07.28.2010

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Updates

Background

The Departments of Labor, Health and Human Services and Treasury (the "Departments") recently issued Interim Final Regulations (the "Regulations") on grandfathered health plans under the Patient Protection and Affordable Care Act ("PPACA").  Grandfathering allows employers to continue health plans that were in existence on March 23, 2010 and exempts such plans from a number of PPACA provisions.  To maintain grandfathered status, the plan or coverage must have continuously covered at least one person, though not necessarily the same person, since March 23, 2010.  Any new policy, certificate or contract of insurance issued after March 23, 2010 will not be grandfathered. 

Employers with grandfathered plans must analyze whether the benefit of being grandfathered is justified by the cost and administrative burden of maintaining grandfathered status.  To do this, an employer must know which provisions of PPACA do and do not apply to grandfathered plans and which of those provisions are relevant to its own plan.  Here are two examples:

1.         Preventive Care

PPACA requires that group health plans offer certain preventive care services without imposing cost sharing requirements such as deductibles or copayments to such services.  Examples of preventive care services include periodic health evaluations, routine prenatal and well-child care, child and adult immunizations, tobacco cessation programs, obesity weight loss programs and screenings services.  Please note, however, that not all of these examples are required to be provided under the PPACA.  Recent guidance on preventive care requires that services recommended by the U.S. Preventive Services Task Force, such as routine immunizations for children and certain screenings for infants, children and adolescents, must be offered under a group health plan.  Additionally, the plan may impose cost-sharing requirements only in explicitly outlined situations and generally may not impose cost sharing requirements if the preventive service is the primary purpose of the office visit.  Grandfathered plans, however, are not subject to these preventive care requirements.  A complete list of the preventive care recommendations and guidelines that are required to be covered under the Regulations can be found here.

2.         Lifetime and Annual Limits

On the other hand, grandfathered plans are not exempt from PPACA's restrictions on lifetime and annual limits.  Such rules apply to all fully insured and self-insured group health plans, as well as individual health insurance policies, whether grandfathered or not.  Recently published regulations impose an immediate prohibition on lifetime limits for essential benefits and phase in a restriction on annual limits for essential benefits.  Essential health benefits include coverage for ambulatory patient services, emergency services, hospitalization, maternity and newborn care, mental health and substance abuse care, prescription drugs, rehabilitative and habilitative services, laboratory services, preventive and wellness services and pediatric care (including pediatric oral and vision care).  Additionally, effective January 1, 2014, a grandfathered plan may not impose any preexisting condition exclusion (this requirement is effective for the first plan year beginning on or after September 23, 2010 for individuals enrolled in a plan who are under 19 years of age) and may not rescind coverage unless a participant intentionally misrepresents a material fact.

Tables at the end of this update provide a helpful list of the PPACA provisions that apply to grandfathered plans as well as a list of provisions that do not apply to grandfathered plans.  This update also discusses the limitations and disclosure requirements that an employer must comply with in order to maintain a plan’s grandfathered status.

The Departments indicated in the preamble to the Regulations their intent to eventually bring all plans, including grandfathered plans, into full compliance with PPACA.  By the end of 2013, the Departments' mid-range estimate is that 66% of small employers and 45% of large employers will make changes to their plans that will require them to relinquish their grandfathered status. 

Summary of Regulations

The Departments recognize that employers must make certain changes to the terms of their plans or coverage on an annual basis.  The Regulations define a limited category of changes, which, if modified within the limitations set forth in the Regulations, will not cause a loss of grandfathered status.  Importantly, the Preamble provides that changes not specifically identified in the Regulations as either allowable within certain limitations or prohibited entirely can be made to a grandfathered plan without causing it to lose its grandfathered status.  The Departments, however, are considering additional circumstances that may be added in subsequent guidance to the category of changes addressed by the Regulations.

1.         Copayments, Cost Sharing and Contribution Rates

    • Increase in a fixed amount of copayment.  Any increase to an employee's copayment requirement must be less than the greater of (1) $5 increased by medical inflation or (2) medical inflation (from March 23, 2010) plus 15% as applied to the amount of the copayment requirement as of March 23, 2010.   

    • Increase in a fixed amount cost sharing requirement other than a copayment.  The total percentage increase to fixed amount cost sharing requirements other than copayments, such as deductibles or out-of-pocket limits, must be less than the "maximum percentage increase," which is medical inflation plus 15%.

    • Increase in percentage of cost sharing.  The regulations prohibit any increase to percentage cost sharing requirements, such as an employee's coinsurance percentage.

    • Decrease in contribution rate.  An employer cannot decrease its "contribution rate based on cost of coverage" on any tier of coverage for any class of similarly situated individuals by more than 5% below the contribution rate that was in effect on March 23, 2010.  "Contribution rate based on cost of coverage" means that amount of contributions made by an employer or employee organization compared to the total cost of coverage, expressed as a percentage.  The total cost of coverage is determined in the same manner that the applicable premium is calculated under the COBRA continuation provisions of section 4980B(f)(4), section 604 of the Employee Retirement Income Security Act (“ERISA”) and section 2204 of the Public Health Services Act (“PHSA”).  In the case of a self-insured plan, contributions by an employer or employee organization are equal to the total cost of coverage minus the employee contributions towards the total cost of coverage.  The 5% reduction threshold also applies to contribution rates based on formulas, such as hours worked.

2.         Annual Limits

The Regulations limit the ability of a grandfathered plan to impose an overall annual limit on the dollar value of benefits received.  The Regulations address three scenarios:  (1) if the plan did not impose an annual or lifetime limit on March 23, 2010, no annual limit may ever be imposed; (2) if the plan imposed a lifetime limit but no annual limit on March 23, 2010, the plan may not impose an annual limit below the dollar value of the lifetime limit on March 23, 2010; and (3) if the plan imposed an annual limit on March 23, 2010, it can never decrease the dollar value of that limit.  Please see our discussion below on Additional Recent Guidance for a link to recently issued Interim Final Rules on annual and lifetime limits.

3.         Insurance Carriers

Subject to certain exceptions, if an employer or employee organization enters into a new policy, certificate or contract of insurance (including switching insurance carriers) after March 23, 2010, then the new policy, certificate or contract will not be a grandfathered health plan.  Renewal of an existing policy issued by the same carrier will not cause a loss of grandfathered status, provided that the policy complies with the other limitations and prohibitions that apply to grandfathered plans.

4.         Elimination of Benefits

The Regulations clarify that each benefit package made available under a group health plan or health insurance coverage will be treated separately for purposes of determining grandfathered status.  Thus, significant changes to one benefit package could result in the loss of grandfathered status for such benefit package but not for other benefit packages offered under the plan.  For each benefit package, the Regulations provide that an employer may not eliminate all or substantially all of the benefits (e.g., procedures or diagnostic services) required to diagnose or treat a particular condition, including any necessary elements for diagnosis or treatment.  For instance, if a benefit package provides benefits for a certain mental health illness, the treatment for which is counseling and prescription drugs, a plan could not eliminate benefits for counseling.

5.         Documentation and Disclosure Requirements

The Regulations provide that grandfathered plans must maintain records to verify the terms of the plan as of March 23, 2010.  Such documentation must be made available to any participant, beneficiary, individual policy subscriber or state or federal agency for as long as the plan or coverage asserts its grandfathered status.

In any plan materials distributed to participants or beneficiaries that describe the benefits provided under the plan or coverage, grandfathered plans must include a disclosure statement that the plan or health insurance coverage believes that it is a grandfathered health plan within the meaning of section 1251 of PPACA.  The disclosure statement must include contact information for questions and complaints.  The Regulations provide the following model language:

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 preventative 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 provisions 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 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 https://www.healthcare.gov/.]

6.         Anti-Abuse Rules Regarding the Addition of New Employees

 

The Regulations generally allow new employees and their families to enroll in an employer's grandfathered health plan after March 23, 2010.  However, the Regulations provide two rules to prevent the abuse of this allowance.  First, a plan will lose its grandfathered status if the "principal purpose" of a merger, acquisition or other business restructuring is to cover new individuals under a grandfathered plan.  Second, a plan will lose its grandfathered status if an employer attempts to circumvent the Regulations' limits on changes by transferring employees from one grandfathered plan to another.  Under this rule, a grandfathered health plan will lose its grandfathered status if the following three conditions are met: (1) if employees are transferred from one grandfathered health plan to another, (2) if treating the terms of the latter plan as changes to the former plan would cause the former plan to lose its grandfathered status; and (3) if there was no bona fide employment-based reason for the transfer.

7.         Collectively Bargained Plans

The Regulations distinguish between insured and self-insured collectively bargained plans.  Insured plans provided pursuant to a collectively bargained plan that was ratified before March 23, 2010 will retain their grandfathered status regardless of whether changes are made that would otherwise require the loss of grandfathered status.  However, once the collective bargaining agreement terminates, the coverage in effect at the time of termination will be compared to the coverage in effect on March 23, 2010 to determine whether any of the changes have resulted in the loss of its grandfathered status.  Self-insured collectively bargained plans are subject to the rules that govern non-collectively bargained plans. 

8.         Exemption for Retiree-only Plans and Excepted Benefits

The Preamble to the Regulations confirms that retiree-only plans and excepted benefits, as defined by HIPAA, are generally exempted from PPACA.  Examples of excepted benefits include coverage for accidental death and dismemberment; disability income coverage; liability insurance; workers compensation; coverage for on-site medical clinics; and limited-scope dental, vision, or long-term care benefits if they are provided under a separate policy, certificate or contract of insurance or are otherwise not an integral part of a group health plan.  For a complete listing of all excepted benefits, see 26 C.F.R. § 54.9831-1.

9.         Transitional Relief

The Departments recognize that many employers made changes to their plans or coverage prior to the publication the Regulations.  As a result, the Regulations provide the following transitional relief for certain plan and coverage changes that otherwise would cause a loss of grandfathered status: 

    • Changes Adopted Prior to March 23, 2010.  If a plan sponsor adopted changes to a plan or coverage on or before March 23, 2010 and such changes did not go into effect until after March 23, 2010, then such changes will be considered part of the terms of the plan or coverage on March 23, 2010 and will not cause a loss of grandfathered status.  The changes must have been made pursuant to a legally binding contract, a filing with a state insurance department or a written amendment to the plan.

    • Grace Period for Changes Adopted Prior to June 14, 2010.  The Regulations allow employers to revoke or modify changes adopted prior to June 14, 2010 (the date the Regulations were issued) that otherwise would cause a plan or coverage to lose its grandfathered status.  The employer must revoke or modify such changes by the first day of the first plan year beginning on or after September 23, 2010.

Good Faith Compliance for Changes Adopted Prior to June 14, 2010.  The Preamble to the Regulations provides that the Departments will take into account an employer's "good faith efforts" to comply with PPACA prior to the issuance of the Regulations (June 14, 2010).  As a result, the Departments may disregard changes to a plan or coverage adopted prior to June 14, 2010 that only "modestly exceed" the limitations established under the regulations.

Practical Tips

    • Based on the limitations applicable to grandfathered plans, such as the limitations on copayments, cost sharing and contribution rates, employers should engage in a careful cost-benefit analysis based on their own individual circumstances to determine whether retaining grandfathered status is economically prudent.

    • The Departments have indicated that they would like to see grandfathered plans brought into full compliance with the PPACA.  Accordingly, we anticipate that the Departments will carefully scrutinize grandfathered plans and will likely resolve ambiguities in a manner that is not favorable to maintaining grandfathered status.  The Departments indicated in the Regulations that a "constant share of plans" will regularly be compelled to relinquish their grandfathered status. 

    • In addition to retaining documents that verify the terms of grandfathered plans as of March 23, 2010, employers should also consider implementing additional document retention policies.  For instance, to avoid allegations of abuse, employers may want to retain documents that substantiate the purpose of any merger, acquisition or other business restructuring that adds new employees to a grandfathered plan.  Similarly, employers may also want to document the bona fide employment-based reason for transferring employees from one grandfathered plan to another. 

    • The Departments did not provide guidance on what changes they will consider to only "modestly exceed" the Regulations' limitations.  As a result, employers should be wary of relying upon the Preamble's good faith compliance provision for changes made between March 23, 2010 and June 14, 2010.  Instead, employers may decide to err on the side of caution and utilize the grace period to revoke or modify such changes by the first day of the first plan year beginning on or after September 23, 2010.

    • The Regulations do not address wrap plans.  Because the Regulations analyze grandfathered status based on the individual benefit packages provided within the plan, modifications to the structure of the wrap plan should not affect grandfathered status if the individual benefit packages are not modified in a manner that would violate the limitations of the Regulations.  The Regulations are concerned with the underlying benefit packages and less concerned with the manner in which the plan is structured and/or documented. 

    • Spinning off a component plan, such as a retiree-only or excepted benefit plan, should not trigger a loss of grandfathered status so long as the modification does not impermissibly affect the remaining benefit packages within the plan.  Spinning off a retiree-only or excepted benefit plan may be desirable because such plans are not subject to PPACA.  If such a plan remains part of a grandfathered plan, however, such plan will be subject to the grandfathered provisions that apply to the plan as a whole, such as participant disclosure requirements.  Similarly, because of the different PPACA treatment of insured versus self-insured collectively bargained plans, it may be desirable to bifurcate such plans.  Employers should carefully analyze the costs and benefits involved. 
Provisions Not Applicable to Grandfathered Health Plans Statutory Authority (all PHSA sections below are incorporated into ERISA through ERISA § 715 and into the Internal Revenue Code through Code § 9815)
Fair health insurance premiums (premium rates with respect to a particular plan or coverage may only vary based on limited categories) PHSA § 2701
Guaranteed availability of coverage (each health insurance issuer that offers health insurance coverage must accept every employer and individual in the state that applies for such coverage) PHSA § 2702
Guaranteed renewability of coverage (a health insurance issuer must renew or continue in force health insurance coverage at the option of the plan sponsor, subject only to specified exceptions and restrictions) PHSA § 2703
Nondiscrimination based on health status (group health plans and health insurance issuers offering health insurance coverage are prohibited from discriminating against an individual with regard to eligibility or coverage based on a health status related factor) PHSA § 2705
Nondiscrimination based on health care provider (group health plans and insurers are prohibited from discriminating with respect to plan participation or coverage against any health care provider acting within the scope of that provider's license or certification under applicable state law) PHSA § 2706
Comprehensive health coverage requirement (health insurance issuers offering coverage in the individual or small group market must ensure that such coverage includes "essential health benefits") PHSA § 2707
Participation in clinical trials (group health plans providing coverage to a qualified individual may not deny the individual participation in an approved clinical trial) PHSA § 2709
Coverage of preventive health services (group health plans and insurers must provide certain preventive services without imposing any cost sharing with respect to such services) PHSA § 2713
Transparency in coverage (a health plan seeking status as a "qualified health plan" must make accurate and timely disclosure of specified information to the insurance Exchange and the public) PHSA § 2715A
Nondiscrimination rules for insured plans (insured group health plans must satisfy the nondiscrimination rules of Code Section 105(h)(2)) PHSA § 2716
Quality of care reporting (group health plans and health insurance issuers must submit an annual report to the Secretary of HHS addressing plan or coverage benefits and provider reimbursement structures that may affect the quality of care) PHSA § 2717
 Claims appeal procedures (this section imposes additional requirements for the process of appealing a denied benefit claim)  PHSA § 2719
 Patient protections (some of the new patient protections include the right to designate a primary care provider, certain rights if a plan provides for emergency room services and no preauthorization requirement for obstetrical or gynecological care)  PHSA § 2719A
Provisions Applicable to Grandfathered Health Plans (provisions are effective for the first plan year on or after September 23, 2010 unless otherwise indicated) Statutory Authority                                           
Prohibition on preexisting condition exclusions  (effective for the first plan year beginning on or after September 23, 2010 for individuals enrolled in a plan who are under 19 years of age; effective January 1, 2014 for individuals 19 years of age and older) PHSA § 2704
Prohibition on excessive waiting periods (effective as of plan years beginning on or after January 1, 2014, group health plans and insurers are prohibited from applying a waiting period that exceeds 90 days) PHSA § 2708
Prohibition on lifetime and annual limits (this section provides restrictions and prohibitions on lifetime limits and annual dollar limits for "essential health benefits") PHSA § 2711
Prohibition on rescissions (group health plans and insurers are prohibited from rescinding coverage unless the individual has engaged in fraud or made an intentional misrepresentation) PHSA § 2712
Requirement to cover adult children up to age 26 if the plan covers dependents (applicable to grandfathered plans for the first plan year beginning on or after September 23, 2010, unless the adult child is eligible to enroll in an employer-sponsored health plan other than a group health plan of a parent; for plan years beginning on or after January 1, 2014, all plans, including grandfathered plans, are required to offer coverage to adult children up to age 26, regardless of the availability of other coverage.) PHSA § 2714
Summary of benefits and coverage explanation (this provision expands ERISA's disclosure requirements by requiring that a four-page “summary of benefits and coverage” be provided to applicants and enrollees before enrollment or re-enrollment) PHSA § 2715
Reporting and rebates (health insurance issuers offering coverage in the group or individual market are required to submit reports to HHS for each plan year relating to plan costs; they may also be required to provide rebates to policyholders under certain circumstances) PHSA § 2718
Early retiree reinsurance provisions (effective June 1, 2010) PPACA § 1102
FSA prohibition on reimbursement for over-the-counter drug expenses unless prescribed (effective January 1, 2011) PPACA § 9003
Employer requirement to report value of health coverage on W-2 (effective January 1, 2011) PPACA § 9002
Annual $2,500 limitation on contributions to an FSA (effective January 1, 2013) PPACA § 10902(a)

Additional Information

This update provides only a general summary of the Regulations.  For more information, please contact one of our attorneys in the Employee Benefits & Executive Compensation practice.  For a general summary of PPACA, see our April 20, 2010 Client Update.


 

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