Health Reform – Regulations Limit Ability to Rely on Grandfathered Status

As we have reported in earlier Advisories (please see our Client Advisories from April 9, 2010, April 26, 2010, May 10, 2010, and June 11, 2010), the health care reform laws require significant changes to group health plans effective for plan years beginning on and after September 23, 2010 (January 1, 2011 for calendar plan years).  Whether a plan is required to comply with all of the requirements depends upon whether the plan is considered a "grandfathered" plan.  The Departments of Treasury, Labor, and Health and Human Services recently issued final interim regulations regarding this important distinction, and their limited application of grandfathered status may surprise many. 

Definition of Grandfathered Plan

Grandfathered plans, generally, are plans that were providing coverage to at least one person since March 23, 2010 (collectively bargained plans have a special rule that is described below).  Grandfathered plans are exempt from some, but not all, of the new requirements of the health care reform laws.  For example, grandfathered plans are exempt from the full extent of the rules requiring extended coverage for adult children  up to age 26 until 2014.  In other cases, as long as the plan can maintain grandfathered status, the plan will be exempt from requirements such as the rule prohibiting discrimination in insured group health plans.  In order to avoid the full impact of the health care reform laws, an employer with a grandfathered plan will need to keep the plan within the confines of the new regulations and comply with certain notice requirements. 

Changes that Will Not Cause a Plan to Lose Its Grandfathered Status

The regulations state that the following types of changes taken alone will not disturb a plan's grandfathered status:

• Allowing family members of individuals enrolled as of March 23, 2010, to enroll in the plan covering the individual,
• Allowing new employees and their families to join a plan that provided coverage on March 23, 2010, unless the principal purpose of a merger, acquisition, or similar business restructuring is to cover new individuals under a grandfathered health plan, or if other anti-abuse rules are violated,
• Changing premiums,
• Making changes to increase benefits,
• Making changes to comply with federal or state legal requirements,
• Making changes to voluntarily comply with the provisions of health care reform laws,
• Changing third-party administrators.

Changes that Will Cause a Plan to Lose Its Grandfathered Status

The following changes will cause a plan to lose its grandfathered status:

• Except in certain limited cases for collectively bargained plans, entering into a new insurance contract or policy,
• Eliminating all or substantially all benefits to diagnose or treat a particular condition (including eliminating any benefits for any necessary element to diagnose or treat a condition),
• Increasing an individual's coinsurance or other percentage-based, cost-sharing amount by any percentage.
• Increasing a fixed-amount copayment if the total increase in the copayment as of March 23, 2010, exceeds the greater of (a) an amount equal to $5 adjusted by medical inflation, or (b) a total percentage that is more than the sum of medical inflation plus 15%,
• Increasing a fixed-amount deductible or out-of-pocket limit by a total percentage measured from March 23, 2010, that is more than the sum of medical inflation plus 15%,
• Decreasing the contribution rate by an employer or employee organization by more than 5% below the contribution rate for the coverage period that includes March 23, 2010,
• Adding an overall annual limit on the dollar value of benefits, if the plan, as of March 23, 2010, did not impose an overall or annual lifetime limit on the dollar value of all benefits,
• Adopting a new overall annual limit at a dollar value that is lower than the dollar value of a lifetime limit imposed on March 23, 2010,
• Decreasing the dollar value of an annual limit in effect on March 23, 2010.

Changes that May or May Not Cause a Plan to Lose Its Grandfathered Status

The following types of changes may or may not cause a plan to lose its grandfathered status.  The Departments have requested comments on whether the following changes will cause a plan to lose its grandfathered status and be subject to the new rules:

• Changing the plan structure (such as switching from fully insured to self insured),
• Changing to a provider network,
• Changing a prescription drug formulary.

Grandfathered status will apply separately to each benefit package or option offered under a policy or plan. 

Collectively Bargained Health Plans - Special Rules

The regulations also take a strict view of the special grandfathered rule for collectively bargained plans.  The special rule treats such a plan as grandfathered until the date on which the last of the collective bargaining agreements relating to the coverage that was in effect on March 23, 2010, terminates.  First, the regulations limit this special grandfathered rule to fully insured, and not self-insured, plans.  Second, the regulations clarify that grandfathered, collectively bargained plans must comply with all of the requirements of other grandfathered plans (for example, those plans must extend coverage to adult children up until age 26 unless the adult child is covered under other employer-provided group health coverage in the same manner as other grandfathered plans). 

Comment:  These regulations will take many collectively bargained health plans by surprise. 

Employers that made changes after March 23, 2010, and before these regulations were issued can take advantage of transition relief.  If a plan made changes after March 23, 2010, due to a legally binding contract entered into before that date, the changes will be considered part of the terms of the plan on March 23, 2010.  If a plan made changes after March 23, 2010, but before the regulations were issued, changes can be revoked or modified effective the first day of the first plan year on or after September 23, 2010, and the terms on that date, as modified, will not cause the plan to lose its grandfathered status.  In addition, the preamble to the regulations provides that if the plan makes changes that only "modestly exceed" some of the rules in the regulations, the changes will be disregarded for enforcement purposes. 

Notice Requirements for All Grandfathered Plans

In addition to the plan design requirements, in order to maintain status as a grandfathered plan, the plan must 1) include a statement in any plan materials describing the benefits provided under the plan and provided to a participant or beneficiary  that the plan believes it is a grandfathered plan and 2) must provide contact information for questions and complaints.  The regulations provide model language for this notice.  In addition,  for as long as a plan asserts grandfathered status, the plan must maintain documents showing the coverage in effect on March 23, 2010, and any other documents necessary to prove its status. 

Comment:  Is it worth trying to preserve grandfathered status?  It depends upon the employer and the plan.  For example, if an employer has allowed its executives to pay less for premiums under a fully insured plan than the premiums charged other employees, and wants to try to continue to offer that perk, the employer will want to comply with the requirements imposed on grandfathered plans.  Other employers may find that having to explain to employees why some of the new health care reforms are not applicable to their plan is more trouble than the benefits of grandfathered status.

Our Employee Benefits Team is available to answer any questions you may have regarding the new health reform laws, or any other employee benefit matter.

If you have any questions about this Client Advisory, please contact any member of our Employee Benefits Team.

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©2010 Sherman & Howard                                                                  July 1, 2010