by James A. Woehlke, Esq., CPA
General Counsel / COO, MBL Benefits Consulting Corp.

Background
The Patient Protection and Affordable Care Act (the ACA*) was enacted on March 23, 2010. The ACA permits certain of its provisions to not apply to group health plans in existence on the effective date. These plans are called “grandfathered plans”. The Administration issued guidance on a plan’s status as a grandfathered health plan in the form of interim, final regulations on June 17, 2010.

Grandfathered plan status excuses grandfathered plans from certain, but not all, of the ACA’s requirements. Many feared grandfathered-plan status was so delicate that almost any change would cause a plan to lose its grandfathered status. The regulations issued June 17 put this fear to rest, permitting slightly more flexibility than many originally predicted.

Grandfathered plans are not subject to the following ACA requirements:

  • Extended nondiscrimination rules
  • Inclusion of access to out-of-network emergency services without cost-sharing or pre-certification
  • Provision of certain preventive care without cost-sharing
  • Inclusion of HIPAA wellness program rules pertaining to obstetrical and gynecological care
  • Implementation of internal and external review processes
  • Permit identification of any available primary care physician as the participant’s PCP

How Grandfathered Status is Lost
Generally speaking, grandfathered status is lost by changing a plan’s carrier or redesigning a plan to significantly increase the contributions required of employees. This presents employers with a planning decision relating to whether the avoidance of these mandates justifies the additional premium burden the employer would bear to maintain the grandfathered status. Performing this cost-benefit analysis will require some additional time and effort with each year’s renewal. Employers and their health care advisors need to factor that additional analysis into their renewal process. In addition, if the decision is made to maintain grandfathered status, the plan must provide notice to employees that the employer believes the plan is grandfathered and document the plan description as it existed on March 23, 2010, which description must be made available upon request. (See, Department of Health and Human Services sample notice at http://www.dol.gov/ebsa/grandfatherregmodelnotice.doc.)

Plan Changes Permitted for Grandfathered Plans
The statute and new interim final regulations permit the following plan changes without adversely affecting grandfathered status:

  • Adding new and deleting terminated participants
  • Certain collectively bargained-for changes
  • Plan changes required by health care reform
  • Cost adjustments to keep pace with medical inflation
  • Adding benefits
  • Making modest adjustments to existing benefits
  • Voluntarily adopting new consumer protections under the new law
  • Making changes to comply with state or other federal laws

Grandfathered status will be lost if (a) the plan changes insurance carriers or (b) significant changes are made which either reduce benefits or increase costs to the participants. These significant changes include:

  • Significant reductions in coverage
  • Any increase in percentage cost-sharing (i.e. co-insurance)
  • Fixed cost-sharing increases greater than medical inflation plus 15%
  • Certain reductions in employer cost-sharing
  • Imposition of a new cap or reducing an existing cap

Significant Reductions in Coverage. If a plan eliminates all or substantially all benefits to diagnose or treat a particular condition, such as cystic fibrosis, grandfathered status is lost. The elimination of benefits for any necessary element to diagnose or treat a condition would also be considered a significant reduction causing loss of status. For example, if a plan provides benefits for the treatment of a mental health condition and that treatment would normally include medication and counseling, the later elimination of benefits for counseling will cause loss of grandfathered status.

Change to Percentage Cost-Sharing. Percentage cost-sharing automatically tracks with the rate of inflation for medical costs. Therefore, the regulations provide that any change in percentage-cost sharing will cause loss of status.

Change in Fixed Cost-Sharing. If a plan increases fixed cost-sharing, such as a deductible, copayment, or an out-of-pocket limit, grandfathered status is affected only if the change exceeds 15% plus the rate of medical inflation. For instance, if medical inflation is 10% and a $200 deductible is increased to $300, grandfathered status would be lost because the increase of $200 to $300 (a 50% increase) exceeds the 25% maximum under the assumed facts. However, for copayments, the regulations have a special rule that permits an increase of $5 plus medical inflation, in the event the 15% plus medical inflation limitation is exceeded. For example, a copayment increase from $10 to $15 in the previous example would exceed the inflation plus 15% limit, but be permitted under the special rule for copayments.

Reductions in Employer Cost-Sharing. Grandfathered status is also lost if the employer reduces its contribution for health coverage by more than 5%.

Imposition of a New Cap or Reducing an Existing Cap. Grandfathered plan status is lost if a plan adds either an annual cap or lifetime cap. Also, a plan with an existing cap will lose its grandfathered status if it reduces the cap.

If you have questions about your plan’s grandfathered status, please contact your MBL Benefits consultant or the author at jwoehlke@mblbc.com.

* For simplicity, the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act are collectively referred to as the Affordable Care Act or ACA.

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Additional resources available at

Official publication of interim final regulations: http://www.federalregister.gov/articles/2010/06/17/2010-14488/interim-final-rules-for-group-health-plans-and-health-insurance-coverage-relating-to-status-as-a

Department of Health and Human Services Fact Sheet: Keeping the Health Plan You Have: The Affordable Care Act and “Grandfathered” Health Plans, http://www.healthreform.gov/newsroom/keeping_the_health_plan_you_have.html

Department of Health and Human Services Model Grandfathered Health Plan Notice in Word format, http://www.dol.gov/ebsa/grandfatherregmodelnotice.doc.

Department of Health and Human Services Question and answer sheet on grandfathered status, http://healthreform.gov/about/grandfathering.html
Healthreform.gov information page on grandfathered plans, http://healthreform.gov/about/grandfathering.html

Proskauer Rose article on Grandfathered Plan Status, http://www.proskauer.com/publications/client-alert/health-care-reform-grandfathered-health-plan-interim-final-regulations/

Proskauer Rose Table on the Application of the ACA to grandfathered plans, http://www.proskauer.com/files/uploads/Images/Comprehensive-Chart-on-Part-A-Mandates.pdf.

Health Care Reform Law: Agencies Explain “Grandfathering” http://www.jacksonlewis.com/legalupdates/article.cfm?aid=2099

Venable LLP article on Grandfathered Plan regulations: http://www.venable.com/files/Publication/7948335d-f3ac-4e10-9727-3959d1aa6094/Presentation/PublicationAttachment/eb569e95-25e0-46ee-ab87-543244fc7fb9/grandfathered_health_plans_7-22-10.pdf

Rev. 8/30/2010.

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