To Grandfather or Not to Grandfather Under the Affordable Care Act

March 7, 2011

TO GRANDFATHER OR NOT TO GRANDFATHER
UNDER THE AFFORDABLE CARE ACT

The Patient Protection and Affordable Care Act of 2010 (“PPACA”) § 1251 as amended by the Health Care and Education Reconciliation Act of 2010 (the “Reconciliation Act”, and collectively the “Affordable Care Act”) § 2301, provide that plans in effect on March 23, 2010 (date of enactment of PPACA) are grandfathered and thereby exempt from some but not all of the requirements of the Affordable Care Act.

v  Many companies are attempting to keep their health plans grandfathered – at least for the time being. (See, e.g. 38 BNA Pension and Benefits Reporter 114 (Jan, 18, 2011) citing survey by the Congressional Research Service that numerous comments to grandfather regulations show a desire of many companies to keep their health plans grandfathered.)

Determination of Grandfathered Status. Treasury Regulation § 54.9815-1251T (with corresponding DOL and HHS regulations), as finalized in 75 Fed. Reg. 34538 (June 17, 2010) and as amended in 75 Fed. Reg. 70114 (Nov. 17, 2010), provides the following rules for determining if the health plan coverage is grandfathered.

(i)  The health coverage must have been in existence on March 23, 2010. Treas. Reg. § 54.9815-1251T(a)(l)(i).

 (ii)  As provided  in the  amended regulations, which are effective as of  Nov. 15, 2010, health insurance coverage does not cease to be grandfathered  merely because a new contract is entered into after March 23, 2010 (for example, a new insurer or a new contract with the existing insurer).  Treas. Reg. § 54.9815-1251T(a)(i) & (ii) as amended in 75 Fed. Reg. 70114 (Nov. 17, 2010).

(iii)  The grandfathered rules apply separately for each benefit package, so that one benefit package under the plan may be grandfathered even if other benefit packages are not. § 54.9815-1251T(a)(i)(i).

(iv)  The plan materials (e.g. the SPD) must contain a statement (see model language in regulations) that the plan administer believes that it is a grandfathered plan.  § 54.9815-1251T (a)(2).

(v)  The plan must maintain records (which must be made available on request) which show the coverage as in effect March 23, 2010. Under the November 17, 2010, amendments to the regulations, if there is a new policy, the new insurer must be given the prior plan terms (including benefits, cost sharing, employer contributions and annual limit) so that it can determine if the plan is still grandfathered. Treas. Reg. § 54.9815-1251T(a)(3), as amended in 75 Fed. Reg. 70114 (Nov. 17, 2010).

v  Note that grandfathering applies even to new employees and family members who join the plan after March 23, 2010.  § 54.9815-1251T(b)(1).

 (vi)  Under anti-abuse rules: (a) if a merger or acquisition is made merely to cover new employees   under a grandfathered plan it will lose grandfathering; and (b) if employees are transferred from the grandfathered plan to a non-grandfathered plan it will cause loss of grandfathered status. § 54.9815-1251T(b)(2).

Maintenance of Grandfathered Status. The following rules apply regarding maintenance of grandfather status and when change to the terms of a plan will cause loss of grandfathered status:

(i)  A reduction in scope of benefits, for example, where benefits to treat a particular condition are eliminated, will cause a loss of grandfathered status. Treas. Reg. § 54.9815.1251T(g)(1)(i).

(ii)  An increase in the percentage of cost-sharing (co-insurance) will cause loss of grandfather statues.  § 54.9815-1251-(g)(1)(ii).

v  Note that an increase in the amount of co-insurance without an increase in percentage of cost sharing will not cause loss of grandfathering.

(iii)  An increase in the fixed cost-sharing amount, i.e. the deductible or out-of-pocket limit, will cause loss of grandfathered status if such increase is more than 15% plus medical inflation above the March 23, 2010 amounts.  § 54.9815-1251T(g)(1)(iii).

(iv)  An increase in the fixed-amount copayment that exceeds the March 23, 2010 copayment amount by the greater of (a) $5 increased by medical inflation or (b) the medical inflation percentage plus 15% will cause loss of grandfathering. § 54.9815-1251T(g)(1)(iv).

(v)  A decrease in the employer contribution rate for premiums based on cost of coverage (i.e., the employer contribution as percentage of total cost of coverage) or based on a formula, by more than 5% below the contribution rate on March 23, 2010 will cause loss of grandfathering. § 54.9815-1251T(g)(1)(v).

(vi)  Changes in annual limit, including (a) the addition of an annual limit where there was none, (b) a decrease in annual limit or at a dollar amount lower than the overall lifetime limit in effect, or (c) decrease in the annual limit for a plan that had a higher annual limit, will cause loss of grandfathering. § 54.9815-1251T(g)(1)(vi).

Transition Rules for Grandfathering.  The following transition rules apply:

    (i)  If there are changes to plans that were effective after March 23, 2010 but such changes were pursuant to a legally binding contract, pursuant to a filing with a state insurance department prior to March 23, 2010, or pursuant to written amendments that were made prior to March 23, 2010, the health insurance will remain grandfathered under transition rules. Treas. Reg. § 54.9815-1251T(g)(2)(i).

    (ii)  If changes are made to the health insurance after enactment of PPACA (March 23, 2010) and prior to adoption of these regulations (June 14, 2010) but the changes are reversed for plan years beginning on or after Sept. 23, 2010, the grandfather will be retained.  § 54.9815-1251T(g)(2)(ii).

    (iii) Where good faith reasonable interpretation of the grandfather requirements prior to issuance of the regulations (June 14, 2010) only modestly exceed the changes permitted by the regulations, the grandfather can be retained. Preamble to final regulation 75 Fed. Reg. 34538, 34569 (June 17, 2010).

       Provisions Not Effective in 2010 if Plans are Grandfathered.  Provisions of the Affordable Care Act that become effective for plan years beginning on or after Sept. 23, 2010 only if the plan is not grandfathered include:

(i) new procedures for claims, appeals and external review under the Public Health Service Act (“PHSA”) § 2719, which is not applicable to grandfathered plans;

(ii) coverage of preventive care without any deductibles, e.g., immunizations or screenings, under PHSA § 2713, which is not applicable to grandfathered plans; 

(iii) prohibition on discrimination in favor of highly-compensated individuals even for insured plans under PHSA § 2716 (Code § 105(h) expanded beyond just self-insured plans), which is not applicable to grandfathered plans;  and

(iv) right to select a participating primary care provider or pediatrician, and to see an obstetrician without referral under PHSA § 2719A, which is not applicable to grandfathered plans.

Provisions Already Effective Even for Grandfathered Plans.   Provisions of the Affordable Care Act that become effective for plan years beginning on or after Sept. 23, 2010 even for grandfathered plans include: 

(i) prohibition on preexisting condition exclusion or discrimination based on health status for children under age 19 under PHSA § 2714, which for group health plans applies even to grandfathered plans;  

(ii) prohibition on rescissions after coverage begins except in the case of fraud or intentional misrepresentation under PHSA § 2712, which applies even to grandfathered plans; and

(iii) restriction on annual limits for group health plans or lifetime limits under PHSA § 2711, which applies even to grandfathered plans.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. Federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter that is contained in this document.