Grandfather Rules – Hard to Decipher and Harder to Meet

The Obama administration made a mantra of “if you like your plan, you can keep it.” But, the resulting health reform law added several caveats to the mantra. And, newly issued proposed interim final rules, issued June 14, 2010, make keeping the same plan even less likely. In fact, the United States Chamber of Commerce recently released an analysis of the new rules with the criticism, “If you like your plan, you can keep it – for a while.”

Grandfather Status in the Law

Plans had to be in effect on March 23, 2010 in order to be eligible to be grandfathered. The rules released in June provide greater detail on changes plans can make to preserve or lose this status, among other provisions.

The proposed rules state that “The Affordable Care Act balances the objective of preserving the ability of individuals to maintain their existing coverage with the goals of ensuring access to affordable essential coverage and improving the quality of coverage.” In a press conference on June 14, 2010, Secretary Sebellius spoke of the grandfather provisions in terms of limiting disruptions in employee benefits and health insurance. The rules would seem to support this statement, if it is interpreted to mean changes that reduce existing coverage.

One of the most asked questions was definitively put to rest by the rules. That question was whether an employer could switch insurers and still maintain grandfathered status. The rules state that: “Any policies sold in the group and individual health insurance markets to new entities or individuals after March 23, 2010 will not be grandfathered health plans even if the health insurance products sold to those subscribers were offered in the group or individual market before March 23, 2010.”

Benefits of Grandfathered Status

Grandfathered plans must comply with the following reforms (these are broadly stated, dates for compliance and terms may vary):

• Reporting of medical loss ratio, including premium rebates if the plan did not meet the specific loss ratio
• Uniform explanation of coverage
• Prohibition on annual and lifetime limits on essential health benefits
• Prohibition on health plan rescissions
• Requirement to extend coverage to adult dependent children
• Prohibition on coverage exclusions for pre-existing conditions.

Of more interest are the provisions that “grandfathered” plans may avoid, including:

• First dollar coverage for preventive care
• Revised appeals process
• Limits on employee out-of-pocket expenses
• Nondiscrimination requirements.

The provisions that may be avoided – and the value an employer perceives in maintaining this status – must be measured against these new rules. The application of nondiscrimination requirements may be of highest interest to employers. These rules are recapped later in this article.

Disclosure Required for Grandfathered Status

If a plan wishes to maintain Grandfathers status, the rules require a notice to that effect.  This notice must be in any plan materials. Model language is included in the interim final regulations. The notice must include contact information for “questions and complaints.” The model notice is problematic in its wording. It includes language disparaging grandfather status as a means to avoid some of the benefits of health reform.

Documentation Required to Prove Grandfathered Status

In order to maintain status as a grandfathered health plan, the plan must document the terms of the plan that was in effect on March 23, 2010. According to the rules, “Such documents could include intervening and current plan documents, health insurance policies, certificates orcontracts of insurance, summary plan descriptions, documentation of premiums or the cost of coverage, and documentation of required employee contribution rates.”

Documents must be available for inspection by state or federal agencies as well as by plan participants.

Specific Changes Allowed

There are a number of specific references as guidance for changes that will not affect grandfathered status. These include:

• Family members of an individual who is enrolled in a grandfathered health plan as of March 23, 2010 enroll in the plan after March 23, 2010, the plan or health insurance coverage is also a grandfathered health plan with respect to the family members
• New employees (whether newly hired or newly enrolled) and their families who enroll in the grandfathered health plan after March 23, 2010.

Other examples taken from the rules offer more guidance. One example specifies that an employer has both Plan A and Plan B. If the employer requires everyone to move to Plan B, both plans lose grandfather status. If however, Plan A is amended to have benefits similar to Plan B, then only Plan A loses grandfather status. Plan B remains grandfathered since grandfathered status applies on a plan by plan basis.

Anti-Abuse Provisions

Regulators are concerned that plans will endeavor to maintain grandfathered status through questionable practices. As such, there are anti-abuse provisions specifically addressed in the rules. Chief among these is a prohibition of using a merger, acquisition, or similar business restructuring with the principle purpose to cover new individuals under a grandfathered health plan. This would cause the plan to cease to be a grandfathered health plan. “The goal of this rule is to prevent grandfather status from being bought and sold as a commodity in commercial transactions.”

Another anti-abuse rule is designed to prevent a plan or issuer from circumventing the limits on changes that cause a plan or health insurance coverage to cease to be a grandfathered health plan. This rule is intended to prevent efforts to retain grandfather status by indirectly making changes that would result in loss of that status if those changes were made directly.

Changes that Cause a Loss of Grandfathered Status

The list of changes that cause a loss of Grandfathered status are many, including:

• Significant cut or reduction of benefits including cuts to a specific type of coverage such as that for mental health, diabetes and the like
• Increase in co-insurance charges given the rationale that medical inflation is already taken into account with co-insurance
• Significant increase in co-payments. Increases in excess of $5 or a percentage equal to medical inflation plus 15 percentage points result in a loss of status
• Significant increase in deductibles. To maintain grandfathered status, deductibles can be raised only by a percentage equal to medical inflation plus 15 percentage points. The example given offers that a family deductible of $1000 may increases by $190 or $200 between 2010 and 2011. It could increase by an additional $50 for 2011 to 2012.
• Significant decrease in employer contributions. Employers cannot decrease the percent of premiums paid by the employer by more than 5 percentage points.
• Tighten or add an annual limit on what the insurer pays. Plans cannot add an annual dollar limit without losing grandfathered status unless they are replacing a lifetime dollar limit with an annual dollar limit that is “at least as high as the lifetime limit.”
• Change insurance companies. Coverage from the new insurer will not be considered a grandfathered plan.

Nondiscrimination Requirements

The avoidance of the nondiscrimination requirements may be of most interest to small employers since, previously, only self-funded plans had to contend with these requirements.

According to current law and rule under Section 105(h) of the Internal Revenue Code (IRC), a plan discriminates as to eligibility unless it benefits:

1. 70% or more of all employees, or
2. 80% or more of all employees eligible to benefit under the plan, if 70% or more of all employees are eligible to benefit under the plan, or
3. employees who have not completed three years of service, part-time employees, employees covered by a collective bargaining agreement, and nonresident aliens.

The health reform laws specifically state that a plan must not discriminate in favor of highly compensated individuals. A highly compensated employee meets one of these tests:

1. Is one of the five highest-paid officers of the employer
2. Is a shareholder who owns directly or indirectly more than 10% in value of the employer's stock
3. Is in the top 25% of highest paid employees.

This IRC section applies to all employer-provided health plans. It has not previously applied to plans where an insurance company is at risk but rather to self-funded employer plans. Plans that are found to be discriminatory are subject to a $100 per participant per day excise tax. The income tax penalties that apply to self-funded plans do not apply to insured plans.

Many employers, particularly those with carve-out type plans, will find the nondiscrimination rules the principle reason to pursue grandfather status. There is a slim ray of hope that the excise tax may not apply to group with 2 – 50 employees. Some research points to a provision in the Internal Revenue Code that carves out these employers from Public Health Services Act violations, the law that was amended to apply the nondiscrimination rules. One must wonder, however, whether other obscure but equally onerous penalties would be applicable.

About the Author:

Pamela D. Mitroff Consulting, Inc. of Wheaton, Illinois provides affordable insurance and employee benefits compliance products and services. These include The Advisor Advantage, a personalized newsletter for brokers to send to their group clients and the HITECH Technology Privacy Suite of technology solutions. Pamela Mitroff,  has more than 30 years of insurance, employee benefits and compliance experience. Her work with a privacy and security technology firm enables her to “translate” tech-speak to seek out solutions insurance brokers and others need to secure their computers and data. Her email is mitroffconsulting@sbcglobal.net.