NAIFA GovWatch

HHS, Labor, and Treasury Issue Regulation on “Grandfathered” Health Plans

Issue: Health Insurance Reform

Date: June 15, 2010

On June 14, the U.S. Departments of Health and Human Services (HHS), Labor, and Treasury issued interim final regulations implementing the rules for group health plans and health insurance coverage in the group and individual markets under provisions of the Patient Protection and Affordable Care Act regarding status as a grandfathered health plan.

NAIFA Position: NAIFA members will play an increasingly important role in assisting clients in determining whether the rules applicable to grandfathered health plans are more or less favorable than the rules applicable to non-grandfathered health plans. The following Q&A will help members and their clients determine the value of retaining the health plan’s grandfather status and necessary actions needed to preserve grandfathered status.

Q: What is a Grandfathered Plan?
A: To be a grandfathered health plan, a group health plan or an individual coverage must have been in effect on March 23, 2010, the date of enactment. In general, the law allows a grandfathered plan to continue its normal operations without losing its grandfathered status. New employees may enroll in a grandfathered plan, and current participants may reenroll or change coverage to add dependents to the health plan.

Q: What are the benefits of being a Grandfathered Plan?
A: Grandfathered plans are exempt from some of the new requirements. Certain provisions have specific effective dates, noted below. The following are many of the provisions that will NOT apply to grandfathered plans:

Effective for the first plan year beginning on or after Sept. 23, 2010 (Jan. 1, 2011, for calendar year plans)

Grandfathered plans that are insured plans will not be subject to the nondiscrimination rules of Internal Revenue Code Section 105(h). Section 105(h) prohibits a covered health plan from discriminating in favor of highly compensated employees as to eligibility to participate or benefits provided. Previously, Code Section 105(h) applied only to self-funded health plans but now the Act expands the application of these rules to include all insured plans that are not grandfathered. Avoiding the application of Code Section 105(h) will be a critical issue for many employers who sponsor insured plans that provide different levels of benefits to different workforces.
Grandfathered plans do not have to provide essential benefits that limit employee out-of-pocket expenses.
Grandfathered plans are exempt from the requirement that group health plans must establish and maintain a claims and appeal process that includes external review.
Grandfathered plans do not have to provide the specified preventive care that other group health plans must provide. These preventive care services include certain immunizations and screenings that must be provided by non-grandfathered plans with no cost-sharing to the participant.
Grandfathered plans do not have to provide emergency services without prior certification and do not have to allow out-of-network expenses under the same cost structure applicable to in-network emergency services.
Grandfathered plans are not required to provide an individual with the choice of a primary care physician, do not need to permit an individual to choose a pediatrician as a primary care physician, and do not need to permit women direct access to an obstetrician or gynecologist.
Grandfathered plans can continue to exclude coverage for a treatment due to it’s being part of a clinical trial.
Grandfathered plans will not need to provide annual reports to the Secretary of Health and Human Services regarding health care quality and wellness programs.

Effective for the plan year beginning on or after Jan. 1, 2014:

Grandfathered plans will remain exempt from the cost sharing limit and the deductible requirement that will be applicable otherwise. Beginning in 2014, the new law prohibits health plans from imposing total cost sharing for a year that exceeds the out-of-pocket limits that are applicable to high-deductible health plans. Currently, these limits are $5,950 for individual coverage and $11,900 for family coverage. Also in 2014, the new law will limit the maximum deductible to $2,000 for individual coverage and $4,000 for family coverage.

Q: What changes DO apply to grandfathered plans?

A: Except for the delayed effective date for full coverage of adult dependents, the following provisions apply for the first plan year beginning on or after Sept. 23, 2010 (Jan. 1, 2011 for calendar year plans).

All group health plans must provide coverage for adult dependent children up to age 26. Prior to Jan. 1, 2014, this rule applies to grandfathered plans only if the child is not eligible for coverage under another employer sponsored plan.
Grandfathered plans are prohibited from pre-existing condition exclusions for enrollees under the age of 19 and for all enrollees in 2014.
Grandfathered plans may not rescind coverage under a group health plan for a participant except in the case of fraud or intentional misrepresentation by the participant.
Grandfathered plans are prohibited (like all group health plans) from applying a lifetime limit on the value of ‘essential benefits’ for any plan participant or beneficiary. The new law also only permits “restricted annual limits” (to be defined by future HHS regulations) on the dollar value of essential benefits provided to a plan participant or beneficiary.

The following provisions will apply to grandfathered plans (and all other group health plans) for plan years beginning on or after Jan. 1, 2014.

A plan may not have a waiting period in excess of 90 days for a new enrollee.
All group health plans and insurers will be prohibited from denying coverage for pre-existing conditions.
Beginning in 2014, annual coverage limits are prohibited.

Q: What events or modifications to group health plans will alter grandfathered plan status?

A: Interim final regulations issued on June 14 provide that a group health plan or health insurance coverage no longer will be considered a grandfathered health plan if a plan sponsor or an issuer:

Switches insurance companies (unless the plan is covered by a union contract or the employer pays claims out of its own funds and uses the insurer only to administer the plan).
Eliminates all or substantially all benefits to diagnose or treat a particular condition. The 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.
Increases a percentage cost-sharing requirement (such as coinsurance) above the level at which it was on March 23, 2010.
Increases fixed-amount cost-sharing requirements other than copayments, such as a $500 deductible or a $2,500 out-of-pocket limit, by a total percentage measured from March 23, 2010 that is more than the sum of medical inflation and 15 percentage points.
Increases copayments by an amount that exceeds the greater of: a total percentage measured from March 23, 2010 that is more than the sum of medical inflation plus 15 percentage points, or $5 increased by medical inflation measured from March 23, 2010.
For a group health plan or group health insurance coverage, an employer or employee organization decreases its contribution rate by more than five percentage points below the contribution rate on March 23, 2010.
With respect to annual limits (1) a group health plan, or group or individual health insurance coverage, that, on March 23, 2010, did not impose an overall annual or lifetime limit on the dollar value of all benefits imposes an overall annual limit on the dollar value of benefits; (2) a group health plan, or group or individual health insurance coverage, that, on March 23, 2010, imposed an overall lifetime limit on the dollar value of all benefits but no overall annual limit on the dollar value of all benefits adopts an overall annual limit at a dollar value that is lower than the dollar value of the lifetime limit on March 23, 2010; or (3) a group health plan, or group or individual health insurance coverage, that, on March 23, 2010, imposed an overall annual limit on the dollar value of all benefits decreases the dollar value of the annual limit (regardless of whether the plan or health insurance coverage also imposes an overall lifetime limit on the dollar value of all benefits).

Q: What modifications can be made without relinquishing grandfathered plan status?

A: The following events CAN occur without changing grandfathered status:

Participants in a grandfathered plan may renew their coverage (for example, during the next open enrollment) after the date of enactment.
Participants may enroll their dependents for coverage, including dependents who were not covered at the date of enactment.
New employees and their dependents may be enrolled in a grandfathered plan. In addition to the enrollments described above, the new law notes that coverage amendments made to conform to a collectively bargained plan to the new requirements will not be treated as a termination of the collective bargaining agreement. This implies that the grandfathered plan that is being amended does not lose its grandfathered status by making conforming amendments and should apply to non-bargained plans as well. On this basis, amendments required for compliance with other provisions of the new law or other applicable law (for example, updates for HIPAA HITECH) would not alter grandfathered status.

Q: What can employers do to preserve grandfathered status for current plans?
A: To maintain status as a grandfathered health plan, a plan must:

Disclose grandfather status to participants (and beneficiaries) that the plan believes it is a grandfathered health plan within the meaning of section 1251 of the Patient Protection and Affordable Care Act.

Model Language

This [group health plan or health insurance issuer] believes this [plan or coverage] is a “grandfathered health plan” under the Patient Protection and Affordable Care Act (the Affordable Care Act). As permitted by the Affordable Care Act, a grandfathered health plan can preserve certain basic health coverage that was already in effect when that law was enacted. Being a grandfathered health plan means that your [plan or policy] may not include certain consumer protections of the Affordable Care Act that apply to other plans, for example, the requirement for the provision of preventive health services without any cost sharing. However, grandfathered health plans must comply with certain other consumer protections in the Affordable Care Act, for example, the elimination of lifetime limits on benefits.

Questions regarding which protections apply and which protections do not apply to a grandfathered health plan and what might cause a plan to change from grandfathered health plan status can be directed to the plan administrator at [insert contact information]. [For ERISA plans, insert: You may also contact the Employee Benefits Security Administration, U.S. Department of Labor at 1-866-444-3272 or www.dol.gov/ebsa/healthreform. This website has a table summarizing which protections do and do not apply to grandfathered health plans.] [For individual market policies and nonfederal governmental plans, insert: You may also contact the U.S. Department of Health and Human Services at www.healthreform.gov.]

Maintain records documenting the terms of the plan in connection with the coverage in effect on March 23, 2010, and any other documents necessary to verify, explain, or clarify its status as a grandfathered health plan.

Make such records available for examination upon request.

Next Steps: The Departments invite comments from the public on whether its list of changes is appropriate and what other changes, if any, should be added. Specifically, the Departments invite comments on whether the following changes should result in cessation of grandfathered health plan status for a plan or health insurance coverage:

Changes to plan structure (such as switching from a health reimbursement arrangement to major medical coverage or from an insured product to a self-insured product).
Changes in a network plan’s provider network, and if so, what magnitude of changes would have to be made.
Changes to a prescription drug formulary, and if so, what magnitude of changes would have to be made.
Any other substantial change to the overall benefit design.

In addition, the Departments invite comments on the specific standards included in these interim final regulations on benefits, cost sharing, and employer contributions. The Departments specifically invite comments on whether these standards should be drawn differently in light of the fact that changes made by the Affordable Care Act may alter plan or issuer practices in the next several years. Any new standards published in the final regulations that are more restrictive than these interim final regulations would only apply prospectively to changes to plans or health insurance coverage after the publication of the final rules.

NAIFA Staff Contact: Diane Boyle, Vice President – Federal Government Relations.

Back to NAIFA GovWatch