GUIDANCE ISSUED ON GRANDFATHERED HEALTH PLANS
On June 14, 2010, the Internal Revenue Service, Department of Labor, and Department of Health and Human Services jointly released interim final rules (the “Regulations”) that will help employers identify which health plans will qualify as grandfathered health plans under the recently enacted health reform law (the “Act”) and the types of changes that they can make to those plans without causing a loss of grandfathered status. Sponsors of group health plans have been anxiously awaiting this guidance because grandfathered plans are exempt from some key provisions of the Act.
The Regulations answer (or at least partially answer) the following questions:
- What is a grandfathered health plan?
A grandfathered health plan is a plan that was in effect on March 23, 2010. The rules for determining whether a plan is a grandfathered health plan apply separately to each benefit package available under the plan. The Regulations do not define the term "benefit package" but examples suggest that different plan options, such as an HMO option, a PPO option and a high deductible plan option, would each be considered a separate benefit package.
- Are retiree-only plans subject to the Act?
What about dental and vision plans? Plans that only cover retirees are not subject to any of the plan design and operational changes under the Act. Dental and vision coverage are also exempt from these requirements as long as employees are allowed to make a separate election and pay a separate premium for such coverage.
- What provisions apply to grandfathered health plans?
All group health plans (other than certain retiree-only health plans as described above), regardless of whether they are grandfathered health plans, must comply with certain provisions of the Act. For example, for plan years beginning on or after September 23, 2010, group health plans cannot impose lifetime limits on benefits and must cover adult dependent children up to age 26.
- What provisions do not apply to grandfathered health plans?
Among other things, grandfathered health plans do not have to establish an appeals process that includes an external review. They are also not subject to the requirements to provide specified preventive care without any cost sharing to participants. In addition, grandfathered health plans that are insured plans are not subject to the nondiscrimination rules in the Internal Revenue Code.
- Will adding new employees or new individuals to the plan cause the plan to lose its grandfathered status?
No. Permitting new hires and their eligible dependents to enroll in the plan does not cause the plan to lose its grandfathered status. In addition, allowing current employees or their eligible dependents who previously declined coverage to enroll in the plan will not cause a plan to lose its grandfathered status. This means that plans can generally continue with their open enrollment periods without jeopardizing the grandfathered status of their plans.
- Can an employer switch insurance providers or not renew an existing insurance policy for an insured health plan and maintain the plan's status as a grandfathered health plan?
No. If an employer enters into a new policy, certificate or contract of insurance after March 23, 2010, the new policy, certificate or contract of insurance is not a grandfathered health plan.
- What plan design changes will cause the plan to lose its grandfathered status?
Under the Regulations, a plan (or benefit package) will cease being a grandfathered plan (or benefit package) if any one of the following events occurs after March 23, 2010:
- Elimination of benefits. The elimination or significant reduction of benefits to diagnose or treat a particular condition (including any necessary element to diagnose or treat a condition). For example, if a plan no longer covers previously covered treatments for cystic fibrosis, the plan would lose its grandfathered status.
- Increase in level of coinsurance. Any increase in a percentage cost-sharing requirement (such as coinsurance) above the level it was on March 23, 2010. For example, if a participant is currently required to pay 20 percent of the hospital bill for inpatient surgery and that percentage increases, the plan will lose its grandfathered status.
- Significant increase in deductible or out-of-pocket limit. Any significant increase in a fixed-amount cost-sharing requirement other than copayments (such as deductibles or out-of-pocket limits). For example, if a plan's deductible limit (as compared to the limits required as of March 23, 2010) increases by a percentage that is greater than medical inflation plus 15 percentage points, it will lose its grandfathered status.
- Significant increase in copayments. Any significant increase in a fixed-amount copayment. For example, if a plan's copayment amount (as compared to the amount required as of March 23, 2010) increases by more than the greater of $5 (as adjusted for medical inflation) or a percentage that is less than or equal to medical inflation plus 15 percentage points, the plan will lose its grandfathered status.
- Significant reduction in employer contributions. Any significant reduction in the amount of the employer contribution paid towards the cost of coverage. For example, if the percentage of the premiums the employer pays decreases by more than 5 percent (as compared to the amount required as of March 23, 2010), the plan will lose its grandfathered status.
- Changes in annual limits. An addition of an annual or lifetime limit to a plan that did not have such a limit as of March 23, 2010.
- Will any other changes cause a loss of grandfathering? Subject to the “unanswered questions” discussion below, changes to a plan other than those described above should not cause a loss of grandfathering. For example, if an employer amends a plan to enhance benefits or decrease cost-sharing, the plan could still retain grandfathered status.
- Does a plan need to take any special action to maintain its status as a grandfathered plan? Yes. To maintain its status as a grandfathered plan, a plan must include a statement in any plan materials provided to participants describing the benefits provided under the plan that the plan believes it is a grandfathered plan. The statement also must include contact information for questions and complaints. In addition, plan sponsors must maintain records documenting the terms of the plan that were in effect on March 23, 2010 and any other documents that support the plan’s status as a grandfathered plan. These records must be made available for examination by federal or state agencies. The issuing agencies have issued model language to use for purposes of this requirement.
Are there any special provisions for a group health plan maintained pursuant to a collective bargaining agreement?
- Insured Plans. Health insurance coverage that was in effect on March 23, 2010, will remain a grandfathered health plan at least until the last collective bargaining agreement that relates to the coverage terminates. This means that an insured collectively bargained plan will not lose its status as a grandfathered plan prior to the expiration of the collective bargaining agreement (“CBA”), even if there is a change in insurance providers. Such a plan also will not be required to comply with changes under the Act until the expiration of the relevant CBA.
- Self-Funded Plans. Collectively bargained plans that are self-funded will be subject to the same requirements as noncollectively bargained self-funded plans.
- Do the Regulations Include any Type of Grace Period or Transition Rule? Changes that were adopted prior to March 23, 2010 but effective after such date will be considered part of the plan on March 23, 2010 and will not affect the plan's grandfathered status. If an employer adopted changes that would cause a loss of grandfathering that are not yet effective, it may take action to reverse those changes. The issuing agencies may also choose to disregard changes that were adopted between March 23 and the date the Regulations were issued but are not required to do so.
- Do the Regulations Leave any Unanswered Questions? As noted above, the Regulations do not define the term "benefit package," which appears to be critical to the grandfathering analysis. In addition, the issuing agencies have asked for comments on whether certain changes, including changes to plan structure (such as a change from an insured plan to self-funded plan), prescription drug formularies and provider networks should cause a loss of grandfathered status.
- Is there any other guidance available? Department of Health and Human Services has also published a Q&A companion to the regulations, which can be found here.
Q&B Keys: Employers that sponsor group health plans will want to immediately take the following actions:
- Identify “Benefit Packages.” As noted above, grandfathering is looked at on a “benefit package” basis rather than a plan basis. The regulations offer little guidance on determining what constitutes a benefit package but it appears that a PPO option would be considered a separate package, an HMO option would be considered a separate package, a high deductible plan option would be considered a separate package, etc. Employers should identify each benefit package that they offer and individually analyze the grandfathered status of each package.
- Consider How Recently Adopted or Planned Changes Impact Grandfathering. Employers who have already planned design changes for the upcoming plan year need to analyze how these planned changes impact grandfathering. Under a transition rule, an employer may act to reverse changes that it adopted on or after since March 23.
- Modify Plan Documents, SPDs and Other Plan Materials to Include a Grandfathered Plan Notice. The regulations require employers with grandfathered plans to include a statement regarding the plan's grandfathered status in any plan materials provided to participants and beneficiaries. The issuing agencies have provided model language to use for this purpose.
- Revisit Compliance Deadline for Collectively Bargained Plans. Based on statutory language alone, it appeared that collectively bargained plans might not have been required to comply with the Act until the expiration of the collective bargaining agreement. The regulations make it clear that self-funded collectively bargained plans have the same compliance deadline as other plans and employers need to plan accordingly.
- Review Status of Plans Covering Retirees. As discussed above, retiree-only plans are not subject to the Act. However, if retirees are covered under the same plan as active employees or if a retiree health plan option is wrapped with active employee health plan options for 5500 filing purposes (such that retiree benefits and active employee benefits are reported on a single 5500), the retiree portion of the plan will be required to comply with the Act. Employers should review the structure of their retiree health benefits to determine needed compliance and consider whether it is desirable to move retirees to a separate plan if they are currently in the same plan as active employees.