Employers get guidance on grandfathering

An interim final rule clarifying the grandfathering provisions for employers under the health care reform law contains surprises that raise the stakes on advising companies about their health plans.

The Patient Protection and Affordable Care Act puts new obligations on employers but generally grandfathers health plans in existence as of March 23, 2010, allowing exemption from certain requirements, such as non-discrimination, and extending deadlines for others, such as coverage of dependents up to age 26.

Most employers likely will try to maintain grandfather status because loss of the status is permanent and its impact uncertain until future provisions are clarified.

But despite the obvious advantages to being grandfathered in, some employers are rethinking the calculus in light of the new rule issued jointly by the Department of Labor, the Department of Health and Human Services and the IRS.

“These regs changed the analysis completely. … The effect is to impose a cost on maintaining grandfather status that was frankly not expected,” said Martin J. Moderson, a partner and vice chairman of the employee benefits and executive compensation group at Sonnenschein Nath & Rosenthal in Kansas City, Mo.

For example, in order to avoid losing grandfather status, an employer cannot eliminate or substantially reduce coverage, such as dropping cancer coverage, said Bruce Barth, a partner at Robinson & Cole in Hartford, Conn. and head of the firm’s Employee Benefits and Compensation Group.

An employer also risks losing grandfather status if it changes the cost structure beyond limits that the rules impose, such as lowering employer contributions by more than five percent, raising copayments more than $5 or 15 percent (whichever is greater), or raising deductibles more than medical inflation plus 15 percent, Barth said.

Another game-changer is if an employer changes carriers, it loses grandfathered status, even if the plan remains identical.

It’s a “huge trap” that employers must be warned about, said Moderson.

Smaller employers that administer a fully-insured plan should be mindful that if they lose grandfather status they will be subject to new non-discrimination requirements.

“If you’re a fully insured plan just covering your management team and not covering the lower workers, and you lose grandfathered status, you will have to broaden group coverage. It could be devastating,” Moderson said.