- Most Changes Will Jeopardize Plan's Grandfathered Status Under New Health Care Reform Regulations
- July 1, 2010 | Author: Mary V. Bauman
- Law Firm: Miller Johnson - Grand Rapids Office
The IRS, U.S. Department of Labor and HHS jointly released interim final regulations on June 14, 2010 regarding the grandfathered status of health plans under Health Care Reform. Most changes will jeopardize a plan’s grandfathered status under the new regulations.
What is a grandfathered plan and why is it important?
A grandfathered plan is a fully-insured or self-funded health plan in existence on March 23, 2010 (the date Health Care Reform was enacted). A grandfathered plan generally includes existing participants as well as subsequently enrolling individuals. Grandfathered plans are subject to many insurance market reform rules under Health Care Reform but have relief from others. For example:
- Grandfathered plans, like non-grandfathered plans, must allow older dependent children to be eligible until age 26. However, for plan years beginning before 2014, grandfathered plans are not required to offer coverage to an adult dependent child who is eligible for any other employer-sponsored health plan.
- Grandfathered plans are not required to offer “first dollar” preventive care with no participant cost-sharing.
- Grandfathered plans are not subject to the new nondiscrimination rules affecting highly compensated individuals participating in fully-insured group health plans.
- Grandfathered plans are not subject to certain new patient protections. For example, unlike non-grandfathered plans, grandfathered plans may continue to limit the types of health care providers that may be designated as a primary care physician, require preauthorization for emergency services or provide less favorable coverage for non-network emergency care.
- Grandfathered plans are not required to provide coverage for participation in clinical trials.
Can grandfathered status be lost?
Health Care Reform did not address whether or how a grandfathered plan can lose its grandfathered status and, as a result, be subject to the requirements applicable to non-grandfathered plans. In the absence of specificity in the law, many in the employee benefits community expressed a concern that significant health plan changes could jeopardize grandfathered status. The new regulations validate these concerns.
The new regulations indicate that the grandfathered plan rule is not intended to provide permanent relief from the insurance market reform requirements. Rather, the grandfathered plan rule should be viewed as providing transition relief to allow for the gradual implementation of the new requirements. Accordingly, not only significant plan changes, but most plan changes, will put a health plan’s grandfathered status at risk under the new regulations. The following post-March 23, 2010 changes will cause a plan’s grandfathered status to be lost:
- Significant reduction in benefits - The elimination of all or substantially all benefits to diagnose or treat a particular condition, even if the condition only affects relatively few participants. This also includes the elimination of benefits for any element necessary to diagnose or treat a condition. For example, if a plan provides coverage for a particular mental health condition, the treatment for which is a combination of counseling and prescription drugs, and the plan eliminates benefits for counseling, the plan is treated as having eliminated all or substantially all benefits for that mental health condition.
- Increase in participant’s coinsurance - Most health plans have a coinsurance design where the plan pays a fixed percentage of eligible charges (such as 80%) and the participant pays the remaining percentage (20% in this example). Grandfathered plans cannot increase the participant’s coinsurance amount to a higher percentage.
- Copay increase - Grandfathered plans cannot increase office visit and other copays beyond March 23, 2010 levels by more than the greater of $5 (adjusted annually for medical inflation) or a percentage equal to medical inflation (from March 23, 2010) plus 15%.
- Increase in deductibles or out-of-pocket limits - Compared with the deductibles and out-of-pocket limits required as of March 23, 2010, grandfathered plans can only increase future deductibles and out-of-pocket limits by a percentage equal to medical inflation (from March 23, 2010) plus 15%.
Here’s an example:
A grandfathered health plan has a $100 deductible in effect on March 23, 2010. The employer decides that, effective January 1, 2012, it will raise the deductible to $120 (a 20% increase). Assume medical inflation since March 23, 2010 is 7.05%. Therefore, the maximum percentage increase permitted is 22.05% (15% plus 7.05%). Because the 20% increase in the deductible is less than 22.05%, the change will not cause the plan to lose grandfathered status. But what if the employer wants to raise the deductible again from $120 to $140, effective January 1, 2014? Assume, medical inflation since March 23, 2010 is 23.8%. Therefore, the maximum percentage increase permitted is 38.8% (15% plus 23.8%). Because the 40% increase in deductible since March 23, 2010 exceeds the maximum percentage increase of 38.8%, this subsequent change would cause the plan to lose grandfathered status.
- Reduction in employer contribution - Employers cannot decrease the percentage of their contribution toward the total premium/cost for any tier of coverage (e.g., single, family, etc.) under a grandfathered plan by more than 5% below the employer’s contribution rate in effect on March 23, 2010.
- Change in overall annual limit - Grandfathered plans cannot add an overall annual limit unless the limit is replacing an overall lifetime limit where the annual limit is at least as high as the lifetime limit being eliminated. Further, any existing overall annual limit cannot be reduced.
- Change in fully-insured policy - If a fully-insured policy is not renewed and the employer enters into a new insurance contract (e.g., with a different insurer), grandfathered status will be lost. However, if a self-funded plan switches to a new third party administrator it will not jeopardize grandfathered status. The regulations solicit comments as to whether a change from a fully-insured plan to a self-funded plan should trigger a loss in grandfathered status.
Each of the above rules applies separately to each benefit package under a health plan. So, for example, if an employer maintains a group health plan with three medical options (two self-funded and one fully-insured) and the employer makes a change in insurance carriers regarding the fully-insured option, that would trigger a loss in grandfathered status with respect to the fully-insured option but would not cause grandfathered status to be lost with respect to the two self-funded options.
What changes will not cause grandfathered status to be lost?
Many health plan changes will not cause grandfathered status to be lost, including the following:
- Legal compliance - Changes to comply with federal or state law will not cause grandfathered status to be lost. This includes voluntary changes adopted to comply with Health Care Reform, such as a decision to allow older dependent children to participate earlier than the effective date prescribed by Health Care Reform.
- Benefit improvements - Benefit improvements will not cause grandfathered status to end.
- Enrollment of new employees - Coverage of new employees under a health plan after March 23, 2010 will generally not cause the loss of the plan’s grandfathered status. However, if the principal purpose of a merger or acquisition is to cover new employees under a grandfathered plan, the plan will lose its grandfathered status. Similarly, if a group of employees is transferred from one grandfathered plan to another grandfathered plan, it will jeopardize the successor plan’s grandfathered status if the new coverage would have constituted an impermissible amendment to the prior plan unless there is a bona fide employment-based reason to transfer the employees (such as a plant closure).
What other important guidance is included in the regulations?
- Retiree-only plans - The regulations clarify that retiree-only plans are not subject to the insurance market reforms under Health Care Reform including, but not limited to, the ban on lifetime limits, restriction on annual limits and requirement to cover older dependent children.
- Excepted benefits - Similarly, “excepted benefits” as defined under the HIPAA portability rules, such as dental-only plans, vision-only plans and most medical FSAs, are not subject to the insurance market reforms under Health Care Reform.
- Collectively-bargained plans - Health plans maintained pursuant to a collective bargaining agreement are subject to the same grandfathered plan rules as non-union plans. However, a fully-insured (but not self-funded) collectively-bargained plan in effect on March 23, 2010 will be considered to be a grandfathered plan until the last applicable collective bargaining agreement terminates, even if there is a change in insurance carriers before that date. After the collective bargaining agreement terminates, the plan’s grandfathered status will be determined in the same manner as other plans.
- Notice/record retention - Employers are required to notify participants in plan materials if a health plan is intended to qualify as a grandfathered plan. Model language is provided in the regulations. Further, employers are required to maintain records documenting the coverage in effect on March 23, 2010 and any subsequent changes in order to demonstrate grandfathered status.
- Transition relief - Amendments adopted on or before March 23, 2010 will not jeopardize a plan’s grandfathered status, even if the effective date is after March 23, 2010. However, amendments adopted after March 23, 2010 are subject to the new restrictions. Employers who have adopted amendments to their plans after March 23, 2010 which may cause grandfathered status to be lost have special transition relief to revoke and modify those amendments. Such an amendment must be effective as of the first day of the first plan year beginning on or after September 23, 2010.
What should employers do in response?
The preamble to the regulations predicts that most employers will likely abandon grandfathered status with respect to their health plans by the end of 2013. This is primarily because of the loss of flexibility to make changes to control costs, and to a lesser extent, due to the new notice and record retention rules. Employers should weigh the benefits of grandfathered status against these new requirements in evaluating whether to rely on grandfathered status going forward.