How important is it to be a grandfathered group health plan? Under the new health care law, a grandfathered plan is not required to comply with certain changes. For other changes, a delayed effective date will apply.
If a plan was in existence when the law was signed, the plan will start out as a grandfathered plan. But as I explained in my Aug. 5 column, that status will be lost if coverage is moved to a new insurance company, the employee's share of the cost is increased by more than a set amount, benefits are reduced, or co-pays and deductibles are increased by more than a certain amount, among other possibilities.
Because regulations are still being written, and because the market is still reacting to these changes, it is difficult to identify the exact effect of losing grandfathered status on any given plan. However, grandfathered status offers a number of advantages.
First, a plan that loses grandfathered status will have to comply with a number of new mandates. Almost everything we have seen suggests that the cost of complying with these mandates will increase the cost of coverage, at least in the short run. Some say that, in the long run, we may all be healthier and health care costs may go down. That may or may not turn out to be true. However, in the short run, a plan that loses grandfathered status is likely to experience increased costs.
Second, up until now, fully insured plans have not been subject to the same nondiscrimination rules as self-insured plans. This means that an employer that is fully insured has had the flexibility to provide different benefits to different groups of employees, at least if certain basic requirements are met. For example, an employer that is fully insured could offer one type of coverage to its management team and a different type of coverage to everyone else. An employer could also pay the entire cost of coverage for salaried employees, for example, while providing a lower level of subsidy for hourly workers.
This has changed. If highly paid employees receive better coverage or a higher level of employer subsidies than everyone else, the plan probably will fail its nondiscrimination testing. However, grandfathered plans are not subject to the new nondiscrimination rules for fully insured plans.
This will not affect every employer. But, for the employers it does affect, it's a big consideration. And, to this point, it has not received a lot of attention.
Third, plans that are not grandfathered will be subject to a wide range of new reporting and disclosure requirements. At some point, they may become routine. But any time new requirements like this take effect, figuring out what you need to do to comply can be a challenge. Grandfathered plans can avoid this.
This leads to a final thought. Sooner or later, every group health plan probably will end up having to comply with all of the requirements in the new law. Although grandfathered status can, in theory, last indefinitely, the reality is that sooner or later most plans will need to make a change that will result in the loss of grandfathered status. But, by waiting to make those changes, an employer can buy time. That time will allow an employer to learn from the experiences of others.
If you preserve your grandfathered status, you can always choose at a later date to give up that status and comply with all of the provisions of the new law. But once you've lost grandfathered status, you can't go back again.