As we reported in our April 2010 Client Alert, the Patient Protection and Affordable Care Act (“PPACA”) ushers in a new era of healthcare reform in the United States. The government has since been busy preparing guidance on the details of PPACA’s new mandates for employer-sponsored health coverage. Perhaps most eagerly anticipated is the guidance on “grandfathered plans” under PPACA. Although PPACA imposes numerous requirements on group health plans with respect to employees that must be covered and the benefits that must be provided, plans that qualify for “grandfathered” status under the law are exempt from many of those requirements. Unfortunately, PPACA itself did not provide much information as to how to maintain grandfathered status. On June 14, 2010 the Department of Health and Human Services (“HHS”), the Department of Labor (“DOL”) and the Internal Revenue Service (“IRS”) jointly issued final interim regulations which detail when group health plans in existence on March 23, 2010 will either retain or lose grandfathered status. The regulations, which were published in the Federal Register on June 17, 2010, are effective immediately.
The following Q&As summarize the most significant grandfathered plan rules from the regulations. The rules reveal a rather stringent approach taken by the governmental agencies in determining when a grandfathered plan may lose its status as such.
What Is a Grandfathered Plan? A plan is grandfathered if it had at least one individual enrolled in group health coverage on March 23, 2010, and the policy or plan has continuously covered at least one individual since March 23, 2010.
How Is Grandfathered Status Lost? Generally, if any one or more of the following changes are made after March 23, 2010, the group health plan will lose its grandfathered status:
- Eliminating all or substantially all benefits to diagnose or treat a particular condition, including eliminating a necessary element to diagnose or treat a condition.
- Increasing the coinsurance percentage.
- Increasing a deductible or out-of-pocket maximum by more than medical inflation plus 15%.
- Increasing a copayment for any service by more than greater of (1) $5 (adjusted for medical inflation), or (2) medical inflation plus 15%.
- Decreasing the employer contribution toward the cost of any tier of coverage (for example, employee-only or family) by more than 5% below the contribution rate that was in place on March 23, 2010.
- Changing Certain Limits:
- If the plan did not impose lifetime or annual limits as of March 23, 2010, it will lose grandfathered status if those limits are later imposed.
- If the plan did impose a lifetime limit on benefits, but not an annual limit, the plan will lose its grandfathered status if it later establishes an annual limit on the dollar value of benefits that is lower than the dollar value of the lifetime limit on March 23, 2010.
- If a plan imposed an overall annual limit on the dollar amount of all benefits, it will lose grandfather status if the plan later decreases the dollar value of the annual limit.
What about adding New Employees? A plan may add new employees after March 23, 2010 without losing its grandfathered status. However, if the principal purpose of a corporate merger, acquisition, or restructuring is to cover new individuals under a grandfathered plan, the plan will lose its grandfathered status.
Are there any Administrative Requirements? In order to maintain grandfathered status, plans must maintain records documenting policy or plan terms that were in effect on March 23, 2010 and any other documents necessary to verify, explain, or clarify its status as a grandfathered plan. The plan must make its records available to participants and beneficiaries upon request. Also, the plan must include a statement in its description of plan benefits to participants that the plan believes it is grandfathered under PPACA, and it must provide contact information for the plan administrator and DOL (in the case of an ERISA plan) or HHS (in the case of an individual or nonfederal government plan). The DOL has made model language available at http://www.dol.gov/ebsa/grandfatherregmodelnotice.doc for purposes of satisfying this disclosure obligation.
Are there any Special Rules for Collectively Bargained Plans? For health insurance coverage maintained pursuant to a collective bargaining agreement ("CBA") that was ratified prior to March 23, 2010, the coverage is grandfathered until the CBA in effect on March 23, 2010 terminates.
What are the Transition Rules? The regulations include some transition rules for plans that made changes prior to enactment of PPACA and/or the interim final regulations on grandfathered status.
- Changes Adopted Prior to March 23, 2010: The transition rules provide that a policy or plan will not lose its grandfathered status based on changes adopted before March 23, 2010 (even if they take effect after March 23, 2010) so long as such changes were adopted pursuant to a legally binding contract, insurance filing, or written plan amendment.
- Good Faith Compliance: Plan changes adopted after March 23, 2010 but before issuance of the regulations that "only modestly exceed" the parameters established by the regulations will not cause the plan to lose grandfathered status if “good faith efforts to comply with a reasonable interpretation of PPACA” were taken when the changes were made.
- Grace Period: Plan changes adopted after March 23, 2010 (but before issuance of the regulations) that were significant and that violate the requirements for maintaining grandfathered status under the regulations will cause the plan to lose its grandfathered status unless the change is revoked by the first plan year beginning on or after September 23, 2010.
What Is the Bottom Line? Going forward, group health plans that are currently grandfathered will be able to make some limited changes in their coverage without losing their grandfathered status. Care should be taken when making any changes to a grandfathered plan in order to avoid inadvertently forfeiting the plan’s grandfathered status. If the plan loses its grandfathered status, it will thereafter be responsible for complying with all aspects of PPACA. Ultimately though, employers will need to weigh the benefits of maintaining a group health plan’s grandfathered status against the costs of doing so. In some cases, employers may find it more beneficial from an administrative and, perhaps, financial viewpoint to allow the plan’s grandfathered status to lapse and fully comply with PPACA.
In May 2010 the IRS, along with the DOL and HHS issued interim final rules providing guidance on the extension of health coverage under PPACA to children until age 26. As we communicated in our April 2010 Client Alert, PPACA requires all plans covering dependent children to provide health coverage until the dependent attains age 26.
Many group health plans that currently offer coverage to children require the child to satisfy certain criteria, such as maintaining full-time student status after the child has attained age 19. The regulations that have been issued prohibit employers from including such restrictions and clarify that, with respect to dependents who have not attained age 26, a plan may not define the term “dependent” for purposes of eligibility for coverage other than in terms of a relationship between the parent and child. The result of this change is that a plan may no longer require an adult child to be a full-time student or live with parents to remain eligible for group health coverage.
Grandfathered plans are not exempt from extending dependent health coverage to children until they have reached age 26. However, the regulations provide that for plan years beginning before January 1, 2014, a grandfathered plan may continue to exclude from coverage adult children who have not attained age 26 if the child is eligible to enroll in another employer-sponsored health plan.
The regulations also include a transitional rule for a child whose health coverage ended, or who was denied coverage because the plan’s coverage availability ended before the child attained age 26. Under the transitional rule, a plan is required to provide the individual with an opportunity to enroll by giving the child (or the employee who is the parent to such child) written notice of this opportunity and providing at least 30 days to enroll. The enrollment opportunity (including the written notice) must be provided no later than the first day of the first plan year beginning on or after September 23, 2010. Any child enrolling in group health plan coverage under the transitional rule must be treated as a “special enrollee” under HIPAA. Therefore, the child must be offered all the benefit packages available to, and the child cannot be required to pay more for coverage than similarly situated individuals who did not lose coverage by reason of cessation of dependent status. Model language appears on the DOL website at http://www.dol.gov/ebsa/dependentsmodelnotice.doc.
In June 2010, the IRS, DOL and HHS jointly issued interim final rules, dubbed the “Patient’s Bill of Rights,” under PPACA. For the most part, the Patient’s Bill of Rights offers little guidance beyond the provisions of the statute, with a few notable exceptions.
Prohibition on Lifetime Limits and Phase-out of Restricted Annual Limits
As we communicated in our April 2010 Client Alert, under PPACA, for plan years beginning on or after September 23, 2010, plans are prohibited from imposing lifetime limits on the amount of essential benefits available under the plan, and until January 1, 2014, plans are subject to restrictions on any annual limitations that are imposed on essential benefits.
The Patient’s Bill of Rights adopts a three-year phased approach for the restrictions on annual limitations as follows: annual limits may not exceed (1) $750,000 for plan years beginning between September 23, 2010 and September 22, 2011, (2) $1.25 million for plan years beginning between September 23, 2011 and September 22, 2012 and (3) $2 million for plan years beginning between September 23, 2012 and December 31, 2013. Thereafter, all annual limits are prohibited.
The Patient’s Bill of Rights also requires plans and issuers to give written notice to all individuals who reached a lifetime limit before the prohibition became effective (i.e., the first day of the first plan year beginning on or after September 23, 2010) but who otherwise still would be eligible under the plan or coverage. The written notice must provide that the lifetime limit no longer applies and that the individuals, if covered, are once again eligible for benefits under the plan. If such individuals are no longer enrolled, they must be given a 30-day enrollment opportunity. The notices and the enrollment opportunity must be provided beginning on or before the first day of the plan year beginning on or after September 23, 2010. The DOL has issued model language for this notice and enrollment opportunity, which is available at: http://www.dol.gov/ebsa/lifetimelimitsmodelnotice.doc.
Additional Patient Protections
The Patient’s Bill of Rights also requires group health plans and insurers to notify participants of their rights to: (1) choose a primary care provider or a pediatrician from the plan’s network and (2) obtain obstetrical or gynecological care without prior authorization. The notice must be provided no later than the first day of the first plan year beginning on or after September 23, 2010 and must be provided whenever the plan or issuer provides a participant with a summary plan description (or other similar description of benefits). The DOL has issued model language for this notice, available at: http://www.dol.gov/ebsa/patientprotectionmodelnotice.doc. These requirements do not apply to grandfathered plans.
The Preservation of Access to Care of Medicare and Beneficiaries and Pension Relief Act of 2010 (“Pension Relief Act”) was signed into law on June 25, 2010 in response to the continuing funding difficulties that pension plan sponsors have faced during the most recent economic downturn. The Pension Relief Act provides funding relief for both single-employer and multi-employer pension plans if certain conditions are satisfied.
Instead of the seven year amortization period that normally applies, single employer plan sponsors may choose to either (1) pay only interest on the plan’s amortization shortfall base for two years and then amortize principal over the following seven years or (2) extend the amortization period to fifteen years. As a condition to this relief, however, additional contributions must be made to the plan equal to the amount of any “excess compensation” (generally, $1,000,000 or more) paid to an individual by the plan sponsor or any controlled group member. Additional contributions also must be made if “extraordinary” dividends and redemptions are declared and paid by the plan sponsor. The Pension Relief Act establishes a detailed formula for purposes of determining when dividends and redemptions become extraordinary and thus require a contribution to the plan. This relief is available to a plan sponsor for a maximum of two years if the plan sponsor provides notice to participants and beneficiaries and file an election with the Pension Benefit Guaranty Corporation (“PBGC”). Future guidance will explain the procedure for making this election.
Multi-employer plans that satisfy a “solvency test” will be permitted to amortize (over a 30-year period) net investment losses for the two consecutive plan years ending on or after August 31, 2008. To satisfy the solvency test, the plan’s actuary must certify that the plan is projected to have sufficient assets to pay expected benefits and expenses over the amortization period, taking into account the funding relief available. Similar to single employer plans, a multiemployer plan that wishes to take advantage of this relief must make an election with the PBGC and notify participants and beneficiaries.
- The IRS’ 401(k) Plan Compliance Check. You may already have received a letter from the IRS as part of its new 401(k) Compliance Check Questionnaire Project that requires you to complete an on-line questionnaire. If you receive such a letter, keep in mind that you only have 90 days to complete and return it. We suggest that you print a copy of the questionnaire from the IRS website in order to ensure its careful and accurate completion. All responses should be consistent with previously filed Forms 5500.
- High-risk Participants. PPACA required the implementation of a High-risk Insurance Pool that went into effect on June 21, 2010. To be eligible for this reinsurance program, individuals generally must have a pre-existing condition and no creditable coverage for at least six months prior to applying for high-risk pool coverage. This generally will not impact employers, but beware! Keep in mind that PPACA imposes sanctions on insurance issuers or employer-provided health plans if “high risk” employees are encouraged to disenroll from the employer’s health plan in order to be eligible for the high-risk pool.
- Wellness Plans. Wellness plans are increasingly becoming an important tool employers use to help keep healthcare costs down. However, if not designed and implemented properly, HIPAA’s burdensome privacy, security, and portability requirements may apply. Consequently, if you are considering adopting a wellness program for your employees, you should ensure that it is carefully structured to avoid HIPAA’s application. Likewise, existing wellness plans should be reviewed periodically to ensure that proper steps continue to be taken to avoid falling into HIPAA’s trap.
- Executive Health Plans. Do not forget that fully insured executive health plans should be reviewed prior to the start of the first plan year that begins on or after September 23, 2010 to ensure that they satisfy the new nondiscrimination requirements imposed under PPACA. In short, PPACA mandates that insured health plans can no longer discriminate in favor of highly compensated individuals. The determination of whether a plan is discriminatory requires the application and analysis of a complicated set of tests already established under the Internal Revenue Code. For this reason, making an accurate determination whether your plans are or are not discriminatory is an important though difficult task in most instances. In fact, all insured health plans of an employer should likewise be reviewed with respect to this new requirement.
- Early Retiree Subsidy. Act fast if your group health plan provides benefits to early retirees (between ages 55 and 64)! As previously reported in our April 2010 Client Alert, PPACA established an early retiree reinsurance program. The program is intended to offset the costs of health claims for employers that provide health benefits for early retirees (ages 55 through 64) and will reimburse plan sponsors for 80% of the cost of benefits provided to early retirees and their spouses and dependents that are between $15,000 and $90,000. Interim final regulations were issued in May that detail eligibility for the program and the process for receiving reimbursements. The program was up and running in June and is scheduled to be available through January 1, 2014; however, it could end sooner if the $5 billion set aside for the program is exhausted in the meantime. Plan sponsors interested in participating must apply for the program and be certified by HHS. HHS began accepting applications for the program on June 29, 2010; because funds are limited, eligible plan sponsors should submit applications as soon as possible. The application is available here.
- Small Business Tax Credit under PPACA. Attention small employers! Don’t forget that you may be eligible to take advantage of the Small Business Health Care Tax Credit under PPACA if you (1) have fewer than 25 full-time equivalent employees for the tax year, (2) pay average wages of less than $50,000 per full-time employee, and (3) pay premiums under a “qualifying arrangement.” For tax years beginning in 2010 through 2013, the maximum credit is 35% of the employer’s premium expenses (25% in the case of tax-exempt qualified employers). The IRS recently issued Notice 2010-44, which provides clarification on: (1) determining whether an employer is eligible for the tax credit; (2) calculating the credit; and (3) claiming the credit and the effect on estimated tax, alternative minimum tax, and deductions.
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