Mooney, Green, Baker & Saindon, P.C.

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Telephone: 202-783-0010
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Spring 2010

  This is one of a continuing series of updates on recent developments in the law affecting labor rights and employee benefit plans.

HEALTHCARE REFORM “GRANDFATHER” REGULATIONS RELEASED      

    The Departments of Health and Human Services, Labor and Treasury have released their long-awaited regulations regarding the “grandfathering” of health plans under the recently-enacted healthcare reform laws. Because they are drafted as interim final regulations, they are effective upon publication, scheduled for June 17, 2010. Nevertheless, there will be a sixty-day comment period, which should end August 16, 2010. Under the two separately-passed statutes that constitute the healthcare reform law, the Patient Protection and Affordable Care Act (“PPACA”) and the Health Care and Education Reconciliation Act (“Reconciliation Act”) (collectively the “Reform Acts”), the mandates of the new law generally apply to plans and individual insurance policies as early as the first day of the first plan year beginning after September 23, 2010. (See the chart at the end for a list of effective dates.) For calendar year plans, this would be January 1, 2011. The Reform Acts contain an exemption for “grandfathered” plans from some of these requirements. Exactly how the Reform Acts’ mandates apply to certain grandfathered plans, particularly collectively bargained plans, has been a subject of much controversy—controversy now largely resolved by these regulations. Plans can be grandfathered in either of two ways. First, any plan in effect on March 23, 2010, the date of the PPACA’s enactment, is automatically grandfathered, provided nothing happens to change its status (as explained below). Second, a plan that is collectively bargained is grandfathered until the last collective bargaining agreement in effect on March 23, 2010 expires. With regard to collectively bargained plans, however, the agencies have narrowly read both the scope and affect of grandfathering.

On June 11, the agencies released a draft of these regulations. This summary has been revised to reflect the contents of the final version released on June 14, 2010.

Collectively Bargained Plans

               The controversy surrounding the grandfathering of collectively bargained plans generally centers on two issues. First, the question is whether the Reform Acts’ mandates applicable to other grandfathered plans are also applicable to collectively bargained plans. These regulations answer that question in the affirmative: all grandfathered plans, including those that are collectively bargained, are treated the same with regard to the applicability of the Reform Acts’ mandates.   (See chart at end for a list of mandates, including which ones are applicable to grandfathered plans.) The second question is whether the grandfathering of collectively bargained plans applies to all collectively bargained plans or only to insured plans. These regulations indicate that the agencies have concluded that the special rules applicable to collectively bargained grandfathered plans only apply to insured plans. In order for a self-insured collectively bargained plan to be grandfathered, it must meet the general requirements for a grandfathered plan.

                The regulations clarify that, upon the expiration of the last collective bargaining agreement in effect on March 23, 2010, a collectively bargained plan will lose its grandfathered status unless it would otherwise be considered grandfathered under the general grandfathering rules. The regulations also explain the principal difference between those general rules and the collective bargaining rules. For a plan to comply with the general grandfathering rules, it must have been adopted or in place as of March 23, 2010. A collectively bargained plan, however, can be grandfathered even if the insurance policy was not in place until after March 23, as long as the relevant collective bargaining agreements were ratified prior to the March 23 date. Furthermore, collectively bargained changes made after March 23 will not cause a plan to lose its grandfathered status, provided the changes are solely for the purpose of complying with requirements of the PPACA.

General Grandfather Rules

                Under the general rule, a plan is grandfathered based upon its terms in effect as of March 23, 2010.  Changes that became effective later will also be considered in effect on March 23, provided they were made pursuant to a plan amendment adopted on or prior to March 23, a legally binding contract entered into on or before March 23, or a filing with a state insurance department made on or prior to March 23. 

A plan will lose its grandfathered status under the following conditions:

Ø                  If it eliminates coverage, or a necessary element of treatment, for a particular health condition;

Ø                  For copayments or other cost-sharing stated as a percentage, if it increases the employees’ percentage cost (e.g., going from an 80-20 plan to a 75-25 plan);

Ø                  For cost-sharing other than copayments (e.g., deductibles and out-of pocket limits) stated as a dollar amount, if the total percentage increase exceeds the total of medical inflation (i.e., the medical care component of CPI-U, unadjusted, as of March 2010) plus 15 percentage points;

Ø                  For copayments stated as a dollar amount, if the total increase exceeds the greater of the percentage increase permitted for other types of cost-sharing or $5;

Ø                  If it adds new annual or lifetime caps or reduces existing ones; or

Ø                  If the share of plan costs (as calculated for COBRA purposes) payable by employers (i.e., not payable by employees) is reduced by more than 5%, or, in the case of a plan supported by formula-based contributions (e.g., hourly or tonnage rates), the employer contribution rate for any tier of benefits is reduced by more than 5%.

What this means is that many other types of changes will not result in a plan losing its grandfathered status.  For example, benefit increases, new or revised cost containment measures, network changes, formulary revisions, coverage changes, changes in premiums, and much more will not cause a plan to lose its grandfathered status, as long as they do not result in one of the six conditions listed above.  Furthermore, the entry of new employees and family members into a plan does not affect its grandfathered status.  In fact, a plan will not lose its grandfathered status even if it has had a complete turnover of its participant population, as long as it has provided continuous coverage since March 23, 2010.  On the other hand, under an anti-abuse rule, a plan will lose its grandfathered status if an employer moves employees into the plan from another plan for other than “bona fide employment based reasons.”   Under a separate rule, a plan will not lose its grandfathered status for moving new employees into a plan following a corporate merger or other restructuring, unless the principal purpose of the merger or restructuring was to put the employees into the plan.

The regulations also clarify that each package of benefits offered by a plan is considered separately for purposes of grandfathering.  This means that one package of benefits in a single plan can be grandfathered even if a different benefit package is not. 

                Furthermore, some changes that would normally cause a plan to lose its grandfathered status will not do so under a special transition rule.  To qualify under the rule, the changes must have been adopted before the release of the regulations, and they must be revoked prior to the first day of the first plan year beginning on or after September 23, 2010.  Additionally, if a plan has adopted rules on a good faith basis before the date of the release of the regulations that only modestly exceed the thresholds that would ordinarily cause them to lose grandfathered status, the agencies have indicated that they may exercise their discretionary authority to not strictly enforce the rules.

                The regulations also require that a statement that a plan is grandfathered be included in participant communications.  Included in the regulations is a model paragraph that satisfies the notice requirement.  Furthermore, a plan must maintain records demonstrating that it is in fact eligible for grandfathering, which must be made available upon request to participants and beneficiaries, as well as to government officials.

Other Issues

                The regulations also provide guidance on a number of other points. Among other things, they clarify that state laws that impose greater requirements on health plans, to the extent they are not otherwise preempted, are not preempted by the Reform Acts. They also clarify that the mandates of the Reform Acts do not apply to employee benefit plans that cover fewer than two active employees nor to retiree-only plans. The chart that follows, prepared by the agencies and included in the draft regulations (although not included in the final version), provides an overview of the implementation dates of the various mandates under the Reform Acts for both grandfathered and non-grandfathered plans.

                We will keep you advised as matters develop.  If you have any questions, please contact us.

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Effective Dates of the Health Reform Mandates and Applicability to Grandfathered Health Plans

Note: This chart was prepared by the agencies as part of the draft regulations released on June 11, 2010. Although it was not included in the final version, we have retained it here.

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This Newsletter provides an update on current legal developments, and is not intended as legal advice.  Copyright © 2010 Mooney, Green, Baker & Saindon, P.C.