Grandfathered Plan Status Under the ACA

The Affordable Care Act (ACA) exempts “Grandfathered” plans from many of its design and administrative mandates.  A “Grandfathered” plan is one that was in effect on or before March 23, 2010 and that has not been modified in any way that would invalidate the exemption. The exemption from certain ACA mandates only lasts for as long as the plan maintains its Grandfathered status.  Certain requirements must be met in order to maintain a plan’s Grandfathered status.

The decision whether to maintain grandfathered status is an important consideration for employers sponsoring group health plans depending on the costs, administrative difficulty of complying with ACA provisions if not Grandfathered, and the restrictions on plan modifications.

Statement of Grandfathered Status – Maintaining Grandfathered Status

To maintain status as a grandfathered health plan, a Statement of Grandfathered Status to that effect must be included in any plan materials provided to a participant that describe the benefits under the plan.

While it is not necessary to include the Statement of Grandfathered Status with every plan communication to participants (such as an Explanation of Benefits), plan sponsors are encouraged to identify communications where disclosure of grandfather status would be appropriate and consistent with the goal of providing information necessary for participants to make informed decisions regarding health coverage.

Because not all insurance carriers are aware of employer changes in contribution level, a plan will not be treated as having lost its grandfathered status, immediately, based on a change in the employer contribution rate if the employer plan sponsor and health insurance carrier take the following steps:

      • Upon renewal, the carrier requires the plan sponsor to 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
      • The carrier’s policies, certificates, or contracts of insurance disclose in a prominent and effective manner that the sponsor is required to notify the carrier if the contribution rate changes at any point during the plan year.

Once the carrier becomes aware of a five (5) percentage point (or more) reduction in the employer contribution rate, or another change that would cause a loss of grandfather status, this special rule will no longer apply.

Health insurance carriers are permitted to include language in a policy, certificate or contract of insurance that requires plan sponsors to notify the carrier in advance (i.e., 30 or 60 days) of a change in the sponsor’s contribution rate.

Changes to Group Health Plans Beyond Those Described in the Regulations

At this time, only the six (6) changes to a plan described below will cause it to lose grandfather status. Consequently, modifications to provider networks, changes in drug formulary or moving from fully-insured to self-insured funding arrangement will not impact grandfather status. However, the agencies are to review circumstances that would cause a plan to lose grandfather status and will issue additional guidance when that review is completed.

      • Elimination of all or substantially all benefits to diagnose or treat a particular condition.
      • Any increase in a coinsurance percentage cost-sharing requirement (e.g., raising a plan’s coinsurance percentage requirement from 20% to 25%).
      • Any increase in a deductible or out-of-pocket maximum by an amount that exceeds medical inflation plus fifteen (15) percentage points.
      • Any increase in a fixed copayment by an amount that exceeds the greater of: (1) $5 increased by medical inflation ($5 times medical inflation, plus $5); or (2) the rate of medical inflation plus fifteen (15) percentage points.
      • Decrease in an employer’s contribution rate towards the cost of coverage by more than five (5) percentage points.
      • Imposition or reduction in overall annual dollar limits.

Limits Based on a Formula

A group health plan will not lose grandfather status because it has a fixed-amount cost sharing requirement other than a co-payment (e.g., a deductible or out-of-pocket limit) that is based on a percentage of compensation formula, provided that the formula remains the same as that in effect on March 23, 2010. For example, a plan that has an out-of-pocket limit based on a percentage of compensation will not lose grandfather status if the percentage remains fixed but the dollar limit is raised because an employee’s compensation increased.

Frequently Asked Questions can be found on the Department of Labor’s Employee Benefits Security Administration Health Reform page.
Glocal Insurance Services is not a law firm and no opinion, suggestion, or recommendation of the firm or its employees shall constitute legal advice. Clients are advised to consult with their own attorney for a determination of their legal rights, responsibilities and liabilities, including the interpretation of any statute or regulation, or its application to the clients’ business activities.