The Patient Protection and Affordable Care Act ("Act"), commonly referred to as Health Care Reform, was passed earlier this year and requires employers to make changes to their health plans, fulfill certain notice obligations, and adhere to numerous administrative requirements in order to bring their plans into compliance with the Act. Many of the new requirements under the Act apply to plan years starting after September 23, 2010, and are therefore effective January 1, 2011 for calendar year plans. This means that if you maintain a calendar year plan, plan changes are required to be made, and notice requirements fulfilled, before 2011. In addition, if you are currently putting together your open enrollment materials for the 2011 year, changes may need to be included in those materials.
To assess what changes Health Care Reform requires for your company's group health plan for 2011, you will need to make the following determinations:
- Is your Plan "grandfathered" for purposes of the Act?
- Even if your Plan is grandfathered, what requirements of the Act must you comply with as of 2011?
- If your Plan is not a grandfathered one, what additional requirements of the Act must you comply with as of 2011?
- What amendments must be made to your cafeteria plans, including any flexible spending accounts, in connection with the Act?
- Are there other new medical plan mandates that need to be addressed now?
The remainder of this Advisory responds to each of these questions in a summary fashion. We are happy to assist you in analyzing each of these issues in the context of your company's own health plans. We note that this Advisory addresses only the Act's changes applicable to plans beginning in 2011; both grandfathered and non-grandfathered plans are required to comply with additional changes in later plan years. We will continue to update you as new Health Care Reform requirements become applicable to health plans and new guidance is issued.
Is Your Plan a "Grandfathered" One?
For plans that meet the Act's definition of "grandfathered," the effective date for many of the requirements under Health Care Reform is delayed until a later year or until the plan loses its grandfathered status, if that happens first. A plan is generally grandfathered if it was in existence on, and has had at least one participant since, March 23, 2010, and has not lost its grandfathered status due to certain plan changes or a violation of the grandfathered plan anti-abuse rules. Sponsors of grandfathered plans must include a notice about the plan's grandfathered status in any materials describing the plan's benefits. Grandfathered status is not relevant to certain types of plans because many of the Act's reforms are not applicable to those plans, referred to in this Advisory as "Excepted Plans"; Excepted Plans include dental-only plans, vision-only plans, most health flexible spending arrangements, retiree-only plans, and plans with fewer than two participants who are current employees, provided (i) such plans are offered under a separate policy or contract, (ii) participants may elect not to receive the coverage, and (iii) participants electing the coverage must pay an additional premium.
At the end of this Advisory is Schedule A, a more detailed discussion, in Question and Answer format, of what allows a plan to qualify as grandfathered, and what will cause a plan to lose its grandfathered status.
What Health Care Reform Changes Apply to All Plans as of 2011?
Certain requirements of Health Care Reform are effective and must be complied with as of the 2011 plan year for both grandfathered and non-grandfathered plans, other than Excepted Plans. These requirements include the following:
- The plan must provide coverage to children up to age 26 (unless they are eligible for coverage under another non-parent plan). Additionally, a 30-day special enrollment opportunity must be offered to children under age 26 where their coverage previously ended, or they were not eligible for coverage because the availability of dependent coverage of children ended before the attainment of age 26 (and in some cases the special enrollment opportunity must also be offered to a parent who is not enrolled in the plan but has a child under age 26). A plan sponsor must provide a notice regarding this enrollment opportunity. The Department of Labor has issued a model notice for this purpose.
- Plans must, generally, eliminate both annual dollar limits and lifetime dollar limits on "essential benefits." For purposes of Health Care Reform, "essential benefits" are defined as any or all of the following services:
- Ambulatory patient services
- Emergency services
- Maternity and newborn care
- Mental health and substance use disorder services, including behavioral health treatment
- Prescription drugs
- Rehabilitative and habilitative services and devices
- Laboratory services
- Preventative and wellness services and chronic disease management
- Pediatric services, including oral and vision care
Under certain circumstances, however, a plan may have a "restricted" annual limit.
To the extent a current or former plan participant was no longer eligible for continued benefits due to reaching a lifetime limit, a notice must be provided to those individuals informing them that they may again enroll in the plan and a 30-day special enrollment opportunity must be offered. The Department of Labor has issued a model notice for this purpose.
- Plans must eliminate pre-existing condition limitations for children up to age 19.
- Coverage under the plan cannot be rescinded other than for fraud, intentional misrepresentations, and nonpayment of premiums.
- Health Care Reform originally required that for the 2011 year (i.e., the Form W-2 provided to employees in January 2012), Form W-2s must report the aggregate cost of employer-provided coverage under the employer's group health plans (including certain Excepted Plans). Pursuant to interim relief just issued by Treasury, however, this W-2 reporting requirement is not required for 2011.
What Changes Are Required for New and Non-Grandfathered Plans Only?
For plans that are not grandfathered, lose their grandfathered status, or first become effective after March 23, 2010, the following requirements of Health Care Reform, in addition to the ones listed in the Section above, will apply as of January 1, 2011:
- Non-discrimination requirements, previously applicable only to self-insured plans, now apply to fully insured plans as well.
- Coverage for in-network preventive services must be provided without any cost-sharing.
- For emergency room care, no pre-authorizations can be required for out-of-network services and out-of-network services must be treated in the same manner as in-network services.
- The plan must implement new patient protections as follows:
- If a plan requires a participant to select a primary care provider, a participant must be permitted to select an obstetrician/gynecologist, or pediatrician in the case of a child, as the primary care provider.
- Plans cannot require authorizations or referrals for obstetric/gynecological services from a participating obstetrician/gynecologist.
- Applicable plans must provide a notice to participants regarding these new patient protections. The Department of Labor has issued a model notice for this purpose.
- Plans' internal and external appeals processes for coverage and claims determinations need to be revised to meet specified state or federal government standards.
- Under certain circumstances, plan coverage of a qualifying individual's participation in clinical trials is required.
What Amendments to Cafeteria Plans and Flexible Spending Accounts Now Need to Be Adopted?
- Any flexible spending account, health reimbursement arrangement, or health savings account that permits reimbursement of over-the-counter drugs must be amended effective January 1, 2011 to prohibit this type of reimbursement; this amendment must be adopted no later than June 30, 2011. Reimbursements of over-the-counter medical items will still be permitted, however, for (i) insulin, (ii) medical care that is not medicines or drugs (such as medical equipment, supplies and diagnostic devices), and (iii) medicines and drugs for which the individual obtains a prescription.
- A cafeteria plan that provides only for pre-tax payment of medical plan premiums may need to be amended no later than December 31, 2010 to bring the plan into compliance with the Act's changes, including changes regarding special enrollment rights.
- Any health flexible or health reimbursement arrangement may need amendments to the extent the plan's current provisions prohibit reimbursement of medical expenses incurred by qualifying children up to age 26. This amendment must be adopted no later than December 31, 2010 for calendar year plans.
What Other New Medical Plan Mandates Need to Be Addressed Now?
In addition to implementing the Act's changes, employers are also required to comply with other new health plan mandates. The Children's Health and Insurance Program Reauthorization Act of 2009 ("CHIPRA") requires that employers maintaining either a fully-insured or self-insured medical plan in a state that provides certain premium assistance programs, distribute an annual notice to all employees informing them of their state of residence's premium assistance program.
The Department of Labor has provided a model notice that employers may use to fulfill this requirement; we can provide you with this model notice, or the notice can be found at www.dol.gov/ebsa/chipmodelnotice.doc. While an employer is not required to distribute the notice to employees who are residents of states that do not have a premium assistance program, an employer may find it easier to send the notice to all employees rather than determining what state an employee resides in and whether that state has a premium assistance program.
The notice may be provided along with the employer's open enrollment materials, summary plan description, or materials notifying an employee of his or her health plan eligibility, so long as the notice appears (i) separately and (ii) in a manner which ensures that an employee who may be eligible for premium assistance could reasonably be expected to appreciate the notice's significance. Because this notice must be provided to all affected employees regardless of whether the employee is eligible for the employer's medical plan, an employer may wish to consider including a provision in the notice clarifying that CHIPRA does not give an employee who is otherwise ineligible to participate in the plan any right to enroll in the employer's plan. For calendar year plans, the notice must be distributed no later than January 1, 2011. Employers that maintain a fiscal year plan beginning on or after February 4, 2010 and have not yet provided the notice should do so as soon as possible.
Please let us know if we can assist you in implementing any of the foregoing required changes or drafting the required amendments to your plans.
Determination of a Plan's Grandfathered Status
What makes a plan a "grandfathered" plan?
A grandfathered plan is an insured or self-insured group health plan that (1) was in existence on, and has had at least one participant since, March 23, 2010 and (2) has not lost its grandfathered status due to certain changes that have been made to the plan or a violation of the grandfathered plan anti-abuse rules.
What changes will cause a plan to lose its grandfathered status?
A group health plan will lose its grandfathered status if any of the following changes are made to the plan after March 23, 2010:
- All or substantially all benefits to diagnose or treat a particular condition are eliminated. For example, if the plan eliminates coverage for a particular disease, or if the plan provides benefits for a particular condition, the treatment for which is a combination of drugs and counseling and the plan eliminates benefits for counseling, the plan will no longer be grandfathered.
- Fixed-amount cost-sharing requirements, like deductibles and out-of-pocket maximums, are increased by more than the maximum percentage increase,1 as measured from March 23, 2010.
- Copayments are increased by an amount that exceeds the greater of: (1) the maximum percentage increase, or (2) $5 increased by medical inflation (meaning $5 times medical inflation plus $5), as measured from March 23, 2010.
- The percentage of a cost-sharing requirement (like coinsurance) is increased by any amount, as measured from March 23, 2010.
- The employer's contribution toward the cost of coverage is decreased for any tier of coverage (i.e., self-only, family) for any class of similarly situated individuals by more than 5% of the contribution rate in effect on March 23, 2010.
- Annual or lifetime limits on benefits are increased, as compared with the plan's terms on March 23, 2010. Specifically, to maintain grandfathered status a plan (1) that did not impose an overall annual or lifetime limit on the dollar value of all benefits may not begin to impose an annual limit; (2) that did not impose an overall lifetime limit on the dollar value of all benefits may not begin to impose an annual limit that is lower than the dollar value of the lifetime limit; or (3) that did impose an overall annual limit may not decrease the annual limit on the dollar value of all benefits.
- An insured plan enters into a new policy or certificate of coverage after March 23, 2010 (because, for example, the previous policy or contract for insurance was not renewed). The government has promised future additional guidance with regard to this type of plan change.
With respect to the second, third and fifth bullets above, a plan sponsor will likely need to consult with the plan's health insurance issuer or actuary to determine whether any applicable increases will cause the plan to lose its grandfathered status.
What are the grandfathered plan anti-abuse rules?
The grandfathered plan regulations contain anti-abuse rules designed to prevent a plan from circumventing the limits on changes that will cause a plan to lose its grandfathered status. A plan will lose its grandfathered status if participants are transferred from a grandfathered plan to a less generous plan (even if the transferee plan is a grandfathered plan) without a bona fide employment-based reason or if the principal purpose of a business restructuring is to cover individuals under a grandfathered plan.
Can any changes be made to a plan without the plan losing its grandfathered status?
Plan changes that do not fall into any of the categories listed in the second question of this Schedule A should not affect the plan's grandfathered status. In addition, the regulatory guidance states that the following changes can be made to a plan without causing the plan to lose its grandfathered status:
- Routine adjustments to premiums, changes to plan terms to comply with legal requirements, voluntary amendments to comply with the Act, and changes to third-party administrators provided that these changes do not exceed the limits described in the second question of this Schedule A; and
- Certain changes to a plan's terms made after March 23, 2010 pursuant to a legally binding contract entered into prior to March 23, 2010, changes effective after March 23, 2010 that were made pursuant to a state insurance department filing on or before March 23, 2010, or changes effective after March 23, 2010 made pursuant to a written plan amendment adopted on or before March 23, 2010.
The federal agencies responsible for enforcing the Act and the grandfathered plan regulations have stated that, for enforcement purposes, they will take into account good-faith efforts to comply with a reasonable interpretation of the Act and may disregard changes made to a plan prior to June 14, 2010 that only modestly exceed the changes otherwise described in the regulations affecting grandfathered plan status. It is not at all clear what standards would need to be met to demonstrate a good-faith compliance effort or what plan changes would only "modestly" exceed the changes affecting grandfathered plan status.
Any changes that are made to a plan must be carefully considered in the context of how the change may affect the plan's grandfathered status.
Is there a grace period to revoke certain changes affecting a plan's grandfathered status?
Changes made to a plan after March 23, 2010 and prior to June 14, 2010 may be revoked or modified effective as of the first day of the plan year beginning on or after September 23, 2010, provided the terms of the plan after the revocation or modification would not otherwise cause the plan to lose grandfathered status. For purposes of this grace period, a change will be considered to have been adopted prior to June 14, 2010 if the change is effective: (1) before June 14, 2010; (2) on or after June 14, 2010 if the change was made pursuant to a legally enforceable contact entered into prior to June 14, 2010; (3) on or after June 14, 2010 if the change was made pursuant to a filing with a state insurance department; or (4) on or after June 14, 2010 pursuant to a written plan amendment adopted before June 14, 2010.
Does a plan remain grandfathered if new participants enroll in the plan?
New participants and their families may enroll in a grandfathered plan without affecting the plan's grandfathered status.
If a single plan offers multiple benefit options - like a PPO option and an HMO option - how do the grandfather rules apply to the plan?
Generally, the grandfathered plan rules apply separately to each benefit option. It is possible that one of the plan's benefit options is grandfathered while another is not.
If a plan is grandfathered, does it stay grandfathered indefinitely?
No. As routine changes are made to a plan, the plan will eventually lose its grandfathered status and become subject to, among other items, the Act's reforms discussed in this Advisory. A plan will need to assess whether it is still a grandfathered plan whenever changes are made to the plan.
What participant notice and record retention requirements must be fulfilled in connection with a plan's grandfathered status?
In order to maintain a plan's grandfathered status, any plan materials provided to participants or beneficiaries describing the plan's benefits must include (1) a statement that the plan is believed to be a grandfathered plan and (2) contact information for questions and complaints. The Department of Labor has issued a model notice for this purpose that we can provide you with. Additionally, all records documenting the terms of the plan that were in effect on March 23, 2010 (including plan documents and documentation of premiums, the cost of coverage, and required employee contribution rates) that could verify the plan's status as a grandfathered plan must be maintained and made available for examination by a participant, beneficiary, or state or federal agency upon request.
What notice requirement must a grandfathered fully-insured plan meet if the employer contribution toward the cost of coverage is decreased by 5% during the plan year?
Because a health insurance issuer may not always be aware of changes to the employer's contribution toward the cost of coverage that are made during the year that would affect the plan's grandfathered status, an insurer may require that it be given a notice of any changes that are made to the employer's contribution rate during the plan year. Specifically, an insurance issuer may (1) require a plan sponsor to, upon renewal of the insurance policy effective for plan years beginning on and after January 1, 2011, make a representation regarding its contribution rate for the plan year covered by the renewal as well as its contribution rate on March 23, 2010; and (2) include in the insurance policy that the plan sponsor is required to notify the insurance issuer if the contribution rate changes at any point during the plan year (a plan sponsor should carefully review the policy to see if the issuer requires advance notice of any change to the rate of employer contributions). If a policy was renewed prior to January 1, 2011, an insurance issuer may amend the policy before January 1, 2011 to include this notice requirement.
How do the grandfathered plan rules apply to a collectively-bargained plan?
A health plan subject to a collective bargaining agreement ratified before March 23, 2010 will maintain its grandfathered status through the date the collective bargaining agreement expires. Before the expiration of the applicable collective bargaining agreement, a fully-insured collectively bargained plan will retain its grandfathered status even if changes are made to the plan that would otherwise cause the plan to lose its grandfathered status. A self-insured collectively bargained plan, on the other hand, will lose its grandfathered status if any applicable changes are made to the plan, regardless of the date on which the collective bargaining agreement expires. Once the applicable collective bargaining agreement expires, a plan's grandfathered status will be determined by comparing the coverage that was available under the plan as of March 23, 2010 to the terms of the coverage offered upon the expiration of the collective bargaining agreement (under certain circumstances, a fully-insured collectively bargained plan may not lose its grandfathered status after the collective bargaining agreement expires solely due to a change in insurance carriers). Both insured and self-insured collectively bargained plans must comply with the Act's requirements for grandfathered plans in the same manner as a non-collectively bargained plan, regardless of the date the collective bargaining agreement expires. Once a collectively bargained plan becomes non-grandfathered, it will also be required to comply with the Act's requirements for non-grandfathered plans.
Is additional grandfathered plan guidance expected?
The agencies responsible for enforcement of the grandfathered plan rules have asked for comments on whether changes to a provider network, drug formulary, plan structure (for example, switching from a fully-insured to a self-insured plan), or overall benefit design should affect a plan's grandfathered status. It is expected that any additional circumstances under which a plan will lose its grandfathered status that are more restrictive than what the agencies have already published will be applied on a prospective basis only.
Kelley Drye & Warren's Employee Benefits and Executive Compensation Practice Group
advises clients on a broad range of employee benefits and executive compensation issues, including qualified and nonqualified retirement plans, equity-based compensation arrangements, health and welfare programs, fiduciary issues involving the investment of plan assets, mergers and acquisitions, cross-border employee benefits and compensation arrangements, and related legal and tax issues. We will continue to provide updates on the Health Care Reform Act as guidance is issued. For more information about this Client Advisory, please contact: