On April 1, 2011, the Department of Health and Human Services (HHS) issued six FAQs providing additional guidance on the types of changes that will cause a group health plan to lose grandfathered status for purposes of federal Health Care Reform. While the FAQs generally do not break new ground, they do provide helpful guidance for employers in specific situations.

The FAQs clarify that:

  • If a generic equivalent becomes available for a brand-name drug, moving the brand-name drug to a new tier within the plan's formulary with a resulting increase in the cost-sharing level for that drug and adding the generic to the formulary will NOT cause the plan to lose grandfathered status.
  • If a calendar year plan adopts an amendment that will cause the plan to lose grandfathered status on July 1, 2011, with an effective date of January 1, 2012, grandfathered status is lost on January 1, 2012, the effective date of the amendment, NOT on July 1, 2011, the date it was adopted.
  • If a calendar year plan adopts an amendment that will cause the plan to lose grandfathered status with an effective date of July 1, 2011, it will lose grandfathered status as of that date.
  • Where an employer determines its contribution toward the cost of coverage based on a formula and the formula does not change, the plan does NOT lose grandfathered status even though the actual dollar amount paid by participants increases due to underlying increases in the cost of the coverage.

The interim final regulations regarding grandfathered plan status state that transferring employees from one grandfathered group health plan to another grandfathered group health plan will cause the receiving plan to lose grandfathered status if amending the transferring plan to replicate the terms of the receiving plan would have caused the receiving plan to lose grandfathered status unless the transfer was done for a "bona-fide employment-based reason."

The FAQs clarify that the term "bona-fide employment-based reason" encompasses a variety of circumstances, including but not limited to:

  • Elimination of a benefit package because the insurer is leaving the market or no longer offers the product to the employer.
  • Low or declining participation in a benefit package makes it impractical for the plan sponsor to continue to offer the benefit package.
  • A benefit package is eliminated for any reason and multiple benefit packages covering a significant portion of other employees remain available to the employees being transferred.
  • A benefit package is eliminated from a multiemployer plan as agreed to through collective bargaining

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.