Federal regulators responsible for enforcing the health reform law issued yesterday an interim final rule on what constitutes a grandfathered health plan under the Patient Protection and Affordable Care Act.

A grandfathered health plan is an employer-sponsored group health plan, either insured or self-insured, or individual insurance coverage that existed as of March 23, 2010.

The regulations, released by the Departments of Health and Human Services, Labor and Treasury, explain to employers and plan sponsors the changes that may and may not be made to plans seeking the grandfathered status. HHS also created a “Fact Sheet” and “FAQs” Web pages regarding grandfathered health plans.

According to the regulators, the changes that will cause a plan to lose its grandfathered status include:

• Elimination of all or substantially all benefits to diagnose or treat a particular condition, even if that condition affects only a few covered individuals;
• Increases in an individual’s percentage coinsurance requirement (e.g., increasing from 20% to 30% coinsurance);
• Increases in fixed-dollar cost-sharing (such as deductibles and out-of-pocket expense limits, but not co-payments) in excess of the rate of medical inflation since March 23, 2010, plus 15 percentage points;
• Increases in co-payments in excess of the greater of (1) the rate of medical inflation, plus 15 percentage points, or (2) $5.00, as adjusted for medical inflation;
• Decreases in the employer contribution on the cost of any tier of coverage by more than 5% of its contribution rate in effect on March 23, 2010. The total cost of coverage is to be determined in the same manner as the COBRA continuation premium; and
• Certain changes to lifetime and annual benefit limits that would be adverse to plan participants.

Under the rules, “plans must also provide notice to participants or beneficiaries that the plan believes it is a grandfathered plan and maintain plan documents and records necessary to verify, explain, or clarify its status as a grandfathered health plan,” explain analysts at Hewitt Associates.

The interim final rule also clarifies that the group-health-insurance provisions of the reform law do not apply to stand-alone, retiree-only plans. “Specifically, this applies to retiree plans that cover less than two participants who are current employees,” Hewitt experts note.

The final regulations also answer a few burning questions that employers had on their minds about grandfathered plans and health care reform, claim attorneys at Ballard Spahr.

For example, adding existing employees as new enrollees in a group health plan after March 23, 2010, will not affect the plan’s status as a grandfathered health plan. In addition, a plan that has multiple benefit packages may have both grandfathered and non-grandfathered benefit packages; the regulations apply separately to each benefit package, explains the law firm’s health care team.

Overall, plan changes enacted before March 23, 2010, with an effective date after that date, will not cause a loss of grandfathered status. If an employer or plan sponsor has amended a group health plan since March 23, 2010, that would cause a plan to lose its grandfathered status under the new guidance.

The employer or plan sponsor, however, may reverse those amendments before the first plan year beginning on or after Sept. 23, 2010 (typically, the 2011 plan year) and retain grandfathered health plan status, according to the Philadelphia-based experts. Health plan changes that are not specifically prohibited (e.g., benefit improvements) will not cause a health plan to lose its grandfathered status.

“Employers and other plan sponsors will need to decide whether the limited grandfathered health plan exemption from the health care reform plan design and operational changes is worth the cost of limited flexibility in making desired plan design changes,” explain Ballard Spahr attorneys.

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