As many employers with grandfathered health plans prepare for 2012, they may be considering changes to their plans that could affect the plans’ grandfathered status. Rules regarding grandfathered status have been issued in piece-meal fashion since the enactment of health care reform and we thought it would be helpful to gather that guidance in one place below:
The exemption of a grandfathered plan from certain aspects of health care reform was initially outlined in Section 1251 of PPACA. The statute did not go into much detail about what changes might cause a plan to lose its grandfathered status, but it did state that family members of existing enrollees and new employees (and their families) could enroll in a grandfathered health plan without jeopardizing the plan’s grandfathered status.
In June 2010, interim final regulations provided the first guidance on grandfathered plans, clarifying that each benefit package’s grandfathered status is determined separately and that grandfathered plans could make changes to third-party administrators or changes to comply with law without losing their grandfathered status. The regulations also stated that the following 6 changes would cause a plan to lose its grandfathered status:
- Elimination of all or substantially all benefits to diagnose or treat particular condition
- Any increase in percentage cost-sharing
- Increase in a fixed-amount cost-sharing requirement other than a copayment (e.g., deductible or out-of-pocket maximum) by more than 15% above medical inflation
- Increase in a fixed-amount copayment of more than $5 or 15% above medical inflation
- Decrease in employer contribution rate of more than 5 percentage points below rate on March 23, 2010
- Certain changes to annual limits
An amendment to the regulations later clarified that an insured group health plan entering into a new group health policy, certificate, or contract would not cause loss of grandfathered status as long as the plan continued to comply with all of the other regulations relating to grandfathered rules.
Since then, the DOL has issued subregulatory guidance on grandfathered plans in a series of 6 sets of Affordable Care Act Implementation FAQs on its website. The following are some FAQs that directly address changes that might cause a plan to lose its grandfathered status:
- Q/A-3 clarifies that if an employer restructures its tiers of coverage, the employer contribution for any new tier would be tested by comparison to the contribution rate for the corresponding tier on March 23, 2010. However, if the plan adds a new coverage tier (e.g., family) without eliminating or modifying any previous tiers (e.g., employee-only) and those new coverage tiers cover classes of individuals that were not previously covered, then the new tiers would not need to be compared to any previous tiers.
- Q/A-4 confirms that a plan will relinquish grandfathered status if the copayment level for only one category of services (e.g., outpatient or primary care) is raised, even if it retains the copayment levels for other categories of services (e.g., inpatient or specialty care).
- Q/A -5 discusses the fact that grandfathered plans will need to consider whether any penalties imposed under a wellness program might cause the plan to violate one of the 6 impermissible changes outlined in the regulations.
- Q/A-7 clarifies that if a plan has a fixed-amount cost-sharing requirement other than a copayment (e.g., a deductible or out-of-pocket limit) that is based on a percentage-of-compensation formula, such an arrangement will not cause the plan to lose grandfathered status as long as the formula remains the same as what was in effect on March 23, 2010.
Q/A-1 addresses the complicated issue of how to apply the regulations’ anti-abuse rule to employee transfers, stating that the following is a non-exclusive list of “bona fide” reasons for employee transfers that would not cause the transferee plan’s grandfathered status to be lost:
- A benefit package is eliminated because the issuer is exiting the market or no longer offers the product to the employer;
- Low participation makes it impractical for the plan sponsor to continue offering a benefit package;
- A benefit package is eliminated from a multiemployer plan under the terms of collective bargaining; or
- A benefit package is eliminated for any reason and multiple benefit packages covering a significant portion of other employees remain available to the employees being transferred.
- Q/A-2 confirms that the movement of the brand-name drug into higher cost-sharing based on the addition of the generic to the formulary will not cause the plan to lose its grandfathered status.
- Q/A-4 & 5 confirm that a plan ceases to be a grandfathered health plan as of the effective date of the amendment that causes the loss of grandfathered status—not the date when the amendment is adopted. However, if a plan sponsor chooses to make an amendment to plan terms effective in the middle of a plan year, the plan will lose its grandfathered status in the middle of the year.
- Q/A-7 clarifies that if an employer’s contribution towards cost of coverage is based on a formula (e.g., a fixed dollar amount multiplied by years of service, subject to a flat dollar cap), as long as the formula does not change, the employer is not considered to have reduced its contribution rate, regardless of any increase in the total cost of coverage.
Lastly, as a reminder for open enrollment season, Q/A-1 of FAQ Part IV addresses how often a grandfathered plan must comply with the required disclosure of grandfathered status described in the regulations. The guidance states that a plan will comply with the requirement if it includes language about its grandfathered status “whenever a summary of the benefits under the plan is provided to participants and beneficiaries.” The FAQ goes on to state that although it is not necessary to include the disclosure of grandfathered status in each plan or communication to participants (such as an EOB), plan sponsors are encouraged to identify other communications in which disclosure of grandfathered status would be appropriate.
Interestingly, the recently issued guidance on the new 4-page “mini-SPD” requirement seeks comment on whether the new “Summary of Benefits and Coverage” should require the inclusion of additional information such as “status as a grandfathered health plan,” so employers will want to monitor any developments on that front. In the mean time, if an employer plans to retain its grandfathered status for the 2012 plan year, we believe that it will want to continue to include language about the plan’s grandfathered status in the open enrollment materials it sends out.