acts”). These interim final rules (click here to view) take effect immediately, though they are subject to revision following a 60-day comment period. This Client Alert highlights key aspects of this new guidance.
Grandfathered Health Plan – Defined
A “grandfathered health plan” is a group health plan (insured or self-funded) that was in operation as of March 23, 2010. A grandfathered plan may be maintained without being subject to minimum coverage standards under the Health Care Acts, although certain benefit mandates will apply. For example, grandfathered plans are not required to fully cover certain preventive services or offer government-defined minimum benefits. In addition, obligatory coverage of adult children to age 26 does not apply to grandfathered plans until 2014 if the child is eligible for other employer-sponsored health care. Grandfather status is determined separately for each benefit package under a group health plan. Therefore, loss of grandfather status for one benefit offering under a group health plan does not affect the grandfather status of other offerings.
Note that the Health Care Acts generally do not apply to certain retiree-only plans and benefit plans that are exempt from compliance with HIPAA, such as dental-only and vision-only plans, as well as certain health flexible spending accounts. Therefore, such plans are not affected by these rules.
Changes That Result in a Loss of Grandfather Status
The following changes will cause a plan to lose its grandfather status:
- Entering into a new policy, certificate, or contract of insurance with a current issuer or changing issuers (except with respect to any insured collectively bargained plan during the term of an agreement related to the coverage).
- Elimination of all or substantially all benefits to diagnose or treat a particular condition.
- Any increase to an individual's percentage coinsurance or other cost-sharing requirement.
- Any increase in a fixed-amount cost-sharing requirement (such as deductibles or out-of-pocket limits, but not copayments) above the rate of "medical inflation" plus 15 percentage points.
- Any increase in copayments above the greater of (a) the rate of "medical inflation" plus 15 percentage points or (b) $5.00, as adjusted for "medical inflation."
- Any decrease in the employer contribution rate towards the cost of any tier of coverage by more than 5 percentage points.
- Decreasing or imposing a new annual benefit limit (except that plans with an existing lifetime limit may impose an overall annual limit lower than the lifetime limit).
- Violating anti-abuse rules related to certain conduct during mergers, acquisitions, or similar business restructuring and plan transfers.
Additionally, in order to maintain grandfather status the plan document and disclosure materials must include a statement that the plan is a grandfathered health plan (the regulations provide model language for this) and the plan or issuer must adhere to certain record-keeping practices.
Changes That Do Not Result in a Loss of Grandfather Status
The following changes will not cause a plan to lose its grandfather status:
- Changes to premiums.
- Changes to voluntarily comply with health care reform mandates.
- Changes adopted prior to June 14, 2010 that would cause a plan or coverage to lose grandfather status, if those changes are revoked and the plan or coverage is modified effective as of the first day of the first plan year on or after September 23, 2010.
- In general, changes adopted before March 23, 2010 but with an effective date after that date.
- Changing a self-insured plan's third-party administrator.
- Addition of current enrollees' family members and newly hired or newly enrolled employees and their families; these new enrollees will be covered according to a plan's grandfathered terms.
Special Rules for Collectively Bargained Plans
Both self-funded and fully insured collectively bargained plans that are grandfathered health plans are subject to the same requirements as other grandfathered plans. Thus, the provisions that apply to grandfathered health plans apply to collectively bargained plans regardless of whether an applicable collective bargaining agreement is in effect, and changes may be required to bring a collectively bargained plan into compliance with health care reform mandates before the expiration of the collective bargaining agreement.
A self-funded collectively bargained plan will maintain grandfather status only to the extent that it satisfies the requirements described above and does not make any changes that will result in the loss of grandfather status. An insured collectively bargained plan, however, is entitled to maintain grandfather status at least until the termination of the last related collective bargaining agreement in effect on March 23, 2010.
Next Steps for Plan Sponsors
The new regulations provide meaningful guidance on grandfathered health plans. Nonetheless, we expect further agency guidance on this issue. In the meantime, employers should review their current group health plan benefit offerings and decide whether the protection afforded by grandfather status is worth the limited flexibility and prohibitions imposed by it. Depending on the benefits provided, some employers may find that the loss of grandfather status results only in modest health plan cost increases. For other employers, however, loss of grandfather status could result in substantial increases in the cost of providing health coverage.
If you have questions regarding the impact of health care reform on your group health plan, please contact the member of Verrill Dana's Employee Benefits and Executive Compensation Group with whom you normally work.
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