Grandfathered Health Plan Rules Issued

06.23.2010 Grandfathered Health Plan Rules Issued Includes Guidance on Retiree-Only Plans and HIPAA Excepted Benefits Grandfathered health plans are subject only to a subset of the health care reform provisions imposed by the federal laws enacted in March 2010 ( PPACA ). 1 This newsletter summarizes recently issued interim final regulations that describe in greater detail what is a grandfathered health plan and the circumstances under which a plan may lose its grandfathered health plan status. 2 These regulations generally are effective immediately. What is a Grandfathered Health Plan A group health plan or group or individual health insurance with respect to individuals enrolled on March 23, 2010 is a grandfathered health plan (a Grandfathered Plan ) for as long as it maintains that status under the grandfathered health plan rules, described in greater detail below. The determination of Grandfathered Plan status is made separately with respect to each benefit package available under a group health plan or health insurance coverage. A plan or coverage will not lose its Grandfathered Plan status if any or all of the individuals who were enrolled on March 23, 2010 cease to be covered, as long as one person continues to be covered under the coverage provided on March 23, 2010. Generally, a plan will retain its Grandfathered Plan status even with the addition of new employees or if an employeeparticipant adds new dependents. Collectively Bargained Plans, Including Multiemployer Health and Welfare Funds. Health insurance coverage maintained pursuant to one or more collective bargaining agreements ratified before March 23, 2010, will be treated as a Grandfathered Plan until the date on which the last of the collective bargaining agreements relating to the health coverage that was in effect on March 23, 2010 terminates. Any amendments adopted solely for the purpose of conforming to the applicable PPACA requirements will not be treated as a termination of the collective bargaining agreement. Afterwards, the determination whether the plan is a Grandfathered Plan must be made under the same rules that apply to non-collectively bargained plans. BHFS Comment: This special rule for collectively bargained plans applies solely to health insurance coverage. The agencies writing the regulations have read this law narrowly and, as a result, this special rule applies only to fully insured arrangements and does not apply to self-funded plans that are maintained pursuant to one or more collective bargaining agreements. We hope that enough comments are submitted to persuade the agencies to expand this rule to include self-funded plans and/or that there will be a technical corrections bill to extend this rule to self-funded collectively bargained plans. We also hope that there soon will be guidance on what is meant by a collectively bargained plan (that is, what percentage of employees covered under the plan must be union employees, 100%, 50%, 20%). 3 1 Section 1251 of the Patient Protection and Affordable Care Act, Public Law 111-148, enacted on March 23, 2010, as modified by Section 10103 of that Act and Section 2301 of the Health Care and Education Reconciliation Act, Public Law 111-152, enacted on March 30, 2010. 2 These regulations are jointly issued by the IRS, DOL and HHS. See, 75 Federal Register 34538 (June 17, 2010); http://edocket.access.gpo.gov/2010/pdf/2010-14488.pdf. 3 Comments on these regulations are due by August 16, 2010. Page 1

Also, this special rule for collectively bargained plans does not delay the effective date by which insured plans must comply with PPACA requirements that generally apply to Grandfathered Plans. Impact of Corporate Transactions on a Plan s Grandfathered Plan Status. Corporate mergers, acquisitions and other corporate transactions should not impact a plan s Grandfathered Plan status unless the principal purpose of the transaction is to cover new individuals under a grandfathered health plan. In such a case, the plan s Grandfathered Plan status is terminated. BHFS Comment: A buyer in a corporate transaction will need to determine if a target has any grandfathered health plans and whether it is worth trying to retain that status. Ways to Lose Grandfathered Plan Status There are numerous ways a group health plan or health insurance coverage will lose its Grandfathered Plan status, and sponsors should carefully examine the impact of any action. Benefit Reduction or Elimination. A group health plan or health insurance coverage will lose its Grandfathered Plan status if, after March 23, 2010, the plan sponsor or issuer eliminates all or substantially all benefits to diagnose or treat a particular condition or eliminates benefits for any necessary element to diagnose or treat a condition (for example, if the plan is amended after March 23, 2010 to eliminate dialysis benefits). However, changes to plan design to comply with federal or state law or voluntary changes to comply with PPACA or increase benefits should not affect a plan s Grandfathered Plan status. It is unclear how an amendment that decreases or limits benefits in order to comply with applicable law would affect a plan s status (e.g., some of the changes permitted in order to comply with the new mental health parity and addiction law may result in benefit restrictions). The federal government is asking for comments as to whether Grandfathered Plan status should be impacted by changes to a prescription drug formulary, changes in provider network or changes in plan structure (e.g., switching from fully insured to self-funded). Increasing Employees Cost for Coverage. While an increase in the cost of plan coverage is not itself an event that would cause a plan to lose its Grandfathered Plan status, such status will be lost if the employer or issuer passes a significant portion of any cost increases onto participants. Specifically, a group health plan or health insurance coverage will lose its Grandfathered Plan status if, after March 23, 2010, the plan sponsor or issuer: Increases a percentage cost-sharing requirement (such as coinsurance) above the level at which it was on March 23, 2010. Increases fixed amount cost-sharing requirements, other than a copayment, such as deductibles or out-of-pocket maximum limits, by a total percentage measured from March 23, 2010 that is more than the sum of medical inflation plus 15%. Medical inflation is defined by reference to the overall medical care component of the Consumer Price Index for All Urban Consumers, unadjusted, published by the U.S. Department of Labor. Increases copayments by an amount that exceeds the greater of (a) a total percentage measured from March 23, 2010 that is more than the sum of medical inflation plus 15% or (b) $5 increased by medical inflation measured from March 23, 2010. Decreases the employer s contribution rate toward the cost of coverage by more than 5% below the employer s contribution rate on March 23, 2010. This is examined at each separate level of coverage (e.g., self, self+spouse, family, etc.). Page 2

Makes changes in annual limits after March 23, 2010 that are detrimental to participants, including: Adding an annual limit on the dollar value of benefits if the plan did not have any overall annual or lifetime limit on the dollar value of all benefits on March 23, 2010. Adding an overall annual limit at a dollar value that is less than the plan s overall lifetime limit as in effect on March 23, 2010. Decreasing the dollar value of the annual limit in effect on March 23, 2010 (regardless whether or not the plan has an overall lifetime limit in effect on March 23, 2010). However, an employee s voluntary election to change from one coverage option to another option during open enrollment or due to qualifying status change, even if such change results in a coverage cost increase to the individual participant, does not cause the plan to lose Grandfathered Plan status. Changing Insurers. A plan that changes insurers after March 23, 2010, even if that insurer offered the same coverage before March 23, 2010, loses its Grandfathered Plan status. However, a self-funded plan s change of its third party administrator should not result in the loss of Grandfathered Plan status. Certain Plan Transfers and Mergers. A plan will lose its Grandfathered Plan status if the employer transfers employees from one Grandfathered Plan into another Grandfathered Plan and if the transferee plan includes design features that, if such features were treated as an amendment to the transferor plan, would cause the transferor plan to lose Grandfathered Plan status, unless there is a bona fide employment-based reason for the transfer (such as, for example, a transfer to the acquirer s facilities). BHFS Comment: Acquiring companies will need to determine whether it is necessary to maintain a target s plan separately to maintain Grandfathered Plan status of its own plan. Also, employers considering streamlining and consolidating operations will need to examine the impact of such actions on the Grandfathered Plan status of its plans. Transition Rules. Changes effective after March 23, 2010 do not impact a plan s Grandfathered Plan status if these changes were made according to (a) a legally binding contract entered into on or before March 23, 2010, (b) a filing made on or before March 23, 2010 with a State insurance department or (c) written plan amendments adopted on or before March 23, 2010 and as long as those changes do not otherwise cause the plan to cease to be a Grandfathered Plan. BHFS Comment: If an employer has a contract under which plan changes automatically will be implemented after 2010, the employer will need to examine whether any of those changes would increase employees costs for coverage or reduce or eliminate benefits in such a way as to cause the loss of Grandfathered Status. In addition, changes made after March 23, 2010 and before the issuance of the interim final regulations describing Grandfathered Plans but which are revoked or appropriately modified as of the first day of the first plan year beginning after September 23, 2010, will not cause a plan or coverage to lose its Grandfathered Plan status. BHFS Comment: Employers have a limited period in which to revoke recent changes that impact Grandfathered Plan status and, therefore, should review with their insurers and third party administrators any amendments or automatic changes to their plans after March 23, 2010. Actions Required to Maintain Grandfathered Plan Status Employers will need to carefully weigh the advantages of maintaining Grandfathered Plan status against the employer s absorption of coverage cost increases and/or limitations on plan design modifications. If Page 3

an employer decides it is worth maintaining Grandfathered Plan status, the following actions must be taken in order to maintain Grandfathered Plan status: Disclose Grandfathered Plan Status. Plan materials provided to participants and beneficiaries must include a statement that (i) describes the benefits provided, (ii) states the belief that the coverage is a grandfathered plan within the meaning of PPACA 1251 and (iii) provides the plan administrator s and the DOL s or HHS s contact information for questions and complaints. The interim final regulations include the following model language intended to satisfy this 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 website 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.] BHFS Comment: The regulations do not address whether there is a deadline by when this statement must be distributed. Maintain Documentation of March 23, 2010 Coverage. The plan or issuer must maintain records documenting the terms of the plan or coverage that were in effect on March 23, 2010 and such other documents as may be necessary to verify, explain or clarify its status as a Grandfathered Plan. These documents must be maintained for as long as the plan claims to be grandfathered. These documents must be made available for examination when requested by the government, as well as by participants and beneficiaries. BHFS Comment: Sponsors of selffunded plans that rely on third party administrators likely will need to negotiate with their service providers as to what is appropriate documentation and the parameters for retention and production of this documentation and its production when requested. How PPACA Applies to Grandfathered Plans Grandfathered Plans are only required to comply with a subset of the PPACA s requirements under subtitles A and C of title I of the PPACA. The DOL published a table summarizing the application of PPACA s health reform provisions to Grandfathered Plans. This table can be found at: http://www.dol.gov/ebsa/pdf/grandfatherregtable.pdf. Clarification Regarding Retiree-Only and HIPAA Excepted Benefits The preamble to the interim final regulations clarifies that (i) retiree-only plans and HIPAA excepted benefits are not subject to PPACA s insurance market reform provisions and (ii) if such plans are subject to PPACA, the HHS will not take any enforcement action. This means that PPACA will not be applied to: Page 4

Plans sponsored by non-governmental employers and that cover participants of which fewer than two are active employees (because the small employer exception remains in effect under ERISA and the Code); Plans sponsored by governmental employers and that cover participants of which fewer than two are active employees (because although PPACA removed the small employer exception from the PHSA, HHS is not going to take any enforcement action); and HIPAA-excepted benefits, including, for example, separate limited-scope benefits (e.g., dentalonly or vision-only plans, long-term care benefits), accident only coverage (e.g., AD&D insurance), disability income coverage, liability insurance (e.g., automobile liability insurance or automobile medical payment insurance), supplemental coverage (e.g., Medigap, MedSupp, TRICARE), workers compensation insurance coverage, independent and non-coordinated disease-only coverage (e.g., cancer insurance policies), coverage for on-site medical clinics, and certain fixed indemnity plans. 4 BHFS Comment: We do not think that wrapping a vision or dental plan together with a medical plan so as to be able to file a single Form 5500 impacts this exception. The following Brownstein attorneys are ready to help you with your benefits issues, so please contact any one of them with your questions: Nancy A. Strelau 303-223-1151 nstrelau@bhfs.com Andrew S. Brignone 702-464-7006 abrignone@bhfs.com Adam P. Segal 702-464-7001 asegal@bhfs.com Irene F. Gallagher 303-223-1124 igallagher@bhfs.com Cara S. Elias 303-223-1141 celias@bhfs.com Xanna R. Hardman 702-464-7016 xhardman@bhfs.com Jason S. Jeskey 702-464-7037 jjeskey@bhfs.com Dana B. Krulewitz 702-464-7042 dkrulewitz@bhfs.com This document is intended to provide you with general information about employee benefits issues. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorney listed below or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions. Albuquerque Office 201 Third Street NW Suite 1700 Albuquerque, NM 87102 T 505.244.0770 Denver Office 410 Seventeenth Street Suite 2200 Denver, CO 80202 T 303.223.1100 Las Vegas Office 100 City Parkway Suite 1600 Las Vegas, NV 89106 T 702.382.2101 Santa Barbara Office 21 East Carrillo Street Santa Barbara, CA 93101 T 805.963.7000 Washington, DC Office 1350 I Street, NW Suite 510 Washington, DC 20005 T 202.296.7353 Timothy R. Van Valen Gregory W. Berger Cara S. Elias Andrew C. Elliott Irene F. Gallagher Neil M. Goff Marybeth K. Jones Nancy A. Strelau Andrew S. Brig none Xanna R. Hardman Jason S. Jeskey Dana B. Krulewitz Adam P. Segal 2010 Brownstein Hyatt Farber Schreck, LLP. All Rights Reserved. Steven Jung Michelle Lee Pickett Christine E. Ray George G. Short Michael B. Levy 4 See, 26 C.F.R. 54.9831-1, 29 C.F.R. 2590.732, and 45 C.F.R. 146.145 and 148.220. Page 5