Additional information released regarding grandfathered group health plans
April 6, 2011
The Departments of Health and Human Services, Labor and the Treasury released additional information regarding the interpretation of the grandfather provision.
As previously communicated in a Reform Alert, the health care reform law distinguishes between health plans that existed prior to the March 23, 2010, law enactment date and those that come into existence afterward. Individual and group health plans already in existence prior to enactment are referred to as "grandfathered" plans, and new health plans (or plans which have been materially modified after March 23, 2010) are referred to as "non-grandfathered" plans. This distinction is important because grandfathered health plans are, in some cases, exempt from certain reform requirements.
Like previously issued frequently asked questions, the newly-released FAQs aim to help people understand and benefit from the new law. Four of the more commonly asked questions are included below.
Click here to read the entire FAQ.
What are considered “bona fide employment-based reasons” for eliminating a benefit package that will not impact the grandfathered status of the other benefit packages?
While not exclusive, the reasons include:
- When a benefit package is being eliminated because the issuer is exiting the market;
- When a benefit package is being eliminated because the issuer no longer offers the product to the employer (for example, because the employer no longer satisfies the issuer's minimum participation requirement);
- When low or declining participation by plan participants in the benefit package makes it impractical for the plan sponsor to continue to offer the benefit package;
- When a benefit package is eliminated from a multiemployer plan as agreed upon as part of the collective bargaining process; or
- When a benefit package is eliminated for any reason and multiple benefit packages covering a significant portion of other employees remain available to the employees being transferred.
What happens to the grandfathered status of my plan when changes are made to the formulary due to the release of generic drugs where my plan’s cost-sharing level is based on whether the drug has a generic alternative and as a result of the newly available generic drug the cost sharing for the brand-name increases?
For example, if, as of March 23, 2010, the terms of the plan included prescription drug benefits with different cost-sharing divided into tiers as follows:
- Tier 1 includes generic drugs only;
- Tier 2 includes brand name drugs with no generic available;
- Tier 3 includes brand name drugs with a generic available in Tier 1; and
- Tier 4 includes IV chemotherapy drugs.
A drug was previously classified in Tier 2 as a brand name drug with no generic available. However, a generic alternative for the drug has just been released and is added to the formulary. Since the generic is now available, the plan moves the brand name drug into Tier 3 and adds the generic to Tier 1. This movement of the brand name drug into a higher cost-sharing tier does not cause the plan to relinquish grandfather status.
When changing a plan’s benefits, when does the plan become non-grandfathered?
A plan operating on a calendar plan year is considering an amendment to plan terms that will exceed the thresholds described in paragraph (g)(1) of the interim final regulations and cause it to relinquish grandfather status. If the plan sponsor decides to adopt this amendment on July 1, 2011, and the change becomes effective for the plan year beginning on January 1, 2012, at what point in time does the plan relinquish grandfather status?
A plan or coverage will cease to be a grandfathered health plan when an amendment to plan terms, which exceeds the thresholds described in paragraph (g)(1) of the interim final regulations, becomes effective – regardless of when the amendment is adopted. Therefore, in this example, the plan would cease to be a grandfathered health plan on January 1, 2012, the first day of the first plan year for which the change is effective.
A plan operating on a calendar plan year is considering an amendment to plan terms that will cause it to relinquish grandfather status, but wants the amendment to become effective before the first day of the next plan year. If the plan sponsor decides to make this amendment effective on July 1, 2011, does the plan relinquish grandfather status in the middle of the plan year?
Yes. A plan or coverage will cease to be a grandfathered health plan when a plan amendment becomes effective. Therefore, if a plan sponsor chooses to make an amendment to plan terms effective in the middle of a plan year, the plan will cease to be a grandfathered health plan at that time.
If a plan sponsor wishes to avoid relinquishing grandfathered status in the middle of a plan year, any changes that will cause a plan or coverage to relinquish grandfather status should be made effective the first day of a plan year that begins after the change is adopted.
A plan covers both retirees and active employees and is subject to the market reform requirements of the Affordable Care Act. For retirees, the employer that sponsors the plan contributes $300 per year multiplied by the individual's years of service for the employer, capped at $10,000 per year. As the cost of coverage increases over time, how is it determined whether the employer's contribution rate has decreased for purposes of maintaining grandfather status?
In this example, the employer makes contributions based on a formula. Accordingly, the plan will cease to be a grandfathered health plan if the employer decreases its contribution rate towards the cost of coverage by more than five percent below the contribution rate on March 23, 2010. If the formula does not change, the employer is not considered to have reduced its contribution rate, regardless of any increase in the total cost of coverage. However, if the dollar amount that is multiplied by years of service decreases by more than five percent (or if the $10,000 maximum employer contribution cap decreases by more than five percent), the plan will cease to be a grandfathered health plan.
The information on this website is based on BCBSM's review of the national health care reform legislation and is not intended to impart legal advice. Interpretations of the reform legislation vary, and efforts will be made to present and update accurate information. This overview is intended as an educational tool only and does not replace a more rigorous review of the law's applicability to individual circumstances and attendant legal counsel and should not be relied upon as legal or compliance advice. Analysis is ongoing and additional guidance is also anticipated from the Department of Health and Human Services. Additionally, some reform regulations may differ for particular members enrolled in certain programs such as the Federal Employee Program, and those members are encouraged to consult with their benefit administrators for specific details.