New Guidance Confirms: It is Going to be Nearly Impossible to Remain a “Grandfathered” Health Plan
On June 14, 2010, the Internal Revenue Service and Department of Health and Human Services made available detailed guidance on grandfathered health plan status, including a long preamble and Interim Final Regulations. A “grandfathered” health plan is exempt from certain mandates under the Patient Protection and Affordable Care Act (“PPACA”). As feared, the rules are not very flexible from an employer’s standpoint, leaning instead to protecting employee-consumers.
Interestingly, in the preamble to these Regulations the government estimates that 66% of small employer plans, and 48% of larger employer plans made changes in 2008/09 (before health reform) that would have had the effect under these rules of voiding grandfathered status. Clearly, few plans will still be grandfathered in 2014 when the Pay or Play rules become effective.
Why it Matters
If a plan in existence on March 23, 2010 remains grandfathered, that plan need not:
- Provide no-cost preventive services
- Cover emergency care at non-network facilities at same cost-sharing as in-network care
- Pay for clinical trial costs
- Address the appeals process changes that will be mandated
- Comply with the salary-based nondiscrimination rules (unless already subject because the plan is self-insured)
- Place caps on deductibles and out-of-pocket maximums, and meet several other requirements to have “minimum essential benefits”
- Allow enrollment of children of employees up to age 26, if those children have access to coverage through another employer
If a plan is not grandfathered, or loses that status, then these rules take effect for the first plan year beginning after September 23, 2010 (with the exception of clinical trial costs, which are mandated for 2014), along with various other design mandates. Click here to see our earlier Legal Update describing PPACA generally, and for more details on mandates that apply even to grandfathered plans.
For employers with fully-insured plans, the most significant reason for employers to retain grandfathered status, if possible, is to avoid having to change who is covered within their workforce, at what date, and at what cost-sharing, to comply with nondiscrimination requirements under 105(h) of the Code. Self-insured plans have always been required to meet these rules, or risk having to tell the top 25% of their workforce that they owe income taxes on health costs paid for their benefit under the plan (the amounts paid to providers, not just premiums). But, if fully-insured plans are found to be discriminatory in favor of those with higher salaries, the penalty is different: it is imposed on the employer, in an amount of up to $100 per day, per “individual to whom such failure relates.”
Plan Changes That Revoke Grandfathered Status
To be grandfathered, a plan must have been in effect on March 23, 2010, and cannot thereafter be changed in certain ways that erode the value to employees by more than prescribed amounts. The specific changes that will cause a plan to lose grandfathered status are:
- If the plan obtains an entirely new policy of insurance (for example, switches to a consumer-driven product from a more traditional PPO) to fund its benefits.
- If the insurance carrier is changed, even if the new carrier’s policy is very similar to that offered by the prior carrier.
- Oddly, it is clear that a self-insured plan can change TPAs and not lose grandfathered status, and the Regulations leave open whether a fully-insured plan could switch to self-insured and retain grandfathered status.
- If coverage for a specific condition is eliminated (i.e., organ transplants) or benefits necessary to diagnose or treat a condition are eliminated, grandfathered status is lost.
- Any increases in the employee’s % sharing of under plans that share some costs based on a % of total cost (i.e., employee pays 10%, insurer pays 90%)
- Increases in dollar co-pays for prescriptions or doctor visits cannot exceed $5, or, if more, medical inflation plus 15 percentage points.
- Increases in deductibles and out-of-pocket maximums or other fixed dollar cost-sharing, by more than medical inflation plus 15 percentage points.
- Changes in the sharing arrangement between an employer and employees of more than 5 percentage points. For example, if the employee paid $100 per month on a policy with total premiums of $200, and the premium increases to $250, if the employee's share of that cost is more than 55% of $250 or $137.50. This cost-sharing is applied at all levels of coverage, so reduction of the employer’s subsidy for family coverage, in order to pay more toward single coverage, will still void grandfathered status.
- Imposing new, or lower, annual or lifetime dollar limits.
- While new enrollees can be added to a grandfathered plan, if the principal purpose of a merger or business restructuring is to expand the coverage of a grandfathered health plan, then it can affect the grandfathered status of the plan that has increased enrollment. There must be a bona fide employment-based reason (other than lowering health costs) for the transfer among plans. Closing one facility and offering employment to certain affected employees at another facility that has a different health plan is an example of a situation when restructuring who is eligible for a plan might not void its grandfathered status.
In addition to avoiding the above changes, a grandfathered plan must disclose to participants that it is grandfathered. The Regulations include model disclosure language for this requirement. Records of the plan documents, contracts and SPDs in effect on March 23, 2010, and any intervening changes, must be retained and provided to participants and government agencies upon request to verify the claimed grandfathered status.
The Regulations anticipate that other changes that would revoke grandfathered status may be added to the list after a comment period. The Regulations indicate that, if more restrictive requirements are added, they will be applied prospec-tively. Examples being considered: changes in a provider network or drug formulary.
Transition Rules for Changes Already In Process
Employers who made plan design changes after March 23, 2010, and before this guidance was issued, get limited transition relief. For example, if an employer had, before March 23, 2010, signed a contract or adopted plan amendments to switch insurance carriers, change co-pays or deductibles, effective for a date after enactment (e.g., for an April 1 open enrollment), that change will not revoke grandfathered status.
If health plan changes were made (or are in process) pursuant to a contract change or plan amendment adopted after March 23, 2010, but before these regulations were issued, the employer gets a grace period—if the plan is modified to remove the changes that would otherwise revoke grandfathered status (i.e., the plan is restored to its March 23, 2010 plan design) before the first plan year beginning after September 23, 2010, the plan will still be treated as grandfathered after that date.
Special Rules for Collectively Bargained Plans
PPACA contained a special rule to protect the grandfathered status of a collectively bargained health plan until expiration of the bargaining agreement in effect on March 23, 2010, and the Regulations clarify the application of this special rule.
First, the regulations point out that this special grandfathered rule applies only to bargained plans that are insured, not to self-insured plans—the latter have to analyze grandfathered status based on the same rules applicable to non-bargained plans. Secondly, the grandfathered status continues until the last employer bargaining agreement related to a multiemployer plan expires. Finally, such a plan does not automatically lose its grandfathered status when the last bargaining agreement expires, but rather its status is then determined based on the same limitations applicable to non-bargained plans, with the one exception that carrier or policy changes during the bargaining agreement's term, without economic changes like those above, will not affect its grandfathered status.
For more information, please contact Debbie Reiss Hardesty, or any other attorney in Frost Brown Todd’s Employee Benefits Practice Group.