Grandfathered Plans: Permitted and Prohibited Changes
The Affordable Care Act (ACA) contains numerous changes for group health coverage. The extent of the law’s impact on an employer’s health plan depends, in part, on whether the health plan has “grandfathered” status. A grandfathered plan is a group health plan that existed on March 23, 2010 (the date the ACA was enacted) and has not had certain prohibited changes made to it.
If a plan is grandfathered, it is exempt from certain health care reform requirements, such as the requirement to provide preventive health services without cost-sharing. If a plan loses its grandfathered status, it must comply with additional health care reform requirements. Plans may maintain their grandfathered status after Jan. 1, 2014, when many key ACA changes became effective.
On June 17, 2010, the Departments of Health and Human Services, Labor and the Treasury (Departments) issued interim final regulations regarding grandfathered plans. Importantly, the final regulations clarify what types of changes can be made to plans that will allow them to retain their grandfathered status (permitted changes) and what types of changes will cause plans to lose their grandfathered status (prohibited changes).
At renewal time, employers with grandfathered plans will need to evaluate whether proposed plan changes are permitted changes or prohibited changes. Employers will also need to weigh the importance of any prohibited changes and assess the implications of losing grandfathered status.
This Legislative Brief summarizes the permitted and prohibited changes for grandfathered plans. Please read below for more information.
PERMITTED CHANGES
Grandfathered health plans may make routine changes to their coverage and maintain their status. These routine changes include making cost adjustments to keep pace with medical inflation, adding new benefits, making modest adjustments to existing benefits, voluntarily adopting new consumer protections under the ACA, or making changes to comply with state or other federal laws.
Premium changes are not taken into account when determining whether or not a plan is grandfathered. However, as explained below, a decrease in the rate of employer contributions for health plan coverage may cause a plan to lose its grandfathered status.
In addition, grandfathered protections still apply even if family members or new employees are added to a plan’s coverage.
PROHIBITED CHANGES
Plans lose their grandfathered status if they choose to make significant changes that reduce benefits or increase costs for participants. In general, the starting point for analyzing whether a plan has lost its grandfathered status is to consider the plan as it existed on March 23, 2010. The plan as it existed on this date will be the comparison for future plan changes.
General Rules
Making the following changes would cause a plan to lose its grandfathered status:
• Significantly Cutting or Reducing Benefits. For example, if a plan decides to no longer cover care for people with diabetes, cystic fibrosis or HIV/AIDS.
• Raising Co-insurance Charges. Typically, co-insurance requires a patient to pay a fixed percentage of a charge (for example, 20 percent of a hospital bill). Grandfathered plans cannot increase this percentage.
• Significantly Raising Co-payment Charges. Frequently, plans require patients to pay a fixed-dollar amount for doctor’s office visits and other services. Compared with the co-payments in effect on March 23, 2010, grandfathered plans will be able to increase co-payments by no more than the greater of $5 (adjusted annually for medical inflation) or a percentage equal to medical inflation plus 15 percentage points.
• Significantly Raising Deductibles. Many plans require patients to pay the first bills they receive each year (for example, the first $500, $1,000 or $1,500 a year). Compared with the deductible required as of March 23, 2010, grandfathered plans can only increase their deductibles by a percentage equal to medical inflation plus 15 percentage points.
• Significantly Reducing Employer Contributions. Many employers pay a portion of their employees’ premium for insurance and this is usually deducted from their paychecks. Grandfathered plans cannot decrease the percent of premiums the employer pays by more than 5 percentage points for any tier of coverage (for example, decrease their own share and increase the workers’ share of premium from 15 percent to 25 percent). This standard applies to each tier of coverage under a health plan. For example, if an employer reduces its contribution rate for family coverage by more than 5 percentage points and keeps the same contribution rate for self-only coverage, the plan will lose its grandfathered status. The fact that the contribution rate for self-only coverage remains the same does not change the result.
Also, if a plan modifies its tiers of coverage (for example, from self-only and family to a multi-tiered structure of self-only, self-plus-one, self-plus-two and self-plus-three-or-more), the employer contribution for any new tier would be compared to the contribution rate for the corresponding tier on March 23, 2010. In this example, if the employer contribution rate for family coverage was 50 percent on March 23, 2010, the employer contribution rate for any new tier of coverage other than self-only (that is, self-plus-one, self-plus-two or self-plus-three-or-more) must be within 5 percentage points of 50 percent (that is, at least 45 percent).
However, if a plan adds one or more new coverage tiers without eliminating or modifying any existing tiers and the new coverage tier covers classes of individuals that were not previously covered by the plan (for example, a plan with self-only coverage adds a family coverage tier), the level of employer contribution toward the new tier will not cause a plan to lose its grandfathered status.
• Adding or Tightening an Annual Limit on What the Insurer Pays. Some insurers cap the amount that they will pay for covered services each year. If they want to retain their status as grandfathered plans, plans cannot tighten any annual dollar limit in place as of March 23, 2010. Moreover, plans that do not have an annual dollar limit cannot add a new one unless they are replacing a lifetime dollar limit with an annual dollar limit that is at least as high as the lifetime limit (which is more protective of high-cost enrollees).
Changing Insurance Companies or Policies
The regulations initially provided that changing insurance companies or policies would cause a health plan to lose grandfathered plan status. However, on Nov. 15, 2010, the Departments released an amended rule. Under the amendment, an insured group health plan will not lose grandfathered status merely because of a change in the plan’s insurance policy, certificate or contract of insurance, as long as the coverage under the new policy was effective on or after Nov. 15, 2010. Also, to maintain grandfathered status, the plan must provide documentation of the prior plan’s terms to the new issuer.
Anti-abuse Rules
Under the final regulations, transferring employees from one grandfathered plan or benefit package (transferor plan) to another (transferee plan) will cause the transferee plan to lose grandfathered status if amending the transferor plan to replicate the terms of the transferee plan would have caused the transferor plan to lose grandfathered status. However, this rule applies only if there was no bona fide employment-based reason to transfer the employees.
A set of frequently asked questions (FAQs) issued by the Departments clarifies that “bona fide employment-based reason” includes a variety of circumstances. These circumstances (under which a transfer would not cause a plan to lose grandfathered status) include (but are not limited to) any of the following:
• When a benefit package is being eliminated because the issuer is exiting the market;
• When a benefit package is being eliminated because the issuer no longer offers the product to the employer (for example, because the employer no longer satisfies the issuer’s minimum participation requirement);
• When low or declining participation by plan participants in the benefit package makes it impractical for the plan sponsor to continue to offer the benefit package;
• When a benefit package is eliminated from a multiemployer plan as agreed upon as part of the collective bargaining process; or
• When a benefit package is eliminated for any reason and multiple benefit packages covering a significant portion of other employees remain available to the employees being transferred.
This list is not exhaustive. There may be many other circumstances in which a benefit package is considered to be eliminated for a bona fide employment-based reason.
Also, the final regulations provide that if the principal purpose of a merger, acquisition or similar business restructuring is to cover new individuals under a grandfathered health plan, the plan will lose its grandfathered status.
Effective Date of Change
The Departments have clarified in FAQs that a plan’s grandfathered status is lost on the date the plan change becomes effective, rather than on the date a plan amendment is adopted. Thus, if a plan amendment is effective mid-year, the plan would lose its grandfathered status mid-year. If the amendment is effective at the beginning of the next plan year, the plan would lose its grandfathered status for that next plan year.
Example: On July 1, 2015, a calendar-year plan adopts an amendment that will cause it to lose grandfathered status. The change becomes effective for the plan year beginning on Jan. 1, 2016. The plan will lose its grandfathered status on Jan. 1, 2016.
TRANSITION RELIEF
The final regulations contained some transition relief for plans that made changes before the regulations were issued and thus before plan sponsors knew what changes were permissible. The transition relief that is available depends on when the changes were made.
If a group health plan (or health insurance issuer) made legally binding changes to the terms of the plan or coverage on or before March 23, 2010, those changes are considered part of the plan or coverage on March 23, 2010, even if the changes were not yet effective on that date. A change is considered legally binding if it was made pursuant to a contract, a filing with a state insurance department or a written amendment to the plan that was entered into, made or adopted on or before March 23, 2010.
The regulations also provided transition relief for changes made to plans after the ACA was enacted on March 23, 2010, and before the regulations were available on June 14, 2010. If a group health plan or health insurance issuer made changes after March 23, 2010 that were adopted prior to June 14, 2010 and would cause the plan to lose grandfathered status, the plan had a grace period to revoke or modify the changes. Under this rule, grandfathered status was preserved if the changes were revoked and the plan was modified, effective as of the first day of the first plan year beginning on or after Sept. 23, 2010, to bring the terms of the plans within the limits for retaining grandfathered status.
NOTICE REQUIREMENT FOR GRANDFATHERED PLANS
To promote transparency, the regulations require a plan to disclose to consumers, every time it distributes materials describing plan benefits, that the plan believes that it is a grandfathered plan and therefore is not subject to some of the additional consumer protections of the ACA. This allows consumers to understand the benefits of staying in a grandfathered plan or switching to a new plan. The plan must also provide contact information for enrollees to have their questions and complaints addressed.
A model notice of grandfathered status is available on the Department of Labor’s website.