The Health Care Reform Act, which is now being referred to as the "Affordable Care Act," was signed into law on March 23, 2010. Supplemental provisions, the "Reconciliation Bill," were enacted on March 30, 2010. This new federal law will soon require group health plans to comply with an array of new minimum benefit standards. However, requiring changes to be made to a plan is contrary to the pre-enactment promise of the Obama administration that ‘people who like their current coverage can keep it.' As a compromise, the law, as ultimately passed by Congress, holds that a plan that was in effect on March 23, 2010, and which stays in effect without change, will be exempt from certain provisions of the new legislature.

The IRS, along with the Departments of Labor and Health and Human Services, recently issued interim regulations providing guidance on the scope of the exemption accorded to so-called "grandfathered health plans." Unfortunately, the regulations are purposely designed to discourage employers from reducing benefits or shifting rising costs to employees. In addition, merely purchasing a new insurance policy or changing carriers after March 23, 2010 will cause a plan to lose its grandfathered status.

Comment: Many employers will quickly conclude that the advantages of maintaining a plan's grandfathered status is outweighed by the need to modify the design of the plan to reduce costs. In support of this fact, the Department of Health and Human Services (HHS) has projected that by 2013, as few as 36% of large plans, and 20% of small plans, will remain grandfathered.

A discussion of the recent guidance provided by the IRS is below.

A. Scope of Grandfathered Plan Relief
Having grandfathered plan status is not all that wonderful because most of the new provisions of the Affordable Care Act apply to all group health plans, including grandfathered plans. The key provisions of the Affordable Care Act that will apply to a plan that is not grandfathered are outlined below.

Nondiscrimination Standards for Insured Plans. An insured group health plan that is not grandfathered is subject to the same minimum participation nondiscrimination requirement as currently applied to self-insured plans.

Coverage of Preventive Health Services. A non-grandfathered plan may not impose any cost-sharing requirements (such as co-pay, co-insurance or deductibles) for certain preventive services.

Choice of Primary Care Provider. A non-grandfathered plan that requires or provides for an individual's designation of a health care professional as primary care provider must permit each covered individual to designate any participating primary care provider who is available to accept that individual.

Emergency Department Services. A non-grandfathered plan that covers emergency department services may not impose greater coverage restrictions for non-participating provider services, and may not impose greater cost-sharing requirements for out-of-network services, than are imposed for participating providers and in-network emergency department services.

Appeals Process. A non-grandfathered plan must establish a claims appeals process that allows claimants to review their file, to present evidence and testimony as part of the appeals process, and to receive continued coverage pending the outcome of the appeals process.

A self-insured plan must meet standards that have yet to be established by the HHS. These standards, at a minimum, will include aspects of the Uniform External Review Model Act developed by the National Association of Insurance Commissioners

Cost-Sharing Limitations. Non-grandfathered plans are prohibited from imposing levels of cost-sharing requirements in excess of the applicable limits for high-deductible health plans.
The Department of Labor has made available a list of all the provisions applicable to non‑grandfathered plans. The list can be found at http://www.dol.gov/ebsa/pdf/grandfatherregtable.pdf.

B. Plan Changes that Will Void a Plan's Grandfathered Status

When the Affordable Care Act was first enacted, it was generally believed that a group health plan would have its grandfathered status preserved so long as no "material changes" were made to the plan. The new regulations provide otherwise. Under the new regulations, any one of the changes listed below, even if immaterial, will cause a plan to lose its grandfathered status.

Changes in insurance policies or carriers
The elimination of coverage for the expenses of a particular condition
An increase in a co-payment in excess of a prescribed limit
An increase in a plan deductible or out-of-pocket requirement in excess of a prescribed limit
An increase in a percentage-based cost-sharing requirement
A decrease in the level of an employer's contribution to the plan
Adverse changes to any annual benefit limit
A discussion of these changes, and examples of their application as provided by the IRS guidance, are set forth below.

Change in Insurance Policies or Carriers. If an employer enters into a new insurance policy after March 23, 2010 (such as in the case of a prior policy not being renewed, or the changing of insurance carriers), then the new policy is not grandfathered.
Example: An employer changes insurance carriers, effective as of July 1, 2011. The plan ceases to be grandfathered as of the January 1, 2011 effective date.
Elimination of Coverage of a Condition. The elimination of all or substantially all benefits to diagnose or treat a particular condition will cause a group health plan to cease to be a grandfathered health plan.
Example: A group health plan eliminates coverage for cystic fibrosis. Upon that event, the plan ceases to be a grandfathered health plan, even though this condition may affect relatively few individuals covered under the plan.
Increases in Percentage-Based Cost-Sharing. Any increase, measured from March 23, 2010, in a percentage-based cost-sharing requirement (such as co-insurance requirement) will cause a group health plan to lose its grandfathered status.
Example: A plan's co-insurance requirement for inpatient surgery on March 23, 2010 was 20%. The plan is subsequently amended to increase the co-insurance requirement to 25%. The increase in the co-insurance requirement from 20% to 25% causes the plan to cease to be a grandfathered health plan.
Increase in Co-payment. An increase in any co-payment will cause a group health plan to cease to be grandfathered if the total increase in the co-payment (measured from March 23, 2010) exceeds the greater of:
An amount equal to $5 increased by medical inflation (that is, $5 times medical inflation, plus $5); or
The "maximum percentage increase" (which is defined as medical inflation1, plus 15 percentage points).
Example: On March 23, 2010, a group health plan had a co-payment of $10 per office visit for primary care providers. The plan is subsequently amended to increase the co-payment by $10 to $20. Under the formula prescribed in the regulations, the dollar amount of increase that would cause the plan to cease to be a grandfathered health plan is $6.00. The $10 increase in co-payment exceeds this threshold, and therefore causes the plan to lose its grandfathered status.

Increase in a Deductible or Out-of-Pocket Limit. Any increase in a fixed-amount deductible or out-of-pocket limit will cause a group health plan to cease to be grandfathered if the total percentage increase in the cost-sharing requirement (measured from March 23, 2010) exceeds the maximum percentage increase (as defined above).

Decrease in the Employer Contribution Rate. A group health plan ceases to be grandfathered if the employer decreases its contribution rate (based on cost of coverage) of any tier of coverage for any class of similarly-situated individuals by more than 5% below the contribution rate for the coverage period that includes March 23, 2010.

The "contribution rate based on cost of coverage" means the amount of contributions made by an employer compared to the total cost of coverage, expressed as a percentage. The total cost of coverage is determined in the same manner as the applicable premium is calculated under COBRA. In the case of a self-insured plan, contributions by an employer are equal to the total cost of coverage, minus the employee contributions towards the total cost of coverage.

Example: On March 23, 2010, a self-insured group health plan provides two tiers of coverage – self-only and family. The employer contributes 80% of the total cost of coverage for self-only, and 60% of the total cost of coverage for family. For the 2011 plan year, the employer reduces the contribution to 50% for family coverage, but keeps the same contribution rate for self-only coverage.

The decrease of 10 percentage points for family coverage in the contribution rate based on cost of coverage causes the plan to cease to be a grandfathered health plan. The fact that the contribution rate for self-only coverage remains the same does not change the result.

Changes in Annual or Lifetime Limits. A group health plan that, on March 23, 2010, imposed an overall annual limit on the dollar value of all benefits ceases to be a grandfathered health plan if the plan decreases the dollar value of the annual limit.
Note: Effective for plan years beginning after January 1, 2014, no annual limits may be imposed on essential health benefits. However, annual limits may apply to non-essential health benefits.

C. Grandfathered Status of Collectively Bargained Plan

Health insurance coverage maintained pursuant to one or more collective bargaining agreements ratified before March 23, 2010 is grandfathered at least until the date on which the last of the collective bargaining agreements terminates. The scope of this grandfathering is limited, as discussed below.

Not Applicable to Self-Insured Plan. The special grandfathering rule for collectively-bargained plans does not apply to self-insured plans. The rationale for this different treatment is that the statute extends the exemption only to "health insurance coverage," and not to the plan itself.

Change in Policy or Carrier. A plan can change policies or insurers during the collectively-bargained plan exemption period without voiding the grandfathered status of the plan. However, pursuant to the general rules of the new law, changes in policies or insurers after the expiration of the final bargaining agreement will then cause the plan to lose its grandfathered status.

Other Plan Changes. Changes in the plan that otherwise would cause the plan to lose its grandfathered status are permissible prior to termination of the applicable collective bargaining agreement. However, if, prior to the termination of the last of the agreements, any changes are made that would otherwise cause the plan to lose its grandfathered status (other than a change in policies or carriers), the grandfathered status will be lost as of the termination of the last agreement.
D. Affect of New Employees on Grandfathered Plan Status

A group health plan that provided coverage on March 23, 2010 (and has not lost its grandfathered status due to plan changes) is grandfathered for new employees (whether newly-hired or newly-enrolled) and their families enrolling in the plan after March 23, 2010. In addition, employees may change plans during an open enrollment period without affecting the grandfathered status of the new plan.

Example: An employer offers two plans to its employees on March 23, 2010: Plan A and B. During the open enrollment period for 2011, some of the employees enrolled in Plan A switch to Plan B.

The group health coverage provided under Plan B remains grandfathered because employees previously enrolled in Plan A are allowed to enroll in Plan B as "new employees."

However, if employees are involuntarily transferred to a new plan, the same favorable treatment is not necessarily available. Specifically, a group health plan (including a benefit package under a group health plan) ceases to be grandfathered if:

Employees are involuntarily transferred into the plan (the "transferee plan") from a plan under which the employees were covered on March 23, 2010 (the "transferor plan");

There was no bona fide employment-based reason to transfer the employees into the transferee plan. For this purpose, changing the terms or cost of coverage is not a bona fide employment-based reason; and

The terms of the transferee plan, as compared to those of the transferor plan as in effect on March 23, 2010, effectively constitute a change in the coverage of the transferred employees that results in a loss of grandfathered status (e.g., if the transferee plan has a higher deductible level).
Example 1: An employer offers two plans to its employees: Plan A and Plan B. Plan B has a higher deductible and out-of-pocket limits. The employer eliminates Plan A because of its high cost, and transfers employees covered under Plan A to Plan B.

In this situation, there was no bona fide employment-based reason to transfer employees from Plan A to Plan B. Therefore, Plan B ceases to be a grandfathered health plan with respect to all employees (and not merely these who were transferred into the plan).

Example 2: Employees in one of an employer's manufacturing plants are covered under Plan C. All other employees are covered under Plan D, which has higher deductible and out-of-pocket levels. Subsequently, the plant is closed, and some employees in the closed plant are moved to another plant. The employer terminates Plan C, and the employees that are moved are transferred to Plan D. In this situation, there exists a bona fide employment-based reason to transfer employees from Plan C to Plan D. Therefore, Plan D does not cease to be a grandfathered health plan by reason of the transfer of employees.

E. Transition and Retroactive Correction Rules

Many employers committed to making changes to their group health plans before the law was even enacted. As a means of relief, the regulations provide that changes to a plan that become effective after March 23, 2010 will not cause the plan to cease to be a grandfathered health plan if the changes were made:

Pursuant to a legally binding contract entered into on or before March 23, 2010;
Pursuant to a filing with a state insurance department on or before March 23, 2010; or
Pursuant to written amendments to the plan that were adopted on or before March 23, 2010.
In addition, changes made to a group health plan after March 23, 2010, that are not covered by the transition exemption described above, but which were adopted prior to June 17, 2010 (the date of publication of the new regulations), will not cause the plan to cease to be a grandfathered health plan if the changes are revoked or appropriately modified effective as of the first day of the first plan year beginning on or after September 23, 2010 (i.e., effective as of January 1, 2011 in the case of a calendar year plan).

F. Notice and Record Retentino Obligations

Not unexpectedly, the regulations impose new prescribed notice and record retention obligations upon employers that wish to avail themselves of the new grandfathered plan exemption.

Notice to Employees. To maintain a plan's grandfathered status, an employer must include in any plan materials provided to plan participants a statement:

Describing the benefits provided under the plan;
That the employer believes the plan to be a grandfathered health plan within the meaning of the Affordable Care Act; and
Contact information for questions and complaints.

The regulations include the following model language that may be used 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 www.dol.gov/ebsa/healthreform. This Web site 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.]

Records to be Maintained. The grandfathered status of a plan is also conditioned on the employer maintaining records documenting the terms of the plan or health insurance coverage 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. The documents to be preserved may include:

Intervening and current plan documents
Health insurance policies, certificates, or contracts of insurance
Summary Plan Descriptions
Documentation of premiums or the cost of coverage
Documentation of required employee contribution rates
In addition, the employer must make such records available for examination. The records must be maintained in such records and kept available for examination for as long as the employer takes the position that the plan is a grandfathered health plan.