Group health plans in existence on March 23, 2010, when health care reform was enacted, are not required to comply with certain plan requirements under health care reform (further described in the chart below). However, new interim final regulations set out specific requirements that a group health plan must comply with in order to maintain grandfathered plan status. While for some plans, employers may find grandfather status to be valuable, other employers may determine that the advantages of grandfather status are relatively minimal – especially when compared to the limitations placed on an employer's ability to make cost containment changes to the plan without jeopardizing its grandfather status.

Advantages of grandfather status

Grandfathered plans have exemptions from, or special treatment under, certain health care reform provisions. Below is a chart describing the health care reform provisions that do NOT apply (or have special application) to grandfathered plans. Accordingly, the loss of grandfather status would mean the non-grandfathered plan would have to comply with the identified health care reform provisions.

In general, any of the following changes which reduce benefits or increase costs for participants would cause a plan to lose its grandfather status:

1) The elimination of all or substantially all benefits to diagnose or treat a particular condition;

2) Any increase in a percentage cost-sharing requirement, such as an individual's coinsurance, above the amount that applied on March 23, 2010;

3) An increase in a fixed-amount cost-sharing requirement that applied on March 23, 2010 other than a copayment (for example, deductible or out-of-pocket limit) by a total percentage that is more than the medical inflation percentage rate plus 15%;

4) An increase in a fixed-amount copayment that applied on March 23, 2010 by more than the greater of $5 (increased for medical inflation) or the medical inflation percentage rate plus 15%;

5) A decrease by an employer in its contribution rate towards the cost of any tier of coverage for any class of similarly situated individuals by more than 5% below the employer's contribution rate for the coverage period that included March 23, 2010; or

6) The imposition of a new overall annual limit or a decrease in the amount of an existing annual limit on the dollar value of benefits.

Grandfathered plans may also lose their status if they transfer employees to another plan or plan option without a bona fide employment-based reason for the transfer.

A special rule applies to insured collectively bargained plans. Such plans maintain grandfather status, even if changes are made, until the last collective bargaining agreement in effect on March 23, 2010 terminates. At that time, the collectively bargained plan either retains or loses grandfather status, depending on the changes made compared to the plan in effect on March 23, 2010.

The interim final rules provide that the following changes will generally not cause a plan to cease to be grandfathered: changes to premiums, changes to comply with federal or state legal requirements, changes to voluntarily comply with provisions of health care reform, and changes in the plan's third party administrator. However, the rules request comments on whether certain other changes not currently addressed in the rules should result in cessation of grandfather status, such as changes to plan structure (switching from self-funded to fully insured, or from a health reimbursement arrangement to major medical coverage), changes in a network plan's provider network, changes to a prescription drug formulary, or any other substantial changes to the overall benefit design. The regulations provide that any new standards published in the final regulations that are more restrictive would only apply prospectively to changes to plans after the publication of the final rules.

Whether to Preserve Grandfather Status

Employers may instinctively think that it is critical to maintain grandfather status. Now that the limits of grandfather status are clarified, employers may want to engage in a cost-benefit analysis. A determination of whether or not it is important to keep grandfather status will require a separate analysis for each benefit package option under a plan. Employers will want to consider the long-term value of preserving grandfather status for a particular benefit package option (based on the exemption or delayed effective date of various health care reform provisions described in the chart below) as compared to the short-term need to modify plan structure in order to control premium costs or achieve other business objectives.

The following Health Care Reform provisions apply ONLY if
grandfathered status is lost:

This chart applies only to self-funded group health plans. Other provisions will apply to fully insured plans.

*This chart assumes the plan year is the calendar year.