Due to comments received on the interim rules governing grandfathered health plans, the Departments of Health and Human Services, Labor, and Treasury (“Departments”) have expanded and clarified their position on such plans. The expansion allows for a group health plan to change insurance carriers without a loss of grandfathered status. Rules regarding cost changes, benefits, and disclosures also have been clarified through a series of published “questions and answers.”

Changes that will end grandfathered status

The Departments have clarified that only the following six specific changes will result in the loss of grandfathered status:

  1. Benefit reduction: elimination of all or substantially all benefits to diagnose or treat a particular condition.
  2. Percentage increase in cost sharing—e.g., raising an individual’s co-insurance from 20 percent to 23 percent.
  3. Increase in fixed deductibles or out of pocket maximums by an amount that exceeds medical inflation plus 15 percentage points.
  4. Increase in fixed copayments: increase that exceeds medical inflation plus 15 percentage points (or, if greater, $5 plus medical inflation).
  5. Decrease in employer contributions toward the cost of coverage by more than five percentage points.
  6. Imposition of or change in annual dollar limits below specified amounts.

Ensuring successful compliance

Previously, one of the ways a group health plan could lose its grandfathered status was to switch from one insurance carrier to another. This rule was recently amended to permit a change in carrier, provided the plan does not violate any of the six rules set forth above, when making the change.

To take advantage of this new rule, the group health plan must provide, and the new carrier must request, documentation of the plan terms sufficient to determine that the plan is eligible for grandfathered status. This new rule, however, only applies to group health plans. A change of insurers in the individual market would still result in a loss of grandfathered status. Therefore, a change of the insurer on an individual policy covering a CEO would cause such a policy to become subject to the new IRC Section 105(h) nondiscrimination rules.

Moreover, the rule applies only to changes in group health plans that were effective on or after Nov. 15, 2010. So, if the group plan previously entered into an agreement with a new insurer on July 1, 2010, for a new policy effective on Sept. 1, 2010, grandfathered status is lost.

The Departments have invited comments on this prospective rule, leaving some hope it will once again be revisited.

Further clarification from the Departments

The Departments have also clarified that not all participant communications have to notify participants of a plan’s grandfathered status. For example, an explanation of benefits (EOB) does not have to contain a disclosure of the grandfathered status of the plan. However, plan summaries and open enrollment materials should disclose such status.

The Departments clarified that grandfathered status is applied on a benefit-package-by-benefit-package basis. Thus, a loss of grandfathered status with respect to a PPO will not affect the grandfathered status of an HMO.

Finally, the Departments clarified that a change in employer contribution rate is applied on a tier-by-tier basis. For example, if the employer contribution rate for family coverage was 50 percent on March 23, 2010, the employer contribution rate for any new tier of similar coverage (i.e., self-plus-one, self-plus-two, self-plus-three or more) must be within five percentage points of 50 percent (i.e., at least 45 percent).

To ensure that an employer’s plan meets the grandfathered requirements regarding the cost of coverage, an insurance carrier may require that the employer make a representation regarding its contribution rate as of March 23, 2010. In addition, the insurance carrier can require that the employer give advance notice of any contribution changes.