Overview of Grandfathered Plans
The Affordable Care Act (ACA) contains many provisions that affect employer-sponsored health coverage. The extent of the ACA’s impact depends, in part, on whether an employer’s health plan has “grandfathered” status. Grandfathered plans can avoid a number of the ACA’s reforms.
A grandfathered plan is a group health plan or health insurance coverage that was in existence on March 23, 2010 (the date the ACA was passed). Grandfathered status does not expire on a set date. A plan will retain its grandfathered status after 2014, when many of the ACA’s changes became effective. However, a plan will lose its grandfathered status if certain prohibited changes are made to its plan terms.
This ACA Overview describes grandfathered plans, including information on what makes a plan “grandfathered.” It also includes a summary of the ACA’s provisions that are applicable to grandfathered plans.
Under the ACA, certain provisions will not apply to group health plans or health insurance coverage in which an individual was enrolled on March 23, 2010 (the date the law was passed). The ACA refers to these plans as “grandfathered” plans. A grandfathered plan will retain its grandfathered status even if covered individuals renew their coverage after March 23, 2010, family members are added to coverage or new employees (and their families) enroll for coverage.
A plan may retain its grandfathered status even after Jan. 1, 2014, when many of the ACA’s changes became effective. However, health plans will lose their grandfathered status if they choose to significantly cut benefits or increase out-of.pocket spending for participants.
Losing grandfathered status means that a plan must comply with the ACA requirements that do not apply to grandfathered plans, such as first-dollar coverage of recommended preventive health services and patient protections (for example, guaranteed access to OB-GYNs and pediatricians).
Permitted and Prohibited Changes
Grandfathered health plans may make routine changes to their coverage and maintain their grandfathered status, including making cost adjustments to keep pace with medical inflation, adding new benefits, making modest adjustments to existing benefits, voluntarily adopting new consumer protections under the ACA, or making changes to comply with state or other federal laws.
Premium changes are not taken into account when determining whether or not a plan is grandfathered. However, as explained below, a decrease in the rate of employer contributions for health plan coverage may cause a plan to lose its grandfathered status.
The prohibited changes that will cause a plan to lose its grandfathered status include the following:
Significantly Cutting or Reducing Benefits. For example, if a plan decides to no longer cover care for people with diabetes, cystic fibrosis or HIV/AIDS.
- Raising Co-Insurance Charges. Typically, co-insurance requires a patient to pay a fixed percentage of a charge (for example, 20 percent of a hospital bill). Grandfathered plans cannot increase this percentage.
- Significantly Raising Co-payment Charges. Compared with the co-payments in effect on March 23, 2010, grandfathered plans will be able to increase those co-pays by no more than the greater of $5 (adjusted annually for medical inflation) or a percentage equal to medical inflation plus 15 percentage points.
- Significantly Raising Deductibles. Many plans require patients to pay the first bills they receive each year (for example, the first $500, $1,000 or $1,500 a year). Compared with the deductible required as of March 23, 2010, grandfathered plans can only increase these deductibles by a percentage equal to medical inflation plus 15 percentage points.
- Significantly Reducing Employer Contributions. Many employers pay a portion of their employees’ premium for insurance and this is usually deducted from their paychecks. Grandfathered plans cannot decrease the percent of premiums the employer pays by more than 5 percentage points for any tier of coverage (for example, decrease their own share and increase the workers’ share of premium from 15 percent to 25 percent).
- Adding or Tightening an Annual Limit. If they want to retain their status as grandfathered plans, plans cannot tighten any annual dollar limit in place as of March 23, 2010. Moreover, plans that do not have an annual dollar limit cannot add a new one unless they are replacing a lifetime dollar limit with an annual dollar limit that is at least as high as the lifetime limit (which is more protective of high-cost enrollees).
The regulations initially provided that changing insurance companies or policies would cause a health plan to lose grandfathered plan status. However, on Nov. 15, 2010, the Departments released an amended rule. Under the amendment, a group health plan will not lose grandfathered status merely because of a change in the plan’s insurance policy, certificate or contract of insurance, as long as the coverage under the new policy is effective on or after Nov. 15, 2010. Also, to maintain grandfathered status, the plan must provide documentation of the plan’s terms to the new issuer.
Under the regulations, transferring employees from one grandfathered plan or benefit package (transferor plan) to another (transferee plan) will cause the transferee plan to lose grandfathered status if amending the transferor plan to replicate the terms of the transferee plan would have caused the transferor plan to lose grandfathered status. However, this rule applies only if there was no bona fide employment-based reason to transfer the employees. Also, the regulations provide that if the principal purpose of a merger, acquisition or similar business restructuring is to cover new individuals under a grandfathered health plan, the plan will lose its grandfathered status.
A plan’s grandfathered status is lost on the date the plan change becomes effective, rather than on the date a plan amendment is adopted. Thus, if a plan amendment is effective mid-year, the plan would lose its grandfathered status mid.year. If the amendment is effective at the beginning of the next plan year, the plan would lose its grandfathered status for that next plan year.
Final Rule Provides Greater Flexibility
On Dec. 11, 2020, the Departments announced a final rule that provides greater flexibility for grandfathered plans under the ACA, as follows:
- First, the rule clarifies that grandfathered high deductible health plan (HDHP) coverage may increase fixed-amount cost-sharing requirements, such as deductibles, to the extent necessary to maintain its status as an HDHP without losing grandfather status. This provision is intended to ensure that participants and beneficiaries enrolled in that coverage remain eligible to contribute to a health savings account (HSA).
- Second, the final rule provides an alternative method of measuring permitted increases in fixed-amount cost-sharing that is intended to allow plans and issuers to better account for changes in the costs of health coverage over time.
This additional flexibility may allow additional plans to maintain their grandfather status, despite certain changes being made to the plan. The Departments intend for these changes to benefit plan participants and beneficiaries, employers, employee organizations and other stakeholders.
Special Rule for Collectively Bargained Plans
A special rule applies for insured plans that are maintained pursuant to one or more collective bargaining agreements in place before March 23, 2010. These plans are considered grandfathered until the last collective bargaining agreement terminates, even if there is a change that would otherwise terminate a plan’s grandfathered status. This rule does not This special rule does not provide a delayed effective date for collectively bargained plans to comply with the ACA’s requirements. Rather, it extends the time these plans can be considered grandfathered. These plans are not exempt from complying with the rules that apply to grandfathered plans.
After the last collective bargaining agreement expires, whether the plan is grandfathered is determined by comparing the plan in existence on the expiration date with the plan as it existed on March 23, 2010.
What are the Notice and Recordkeeping Requirements?
To maintain grandfathered plan status, a plan administrator or health issuer must include a statement of the plan’s grandfathered status in plan materials provided to participants describing the plan’s benefits (such as the summary plan description (SPD) and open enrollment materials). The notice informs participants that their plan may not include certain consumer protections that apply to non-grandfathered plans, such as the requirement to cover certain preventive health services without any cost-sharing. The DOL has provided a model grandfathered plan notice, which is available on its website.
In addition, a grandfathered health plan must document its terms on March 23, 2010. This documentation, plus any additional records needed to support the plan’s grandfathered status (for example, plan documents or insurance certificates or policies), must be retained for as long as the plan holds onto its grandfathered status.
Which ACA Reforms DO NOT Apply to Grandfathered Plans?
The ACA specifically exempts grandfathered plans from certain requirements of the law. Grandfathered health plans are not required to comply with the following ACA provisions:
Coverage of Preventive Health Services. Effective for plan years beginning on or after Sept. 23, 2010, group health plans and health insurance issuers offering group or individual health insurance coverage must provide coverage for certain preventive health services without imposing cost-sharing requirements. Additional preventive health services for women must be covered without cost-sharing effective for the plan year beginning on or after Aug. 1, 2012.
- Patient Protections. Effective for plan years beginning on or after Sept. 23, 2010, the ACA requires the following protections for patients:
- Group health plans and health insurance issuers offering group or individual health insurance coverage that require designation of a participating primary care provider must permit each participant, beneficiary and enrollee to designate any available participating primary care provider (including a pediatrician for children);
- Group health plans and health insurance issuers offering group or individual health insurance coverage that provide emergency services may not impose preauthorization or increased cost-sharing for emergency services (in or out of network); and
- Group health plans and health insurance issuers offering group or individual health insurance coverage that provide obstetrical/gynecological care and require a designation of a participating primary care provider may not require preauthorization or referral for obstetrical/gynecological care.
- Nondiscrimination Rules for Fully Insured Plans. Fully insured plans will have to satisfy the requirements of Internal Revenue Code section 105(h)(2). This section provides that a plan may not discriminate in favor of highly compensated individuals as to eligibility to participate and that the benefits provided under the plan may not discriminate in favor of participants who are highly compensated individuals. This provision will be effective sometime after regulations are issued. The regulations will specify the effective date.
- Quality of Care Reporting. Reporting requirements will be developed for group health plans and health insurance issuers offering group or individual health insurance coverage. The reports will relate to benefit and reimbursement structures that are designed to improve health outcomes, prevent hospital re-admissions, improve patient safety, reduce medical errors and implement health and wellness activities.
- Improved Appeals Process. Effective for plan years beginning on or after Sept. 23, 2010, group health plans and health insurance issuers offering group or individual health insurance coverage must implement an improved appeals process and meet minimum requirements for external review.
- Insurance Premium Restrictions. Effective for plan years beginning on or after Jan. 1, 2014, premiums charged for health insurance coverage in the individual or small group market may not be discriminatory and may vary only by individual or family coverage, rating area, age and tobacco use, subject to certain restrictions.
- Guaranteed Issue and Renewal of Coverage. Effective for plan years beginning on or after Jan. 1, 2014, health insurance issuers offering health insurance coverage in the individual or group market in a state must accept every employer and individual in the state that applies for coverage and must renew or continue in force the coverage at the option of the plan sponsor or the individual.
- Nondiscrimination in Health Care. Effective for plan years beginning on or after Jan. 1, 2014, group health plans and health insurance issuers offering group or individual insurance coverage may not discriminate against any provider operating within their scope of practice. However, this provision does not require a plan to contract with any willing provider or prevent tiered networks. Plans and issuers also may not discriminate against individuals based on whether they receive subsidies or cooperate in a Fair Labor Standards Act investigation.
- Comprehensive Health Insurance Coverage. Effective for plan years beginning on or after Jan. 1, 2014, health insurance issuers that offer health insurance coverage in the individual or small group market must provide the essential benefits package required of plans sold in the health insurance Exchanges.
- Limits on Cost-Sharing. Effective for plan years beginning on or after Jan. 1, 2014, group health plans must comply with cost-sharing limits with respect to their coverage of essential health benefits. This cost-sharing limit is an overall annual limit (or an out-of-pocket maximum) for self-only coverage and family coverage, which is subject to annual adjustment for inflation. The out-of-pocket maximum applies to all non-grandfathered health plans. This includes, for example, self-insured health plans and insured health plans of any size.
- Coverage for Clinical Trials. Effective for plan years beginning on or after Jan. 1, 2014, group health plans and health insurance issuers offering group or individual insurance coverage must permit certain enrollees to participate in certain clinical trials, must cover routine costs for clinical trial participants and may not discriminate against participants.
Which Major ACA Reforms DO Apply to Grandfathered Plans?
The provisions described below apply to both grandfathered and non-grandfathered health plans. Keep in mind that this is a description of major provisions that affect health plans, not an exhaustive list of how the ACA might affect an employer’s group health coverage.
- Extension of Dependent Coverage. Effective for plan years beginning on or after Sept. 23, 2010, group health plans must provide coverage for adult children up to age 26.
- Elimination of Lifetime and Annual Limits. Effective for plan years beginning on or after Sept. 23, 2010, group health plans and health insurance issuers offering group or individual health coverage may not establish lifetime limits on the dollar value of essential health benefits. Group health plans may also not establish unreasonable annual limits. Effective for plan years beginning on or after Jan. 1, 2014, annual limits on the dollar value of essential health benefits are prohibited.
- Elimination of Pre-existing Condition Exclusions. Effective for plan years beginning on or after Sept. 23, 2010, pre.existing condition exclusions may not be applied to enrollees under age 19. Pre-existing condition exclusions are eliminated for all enrollees for plan years beginning on or after Jan. 1, 2014.
- Limits on Rescissions. Effective for plan years beginning on or after Sept. 23, 2010, coverage may not be rescinded, except in the case of fraud or intentional misrepresentation of material fact. Policyholders must be notified prior to cancellation.
- Limits on Waiting Periods. Effective for plan years beginning on or after Jan. 1, 2014, group health plans and health insurance issuers offering group or individual health insurance coverage may not require a waiting period of more than 90 days.
- Summary of Benefits and Coverage. Health plans and health insurance issuers must provide a summary of benefits and coverage (SBC) to participants, beneficiaries and applicants.
- Reporting Medical Loss Ratio. Effective for plan years beginning on or after Sept. 23, 2010, health insurance issuers offering group or individual health insurance coverage must annually report the percentage of premiums spent on non-claim expenses. Beginning Jan. 1, 2011, insurers must provide rebates if more than the applicable percentage is spent on non-claims costs.
More information on grandfathered plans is available through www.HealthCare.gov.