Health Care Reform Update - Grandfathered Plans

Health Care Reform Update: Clarification on "Grandfathered" Plans

As discussed in last week's issue of EmployNews , President Obama recently signed into law the Patient Protection and Affordable Care Act and the Health Care & Education Reconciliation Act of 2010 (together, the "Acts"). Last week's article had a brief discussion regarding "grandfathered" health plans and the applicability of the Acts to such plans. After receiving additional guidance on "grandfathered" health plans, the following provides clarification and additional information on such plans and answers some questions regarding this exception from certain provisions of the Acts.

What is a "grandfathered" health plan?

A "grandfathered" health plan is any group health plan or individual coverage that was in effect on the date of the Acts' enactment on March 23, 2010. "Grandfathered" status is important under the Acts as certain provisions of the Acts do not apply to grandfathered plans (or at least to many participants under "grandfathered" plans), or apply to such plans at a later date. There remain many questions regarding "grandfathered" plans and the extent to which "grandfathered" status will apply. It is hoped that future guidance will provide clarification of these issues.

What provisions of the Acts apply to "grandfathered" health plans in the short-term?

The following lists some of the key provisions of the Acts that apply to "grandfathered" health plans with plan years beginning on or after September 23, 2010:

•Dependent Coverage Until Age 26 - The Acts require group health plans (including "grandfathered" health plans) that cover dependents to provide coverage for dependent children until they reach age 26, regardless of student status or marital status. However, for plan years beginning before January 1, 2014, coverage need not be offered by a "grandfathered" plan if a dependent is eligible to enroll for coverage under another employer-sponsored group health plan.

•Restrictions on Annual and Lifetime Limits - Group health plans (including "grandfathered" health plans) may not impose lifetime limits or "unreasonable" annual limits on the value of "essential benefits" for any plan participant or beneficiary. For plan years beginning on or after January 1, 2014, group health plans (including "grandfathered" health plans) may not impose any annual limit on such essential benefits. The definition of "essential benefits" will be determined by Department of Health and Human Services regulations.

•Prohibition on Retroactive Cancellation of Coverage - Group health plans (including "grandfathered" health plans) may not retroactively cancel a participant's coverage once the participant is enrolled in the plan unless the individual has engaged in fraud or made an intentional misrepresentation of a material fact. Prior notice requirements also apply.

•Restrictions on Preexisting Conditions - The Acts mandate that group health plans (including "grandfathered" health plans) may not impose any preexisting condition exclusions for eligible children under age 19. In the future, this mandate will be expanded, and for plan years beginning on or after January 1, 2014, group health plans may not impose any preexisting condition exclusions for any individual.
The following key provisions of the Acts apply to "grandfathered" health plans beginning on January 1, 2011:

•W-2 Reporting of Health Benefits - Employers will be required to report the value of health benefits on an employee's IRS Form W-2.

•No Reimbursement of Over-the-Counter Medicine or Drug Purchases - Health flexible spending accounts, health reimbursement arrangements, and health savings accounts may no longer reimburse purchases of over-the-counter medicines or drugs (except insulin) without a prescription from a doctor.

What provisions of the Acts do not apply to "grandfathered" health plans?

"Grandfathered" health plans are excluded from the following provisions of the Acts so long as the plan maintains its "grandfathered" status:

•Preventative Care Benefits - For plan years beginning on or after September 23, 2010the Acts require that group health plans (other than "grandfathered" health plans) offer certain preventative care benefits, such as immunizations and breast cancer screening, on a first-dollar basis, without cost to participants.

•Nondiscrimination Testing - Currently, the existing Internal Revenue Code rules for nondiscrimination testing apply only to self-insured plans. For plan years beginning on or after September 23, 2010, the Acts require that fully-insured health plans (other than "grandfathered" health plans) apply the same nondiscrimination tests in an effort to discourage plans that cover only high-ranking employees.

•External Review of Claim Denials and Appeals - For plan years beginning on or after September 23, 2010, group health plans (other than "grandfathered" health plans) must provide a mechanism in their claims procedures for an external review process, among other things.

How can a plan lose "grandfathered" status?

It currently appears that a plan will not lose its "grandfathered" status if new employees (and their dependents) are enrolled in the plan after March 23, 2010. A plan also will not lose its "grandfathered" status even if an individual, who was enrolled in the plan on March 23, 2010, chooses to add their dependents to the plan after March 23, 2010, so long as the plan offered dependent coverage prior to March 23, 2010. However, at this point, it is not clear whether a plan would lose its "grandfathered" status under the Acts if design or benefit changes are made to the plan. We anticipate more guidance on this aspect of "grandfathered" plan status.

Plan sponsors whose plans were in effect on March 23, 2010, and fall under the "grandfathered" plan exception should review the terms of their plans and become acquainted with the provisions of the Acts that will apply in the near future. Additionally, plan sponsors should continue to review future guidance as it is released and ensure that their plans continue to remain in compliance with the terms of the Act. As future guidance is released, we will be providing additional alerts on this landmark legislation.

Note: In some cases, the effective date for the provisions of the Acts described above may differ for collectively bargained plans.

ParkerPoe, EmployNews, Issue 564