On June 14, 2010, the Departments of Labor, Treasury and Health and Human Services (the Departments) issued interim final rules (the Rules) to implement the “grandfather plan” provisions of the Affordable Care Act. The Rules are important because a grandfathered plan is exempt from many of the provisions of the Affordable Care Act, including the preventive care, emergency services, choice of provider and reporting requirements. Although the Rules take a somewhat logical approach to grandfather status, the Rules limit many plan design changes if a plan sponsor desires to maintain grandfather plan status. Due to the cumulative effect of plan design changes, many plans will fall out of grandfather plan status over time. Further, because of these new restrictions, employers who desire to maintain grandfather status will need to scrutinize each proposed plan design change and, if the change would cause the elimination of grandfather status, determine whether it is instead preferable to make the design change but lose grandfather status.   

Do the Rules Address Retiree-Only Plans? 

Yes. As we have discussed previously, the technical wording of the Affordable Care Act appeared to leave intact the “retiree-only” exception under Part 7 of ERISA (and the parallel provisions of Chapter 100 of the Code), meaning that retiree-only plans should be exempt from the insurance reform provisions of the Affordable Care Act (as well as mental health parity, HIPAA portability, etc.). The preamble to the Rules confirms that the current exemption for retiree-only plans, stand-alone dental and vision benefits, health flexible spending arrangements and all other benefits that are exempt from Part 7 of ERISA (and Chapter 100 of the Code) are exempt from the insurance reforms under the Affordable Care Act. While the Affordable Care Act eliminated this exemption for governmental plans that are subject to the Public Health Service Act, the preamble states that HHS will not enforce any of the requirements of the Affordable Care Act with respect to nonfederal governmental retiree-only plans. Employers with active employees and retirees in the same ERISA plan should seriously consider moving the retirees to a separate ERISA plan prior to the application of the Affordable Care Act requirements.

What Is a “Plan” under the Rules?   

The Rules apply the grandfather plan requirements to each separate benefit package/benefit option that was in existence on March 23, 2010. This is helpful to employers with one ERISA plan, but with multiple medical benefit options. The loss of grandfather status for one medical option will not cause the loss of grandfather status for any other options. However, for insured options, switching from one insurer to another insurer will cause the loss of grandfathered status for that insured option. For self-insured plans, switching third-party administrators will not cause the loss of grandfathered status (as long as there are no other plan design changes that would cause a loss of grandfathered status).

Can New Employees and Participants Enroll in a Grandfathered Plan?   

Yes. The Rules confirm that new employees (whether newly hired or previously existing employees) can enroll in a grandfathered plan without the plan losing its grandfathered status. Further, employees may enroll new or existing family members in a grandfathered plan without the plan losing its grandfathered status. However, the Departments were concerned with grandfathered plan status being bought and sold as a commodity in the marketplace. Therefore, if the principal purpose of the merger, acquisition or other restructuring is to cover a new employee under a grandfathered plan, the grandfathered plan will lose its grandfathered status. Furthermore, if employees are transferred from one grandfathered plan to another grandfathered plan and the new plan imposes plan design changes that could not otherwise be made to the existing plan without causing a loss of grandfathered status, the new plan will also lose its grandfathered status unless there is a bona fide employment-based reason for the transfer.

What Types of Plan Design Changes Cause the Loss of Grandfathered Status?   

While the Rules do not create a “substantial modification” prohibition to maintain grandfathered status, the Rules do set forth various plan design changes that if implemented would cause the loss of grandfathered plan status. The base line for all the changes set forth below is March 23, 2010, and all changes are cumulative in nature. These changes are summarized as follows –

  • Elimination of Benefits. The elimination of all or substantially all benefits to diagnose or treat a particular condition causes the plan to lose grandfathered status. This is true regardless of how discrete the condition is and how many people are affected.

  • Increase in Coinsurance. Any increase in a co-insurance rate will cause a plan to lose grandfathered status, such as increasing the co-insurance for an in-patient hospital stay from 20% to 30%.

  • Increase in Deductible or Out-of-Pocket Maximums. Any increase in a deductible or out-of-pocket maximum will cause a plan to lose grandfathered status if the total percentage increase exceeds the medical inflation rate plus 15%.

  • Increase in Co-payments. Any increase in a co-payment amount will cause a plan to lose grandfathered status if the total increase exceeds the greater of $5 plus medical inflation or the medical inflation rate plus 15%. This rule ensures that a co-payment amount can always increase by at least $5 from the level on March 23, 2010.

  • Decrease in Contribution Rate. A plan loses grandfathered status if the employer decreases its contribution rate for the cost of coverage for any tier of coverage under the plan by more than 5 percentage points. For example, if the employer contributes 70% and the employee contributes 30% for the cost of coverage, the employer cannot reduce its contribution below 65% and retain grandfather status. This means that all future cost increases must continue to be shared based on the same percentage contribution rates (subject to the 5% allowed reduction). This rule is easily applied to existing coverage tiers, but many employers will be expanding their coverage tiers for 2011, and the Rules do not address how to apply this requirement to coverage tiers that were not in existence on March 23, 2010.

  • Changes in Annual Limits. A plan loses grandfathered status if the plan imposes a new annual limit or reduces an existing annual limit for all benefits under the plan. While unclear this limitation appears to apply to annual limits on the dollar value of all benefits under the plan, and not specific benefits, meaning that a new annual limit or reduced annual limits on individual benefits may still be possible. Of course, any changes in this regard would have to comply with the non-elimination of benefits requirement set forth above and other requirements of the Affordable Care Act (such as the annual limit restrictions on essential health benefits).

The Rules provide certain transition rules for changes that are effective after March 23, 2010, but were adopted by March 23, 2010, pursuant to a legally binding contract, insurance policy or a written amendment to a plan. In that case, those changes are considered to be in effect on March 23, 2010, and those changes become the new baseline from which the above plan design changes are measured (assuming that those changes themselves would not cause the loss of grandfather status). The Rules also provide that changes made after March 23, 2010, but prior to June 14, 2010, that would otherwise violate the Rules will not cause the loss of grandfathered status if the changes are revoked by the first day of the first plan year beginning on or after September 23, 2010, (i.e., January 1, 2011 for calendar year plans), and the plan as modified would not otherwise fail the grandfather requirements set forth above.

Does Coverage Maintained Pursuant to a Collective Bargaining Agreement Have Special Rules?   

Yes. Insured coverage maintained pursuant to one or more collective bargaining agreements that were ratified before March 23, 2010, is a grandfathered plan at least until the date on which the last of the collective bargaining agreements relating to the coverage terminates. This appears to be applied separately to each insured benefit option. Once the last collective bargaining agreement expires, then the determination of grandfathered status is determined under the normal plan design rules set forth above using the coverage in effect on that date. However, due to the technical wording of the statute, the Departments confirm in the preamble this special grandfather rule does not apply to self-insured options maintained pursuant to a collective bargaining agreement. Further, in the preamble the Departments confirm that collectively bargained plans (both insured and self-insured) that are grandfathered plans are subject to the same requirements as other grandfathered plans, and are not provided with a delayed effective date for requirements that otherwise apply to a grandfathered plan. Therefore, the provisions that apply to grandfathered plans (e.g., the age 26 child requirements and no lifetime dollar maximums) apply to collectively bargained grandfathered plans at the same time they would otherwise apply to any other grandfathered plan.

Are There Recordkeeping and Notice Requirements for Grandfathered Plans?   

Yes. The Rules provide that plan sponsors maintaining grandfathered plans must 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 the plan’s status as a grandfathered plan. These records must be made available upon request. Grandfathered plans must also disclose to participants in the plan’s summary plan description, enrollment guide and any other plan materials that a particular plan is a grandfathered plan.

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