Guest Article

(From the October 18, 2010 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

The Affordable Care Act: More Clarity on Grandfathered Plans and Two New Grace Periods

New Frequently Asked Questions were released by the enforcement agencies for the Patient Protection and Affordable Care Act (the "Act") to provide greater clarity on grandfathered plans, plans exempt from the Act, rescissions, and the Act's effective date for individual health insurance policies. Two new compliance grace periods were granted. Until further guidance is issued, plans that cover only retirees and individuals on long-term disability will be treated as exempt under the "two current employees" rule. Carriers of individual policies with fixed policy years who, in good faith, issued new coverage on or after September 23, 2010 believing the Act did not apply until the commencement of the standard "policy year" are given a reasonable period to come into compliance.

Grandfathered Plans Clarified

The Departments of Labor, Treasury, and Health and Human Services together released two sets of Frequently Asked Questions (FAQs) to respond to various practical questions regarding the Act's application. Reaffirming the guidance released earlier in federal regulations, the FAQs in large part clarify how a plan retains grandfathered status. Specifically, the FAQs confirm:

In the case of insured plans, the plan must continue the same policy. However, the Departments are considering under what circumstances a grandfathered plan may change issuers and still remain grandfathered. Q&A-1.

Rescissions and the Act's Effective Date for Individual Policies

The FAQs confirm that the Act's prohibition against rescissions (except in the case of fraud or misrepresentation by the employee) extends beyond circumstances involving prior medical history. For example, as provided in the regulations, an employer who mistakenly covers a part-time employee for some time (and the employee relies on the coverage) may prospectively cancel the coverage, but may not retroactively cancel it unless there was some fraud or intentional misrepresentation by the employee. However, where a plan covers only active employees and those on COBRA, and an employee pays no premium for coverage after his or her termination of employment, the retroactive termination of the employee's coverage back to the date of termination when the administrative records are reconciled would not be considered a rescission subject to the Act. Similarly, if the plan is not notified of a divorce and the COBRA premium is not paid, the termination of coverage retroactive to the divorce date would not be considered a rescission under the Act. Q&A-7.

Questions have arisen regarding the date on which new individual policies are subject to the Act. Although carriers in the individual market may designate a fixed policy year while continuing to issue policies throughout the year, the Act and regulations contemplate that, if new coverage begins on or after September 23, 2010, the Act's requirements will apply on that date notwithstanding that the policy year may begin later (e.g., January 1 for policies with a calendar policy year). Carriers who in good faith believed otherwise are provided a reasonable period of time after release of the FAQs to come into compliance with this clarification - and are not permitted to rely in good faith on contrary guidance by a state insurance regulator. Q&A-9.

Exempt Plans: HIPAA-Excepted Dental / Vision Plans and Plans with Less than Two Active Employees

Dental or vision benefits that are structured as excepted benefits under HIPAA are exempt from the Act's market reforms if they are offered under a separate policy (or are not an integral part of the plan so that participants can elect not to have the coverage - or, if they elect coverage, must pay an additional premium). Q&A-6.

A separate set of FAQs confirms that plans with "less than two participants who are current employees" are also exempt from the Act's market reforms (as they are exempt from HIPAA). Q&A-1. It is not clear, however, whether plans covering only retirees and individuals on long-term disability are exempt. The Departments expect to issue guidance in the near future on this issue. In the meantime, they will treat such plans as satisfying the exemption for plans with less than two current employees. Q&A-2.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955. Copyright 2010, Deloitte.