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Is Your Group Health Plan Grandfathered?

Publisher: Day Pitney Alert
June 23, 2010
Day Pitney Author(s) Kathy A. Lawler

Last week, the Department of Health and Human Services issued interim final regulations (the "Regulations") explaining what changes a plan sponsor can make to a group health plan that was in existence on March 23, 2010 without causing the plan to forfeit its grandfathered status.  The Regulations also clarified that certain HIPAA excepted plans such as stand-alone dental, vision and retiree medical plans are not subject to PPACA's group market reforms.  Finally, the Regulations clarified the interaction of the general grandfather rules with the grandfather provisions for insured group health plans maintained pursuant to a collective bargaining agreement ratified before March 23, 2010.

If a plan sponsor determines that its plan qualifies for grandfather status, the Regulations impose a notice requirement and record retention obligations.  A plan administrator of a grandfathered group health plan must provide notice to the plan participants that the plan sponsor intends to treat the plan as a grandfathered health plan effective for plan years commencing on or after September 23, 2010.  The Regulations contain a model notice which can be inserted in the SPD.  The model notice advises participants that they can contact the plan administrator to determine which protections apply and which do not apply under PPACA to a grandfathered health plan. (View Model Notice) Since many grandfathered health plans already comply with some of PPACA's market reforms, plan administrators should become familiar with, and be able to communicate to participants, those terms that are PPACA-compliant versus those that are not applicable by virtue of the plan's grandfathered status.  Additionally, the plan administrator must maintain copies of the plan documents setting forth the terms of the plan as of March 23, 2010, to verify that subsequent changes (as compared to the terms on March 23, 2010) terms do not result in a loss of grandfathered status.

The Regulations clearly anticipate that group health plans will eventually lose or decide to relinquish grandfather status.  The Regulations permit plan sponsors to make routine design changes and cost changes within narrow parameters, providing limited flexibility to plan sponsors that want to retain grandfather status.  For purposes of analyzing whether a group health plan is grandfathered, the determination applies separately to each "benefit package" made available under the group health plan.  The examples in the Regulations indicate that each benefit option under the group health plan (e.g., PPO, POS, HMO, HDHP, etc.) constitutes a benefit package.

In order to be grandfathered, a benefit option must have been in existence on March 23, 2010.  It is not necessary that the option continues to cover the same participants as were covered on March 23, 2010.  New employees can be added, employees can transfer between options and participants can add/drop dependents.  Generally, coverage changes as a result of a merger or acquisition will not result in loss of grandfather status.  However, plan sponsor decisions to transfer employees between options will be subject to special testing if the change in benefit/cost would otherwise have resulted in a loss of grandfather treatment when looking at the benefits for the transferred employees.

The Regulations provide guidance on the changes that will result in a loss of grandfathered status.  A change in the carrier for an insured plan automatically results in the loss of grandfathered status (subject to the special grandfathering rule for collectively bargained plans).  Similarly, any of the following changes in design or cost result in forfeiture of grandfather status:

  • Eliminating all or substantially all the benefits to diagnose or treat a particular condition;
  • Increasing the percentage cost sharing arrangement above the March 23, 2010 level (i.e., increasing the coinsurance for inpatient surgery from 20% to 25%);
  • Increasing the fixed-dollar cost sharing (other than copayments), such as a $500 deductible or a $2,500 out-of pocket limit, by a total percentage measured from March 23, 2010, that is greater than the sum of medical inflation and 15%;
  • Increasing co-payments by an amount that exceeds the greater of: a total percentage measured from March 23, 2010, that is more than the sum of medical inflation plus 15%, or $5 increased by medical inflation measured from March 23, 2010;
  • Decreasing the employer contribution rate by more than 5% below the contribution rate on March 23, 2010;
  • With respect to annual limits on the dollar value of benefits:

1. If the plan did not impose an overall annual or lifetime limit, it cannot now add an annual limit;

2.  If the plan imposed an overall lifetime limit, but no annual limit on the dollar value of benefits, it cannot now add an overall annual limit at a dollar value that is lower than the March 23, 2010 lifetime limit; and

3. If the plan imposed an overall annual limit, it cannot decrease the dollar value of annual limit.

The Regulations provide limited relief for certain changes that have already been adopted by the plan sponsor.  If the change was adopted prior to March 23, 2010 pursuant to a written amendment, binding written contract or a plan filed with a state department of insurance, the change will be treated as part of March 23, 2010 group health plan terms.  If a change was adopted after March 23, 2010, that would result in revocation of grandfathered status, the Regulations provide that the change can be rescinded prior to the first plan year commencing after September 23, 2010, without voiding the plan's grandfathered status.  Consequently, if changes were made for a plan year beginning after March 23, 2010, but before September 23, 2010, the changes can remain in effect for the 2010 plan year even if they would otherwise void grandfather status.  The plan sponsor will have to determine whether to revoke the changes for the first plan year beginning after September 23, 2010.  Note that this rule requires plan sponsors to immediately consider the importance of preserving grandfather status versus making design changes that would otherwise exceed the scope of the permissible changes under the Regulations.

Finally, the Regulations explain the special grandfather rule for insured collectively bargained plans.  Under the special rule, grandfathered status for an insured plan which is maintained pursuant to a collective bargaining agreement that was ratified before March 23, 2010 continues until the date on which the last collective bargaining agreement in effect terminates.  At that point, the continued status of the group plan as a grandfathered plan is assessed under the general rule by determining whether changes have been made to the plan's terms after March 23, 2010 which would rescind its grandfather status.

These new Regulations solicit comments on other changes that might result in loss of grandfather status.  Therefore, plan sponsors should tread carefully when making any changes to the March 23, 2010 terms.  The Regulations will require an immediate assessment by plan sponsors of proposed changes in connection with upcoming open enrollments to determine whether the benefit packages offered under their group health plans are grandfathered.  For assistance with an evaluation of proposed changes or any other PPACA questions, please feel free to contact a member of the Firm's Employee Benefits and Executive Compensation group.