Regulation Reversal On Grandfathered Plans A Welcome Relief to Employers-November 2010

The federal agencies implementing regulations under the Patient Protection and Affordable Care Act (PPACA) have previously issued regulations stating that grandfathered group health plans (those in existence before March 23, 2010), can maintain grandfathered plan status (and avoid compliance with some of PPACA's requirements) provided that they do not significantly reduce benefits or increase costs. The agency regulations also included a provision that a grandfathered group health plan would lose its grandfathered status if it entered into a new policy, certificate, or contract of insurance. The regulations further clarified that a self-funded group health plan would not lose its grandfathered plan status merely by changing its third party administrator (TPA).

The result of these regulations, however, put fully insured group health plans (who could not change insurance carriers without losing grandfathered status) at a disadvantage to the self-funded plans (who were free to change TPAs and keep grandfathered status so long as it did not require a significant reduction in benefits or increase in costs in the plan). The agencies also recognized that some fully insured group health plans might be forced to change carriers involuntarily due to that carrier withdrawing from the marketplace. The agencies found that the interim regulations could unnecessarily restrict the ability of carriers to reissue policies to plan sponsors for administrative reasons unrelated to a change in the terms of the health coverage (for example, to transition the policy to a subsidiary of the original carrier or to consolidate a policy with its various riders or amendments). Lastly, a provision that eliminates grandfathered plan status merely by virtue of changing carrier could give those carriers unfair leverage in negotiating the price of coverage renewals with the sponsors of grandfathered health plans.

As a result, the agencies have amended the interim regulations to allow group health plans to keep their grandfathered plan status when they change insurance carriers, provided that the underlying terms of the group health plan do not otherwise reduce benefits or increase costs in a manner that results in the loss of grandfathered plan status under the interim regulations.

Under the amended regulations, in order to keep grandfathered plan status while entering into a new policy, certificate, or contract of insurance, the grandfathered plan must provide to the new health insurance carrier (and the new health insurance carrier must require) documentation of plan terms (including benefits, cost sharing, employer contributions, and annual limits) under the prior health coverage sufficient to determine whether any change is being made that would cause the plan to lose its grandfathered status.

The amended regulations only apply to grandfathered group health plans entering into a new policy, certificate, or contract of insurance where the effective date of that policy, certificate, or contract of insurance occurs on or after November 15, 2010. So if you entered a new policy, certificate, or contract of insurance with an effective date occurring between March 23, 2010 and November 15, 2010, you've already lost your grandfathered plan status according to the amended regulations.

If you have questions about this Advisory or any other matter of labor, employment or benefits law, please contact your LMV Attorney at (205) 326-3002.