HCW Benefits Blog

Contributor:
Jay Lowe, Consultant
Hill, Chesson & Woody

When the Departments of Labor, Treasury, and Health and Human Services issued the interim rules providing guidance on grandfathered plan status, it was intended to answer the question on most employers’ minds: what constitutes a grandfathered plan?  While the guidance did in fact answer that question to a degree – giving employers a better idea of what grandfathered status was, how it is lost, and what provisions are applicable to those plans – employers may be left with more questions, with one standing above the rest: should we maintain our grandfathered status or give it up?  In fact, the decision for employers to either keep their current “grandfathered” plan design or make changes at renewal and hope for the best could be one of the more difficult they will face in the advent of reform.

While additional guidance on certain specifics is still forthcoming, employers do know that grandfathered status only applies to plans that have been in place and had at least one participant enrolled on or before March 23, 2010. After this date, the plan can allow new and existing employees and their dependents to enroll or be removed, but it cannot make any “significant changes” to the plan itself – including certain changes that decrease benefits or increase costs for participants or even result in a change of carrier. (For a more detailed discussion on the grandfathered status guidance, see HCW’s Compliance Alert dated June 17, 2010.)

There are benefits to maintaining grandfathered status that would spare employers from certain reform provisions.  Most of these benefits vary on a plan-by-plan basis, but in most cases where a plan would lose grandfathered status, it would need to meet specific requirements to provide prevention services with no cost-sharing and offer patient protections such as guaranteed access to certain providers.  Non-grandfathered plans would also be required to offer minimum levels of coverage or face hefty fines if the conditions are not met.

Likely the most significant impact for fully-insured group plans would be in regard to the Section 105(h)(2) nondiscrimination rules, which previously applied only to self-funded plans.  According to the grandfathered status guidelines, any non-grandfathered, fully insured plan that discriminates in favor of highly compensated employees would now be subject to the Section 105(h) rules and could be faced with providing all employees the same benefits or developing benefit coverage that will satisfy the nondiscrimination rules.

In making the decision to grandfather or not, employers will ultimately have to weigh the overall impact on their own plan costs.  Employers who chose to grandfather their plans will not be able to mitigate their renewal increases by adjusting benefits.  As such, this may not be a viable option for some employers as healthcare costs continue to skyrocket and plan costs become prohibitive, pushing many into new designs and into the reform system of healthcare. Further complicating matters is the idea that carriers may begin to phase out grandfathered plans and no longer offer the original plan design at renewal.  Again, due to rising costs, carriers may be forced to streamline their offerings to employers and inadvertently disqualify any grandfathered status.

While the grandfather provisions strive to uphold the Obama administration’s promise to consumers to “keep the plans they have”, the provisions themselves may steer several employers into forfeiting their grandfathered status and becoming fully conforming with the healthcare reform law.  According to the Department of Health and Human Services, between 39 and 66 percent of employer plans will lose grandfathered status by 2013.  In the case of small employers (under 100 employees), those numbers are expected to be between 50 and 80 percent as many are expected to take advantage of the small business tax credit for offering plans under the reform law.

The option to grandfather offers the employer time to understand the full impact of the healthcare reform provisions and adjust their strategies to reflect these changes.  It is important for employers to look at their ultimate goals and determine if maintaining their current benefits is necessary for them to meet their benefit plan objectives.  Through the evolving healthcare reform era, it is more important than ever for employers to keep their benefit strategies in sync with their corporate objectives so they can continue to recruit and retain their talent.

However, as difficult as the decision to grandfather may seem, the ultimate choice is unlikely to be a crucial one for most employers as the end result will have minimal impact on their bottom line.  The impact of losing grandfathered status would only significantly affect fully-insured plans that discriminate in benefit offerings and would then be subject to the Section 105(h) non-discrimination rules.  As for those not subject to the Section 105(h) rules, the grandfather decision may just come down to whether the employer can afford to renew their plan with little to no changes.  In either case, it is always important for an employer to ensure their benefit strategy – grandfathered or not – with their corporate direction.

For more information on this topic, please visit the following links:

• Does It Pay to Remain Grandfathered?
• Analyzing the Grandfather Regs under PPACA
• Heartburn over Grandfathering
• Variety of Plan Changes Will End Grandfathered Status under Health Reform