In November 2010, the Departments of Health and Human Services, Treasury, and Labor provided some relief to employers sponsoring fully insured group health plans by amending the interim final rules on grandfathered plan status under the Patient Protection and Affordable Care Act.
Through the amendments, the agencies eliminated the rule that certain insurance changes would cause a loss of grandfathered plan status, thus giving employers more flexibility in choosing insurance carriers and modifying their group health plans.
Grandfathered plans - group health plans and health insurance coverage existing as of March 23, 2010 - are exempt from certain provisions of PPACA.
For example, grandfathered plans are not subject to the requirement that preventive health services be covered without cost-sharing, or to PPACA's claims and appeals process rules.
The interim final rules on grandfathered plan status, issued in June 2010, provided that if an employer entered into a new policy, certificate or contract of insurance after March 23, 2010, the policy, certificate or contract of insurance would not be grandfathered.
For example, if an employer changed health insurance carriers after March 23, 2010, the group health plan would have ceased to be a grandfathered plan, even if the plan would have otherwise satisfied the grandfather rules, such as the rules prohibiting elimination of benefits and specific increases in cost-sharing.
Under the amended regulations, a plan can retain its grandfathered status under PPACA if it changes its carrier or enters into a new policy, certificate or contract of insurance with its existing carrier, provided that the plan has not made any other changes that would cause it to lose grandfathered status.
The regulations also state that if a plan has entered into a new policy, certificate,or contract of insurance, the plan must provide the new health insurance issuer with documentation of plan terms under the prior health coverage, such as a copy of the summary plan description describing the benefits, cost-sharing, employer contributions and annual limits under the plan.
This documentation must be sufficient for the new issuer and presumably, any investigating authority, to determine whether the plan has made any other changes that would cause it to lose grandfathered status.
Effective dates
Importantly, the new rule applies to changes in insurance policies or carriers that become effective on or after Nov. 15, 2010. For this purpose, the effective date is the operative date, not the date a new policy, certificate or contract of insurance is entered into.
For example, if an employer entered into an agreement with a new health insurance issuer on Sept. 28, 2010, for a new policy to be effective on Jan. 1, 2011, the employer may change carriers without losing the plan's grandfathered status.
In the preamble to the regulations, the agencies state that their decision to eliminate this particular rule was based on four principal concerns submitted by the public during the comment period.
Specifically, commenters took issue that the grandfather rules:
1. Treat fully insured group health plans differently from self-insured group health plans, which are permitted to change third-party administrators without losing grandfathered status;
2. Do not take into consideration circumstances in which a group health plan changes its issuer involuntarily, such as when an issuer withdraws from the market;
3. Unnecessarily restrict the ability of issuers to reissue policies to current plan sponsors for administrative reasons unrelated to any change in the underlying terms of the health insurance coverage, such as when an issuer consolidates a policy with its various riders or amendments; and
4. Give carriers undue and unfair leverage in negotiating the price of coverage renewals with the sponsors of grandfathered health plans, and this interferes with the health care cost containment that tends to result from price competition.
Although the amendments were issued late last year after most employers already had made significant changes to their health plans for the 2011 plan year, it has a significant impact on fully insured group health plans that have entered into new contracts of insurance or changed insurance carriers.
Such plans will be able to maintain grandfathered status, provided that they have not made any other changes that would cause them to lose it and that they supply employees with the required grandfathered plan notice in the plan materials.
Nondiscrimination requirements
In December 2010, the agencies provided additional relief to employers sponsoring fully insured group health plans by delaying the application of the nondiscrimination requirements under Section 105(h) of the Internal Revenue Code to such plans.
The nondiscrimination requirements under Section 105(h) of the Code generally prohibit discrimination in favor of highly compensated individuals as to eligibility and benefits and have historically only applied to self-insured group health plans.
PPACA incorporates the substantive nondiscrimination requirements under Section 105(h) and applies them to fully-insured group health plans, effective for plan years beginning on or after Sept. 23, 2010 to Jan. 1, 2011 for calendar year plans.
Under PPACA, fully insured plans that have retained grandfathered status would not be required to comply with Section 105(h) nondiscrimination requirements until grandfathered status is lost.
The agencies issued guidance delaying the application of the Section 105(h) nondiscrimination requirements to fully insured group health plans until "after regulations or other administrative guidance of general applicability has been issued" by the agencies.
The agencies recognized that, based on the public comments submitted in response to a previous request from the agencies regarding this provision of PPACA, plan sponsors are uncertain how to apply these nondiscrimination requirements to fully insured group health plans.
Primarily, this is because of the statutory language under PPACA, which requires that rules "similar to" the Section 105(h) nondiscrimination requirements be applied to fully-insured plans.
Therefore, fully insured group health plans will not be required to comply with the Section 105(h) nondiscrimination requirements until the agencies release guidance explaining how to apply these requirements to fully insured plans.
This guidance is welcomed relief for employers sponsoring fully insured group health plans that have lost grandfathered status, as the penalties for non-compliance with this provision of PPACA include an excise tax of $100 for each day.
In light of these particular changes, it appears that employers can be optimistic that the agencies are reviewing and considering the comments submitted by the public addressing the regulatory guidance under PPACA.
Contributing Editor Kate Bongiovanni is an associate in the tax section of Smith, Gambrell & Russell, LLP. She practices in employee benefits law, with a specific concentration in health and welfare matters, including compliance with PPACA, ERISA, HIPAA, FMLA and COBRA. She can be reached at
