Overview of Grandfathered Plans (Part 1)
Posted on: October 7, 2014Categories: HR & ComplianceThe health care reform law contains many provisions that affect the health coverage you provide for your employees. The extent of the law’s impact depends, in part, on whether you maintain a “grandfathered” health plan. Grandfathered plans can avoid a number of the health care reform provisions.
This Legislative Brief provides an overview of grandfathered plans, including information to help you understand what makes a plan “grandfathered.” It also includes a summary of the health care reform provisions that are applicable to grandfathered plans and those that are inapplicable to grandfathered plans.
GRANDFATHERED STATUS
What Is a Grandfathered Plan?
The health care reform law provides that certain provisions of the law will not apply to group health plans or health insurance coverage in which an individual was enrolled on March 23, 2010, the date the legislation was passed. The law refers to these plans as “grandfathered” plans. The law states that a grandfathered plan will retain its grandfathered status even if covered individuals renew their coverage after March 23, 2010, family members are added to coverage or new employees (and their families) enroll for coverage.
A plan may retain its grandfathered status even after Jan. 1, 2014, when many health care reform changes became effective. Interim final regulations issued by the Departments of Health and Human Services, Labor and Treasury (Departments) provide guidance on how plans lose their grandfathered status. The regulations essentially state that plans will lose their grandfathered status if they choose to significantly cut benefits or increase out-of-pocket spending for participants.
Losing grandfathered status means that a plan must comply with the health care reform requirements that do not apply to grandfathered plans, such as first-dollar coverage of recommended preventive health services and patient protections (for example, guaranteed access to OB-GYNs and pediatricians).
What Are the Permitted and Prohibited Changes?
Grandfathered health plans may make routine changes to their coverage and maintain their grandfathered status. These routine changes include making cost adjustments to keep pace with medical inflation, adding new benefits, making modest adjustments to existing benefits, voluntarily adopting new consumer protections under the health care reform law, or making changes to comply with state or other federal laws.
Premium changes are not taken into account when determining whether or not a plan is grandfathered. However, as explained below, a decrease in the rate of employer contributions for health plan coverage may cause a plan to lose its grandfathered status.
The prohibited changes that will cause a plan to lose its grandfathered status include the following:
- Significantly Cutting or Reducing Benefits. For example, if a plan decides to no longer cover care for people with diabetes, cystic fibrosis or HIV/AIDS.
- Raising Co-Insurance Charges. Typically, co-insurance requires a patient to pay a fixed percentage of a charge (for example, 20 percent of a hospital bill). Grandfathered plans cannot increase this percentage.
- Significantly Raising Co-Payment Charges. Compared with the co-payments in effect on March 23, 2010, grandfathered plans will be able to increase those co-pays by no more than the greater of $5 (adjusted annually for medical inflation) or a percentage equal to medical inflation plus 15 percentage points.
- Significantly Raising Deductibles. Many plans require patients to pay the first bills they receive each year (for example, the first $500, $1,000 or $1,500 a year). Compared with the deductible required as of March 23, 2010, grandfathered plans can only increase these deductibles by a percentage equal to medical inflation plus 15 percentage points.
- Significantly Reducing Employer Contributions. Many employers pay a portion of their employees’ premium for insurance and this is usually deducted from their paychecks. Grandfathered plans cannot decrease the percent of premiums the employer pays by more than 5 percentage points for any tier of coverage (for example, decrease their own share and increase the workers’ share of premium from 15 percent to 25 percent).
- Adding or Tightening an Annual Limit. If they want to retain their status as grandfathered plans, plans cannot tighten any annual dollar limit in place as of March 23, 2010. Moreover, plans that do not have an annual dollar limit cannot add a new one unless they are replacing a lifetime dollar limit with an annual dollar limit that is at least as high as the lifetime limit (which is more protective of high-cost enrollees).
The regulations initially provided that changing insurance companies or policies would cause a health plan to lose grandfathered plan status. However, on Nov. 15, 2010, the Departments released an amended rule. Under the amendment, a group health plan will not lose grandfathered status merely because of a change in the plan’s insurance policy, certificate or contract of insurance, as long as the coverage under the new policy is effective on or after Nov. 15, 2010. Also, to maintain grandfathered status, the plan must provide documentation of the plan’s terms to the new issuer.
Under the regulations, transferring employees from one grandfathered plan or benefit package (transferor plan) to another (transferee plan) will cause the transferee plan to lose grandfathered status if amending the transferor plan to replicate the terms of the transferee plan would have caused the transferor plan to lose grandfathered status. However, this rule applies only if there was no bona fide employment-based reason to transfer the employees. Also, the regulations provide that if the principal purpose of a merger, acquisition or similar business restructuring is to cover new individuals under a grandfathered health plan, the plan will lose its grandfathered status.
A plan’s grandfathered status is lost on the date the plan change becomes effective, rather than on the date a plan amendment is adopted. Thus, if a plan amendment is effective mid-year, the plan would lose its grandfathered status mid-year. If the amendment is effective at the beginning of the next plan year, the plan would lose its grandfathered status for that next plan year.
Is There a Special Rule for Collectively Bargained Plans?
The regulations provide a special rule for insured plans that are maintained pursuant to one or more collective bargaining agreements in place before March 23, 2010. These plans are considered grandfathered until the last collective bargaining agreement terminates, even if there is a change that would otherwise terminate a plan’s grandfathered status.
This rule does not apply to self-funded collectively bargained plans. They were required to comply with the restrictions on grandfathered plans right away.
This special rule does not provide a delayed effective date for collectively bargained plans to comply with the health care reform requirements. Rather, it extends the time these plans can be considered grandfathered. Also, these plans are not exempt from complying with the rules that apply to grandfathered plans.
After the last collective bargaining agreement expires, whether the plan is grandfathered is determined by comparing the plan in existence on the expiration date with the plan as it existed on March 23, 2010.
What Are the Notice and Record-keeping Requirements?
To maintain grandfathered plan status, a plan administrator or health issuer must include a statement of the plan’s grandfathered status in plan materials provided to participants describing the plan’s benefits (such as the summary plan description (SPD) and open enrollment materials). The notice informs participants that their plan may not include certain consumer protections that apply to non-grandfathered plans, such as the requirement to cover certain preventive health services without any cost-sharing.
The Department of Labor has provided a model grandfathered plan notice, which is available on its website.
In addition, a grandfathered health plan must document its terms on March 23, 2010. This documentation, plus any additional records needed to support the plan’s grandfathered status (for example, plan documents or insurance certificates or policies), must be retained for as long as the plan holds onto its grandfathered status.
Look out for Part 2 of this week’s blog on Grandfather Plans that will be addressing health care reform provisions.
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