Health Reform Questions – Loss of Grandfathered Status

By Larry Grudzien, JD

March 24, 2012

My client currently sponsors a PPO, an HMO and an HDHP. For the next policy year, it wants to eliminate the PPO for cost reasons and transfer all the employees to the remaining two plans it sponsors. Will such elimination affect the grandfathered status of the other two plans it sponsors?   It may.  See the discussion below:   A plan will lose its grandfathered status if a plan transfers employees to another plan in a circumstance where the transfer, if treated like a plan amendment to the transferor plan, would cause that plan to lose its grandfathered status, unless there is a bona fide employment-based reason for the transfer, as provided in Treasury Regulations Section 54.9815-1251T(b)(2)(ii);DOL Regulations Section 2590.715-1251(b)(2)(ii);HHS Regulations Section 147.140(b)(2)(ii). However, employees may voluntarily change from one grandfathered health plan to another without endangering the grandfathered status of either plan, as provided in Treasury Regulations Section 54.9815-1251T(b)(3), Example 1; DOL Regulations Section 2590.715-1251(b)(3), Example 1; HHS Regulations Section 147.140(b)(3), Example 1.   What is a bona fide employment-based reason for this purpose?   Treasury Regulations Section 54.9815-1251T(b)(2)(ii)(C);DOL Regulations 2590.715-1251(b)(2)(ii)(C);HHS Regulations Section 147.140(b)(2)(ii)(C) specifically note that changing terms or cost of coverage is not a bona fide employment-based reason. Similarly, dropping one of two benefit options solely for cost reasons is impermissible, although dropping a benefit option following a plant closure may be permissible, as provided in Treasury Regulations Section 54.9815-1251T(b)(3), Examples 2 and 3; DOL Regulations Section 2590.715-1251(b)(3), Examples 2 and 3; HHS Regulations Section 147.140(b)(3), Examples 2 and 3.   Agency FAQs provide further guidance, describing several circumstances under which an employer may transfer employees from one grandfathered benefit package to another without causing a loss of grandfathered status:   * when the insurance issuer is exiting the market or will no longer offer the product to the employer;   * when low or declining participant enrollment makes it impractical for the employer to continue to offer the benefit package;   * when the benefit package is eliminated under a multiemployer plan as part of a collective bargaining process; and   * when the benefit package is eliminated for any reason, provided multiple benefit packages covering a significant number of other employees remain available to the transferring employees, as provided in FAQs About the Affordable Care Act Implementation Part VI, Q/A-1.

To view these FAQs, please click on the link below:   In the FAQs, the DOL indicates that the list is not intended to be an exhaustive list of circumstances that will be deemed to satisfy the bona fide employment-based reason condition. There may be many other circumstances in which a benefit package is considered to be eliminated for a bona fide employment-based reason.