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Maintaining Grandfathered Health Plan Status

Group health plan coverage that was in place on March 23, 2010 (the date that health care reform was enacted), and continuously thereafter are exempt from some health care mandates that otherwise apply to group health plans. This rule providing exemption is known as the “grandfather rule,” thus the plans are referred to as grandfathered health plans.

However, plans can permanently lose grandfathered status if certain coverage or design changes are made. As a result, employer-sponsors who wish to preserve a plan’s grandfathered status should understand the plan design changes that are permissible and must take care to avoid implementing any change that would cause an unintended loss of grandfathered status.

The Significance of Grandfathered Status
Grandfathered health plans are exempt from some, but not all, of the health care reform mandates. This includes the patient protection provisions; the appeals and external review processes; coverage of preventive health services and the ten categories of essential health benefits; and the guaranteed renewability and availability requirements. Importantly, other mandates apply regardless of a plan’s grandfathered status, which include the prohibitions on rescissions of coverage and annual and lifetime limits; the requirement to provide dependent coverage up to age 26; the 90-day limit on waiting periods; and the distribution requirement of Summaries of Benefits and Coverage (SBCs).

Because these plans remain subject to some health care reform mandates, the decision as to whether to maintain grandfathered status requires a cost-benefit analysis by the employer-sponsor on an ongoing basis. The advantages of avoiding the application of some mandates will need to be weighed against the considerable constraints that are placed upon the plan’s design and flexibility.

Plan Changes That Jeopardize Grandfathered Status
The regulations governing grandfathered health plans contain detailed rules regarding the plan design changes that will cause a loss of grandfathered status. Grandfathered status is lost as of the effective date of the impermissible plan design change and once lost, it cannot be regained.

  • (1) Elimination of Benefits
    The elimination of all or substantially all benefits under a plan to diagnose or treat a particular medical condition will cause a loss of grandfathered status. There is no clear rule for determining whether a plan has eliminated substantially all benefits to diagnose or treat a condition; rather, the determination is made based on facts and circumstances, with consideration to the coverage that was in place on March 23, 2010, as compared to the benefits that would be in place following the change.
    Changes in prescription drug formularies may constitute an impermissible elimination of benefits if the change eliminates drugs used to treat a particular medical condition.
  • (2) Any Increase in Percentage Cost-Sharing
    Any increase in percentage cost-sharing under the plan, such as an increase in coinsurance, will cause a loss of grandfathered status. The increase is measured from the cost-sharing in place as of March 23, 2010.
  • (3) Increase in Fixed-Amount Cost-Sharing
    Increases in fixed-amount cost-sharing, like deductibles and out-of-pocket limits, that exceed 15% above medical inflation will cause a loss of grandfathered status. Increases may be determined by reference to the greater of either: 1). The overall medical care component of the Consumer Price Index for All Urban Consumers published by the Department of Labor; or, 2). the most recent premium adjustment percentage published by the Department of Health and Human Services.
    Plans may make increases to fixed-amount cost-sharing that are necessary to maintain the plan’s high deductible (HDHP) status without jeopardizing grandfathered status.
  • (4) Decrease in Rate of Employer Contributions
    A decrease in the rate of employer contributions by more than five percentage points below the contribution rate in place on March 23, 2010, will cause a loss of grandfathered status. Changes to the rate of employer contributions may occur where the employer changes its contribution formula, or where the employer implements a wellness program or working-spouse carve-out that incorporates premium surcharges.
    Because any decrease in employer contributions is measured against the rate in place on March 23, 2010, an employer can decrease its contribution rate across multiple plan years so long as the cumulative reduction does not exceed five percentage points.

Changes that are not expressly prohibited by the regulations will not cause a loss of grandfathered status. Therefore, an employer-sponsor may make a change not listed here without impacting the grandfathered status of their plan.

Plan Changes in Response to the COVID-19 Emergency Period
Special guidance was provided to grandfathered health plans in light of the COVID-19 public health emergency. To the extent a group health plan added benefits, or reduced or eliminated cost-sharing, for COVID-19 diagnosis and treatment or for telehealth and other remote care services, its grandfathered status would not be jeopardized if these coverage changes are later reversed following the end of the emergency period. In other words, even though reversing these changes might ordinarily constitute an impermissible elimination of benefits or an increase in cost-sharing, it will not adversely affect a plan’s grandfathered status.
Preparing for the Loss of Grandfathered Status
There are many reasons why an employer-sponsor may choose to relinquish a health plan’s grandfathered status. For example, the costs of maintaining the employer contribution rates may become too high when faced with rising coverage costs, the employer may prefer to work with a third-party administrator that isn’t able to accommodate a grandfathered plan design, or the employer may be contemplating a business reorganization that will necessitate plan design changes.

Regardless of the rationale, employer-sponsors should prepare for the loss of grandfathered status to avoid unintended violations of health care reform mandates. Plan details should be reviewed to ensure adequate coverage for preventive care services and essential health benefits; plan documents, SPDs, and SBCs should be amended to reflect the effective date of the loss of grandfathered status; and any plan service providers, like claims administrators or other third-party administrators, should be promptly notified.

Click here to download a copy of this AHERN Benefits Brief.


*This Benefits Brief is not intended to be exhaustive, it is for informational purposes only and should not be considered legal or tax advice. A qualified attorney or other appropriate professional should be consulted on all legal compliance matters.

Employers looking to lower their health plan costs have considered some strategies to reduce the number of participants. Among these strategies are spousal surcharges and carve-outs, which either impose an additional or increased employee contribution or restrict eligibility for spouses with access to a health plan through their employer. A more aggressive approach excludes spouses from enrolling in the plan altogether. These designs are also known as “working spouse provisions.” When one of these strategies is implemented, employers ultimately pay less in premiums (or claims for self-funded plans) than they would have if the spouses were enrolled. Employers considering one of these strategies must first consider the specific eligibility strategy they want to implement and the various federal and state law implications.

Spousal Eligibility Restrictions
Employers that don’t want to exclude spouses from their plan completely may choose to restrict their eligibility by imposing different strategies. One such strategy is a spousal carve-out. A spousal carve-out is a plan provision that excludes or restricts spouses from being eligible for the employer’s group health plan when they are eligible or enrolled in their own employer’s health plan.

Another approach to limit spousal eligibility in the plan is a spousal surcharge. A spousal surcharge is an additional or increased employee contribution amount when an employee enrolls a spouse that is eligible for coverage through their employer’s health plan.
A third, less aggressive approach employers may implement is allowing the spouse to enroll in the employee’s plan if they are also enrolled in their own employer plan (if applicable). In effect, the employer’s plan becomes a secondary payer to the spouse’s plan, potentially lowering costs for the employer.

Compliance Considerations
Whether an employer chooses the spousal surcharge or carve-out strategy, they must review the legal compliance considerations on their plans and prepare for any potential risks.

  •  ACA Pay or Play Rules. The ACA’s employer mandate does not require employers to offer coverage to spouses, so a spousal carve-out or surcharge is permitted. In some cases, these provisions can be beneficial for spouses. When spouses are ineligible, or the cost of the plan is too expensive, they could be eligible for a subsidy through the Exchange.
  • ACA Reporting. When the employer completes Form 1095-C, they must use either Code 1J (for plans that do not offer coverage to non-spouse dependents) or Code 1K (for plans that do offer coverage to non-spouse dependents) in Line 14 of the Form 1095-C to indicate that the employee’s spouse received a conditional offer of coverage.
  • ACA Grandfathered Plans. A spousal surcharge may cause a health plan to lose its grandfathered plan status.
  • State Laws. Many states have laws that prohibit discrimination based on marital status or sex. In addition, some states require specific spousal coverage. For self-insured plans subject to ERISA, such state laws will generally be preempted by ERISA, meaning that the state law will not prevent an ERISA plan from excluding spouses or imposing a surcharge. However, this won’t be the case for fully insured plans. If a plan is not subject to ERISA (such as church or government employers) or is fully insured, then ERISA will not offer any protection from applying state or local jurisdiction laws (e.g., statutes, regulations, and case law).
  • Medicare Secondary Payer (MSP) Rules. Employers should ensure that their plan’s eligibility restrictions apply uniformly to all participants. An employer who excludes Medicare-eligible spouses from the plan may violate the MSP rules, which prevents employers with 20 or more employees (including private and public sector employers and nonprofit organizations) from offering Medicare-eligible employees the same benefits as individuals under age 65.
  •  HIPAA Special Enrollment. If an employer implements a new spousal carve-out rule and an employee’s spouse becomes ineligible for the employer’s coverage, the loss of coverage for the spouse will trigger a HIPAA special enrollment and require the spouse’s employer to allow a special mid-year enrollment. However, the HIPAA special enrollment rules do not apply to a new spousal surcharge.
  • Section 125 Rules. Employers offering Section 125 Cafeteria Plans that offer pre-tax contributions for employees allow for midyear election changes for qualifying events in addition to HIPAA’s special enrollment periods. Since these events can vary from plan to plan, it could be difficult for a spouse to change their election with their employer’s plan. Also, employers should be cautious that their plan doesn’t run afoul of the Section 125 non-discrimination rules, which prevents employers from favoring highly compensated employees.
  • COBRA. Though the loss of coverage is a qualifying event under HIPAA special enrollment rules, the loss of eligibility due to a plan change (like a spousal carve-out) is not a COBRA qualifying event for the spouse. Although some employers may be tempted to offer COBRA in this situation, an insurance carrier or stop-loss provider might not provide coverage since it is not an actual COBRA event.
  • Plan Documents & Summary Plan Descriptions (SPDs). Employers implementing a spousal carve-out or surcharge must update their plan documents and SPDs to reflect the new rules clearly. Employers should also include any verification procedures and potential consequences. This information should also be included in all of their enrollment materials.

Other Considerations
In addition to the compliance considerations, employers should evaluate other potential issues and prepare proactively for them.

  • Employee Perception. Employers should be cautious of employee perception. In addition to being perceived as a benefit being taken away from them, adding a surcharge raises fairness issues for affected employees and could impact their “family-friendly” culture.
  • Eligibility Verification. How will employers verify eligibility status or when to include a surcharge? Will they use an attestation form or require documentation through the spouse’s employer? If an attestation form is used, they must decide if there will be any consequences to employees that do not answer truthfully or if the form is not received timely. Will it be required every year or only when the spouse’s circumstances change?
  • Exceptions. When designing the plan for a spousal carve-out or surcharge, employers should consider if they will allow any exceptions to the new rules (e.g., if a spouse works part-time, their employer’s plan is unaffordable, or when the plan offers less coverage).
  • Definition of Spouse. Employers must decide if the new rules will apply to domestic partners, civil union partners, common-law partners, surviving spouses, etc. Also, what is the impact (if any) on married employees working for the same employer?
  • Collective bargaining agreements (or other contractual obligations). Employers should review any collective bargaining agreements or other contractual obligations for potential conflicts if they decide to impose a change to spouse eligibility and employee contributions.
  • Insurance Carrier Rates. Using spousal surcharges and eligibility restrictions in an employer’s insured medical plan may affect the insurer’s underwriting assumptions and impact the plan’s premium rates. Employers must work with their carriers before changing their plan rules.

Employers looking to lower their health plan costs through a spousal surcharge or carve-out provision should work with their insurance agent, legal counsel, and tax advisor for a more detailed analysis of the impact on their health plan.

Click here to download a copy of this AHERN Benefits Brief.

It is my pleasure to extend to you a warm invitation to our upcoming virtual HR Leaders Compliance Summit (HRLCS 2023), which starts next Tuesday, March 7, 2023!

Over the course of this summit, you will hear from numerous subject matter experts that specialize in various HR-related disciplines covering topics ranging from labor & employment regulation updates, employee benefits trends, and human capital management best practices…all made infinitely more complex given today’s unprecedented times.  Each day is also pre-approved by SHRM/HRCI for 2 hours of continuing education (CE) credits.

We are also extremely excited to welcome Robin Arzón and Mike Abrashoff as our keynote speakers.  In addition to both being New York Times best-selling authors, Robin and Mike lend a valuable and unique series of insights to the challenges facing HR teams and their organizations today.  We are thrilled to have them participating in this year’s event!

For a full agenda overview, along with registration information, please visit the HRLCS 2023 event registration site.  When registering, please be sure to use our agency’s complimentary code of AIB to waive the admission cost.

We look forward to seeing you next week at HRLCS 2023!

Plan sponsors of group health plans providing prescription drug coverage to individuals who are eligible for Medicare Part D prescription drug coverage are required to satisfy certain notice requirements.

Each year, Medicare Part D requires group health plan sponsors to disclose to individuals who are eligible for Medicare Part D and to the Centers for Medicare and Medicaid Services (CMS) whether the prescription drug coverage is creditable.

The creditable coverage disclosure notice alerts individuals as to whether their plan’s prescription drug coverage is at least as good as the Medicare Part D coverage (in other words, whether their prescription drug coverage is “creditable”). Medicare beneficiaries who are not covered by creditable prescription drug coverage and who choose not to enroll in Medicare Part D before the end of their initial enrollment period will likely pay higher premiums if they enroll in Medicare Part D at a later date.

CMS has provided two model notices for employers to use:

Please click here to continue reading our AHERN Benefits Brief. This Benefits brief covers how to determine whether a prescription drug plan is creditable, notice requirements, whether there is a penalty for noncompliance, as well as CMS reporting.

Tag Archive for: AIB Benefits Team