Foley & Lardner LLP

29 June 2010
Legal News: Employee Benefits & Executive Compensation

Defining Grandfathered Plans and Maintaining Grandfathered Status Under Health Care Reform

On June 14, 2010, the U.S. Departments of the Treasury, Labor, and Health and Human Services released interim final regulations providing guidance on what is a “grandfathered plan” and maintaining grandfathered status for purposes of the Patient Protection and Affordable Care Act (PPACA). The following is a summary of these regulations with a focus on employer-sponsored health plans.

Why Grandfathered Status Is Important

A grandfathered plan is exempt from certain provisions of the PPACA, as explained in the following chart:

Provisions Applicable to Grandfathered Plans

Provisions NOT Applicable to Grandfathered Plans

  • Prohibition of preexisting condition exclusion or other discrimination based on health status
  • Prohibition on excessive waiting periods to join a plan
  • No lifetime and restricted annual limits
  • Prohibition on rescinding coverage for other than fraud or intentional misrepresentation
  • Coverage of adult children until age 26*
  • Development and utilization of uniform explanation of coverage statements and standardized definitions
  • Bringing down the cost of health care coverage for insured plans
  • Application of nondiscrimination rules to insured plans
  • Preventive coverage without charge
  • No pre-authorization for emergency and OB/GYN care
  • Prohibition of deductibles in excess of $2,000 for single and $4,000 for family coverage
  • New appeals process
  • Nondiscrimination against individuals in approved clinical trials
  • Automatic enrollment rules

* Until 2014, a grandfathered plan is required to cover an adult child to age 26 only if the adult child is not eligible for employment-based coverage through either the employer of such adult child or such adult child’s spouse.

What Is a Grandfathered Plan?

A grandfathered plan is a plan (insured, self-insured, or combination) that existed on March 23, 2010, the date the PPACA was enacted. Each benefit package (e.g., HMO, self-insured, insured with insurance company X, insured with insurance company Y) offered in a plan is considered separately. As a result, the loss of grandfathered status for one benefit package will not affect the grandfathered status of the other packages.

Changes in the covered employee population do not disrupt grandfathered status, provided the plan continuously covers at least one person (not necessarily the same person) since the enactment date. Thus, the enrollment of (1) existing employees who previously declined coverage, (2) newly eligible employees, or (3) dependents of the foregoing, does not affect a plan’s grandfathered status. However, a change in employee population could result in a loss of grandfathered status under the anti-abuse rule discussed under “Ways to Lose Grandfathered Status” below.

Administrative Requirements

In order to maintain grandfathered status, the plan sponsor must comply with certain notice and record retention requirements. Any plan communication given to an employee or dependent must include a statement that the plan is grandfathered, along with contact information for questions or complaints. The notice’s purpose is to allow employees to make more informed choices. The regulations include a model notice. Because this notice requirement applies to “any” plan communication, all benefit communications (open enrollment materials, summary plan descriptions, new hire packets, and so forth) must include the notice. As long as the plan is grandfathered, the plan sponsor must maintain records verifying the plan’s grandfathered status. Participants, beneficiaries, and state or federal officials are entitled to examine these records.

Ways to Lose Grandfathered Status

Compared to the plan’s terms as of March 23, 2010, any of the following changes results in a loss of grandfathered status:

  • Entering into a new insurance contract.
  • Eliminating all or substantially all of the benefits to diagnose or treat a particular condition.
  • Increasing a plan participant’s percentage cost-sharing requirement such as co-insurance, by any amount.
  • Increasing a plan participant’s fixed-cost cost-sharing requirement other than co-payments such as deductibles, by more than 15 percentage points plus the medical inflation percentage (Maximum Percentage Increase).
  • Increasing a participant’s co-payment requirement by the greater of (i) $5 increased by medical inflation or (ii) the Maximum Percentage Increase.
  • Decreasing the plan sponsor’s contribution rate, which is the percentage of the total cost paid by the plan sponsor, for any tier of coverage (e.g., employee only, family) by more than five percentage points. If the plan sponsor’s contribution rate is defined by reference to a formula such as hours worked, a decrease of more than five percent causes a loss of grandfathered status.
  • Adding a new overall annual or lifetime limit on the dollar value of benefits.
  • Imposing an overall annual limit on the dollar value of benefits that is less than the plan’s existing lifetime limit.
  • Reducing an overall annual limit on the dollar value of benefits.
  • Transferring a new group of employees into a grandfathered plan if the main purpose is to take advantage of the plan’s grandfathered status. Such transfers are permitted only if there is a bona fide employment-based reason for the transfer.

If a plan sponsor has adopted a plan change after March 23, 2010 but before June 17, 2010 that would result in the loss of grandfathered status, the plan sponsor may revoke or appropriately modify that change effective as of the first plan year beginning on or after September 23, 2010 (January 1, 2011 for calendar year plans) in order to regain grandfathered status.

For special rules applicable to fully-insured collectively bargained plans, please see our alert entitled “Regulatory Agencies Provide Only Limited Relief From Health Care Reform for Collectively Bargained Plans” at http://www.foley.com/publications/pub_detail.aspx?pubid=7247.

Plan Sponsor Action Steps

  • Review current plan design to determine if grandfathered status is helpful. If the design already complies with many of the PPACA provisions, it may be worthwhile to forfeit grandfathered status in order to gain more flexibility in plan design.
  • Determine if any pre-June 17, 2010 changes would be permissible under the regulations. If the changes are not permitted, decide whether such action should be rescinded before the end of the 2010 plan year in order to regain grandfathered status.
  • If the goal is to maintain grandfathered status, examine each future proposed plan design change in light of these regulations.

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues.

If you have any questions about this alert or would like to discuss the topic further, please contact your Foley attorney or the following individuals:

Katherine L. Aizawa
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Christopher S. Berry
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Lloyd J. Dickinson
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Gregg H. Dooge
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Casey K. Fleming
Milwaukee, Wisconsin
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Robert E. Goldstein
San Diego, California
858.847.6710
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Andrew D. Gregor
San Diego, California
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Samuel F. Hoffman
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Harvey A. Kurtz
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Belinda S. Morgan
Chicago, Illinois
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Isaac J. Morris
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Greg W. Renz
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Leigh C. Riley
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Michael H. Woolever
Chicago, Illinois
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