IRS Issues Guidance on "Grandfathered" Plans Under Affordable Care Act

Three federal agencies, the IRS, EBSA, and HHS, have issued new regulations explaining the definition and scope of grandfathered plans as provided under the Affordable Care Act. The new regulations become effective with the first day of a new group health plan year occurring on or after September 23, 2010.

Our Employment Law Advisories have previously discussed how the Affordable Care Act exempted certain plans that were in existence prior to the passage of the Act on March 23, 2010 from some provisions of the Act, provided that they meet the Act's definition of a "grandfathered" plan. We've been cautious in our interpretation of the Act's intended definition of these grandfathered plans, waiting instead for the agencies to provide us with regulatory guidance. Consistent with the recent regulatory trend in health care, we think the agencies have interpreted the grandfathered plan exception much more narrowly than we had hoped. For many group health plans, imposing the limitations required by the regulations to maintain grandfathered status simply won't be worth the effort.

The Act made clear that some of its provisions were important enough that the grandfathered plan exception would not apply to them. The new regulations explain that although grandfathered plans generally are not subject to subtitles A and C of Title I of the Affordable Care Act (including prohibition of annual limits and pre-existing condition exclusions, requirements regarding preventive care), some provisions of subtitles A and C of Title I of the Act continue to apply to all grandfathered health plans (including coverage for adult children to age 26, prohibition on rescissions of coverage except in the case of fraud or intentional misrepresentation and the elimination of lifetime limits).

The new regulations are intended to help plans determine the point at which changes to a plan in which an individual was enrolled on March 23, 2010, are significant enough to cause the plan to cease to be a grandfathered plan.

The Basics: Qualifying For and Maintaining Grandfathered Plan Status

A group health plan is a grandfathered plan with respect to individuals enrolled on March 23, 2010, for as long as it maintains this same status.

The new regulations explain that a group health plan does not cease to be grandfathered merely because one or more (or even all) individuals enrolled on March 23, 2010 cease to be covered, provided the plan has continuously covered someone since March 23, 2010 (not necessarily the same person, but at all times at least one person). Under the new rules, this determination is made separately for each benefit package made available under a group health plan. (§ 54.9815-1251T(a)(1)).

To maintain status as a grandfathered plan, a plan must:

1. include a statement, in any plan materials provided to participants or beneficiaries describing the benefits provided under the plan, that the plan believes that it is a grandfathered plan within the meaning of section 1251 of the Affordable Care Act;
2. provide contact information for questions and complaints. The agencies propose the following model language, subject to change, to satisfy this disclosure requirement:

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 http://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.] (§ 54.9815-1251T(a)(2)).

3. maintain records documenting the terms of the plan that were in effect on March 23, 2010, and any other documents necessary to verify, explain, or clarify its status as a grandfathered health plan; and
4. make the records in item (C) available for examination for as long as the plan takes the position that the plan is a grandfathered health plan. (§ 54.9815-1251T(a)(3)).

Enrolling New Employees and Family Members Generally Does Not Disqualify Plan From Grandfathered Status

Family members of an individual who is enrolled in a group health plan on March 23, 2010, may enroll after March 23, 2010, without causing the plan or coverage to cease to be a grandfathered plan. (§ 54.9815-1251T(a)(4)).

A group health plan that provided coverage on March 23, 2010 generally is also a grandfathered plan with respect to new employees (whether newly hired or newly enrolled) and their families who enroll in the grandfathered plan after March 23, 2010. (§ 54.9815-1251T(b)(1)). To prevent abuse, if the principal purpose of a merger, acquisition, or similar business restructuring is to cover new individuals under a grandfathered plan, the plan ceases to be a grandfathered plan. A second anti-abuse rule, designed to prevent a plan from circumventing the limits on changes that cause a plan to cease to be a grandfathered health plan, is intended to prevent retention of grandfather status by indirectly making changes that would result in loss of that status if those changes were made directly. (§ 54.9815-1251T(b)(2)).

Maintaining Grandfathered Plan Status

Two sets of rules determine when changes to the terms of a plan cause the plan to cease to be a grandfathered plan: one for reduction of benefits, the other regarding changes in cost-sharing.

Under the first set of rules, the elimination of all or substantially all benefits to diagnose or treat a particular condition causes a plan to cease to be a grandfathered plan. If, for example, a plan eliminates all benefits for muscular dystrophy, the plan ceases to be a grandfathered health plan (even though this condition may affect relatively few individuals covered under the plan). For purposes of this rule, 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. (§ 54.9815-1251T(g)(1)(i)). Faced with a compliance deadline under the Mental Health Parity and Addiction Equity Act this year, some plans may consider dropping coverage for mental health and substance abuse, entirely. For purposes of the grandfathered plan rules, a plan that eliminated mental health or substance abuse coverage after March 23, 2010 would lose its grandfathered status.

A second set of rules limits the extent to which plans can increase the fixed-amount and the percentage cost-sharing requirements that are imposed on individuals for covered items and services. Different standards are provided for coinsurance and fixed-amount cost sharing. Because coinsurance automatically rises with medical inflation, changes to the level of coinsurance (such as moving from a requirement that the patient pay 20 percent to a requirement that the patient pay 30 percent of inpatient surgery costs) would significantly alter the level of benefits provided. Thus, any increase in a percentage cost-sharing requirement (such as coinsurance) causes a plan to cease to be a grandfathered plan. (§ 54.9815-1251T(g)(1)(ii)).

On the other hand, fixed-amount cost sharing requirements (such as copayments and deductibles) do not take into account medical inflation. Thus, changes to fixed-amount cost-sharing requirements (for example, moving from a $35 copayment to a $40 copayment for outpatient doctor visits) may be reasonable to keep up with the rising cost of medical items and services. For fixed-amount cost-sharing requirements other than copayments, a plan ceases to be a grandfathered plan if there is an increase, since March 23, 2010, in a fixed-amount cost sharing requirement that is greater than the maximum percentage increase (see below). (§ 54.9815-1251T(g)(1)(iii)).

For fixed-amount copayments, a plan ceases to be a grandfathered plan if there is an increase since March 23, 2010 in the copayment that exceeds the greater of (A) the maximum percentage increase, or (B) five dollars increased by medical inflation. For contributory plans or coverage, the new regulations limit the ability of an employer or union to decrease its contribution rate for coverage under a group health plan.

In one situation, if the contribution rate is based on the cost of coverage, a group health plan ceases to be a grandfathered plan if the employer or union decreases its contribution rate towards the cost of any tier of coverage for any class of similarly situated individuals by more than 5 percentage points below the contribution rate on March 23, 2010. For this purpose, "contribution rate" is defined as the amount of contributions made by an employer or union compared to the total cost of coverage, expressed as a percentage. For a self-insured plan, contributions by an employer or union are calculated by subtracting the employee contributions towards the total cost of coverage from the total cost of coverage.

In the second situation, if the contribution rate is based on a formula (such as hours worked), a group health plan ceases to be a grandfathered plan if the employer or union decreases its contribution rate towards the cost of any tier of coverage for any class of similarly situated employees by more than 5% below the contribution rate on March 23, 2010. (§ 54.9815-1251T(g)(1)(iv)).

The "maximum percentage increase" is defined as medical inflation (from March 23, 2010) plus 15 percentage points. For this purpose, medical inflation is defined in these new regulations by reference to the overall medical care component of the Consumer Price Index for All Urban Consumers, unadjusted (CPI), published by the Department of Labor. (§ 54.9815-1251T(g)(3)).

New or Modified Annual Limits

The new regulations address the imposition of a new or modified annual limit by a plan in three situations.

• A plan that, on March 23, 2010, did not impose an overall annual or lifetime limit on the dollar value of all benefits ceases to be a grandfathered plan if the plan imposes an overall annual limit on the dollar value of benefits.
• A plan 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 ceases to be a grandfathered plan if the plan adopts an overall annual limit at a dollar value that is lower than the dollar value of the lifetime limit on March 23, 2010.
• A plan that, on March 23, 2010, imposed an overall annual limit on the dollar value of all benefits ceases to be a grandfathered plan if the plan decreases the dollar value of the annual limit (regardless of whether the plan also imposed an overall lifetime limit on March 23, 2010 on the dollar value of all benefits). (§ 54.9815-1251T(g)(2)(i)).

Effect of Changes Based on Pre-Act Obligations

The new regulations provide transitional rules for plans that made changes (1) after the enactment of the Affordable Care Act pursuant to a legally binding contract entered into prior to enactment, (2) to the terms of health insurance coverage pursuant to a filing before March 23, 2010 with a state insurance department, or (3) pursuant to written amendments to a plan that were adopted prior to March 23, 2010. If a plan or issuer makes changes in any of these situations, the changes are effectively considered part of the plan terms on March 23, 2010, even though they are not then effective. (§ 54.9815-1251T(g)(2)(ii)).

For purposes of enforcement, good faith efforts to comply with a reasonable interpretation of the statutory requirements will be taken into account, and changes to plan terms that only modestly exceed those changes described in the new regulations may be disregarded.

In addition, the new regulations provide employers with a grace period within which to revoke or modify any changes adopted prior to a specified date, where the changes might otherwise cause the plan to cease to be a grandfathered plan. Under this rule, grandfathered status is preserved if the changes are revoked, and the plan is modified, effective as of the first day of the first plan year beginning on or after September 23, 2010, to bring the terms within the limits for retaining grandfathered status.

For this purpose, and for purposes of the reasonable good faith standard, changes will be considered to have been adopted before the new regulations are publicly available, if the changes are effective (a) before that date, (b) on or after that date pursuant to a legally binding contract entered into before that date, (c) on or after that date pursuant to a filing before that date with a state insurance department, or (d) on or after that date pursuant to written amendments to a plan that were adopted before that date. (§ 54.9815-1251T(g)(2)(ii)).

Special Rules for Collectively Bargained (Union) Plans

For collectively bargained plans, a new policy, certificate, or contract of insurance after March 23, 2010, that an employer or union enters into is not a grandfathered plan. (§ 54.9815-1251T(a)(1)(ii)).

For health insurance coverage maintained pursuant to one or more collective bargaining agreements ratified before March 23, 2010, the coverage 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. Thus, before the last of the applicable collective bargaining agreements terminates, any health insurance coverage provided pursuant to the collective bargaining agreements is a grandfathered plan, even if there is a change in issuers during the period of the agreement. Because the statutory language refers solely to "health insurance coverage" and does not refer to a "group health plan," the new regs apply this provision only to insured plans maintained pursuant to a collective bargaining agreement, and not to self-insured plans maintained pursuant to a collective bargaining agreement.

After the date on which the last of the collective bargaining agreements terminates, the determination of whether health insurance coverage maintained pursuant to a collective bargaining agreement is grandfathered is made under the general rules on maintenance of grandfather status (see above). This determination is made by comparing (i) the terms of the coverage on the date of determination, with (ii) the terms that were in effect on March 23, 2010. A change in issuers during the period of the agreement, by itself, would not cause the plan to cease to be a grandfathered plan at the termination of the agreement. (§ 54.9815-1251T(f)(1)).

If you have questions about this Advisory or any other matter of labor and employment law, please contact your LMV attorney at (205) 326.3002.