Final Rule Issued Allowing Increased Flexibility for Grandfathered Health Plans

Grandfathered health plans (those in existence prior to the enactment of the Affordable Care Act (ACA) on March 23, 2010 and that have abided by the list of rules necessary to maintain that particular status designation in the time since, including being offered continuously, avoiding certain changes, and having at least one person enrolled at all times) have now been granted additional flexibility in their overall administration. As has been the case since their establishment, grandfathered health plans play by a different set of rules and are required to meet some but not all of the standard ACA requirements that non-grandfathered plans are subject to. For example, grandfathered plans do not have to cover essential health benefits, can choose to be exempt from covering certain preventive services (including women’s contraceptives) without employee cost-sharing, and are not constrained by the ACA provisions on limiting annual out-of-pocket costs for employees. It should of course be noted that while plans implemented post-ACA cannot become grandfathered, it is certainly possible to lose grandfathered status. Once a health plan is no longer considered grandfathered it becomes bound by all of the remaining ACA requirements from which it was previously exempt. Therefore, it is advantageous for many applicable employers to continue to maintain this distinction.
Published on December 15, 2020, the final rule prompting the current update is in direct response to a 2017 Executive Order issued by the Trump Administration. The new regulations will allow grandfathered health plans that are also high deductible health plans (HDHPs) to increase their fixed-amount cost sharing requirements (such as upping their deductibles). While doing so would have previously triggered a loss of grandfathered status the final rule ensures that these plans will no longer suffer that fate, so long as the changes are made only to the extent necessary to continue to comply with the HDHP requirements under Code Sec. 223 (c)(2). The overarching worries here appear to be future focused, as the final rule is essentially acting as a safeguard against the annual cost-of-living adjustments for HDHP deductibles rising to the point that could in turn initiate a loss of grandfathered status for certain plans. It should be noted that plan participants and enrolled beneficiaries will remain eligible to contribute to their health savings accounts (HSAs).
The final rule also provides a modified definition of “maximum percentage increase” designed to provide “an alternative method of measuring permitted increases in fixed-amount cost sharing that allows plans and issuers to better account for changes in the costs of health coverage over time,” according to a December 11, 2020 joint press release from the DOL, HHS, and the Treasury (the Departments). This portion of the regulations was implemented since grandfathered plans are susceptible to losing their grandfathered designations if their cost-sharing percentages hit a certain amount. As a result, any maximum percentage increases are treated with strict scrutiny for plans hoping to maintain their grandfathered status. According to the final rule, the alternative methodology here would not supplant the current standard, however, and “would be available to the extent it yields a higher-dollar value than the current standard, and it would apply only with respect to increases in fixed amount cost-sharing requirements that are made effective on or after the applicability date of the final rules.” The applicability date that the Departments note is June 15, 2021, so this alternative standard is available only to grandfathered plans that make plan changes effective on or after that date. More illustrative examples of how this standard would be applied in practice rather than in theory are provided within the regulations.
Also, as a point of clarification, the final rule does not impact grandfathered individual coverages and is only appliable to grandfathered group coverages.