TAX NEWS - 2010

US Tax: Guidance addresses 'grandfathered health plans' under Patient Protection Act

The Departments of Health and Human Services, Labor, and Treasury released eagerly anticipated regulations June 14 on issues related to "grandfathered health plans" under comprehensive health care reform legislation that was signed into law in March.

The Patient Protection and Affordable Care Act (PPACA) imposes many new requirements on employer-sponsored group health plans. A "grandfathered health plan" is exempt from some of these requirements, but only for as long as it remains grandfathered. The PPACA does not specify what changes cause plans to lose grandfathered status. The regulations fill that gap and clarify several other significant issues relating to grandfathered status. Notably, the regulations provide that:

- A grandfathered health plan is one that has continuously covered someone since March 23, 2010. This does not mean a specific individual (or individuals) must have been continuously covered since March 23, 2010.

- Grandfathered status is determined separately for each benefit package available under a plan, so it is possible to lose grandfathered status for one benefit package and retain it for others within a plan.

- Employers that have implemented changes to plans since March 23, 2010, that otherwise would cause them to lose grandfathered status might still have the opportunity to undo those changes to save that status.


Changes that will cause plans to lose grandfathered status

The guidance identifies a number of changes that will cause a plan to lose grandfathered status.

Obtaining a new insurance contract – If the plan sponsor enters into a new policy, certificate, or contract of insurance after March 23, 2010, then the new policy, certificate, or contract of insurance is not a grandfathered health plan. Sponsors of fully insured plans must renew the insurance contract in effect on March 23, 2010, to maintain grandfathered status.

Self-insured plans cannot be converted to insured plans without losing grandfathered status even if no other changes are made to the plan's benefits, cost-sharing requirements, and other terms and conditions.

Eliminating benefits – A plan will lose its grandfathered status if all or substantially all benefits to diagnose or treat a particular condition are eliminated. This includes eliminating benefits for any necessary element to diagnosing or treating a condition.

A plan will lose its grandfathered status if there is any increase to an individual's coinsurance percentage requirement (or other percentage cost-sharing requirement) measured from March 23, 2010. Other cost-sharing increases may cause a plan to lose grandfathered status if the increase exceeds certain specific thresholds.

- In the case of fixed-amount cost-sharing requirements other than copayments – such as deductibles or out-ofpocket maximums – grandfathered status will be lost if the total percentage increase (measured from March 23, 2010) exceeds the "maximum percentage increase" (the increase in the overall medical care component of the Consumer Price Index for All Urban Consumers (CPI-U) since March 2010, plus 15 percentage points). Note that the CPI-U medical care component index was 387.142 in March 2010 and has been increasing approximately 3.8 percent annually over the past several years. If this average trend continues for the remainder of 2010, it is expected that the increase from March 2010 to January 2011 will be approximately 3 percent. Thus, the "maximum percentage increase" for calendar 2011 is expected to be approximately 18 percent.

- In the case of copayments, grandfathered status will be lost if the total increase in the copayment (measured from March 23, 2010) exceeds the greater of $5 (increased by medical inflation) or the "maximum percentage increase." Decreasing employer premium contributions – A plan will lose its grandfathered status if:

- The employer's contribution is based on the cost of coverage, and the employer decreases its contribution rate for any tier of coverage for any class of similarly situated individuals by more than 5 percentage points below the contribution rate for the coverage period including March 23, 2010.

- The employer's contribution is based on a formula (for example, hours worked) and the employer decreases its contribution rate for any class of similarly situated individuals by more than 5 percentage points below the contribution rate for the coverage period including March 23, 2010.

The contribution rate is the employer's contribution compared with the total cost of coverage, expressed as a percentage. (For self-insured plans, the total cost of coverage is the plan's COBRA premium.) Note that the dollar amount of employer and employee contributions may increase as the total cost of coverage increases without changing the employer's contribution rate. However, freezing the dollar amount of employer contributions will lead to a reduction in the employer's contribution rate as the total cost of coverage increases.

Adding new annual limits or reducing existing ones – A plan will lose its grandfathered status if:

- It did not impose an overall annual or lifetime limit on the dollar value of benefits on March 23, 2010, but subsequently imposes an overall annual limit on the dollar value of benefits.

- It imposed an overall lifetime limit, but no overall annual limit, on the dollar value of benefits on March 23, 2010, and subsequently imposes an overall annual limit at a dollar limit that is below the lifetime limit on March 23, 2010.

- It imposed an overall annual limit on the dollar value of benefits on March 23, 2010, and subsequently decreases the dollar value of the annual limit.

In addition to the potential consequences for grandfathered status, any changes with respect to overall lifetime or annual limits also must comply with the PPACA's new restrictions on such limits. No overall lifetime limits are permitted for plan years beginning on or after September 23, 2010, and overall annual limits are banned for plan years beginning on or after January 1, 2014. (Future regulations will address "restricted annual limits," which are permitted until the ban on overall annual limits takes effect.) These restrictions apply to all group health plans, including grandfathered plans.


Anti-abuse provisions

The guidance also identifies two circumstances that will cause a plan to lose its grandfathered status even if none of the specific changes discussed above have occurred. The first involves transferring employees from one grandfathered plan to another to effect changes that, if made directly to the transferor plan, would result in the loss of grandfathered status (unless there was a bona fide employment-based reason for the transfer).

The second involves transferring new employees to a grandfathered plan pursuant to a merger, acquisition, or business restructuring. In this case, the grandfathered plan will lose that status if the principal purpose of the transaction is to cover new individuals under the grandfathered plan. The "principal purpose" language is key because it confirms a grandfathered plan can be a successor plan in legitimate business transactions and not necessarily lose its grandfathered plan status.


Collectively bargained plans

Special rules apply to plans maintained pursuant to one or more collective bargaining agreements. These plans will not lose grandfathered status before the termination of the last collective bargaining agreement in effect on March 23, 2010. The plan terms in effect after the last of these collective bargaining agreements terminates will be compared to the terms in effect on March 23, 2010, to determine if the plan's grandfathered status will continue.


Special relief for pre-guidance plan changes

The guidance recognizes that some plans already have implemented changes that would cause them to lose grandfathered status, and that some of these changes would not have been made if the plan sponsors had known the consequences. As a result, the guidance provides special relief to help some of these plans maintain grandfathered status in limited circumstances.

The first situation involves changes made pursuant to written plan amendments adopted (or legally binding agreements entered into) on or before March 23, 2010, but not effective until after that date. The guidance treats these modifications as part of the plan's terms on March 23, 2010, so they will not cause a loss of grandfathered status.

The second situation involves changes made after March 23, 2010, and adopted before June 14, 2010 – the date the guidance was issued. The guidance allows the plan sponsor to revoke or modify these changes effective as of the first day of the first plan year beginning on or after September 23, 2010, to preserve the plan's grandfathered status.

Finally, the guidance provides that regulators may disregard certain plan changes adopted before June 14, 2010, if based on a good-faith effort to comply with a reasonable interpretation of the statutory requirements. However, only changes that "modestly exceed" the acceptable thresholds will be disregarded under this provision.


Notice and recordkeeping requirements

To maintain grandfathered status, the plan must disclose that it believes it is a grandfathered health plan and provide contact information for questions and complaints in any materials given to participants and beneficiaries that describe the plan's benefits (for example, the summary plan description or SPD). The guidance provides model language that can be used to satisfy this requirement. The plan also must maintain sufficient records to verify its status as a grandfathered plan. These records must be available for examination by participants, beneficiaries, and government officials.


Smart first steps

Many employers have been concerned about making any changes to their plans since the PPACA was enacted. The guidance largely eliminates that uncertainty by drawing clear distinctions between the changes that will and will not cause a loss of grandfathered status – just in time for many employers to make decisions about the changes they want to implement for the upcoming 2011 plan year.

From a long-term planning perspective, employers now have the information needed to begin comparing the benefits of grandfathered status with the cost of maintaining that status over an extended period. This type of analysis can be a key element of some employers' strategic planning for PPACA implementation.