Guidance on Grandfathered Health Plans Under the Patient Protection and Affordable Care Act

The Departments of Treasury, Health and Human Services, and Labor published Interim Final Rules on June 14, 2010, addressing the status of health plans as grandfathered plans under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the “PPACA”).

General

Group health plan and health insurance issuers offering group or individual health insurance coverage are required to comply with some, but not all, of the market reform provisions of PPACA. For example, grandfathered plans generally must comply with the following market reform provisions (with staggered effective dates):

1. No lifetime limits and only reasonable restrictions on annual limits until 2014, after which time,  no annual limits;
2. No rescissions of coverage;
3. Extension of coverage for adult children;
4. No exclusions for children (and eventually adults) based on preexisting conditions;
5. No waiting periods; and
6. Uniform summary of benefits disclosure requirements.

The Interim Final Rules clarify which health plans will have grandfathered status and the circumstances under which they may lose such status.

Definition of Grandfathered Plan

Coverage provided by a group health plan or a health insurance issuer is a grandfathered plan with respect to individuals enrolled on March 23, 2010. A grandfathered plan does not cease to be a grandfathered plan merely because one or more (even all) individuals enrolled on March 23, 2010, cease to be covered, provided that the grandfathered plan has continuously covered someone since March 23, 2010. A grandfathered plan is still considered a grandfathered plan with respect to new employees (whether newly hired or newly enrolled) and their families who are enrolled after March 23, 2010, as well as for an existing covered individual’s family members who are enrolled after March 23, 2010. Despite these provisions, the Interim Final Rules include anti-abuse provisions under which a plan could lose its grandfathered status if the principal purpose is to abuse or manipulate the grandfathered rules without bona fide employment-based reasons.

Examples in Interim Final Rules: Facts 1: A group health plan offers two benefit packages on March 23, 2010, Options F and G. During a subsequent open enrollment period, some of the employees enrolled in Option F on March 23, 2010, switch to Option G. Conclusion 1: The group health coverage Option G remains a grandfathered health plan … because employees previously enrolled in Option F are allowed to enroll in Option G as new employees. Facts 2: Same facts as above, except that the plan sponsor eliminates Option F because of its high cost and transfers employees covered under Option F to Option G. If instead of transferring employees from Option F to Option G, Option F was amended to match the terms of Option G, then Option F would cease to be a grandfathered health plan. Conclusion 2: The plan did not have a bona fide employment-based reason to transfer employees from Option F to Option G. Therefore, Option G ceases to be a grandfathered health plan with respect to all employees. Facts 3: A group health plan offers two benefit packages on March 23, 2010, Option H and Option I. On March 23, 2010, Option H provides coverage only for employees in one manufacturing plant. Subsequently, the plant is closed and some employees in the closed plant are moved to another plant. The employer eliminates Option H and the employees that are moved are transferred to Option I. If instead of transferring employees from Option H to Option I, Option H was amended to match the terms of Option I, then Option H would cease to be a grandfathered health plan. Conclusion 3: The plan has a bona fide employment-based reason to transfer employees from Option H to Option I; therefore, Option I does not cease to be a grandfathered plan.

If an employer or employee organization enters into a new policy, certificate, or contract of insurance after March 23, 2010 (e.g. the contract, policy, or certificate is not being renewed), then such policy, contract, or certificate generally will not qualify for grandfathered status with respect to the individuals covered by such contract, policy, plan, or certificate. Nongrandfathered plans must comply with all of the market reform provisions of the PPACA, which include the ones mentioned above as well as a number of other requirements (e.g., prohibition on discrimination in favor of highly compensated individuals with respect to eligibility and benefits under fully insured plans, restrictions on premium increases and rate variances, no-cost coverage of certain preventive care services, enhanced and extended appeal process rights, patient protection provisions, guaranteed access and renewability requirements, and prohibition on discriminating based on health-related factors for all plans or dropping coverage for participating in clinical trial).

Disclosure Requirement for Grandfathered Plans

To remain a grandfathered plan, the plan or coverage must include a statement, in any plan materials provided to the participants or beneficiaries (or, with respect to individual plans, to the primary subscribers) describing the benefits provided under the plan or coverage, that the plan or coverage believes it’s a grandfathered plan under the PPACA, and providing contact information for questions and complaints. Model language is provided in the Interim Rule regulations to satisfy this requirement.

Documentation Requirements for Grandfathered Plans

To maintain grandfathered plan status, a plan or coverage must maintain records documenting the terms of the plan or coverage that were in effect on March 23, 2010, and any other documents necessary to verify, explain, or clarify its status as a grandfathered plan. These records need to be made available for examination so that a participant, beneficiary, individual policy subscriber, or state or federal agency official would be able to inspect such documents to verify the status of a plan or coverage as a grandfathered plan.

Different Benefit Packages

The Interim Rule applies separately to each benefit package made available under a plan or coverage. For example, if a plan has three benefit packages (A, B, and C) and the plan enters into a new contract with an issuer after March 23, 2010, for package B, the change causes the benefit package B to cease to be grandfathered and benefit packages A and C remain unaffected solely by this change in benefit package B.

Collectively Bargained Plans

Insured coverage maintained pursuant to one or more collective bargaining agreements ratified before March 23, 2010, is a grandfathered plan at least until the date on which the last agreement relating to the coverage that was in effect on March 23, 2010, terminates. Even if there is a change in issuers during the term of the collective bargaining agreement that was ratified prior to March 23, 2010, any health insurance coverage provided pursuant to the collective bargaining agreement will remain a grandfathered plan until the last day of the applicable collective bargaining agreement. Additionally, any coverage amendment made solely to conform to the insurance market reform provisions added by the PPACA is not treated as a termination of the collective bargaining agreement. A collectively bargained self-insured plan cannot avail itself of these special rules. Therefore, the collectively bargained self-insured plan must determine its status as a grandfathered plan and monitor any changes that may terminate its grandfathered status regardless of the status of the collective bargaining agreement.

Whether a plan remains grandfathered following the termination date of the last collective bargaining agreement is determined by comparing the terms of the coverage on the date of termination with the terms of the coverage that were in effect on March 23, 2010. Regardless of whether the collective bargaining agreement was ratified prior to March 23, 2010, the collectively bargained plans (both insured and self-insured) are subject to the same requirements as other grandfathered plans and are not provided a delay in the effective date for PPACA provisions with which other grandfathered plans must comply.

Losing Grandfathered Status

The following summarizes changes that would cause a cessation of grandfathered status:

• Elimination of benefits. Elimination of all or substantially all benefits to diagnose or treat a particular condition will cause a plan or coverage to cease to be a grandfathered plan. Additionally, elimination of benefits for any necessary element to diagnose or treat a condition is considered the elimination of all or substantially all benefits to diagnose or treat a particular condition.
• Increase in coinsurance. Any increase in a percentage cost-sharing requirement above the level it was at March 23, 2010 (such as increasing an individual’s 20% coinsurance requirement to a 30% requirement), will cause the plan or coverage to lose its grandfathered status.
• Deductibles and out-of-pocket maximums. Any increase in deductibles or out-of-pocket maximums, determined as of the effective date of the increase, causes a plan or coverage to cease to be a grandfathered health plan, if the total percentage increase in the cost-sharing requirement, measured from March 23, 2010, exceeds medical inflation (from March 23, 2010) plus 15%.
• Copayments. Any increase in a fixed-amount copayment, determined as of the effective date of the increase, causes a plan or coverage to cease to be a grandfathered plan, if the total increase in copayment measured from March 23, 2010, exceeds the greater of: (i) an amount equal to $5 increased by medical inflation or (ii) a total percentage measured from March 23, 2010, that is more than the sum of the medical inflation rate plus 15%.
• Decrease in contribution rate by employers and employee organizations. A plan or coverage ceases to be a grandfathered plan if the employer or employee organization decreases its contribution rate based on cost of coverage toward the cost of any tier of coverage for any class of similarly situated individuals by more than 5% below the contribution rate for the coverage period that includes March 23, 2010.
• Changes in annual limits. A plan or coverage that did not impose an overall annual or lifetime limit on the dollar value of benefits on March 23, 2010, ceases to be a grandfathered plan if the plan or coverage subsequently imposes an overall limit on the dollar value of benefits. Additionally, a plan or coverage that imposed an overall lifetime limit on the dollar value of all benefits but no annual limit on the dollar value of all benefits on March 23, 2010, ceases to be a grandfathered health plan if the plan or coverage subsequently adopts an overall limit at a dollar value that is lower than the dollar value of the lifetime limit on March 23, 2010. Finally, a plan or coverage that imposed an overall annual limit on the dollar value of all benefits on March 23, 2010, ceases to be a grandfathered plan if the plan or coverage subsequently decreases the dollar value of the annual limit (regardless of whether the plan or coverage also imposed an overall lifetime limit on March 23, 2010, on the dollar value of all benefits).

Changes in premiums, changes to comply with federal and state legal requirements, changes to voluntarily comply with the PPACA, and changing third-party administrators will not cause a plan or coverage to lose its grandfathered status, provided these changes are made without exceeding the standards described above.

Transitional Rules

The following changes will be treated as if they had been made on March 23, 2010, even though they were not necessarily effective on such date: (i) changes effective after March 23, 2010, pursuant to a legally binding contract entered into on or before March 23, 2010; (ii) changes effective after March 23, 2010 pursuant to a filing on or before March 23, 2010 with a state insurance department; or (iii) changes made pursuant to written amendments to a plan that were effective after March 23, 2010, and were adopted on or before March 23, 2010.

In the preambles to the Interim Final Rules, the agencies indicated that they will take into account good-faith efforts to comply with a reasonable interpretation of statutory requirements and may disregard changes to plan and policy terms made after March 23, 2010, that only modestly exceed those changes described in the Interim Rule and that occur before June 14, 2010.

Additionally, significant changes to a plan or coverage made after March 23, 2010, and adopted prior to June 14, 2010, will not cause the plan or coverage to cease to be grandfathered if the changes are revoked or modified effective as of the first day of the plan year (in the individual market, policy year) beginning on or after September 23, 2010, and the terms of the plan or coverage on that date, as modified, would not cause the plan or coverage to cease to be a grandfathered plan under the requirements of the Interim Final Rules. For this purpose, changes will be considered to have been adopted prior to June 14, 2010, if: (i) the changes are effective before that date, (ii) the changes are effective on or after that date pursuant to a legally binding contract entered into before that date, (iii) the changes are effective on or after that date pursuant to a filing before that date with a state insurance department, or (iv) the changes are effective on or after that date pursuant to written amendments to a plan that were adopted before that date.

---

_{As part of our service to you, we regularly compile short reports on new and interesting developments and the issues the developments raise. Please recognize that these reports do not constitute legal advice and that we do not attempt to cover all such developments. Rules of certain state supreme courts may consider this advertising and require us to advise you of such designation. Your comments are always welcome. © 2010 Dykema Gossett PLLC.}