[Federal Register Volume 75, Number 116 (Thursday, June 17, 2010)]
[Rules and Regulations]
[Pages 34538-34570]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-14488]



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Part II

Department of the Treasury



Internal Revenue Service



26 CFR Parts 54 and 602



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Department of Labor



Employee Benefits Security Administration

29 CFR Part 2590



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Department of Health and Human Services

45 CFR Part 147



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Group Health Plans and Health Insurance Coverage Relating to Status as 
a Grandfathered Health Plan Under the Patient Protection and Affordable 
Care Act; Interim Final Rule and Proposed Rule

  Federal Register / Vol. 75 , No. 116 / Thursday, June 17, 2010 / 
Rules and Regulations  

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 54 and 602

[TD 9489]
RIN 1545-BJ51

DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2590

RIN 1210-AB42

DEPARTMENT OF HEALTH AND HUMAN SERVICES

[OCIIO-9991-IFC]

45 CFR Part 147

RIN 0991-AB68


Interim Final Rules for Group Health Plans and Health Insurance 
Coverage Relating to Status as a Grandfathered Health Plan Under the 
Patient Protection and Affordable Care Act

AGENCY: Internal Revenue Service, Department of the Treasury; Employee 
Benefits Security Administration, Department of Labor; Office of 
Consumer Information and Insurance Oversight, Department of Health and 
Human Services.

ACTION: Interim final rules with request for comments.

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SUMMARY: This document contains interim final regulations implementing 
the rules for group health plans and health insurance coverage in the 
group and individual markets under provisions of the Patient Protection 
and Affordable Care Act regarding status as a grandfathered health 
plan.

DATES: Effective date. These interim final regulations are effective on 
June 14, 2010, except that the amendments to 26 CFR 54.9815-2714T, 29 
CFR 2590.715-2714, and 45 CFR 147.120 are effective July 12, 2010.
    Comment date. Comments are due on or before August 16, 2010.

ADDRESSES: Written comments may be submitted to any of the addresses 
specified below. Any comment that is submitted to any Department will 
be shared with the other Departments. Please do not submit duplicates.
    All comments will be made available to the public. Warning: Do not 
include any personally identifiable information (such as name, address, 
or other contact information) or confidential business information that 
you do not want publicly disclosed. All comments are posted on the 
Internet exactly as received, and can be retrieved by most Internet 
search engines. No deletions, modifications, or redactions will be made 
to the comments received, as they are public records. Comments may be 
submitted anonymously.
    Department of Labor. Comments to the Department of Labor, 
identified by RIN 1210-AB42, by one of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: [email protected].
     Mail or Hand Delivery: Office of Health Plan Standards and 
Compliance Assistance, Employee Benefits Security Administration, Room 
N-5653, U.S. Department of Labor, 200 Constitution Avenue, NW., 
Washington, DC 20210, Attention: RIN 1210-AB42.
    Comments received by the Department of Labor will be posted without 
change to http://www.regulations.gov and http://www.dol.gov/ebsa, and 
available for public inspection at the Public Disclosure Room, N-1513, 
Employee Benefits Security Administration, 200 Constitution Avenue, 
NW., Washington, DC 20210.
    Department of Health and Human Services. In commenting, please 
refer to file code OCIIO-9991-IFC. Because of staff and resource 
limitations, the Departments cannot accept comments by facsimile (FAX) 
transmission.
    You may submit comments in one of four ways (please choose only one 
of the ways listed):
    1. Electronically. You may submit electronic comments on this 
regulation to http://www.regulations.gov. Follow the instructions under 
the ``More Search Options'' tab.
    2. By regular mail. You may mail written comments to the following 
address ONLY: Office of Consumer Information and Insurance Oversight, 
Department of Health and Human Services, Attention: OCIIO-9991-IFC, 
P.O. Box 8016, Baltimore, MD 21244-1850.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments to 
the following address ONLY: Office of Consumer Information and 
Insurance Oversight, Department of Health and Human Services, 
Attention: OCIIO-9991-IFC, Mail Stop C4-26-05, 7500 Security Boulevard, 
Baltimore, MD 21244-1850.
    4. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments before the close of the comment period 
to either of the following addresses:
    a. For delivery in Washington, DC--Office of Consumer Information 
and Insurance Oversight, Department of Health and Human Services, Room 
445-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., 
Washington, DC 20201.
    (Because access to the interior of the Hubert H. Humphrey Building 
is not readily available to persons without Federal government 
identification, commenters are encouraged to leave their comments in 
the OCIIO drop slots located in the main lobby of the building. A 
stamp-in clock is available for persons wishing to retain a proof of 
filing by stamping in and retaining an extra copy of the comments being 
filed.)
    b. For delivery in Baltimore, MD--Centers for Medicare & Medicaid 
Services, Department of Health and Human Services, 7500 Security 
Boulevard, Baltimore, MD 21244-1850.
    If you intend to deliver your comments to the Baltimore address, 
please call (410) 786-7195 in advance to schedule your arrival with one 
of our staff members.
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and received after the comment 
period.
    Submission of comments on paperwork requirements. You may submit 
comments on this document's paperwork requirements by following the 
instructions at the end of the ``Collection of Information 
Requirements'' section in this document.
    Inspection of Public Comments: All comments received before the 
close of the comment period are available for viewing by the public, 
including any personally identifiable or confidential business 
information that is included in a comment. The Departments post all 
comments received before the close of the comment period on the 
following Web site as soon as possible after they have been received: 
http://www.regulations.gov. Follow the search instructions on that Web 
site to view public comments.
    Comments received timely will also be available for public 
inspection as they are received, generally beginning approximately 
three weeks after publication of a document, at the headquarters of the 
Centers for Medicare & Medicaid Services, 7500 Security Boulevard, 
Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 
a.m. to 4 p.m. EST. To

[[Page 34539]]

schedule an appointment to view public comments, phone 1-800-743-3951.
    Internal Revenue Service. Comments to the IRS, identified by REG-
118412-10, by one of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: CC:PA:LPD:PR (REG-118412-10), room 5205, Internal 
Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 
20044.
     Hand or courier delivery: Monday through Friday between 
the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-118412-10), 
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, 
NW., Washington, DC 20224.
    All submissions to the IRS will be open to public inspection and 
copying in room 1621, 1111 Constitution Avenue, NW., Washington, DC 
from 9 a.m. to 4 p.m.

FOR FURTHER INFORMATION CONTACT: Amy Turner or Beth Baum, Employee 
Benefits Security Administration, Department of Labor, at (202) 693-
8335; Karen Levin, Internal Revenue Service, Department of the 
Treasury, at (202) 622-6080; Jim Mayhew, Office of Consumer Information 
and Insurance Oversight, Department of Health and Human Services, at 
(410) 786-1565.
    Customer Service Information: Individuals interested in obtaining 
information from the Department of Labor concerning employment-based 
health coverage laws may call the EBSA Toll-Free Hotline at 1-866-444-
EBSA (3272) or visit the Department of Labor's Web site (http://www.dol.gov/ebsa). In addition, information from HHS on private health 
insurance for consumers can be found on the Centers for Medicare & 
Medicaid Services (CMS) Web site (http://www.cms.hhs.gov/HealthInsReformforConsume/01_Overview.asp) and information on health 
reform can be found at http://www.healthreform.gov.

SUPPLEMENTARY INFORMATION:

I. Background

    The Patient Protection and Affordable Care Act (the Affordable Care 
Act), Public Law 111-148, was enacted on March 23, 2010; the Health 
Care and Education Reconciliation Act (the Reconciliation Act), Public 
Law 111-152, was enacted on March 30, 2010. The Affordable Care Act and 
the Reconciliation Act reorganize, amend, and add to the provisions in 
part A of title XXVII of the Public Health Service Act (PHS Act) 
relating to group health plans and health insurance issuers in the 
group and individual markets. The term ``group health plan'' includes 
both insured and self-insured group health plans.\1\ The Affordable 
Care Act adds section 715(a)(1) to the Employee Retirement Income 
Security Act (ERISA) and section 9815(a)(1) to the Internal Revenue 
Code (the Code) to incorporate the provisions of part A of title XXVII 
of the PHS Act into ERISA and the Code, and make them applicable to 
group health plans, and health insurance issuers providing health 
insurance coverage in connection with group health plans. The PHS Act 
sections incorporated by this reference are sections 2701 through 2728. 
PHS Act sections 2701 through 2719A are substantially new, though they 
incorporate some provisions of prior law. PHS Act sections 2722 through 
2728 are sections of prior law renumbered, with some, mostly minor, 
changes. Section 1251 of the Affordable Care Act, as modified by 
section 10103 of the Affordable Care Act and section 2301 of the 
Reconciliation Act, specifies that certain plans or coverage existing 
as of the date of enactment (that is, grandfathered health plans) are 
only subject to certain provisions.
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    \1\ The term ``group health plan'' is used in title XXVII of the 
PHS Act, part 7 of ERISA, and chapter 100 of the Code, and is 
distinct from the term ``health plan'', as used in other provisions 
of title I of the Affordable Care Act. The term ``health plan'' does 
not include self-insured group health plans.
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    The Affordable Care Act also adds section 715(a)(2) of ERISA, which 
provides that, to the extent that any provision of part 7 of ERISA 
conflicts with part A of title XXVII of the PHS Act with respect to 
group health plans or group health insurance coverage, the PHS Act 
provisions apply. Similarly, the Affordable Care Act adds section 
9815(a)(2) of the Code, which provides that, to the extent that any 
provision of subchapter B of chapter 100 of the Code conflicts with 
part A of title XXVII of the PHS Act with respect to group health plans 
or group health insurance coverage, the PHS Act provisions apply. 
Therefore, although ERISA section 715(a)(1) and Code section 9815(a)(1) 
incorporate by reference new provisions, they do not affect preexisting 
sections of ERISA or the Code unless they cannot be read consistently 
with an incorporated provision of the PHS Act. For example, ERISA 
section 732(a) generally provides that part 7 of ERISA--and Code 
section 9831(a) generally provides that chapter 100 of the Code--does 
not apply to plans with less than two participants who are current 
employees (including retiree-only plans that cover less than two 
participants who are current employees). Prior to enactment of the 
Affordable Care Act, the PHS Act had a parallel provision at section 
2721(a). After the Affordable Care Act amended, reorganized, and 
renumbered most of title XXVII of the PHS Act, that exception no longer 
exists. Similarly, ERISA section 732(b) and (c) generally provides that 
the requirements of part 7 of ERISA--and Code section 9831(b) and (c) 
generally provides that the requirements of chapter 100 of the Code--do 
not apply to excepted benefits.\2\ Prior to enactment of the Affordable 
Care Act, the PHS Act had a parallel section 2721(c) and (d) that 
indicated that the provisions of subparts 1 through 3 of part A of 
title XXVII of the PHS Act did not apply to excepted benefits. After 
the Affordable Care Act amended and renumbered PHS Act section 2721(c) 
and (d) as section 2722(b) and (c), that exception could be read to be 
narrowed so that it applies only with respect to subpart 2 of part A of 
title XXVII of the PHS Act, thus, in effect requiring excepted benefits 
to comply with subparts I and II of part A.
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    \2\ Excepted benefits generally include dental-only and vision-
only plans, most health flexible spending arrangements, Medigap 
policies, and accidental death and dismemberment coverage. For more 
information on excepted benefits, see 26 CFR 54.9831-1, 29 CFR 
2590.732, 45 CFR 146.145, and 45 CFR 148.220.
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    The absence of an express provision in part A of title XXVII of the 
PHS Act does not create a conflict with the relevant requirements of 
ERISA and the Code. Accordingly, the exceptions of ERISA section 732 
and Code section 9831 for very small plans and certain retiree-only 
health plans, and for excepted benefits, remain in effect and, thus, 
ERISA section 715 and Code section 9815, as added by the Affordable 
Care Act, do not apply to such plans or excepted benefits.
    Moreover, there is no express indication in the legislative history 
of an intent to treat issuers of group health insurance coverage or 
nonfederal governmental plans (that are subject to the PHS Act) any 
differently in this respect from plans subject to ERISA and the Code. 
The Departments of Health and Human Services, Labor, and the Treasury 
(the Departments) operate under a Memorandum of Understanding (MOU) \3\ 
that implements section 104 of the Health Insurance Portability and 
Accountability Act of 1996 (HIPAA), enacted on August 21, 1996, and 
subsequent amendments, and provides that requirements over which two or 
more Secretaries have responsibility (``shared provisions'') must be 
administered so as to have the same effect at all times. HIPAA section 
104

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also requires the coordination of policies relating to enforcing the 
shared provisions in order to avoid duplication of enforcement efforts 
and to assign priorities in enforcement.
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    \3\ See 64 FR 70164 (December 15, 1999).
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    There is no express statement of intent that nonfederal 
governmental retiree-only plans should be treated differently from 
private sector plans or that excepted benefits offered by nonfederal 
governmental plans should be treated differently from excepted benefits 
offered by private sector plans. Because treating nonfederal 
governmental retiree-only plans and excepted benefits provided by 
nonfederal governmental plans differently would create confusion with 
respect to the obligations of issuers that do not distinguish whether a 
group health plan is subject to ERISA or the PHS Act, and in light of 
the MOU, the Department of Health and Human Services (HHS) does not 
intend to use its resources to enforce the requirements of HIPAA or the 
Affordable Care Act with respect to nonfederal governmental retiree-
only plans or with respect to excepted benefits provided by nonfederal 
governmental plans.
    PHS Act section 2723(a)(2) (formerly section 2722(a)(2)) gives the 
States primary authority to enforce the PHS Act group and individual 
market provisions over group and individual health insurance issuers. 
HHS enforces these provisions with respect to issuers only if it 
determines that the State has ``failed to substantially enforce'' one 
of the Federal provisions. Furthermore, the PHS Act preemption 
provisions allow States to impose requirements on issuers in the group 
and individual markets that are more protective than the Federal 
provisions. However, HHS is encouraging States not to apply the 
provisions of title XXVII of the PHS Act to issuers of retiree-only 
plans or of excepted benefits. HHS advises States that if they do not 
apply these provisions to the issuers of retiree-only plans or of 
excepted benefits, HHS will not cite a State for failing to 
substantially enforce the provisions of part A of title XXVII of the 
PHS Act in these situations.
    Subtitles A and C of title I of the Affordable Care Act amend the 
requirements of title XXVII of the PHS Act (changes to which are 
incorporated into ERISA section 715). The preemption provisions of 
ERISA section 731 and PHS Act section 2724 \4\ (implemented in 29 CFR 
2590.731(a) and 45 CFR 146.143(a)) apply so that the requirements of 
part 7 of ERISA and title XXVII of PHS Act, as amended by the 
Affordable Care Act, are not to be ``construed to supersede any 
provision of State law which establishes, implements, or continues in 
effect any standard or requirement solely relating to health insurance 
issuers in connection with group or individual health insurance 
coverage except to the extent that such standard or requirement 
prevents the application of a requirement'' of the Affordable Care Act. 
Accordingly, State laws that impose on health insurance issuers 
requirements that are stricter than the requirements imposed by the 
Affordable Care Act will not be superseded by the Affordable Care Act.
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    \4\ Code section 9815 incorporates the preemption provisions of 
PHS Act section 2724. Prior to the Affordable Care Act, there were 
no express preemption provisions in chapter 100 of the Code.
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    The Departments are issuing regulations implementing the revised 
PHS Act sections 2701 through 2719A in several phases. The first 
publication in this series was a Request for Information relating to 
the medical loss ratio provisions of PHS Act section 2718, published in 
the Federal Register on April 14, 2010 (75 FR 19297). The second 
publication was interim final regulations implementing PHS Act section 
2714 (requiring dependent coverage of children to age 26), published in 
the Federal Register on May 13, 2010 (75 FR 27122). This document 
contains interim final regulations implementing section 1251 of the 
Affordable Care Act (relating to grandfathered health plans), as well 
as adding a cross-reference to these interim final regulations in the 
regulations implementing PHS Act section 2714. The implementation of 
other provisions in PHS Act sections 2701 through 2719A will be 
addressed in future regulations.

II. Overview of the Regulations: Section 1251 of the Affordable Care 
Act, Preservation of Right To Maintain Existing Coverage (26 CFR 
54.9815-1251T, 29 CFR 2590.715-1251, and 45 CFR 147.140)

A. Introduction

    Section 1251 of the Affordable Care Act, as modified by section 
10103 of the Affordable Care Act and section 2301 of the Reconciliation 
Act, provides that certain group health plans and health insurance 
coverage existing as of March 23, 2010 (the date of enactment of the 
Affordable Care Act), are subject only to certain provisions of the 
Affordable Care Act. The statute and these interim final regulations 
refer to these plans and health insurance coverage as grandfathered 
health plans.
    The Affordable Care Act balances the objective of preserving the 
ability of individuals to maintain their existing coverage with the 
goals of ensuring access to affordable essential coverage and improving 
the quality of coverage. Section 1251 provides that nothing in the 
Affordable Care Act requires an individual to terminate the coverage in 
which the individual was enrolled on March 23, 2010. It also generally 
provides that, with respect to group health plans or health insurance 
coverage in which an individual was enrolled on March 23, 2010, various 
requirements of the Act shall not apply to such plan or coverage, 
regardless of whether the individual renews such coverage after March 
23, 2010. However, to ensure access to coverage with certain 
particularly significant protections, Congress required grandfathered 
health plans to comply with a subset of the Affordable Care Act's 
health reform provisions. Thus, for example, grandfathered health plans 
must comply with the prohibition on rescissions of coverage except in 
the case of fraud or intentional misrepresentation and the elimination 
of lifetime limits (both of which apply for plan years, or in the 
individual market, policy years, beginning on or after September 23, 
2010). On the other hand, grandfathered health plans are not required 
to comply with certain other requirements of the Affordable Care Act; 
for example, the requirement that preventive health services be covered 
without any cost sharing (which otherwise becomes generally applicable 
for plan years, or in the individual market, policy years, beginning on 
or after September 23, 2010).
    A number of additional reforms apply for plan years (in the 
individual market, policy years) beginning on or after January 1, 2014. 
As with the requirements effective for plan years (in the individual 
market, policy years) beginning on or after September 23, 2010, 
grandfathered health plans must then comply with some, but not all of 
these reforms. See Table 1 in section II.D of this preamble for a list 
of various requirements that apply to grandfathered health plans.
    In making grandfathered health plans subject to some but not all of 
the health reforms contained in the Affordable Care Act, the statute 
balances its objective of preserving the ability to maintain existing 
coverage with the goals of expanding access to and improving the 
quality of health coverage. The statute does not, however, address at 
what point changes to a group health plan or health insurance coverage 
in which an individual was

[[Page 34541]]

enrolled on March 23, 2010 are significant enough to cause the plan or 
health insurance coverage to cease to be a grandfathered health plan, 
leaving that question to be addressed by regulatory guidance.
    These interim final regulations are designed to ease the transition 
of the healthcare industry into the reforms established by the 
Affordable Care Act by allowing for gradual implementation of reforms 
through a reasonable grandfathering rule. A more detailed description 
of the basis for these interim final regulations and other regulatory 
alternatives considered is included in section IV.B later in this 
preamble.

B. Definition of Grandfathered Health Plan Coverage in Paragraph (a) of 
26 CFR 54.9815-1251T, 29 CFR 2590.715-1251, and 45 CFR 147.140 of These 
Interim Final Regulations

    Under the statute and these interim final regulations, a group 
health plan or group or individual health insurance coverage is a 
grandfathered health plan with respect to individuals enrolled on March 
23, 2010. Paragraph (a)(1) of 26 CFR 54.9815-1251T, 29 CFR 2590.715-
1251, and 45 CFR 147.140 of these interim final regulations provides 
that a group health plan or group health insurance coverage does not 
cease to be grandfathered health plan coverage merely because one or 
more (or even all) individuals enrolled on March 23, 2010 cease to be 
covered, provided that the plan or group health insurance coverage has 
continuously covered someone since March 23, 2010 (not necessarily the 
same person, but at all times at least one person). The determination 
under the rules of these interim final regulations is made separately 
with respect to each benefit package made available under a group 
health plan or health insurance coverage.
    Moreover, these interim final regulations provide that, subject to 
the rules of paragraph (f) of 26 CFR 54.9815-1251T, 29 CFR 2590.715-
1251, and 45 CFR 147.140 for collectively bargained plans, if an 
employer or employee organization enters into a new policy, 
certificate, or contract of insurance after March 23, 2010 (because, 
for example, any previous policy, certificate, or contract of insurance 
is not being renewed), then that policy, certificate, or contract of 
insurance is not a grandfathered health plan with respect to the 
individuals in the group health plan. Any policies sold in the group 
and individual health insurance markets to new entities or individuals 
after March 23, 2010 will not be grandfathered health plans even if the 
health insurance products sold to those subscribers were offered in the 
group or individual market before March 23, 2010.
    To maintain status as a grandfathered health plan, a plan or health 
insurance coverage (1) must include a statement, in any plan materials 
provided to participants or beneficiaries (in the individual market, 
primary subscribers) describing the benefits provided under the plan or 
health insurance coverage, that the plan or health insurance coverage 
believes that it is a grandfathered health plan within the meaning of 
section 1251 of the Affordable Care Act and (2) must provide contact 
information for questions and complaints.
    Model language is provided in these interim final regulations that 
can be used to satisfy this disclosure requirement. Comments are 
invited on possible improvements to the model language of grandfathered 
health plan status. Some have suggested, for example, that each 
grandfathered health plan be required to list and describe the various 
consumer protections that do not apply to the plan or health insurance 
coverage because it is grandfathered, together with their effective 
dates. The Departments intend to consider any comments regarding 
possible improvements to the model language in the near term; any 
changes to the model language that may result from such comments could 
be published in additional administrative guidance other than in the 
form of regulations.
    Similarly, under these interim final regulations, to maintain 
status as a grandfathered health plan, a plan or issuer must also 
maintain records documenting the terms of the plan or health insurance 
coverage that were in effect on March 23, 2010, and any other documents 
necessary to verify, explain, or clarify its status as a grandfathered 
health plan. Such documents could include intervening and current plan 
documents, health insurance policies, certificates or contracts of 
insurance, summary plan descriptions, documentation of premiums or the 
cost of coverage, and documentation of required employee contribution 
rates. In addition, the plan or issuer must make such records available 
for examination. Accordingly, a participant, beneficiary, individual 
policy subscriber, or State or Federal agency official would be able to 
inspect such documents to verify the status of the plan or health 
insurance coverage as a grandfathered health plan. The plan or issuer 
must maintain such records and make them available for examination for 
as long as the plan or issuer takes the position that the plan or 
health insurance coverage is a grandfathered health plan.
    Under the statute and these interim final regulations, if family 
members of an individual who is enrolled in a grandfathered health plan 
as of March 23, 2010 enroll in the plan after March 23, 2010, the plan 
or health insurance coverage is also a grandfathered health plan with 
respect to the family members.

C. Adding New Employees in Paragraph (b) of 26 CFR 54.9815-1251T, 29 
CFR 2590.715-1251, and 45 CFR 147.140 of These Interim Final 
Regulations

    These interim final regulations at 26 CFR 54.9815-1251T, 29 CFR 
2590.715-1251, and 45 CFR 147.140 provide that a group health plan that 
provided coverage on March 23, 2010 generally is also a grandfathered 
health plan with respect to new employees (whether newly hired or newly 
enrolled) and their families who enroll in the grandfathered health 
plan after March 23, 2010. These interim final regulations clarify that 
in such cases, any health insurance coverage provided under the group 
health plan in which an individual was enrolled on March 23, 2010 is 
also a grandfathered health plan. To prevent abuse, these interim final 
regulations provide that if the principal purpose of a merger, 
acquisition, or similar business restructuring is to cover new 
individuals under a grandfathered health plan, the plan ceases to be a 
grandfathered health plan. The goal of this rule is to prevent 
grandfather status from being bought and sold as a commodity in 
commercial transactions. These interim final regulations also contain a 
second anti-abuse rule designed to prevent a plan or issuer from 
circumventing the limits on changes that cause a plan or health 
insurance coverage to cease to be a grandfathered health plan under 
paragraph (g) (described more fully in section II.F of this preamble). 
This rule in paragraph (b)(2)(ii) addresses a situation under which 
employees who previously were covered by a grandfathered health plan 
are transferred to another grandfathered health plan. This rule is 
intended to prevent efforts to retain grandfather status by indirectly 
making changes that would result in loss of that status if those 
changes were made directly.

[[Page 34542]]

D. Applicability of Part A of Title XXVII of the PHS Act to 
Grandfathered Health Plans Paragraphs (c), (d), and (e) of 26 CFR 
54.9815-1251T, 29 CFR 2590.715-1251, and 45 CFR 147.140 of These 
Interim Final Regulations

    A grandfathered health plan generally is not subject to subtitles A 
and C of title I of the Affordable Care Act, except as specifically 
provided by the statute and these interim final regulations. The 
statute and these interim final regulations provide that some 
provisions of subtitles A and C of title I of the Affordable Care Act 
continue to apply to all grandfathered health plans and some provisions 
continue to apply only to grandfathered health plans that are group 
health plans. These interim final regulations clarify that a 
grandfathered health plan must continue to comply with the requirements 
of the PHS Act, ERISA, and the Code that were applicable prior to the 
changes enacted by the Affordable Care Act, except to the extent 
supplanted by changes made by the Affordable Care Act. Therefore, the 
HIPAA portability and nondiscrimination requirements and the Genetic 
Information Nondiscrimination Act requirements applicable prior to the 
effective date of the Affordable Care Act continue to apply to 
grandfathered health plans. In addition, the mental health parity 
provisions, the Newborns' and Mothers' Health Protection Act 
provisions, the Women's Health and Cancer Rights Act, and Michelle's 
Law continue to apply to grandfathered health plans. The following 
table lists the new health coverage reforms in part A of title XXVII of 
the PHS Act (as amended by the Affordable Care Act) that apply to 
grandfathered health plans:

  Table 1--List of the New Health Reform Provisions of Part A of Title
      XXVII of the PHS Act That Apply to Grandfathered Health Plans
------------------------------------------------------------------------
                                           Application to grandfathered
      PHS Act statutory provisions                 health plans
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Sec.   2704 Prohibition of preexisting   Applicable to grandfathered
 condition exclusion or other             group health plans and group
 discrimination based on health status.   health insurance coverage.
                                         Not applicable to grandfathered
                                          individual health insurance
                                          coverage.
Sec.   2708 Prohibition on excessive     Applicable.
 waiting periods.
Sec.   2711 No lifetime or annual        Lifetime limits: Applicable.
 limits.
                                         Annual limits: Applicable to
                                          grandfathered group health
                                          plans and group health
                                          insurance coverage; not
                                          applicable to grandfathered
                                          individual health insurance
                                          coverage.
Sec.   2712 Prohibition on rescissions.  Applicable.
Sec.   2714 Extension of dependent       Applicable \5\.
 coverage until age 26.
Sec.   2715 Development and utilization  Applicable.
 of uniform explanation of coverage
 documents and standardized definitions.
Sec.   2718 Bringing down cost of        Applicable to insured
 health care coverage (for insured        grandfathered health plans.
 coverage).
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\5\ For a group health plan or group health insurance coverage that is a
  grandfathered health plan for plan years beginning before January 1,
  2014, PHS Act section 2714 is applicable in the case of an adult child
  only if the adult child is not eligible for other employer-sponsored
  health plan coverage. The interim final regulations relating to PHS
  Act section 2714, published in 75 FR 27122 (May 13, 2010), and these
  interim final regulations clarify that, in the case of an adult child
  who is eligible for coverage under the employer-sponsored plans of
  both parents, neither parent's plan may exclude the adult child from
  coverage based on the fact that the adult child is eligible to enroll
  in the other parent's employer-sponsored plan.

E. Health Insurance Coverage Maintained Pursuant to a Collective 
Bargaining Agreement of Paragraph (f) of 26 CFR 54.9815-1251T, 29 CFR 
2590.715-1251, and 45 CFR 147.140 of These Interim Final Regulations

    In paragraph (f) of 26 CFR 54.9815-1251T, 29 CFR 2590.715-1251, and 
45 CFR 147.140, these interim final regulations provide that in the 
case of health insurance coverage maintained pursuant to one or more 
collective bargaining agreements ratified before March 23, 2010, the 
coverage is a grandfathered health plan at least until the date on 
which the last agreement relating to the coverage that was in effect on 
March 23, 2010 terminates. Thus, before the last of the applicable 
collective bargaining agreement terminates, any health insurance 
coverage provided pursuant to the collective bargaining agreements is a 
grandfathered health plan, even if there is a change in issuers (or any 
other change described in paragraph (g)(1) of 26 CFR 54.9815-1251T, 29 
CFR 2590.715-1251, and 45 CFR 147.140 of these interim final 
regulations) during the period of the agreement. The statutory language 
of the provision refers solely to ``health insurance coverage'' and 
does not refer to a group health plan; therefore, these interim final 
regulations apply this provision only to insured plans maintained 
pursuant to a collective bargaining agreement and not to self-insured 
plans. After the date on which the last of the collective bargaining 
agreements terminates, the determination of whether health insurance 
coverage maintained pursuant to a collective bargaining agreement is 
grandfathered health plan coverage is made under the rules of paragraph 
(g). This determination is made by comparing the terms of the coverage 
on the date of determination with the terms of the coverage that were 
in effect on March 23, 2010. A change in issuers during the period of 
the agreement, by itself, would not cause the plan to cease to be a 
grandfathered health plan at the termination of the agreement. However, 
for a change in issuers after the termination of the agreement, the 
rules of paragraph (a)(1)(ii) of 26 CFR 54.9815-1251T, 29 CFR 2590.715-
1251, and 45 CFR 147.140 of these interim final regulations apply.
    Similar language to section 1251(d) in related bills that were not 
enacted would have provided a delayed effective date for collectively 
bargained plans with respect to the Affordable Care Act requirements. 
Questions have arisen as to whether section 1251(d) as enacted in the 
Affordable Care Act similarly operated to delay the application of the 
Affordable Care Act's requirements to collectively bargained plans--
specifically, whether the provision of section 1251(d) that exempts 
collectively bargained plans from requirements for the duration of the 
agreement effectively provides the plans with a delayed effective date 
with respect to all new PHS Act requirements (in contrast to the rules 
for

[[Page 34543]]

grandfathered health plans which provide that specified PHS Act 
provisions apply to all plans, including grandfathered health plans). 
However, the statutory language that applies only to collectively 
bargained plans, as signed into law as part of the Affordable Care Act, 
provides that insured collectively bargained plans in which individuals 
were enrolled on the date of enactment are included in the definition 
of a grandfathered health plan. Therefore, collectively bargained plans 
(both insured and self-insured) that are grandfathered health plans are 
subject to the same requirements as other grandfathered health plans, 
and are not provided with a delayed effective date for PHS Act 
provisions with which other grandfathered health plans must comply. 
Thus, the provisions that apply to grandfathered health plans apply to 
collectively bargained plans before and after termination of the last 
of the applicable collective bargaining agreement.

F. Maintenance of Grandfather Status of Paragraph (g) of 26 CFR 
54.9815-1251T, 29 CFR 2590.715-1251, and 45 CFR 147.140 of These 
Interim Final Regulations)

    Questions have arisen regarding the extent to which changes can be 
made to a plan or health insurance coverage and still have the plan or 
coverage considered the same as that in existence on March 23, 2010, so 
as to maintain status as a grandfathered health plan. Some have 
suggested that any change would cause a plan or health insurance 
coverage to be considered different and thus cease to be a 
grandfathered health plan. Others have suggested that any degree of 
change, no matter how large, is irrelevant provided the plan or health 
insurance coverage can trace some continuous legal relationship to the 
plan or health insurance coverage that was in existence on March 23, 
2010.
    In paragraph (g)(1) of 26 CFR 54.9815-1251T, 29 CFR 2590.715-1251, 
and 45 CFR 147.140 of these interim final regulations, coordinated 
rules are set forth for determining when changes to the terms of a plan 
or health insurance coverage cause the plan or coverage to cease to be 
a grandfathered health plan. The first of those rules (in paragraph 
(g)(1)(i)) constrains the extent to which the scope of benefits can be 
reduced. It provides that the elimination of all or substantially all 
benefits to diagnose or treat a particular condition causes a plan or 
health insurance coverage to cease to be a grandfathered health plan. 
If, for example, a plan eliminates all benefits for cystic fibrosis, 
the plan ceases to be a grandfathered health plan (even though this 
condition may affect relatively few individuals covered under the 
plan). Moreover, for purposes of paragraph (g)(1)(i), the elimination 
of benefits for any necessary element to diagnose or treat a condition 
is considered the elimination of all or substantially all benefits to 
diagnose or treat a particular condition. An example in these interim 
final regulations illustrates that if a plan provides benefits for a 
particular mental health condition, the treatment for which is a 
combination of counseling and prescription drugs, and subsequently 
eliminates benefits for counseling, the plan is treated as having 
eliminated all or substantially all benefits for that mental health 
condition.
    A second set of rules (in paragraphs (g)(1)(ii) through (g)(1)(iv)) 
limits the extent to which plans and issuers can increase the fixed-
amount and the percentage cost-sharing requirements that are imposed 
with respect to individuals for covered items and services. Plans and 
issuers can choose to make larger increases to fixed-amount or 
percentage cost-sharing requirements than permissible under these 
interim final regulations, but at that point the individual's plan or 
health insurance coverage would cease to be grandfathered health plan 
coverage. A more detailed description of the basis for the cost-sharing 
requirements in these interim final regulations is included in section 
IV.B later in this preamble.
    These interim final regulations provide different standards with 
respect to coinsurance and fixed-amount cost sharing. Coinsurance 
automatically rises with medical inflation. Therefore, changes to the 
level of coinsurance (such as moving from a requirement that the 
patient pay 20 percent to a requirement that the patient pay 30 percent 
of inpatient surgery costs) would significantly alter the level of 
benefits provided. On the other hand, fixed-amount cost-sharing 
requirements (such as copayments and deductibles) do not take into 
account medical inflation. Therefore, changes to fixed-amount cost-
sharing requirements (for example, moving from a $35 copayment to a $40 
copayment for outpatient doctor visits) may be reasonable to keep up 
with the rising cost of medical items and services. Accordingly, 
paragraph (g)(1)(ii) provides that any increase in a percentage cost-
sharing requirement (such as coinsurance) causes a plan or health 
insurance coverage to cease to be a grandfathered health plan.
    With respect to fixed-amount cost-sharing requirements, paragraph 
(g)(1)(iii) provides two rules: a rule for cost-sharing requirements 
other than copayments and a rule for copayments. Fixed-amount cost-
sharing requirements include, for example, a $500 deductible, a $30 
copayment, or a $2,500 out-of-pocket limit. With respect to fixed-
amount cost-sharing requirements other than copayments, a plan or 
health insurance coverage ceases to be a grandfathered health plan if 
there is an increase, since March 23, 2010, in a fixed-amount cost-
sharing requirement that is greater than the maximum percentage 
increase. The maximum percentage increase is defined as medical 
inflation (from March 23, 2010) plus 15 percentage points. For this 
purpose, medical inflation is defined in these interim final 
regulations by reference to the overall medical care component of the 
Consumer Price Index for All Urban Consumers, unadjusted (CPI), 
published by the Department of Labor. For fixed-amount copayments, a 
plan or health insurance coverage ceases to be a grandfathered health 
plan if there is an increase since March 23, 2010 in the copayment that 
exceeds the greater of (A) the maximum percentage increase or (B) five 
dollars increased by medical inflation. A more detailed description of 
the basis for these rules relating to cost-sharing requirements is 
included in section IV.B later in this preamble.
    With respect to employer contributions, these interim final 
regulations include a standard for changes that would result in 
cessation of grandfather status. Specifically, paragraph (g)(1)(v) 
limits the ability of an employer or employee organization to decrease 
its contribution rate for coverage under a group health plan or group 
health insurance coverage. Two different situations are addressed. 
First, if the contribution rate is based on the cost of coverage, a 
group health plan or group health insurance coverage ceases to be a 
grandfathered health plan if the employer or employee organization 
decreases its contribution rate towards the cost of any tier of 
coverage for any class of similarly situated individuals \6\ by more 
than 5 percentage points below the contribution rate on March 23, 2010. 
For this purpose, contribution rate is defined as the amount of 
contributions made by an employer or employee organization compared to 
the total cost of coverage, expressed as a percentage. These interim 
final regulations provide that total cost of coverage is determined in 
the same manner as the applicable

[[Page 34544]]

premium is calculated under the COBRA continuation provisions of 
section 604 of ERISA, section 4980B(f)(4) of the Code, and section 2204 
of the PHS Act. In the case of a self-insured plan, contributions by an 
employer or employee organization are calculated by subtracting the 
employee contributions towards the total cost of coverage from the 
total cost of coverage. Second, if the contribution rate is based on a 
formula, such as hours worked or tons of coal mined, a group health 
plan or group health insurance coverage ceases to be a grandfathered 
health plan if the employer or employee organization decreases its 
contribution rate towards the cost of any tier of coverage for any 
class of similarly situated individuals by more than 5 percent below 
the contribution rate on March 23, 2010.
---------------------------------------------------------------------------

    \6\ Similarly situated individuals are described in the HIPAA 
nondiscrimination regulations at 26 CFR 54.9802-1(d), 29 CFR 
2590.702(d), and 45 CFR 146.121(d).
---------------------------------------------------------------------------

    Finally, paragraph (g)(1)(vi) addresses the imposition of a new or 
modified annual limit by a plan, or group or individual health 
insurance coverage.\7\ Three different situations are addressed:
---------------------------------------------------------------------------

    \7\ Independent of these rules regarding the impact on 
grandfather status of newly adopted or reduced annual limits, group 
health plans and group or individual health insurance coverage 
(other than individual health insurance policies that are 
grandfathered health plans) are required to comply with PHS Act 
section 2711, which permits restricted annual limits (as defined in 
regulations) until 2014. The Departments expect to publish 
regulations regarding restricted annual limits in the very near 
future.
---------------------------------------------------------------------------

     A plan or health insurance coverage that, on March 23, 
2010, did not impose an overall annual or lifetime limit on the dollar 
value of all benefits ceases to be a grandfathered health plan if the 
plan or health insurance coverage imposes an overall annual limit on 
the dollar value of benefits.
     A plan or health insurance coverage, that, on March 23, 
2010, imposed an overall lifetime limit on the dollar value of all 
benefits but no overall annual limit on the dollar value of all 
benefits ceases to be a grandfathered health plan if the plan or health 
insurance coverage adopts an overall annual limit at a dollar value 
that is lower than the dollar value of the lifetime limit on March 23, 
2010.
     A plan or health insurance coverage that, on March 23, 
2010, imposed an overall annual limit on the dollar value of all 
benefits ceases to be a grandfathered health plan if the plan or health 
insurance coverage decreases the dollar value of the annual limit 
(regardless of whether the plan or health insurance coverage also 
imposed an overall lifetime limit on March 23, 2010 on the dollar value 
of all benefits).
    Under these interim final regulations, changes other than the 
changes described in 26 CFR 54.9815-1251T(g)(1), 29 CFR 2590.715-
1251(g)(1), and 45 CFR 147.140(g)(1) will not cause a plan or coverage 
to cease to be a grandfathered health plan. Examples include changes to 
premiums, changes to comply with Federal or State legal requirements, 
changes to voluntarily comply with provisions of the Affordable Care 
Act, and changing third party administrators, provided these changes 
are made without exceeding the standards established by paragraph 
(g)(1).
    These interim final regulations provide transitional rules for 
plans and issuers that made changes after the enactment of the 
Affordable Care Act pursuant to a legally binding contract entered into 
prior to enactment, made changes to the terms of health insurance 
coverage pursuant to a filing before March 23, 2010 with a State 
insurance department, or made changes pursuant to written amendments to 
a plan that were adopted prior to March 23, 2010. If a plan or issuer 
makes changes in any of these situations, the changes are effectively 
considered part of the plan terms on March 23, 2010 even though they 
are not then effective. Therefore, such changes are not taken into 
account in considering whether the plan or health insurance coverage 
remains a grandfathered health plan.
    Because status as a grandfathered health plan under section 1251 of 
the Affordable Care Act is determined in relation to coverage on March 
23, 2010, the date of enactment of the Affordable Care Act, the 
Departments considered whether they should provide a good-faith 
compliance period from Departmental enforcement until guidance 
regarding the standards for maintaining grandfather status was made 
available to the public. Group health plans and health insurance 
issuers often make routine changes from year to year, and some plans 
and issuers may have needed to implement such changes prior to the 
issuance of these interim final regulations.
    Accordingly, for purposes of enforcement, the Departments will take 
into account good-faith efforts to comply with a reasonable 
interpretation of the statutory requirements and may disregard changes 
to plan and policy terms that only modestly exceed those changes 
described in paragraph (g)(1) of 26 CFR 54.9815-1251T, 29 CFR 2590.715-
1251, and 45 CFR 147.140 and that are adopted before June 14, 2010, the 
date the regulations were made publicly available.
    In addition, these interim final regulations provide employers and 
issuers with a grace period within which to revoke or modify any 
changes adopted prior to June 14, 2010, where the changes might 
otherwise cause the plan or health insurance coverage to cease to be a 
grandfathered health plan. Under this rule, grandfather status is 
preserved if the changes are revoked, and the plan or health insurance 
coverage is modified, effective as of the first day of the first plan 
or policy year beginning on or after September 23, 2010 to bring the 
terms within the limits for retaining grandfather status in these 
interim final regulations. For this purpose, and for purposes of the 
reasonable good faith standard changes will be considered to have been 
adopted before these interim final regulations are publicly available 
if the changes are effective before that date, the changes are 
effective on or after that date pursuant to a legally binding contract 
entered into before that date, the changes are effective on or after 
that date pursuant to a filing before that date with a State insurance 
department, or the changes are effective on or after that date pursuant 
to written amendments to a plan that were adopted before that date.
    While the Departments have determined that the changes identified 
in paragraph (g)(1) of these interim final regulations would cause a 
group health plan or health insurance coverage to cease to be a 
grandfathered health plan, the Departments invite comments from the 
public on whether this list of changes is appropriate and what other 
changes, if any, should be added to this list. Specifically, the 
Departments invite comments on whether the following changes should 
result in cessation of grandfathered health plan status for a plan or 
health insurance coverage: (1) Changes to plan structure (such as 
switching from a health reimbursement arrangement to major medical 
coverage or from an insured product to a self-insured product); (2) 
changes in a network plan's provider network, and if so, what magnitude 
of changes would have to be made; (3) changes to a prescription drug 
formulary, and if so, what magnitude of changes would have to be made; 
or (4) any other substantial change to the overall benefit design. In 
addition, the Departments invite comments on the specific standards 
included in these interim final regulations on benefits, cost sharing, 
and employer contributions. The Departments specifically invite 
comments on whether these standards should be drawn differently in 
light of the fact that changes made by the Affordable Care Act may 
alter plan or issuer practices in the next several

[[Page 34545]]

years. Any new standards published in the final regulations that are 
more restrictive than these interim final regulations would only apply 
prospectively to changes to plans or health insurance coverage after 
the publication of the final rules.
    Moreover, the Departments may issue, as appropriate, additional 
administrative guidance other than in the form of regulations to 
clarify or interpret the rules contained in these interim final 
regulations for maintaining grandfathered health plan status prior to 
the issuance of final regulations. The ability to issue prompt, 
clarifying guidance is especially important given the uncertainty as to 
how plans or issuers will alter their plans or policies in response to 
these rules. This guidance can address unanticipated changes by plans 
and issuers to ensure that individuals benefit from the Affordable Care 
Act's new health care protections while preserving the ability to 
maintain the coverage individuals had on the date of enactment.

III. Interim Final Regulations and Request for Comments

    Section 9833 of the Code, section 734 of ERISA, and section 2792 of 
the PHS Act authorize the Secretaries of the Treasury, Labor, and HHS 
(collectively, the Secretaries) to promulgate any interim final rules 
that they determine are appropriate to carry out the provisions of 
chapter 100 of the Code, part 7 of subtitle B of title I of ERISA, and 
part A of title XXVII of the PHS Act, which include PHS Act sections 
2701 through 2728 and the incorporation of those sections into ERISA 
section 715 and Code section 9815. The rules set forth in these interim 
final regulations govern the applicability of the requirements in these 
sections and are therefore appropriate to carry them out. Therefore, 
the foregoing interim final rule authority applies to these interim 
final regulations.
    In addition, under Section 553(b) of the Administrative Procedure 
Act (APA) (5 U.S.C. 551 et seq.) a general notice of proposed 
rulemaking is not required when an agency, for good cause, finds that 
notice and public comment thereon are impracticable, unnecessary, or 
contrary to the public interest. The provisions of the APA that 
ordinarily require a notice of proposed rulemaking do not apply here 
because of the specific authority granted by section 9833 of the Code, 
section 734 of ERISA, and section 2792 of the PHS Act. However, even if 
the APA were applicable, the Secretaries have determined that it would 
be impracticable and contrary to the public interest to delay putting 
the provisions in these interim final regulations in place until a full 
public notice and comment process was completed. As noted above, 
numerous provisions of the Affordable Care Act are applicable for plan 
years (in the individual market, policy years) beginning on or after 
September 23, 2010, six months after date of enactment. Grandfathered 
health plans are exempt from many of these provisions while group 
health plans and group and individual health insurance coverage that 
are not grandfathered health plans must comply with them. The 
determination of whether a plan or health insurance coverage is a 
grandfathered health plan therefore could substantially affect the 
design of the plan or health insurance coverage.
    The six-month period between the enactment of the Affordable Care 
Act and the applicability of many of the provisions affected by 
grandfather status would not allow sufficient time for the Departments 
to draft and publish proposed regulations, receive and consider 
comments, and draft and publish final regulations. Moreover, 
regulations are needed well in advance of the effective date of the 
requirements of the Affordable Care Act. Many group health plans and 
health insurance coverage that are not grandfathered health plans must 
make significant changes in their provisions to comply with the 
requirements of the Affordable Care Act. Moreover, plans and issuers 
considering other modifications to their terms need to know whether 
those modifications will affect their status as grandfathered health 
plans. Accordingly, in order to allow plans and health insurance 
coverage to be designed and implemented on a timely basis, regulations 
must be published and available to the public well in advance of the 
effective date of the requirements of the Affordable Care Act. It is 
not possible to have a full notice and comment process and to publish 
final regulations in the brief time between enactment of the Affordable 
Care Act and the date regulations are needed.
    The Secretaries further find that issuance of proposed regulations 
would not be sufficient because the provisions of the Affordable Care 
Act protect significant rights of plan participants and beneficiaries 
and individuals covered by individual health insurance policies and it 
is essential that participants, beneficiaries, insureds, plan sponsors, 
and issuers have certainty about their rights and responsibilities. 
Proposed regulations are not binding and cannot provide the necessary 
certainty. By contrast, the interim final regulations provide the 
public with an opportunity for comment, but without delaying the 
effective date of the regulations.
    For the foregoing reasons, the Departments have determined that it 
is impracticable and contrary to the public interest to engage in full 
notice and comment rulemaking before putting these regulations into 
effect, and that it is in the public interest to promulgate interim 
final regulations.

IV. Economic Impact and Paperwork Burden

A. Overview--Department of Labor and Department of Health and Human 
Services

    As stated earlier in this preamble, these interim final regulations 
implement section 1251 of the Affordable Care Act, as modified by 
section 10103 of the Affordable Care Act and section 2301 of the 
Reconciliation Act. Pursuant to section 1251, certain provisions of the 
Affordable Care Act do not apply to a group health plan or health 
insurance coverage in which an individual was enrolled on March 23, 
2010 (a grandfathered health plan).\8\ The statute and these interim 
final regulations allow family members of individuals already enrolled 
in a grandfathered health plan to enroll in the plan after March 23, 
2010; in such cases, the plan or coverage is also a grandfathered 
health plan with respect to the family members. New employees (whether 
newly hired or newly enrolled) and their families can enroll in a 
grandfathered group health plan after March 23, 2010 without affecting 
status as a grandfathered health plan.\9\
---------------------------------------------------------------------------

    \8\ The Affordable Care Act adds section 715(a)(1) to ERISA and 
section 9815(a)(1) to the Code to incorporate the provisions of part 
A of title XXVII of the PHS Act into ERISA and the Code, and make 
them applicable to group health plans, and health insurance issuers 
providing health insurance coverage in connection with group health 
plans. The PHS Act sections incorporated by this reference are 
sections 2701 through 2728. PHS Act sections 2701 through 2719A are 
substantially new, though they incorporate some provisions of prior 
law. PHS Act sections 2722 through 2728 are sections of prior law 
renumbered, with some, mostly minor, changes. Section 1251 of the 
Affordable Care Act, as modified by section 10103 of the Affordable 
Care Act and section 2301 of the Reconciliation Act, specifies that 
certain plans or coverage existing as of the date of enactment (that 
is, grandfathered health plans) are only subject to certain 
provisions.
    \9\ For individuals who have coverage through an insured group 
health plans subject to a collective bargaining agreement ratified 
before March 23, 2010, an individual's coverage is grandfathered at 
least until the date on which the last agreement relating to the 
coverage that was in effect on March 23, 2010, terminates. These 
collectively bargained plans may make any permissible changes to the 
benefit structure before the agreement terminates and remain 
grandfathered. After the termination date, grandfather status will 
be determined by comparing the plan, as it existed on March 23, 2010 
to the changes that the plan made before termination under the rules 
established by these interim final regulations.

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[[Page 34546]]

    As addressed earlier in this preamble, and further discussed below, 
these interim final regulations include rules for determining whether 
changes to the terms of a grandfathered health plan made by issuers and 
plan sponsors allow the plan or health insurance coverage to remain a 
grandfathered health plan. These rules are the primary focus of this 
regulatory impact analysis.
    The Departments have quantified the effects where possible and 
provided a qualitative discussion of the economic effects and some of 
the transfers and costs that may result from these interim final 
regulations.

B. Executive Order 12866--Department of Labor and Department of Health 
and Human Services

    Under Executive Order 12866 (58 FR 51735), ``significant'' 
regulatory actions are subject to review by the Office of Management 
and Budget (OMB). Section 3(f) of the Executive Order defines a 
``significant regulatory action'' as an action that is likely to result 
in a rule (1) having an annual effect on the economy of $100 million or 
more in any one year, or adversely and materially affecting a sector of 
the economy, productivity, competition, jobs, the environment, public 
health or safety, or State, local or tribal governments or communities 
(also referred to as ``economically significant''); (2) creating a 
serious inconsistency or otherwise interfering with an action taken or 
planned by another agency; (3) materially altering the budgetary 
impacts of entitlement grants, user fees, or loan programs or the 
rights and obligations of recipients thereof; or (4) raising novel 
legal or policy issues arising out of legal mandates, the President's 
priorities, or the principles set forth in the Executive Order. OMB has 
determined that this regulation is economically significant within the 
meaning of section 3(f)(1) of the Executive Order, because it is likely 
to have an annual effect on the economy of $100 million in any one 
year. Accordingly, OMB has reviewed these rules pursuant to the 
Executive Order. The Departments provide an assessment of the potential 
costs, benefits, and transfers associated with these interim final 
regulations below. The Departments invite comments on this assessment 
and its conclusions.
1. Need for Regulatory Action
    As discussed earlier in this preamble, Section 1251 of the 
Affordable Care Act, as modified by section 10103 of the Affordable 
Care Act and section 2301 of the Reconciliation Act, provides that 
grandfathered health plans are subject only to certain provisions of 
the Affordable Care Act. The statute, however, is silent regarding 
changes plan sponsors and issuers can make to plans and health 
insurance coverage while retaining grandfather status. These interim 
final regulations are necessary in order to provide rules that plan 
sponsors and issuers can use to determine which changes they can make 
to the terms of the plan or health insurance coverage while retaining 
their grandfather status, thus exempting them from certain provisions 
of the Affordable Care Act and fulfilling a goal of the legislation, 
which is to allow those that like their healthcare to keep it. These 
interim final regulations are designed to allow individuals who wish to 
maintain their current health insurance plan to do so, to reduce short 
term disruptions in the market, and to ease the transition to market 
reforms that phase in over time.
    In drafting this rule, the Departments attempted to balance a 
number of competing interests. For example, the Departments sought to 
provide adequate flexibility to plan sponsors and issuers to ease 
transition and mitigate potential premium increases while avoiding 
excessive flexibility that would conflict with the goal of permitting 
individuals who like their healthcare to keep it and might lead to 
longer term market segmentation as the least costly plans remain 
grandfathered the longest. In addition, the Departments recognized that 
many plan sponsors and issuers make changes to the terms of plans or 
health insurance coverage on an annual basis: Premiums fluctuate, 
provider networks and drug formularies change, employer and employee 
contributions and cost-sharing change, and covered items and services 
may vary. Without some ability to make some adjustments while retaining 
grandfather status, the ability of individuals to maintain their 
current coverage would be frustrated, because most plans or health 
insurance coverage would quickly cease to be regarded as the same group 
health plan or health insurance coverage in existence on March 23, 
2010. At the same time, allowing unfettered changes while retaining 
grandfather status would also be inconsistent with Congress's intent to 
preserve coverage that was in effect on March 23, 2010.
    Therefore, as further discussed below, these interim final 
regulations are designed, among other things, to take into account 
reasonable changes routinely made by plan sponsors or issuers without 
the plan or health insurance coverage relinquishing its grandfather 
status so that individuals can retain the ability to remain enrolled in 
the coverage in which they were enrolled on March 23, 2010. Thus, for 
example, these interim final regulations generally permit plan sponsors 
and issuers to make voluntary changes to increase benefits, to conform 
to required legal changes, and to adopt voluntarily other consumer 
protections in the Affordable Care Act.
2. Regulatory Alternatives
    Section 6(a)(3)(C)(iii) of Executive Order 12866 requires an 
economically significant regulation to include an assessment of the 
costs and benefits of potentially effective and reasonable alternatives 
to the planned regulation, and an explanation of why the planned 
regulatory action is preferable to the potential alternatives. The 
alternatives considered by the Departments fall into two general 
categories: Permissible changes to cost sharing and benefits. The 
discussion below addresses the considered alternatives in each 
category.
    The Departments considered allowing looser cost-sharing 
requirements, such as 25 percent plus medical inflation. However, the 
data analysis led the Departments to believe that the cost-sharing 
windows provided in these interim final regulations permit enough 
flexibility to enable a smooth transition in the group market over 
time, and further widening this window was not necessary and could 
conflict with the goal of allowing those who like their healthcare to 
keep it.
    Another alternative the Departments considered was an annual 
allowance for cost-sharing increases above medical inflation, as 
opposed to the one-time allowance of 15 percent above medical 
inflation. An annual margin of 15 percent above medical inflation, for 
example, would permit plans to increase cost sharing by medical 
inflation plus 15 percent every year. The Departments concluded that 
the effect of the one-time allowance (15 percent of the original, date-
of-enactment level plus medical inflation) would diminish over time 
insofar as it would represent a diminishing fraction of the total level 
of cost sharing with the cumulative effects of medical inflation over 
time. Accordingly, the one-time allowance would better reflect (i) the 
potential need of grandfathered health plans to make adjustments in the 
near term to

[[Page 34547]]

reflect the requirement that they comply with the market reforms that 
apply to grandfathered health plans in the near term as well as (ii) 
the prospect that, for many plans and health insurance coverage, the 
need to recover the costs of compliance in other ways will diminish in 
the medium term, in part because of the changes that will become 
effective in 2014 and in part because of the additional time plan 
sponsors and issuers will have to make gradual adjustments that take 
into account the market reforms that are due to take effect in later 
years.
    The Departments considered establishing an overall prohibition 
against changes that, in the aggregate, or cumulatively over time, 
render the plan or coverage substantially different than the plan or 
coverage that existed on March 23, 2010, or further delineating other 
examples of changes that could cause a plan to relinquish grandfather 
status. This kind of ``substantially different'' standard would have 
captured significant changes not anticipated in the interim final 
regulation. However, it would rely on a ``facts and circumstances'' 
analysis in defining ``substantially different'' or ``significant 
changes,'' which would be less transparent and result in greater 
uncertainty about the status of a health plan. That, in turn, could 
hinder plan sponsor or issuer decisions as well as enrollee 
understanding of what protections apply to their coverage.
    An actuarial equivalency standard was another considered option. 
Such a standard would allow a plan or health insurance coverage to 
retain status as a grandfathered health plan if the actuarial value of 
the coverage remains in approximately the same range as it was on March 
23, 2010. However, under such a standard, a plan could make fundamental 
changes to the benefit design, potentially conflicting with the goal of 
allowing those who like their healthcare to keep it, and still retain 
grandfather status. Moreover, the complexity involved in defining and 
determining actuarial value for these purposes, the likelihood of 
varying methodologies for determining such value unless the Departments 
promulgated very detailed prescriptive rules, and the costs of 
administering and ensuring compliance with such rules led the 
Departments to reject that approach.
    Another alternative was a requirement that employers continue to 
contribute the same dollar amount they were contributing for the period 
including March 23, 2010, plus an inflation component. However, the 
Departments were concerned that this approach would not provide enough 
flexibility to accommodate the year-to-year volatility in premiums that 
can result from changes in some plans' covered populations or other 
factors.
    The Departments also considered whether a change in third party 
administrator by a self-insured plan should cause the plan to 
relinquish grandfather status. The Departments decided that such a 
change would not necessarily cause the plan to be so different from the 
plan in effect on March 23, 2010 that it should be required to 
relinquish grandfather status.
    After careful consideration, the Departments opted against rules 
that would require a plan sponsor or issuer to relinquish its 
grandfather status if only relatively small changes are made to the 
plan. The Departments concluded that plan sponsors and issuers of 
grandfathered health plans should be permitted to take steps within the 
boundaries of the grandfather definition to control costs, including 
limited increases in cost-sharing and other plan changes not prohibited 
by these interim final regulations. As noted earlier, deciding to 
relinquish grandfather status is a one-way sorting process: after some 
period of time, more plans will relinquish their grandfather status. 
These interim final regulations will likely influence plan sponsors' 
decisions to relinquish grandfather status.
3. Discussion of Regulatory Provisions
    As discussed earlier in this preamble, these interim final 
regulations provide that a group health plan or health insurance 
coverage no longer will be considered a grandfathered health plan if a 
plan sponsor or an issuer:
     Eliminates all or substantially all benefits to diagnose 
or treat a particular condition. The elimination of benefits for any 
necessary element to diagnose or treat a condition is considered the 
elimination of all or substantially all benefits to diagnose or treat a 
particular condition;
     Increases a percentage cost-sharing requirement (such as 
coinsurance) above the level at which it was on March 23, 2010;
     Increases fixed-amount cost-sharing requirements other 
than copayments, such as a $500 deductible or a $2,500 out-of-pocket 
limit, by a total percentage measured from March 23, 2010 that is more 
than the sum of medical inflation and 15 percentage points.\10\
---------------------------------------------------------------------------

    \10\ Medical inflation is defined in these interim regulations 
by reference to the overall medical care component of the CPI.
---------------------------------------------------------------------------

     Increases copayments by an amount that exceeds the greater 
of: a total percentage measured from March 23, 2010 that is more than 
the sum of medical inflation plus 15 percentage points, or $5 increased 
by medical inflation measured from March 23, 2010;
     For a group health plan or group health insurance 
coverage, an employer or employee organization decreases its 
contribution rate by more than five percentage points below the 
contribution rate on March 23, 2010; or
     With respect to annual limits (1) a group health plan, or 
group or individual health insurance coverage, that, on March 23, 2010, 
did not impose an overall annual or lifetime limit on the dollar value 
of all benefits imposes an overall annual limit on the dollar value of 
benefits; (2) a group health plan, or group or individual health 
insurance coverage, that, on March 23, 2010, imposed an overall 
lifetime limit on the dollar value of all benefits but no overall 
annual limit on the dollar value of all benefits adopts an overall 
annual limit at a dollar value that is lower than the dollar value of 
the lifetime limit on March 23, 2010; or (3) a group health plan, or 
group or individual health insurance coverage, that, on March 23, 2010, 
imposed an overall annual limit on the dollar value of all benefits 
decreases the dollar value of the annual limit (regardless of whether 
the plan or health insurance coverage also imposes an overall lifetime 
limit on the dollar value of all benefits).

Table 1, in section II.D of this preamble, lists the relevant 
Affordable Care Act provisions that apply to grandfathered health 
plans.
    In accordance with OMB Circular A-4,\11\ Table 2 below depicts an 
accounting statement showing the Departments' assessment of the 
benefits, costs, and transfers associated with this regulatory action. 
In accordance with Executive Order 12866, the Departments believe that 
the benefits of this regulatory action justify the costs.
---------------------------------------------------------------------------

    \11\ Available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf.

[[Page 34548]]



                                                                Table 2--Accounting Table
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
--------------------------------------------------------------------------------------------------------------------------------------------------------
Benefits
--------------------------------------------------------------------------------------------------------------------------------------------------------
Qualitative: These interim final regulations provide plans with guidance about the requirements for retaining grandfather status. Non-grandfathered
 plans are required to offer coverage with minimum benefit standards and patient protections as required by the Affordable Care Act, while grandfathered
 plans are required only to comply with certain provisions. The existence of grandfathered health plans will provide individuals with the benefits of
 plan continuity, which may have a high value to some. In addition, grandfathering could potentially slow the rate of premium growth, depending on the
 extent to which their current plan does not include the benefits and protections of the new law. It could also provide incentives to employers to
 continue coverage, potentially reducing new Medicaid enrollment and spending and lowering the number of uninsured individuals. These interim final
 regulations also provide greater certainty for plans and issuers about what changes they can make without affecting their grandfather status. As
 compared with alternative approaches, these regulations provide significant economic and noneconomic benefits to both issuers and beneficiaries, though
 these benefits cannot be quantified at this time.
--------------------------------------------------------------------------------------------------------------------------------------------------------
                          Costs                               Low-end        Mid-range       High-end       Year dollar    Discount rate  Period covered
                                                             estimate        estimate        estimate
--------------------------------------------------------------------------------------------------------------------------------------------------------
Annualized..............................................            22.0            25.6            27.9            2010              7%       2011-2013
 
Monetized ($millions/year)..............................            21.2            24.7            26.9            2010              3%       2011-2013
--------------------------------------------------------------------------------------------------------------------------------------------------------
Monetized costs are due to a requirement to notify participants and beneficiaries of a plan's grandfather status and maintain plan documents to verify
 compliance with these interim final regulation's requirements to retain grandfather status.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Qualitative: Limitations on cost-sharing increases imposed by these interim final regulations could result in the cost of some grandfathered health
 plans increasing more (or decreasing less) than they otherwise would. This increased cost may encourage some sponsors and issuers to replace their
 grandfathered health plans with new, non-grandfathered ones. Market segmentation (adverse selection) due to the decision of higher risk plans to
 relinquish grandfathering could cause premiums in the exchanges to be higher than they would have been absent grandfathering.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Transfers
Qualitative: Limits on the changes to cost-sharing in grandfathered plans and the elimination of cost-sharing for some services in non-grandfathered
 plans, leads to transfers of wealth from premium payers overall to individuals using covered services. Once pre-existing conditions are fully
 prohibited and other insurance reforms take effect, the extent to which individuals are enrolled in grandfathered plans could affect adverse selection,
 as higher risk plans relinquish grandfather status to gain new protections while lower risk grandfathered plans retain their grandfather status. This
 could result in a transfer of wealth from non-grandfathered plans to grandfathered health plans.
--------------------------------------------------------------------------------------------------------------------------------------------------------

4. Discussion of Economic Impacts of Retaining or Relinquishing 
Grandfather Status
    The economic effects of these interim final regulations will depend 
on decisions by plan sponsors and issuers, as well as by those covered 
under these plans and health insurance coverage. The collective 
decisions of plan sponsors and issuers over time can be viewed as a 
one-way sorting process in which these parties decide whether, and 
when, to relinquish status as a grandfathered health plan.
    Plan sponsors and issuers can decide to:
    1. Continue offering the plan or coverage in effect on March 23, 
2010 with limited changes, and thereby retain grandfather status;
    2. Significantly change the terms of the plan or coverage and 
comply with Affordable Care Act provisions from which grandfathered 
health plans are excepted; or
    3. In the case of a plan sponsor, cease to offer any plan.
    For a plan sponsor or issuer, the potential economic impact of the 
application of the provisions in the Affordable Care Act may be one 
consideration in making its decisions. To determine the value of 
retaining the health plan's grandfather status, each plan sponsor or 
issuer must determine whether the rules applicable to grandfathered 
health plans are more or less favorable than the rules applicable to 
non-grandfathered health plans. This determination will depend on such 
factors as the respective prices of grandfathered and non-grandfathered 
health plans, as well as on the preferences of grandfathered health 
plans' covered populations and their willingness to pay for benefits 
and patient protections available under non-grandfathered health plans. 
In making its decisions about grandfather status, a plan sponsor or 
issuer is also likely to consider the market segment (because different 
rules apply to the large and small group market segments), and the 
utilization pattern of its covered population.
    In deciding whether to change a plan's benefits or cost sharing, a 
plan sponsor or issuer will examine its short-run business 
requirements. These requirements are regularly altered by, among other 
things, rising costs that result from factors such as technological 
changes, changes in risk status of the enrolled population, and changes 
in utilization and provider prices. As shown below, changes in benefits 
and cost sharing are typical in insurance markets. Decisions about the 
extent of changes will determine whether a plan retains its grandfather 
status. Ultimately, these decisions will involve a comparison by the 
plan sponsor or issuer of the long run value of grandfather status to 
the short-run need of that plan sponsor or issuer to adjust plan 
structure in order to control premium costs or achieve other business 
objectives.
    Decisions by plan sponsors and issuers may be significantly 
affected by the preferences and behavior of the enrollees, especially a 
tendency among many towards inertia and resistance to change. There is 
limited research that has directly examined what drives this tendency--
whether individuals remain with health plans because of simple inertia 
and procrastination, a lack of relevant information, or because they 
want to avoid risk associated with switching to new plans. One study 
that examined the extent to which premium changes influenced plan 
switching determined that younger low-risk employees were the most 
price-sensitive to premium changes; older, high-risk employees were the 
least price-sensitive. This finding suggests that, in particular, 
individuals with substantial health needs may be more apt to remain 
with a plan because of inertia as such or uncertainties associated with 
plan

[[Page 34549]]

switching rather than quality per se--a phenomenon some behavioral 
economists have called ``status quo bias,'' \12\ which can be found 
when people stick with the status quo even though a change would have 
higher expected value.
---------------------------------------------------------------------------

    \12\ http://www.nber.org/reporter/summer06/buchmueller.html. 
``Consumer Demand for Health Insurance'' The National Bureau of 
Economic Research (Buchmueller, 2006).
---------------------------------------------------------------------------

    Even when an enrollee could reap an economic or other advantage 
from changing plans, that enrollee may not make the change because of 
inertia, a lack of relevant information, or because of the cost and 
effort involved in examining new options and uncertainty about the 
alternatives. Consistent with well-known findings in behavioral 
economics, studies of private insurance demonstrate the substantial 
effect of inertia in the behavior of the insured. One survey found that 
approximately 83 percent of privately insured individuals stuck with 
their plans in the year prior to the survey.\13\ Among those who did 
change plans, well over half sought the same type of plan they had 
before. Those who switched plans also tended to do so for reasons other 
than preferring their new plans. For example, many switched because 
they changed jobs or their employer changed insurance offerings, 
compelling them to switch.
---------------------------------------------------------------------------

    \13\ http://content.healthaffairs.org/cgi/reprint/19/3/158.pdf. 
``Health Plan Switching: Choice Or Circumstance?'' (Cunnigham and 
Kohn, 2000).
---------------------------------------------------------------------------

    Medicare beneficiaries display similar plan loyalties. On average, 
only seven percent of the 17 million seniors on Medicare drug plans 
switch plans each year, according to the Centers for Medicare and 
Medicaid Services.\14\ Researchers have found this comparatively low 
rate of switching is maintained whether or not those insured have 
higher quality information about plan choices, and that switching has 
little effect on the satisfaction of the insured with their health 
plans.\15\
---------------------------------------------------------------------------

    \14\ http://www.kaiserhealthnews.org/Stories/2009/December/01/Medicare-Drug-Plan.aspx. ``Seniors Often Reluctant To Switch 
Medicare Drug Plans'' (2009, Kaiser Health News/Washington Post).
    \15\ http://www.ncbi.nlm.nih.gov/pubmed/16704882. ``The effect 
of quality information on consumer health plan switching: evidence 
from the Buyers Health Care Action Group.'' (Abraham, Feldman, 
Carlin, and Christianson, 2006).
---------------------------------------------------------------------------

    The incentives to change are different for people insured in the 
individual market than they are for those covered by group health plans 
or group health insurance coverage. The median length of coverage for 
people entering the individual market is eight months.\16\ In part, 
this ``churn'' stems from the individual market's function as a 
stopping place for people between jobs with employer-sponsored or other 
types of health insurance, but in part, the churn is due to the 
behavior of issuers. Evidence suggests that issuers often make policy 
changes such as raising deductibles as a means of attracting new, 
healthy enrollees who have few medical costs and so are little-
concerned about such deductibles. There is also evidence that issuers 
use such changes to sort out high-cost enrollees from low-cost 
ones.\17\
---------------------------------------------------------------------------

    \16\ Erika C. Ziller, Andrew F. Coburn, Timothy D. McBride, and 
Courtney Andrews. Patterns of Individual Health Insurance Coverage, 
1996-2000. Health Affairs Nov/Dec 2004: 210-221.
    \17\ Melinda Beeuwkes Bustin, M. Susan Marquis, and Jill M. 
Yegian. The Role of the Individual Health Insurance Market and 
Prospects for Change. Health Affairs 2004; 23(6): 79-90.
---------------------------------------------------------------------------

    Decisions about the value of retaining or relinquishing status as a 
grandfathered health plan are complex, and the wide array of factors 
affecting issuers, plan sponsors, and enrollees poses difficult 
challenges for the Departments as they try to estimate how large the 
presence of grandfathered health plans will be in the future and what 
the economic effects of their presence will be. As one example, these 
interim final regulations limit the extent to which plan sponsors and 
issuers can increase cost sharing and still remain grandfathered. The 
increases that are allowed provide plans and issuers with substantial 
flexibility in attempting to control expenditure increases. However, 
there are likely to be some plans and issuers that would, in the 
absence of these regulations, choose to make even larger increases in 
cost sharing than are specified here. Such plans will need to decide 
whether the benefits of maintaining grandfather status outweigh those 
expected from increasing cost sharing above the levels permitted in the 
interim final regulations.
    A similar analysis applies to the provision that an employer's or 
employee organization's share of the total premium of a group health 
plan cannot be reduced by more than 5 percentage points from the share 
it was paying on March 23, 2010 without that plan or health insurance 
coverage relinquishing its grandfather status. Employers and employee 
organizations sponsoring group health plans or health insurance 
coverage may be faced with economic circumstances that would lead them 
to reduce their premium contributions. But reductions of greater than 5 
percentage points would cause them to relinquish the grandfather status 
of their plans. These plan sponsors must decide whether the benefit of 
such premium reductions outweigh those of retaining grandfather status.
    Market dynamics affecting these decisions change in 2014, when the 
Affordable Care Act limits variation in premium rates for individual 
and small group policies. Small groups for this purpose include 
employers with up to 100 employees (States may limit this threshold to 
50 employees until 2016). The Affordable Care Act rating rules will not 
apply to grandfathered health plans, but such plans will remain subject 
to State rating rules, which vary widely and typically apply to 
employers with up to 50 employees. Based on the current State rating 
rules, it is likely that, in many States, no rating rules will apply to 
group health insurance policies that are grandfathered health plans 
covering employers with 51 to 100 employees.\18\
---------------------------------------------------------------------------

    \18\ Kaiser Family Foundation State Health Facts (2010), http://www.statehealthfacts.org/comparetable.jsp?ind=351&cat=7.
---------------------------------------------------------------------------

    The interaction of the Affordable Care Act and State rating rules 
implies that, beginning in 2014, premiums can vary more widely for 
grandfathered plans than for non-grandfathered plans for employers with 
up to 100 employees in many States. This could encourage both plan 
sponsors and issuers to continue grandfathered health plans that cover 
lower-risk groups, because these groups will be isolated from the 
larger, higher-risk, non-grandfathered risk pool. On the other hand, 
this scenario likely will encourage plan sponsors and issuers that 
cover higher-risk groups to end grandfathered health plans, because the 
group would be folded into the larger, lower-risk non-grandfathered 
pool. Depending on the size of the grandfathered health plan market, 
such adverse selection by grandfathered health plans against non-
grandfathered plans could cause premiums in the exchanges to be higher 
than they would have been absent grandfathering. To accommodate these 
changes in market dynamics in 2014, the Departments have structured a 
cost-sharing rule whose parameters enable greater flexibility in early 
years and less over time. It is likely that few plans will delay for 
many years before making changes that exceed medical inflation. This is 
because the cumulative increase in copayments from March 23, 2010 is 
compared to a maximum percentage increase that includes a fixed 
amount--15 percentage points--that does not increase annually with any 
type of inflator. This should help mitigate adverse selection and 
require plans and issuers that seek to maintain grandfather status to 
find ways other than increased

[[Page 34550]]

copayments to limit cost growth. As discussed in the preamble, the 
Departments are also soliciting comments to make any adjustments needed 
for the final rule prior to 2014. Therefore it is premature to estimate 
the economic effects described above in 2014 and beyond. In the 
following section, the Departments provide a range of estimates of how 
issuers and sponsors might respond to these interim final regulations, 
with the caveat that there is substantial uncertainty about actual 
outcomes, especially considering that available data are historical and 
so do not account for behavioral changes in plans and the insured as a 
result of enactment of the Affordable Care Act.
5. Estimates of Number of Plans and Employees Affected
    The Affordable Care Act applies to group health plans and health 
insurance issuers in the group and individual markets. The large and 
small group markets will be discussed first, followed by a discussion 
of impacts on the individual market. The Departments have defined a 
large group health plan as a plan at an employer with 100 or more 
workers and a small group plan as a plan at an employer with less than 
100 workers. Using data from the 2008 Medical Expenditure Survey--
Insurance Component, the Departments estimated that there are 
approximately 72,000 large ERISA-covered health plans and 2.8 million 
small group health plans with an estimated 97.0 million participants 
and beneficiaries \19\ in large group plans and 40.9 million 
participants and beneficiaries in small group plans. The Departments 
estimate that there are 126,000 governmental plans \20\ with 36.1 
million participants in large plans and 2.3 million participants in 
small plans. The Departments estimate there are 16.7 million 
individuals under age 65 covered by individually purchased policies.
---------------------------------------------------------------------------

    \19\ All participant counts and the estimates of individual 
policies are from the 2009 Current Population Survey (CPS).
    \20\ Estimate is from the 2007 Census of Government.
---------------------------------------------------------------------------

a. Methodology for Analyzing Plan Changes Over Time in the Group Market
    For the large and small group markets, the Departments analyzed 
three years of Kaiser-HRET data to assess the changes that plans made 
between plan years 2007 to 2008 and 2008 to 2009. Specifically, the 
Departments examined changes made to deductibles, out-of-pocket 
maximums, copayments, coinsurance, and the employer's share of the 
premium or cost of coverage. The Departments also estimated the number 
of fully-insured plans that changed issuers.\21\ The distribution of 
changes made within the two time periods were nearly identical and 
ultimately the 2008-2009 changes were used as a basis for the analyses.
---------------------------------------------------------------------------

    \21\ Under the Affordable Care Act and these interim final 
regulations, if a plan that is not a collectively bargained plan 
changes issuers after March 23, 2010, it is no longer a 
grandfathered health plan.
---------------------------------------------------------------------------

    As discussed previously, plans will need to make decisions that 
balance the value they (and their enrollees) place on maintaining 
grandfather status with the need to meet short run objectives by 
changing plan features including the various cost sharing requirements 
that are the subject of this rule. The 2008-2009 data reflect changes 
in plan benefit design that were made under very different market 
conditions and expectations than will exist in 2011 and beyond. 
Therefore, there is a significant degree of uncertainty associated with 
using the 2008-2009 data to project the number of plans whose 
grandfather status may be affected in the next few years. Because the 
level of uncertainty becomes substantially greater when trying to use 
this data to predict outcomes once the full range of reforms takes 
effect in 2014 and the exchanges begin operating, substantially 
changing market dynamics the Departments restrict our estimates to the 
2011-2013 period and use the existing data and a range of assumptions 
to estimate possible outcomes based on a range of assumptions 
concerning how plans' behavior regarding cost sharing changes may 
change relative to what is reflected in the 2008-2009 data.
    Deriving projections of the number of plans that could retain 
grandfather status under the requirements of these interim final 
regulations required several steps:
     Using Kaiser/HRET data for 2008-2009, estimates were 
generated of the number of plans in the large and small group markets 
that made changes in employer premium share or any of the cost-sharing 
parameters that were larger than permitted for a plan to retain 
grandfather status under these interim final regulations;
     In order to account for a range of uncertainty with regard 
to changes in plan behavior toward cost sharing changes, the 
Departments assumed that many plans will want to maintain grandfather 
status and will look for ways to achieve short run cost control and 
still maintain that status. One plausible assumption is that plans 
would look to a broader range of cost sharing strategies in order to 
achieve cost containment and other objectives than they had in the 
past. In order to examine this possibility, the Departments carefully 
analyzed those plans that would have relinquished grandfather status 
based on a change they made from 2008-2009. The Departments then 
estimated the proportion of these plans that could have achieved 
similar cost control by using one or more other cost-sharing changes in 
addition to the one they made in a manner that would not have exceeded 
the limits set by these interim final regulations for qualifying as a 
grandfathered health plan. For example, if a plan was estimated to 
relinquish grandfather status because it increased its deductible by 
more than the allowed 15 percentage points plus medical inflation, the 
Departments analyze whether the plan could have achieved the same cost 
control objectives with a smaller change in deductible, but larger 
changes (within the limits set forth in these interim final 
regulations) in copayments, out-of-pocket maximums, and employer 
contributions to the premium or cost of coverage.
     Finally, the Departments examined the impact of 
alternative assumptions about sponsor behavior. For example, it is 
possible that some sponsors who made changes from 2008-2009 in plan 
parameters that were so large that they would have relinquished their 
grandfather status would not make similar changes in 2011-2013. It is 
also possible that even though a sponsor could make an equivalent 
change that conforms to the rules established in these interim final 
regulations to maintain grandfather status, it would decide not to.
    The estimates in this example rely on several other assumptions. 
Among them: (1) The annual proportion of plans relinquishing 
grandfather status is the same throughout the period; (2) all group 
health plans existing at the beginning of 2010 qualify for grandfather 
status; (3) all changes during 2010 occur after March 23, 2010; (4) 
annual medical inflation is 4 percent (based on the average annual 
change in the medical CPI between 2000 and 2009); and (5) firms for 
which the Kaiser-HRET survey has data for both 2008 and 2009 are 
representative of all firms.\22\ The assumption used for

[[Page 34551]]

estimating the effects of the limits on copayment increases does not 
take into account the greater flexibility in the near term than in the 
long term; the estimated increase in firms losing their grandfather 
status over time reflects cumulative effects of a constant policy. To 
the extent that the data reflect plans that are more likely to make 
frequent changes in cost sharing, the assumption that a constant share 
of plans relinquishing grandfather status throughout the period may 
underestimate the number of plans that will retain grandfather status 
through 2013. In addition, data on substantial benefit changes were not 
available and thus not included in the analysis. The survey data is 
limited, in that it covers only one year of changes in healthcare 
plans. The Departments' analysis employed data only on PPO plans, the 
predominant type of plan. In addition, the difficulties of forecasting 
behavior in response to this rule create uncertainties for quantitative 
evaluation. However, the analysis presented here is illustrative of the 
rule's goal of balancing flexibility with maintaining current coverage.
---------------------------------------------------------------------------

    \22\ The analysis is limited to firms that responded to the 
Kaiser/HRET survey in both 2008 and 2009. Large firms are 
overrepresented in the analytic sample. New firms and firms that 
went out of business in 2008 or 2009 are underrepresented. The 
Departments present results separately for large firms and small 
firms, and weight the results to the number of employees in each 
firm-size category. Results are presented for PPO plans. The Kaiser/
HRET survey gathers information about the PPO with the most 
enrollment in each year. If enrollment at a given employer shifted 
from one PPO to a different PPO between 2008 and 2009, then the PPO 
with the most enrollment in 2009 may be different than the PPO with 
the most enrollment in 2008. To the extent this occurred, the 
estimates presented here may overestimate the fraction of plans that 
will relinquish grandfather status. However, given the behavioral 
assumptions of the analysis and the need to present a range of 
results, the Departments believe that such overestimation will not 
have a noticeable effect on estimates presented here.
---------------------------------------------------------------------------

b. Impacts on the Group Market Resulting From Changes From 2008 to 2009
    The Departments first estimated the percentage of plans that had a 
percent change in the dollar value of deductibles, copayments, or out-
of-pocket maximums that exceeded 19 percent (the sum of medical 
inflation (assumed in these analyses to be four percent) plus 15 
percentage points measured from March 23, 2010. Plans making copayment 
changes of five dollars or less were considered to have satisfied the 
copayment limit, even if that change exceeded 19 percent.\23\ The 
Departments also estimated the number of plans for whom the percentage 
of total premium paid by the employer declined by more than 5 
percentage points. For fully-insured plans only, estimates were made of 
the proportion that switched to a different issuer.\24\ This estimate 
does not take into account collectively bargained plans, which can 
change issuers during the period of the collective bargaining agreement 
without a loss of grandfather status, because the Departments could not 
quantify this category of plans. Accordingly, this estimate represents 
an upper bound.
---------------------------------------------------------------------------

    \23\ The regulation allows plans to increase fixed-amount 
copayments by an amount that does not exceed $5 increased by medical 
inflation. In this analysis, the Departments used a threshold of $5, 
rather than the threshold of approximately $5.20 that would be 
allowed by these interim final regulations. There would have been no 
difference in the results if the Departments had used $5.20 rather 
than $5 as the threshold.
    \24\ In contrast, for self-insured plans, a change in third 
party administrator in and of itself does not cause a group health 
plan to cease to be a grandfathered health plan, provided changes do 
not exceed the limits of paragraph (g)(1) of these interim final 
regulations.
---------------------------------------------------------------------------

    Using the Kaiser/HRET data, the Departments estimated that 55 
percent of small employers and 36 percent of large employers made at 
least one change in cost-sharing parameters above the thresholds 
provided in these interim final regulations. Similarly, 33 percent of 
small employers and 21 percent of large employers decreased the 
employer's share of premium by more than five percentage points. In 
total, approximately 66 percent of small employers and 48 percent of 
large employers made a change in either cost sharing or premium 
contribution during 2009 that would require them to relinquish 
grandfather status if the same change were made in 2011.\25\
---------------------------------------------------------------------------

    \25\ Some employers made changes which exceeded at least one 
cost-sharing threshold and decreased the employer's share of 
contribution by more than five percent.
---------------------------------------------------------------------------

    The changes made by employers from 2008 to 2009 were possibly made 
in anticipation of the recession. As discussed previously, analysis of 
changes from 2007 to 2008 suggests that the 2007-08 changes were not 
much different from the 2008-09 changes. Nevertheless, as a result of 
improvements in economic conditions, it makes sense to think that the 
pressure on employers to reduce their contributions to health insurance 
will be smaller in 2011 than they were in 2009, and that the 
Department's analysis of changes in 2009 may overestimate the changes 
that should be expected in 2011.\26\
---------------------------------------------------------------------------

    \26\ Employers who offer plans on a calendar year basis 
generally make decisions about health plan offerings during the 
preceding summer. Thus, decisions for calendar 2009 were generally 
made during the summer of 2008. At that time, the depth of the 
coming recession was not yet clear to most observers.
---------------------------------------------------------------------------

    As discussed previously, it is highly unlikely that plans would 
continue to exhibit the same behavior in 2011 to 2013 as in 2008 to 
2009. In order to guide the choice of behavioral assumptions, the 
Departments conducted further analyses of the 2008-2009 data. Many 
employers who made changes between 2008 and 2009 that would have caused 
them to relinquish grandfather status did so based on exceeding one of 
the cost-sharing limits. Assuming that the sponsor's major objective in 
implementing these changes was to restrain employer costs or overall 
premiums, the Departments examined whether the sponsor could have 
achieved the same net effect on employer cost or premiums by spreading 
cost sharing over two or more changes without exceeding the limits on 
any of these changes. For example, an employer that increased its 
deductible by 30 percent would have relinquished grandfather status. 
However, it is possible that the employer could have achieved the same 
cost control objectives by limiting the deductible increase to 19 
percent, and, also increasing the out-of-pocket maximum or copayments, 
or decreasing the employer share of the premium.
    The Departments estimate that approximately two-thirds of the 
employers that made changes in 2009 that would have exceeded the 
threshold implemented by this rule could have achieved the same cost-
control objective and remained grandfathered by making changes in other 
cost-sharing parameters or in the employer share of the premium. Only 
24 percent of small employers and 16 percent of large employers could 
not have reconfigured the cost-sharing parameters or employer 
contributions in such a manner that would have allowed them to stay 
grandfathered. If benefit changes that are allowed within the 
grandfathered health plan definition were also taken into account (not 
possible with available data), these percentages would be even lower.
    For fully insured group health plans, another change that would 
require a plan to relinquish grandfather status is a change in issuer. 
Between 2008 and 2009, 15 percent of small employers and four percent 
of large employers changed insurance carriers.\27\ However, it is 
likely that the incentive to stay grandfathered would lead some of 
these employers to continue with the same issuer, making the actual 
share of firms relinquishing grandfather status as a result of an 
issuer change lower than the percentage that switched in 2009. There 
appears to be no empirical evidence to

[[Page 34552]]

provide guidance on the proportion of employers that would choose to 
remain with their issuer rather than relinquish grandfather status. 
That being so, an assumption was made that 50 percent of employers that 
changed issuers in 2009 would not have made a similar change in 2011 in 
order to retain grandfather status. It is likely that fewer employers 
will elect to change carriers than in recent years given that some will 
prefer to retain grandfather status. But it is also likely that many 
employers will prefer to switch carriers given a change in the issuer's 
network or other factors. Because there is little empirical evidence 
regarding the fraction of firms that would elect to switch in response 
to the change in regulations, we take the midpoint of the plausible 
range of no switching carriers at one extreme and all switching 
carriers at the other extreme. We therefore assume that 50 percent of 
employers that changed issuers in 2009 would not make a similar change 
in 2011 to retain grandfather status.
---------------------------------------------------------------------------

    \27\ Among the 76 percent of small employers and 84 percent of 
large employers who could have accommodated the cost-sharing changes 
they desired to make within the parameters of these interim final 
regulations, 13 percent of the small employers and three percent of 
the large employers changed issuers.
---------------------------------------------------------------------------

    Combining the estimates of the percentage of employers that would 
relinquish grandfather status because they chose to make cost-sharing, 
benefit or employer contribution changes beyond the permitted 
parameters with the estimates of the percentage that would relinquish 
grandfather status because they change issuers, the Departments 
estimate that approximately 31 percent of small employers and 18 
percent of large employers would make changes that would require them 
to relinquish grandfather status in 2011. The Departments use these 
estimates as our mid-range scenario.
c. Sensitivity Analysis: Assuming That Employers Will Be Willing To 
Absorb a Premium Increase in Order To Remain Grandfathered
    To the extent that a large number of plans placed a high value on 
remaining grandfathered, it is reasonable to assume that some would 
consider other measures to maintain that status. In addition to the 
adjustments that employers could relatively easily make by simply 
adjusting the full set of cost-sharing parameters rather than focusing 
changes on a single parameter, the Departments expect that further 
behavioral changes in response to the incentives created by the 
Affordable Care Act and these interim final regulations is possible. 
For instance, plans could alter other benefits or could decide to 
accept a slight increase in plan premium or in premium contribution. 
All of these options would further lower the percentage of firms that 
would relinquish grandfather status. There is substantial uncertainty, 
however, about how many firms would utilize these other avenues.
    To examine the impact of this type of behavior on the estimates on 
the number of plans that would not maintain grandfather status, the 
Departments examined the magnitude of additional premium increases 
plans would need to implement if they were to modify their cost-sharing 
changes to stay within the allowable limits. Among the 24 percent of 
small firms that would have relinquished grandfather status based on 
the changes they made in 2009, 31 percent would have needed to increase 
premiums by 3 percent or less in order to maintain grandfather status. 
The analogous statistic for the 16 percent of large firms that would 
have relinquished grandfather status is 41 percent. It is reasonable to 
think that employers that are facing only a relatively small premium 
increase might choose to remain grandfathered.
    Using these estimates, if employers value grandfathering enough 
that they are willing to allow premiums to increase by three percent 
more than their otherwise intended level (or can make changes to 
benefits other than cost-sharing that achieve a similar result), then 
14 percent of small employers and 11 percent of large employers would 
relinquish grandfather status if they made the same changes in 2011 as 
they had in 2009. Adding in the employers who would relinquish 
grandfather status because they change issuers, the Departments' lower 
bound estimate is that approximately 21 percent of small employers and 
13 percent of large employers will relinquish grandfather status in 
2011.
d. Sensitivity Analysis: Incomplete Flexibility To Substitute One Cost-
Sharing Mechanism for Another
    Although economic conditions may cause more plans to remain 
grandfathered in 2011 than might be expected from analysis of the 2009 
data, there are other factors that may cause the Departments' estimates 
of the fraction of plans retaining grandfather status to be 
overestimates of the fraction that will retain grandfather status. The 
estimates are based on the assumption that all plans that could 
accommodate the 2009 change they made in a single cost-sharing 
parameter by spreading out those changes over multiple parameters would 
actually do so. However, some plans and sponsors may be concerned about 
the labor relations consequences of reducing the employer contribution 
to premium. For example, if a plan increases its out-of-pocket maximum 
from $3,000 to $5,000 in 2009, it could choose to remain grandfathered 
by limiting the out-of-pocket maximum to $3,570, reducing the employer 
contribution and increasing the employee contribution to premium. It is 
not clear, however, that all plan sponsors would do so--some may see 
the costs in negative employee relations as larger than the benefits 
from remaining grandfathered. Moreover, because some plans may already 
nearly comply with all provisions of the Affordable Care Act, or 
because enrollees are of average to less favorable health status, some 
employers may place less value on retaining grandfather status.
    With this in mind, the Departments replicated the analysis, but 
assumed that one-half of the employers who made a change in cost-
sharing parameter that could not be accommodated without reducing the 
employer contribution will be unwilling to reduce the employer 
contribution as a share of premium. Under this assumption, the 24 
percent and 16 percent estimates of the proportion of employers 
relinquishing grandfather status increases to approximately 37 percent 
and 28 percent among small and large employers, respectively. Adding in 
the number of employers that it is estimated will change issuers, the 
Departments' high-end estimate for the proportion that will relinquish 
grandfather status in 2011 is approximately 42 percent for small 
employers and 29 percent for large employers.
e. Estimates for 2011-2013
    Estimates are provided above for the percentage of employers that 
will retain grandfather status in 2011. These estimates are extended 
through 2013 by assuming that the identical percentage of plan sponsors 
will relinquish grandfathering in each year. Again, to the extent that 
the 2008-2009 data reflect plans that are more likely to make frequent 
changes in cost sharing, this assumption will overestimate the number 
of plans relinquishing grandfather status in 2012 and 2013.
    Under this assumption, the Departments' mid-range estimate is that 
66 percent of small employer plans and 45 percent of large employer 
plans will relinquish their grandfather status by the end of 2013. The 
low-end estimates are for 49 percent and 34 percent of small and large 
employer plans, respectively, to have relinquished grandfather status, 
and the high-end estimates are 80 percent and 64 percent, respectively.

[[Page 34553]]



TABLE 3--Estimates of the Cumulative Percentage of Employer Plans Relinquishing Their Grandfathered Status, 2011-
                                                      2013
----------------------------------------------------------------------------------------------------------------
                                                                       2011            2012            2013
----------------------------------------------------------------------------------------------------------------
Low-end Estimate
    Small Employer Plans........................................             20%             36%             49%
    Large Employer Plans........................................             13%             24%             34%
    All Employer Plans..........................................             15%             28%             39%
Mid-range Estimate
    Small Employer Plans........................................             30%             51%             66%
    Large Employer Plans........................................             18%             33%             45%
    All Employer Plans..........................................             22%             38%             51%
High-end Estimate
    Small Employer Plans........................................             42%             66%             80%
    Large Employer Plans........................................             29%             50%             64%
    All Employer Plans..........................................             33%             55%             69%
----------------------------------------------------------------------------------------------------------------
Notes: Represents full-time employees. Small Employers=3 to 99 employees; Large Employers=100+ employees. All
  three scenarios assume that two percent of all large employer plans and six percent of small employer plans
  would relinquish grandfathered status due to a change in issuer. Estimates are based on enrollment in PPOs.
Source: Kaiser/RHET Employer Survey, 2008-2009

f. Impacts on the Individual Market
    The market for individual insurance is significantly different than 
that for group coverage. This affects estimates of the proportion of 
plans that will remain grandfathered until 2014. As mentioned 
previously, the individual market is a residual market for those who 
need insurance but do not have group coverage available and do not 
qualify for public coverage. For many, the market is transitional, 
providing a bridge between other types of coverage. One study found a 
high percentage of individual insurance policies began and ended with 
employer-sponsored coverage.\28\ More importantly, coverage on 
particular policies tends to be for short periods of time. Reliable 
data are scant, but a variety of studies indicate that between 40 
percent and 67 percent of policies are in effect for less than one 
year.\29\ Although data on changes in benefit packages comparable to 
that for the group market is not readily available, the high turnover 
rates described here would dominate benefit changes as the chief source 
of changes in grandfather status.
---------------------------------------------------------------------------

    \28\ Adele M. Kirk. The Individual Insurance Market: A Building 
Block for Health Care Reform? Health Care Financing Organization 
Research Synthesis. May 2008.
    \29\ Ibid.
---------------------------------------------------------------------------

    While a substantial fraction of individual policies are in force 
for less than one year, a small group of individuals maintain their 
policies over longer time periods. One study found that 17 percent of 
individuals maintained their policies for more than two years,\30\ 
while another found that nearly 30 percent maintained policies for more 
than three years.\31\
---------------------------------------------------------------------------

    \30\ http://content.healthaffairs.org/cgi/content/full/23/6/210#R14. ``Patterns of Individual Health Insurance Coverage'' Health 
Affairs (Ziller et al, 2004).
    \31\ http://content.healthaffairs.org/cgi/content/full/hlthaff.25.w226v1/DC1. ``Consumer Decision Making in the Individual 
Health Insurance Market'' Health Affairs (Marquis et al., 2006).
---------------------------------------------------------------------------

    Using these turnover estimates, a reasonable range for the 
percentage of individual policies that would terminate, and therefore 
relinquish their grandfather status, is 40 percent to 67 percent. These 
estimates assume that the policies that terminate are replaced by new 
individual policies, and that these new policies are not, by 
definition, grandfathered. In addition, the coverage that some 
individuals maintain for long periods might lose its grandfather status 
because the cost-sharing parameters in policies change by more than the 
limits specified in these interim final regulations. The frequency of 
this outcome cannot be gauged due to lack of data, but as a result of 
it, the Departments estimate that the percentage of individual market 
policies losing grandfather status in a given year exceeds the 40 
percent to 67 percent range that is estimated based on the fraction of 
individual policies that turn over from one year to the next.
g. Application to Extension of Dependent Coverage to Age 26
    One way to assess the impact of these interim final regulations is 
to assess how they interact with other Affordable Care Act provisions. 
One such provision is the requirement that, in plan years on or after 
September 23, 2010, but prior to January 1, 2014, grandfathered group 
health plans are required to offer dependent coverage to a child under 
the age of 26 who is not eligible for employer-sponsored insurance. In 
the Regulatory Impact Assessment (RIA) for the regulation that was 
issued on May 13, 2010 (75 FR 27122), the Departments estimated that 
there were 5.3 million young adults age 19-25 who were covered by 
employer-sponsored coverage (ESI) and whose parents were covered by 
employer-sponsored insurance, and an additional 480,000 young adults 
who were uninsured, were offered ESI, and whose parents were covered by 
ESI. In that impact assessment, the Departments assumed that all 
parents with employer-sponsored insurance would be in grandfathered 
health plans, and that none of their 19-25 year old dependents with 
their own offer of employer-sponsored insurance would gain coverage as 
a result of that regulation.
    As estimated here, approximately 80 percent of the parents with ESI 
are likely to be in grandfathered health plans in 2011, leaving 
approximately 20 percent of these parents in non-grandfathered health 
plans. Young adults under 26 with employer-sponsored insurance or with 
an offer of such coverage whose parents are in non-grandfathered plans 
potentially could enroll in their parents' coverage. The Departments 
assume that a large percentage of the young adults who are uninsured 
will enroll in their parents' coverage when given the opportunity. It 
is more difficult to model the choices of young adults with an offer of 
employer-sponsored insurance whose parents also have group coverage. 
One assumes these young adults will compare the amount that they must 
pay for their own employer's coverage with the amount that they (or 
their parents) would pay if they were covered under their parents' 
policies. Such a decision will incorporate the type of plan that the 
parent has, since if the parent already has a family plan whose premium 
does not vary by number of dependents, the

[[Page 34554]]

adult child could switch at no additional cost to the parents. A very 
rough estimate therefore is that approximately 25 percent of young 
adults with ESI will switch to their parents' coverage when their 
parents' coverage is not grandfathered. The Departments assume that 15 
percent of young adults who are offered ESI but are uninsured and whose 
parents have non-grandfathered health plans will switch to their 
parents' plan. This latter estimate roughly corresponds to the 
assumption made in the low-take up rate scenario in the RIA for 
dependent coverage for young adults who are uninsured.
    These assumptions imply that an additional approximately 414,000 
young adults whose parents have non-grandfathered ESI will be covered 
by their parents' health coverage in 2011, of whom 14,000 would have 
been uninsured, compared with the dependent coverage regulation impact 
analysis that assumed that all existing plans would have remained 
grandfathered and none of these adult children would have been eligible 
for coverage under their parents' plans. By 2013, an estimated 698,000 
additional young adults with ESI or an offer of ESI will be covered by 
their parent's non-grandfathered health policy, of which 36,000 would 
have been uninsured.
6. Grandfathered Health Plan Document Retention and Disclosure 
Requirements
    To maintain grandfathered health plan status under these interim 
final regulations, a plan or issuer must maintain records that document 
the plan or policy terms in connection with the coverage in effect on 
March 23, 2010, and any other documents necessary to verify, explain or 
clarify is status as a grandfathered health plan. The records must be 
made available for examination by participants, beneficiaries, 
individual policy subscribers, or a State or Federal agency official.
    Plans or health insurance coverage that intend to be a 
grandfathered health plan, also must include a statement, in any plan 
materials provided to participants or beneficiaries (in the individual 
market, primary subscriber) describing the benefits provided under the 
plan or health insurance coverage, and that the plan or coverage is 
intended to be a grandfathered health plan within the meaning of 
section 1251 of the Affordable Care Act. In these interim final 
regulations, the Departments provide a model statement plans and 
issuers may use to satisfy the disclosure requirement. The Department's 
estimate that the one time cost to plans and insurance issuers of 
preparing and distributing the grandfathered health plan disclosure is 
$39.6 million in 2011. The one time cost to plans and insurance issuers 
for the record retention requirement is estimated to be $32.2 million 
in 2011. For a discussion of the grandfathered health plan document 
retention and disclosure requirements, see the Paperwork Reduction Act 
section later in this preamble.

C. Regulatory Flexibility Act--Department of Labor and Department of 
Health and Human Services

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes 
certain requirements with respect to federal rules that are subject to 
the notice and comment requirements of section 553(b) of the APA (5 
U.S.C. 551 et seq.) and that are likely to have a significant economic 
impact on a substantial number of small entities. Under Section 553(b) 
of the APA, a general notice of proposed rulemaking is not required 
when an agency, for good cause, finds that notice and public comment 
thereon are impracticable, unnecessary, or contrary to the public 
interest. These interim final regulations are exempt from the APA, 
because the Departments made a good cause finding that a general notice 
of proposed rulemaking is not necessary earlier in this preamble. 
Therefore, the RFA does not apply and the Departments are not required 
to either certify that the regulations would not have a significant 
economic impact on a substantial number of small entities or conduct a 
regulatory flexibility analysis.
    Nevertheless, the Departments carefully considered the likely 
impact of the regulations on small entities in connection with their 
assessment under Executive Order 12866. Consistent with the policy of 
the RFA, the Departments encourage the public to submit comments that 
suggest alternative rules that accomplish the stated purpose of section 
1251 of the Affordable Care Act and minimize the impact on small 
entities.

D. Special Analyses--Department of the Treasury

    Notwithstanding the determinations of the Department of Labor and 
Department of Health and Human Services, for purposes of the Department 
of the Treasury, it has been determined that this Treasury decision is 
not a significant regulatory action for purposes of Executive Order 
12866. Therefore, a regulatory assessment is not required. It has also 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations. For the 
applicability of the RFA, refer to the Special Analyses section in the 
preamble to the cross-referencing notice of proposed rulemaking 
published elsewhere in this issue of the Federal Register. Pursuant to 
section 7805(f) of the Code, these temporary regulations have been 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on their impact on small businesses.

E. Paperwork Reduction Act

1. Department of Labor and Department of Treasury: Affordable Care Act 
Grandfathered Plan Disclosure and Record Retention Requirements
    As part of their continuing efforts to reduce paperwork and 
respondent burden, the Departments conduct a preclearance consultation 
program to provide the general public and federal agencies with an 
opportunity to comment on proposed and continuing collections of 
information in accordance with the Paperwork Reduction Act of 1995 
(PRA) (44 U.S.C. 3506(c)(2)(A)). This helps to ensure that requested 
data can be provided in the desired format, reporting burden (time and 
financial resources) is minimized, collection requirements on 
respondents can be properly assessed.
    As discussed earlier in this preamble, if a plan or health 
insurance coverage intends to be a grandfathered health plan, it must 
include a statement in any plan materials provided to participants or 
beneficiaries (in the individual market, primary subscriber) describing 
the benefits provided under the plan or health insurance coverage, and 
that the plan or coverage is intended to be grandfathered health plan 
within the meaning of section 1251 of the Affordable Care Act 
(``grandfathered health plan disclosure''). Model language has been 
provided in these interim final regulations, the use of which will 
satisfy this disclosure requirement
    To maintain status as a grandfathered health plan under these 
interim final regulations, a plan or issuer must maintain records 
documenting the plan or policy terms in connection with the coverage in 
effect on March 23, 2010, and any other documents necessary to verify, 
explain, or clarify its status as a grandfathered health plan 
(``recordkeeping requirement''). In addition, the plan or issuer must 
make such records available for examination. Accordingly, a 
participant, beneficiary, individual policy subscriber, or State or 
Federal agency official would be able to

[[Page 34555]]

inspect such documents to verify the status of the plan or health 
insurance coverage as a grandfathered health plan.
    As discussed earlier in this preamble, grandfathered health plans 
are not required to comply with certain Affordable Care Act provisions. 
These interim regulations define for plans and issuers the scope of 
changes that they can make to their grandfathered health plans and 
policies under the Affordable Care Act while retaining their 
grandfathered health plan status.
    The Affordable Care Act grandfathered health plan disclosure and 
recordkeeping requirements are information collection requests (ICR) 
subject to the PRA. Currently, the Departments are soliciting public 
comments for 60 days concerning these disclosures. The Departments have 
submitted a copy of these interim final regulations to OMB in 
accordance with 44 U.S.C. 3507(d) for review of the information 
collections. The Departments and OMB are particularly interested in 
comments that:
     Evaluate whether the collection of information is 
necessary for the proper performance of the functions of the agency, 
including whether the information will have practical utility;
     Evaluate the accuracy of the agency's estimate of the 
burden of the collection of information, including the validity of the 
methodology and assumptions used;
     Enhance the quality, utility, and clarity of the 
information to be collected; and
     Minimize the burden of the collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology, for example, by 
permitting electronic submission of responses.
    Comments should be sent to the Office of Information and Regulatory 
Affairs, Attention: Desk Officer for the Employee Benefits Security 
Administration either by fax to (202) 395-7285 or by e-mail to [email protected]. A copy of the ICR may be obtained by contacting 
the PRA addressee: G. Christopher Cosby, Office of Policy and Research, 
U.S. Department of Labor, Employee Benefits Security Administration, 
200 Constitution Avenue, NW., Room N-5718, Washington, DC 20210. 
Telephone: (202) 693-8410; Fax: (202) 219-2745. These are not toll-free 
numbers. E-mail: [email protected]. ICRs submitted to OMB also are 
available at reginfo.gov (http://www.reginfo.gov/public/do/PRAMain).
a. Grandfathered Health Plan Disclosure
    In order to satisfy the interim final regulations' grandfathered 
health plan disclosure requirement, the Departments estimate that 2.2 
million ERISA-covered plans will need to notify an estimated 56.3 
million policy holders of their plans' grandfathered health plan 
status.\32\ The following estimates, except where noted, are based on 
the mid-range estimates of the percent of plans retaining grandfather 
status. Because the interim final regulations provide model language 
for this purpose, the Departments estimate that five minutes of 
clerical time (with a labor rate of $26.14/hour) will be required to 
incorporate the required language into the plan document and ten 
minutes of an human resource professional's time (with a labor rate of 
$89.12/hour) will be required to review the modified language.\33\ 
After plans first satisfy the grandfathered health plan disclosure 
requirement in 2011, any additional burden should be de minimis if a 
plan wants to maintain its grandfather status in future years. The 
Departments also expect the cost of removing the notice from plan 
documents as plans relinquish their grandfather status to be de minimis 
and therefore is not estimated. Therefore, the Departments estimate 
that plans will incur a one-time hour burden of 538,000 hours with an 
equivalent cost of $36.6 million to meet the disclosure requirement.
---------------------------------------------------------------------------

    \32\ The Departments' estimate of the number of ERISA-covered 
health plans was obtained from the 2008 Medical Expenditure Panel 
Survey's Insurance component. The estimate of the number of policy 
holders was obtained from the 2009 Current Population Survey. The 
methodology used to estimate the percentage of plans that will 
retain their grandfathered plans was discussed above.
    \33\ EBSA estimates of labor rates include wages, other 
benefits, and overhead based on the National Occupational Employment 
Survey (May 2008, Bureau of Labor Statistics) and the Employment 
Cost Index June 2009, Bureau of Labor Statistics).
---------------------------------------------------------------------------

    The Departments assume that only printing and material costs are 
associated with the disclosure requirement, because the interim final 
regulations provide model language that can be incorporated into 
existing plan documents, such as a summary plan description (SPD). The 
Departments estimate that the notice will require one-half of a page, 
five cents per page printing and material cost will be incurred, and 38 
percent of the notices will be delivered electronically. This results 
in a cost burden of $873,000 ($0.05 per page*\1/2\ pages per notice * 
34.9 million notices*0.62).
b. Record-Keeping Requirement
    The Departments assume that most of the documents required to be 
retained to satisfy recordkeeping requirement of these interim final 
regulations already are retained by plans for tax purposes, to satisfy 
ERISA's record retention and statute of limitations requirements, and 
for other business reasons. Therefore, the Departments estimate that 
the recordkeeping burden imposed by this ICR will require five minutes 
of a legal professional's time (with a rate of $119.03/hour) to 
determine the relevant plan documents that must be retained and ten 
minutes of clerical staff time (with a labor rate of $26.14/hour) to 
organize and file the required documents to ensure that they are 
accessible to participants, beneficiaries, and Federal and State 
governmental agency officials.
    With an estimated 2.2 million grandfathered plans in 2011, the 
Departments estimate an hour burden of approximately 538,000 hours with 
equivalent costs of $30.7 million. The Departments have estimated this 
as a one-time cost incurred in 2011, because after the first year, the 
Departments anticipate that any future costs will be de minimis.
    Overall, for both the grandfathering notice and the recordkeeping 
requirement, the Departments expect there to be a total hour burden of 
1.1 million hours and a cost burden of $291,000.
    The Departments note that persons are not required to respond to, 
and generally are not subject to any penalty for failing to comply 
with, an ICR unless the ICR has a valid OMB control number.
    These paperwork burden estimates are summarized as follows:
    Type of Review: New Collection.
    Agencies: Employee Benefits Security Administration, Department of 
Labor; Internal Revenue Service, U.S. Department of Treasury.
    Title: Disclosure and Recordkeeping Requirements for Grandfathered 
Health Plans under the Affordable Care Act.
    OMB Number: 1210-0140; 1545-2178.
    Affected Public: Business or other for-profit; not-for-profit 
institutions.
    Total Respondents: 2,151,000.
    Total Responses: 56,347,000.
    Frequency of Response: One time.
    Estimated Total Annual Burden Hours: 538,000 (Employee Benefits 
Security Administration); 538,000 (Internal Revenue Service).
    Estimated Total Annual Burden Cost: $437,000 (Employee Benefits 
Security Administration); $437,000 (Internal Revenue Service).

[[Page 34556]]

2. Department of Health and Human Services: Affordable Care Act 
Grandfathered Plan Disclosure and Record Retention Requirements
    As discussed above in the Department of Labor and Department of the 
Treasury PRA section, these interim final regulations contain a record 
retention and disclosure requirement for grandfathered health plans. 
These requirements are information collection requirements under the 
PRA.
a. Grandfathered Health Plan Disclosure
    In order to satisfy the interim final regulations' grandfathered 
health plan disclosure requirement, the Department estimates that 
98,000 state and local governmental plans will need to notify 
approximately 16.2 million policy holders of their plans' status as a 
grandfathered health plan. The following estimates except where noted 
are based on the mid-range estimates of the percent of plans retaining 
grandfather status. An estimated 490 insurers providing coverage in the 
individual market will need to notify an estimated 4.3 million policy 
holders of their policies' status as a grandfathered health plan.\34\
---------------------------------------------------------------------------

    \34\ The Department's estimate of the number of state and local 
governmental health plans was obtained from the 2007 Census of 
Governments. The estimate of the number of policy holders in the 
individual market were obtained from the 2009 Current Population 
Survey. The methodology used to estimate the percentage of state and 
local governmental plans and individual market policies that will 
retain their grandfathered health plan status was discussed above.
---------------------------------------------------------------------------

    Because the interim final regulations provide model language for 
this purpose, the Department estimates that five minute of clerical 
time (with a labor rate of $26.14/hour) will be required to incorporate 
the required language into the plan document and ten minutes of a human 
resource professional's time (with a labor rate of $89.12/hour) will be 
required to review the modified language.\35\ After plans first satisfy 
the grandfathered health plan disclosure requirement in 2011, any 
additional burden should be de minimis if a plan wants to maintain its 
grandfather status in future years. The Department also expects the 
cost of removing the notice from plan documents as plans relinquish 
their grandfather status to be de minimis and therefore is not 
estimated. Therefore, the Department estimates that plans and insurers 
will incur a one-time hour burden of 26,000 hours with an equivalent 
cost of $1.8 million to meet the disclosure requirement.
---------------------------------------------------------------------------

    \35\ EBSA estimates of labor rates include wages, other 
benefits, and overhead based on the National Occupational Employment 
Survey (May 2008, Bureau of Labor Statistics) and the Employment 
Cost Index June 2009, Bureau of Labor Statistics).
---------------------------------------------------------------------------

    The Department assumes that only printing and material costs are 
associated with the disclosure requirement, because the interim final 
regulations provide model language that can be incorporated into 
existing plan documents, such as an SPD. The Department estimates that 
the notice will require one-half of a page, five cents per page 
printing and material cost will be incurred, and 38 percent of the 
notices will be delivered electronically. This results in a cost burden 
of $318,000 ($0.05 per page*\1/2\ pages per notice * 12.7 million 
notices*0.62).
b. Record-Keeping Requirement
    The Department assumes that most of the documents required to be 
retained to satisfy the Affordable Care Act's recordkeeping requirement 
already are retained by plans for tax purposes, to satisfy ERISA's 
record retention and statute of limitations requirements, and for other 
business reasons. Therefore, the Department estimates that the 
recordkeeping burden imposed by this ICR will require five minutes of a 
legal professional's time (with a rate of $119.03/hour) to determine 
the relevant plan documents that must be retained and ten minutes of 
clerical staff time (with a labor rate of $26.14/hour) to organize and 
file the required documents to ensure that they are accessible to 
participants, beneficiaries, and Federal and State governmental agency 
officials.
    With an estimated 98,000 grandfathered plans and 7,400 
grandfathered individual insurance products \36\ in 2011, the 
Department estimates an hour burden of approximately 26,000 hours with 
equivalent costs of $1.5 million. The Department's have estimated this 
as a one-time cost incurred in 2011, because after the first year, the 
Department assumes any future costs will be de minimis.
---------------------------------------------------------------------------

    \36\ The Department is not certain on the number of products 
offered in the individual market and requests comments. After 
reviewing the number of products offered by various insurers in the 
individual market the Department used an estimate of 15 which it 
believes is a high estimate.
---------------------------------------------------------------------------

    Overall, for both the grandfathering notice and the recordkeeping 
requirement, the Department expects there to be a total hour burden of 
53,000 hours and a cost burden of $318,000.
    The Department notes that persons are not required to respond to, 
and generally are not subject to any penalty for failing to comply 
with, an ICR unless the ICR has a valid OMB control number.
    These paperwork burden estimates are summarized as follows:
    Type of Review: New collection.
    Agency: Department of Health and Human Services.
    Title: Disclosure and Recordkeeping Requirements for Grandfathered 
Health Plans under the Affordable Care Act.
    OMB Number: 0938-1093.
    Affected Public: Business; State, Local, or Tribal Governments.
    Respondents: 105,000.
    Responses: 20,508,000.
    Frequency of Response: One-time.
    Estimated Total Annual Burden Hours: 53,000 hours.
    Estimated Total Annual Burden Cost: $318,000.
    If you comment on this information collection and recordkeeping 
requirements, please do either of the following:
    1. Submit your comments electronically as specified in the 
ADDRESSES section of this proposed rule; or
    2. Submit your comments to the Office of Information and Regulatory 
Affairs, Office of Management and Budget,
    Attention: OCIIO Desk Officer, OCIIO-9991-IFC.
    Fax: (202) 395-6974; or
    E-mail: [email protected].

F. Congressional Review Act

    These interim final regulations are subject to the Congressional 
Review Act provisions of the Small Business Regulatory Enforcement 
Fairness Act of 1996 (5 U.S.C. 801 et seq.) and have been transmitted 
to Congress and the Comptroller General for review.

G. Unfunded Mandates Reform Act

    The Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4) requires 
agencies to prepare several analytic statements before proposing any 
rules that may result in annual expenditures of $100 million (as 
adjusted for inflation) by State, local and tribal governments or the 
private sector. These interim final regulations are not subject to the 
Unfunded Mandates Reform Act, because they are being issued as an 
interim final regulation. However, consistent with the policy embodied 
in the Unfunded Mandates Reform Act, these interim final regulations 
have been designed to be the least burdensome alternative for State, 
local and tribal governments, and the private sector, while achieving 
the objectives of the Affordable Care Act.

[[Page 34557]]

H. Federalism Statement--Department of Labor and Department of Health 
and Human Services

    Executive Order 13132 outlines fundamental principles of 
federalism, and requires the adherence to specific criteria by Federal 
agencies in the process of their formulation and implementation of 
policies that have ``substantial direct effects'' on the States, the 
relationship between the national government and States, or on the 
distribution of power and responsibilities among the various levels of 
government. Federal agencies promulgating regulations that have these 
federalism implications must consult with State and local officials, 
and describe the extent of their consultation and the nature of the 
concerns of State and local officials in the preamble to the 
regulation.
    In the Departments' view, this regulation has federalism 
implications, because it has direct effects on the States, the 
relationship between the national government and States, or on the 
distribution of power and responsibilities among various levels of 
government. However, in the Departments' view, the federalism 
implications of the regulation is substantially mitigated because, with 
respect to health insurance issuers, the Departments expect that the 
majority of States will enact laws or take other appropriate action 
resulting in their meeting or exceeding the Federal standard.
    In general, through section 514, ERISA supersedes State laws to the 
extent that they relate to any covered employee benefit plan, and 
preserves State laws that regulate insurance, banking, or securities. 
While ERISA prohibits States from regulating a plan as an insurance or 
investment company or bank, the preemption provisions of ERISA section 
731 and PHS Act section 2724 (implemented in 29 CFR 2590.731(a) and 45 
CFR 146.143(a)) apply so that the HIPAA requirements (including those 
of the Affordable Care Act) are not to be ``construed to supersede any 
provision of State law which establishes, implements, or continues in 
effect any standard or requirement solely relating to health insurance 
issuers in connection with group health insurance coverage except to 
the extent that such standard or requirement prevents the application 
of a requirement'' of a Federal standard. The conference report 
accompanying HIPAA indicates that this is intended to be the 
``narrowest'' preemption of State laws. (See House Conf. Rep. No. 104-
736, at 205, reprinted in 1996 U.S. Code Cong. & Admin. News 2018.) 
States may continue to apply State law requirements except to the 
extent that such requirements prevent the application of the Affordable 
Care Act requirements that are the subject of this rulemaking. State 
insurance laws that are more stringent than the federal requirements 
are unlikely to ``prevent the application of'' the Affordable Care Act, 
and be preempted. Accordingly, States have significant latitude to 
impose requirements on health insurance issuers that are more 
restrictive than the Federal law.
    In compliance with the requirement of Executive Order 13132 that 
agencies examine closely any policies that may have federalism 
implications or limit the policy making discretion of the States, the 
Departments have engaged in efforts to consult with and work 
cooperatively with affected State and local officials, including 
attending conferences of the National Association of Insurance 
Commissioners and consulting with State insurance officials on an 
individual basis. It is expected that the Departments will act in a 
similar fashion in enforcing the Affordable Care Act requirements. 
Throughout the process of developing these regulations, to the extent 
feasible within the specific preemption provisions of HIPAA as it 
applies to the Affordable Care Act, the Departments have attempted to 
balance the States' interests in regulating health insurance issuers, 
and Congress' intent to provide uniform minimum protections to 
consumers in every State. By doing so, it is the Departments' view that 
they have complied with the requirements of Executive Order 13132.
    Pursuant to the requirements set forth in section 8(a) of Executive 
Order 13132, and by the signatures affixed to these regulations, the 
Departments certify that the Employee Benefits Security Administration 
and the Office of Consumer Information and Insurance Oversight have 
complied with the requirements of Executive Order 13132 for the 
attached regulation in a meaningful and timely manner.

V. Statutory Authority

    The Department of the Treasury temporary regulations are adopted 
pursuant to the authority contained in sections 7805 and 9833 of the 
Code.
    The Department of Labor interim final regulations are adopted 
pursuant to the authority contained in 29 U.S.C. 1027, 1059, 1135, 
1161-1168, 1169, 1181-1183, 1181 note, 1185, 1185a, 1185b, 1191, 1191a, 
1191b, and 1191c; section 101(g), Public Law 104-191, 110 Stat. 1936; 
section 401(b), Public Law 105-200, 112 Stat. 645 (42 U.S.C. 651 note); 
section 512(d), Public Law 110-343, 122 Stat. 3881; section 1001, 1201, 
and 1562(e), Public Law 111-148, 124 Stat. 119, as amended by Public 
Law 111-152, 124 Stat. 1029; Secretary of Labor's Order 6-2009, 74 FR 
21524 (May 7, 2009).
    The Department of Health and Human Services interim final 
regulations are adopted pursuant to the authority contained in sections 
2701 through 2763, 2791, and 2792 of the PHS Act (42 U.S.C. 300gg 
through 300gg-63, 300gg-91, and 300gg-92), as amended.

List of Subjects

26 CFR Part 54

    Excise taxes, Health care, Health insurance, Pensions, Reporting 
and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

29 CFR Part 2590

    Continuation coverage, Disclosure, Employee benefit plans, Group 
health plans, Health care, Health insurance, Medical child support, 
Reporting and recordkeeping requirements.

45 CFR Part 147

    Health care, Health insurance, Reporting and recordkeeping 
requirements, and State regulation of health insurance.

Steven T. Miller,
Deputy Commissioner for Services and Enforcement, Internal Revenue 
Service.

    Approved: June 10, 2010.
Michael F. Mundaca,
Assistant Secretary of the Treasury (Tax Policy).

    Signed this 4th day of June, 2010.
Phyllis C. Borzi,
Assistant Secretary, Employee Benefits Security Administration, 
Department of Labor.

    Approved: June 8, 2010.
Jay Angoff,
Director, Office of Consumer Information and Insurance Oversight.

    Approved: June 9, 2010.
Kathleen Sebelius,
Secretary.

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Chapter I

0
Accordingly, 26 CFR parts 54 and 602 are amended as follows:

[[Page 34558]]

PART 54--PENSION EXCISE TAXES

0
1. The authority citation for part 54 is amended by adding entries for 
Sec. Sec.  54.9815-1251T and 54.9815-2714T in numerical order to read 
in part as follows:

    Authority: 26 U.S.C. 7805. * * *


    Section 54.9815-1251T also issued under 26 U.S.C. 9833.
    Section 54.9815-2714T also issued under 26 U.S.C. 9833. * * *


0
2. Section 54.9815-1251T is added to read as follows:


Sec.  54.9815-1251T  Preservation of right to maintain existing 
coverage (temporary).

    (a) Definition of grandfathered health plan coverage--(1) In 
general--(i) Grandfathered health plan coverage means coverage provided 
by a group health plan, or a health insurance issuer, in which an 
individual was enrolled on March 23, 2010 (for as long as it maintains 
that status under the rules of this section). A group health plan or 
group health insurance coverage does not cease to be grandfathered 
health plan coverage merely because one or more (or even all) 
individuals enrolled on March 23, 2010 cease to be covered, provided 
that the plan or group health insurance coverage has continuously 
covered someone since March 23, 2010 (not necessarily the same person, 
but at all times at least one person). For purposes of this section, a 
plan or health insurance coverage that provides grandfathered health 
plan coverage is referred to as a grandfathered health plan. The rules 
of this section apply separately to each benefit package made available 
under a group health plan or health insurance coverage.
    (ii) Subject to the rules of paragraph (f) of this section for 
collectively bargained plans, if an employer or employee organization 
enters into a new policy, certificate, or contract of insurance after 
March 23, 2010 (because, for example, any previous policy, certificate, 
or contract of insurance is not being renewed), then that policy, 
certificate, or contract of insurance is not a grandfathered health 
plan with respect to the individuals in the group health plan.
    (2) Disclosure of grandfather status--(i) To maintain status as a 
grandfathered health plan, a plan or health insurance coverage must 
include a statement, in any plan materials provided to a participant or 
beneficiary describing the benefits provided under the plan or health 
insurance coverage, that the plan or coverage believes it is a 
grandfathered health plan within the meaning of section 1251 of the 
Patient Protection and Affordable Care Act and must provide contact 
information for questions and complaints.
    (ii) The following model language can be used to satisfy this 
disclosure requirement:

    This [group health plan or health insurance issuer] believes 
this [plan or coverage] is a ``grandfathered health plan'' under the 
Patient Protection and Affordable Care Act (the Affordable Care 
Act). As permitted by the Affordable Care Act, a grandfathered 
health plan can preserve certain basic health coverage that was 
already in effect when that law was enacted. Being a grandfathered 
health plan means that your [plan or policy] may not include certain 
consumer protections of the Affordable Care Act that apply to other 
plans, for example, the requirement for the provision of preventive 
health services without any cost sharing. However, grandfathered 
health plans must comply with certain other consumer protections in 
the Affordable Care Act, for example, the elimination of lifetime 
limits on benefits.
    Questions regarding which protections apply and which 
protections do not apply to a grandfathered health plan and what 
might cause a plan to change from grandfathered health plan status 
can be directed to the plan administrator at [insert contact 
information]. [For ERISA plans, insert: You may also contact the 
Employee Benefits Security Administration, U.S. Department of Labor 
at 1-866-444-3272 or www.dol.gov/ebsa/healthreform. This website has 
a table summarizing which protections do and do not apply to 
grandfathered health plans.] [For individual market policies and 
nonfederal governmental plans, insert: You may also contact the U.S. 
Department of Health and Human Services at www.healthreform.gov.]

    (3) Documentation of plan or policy terms on March 23, 2010. To 
maintain status as a grandfathered health plan, a group health plan, or 
group health insurance coverage, must, for as long as the plan or 
health insurance coverage takes the position that it is a grandfathered 
health plan--
    (i) Maintain records documenting the terms of the plan or health 
insurance coverage in connection with the coverage in effect on March 
23, 2010, and any other documents necessary to verify, explain, or 
clarify its status as a grandfathered health plan; and
    (ii) Make such records available for examination upon request.
    (4) Family members enrolling after March 23, 2010. With respect to 
an individual who is enrolled in a group health plan or health 
insurance coverage on March 23, 2010, grandfathered health plan 
coverage includes coverage of family members of the individual who 
enroll after March 23, 2010 in the grandfathered health plan coverage 
of the individual.
    (5) Examples. The rules of this paragraph (a) are illustrated by 
the following examples:

    Example 1.  (i) Facts. A group health plan not maintained 
pursuant to a collective bargaining agreement provides coverage 
through a group health insurance policy from Issuer X on March 23, 
2010. For the plan year beginning January 1, 2012, the plan enters 
into a new policy with Issuer Z.
    (ii) Conclusion. In this Example 1, for the plan year beginning 
January 1, 2012, the group health insurance coverage issued by Z is 
not a grandfathered health plan under the rules of paragraph 
(a)(1)(ii) of this section because the policy issued by Z did not 
provide coverage on March 23, 2010.
    Example 2. (i) Facts. A group health plan not maintained 
pursuant to a collective bargaining agreement offers three benefit 
packages on March 23, 2010. Option F is a self-insured option. 
Options G and H are insured options. Beginning July 1, 2013, the 
plan replaces the issuer for Option H with a new issuer.
    (ii) Conclusion. In this Example 2, the coverage under Option H 
is not grandfathered health plan coverage as of July 1, 2013, 
consistent with the rule in paragraph (a)(1)(ii) of this section. 
Whether the coverage under Options F and G is grandfathered health 
plan coverage is determined under the rules of this section, 
including paragraph (g) of this section. If the plan enters into a 
new policy, certificate, or contract of insurance for Option G, 
Option G's status as a grandfathered health plan would cease under 
paragraph (a)(1)(ii) of this section.

    (b) Allowance for new employees to join current plan--(1) In 
general. Subject to paragraph (b)(2) of this section, a group health 
plan (including health insurance coverage provided in connection with 
the group health plan) that provided coverage on March 23, 2010 and has 
retained its status as a grandfathered health plan (consistent with the 
rules of this section, including paragraph (g) of this section) is 
grandfathered health plan coverage for new employees (whether newly 
hired or newly enrolled) and their families enrolling in the plan after 
March 23, 2010.
    (2) Anti-abuse rules--(i) Mergers and acquisitions. If the 
principal purpose of a merger, acquisition, or similar business 
restructuring is to cover new individuals under a grandfathered health 
plan, the plan ceases to be a grandfathered health plan.
    (ii) Change in plan eligibility. A group health plan or health 
insurance coverage (including a benefit package under a group health 
plan) ceases to be a grandfathered health plan if--
    (A) Employees are transferred into the plan or health insurance 
coverage (the transferee plan) from a plan or health insurance coverage 
under which the employees were covered on March 23, 2010 (the 
transferor plan);

[[Page 34559]]

    (B) Comparing the terms of the transferee plan with those of the 
transferor plan (as in effect on March 23, 2010) and treating the 
transferee plan as if it were an amendment of the transferor plan would 
cause a loss of grandfather status under the provisions of paragraph 
(g)(1) of this section; and
    (C) There was no bona fide employment-based reason to transfer the 
employees into the transferee plan. For this purpose, changing the 
terms or cost of coverage is not a bona fide employment-based reason.
    (3) Examples. The rules of this paragraph (b) are illustrated by 
the following examples:

    Example 1.  (i) Facts. A group health plan offers two benefit 
packages on March 23, 2010, Options F and G. During a subsequent 
open enrollment period, some of the employees enrolled in Option F 
on March 23, 2010 switch to Option G.
    (ii) Conclusion. In this Example 1, the group health coverage 
provided under Option G remains a grandfathered health plan under 
the rules of paragraph (b)(1) of this section because employees 
previously enrolled in Option F are allowed to enroll in Option G as 
new employees.
    Example 2.  (i) Facts. Same facts as Example 1, except that the 
plan sponsor eliminates Option F because of its high cost and 
transfers employees covered under Option F to Option G. If instead 
of transferring employees from Option F to Option G, Option F was 
amended to match the terms of Option G, then Option F would cease to 
be a grandfathered health plan.
    (ii) Conclusion. In this Example 2, the plan did not have a bona 
fide employment-based reason to transfer employees from Option F to 
Option G. Therefore, Option G ceases to be a grandfathered health 
plan with respect to all employees. (However, any other benefit 
package maintained by the plan sponsor is analyzed separately under 
the rules of this section.)
    Example 3. (i) Facts. A group health plan offers two benefit 
packages on March 23, 2010, Options H and I. On March 23, 2010, 
Option H provides coverage only for employees in one manufacturing 
plant. Subsequently, the plant is closed, and some employees in the 
closed plant are moved to another plant. The employer eliminates 
Option H and the employees that are moved are transferred to Option 
I. If instead of transferring employees from Option H to Option I, 
Option H was amended to match the terms of Option I, then Option H 
would cease to be a grandfathered health plan.
    (ii) Conclusion. In this Example 3, the plan has a bona fide 
employment-based reason to transfer employees from Option H to 
Option I. Therefore, Option I does not cease to be a grandfathered 
health plan.

    (c) General grandfathering rule--(1) Except as provided in 
paragraphs (d) and (e) of this section, subtitles A and C of title I of 
the Patient Protection and Affordable Care Act (and the amendments made 
by those subtitles, and the incorporation of those amendments into 
section 9815 and ERISA section 715) do not apply to grandfathered 
health plan coverage. Accordingly, the provisions of PHS Act sections 
2701, 2702, 2703, 2705, 2706, 2707, 2709 (relating to coverage for 
individuals participating in approved clinical trials, as added by 
section 10103 of the Patient Protection and Affordable Care Act), 2713, 
2715A, 2716, 2717, 2719, and 2719A, as added or amended by the Patient 
Protection and Affordable Care Act, do not apply to grandfathered 
health plans. (In addition, see 45 CFR 147.140(c), which provides that 
the provisions of PHS Act section 2704, and PHS Act section 2711 
insofar as it relates to annual limits, do not apply to grandfathered 
health plans that are individual health insurance coverage.)
    (2) To the extent not inconsistent with the rules applicable to a 
grandfathered health plan, a grandfathered health plan must comply with 
the requirements of the Code, the PHS Act, and ERISA applicable prior 
to the changes enacted by the Patient Protection and Affordable Care 
Act.
    (d) Provisions applicable to all grandfathered health plans. The 
provisions of PHS Act section 2711 insofar as it relates to lifetime 
limits, and the provisions of PHS Act sections 2712, 2714, 2715, and 
2718, apply to grandfathered health plans for plan years beginning on 
or after September 23, 2010. The provisions of PHS Act section 2708 
apply to grandfathered health plans for plan years beginning on or 
after January 1, 2014.
    (e) Applicability of PHS Act sections 2704, 2711, and 2714 to 
grandfathered group health plans and group health insurance coverage--
(1) The provisions of PHS Act section 2704 as it applies with respect 
to enrollees who are under 19 years of age, and the provisions of PHS 
Act section 2711 insofar as it relates to annual limits, apply to 
grandfathered health plans that are group health plans (including group 
health insurance coverage) for plan years beginning on or after 
September 23, 2010. The provisions of PHS Act section 2704 apply 
generally to grandfathered health plans that are group health plans 
(including group health insurance coverage) for plan years beginning on 
or after January 1, 2014.
    (2) For plan years beginning before January 1, 2014, the provisions 
of PHS Act section 2714 apply in the case of an adult child with 
respect to a grandfathered health plan that is a group health plan only 
if the adult child is not eligible to enroll in an eligible employer-
sponsored health plan (as defined in section 5000A(f)(2)) other than a 
grandfathered health plan of a parent. For plan years beginning on or 
after January 1, 2014, the provisions of PHS Act section 2714 apply 
with respect to a grandfathered health plan that is a group health plan 
without regard to whether an adult child is eligible to enroll in any 
other coverage.
    (f) Effect on collectively bargained plans--(1) In general. In the 
case of health insurance coverage maintained pursuant to one or more 
collective bargaining agreements between employee representatives and 
one or more employers that was ratified before March 23, 2010, the 
coverage is grandfathered health plan coverage at least until the date 
on which the last of the collective bargaining agreements relating to 
the coverage that was in effect on March 23, 2010 terminates. Any 
coverage amendment made pursuant to a collective bargaining agreement 
relating to the coverage that amends the coverage solely to conform to 
any requirement added by subtitles A and C of title I of the Patient 
Protection and Affordable Care Act (and the amendments made by those 
subtitles, and the incorporation of those amendments into section 9815 
and ERISA section 715) is not treated as a termination of the 
collective bargaining agreement. After the date on which the last of 
the collective bargaining agreements relating to the coverage that was 
in effect on March 23, 2010 terminates, the determination of whether 
health insurance coverage maintained pursuant to a collective 
bargaining agreement is grandfathered health plan coverage is made 
under the rules of this section other than this paragraph (f) 
(comparing the terms of the health insurance coverage after the date 
the last collective bargaining agreement terminates with the terms of 
the health insurance coverage that were in effect on March 23, 2010) 
and, for any changes in insurance coverage after the termination of the 
collective bargaining agreement, under the rules of paragraph 
(a)(1)(ii) of this section.
    (2) Examples. The rules of this paragraph (f) are illustrated by 
the following examples:

    Example 1. (i) Facts. A group health plan maintained pursuant to 
a collective bargaining agreement provides coverage through a group 
health insurance policy from Issuer W on March 23, 2010. The 
collective bargaining agreement has not been amended and will not 
expire before December 31, 2011. The group health plan enters into a 
new group health insurance policy with Issuer Y for the plan year 
starting on January 1, 2011.
    (ii) Conclusion. In this Example 1, the group health plan, and 
the group health

[[Page 34560]]

insurance policy provided by Y, remains a grandfathered health plan 
with respect to existing employees and new employees and their 
families because the coverage is maintained pursuant to a collective 
bargaining agreement ratified prior to March 23, 2010 that has not 
terminated.
    Example 2. (i) Facts. Same facts as Example 1, except the 
coverage with Y is renewed under a new collective bargaining 
agreement effective January 1, 2012, with the only changes since 
March 23, 2010 being changes that do not cause the plan to cease to 
be a grandfathered health plan under the rules of this section, 
including paragraph (g) of this section.
    (ii) Conclusion. In this Example 2, the group health plan 
remains a grandfathered health plan pursuant to the rules of this 
section. Moreover, the group health insurance policy provided by Y 
remains a grandfathered health plan under the rules of this section, 
including paragraph (g) of this section.

    (g) Maintenance of grandfather status--(1) Changes causing 
cessation of grandfather status. Subject to paragraph (g)(2) of this 
section, the rules of this paragraph (g)(1) describe situations in 
which a group health plan or health insurance coverage ceases to be a 
grandfathered health plan.
    (i) Elimination of benefits. The elimination of all or 
substantially all benefits to diagnose or treat a particular condition 
causes a group health plan or health insurance coverage to cease to be 
a grandfathered health plan. For this purpose, the elimination of 
benefits for any necessary element to diagnose or treat a condition is 
considered the elimination of all or substantially all benefits to 
diagnose or treat a particular condition.
    (ii) Increase in percentage cost-sharing requirement. Any increase, 
measured from March 23, 2010, in a percentage cost-sharing requirement 
(such as an individual's coinsurance requirement) causes a group health 
plan or health insurance coverage to cease to be a grandfathered health 
plan.
    (iii) Increase in a fixed-amount cost-sharing requirement other 
than a copayment. Any increase in a fixed-amount cost-sharing 
requirement other than a copayment (for example, deductible or out-of-
pocket limit), determined as of the effective date of the increase, 
causes a group health plan or health insurance coverage to cease to be 
a grandfathered health plan, if the total percentage increase in the 
cost-sharing requirement measured from March 23, 2010 exceeds the 
maximum percentage increase (as defined in paragraph (g)(3)(ii) of this 
section).
    (iv) Increase in a fixed-amount copayment. Any increase in a fixed-
amount copayment, determined as of the effective date of the increase, 
causes a group health plan or health insurance coverage to cease to be 
a grandfathered health plan, if the total increase in the copayment 
measured from March 23, 2010 exceeds the greater of:
    (A) An amount equal to $5 increased by medical inflation, as 
defined in paragraph (g)(3)(i) of this section (that is, $5 times 
medical inflation, plus $5), or
    (B) The maximum percentage increase (as defined in paragraph 
(g)(3)(ii) of this section), determined by expressing the total 
increase in the copayment as a percentage.
    (v) Decrease in contribution rate by employers and employee 
organizations--(A) Contribution rate based on cost of coverage. A group 
health plan or group health insurance coverage ceases to be a 
grandfathered health plan if the employer or employee organization 
decreases its contribution rate based on cost of coverage (as defined 
in paragraph (g)(3)(iii)(A) of this section) towards the cost of any 
tier of coverage for any class of similarly situated individuals (as 
described in Sec.  54.9802-1(d)) by more than 5 percentage points below 
the contribution rate for the coverage period that includes March 23, 
2010.
    (B) Contribution rate based on a formula. A group health plan or 
group health insurance coverage ceases to be a grandfathered health 
plan if the employer or employee organization decreases its 
contribution rate based on a formula (as defined in paragraph 
(g)(3)(iii)(B) of this section) towards the cost of any tier of 
coverage for any class of similarly situated individuals (as described 
in Sec.  54.9802-1(d)) by more than 5 percent below the contribution 
rate for the coverage period that includes March 23, 2010.
    (vi) Changes in annual limits--(A) Addition of an annual limit. A 
group health plan, or group health insurance coverage, that, on March 
23, 2010, did not impose an overall annual or lifetime limit on the 
dollar value of all benefits ceases to be a grandfathered health plan 
if the plan or health insurance coverage imposes an overall annual 
limit on the dollar value of benefits.
    (B) Decrease in limit for a plan or coverage with only a lifetime 
limit. A group health plan, or group health insurance coverage, that, 
on March 23, 2010, imposed an overall lifetime limit on the dollar 
value of all benefits but no overall annual limit on the dollar value 
of all benefits ceases to be a grandfathered health plan if the plan or 
health insurance coverage adopts an overall annual limit at a dollar 
value that is lower than the dollar value of the lifetime limit on 
March 23, 2010.
    (C) Decrease in limit for a plan or coverage with an annual limit. 
A group health plan, or group health insurance coverage, that, on March 
23, 2010, imposed an overall annual limit on the dollar value of all 
benefits ceases to be a grandfathered health plan if the plan or health 
insurance coverage decreases the dollar value of the annual limit 
(regardless of whether the plan or health insurance coverage also 
imposed an overall lifetime limit on March 23, 2010 on the dollar value 
of all benefits).
    (2) Transitional rules--(i) Changes made prior to March 23, 2010. 
If a group health plan or health insurance issuer makes the following 
changes to the terms of the plan or health insurance coverage, the 
changes are considered part of the terms of the plan or health 
insurance coverage on March 23, 2010 even though they were not 
effective at that time and such changes do not cause a plan or health 
insurance coverage to cease to be a grandfathered health plan:
    (A) Changes effective after March 23, 2010 pursuant to a legally 
binding contract entered into on or before March 23, 2010;
    (B) Changes effective after March 23, 2010 pursuant to a filing on 
or before March 23, 2010 with a State insurance department; or
    (C) Changes effective after March 23, 2010 pursuant to written 
amendments to a plan that were adopted on or before March 23, 2010.
    (ii) Changes made after March 23, 2010 and adopted prior to 
issuance of regulations. If, after March 23, 2010, a group health plan 
or health insurance issuer makes changes to the terms of the plan or 
health insurance coverage and the changes are adopted prior to June 14, 
2010, the changes will not cause the plan or health insurance coverage 
to cease to be a grandfathered health plan if the changes are revoked 
or modified effective as of the first day of the first plan year (in 
the individual market, policy year) beginning on or after September 23, 
2010, and the terms of the plan or health insurance coverage on that 
date, as modified, would not cause the plan or coverage to cease to be 
a grandfathered health plan under the rules of this section, including 
paragraph (g)(1) of this section. For this purpose, changes will be 
considered to have been adopted prior to June 14, 2010 if:
    (A) The changes are effective before that date;
    (B) The changes are effective on or after that date pursuant to a 
legally binding contract entered into before that date;
    (C) The changes are effective on or after that date pursuant to a 
filing before

[[Page 34561]]

that date with a State insurance department; or
    (D) The changes are effective on or after that date pursuant to 
written amendments to a plan that were adopted before that date.
    (3) Definitions--(i) Medical inflation defined. For purposes of 
this paragraph (g), the term medical inflation means the increase since 
March 2010 in the overall medical care component of the Consumer Price 
Index for All Urban Consumers (CPI-U) (unadjusted) published by the 
Department of Labor using the 1982-1984 base of 100. For this purpose, 
the increase in the overall medical care component is computed by 
subtracting 387.142 (the overall medical care component of the CPI-U 
(unadjusted) published by the Department of Labor for March 2010, using 
the 1982-1984 base of 100) from the index amount for any month in the 
12 months before the new change is to take effect and then dividing 
that amount by 387.142.
    (ii) Maximum percentage increase defined. For purposes of this 
paragraph (g), the term maximum percentage increase means medical 
inflation (as defined in paragraph (g)(3)(i) of this section), 
expressed as a percentage, plus 15 percentage points.
    (iii) Contribution rate defined. For purposes of paragraph 
(g)(1)(v) of this section:
    (A) Contribution rate based on cost of coverage. The term 
contribution rate based on cost of coverage means the amount of 
contributions made by an employer or employee organization compared to 
the total cost of coverage, expressed as a percentage. The total cost 
of coverage is determined in the same manner as the applicable premium 
is calculated under the COBRA continuation provisions of section 
4980B(f)(4), section 604 of ERISA, and section 2204 of the PHS Act. In 
the case of a self-insured plan, contributions by an employer or 
employee organization are equal to the total cost of coverage minus the 
employee contributions towards the total cost of coverage.
    (B) Contribution rate based on a formula. The term contribution 
rate based on a formula means, for plans that, on March 23, 2010, made 
contributions based on a formula (such as hours worked or tons of coal 
mined), the formula.
    (4) Examples. The rules of this paragraph (g) are illustrated by 
the following examples:

    Example 1.  (i) Facts. On March 23, 2010, a grandfathered health 
plan has a coinsurance requirement of 20% for inpatient surgery. The 
plan is subsequently amended to increase the coinsurance requirement 
to 25%.
    (ii) Conclusion. In this Example 1, the increase in the 
coinsurance requirement from 20% to 25% causes the plan to cease to 
be a grandfathered health plan.
    Example 2. (i) Facts. Before March 23, 2010, the terms of a 
group health plan provide benefits for a particular mental health 
condition, the treatment for which is a combination of counseling 
and prescription drugs. Subsequently, the plan eliminates benefits 
for counseling.
    (ii) Conclusion. In this Example 2, the plan ceases to be a 
grandfathered health plan because counseling is an element that is 
necessary to treat the condition. Thus the plan is considered to 
have eliminated substantially all benefits for the treatment of the 
condition.
    Example 3.  (i) Facts. On March 23, 2010, a grandfathered health 
plan has a copayment requirement of $30 per office visit for 
specialists. The plan is subsequently amended to increase the 
copayment requirement to $40. Within the 12-month period before the 
$40 copayment takes effect, the greatest value of the overall 
medical care component of the CPI-U (unadjusted) is 475.
    (ii) Conclusion. In this Example 3, the increase in the 
copayment from $30 to $40, expressed as a percentage, is 33.33% (40 
- 30 = 10; 10 / 30 = 0.3333; 0.3333 = 33.33%). Medical inflation (as 
defined in paragraph (g)(3)(i) of this section) from March 2010 is 
0.2269 (475 - 387.142 = 87.858; 87.858 / 387.142 = 0.2269). The 
maximum percentage increase permitted is 37.69% (0.2269 = 22.69%; 
22.69% + 15% = 37.69%). Because 33.33% does not exceed 37.69%, the 
change in the copayment requirement at that time does not cause the 
plan to cease to be a grandfathered health plan.
    Example 4. (i) Facts. Same facts as Example 3, except the 
grandfathered health plan subsequently increases the $40 copayment 
requirement to $45 for a later plan year. Within the 12-month period 
before the $45 copayment takes effect, the greatest value of the 
overall medical care component of the CPI-U (unadjusted) is 485.
    (ii) Conclusion. In this Example 4, the increase in the 
copayment from $30 (the copayment that was in effect on March 23, 
2010) to $45, expressed as a percentage, is 50% (45 - 30 = 15; 15 / 
30 = 0.5; 0.5 = 50%). Medical inflation (as defined in paragraph 
(g)(3)(i) of this section) from March 2010 is 0.2527 (485 - 387.142 
= 97.858; 97.858 / 387.142 = 0.2527). The increase that would cause 
a plan to cease to be a grandfathered health plan under paragraph 
(g)(1)(iv) of this section is the greater of the maximum percentage 
increase of 40.27% (0.2527 = 25.27%; 25.27% + 15% = 40.27%), or 
$6.26 ($5 x 0.2527 = $1.26; $1.26 + $5 = $6.26). Because 50% exceeds 
40.27% and $15 exceeds $6.26, the change in the copayment 
requirement at that time causes the plan to cease to be a 
grandfathered health plan.
    Example 5.  (i) Facts. On March 23, 2010, a grandfathered health 
plan has a copayment of $10 per office visit for primary care 
providers. The plan is subsequently amended to increase the 
copayment requirement to $15. Within the 12-month period before the 
$15 copayment takes effect, the greatest value of the overall 
medical care component of the CPI-U (unadjusted) is 415.
    (ii) Conclusion. In this Example 5, the increase in the 
copayment, expressed as a percentage, is 50% (15 - 10 = 5; 5 / 10 = 
0.5; 0.5 = 50%). Medical inflation (as defined in paragraph (g)(3) 
of this section) from March 2010 is 0.0720 (415.0 - 387.142 = 
27.858; 27.858 / 387.142 = 0.0720). The increase that would cause a 
plan to cease to be a grandfathered health plan under paragraph 
(g)(1)(iv) of this section is the greater of the maximum percentage 
increase of 22.20% (0.0720 = 7.20%; 7.20% + 15% = 22.20), or $5.36 
($5 x 0.0720 = $0.36; $0.36 + $5 = $5.36). The $5 increase in 
copayment in this Example 5 would not cause the plan to cease to be 
a grandfathered health plan pursuant to paragraph (g)(1)(iv) of this 
section, which would permit an increase in the copayment of up to 
$5.36.
    Example 6.  (i) Facts. The same facts as Example 5, except on 
March 23, 2010, the grandfathered health plan has no copayment ($0) 
for office visits for primary care providers. The plan is 
subsequently amended to increase the copayment requirement to $5.
    (ii) Conclusion. In this Example 6, medical inflation (as 
defined in paragraph (g)(3)(i) of this section) from March 2010 is 
0.0720 (415.0 - 387.142 = 27.858; 27.858 / 387.142 = 0.0720). The 
increase that would cause a plan to cease to be a grandfathered 
health plan under paragraph (g)(1)(iv)(A) of this section is $5.36 
($5 x 0.0720 = $0.36; $0.36 + $5 = $5.36). The $5 increase in 
copayment in this Example 6 is less than the amount calculated 
pursuant to paragraph (g)(1)(iv)(A) of this section of $5.36. Thus, 
the $5 increase in copayment does not cause the plan to cease to be 
a grandfathered health plan.
    Example 7.  (i) Facts. On March 23, 2010, a self-insured group 
health plan provides two tiers of coverage--self-only and family. 
The employer contributes 80% of the total cost of coverage for self-
only and 60% of the total cost of coverage for family. Subsequently, 
the employer reduces the contribution to 50% for family coverage, 
but keeps the same contribution rate for self-only coverage.
    (ii) Conclusion. In this Example 7, the decrease of 10 
percentage points for family coverage in the contribution rate based 
on cost of coverage causes the plan to cease to be a grandfathered 
health plan. The fact that the contribution rate for self-only 
coverage remains the same does not change the result.
    Example 8.  (i) Facts. On March 23, 2010, a self-insured 
grandfathered health plan has a COBRA premium for the 2010 plan year 
of $5000 for self-only coverage and $12,000 for family coverage. The 
required employee contribution for the coverage is $1000 for self-
only coverage and $4000 for family coverage. Thus, the contribution 
rate based on cost of coverage for 2010 is 80% ((5000 - 1000)/5000) 
for self-only coverage and 67% ((12,000 - 4000)/12,000) for family 
coverage. For a subsequent plan year, the COBRA premium is $6000 for 
self-only coverage and $15,000 for family coverage. The employee 
contributions for that plan year are $1200 for self-only coverage 
and $5000 for family coverage. Thus, the contribution rate based on 
cost of coverage is

[[Page 34562]]

80% ((6000 - 1200)/6000) for self-only coverage and 67% ((15,000 - 
5000)/15,000) for family coverage.
    (ii) Conclusion. In this Example 8, because there is no change 
in the contribution rate based on cost of coverage, the plan retains 
its status as a grandfathered health plan. The result would be the 
same if all or part of the employee contribution was made pre-tax 
through a cafeteria plan under section 125 of the Internal Revenue 
Code.
    Example 9.  (i) Facts. Before March 23, 2010, Employer W and 
Individual B enter into a legally binding employment contract that 
promises B lifetime health coverage upon termination. Prior to 
termination, B is covered by W's self-insured grandfathered group 
health plan. B is terminated after March 23, 2010 and W purchases a 
new health insurance policy providing coverage to B, consistent with 
the terms of the employment contract.
    (ii) Conclusion. In this Example 9, because no individual is 
enrolled in the health insurance policy on March 23, 2010, it is not 
a grandfathered health plan.

    (h) Expiration date. This section expires on or before June 14, 
2013.

0
3. Section 54.9815-2714T is amended by revising paragraphs (h) and (i) 
to read as follows:
* * * * *
    (h) Applicability date. The provisions of this section apply for 
plan years beginning on or after September 23, 2010. See Sec.  54.9815-
1251T for determining the application of this section to grandfathered 
health plans.
    (i) Expiration date. This section expires on or before May 10, 
2013.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

0
4. The authority citation for part 602 continues to read in part as 
follows:

    Authority:  26 U.S.C. 7805. * * *


0
5. Section 602.101(b) is amended by adding the following entry in 
numerical order to the table to read as follows:


Sec.  602.101  OMB Control numbers.

    (b) * * *

------------------------------------------------------------------------
                                                            Current OMB
   CFR part or section where identified and described       control No.
------------------------------------------------------------------------
 
                                * * * * *
54.9815-1251T...........................................       1545-2178
 
                                * * * * *
------------------------------------------------------------------------

DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Chapter XXV

0
29 CFR part 2590 is amended as follows:

PART 2590--RULES AND REGULATIONS FOR GROUP HEALTH PLANS

0
1. The authority citation for part 2590 continues to read as follows:

    Authority:  29 U.S.C. 1027, 1059, 1135, 1161-1168, 1169, 1181-
1183, 1181 note, 1185, 1185a, 1185b, 1191, 1191a, 1191b, and 1191c; 
sec. 101(g), Pub. L. 104-191, 110 Stat. 1936; sec. 401(b), Pub. L. 
105-200, 112 Stat. 645 (42 U.S.C. 651 note); sec. 512(d), Pub. L. 
110-343, 122 Stat. 3881; sec. 1001, 1201, and 1562(e), Pub. L. 111-
148, 124 Stat. 119, as amended by Pub. L. 111-152, 124 Stat. 1029; 
Secretary of Labor's Order 6-2009, 74 FR 21524 (May 7, 2009).


0
2. Section 2590.715-1251 is added to subpart C to read as follows:


Sec.  2590.715-1251  Preservation of right to maintain existing 
coverage.

    (a) Definition of grandfathered health plan coverage--(1) In 
general--(i) Grandfathered health plan coverage means coverage provided 
by a group health plan, or a health insurance issuer, in which an 
individual was enrolled on March 23, 2010 (for as long as it maintains 
that status under the rules of this section). A group health plan or 
group health insurance coverage does not cease to be grandfathered 
health plan coverage merely because one or more (or even all) 
individuals enrolled on March 23, 2010 cease to be covered, provided 
that the plan or group health insurance coverage has continuously 
covered someone since March 23, 2010 (not necessarily the same person, 
but at all times at least one person). For purposes of this section, a 
plan or health insurance coverage that provides grandfathered health 
plan coverage is referred to as a grandfathered health plan. The rules 
of this section apply separately to each benefit package made available 
under a group health plan or health insurance coverage.
    (ii) Subject to the rules of paragraph (f) of this section for 
collectively bargained plans, if an employer or employee organization 
enters into a new policy, certificate, or contract of insurance after 
March 23, 2010 (because, for example, any previous policy, certificate, 
or contract of insurance is not being renewed), then that policy, 
certificate, or contract of insurance is not a grandfathered health 
plan with respect to the individuals in the group health plan.
    (2) Disclosure of grandfather status--(i) To maintain status as a 
grandfathered health plan, a plan or health insurance coverage must 
include a statement, in any plan materials provided to a participant or 
beneficiary describing the benefits provided under the plan or health 
insurance coverage, that the plan or coverage believes it is a 
grandfathered health plan within the meaning of section 1251 of the 
Patient Protection and Affordable Care Act and must provide contact 
information for questions and complaints.
    (ii) The following model language can be used to satisfy this 
disclosure requirement:

    This [group health plan or health insurance issuer] believes 
this [plan or coverage] is a ``grandfathered health plan'' under the 
Patient Protection and Affordable Care Act (the Affordable Care 
Act). As permitted by the Affordable Care Act, a grandfathered 
health plan can preserve certain basic health coverage that was 
already in effect when that law was enacted. Being a grandfathered 
health plan means that your [plan or policy] may not include certain 
consumer protections of the Affordable Care Act that apply to other 
plans, for example, the requirement for the provision of preventive 
health services without any cost sharing. However, grandfathered 
health plans must comply with certain other consumer protections in 
the Affordable Care Act, for example, the elimination of lifetime 
limits on benefits.
    Questions regarding which protections apply and which 
protections do not apply to a grandfathered health plan and what 
might cause a plan to change from grandfathered health plan status 
can be directed to the plan administrator at [insert contact 
information]. [For ERISA plans, insert: You may also contact the 
Employee Benefits Security Administration, U.S. Department of Labor 
at 1-866-444-3272 or www.dol.gov/ebsa/healthreform. This Web site 
has a table summarizing which protections do and do not apply to 
grandfathered health plans.] [For individual market policies and 
nonfederal governmental plans, insert: You may also contact the U.S. 
Department of Health and Human Services at www.healthreform.gov.]

    (3) Documentation of plan or policy terms on March 23, 2010. To 
maintain status as a grandfathered health plan, a group health plan, or 
group health insurance coverage, must, for as long as the plan or 
health insurance coverage takes the position that it is a grandfathered 
health plan--
    (i) Maintain records documenting the terms of the plan or health 
insurance coverage in connection with the coverage in effect on March 
23, 2010, and any other documents necessary to verify, explain, or 
clarify its status as a grandfathered health plan; and
    (ii) Make such records available for examination upon request.
    (4) Family members enrolling after March 23, 2010. With respect to 
an individual who is enrolled in a group health plan or health 
insurance coverage on March 23, 2010, grandfathered health plan 
coverage includes coverage of family members of the individual who

[[Page 34563]]

enroll after March 23, 2010 in the grandfathered health plan coverage 
of the individual.
    (5) Examples. The rules of this paragraph (a) are illustrated by 
the following examples:

    Example 1. (i) Facts. A group health plan not maintained 
pursuant to a collective bargaining agreement provides coverage 
through a group health insurance policy from Issuer X on March 23, 
2010. For the plan year beginning January 1, 2012, the plan enters 
into a new policy with Issuer Z.
    (ii) Conclusion. In this Example 1, for the plan year beginning 
January 1, 2012, the group health insurance coverage issued by Z is 
not a grandfathered health plan under the rules of paragraph 
(a)(1)(ii) of this section because the policy issued by Z did not 
provide coverage on March 23, 2010.
    Example 2.  (i) Facts. A group health plan not maintained 
pursuant to a collective bargaining agreement offers three benefit 
packages on March 23, 2010. Option F is a self-insured option. 
Options G and H are insured options. Beginning July 1, 2013, the 
plan replaces the issuer for Option H with a new issuer.
    (ii) Conclusion. In this Example 2, the coverage under Option H 
is not grandfathered health plan coverage as of July 1, 2013, 
consistent with the rule in paragraph (a)(1)(ii) of this section. 
Whether the coverage under Options F and G is grandfathered health 
plan coverage is determined under the rules of this section, 
including paragraph (g) of this section. If the plan enters into a 
new policy, certificate, or contract of insurance for Option G, 
Option G's status as a grandfathered health plan would cease under 
paragraph (a)(1)(ii) of this section.

    (b) Allowance for new employees to join current plan--(1) In 
general. Subject to paragraph (b)(2) of this section, a group health 
plan (including health insurance coverage provided in connection with 
the group health plan) that provided coverage on March 23, 2010 and has 
retained its status as a grandfathered health plan (consistent with the 
rules of this section, including paragraph (g) of this section) is 
grandfathered health plan coverage for new employees (whether newly 
hired or newly enrolled) and their families enrolling in the plan after 
March 23, 2010.
    (2) Anti-abuse rules--(i) Mergers and acquisitions. If the 
principal purpose of a merger, acquisition, or similar business 
restructuring is to cover new individuals under a grandfathered health 
plan, the plan ceases to be a grandfathered health plan.
    (ii) Change in plan eligibility. A group health plan or health 
insurance coverage (including a benefit package under a group health 
plan) ceases to be a grandfathered health plan if--
    (A) Employees are transferred into the plan or health insurance 
coverage (the transferee plan) from a plan or health insurance coverage 
under which the employees were covered on March 23, 2010 (the 
transferor plan);
    (B) Comparing the terms of the transferee plan with those of the 
transferor plan (as in effect on March 23, 2010) and treating the 
transferee plan as if it were an amendment of the transferor plan would 
cause a loss of grandfather status under the provisions of paragraph 
(g)(1) of this section; and
    (C) There was no bona fide employment-based reason to transfer the 
employees into the transferee plan. For this purpose, changing the 
terms or cost of coverage is not a bona fide employment-based reason.
    (3) Examples. The rules of this paragraph (b) are illustrated by 
the following examples:

    Example 1.  (i) Facts. A group health plan offers two benefit 
packages on March 23, 2010, Options F and G. During a subsequent 
open enrollment period, some of the employees enrolled in Option F 
on March 23, 2010 switch to Option G.
    (ii) Conclusion. In this Example 1, the group health coverage 
provided under Option G remains a grandfathered health plan under 
the rules of paragraph (b)(1) of this section because employees 
previously enrolled in Option F are allowed to enroll in Option G as 
new employees.
    Example 2.  (i) Facts. Same facts as Example 1, except that the 
plan sponsor eliminates Option F because of its high cost and 
transfers employees covered under Option F to Option G. If instead 
of transferring employees from Option F to Option G, Option F was 
amended to match the terms of Option G, then Option F would cease to 
be a grandfathered health plan.
    (ii) Conclusion. In this Example 2, the plan did not have a bona 
fide employment-based reason to transfer employees from Option F to 
Option G. Therefore, Option G ceases to be a grandfathered health 
plan with respect to all employees. (However, any other benefit 
package maintained by the plan sponsor is analyzed separately under 
the rules of this section.)
    Example 3.  (i) Facts. A group health plan offers two benefit 
packages on March 23, 2010, Options H and I. On March 23, 2010, 
Option H provides coverage only for employees in one manufacturing 
plant. Subsequently, the plant is closed, and some employees in the 
closed plant are moved to another plant. The employer eliminates 
Option H and the employees that are moved are transferred to Option 
I. If instead of transferring employees from Option H to Option I, 
Option H was amended to match the terms of Option I, then Option H 
would cease to be a grandfathered health plan.
    (ii) Conclusion. In this Example 3, the plan has a bona fide 
employment-based reason to transfer employees from Option H to 
Option I. Therefore, Option I does not cease to be a grandfathered 
health plan.

    (c) General grandfathering rule--(1) Except as provided in 
paragraphs (d) and (e) of this section, subtitles A and C of title I of 
the Patient Protection and Affordable Care Act (and the amendments made 
by those subtitles, and the incorporation of those amendments into 
ERISA section 715 and Internal Revenue Code section 9815) do not apply 
to grandfathered health plan coverage. Accordingly, the provisions of 
PHS Act sections 2701, 2702, 2703, 2705, 2706, 2707, 2709 (relating to 
coverage for individuals participating in approved clinical trials, as 
added by section 10103 of the Patient Protection and Affordable Care 
Act), 2713, 2715A, 2716, 2717, 2719, and 2719A, as added or amended by 
the Patient Protection and Affordable Care Act, do not apply to 
grandfathered health plans. (In addition, see 45 CFR 147.140(c), which 
provides that the provisions of PHS Act section 2704, and PHS Act 
section 2711 insofar as it relates to annual limits, do not apply to 
grandfathered health plans that are individual health insurance 
coverage.)
    (2) To the extent not inconsistent with the rules applicable to a 
grandfathered health plan, a grandfathered health plan must comply with 
the requirements of the PHS Act, ERISA, and the Internal Revenue Code 
applicable prior to the changes enacted by the Patient Protection and 
Affordable Care Act.
    (d) Provisions applicable to all grandfathered health plans. The 
provisions of PHS Act section 2711 insofar as it relates to lifetime 
limits, and the provisions of PHS Act sections 2712, 2714, 2715, and 
2718, apply to grandfathered health plans for plan years beginning on 
or after September 23, 2010. The provisions of PHS Act section 2708 
apply to grandfathered health plans for plan years beginning on or 
after January 1, 2014.
    (e) Applicability of PHS Act sections 2704, 2711, and 2714 to 
grandfathered group health plans and group health insurance coverage--
(1) The provisions of PHS Act section 2704 as it applies with respect 
to enrollees who are under 19 years of age, and the provisions of PHS 
Act section 2711 insofar as it relates to annual limits, apply to 
grandfathered health plans that are group health plans (including group 
health insurance coverage) for plan years beginning on or after 
September 23, 2010. The provisions of PHS Act section 2704 apply 
generally to grandfathered health plans that are group health plans 
(including group health insurance coverage) for plan years beginning on 
or after January 1, 2014.
    (2) For plan years beginning before January 1, 2014, the provisions 
of PHS Act section 2714 apply in the case of an

[[Page 34564]]

adult child with respect to a grandfathered health plan that is a group 
health plan only if the adult child is not eligible to enroll in an 
eligible employer-sponsored health plan (as defined in section 
5000A(f)(2) of the Internal Revenue Code) other than a grandfathered 
health plan of a parent. For plan years beginning on or after January 
1, 2014, the provisions of PHS Act section 2714 apply with respect to a 
grandfathered health plan that is a group health plan without regard to 
whether an adult child is eligible to enroll in any other coverage.
    (f) Effect on collectively bargained plans--(1) In general. In the 
case of health insurance coverage maintained pursuant to one or more 
collective bargaining agreements between employee representatives and 
one or more employers that was ratified before March 23, 2010, the 
coverage is grandfathered health plan coverage at least until the date 
on which the last of the collective bargaining agreements relating to 
the coverage that was in effect on March 23, 2010 terminates. Any 
coverage amendment made pursuant to a collective bargaining agreement 
relating to the coverage that amends the coverage solely to conform to 
any requirement added by subtitles A and C of title I of the Patient 
Protection and Affordable Care Act (and the amendments made by those 
subtitles, and the incorporation of those amendments into ERISA section 
715 and Internal Revenue Code section 9815) is not treated as a 
termination of the collective bargaining agreement. After the date on 
which the last of the collective bargaining agreements relating to the 
coverage that was in effect on March 23, 2010 terminates, the 
determination of whether health insurance coverage maintained pursuant 
to a collective bargaining agreement is grandfathered health plan 
coverage is made under the rules of this section other than this 
paragraph (f) (comparing the terms of the health insurance coverage 
after the date the last collective bargaining agreement terminates with 
the terms of the health insurance coverage that were in effect on March 
23, 2010) and, for any changes in insurance coverage after the 
termination of the collective bargaining agreement, under the rules of 
paragraph (a)(1)(ii) of this section.
    (2) Examples. The rules of this paragraph (f) are illustrated by 
the following examples:

    Example 1. (i) Facts. A group health plan maintained pursuant to 
a collective bargaining agreement provides coverage through a group 
health insurance policy from Issuer W on March 23, 2010. The 
collective bargaining agreement has not been amended and will not 
expire before December 31, 2011. The group health plan enters into a 
new group health insurance policy with Issuer Y for the plan year 
starting on January 1, 2011.
    (ii) Conclusion. In this Example 1, the group health plan, and 
the group health insurance policy provided by Y, remains a 
grandfathered health plan with respect to existing employees and new 
employees and their families because the coverage is maintained 
pursuant to a collective bargaining agreement ratified prior to 
March 23, 2010 that has not terminated.
    Example 2.  (i) Facts. Same facts as Example 1, except the 
coverage with Y is renewed under a new collective bargaining 
agreement effective January 1, 2012, with the only changes since 
March 23, 2010 being changes that do not cause the plan to cease to 
be a grandfathered health plan under the rules of this section, 
including paragraph (g) of this section.
    (ii) Conclusion. In this Example 2, the group health plan 
remains a grandfathered health plan pursuant to the rules of this 
section. Moreover, the group health insurance policy provided by Y 
remains a grandfathered health plan under the rules of this section, 
including paragraph (g) of this section.

    (g) Maintenance of grandfather status--(1) Changes causing 
cessation of grandfather status. Subject to paragraph (g)(2) of this 
section, the rules of this paragraph (g)(1) describe situations in 
which a group health plan or health insurance coverage ceases to be a 
grandfathered health plan.
    (i) Elimination of benefits. The elimination of all or 
substantially all benefits to diagnose or treat a particular condition 
causes a group health plan or health insurance coverage to cease to be 
a grandfathered health plan. For this purpose, the elimination of 
benefits for any necessary element to diagnose or treat a condition is 
considered the elimination of all or substantially all benefits to 
diagnose or treat a particular condition.
    (ii) Increase in percentage cost-sharing requirement. Any increase, 
measured from March 23, 2010, in a percentage cost-sharing requirement 
(such as an individual's coinsurance requirement) causes a group health 
plan or health insurance coverage to cease to be a grandfathered health 
plan.
    (iii) Increase in a fixed-amount cost-sharing requirement other 
than a copayment. Any increase in a fixed-amount cost-sharing 
requirement other than a copayment (for example, deductible or out-of-
pocket limit), determined as of the effective date of the increase, 
causes a group health plan or health insurance coverage to cease to be 
a grandfathered health plan, if the total percentage increase in the 
cost-sharing requirement measured from March 23, 2010 exceeds the 
maximum percentage increase (as defined in paragraph (g)(3)(ii) of this 
section).
    (iv) Increase in a fixed-amount copayment. Any increase in a fixed-
amount copayment, determined as of the effective date of the increase, 
causes a group health plan or health insurance coverage to cease to be 
a grandfathered health plan, if the total increase in the copayment 
measured from March 23, 2010 exceeds the greater of:
    (A) An amount equal to $5 increased by medical inflation, as 
defined in paragraph (g)(3)(i) of this section (that is, $5 times 
medical inflation, plus $5), or
    (B) The maximum percentage increase (as defined in paragraph 
(g)(3)(ii) of this section), determined by expressing the total 
increase in the copayment as a percentage.
    (v) Decrease in contribution rate by employers and employee 
organizations--(A) Contribution rate based on cost of coverage. A group 
health plan or group health insurance coverage ceases to be a 
grandfathered health plan if the employer or employee organization 
decreases its contribution rate based on cost of coverage (as defined 
in paragraph (g)(3)(iii)(A) of this section) towards the cost of any 
tier of coverage for any class of similarly situated individuals (as 
described in Sec.  2590.702(d) of this part) by more than 5 percentage 
points below the contribution rate for the coverage period that 
includes March 23, 2010.
    (B) Contribution rate based on a formula. A group health plan or 
group health insurance coverage ceases to be a grandfathered health 
plan if the employer or employee organization decreases its 
contribution rate based on a formula (as defined in paragraph 
(g)(3)(iii)(B) of this section) towards the cost of any tier of 
coverage for any class of similarly situated individuals (as described 
in section 2590.702(d) of this part) by more than 5 percent below the 
contribution rate for the coverage period that includes March 23, 2010.
    (vi) Changes in annual limits--(A) Addition of an annual limit. A 
group health plan, or group health insurance coverage, that, on March 
23, 2010, did not impose an overall annual or lifetime limit on the 
dollar value of all benefits ceases to be a grandfathered health plan 
if the plan or health insurance coverage imposes an overall annual 
limit on the dollar value of benefits.
    (B) Decrease in limit for a plan or coverage with only a lifetime 
limit. A group health plan, or group health insurance coverage, that, 
on March 23, 2010, imposed an overall lifetime limit

[[Page 34565]]

on the dollar value of all benefits but no overall annual limit on the 
dollar value of all benefits ceases to be a grandfathered health plan 
if the plan or health insurance coverage adopts an overall annual limit 
at a dollar value that is lower than the dollar value of the lifetime 
limit on March 23, 2010.
    (C) Decrease in limit for a plan or coverage with an annual limit. 
A group health plan, or group health insurance coverage, that, on March 
23, 2010, imposed an overall annual limit on the dollar value of all 
benefits ceases to be a grandfathered health plan if the plan or health 
insurance coverage decreases the dollar value of the annual limit 
(regardless of whether the plan or health insurance coverage also 
imposed an overall lifetime limit on March 23, 2010 on the dollar value 
of all benefits).
    (2) Transitional rules--(i) Changes made prior to March 23, 2010. 
If a group health plan or health insurance issuer makes the following 
changes to the terms of the plan or health insurance coverage, the 
changes are considered part of the terms of the plan or health 
insurance coverage on March 23, 2010 even though they were not 
effective at that time and such changes do not cause a plan or health 
insurance coverage to cease to be a grandfathered health plan:
    (A) Changes effective after March 23, 2010 pursuant to a legally 
binding contract entered into on or before March 23, 2010;
    (B) Changes effective after March 23, 2010 pursuant to a filing on 
or before March 23, 2010 with a State insurance department; or
    (C) Changes effective after March 23, 2010 pursuant to written 
amendments to a plan that were adopted on or before March 23, 2010.
    (ii) Changes made after March 23, 2010 and adopted prior to 
issuance of regulations. If, after March 23, 2010, a group health plan 
or health insurance issuer makes changes to the terms of the plan or 
health insurance coverage and the changes are adopted prior to June 14, 
2010, the changes will not cause the plan or health insurance coverage 
to cease to be a grandfathered health plan if the changes are revoked 
or modified effective as of the first day of the first plan year (in 
the individual market, policy year) beginning on or after September 23, 
2010, and the terms of the plan or health insurance coverage on that 
date, as modified, would not cause the plan or coverage to cease to be 
a grandfathered health plan under the rules of this section, including 
paragraph (g)(1) of this section. For this purpose, changes will be 
considered to have been adopted prior to June 14, 2010 if:
    (A) The changes are effective before that date;
    (B) The changes are effective on or after that date pursuant to a 
legally binding contract entered into before that date;
    (C) The changes are effective on or after that date pursuant to a 
filing before that date with a State insurance department; or
    (D) The changes are effective on or after that date pursuant to 
written amendments to a plan that were adopted before that date.
    (3) Definitions--(i) Medical inflation defined. For purposes of 
this paragraph (g), the term medical inflation means the increase since 
March 2010 in the overall medical care component of the Consumer Price 
Index for All Urban Consumers (CPI-U) (unadjusted) published by the 
Department of Labor using the 1982-1984 base of 100. For this purpose, 
the increase in the overall medical care component is computed by 
subtracting 387.142 (the overall medical care component of the CPI-U 
(unadjusted) published by the Department of Labor for March 2010, using 
the 1982-1984 base of 100) from the index amount for any month in the 
12 months before the new change is to take effect and then dividing 
that amount by 387.142.
    (ii) Maximum percentage increase defined. For purposes of this 
paragraph (g), the term maximum percentage increase means medical 
inflation (as defined in paragraph (g)(3)(i) of this section), 
expressed as a percentage, plus 15 percentage points.
    (iii) Contribution rate defined. For purposes of paragraph 
(g)(1)(v) of this section:
    (A) Contribution rate based on cost of coverage. The term 
contribution rate based on cost of coverage means the amount of 
contributions made by an employer or employee organization compared to 
the total cost of coverage, expressed as a percentage. The total cost 
of coverage is determined in the same manner as the applicable premium 
is calculated under the COBRA continuation provisions of section 604 of 
ERISA, section 4980B(f)(4) of the Internal Revenue Code, and section 
2204 of the PHS Act. In the case of a self-insured plan, contributions 
by an employer or employee organization are equal to the total cost of 
coverage minus the employee contributions towards the total cost of 
coverage.
    (B) Contribution rate based on a formula. The term contribution 
rate based on a formula means, for plans that, on March 23, 2010, made 
contributions based on a formula (such as hours worked or tons of coal 
mined), the formula.
    (4) Examples. The rules of this paragraph (g) are illustrated by 
the following examples:

    Example 1. (i) Facts. On March 23, 2010, a grandfathered health 
plan has a coinsurance requirement of 20% for inpatient surgery. The 
plan is subsequently amended to increase the coinsurance requirement 
to 25%.
    (ii) Conclusion. In this Example 1, the increase in the 
coinsurance requirement from 20% to 25% causes the plan to cease to 
be a grandfathered health plan.
    Example 2. (i) Facts. Before March 23, 2010, the terms of a 
group health plan provide benefits for a particular mental health 
condition, the treatment for which is a combination of counseling 
and prescription drugs. Subsequently, the plan eliminates benefits 
for counseling.
    (ii) Conclusion. In this Example 2, the plan ceases to be a 
grandfathered health plan because counseling is an element that is 
necessary to treat the condition. Thus the plan is considered to 
have eliminated substantially all benefits for the treatment of the 
condition.
    Example 3. (i) Facts. On March 23, 2010, a grandfathered health 
plan has a copayment requirement of $30 per office visit for 
specialists. The plan is subsequently amended to increase the 
copayment requirement to $40. Within the 12-month period before the 
$40 copayment takes effect, the greatest value of the overall 
medical care component of the CPI-U (unadjusted) is 475.
    (ii) Conclusion. In this Example 3, the increase in the 
copayment from $30 to $40, expressed as a percentage, is 33.33% (40-
30 = 10; 10 / 30 = 0.3333; 0.3333 = 33.33%). Medical inflation (as 
defined in paragraph (g)(3)(i) of this section) from March 2010 is 
0.2269 (475-387.142 = 87.858; 87.858 / 387.142 = 0.2269). The 
maximum percentage increase permitted is 37.69% (0.2269 = 22.69%; 
22.69% + 15% = 37.69%). Because 33.33% does not exceed 37.69%, the 
change in the copayment requirement at that time does not cause the 
plan to cease to be a grandfathered health plan.
    Example 4.  (i) Facts. Same facts as Example 3, except the 
grandfathered health plan subsequently increases the $40 copayment 
requirement to $45 for a later plan year. Within the 12-month period 
before the $45 copayment takes effect, the greatest value of the 
overall medical care component of the CPI-U (unadjusted) is 485.
    (ii) Conclusion. In this Example 4, the increase in the 
copayment from $30 (the copayment that was in effect on March 23, 
2010) to $45, expressed as a percentage, is 50% (45-30 = 15; 15 / 30 
= 0.5; 0.5 = 50%). Medical inflation (as defined in paragraph 
(g)(3)(i) of this section) from March 2010 is 0.2527 (485-387.142 = 
97.858; 97.858 / 387.142 = 0.2527). The increase that would cause a 
plan to cease to be a grandfathered health plan under paragraph 
(g)(1)(iv) of this section is the greater of the maximum percentage 
increase of 40.27% (0.2527 = 25.27%; 25.27% + 15% = 40.27%), or 
$6.26 ($5 x 0.2527 = $1.26; $1.26 + $5 = $6.26).

[[Page 34566]]

Because 50% exceeds 40.27% and $15 exceeds $6.26, the change in the 
copayment requirement at that time causes the plan to cease to be a 
grandfathered health plan.
    Example 5.  (i) Facts. On March 23, 2010, a grandfathered health 
plan has a copayment of $10 per office visit for primary care 
providers. The plan is subsequently amended to increase the 
copayment requirement to $15. Within the 12-month period before the 
$15 copayment takes effect, the greatest value of the overall 
medical care component of the CPI-U (unadjusted) is 415.
    (ii) Conclusion. In this Example 5, the increase in the 
copayment, expressed as a percentage, is 50% (15-10 = 5; 5 / 10 = 
0.5; 0.5 = 50%). Medical inflation (as defined in paragraph (g)(3) 
of this section) from March 2010 is 0.0720 (415.0-387.142 = 27.858; 
27.858 / 387.142 = 0.0720). The increase that would cause a plan to 
cease to be a grandfathered health plan under paragraph (g)(1)(iv) 
of this section is the greater of the maximum percentage increase of 
22.20% (0.0720 = 7.20%; 7.20% + 15% = 22.20), or $5.36 ($5 x 0.0720 
= $0.36; $0.36 + $5 = $5.36). The $5 increase in copayment in this 
Example 5 would not cause the plan to cease to be a grandfathered 
health plan pursuant to paragraph (g)(1)(iv) of this section, which 
would permit an increase in the copayment of up to $5.36.
    Example 6.  (i) Facts. The same facts as Example 5, except on 
March 23, 2010, the grandfathered health plan has no copayment ($0) 
for office visits for primary care providers. The plan is 
subsequently amended to increase the copayment requirement to $5.
    (ii) Conclusion. In this Example 6, medical inflation (as 
defined in paragraph (g)(3)(i) of this section) from March 2010 is 
0.0720 (415.0-387.142 = 27.858; 27.858 / 387.142 = 0.0720). The 
increase that would cause a plan to cease to be a grandfathered 
health plan under paragraph (g)(1)(iv)(A) of this section is $5.36 
($5 x 0.0720 = $0.36; $0.36 + $5 = $5.36). The $5 increase in 
copayment in this Example 6 is less than the amount calculated 
pursuant to paragraph (g)(1)(iv)(A) of this section of $5.36. Thus, 
the $5 increase in copayment does not cause the plan to cease to be 
a grandfathered health plan.
    Example 7.  (i) Facts. On March 23, 2010, a self-insured group 
health plan provides two tiers of coverage--self-only and family. 
The employer contributes 80% of the total cost of coverage for self-
only and 60% of the total cost of coverage for family. Subsequently, 
the employer reduces the contribution to 50% for family coverage, 
but keeps the same contribution rate for self-only coverage.
    (ii) Conclusion. In this Example 7, the decrease of 10 
percentage points for family coverage in the contribution rate based 
on cost of coverage causes the plan to cease to be a grandfathered 
health plan. The fact that the contribution rate for self-only 
coverage remains the same does not change the result.
    Example 8.  (i) Facts. On March 23, 2010, a self-insured 
grandfathered health plan has a COBRA premium for the 2010 plan year 
of $5000 for self-only coverage and $12,000 for family coverage. The 
required employee contribution for the coverage is $1000 for self-
only coverage and $4000 for family coverage. Thus, the contribution 
rate based on cost of coverage for 2010 is 80% ((5000--1000)/5000) 
for self-only coverage and 67% ((12,000-4000)/12,000) for family 
coverage. For a subsequent plan year, the COBRA premium is $6000 for 
self-only coverage and $15,000 for family coverage. The employee 
contributions for that plan year are $1200 for self-only coverage 
and $5000 for family coverage. Thus, the contribution rate based on 
cost of coverage is 80% ((6000-1200)/6000) for self-only coverage 
and 67% ((15,000-5000)/15,000) for family coverage.
    (ii) Conclusion. In this Example 8, because there is no change 
in the contribution rate based on cost of coverage, the plan retains 
its status as a grandfathered health plan. The result would be the 
same if all or part of the employee contribution was made pre-tax 
through a cafeteria plan under section 125 of the Internal Revenue 
Code.
    Example 9.  (i) Facts. Before March 23, 2010, Employer W and 
Individual B enter into a legally binding employment contract that 
promises B lifetime health coverage upon termination. Prior to 
termination, B is covered by W's self-insured grandfathered group 
health plan. B is terminated after March 23, 2010 and W purchases a 
new health insurance policy providing coverage to B, consistent with 
the terms of the employment contract.
    (ii) Conclusion. In this Example 9, because no individual is 
enrolled in the health insurance policy on March 23, 2010, it is not 
a grandfathered health plan.

0
3. Section 2590.715-2714 is amended by revising paragraph (h) to read 
as follows:


Sec.  2590.715-2714  Eligibility of children until at least age 26.

* * * * *
    (h) Applicability date. The provisions of this section apply for 
plan years beginning on or after September 23, 2010. See Sec.  
2590.715-1251 of this Part for determining the application of this 
section to grandfathered health plans.

DEPARTMENT OF HEALTH AND HUMAN SERVICES

45 CFR Chapter I

0
For the reasons stated in the preamble, the Department of Health and 
Human Services amends 45 CFR part 147 as follows:

PART 147--HEALTH INSURANCE REFORM REQUIREMENTS FOR THE GROUP AND 
INDIVIDUAL HEALTH INSURANCE MARKETS

0
1. The authority citation for part 147 continues to read as follows:

    Authority:  Secs. 2701 through 2763, 2791, and 2792 of the 
Public Health Service Act (42 USC 300gg through 300gg-63, 300gg-91, 
and 300gg-92), as amended.


0
2. Section 147.120 is amended by revising paragraph (h) to read as 
follows:
    (h) Applicability date. The provisions of this section apply for 
plan years (in the individual market, policy years) beginning on or 
after September 23, 2010. See Sec.  147.140 of this part for 
determining the application of this section to grandfathered health 
plans.

0
3. Section 147.140 is added to read as follows:


Sec.  147.140  Preservation of right to maintain existing coverage.

    (a) Definition of grandfathered health plan coverage--(1) In 
general--(i) Grandfathered health plan coverage means coverage provided 
by a group health plan, or a group or individual health insurance 
issuer, in which an individual was enrolled on March 23, 2010 (for as 
long as it maintains that status under the rules of this section). A 
group health plan or group health insurance coverage does not cease to 
be grandfathered health plan coverage merely because one or more (or 
even all) individuals enrolled on March 23, 2010 cease to be covered, 
provided that the plan or group health insurance coverage has 
continuously covered someone since March 23, 2010 (not necessarily the 
same person, but at all times at least one person). For purposes of 
this section, a plan or health insurance coverage that provides 
grandfathered health plan coverage is referred to as a grandfathered 
health plan. The rules of this section apply separately to each benefit 
package made available under a group health plan or health insurance 
coverage.
    (ii) Subject to the rules of paragraph (f) of this section for 
collectively bargained plans, if an employer or employee organization 
enters into a new policy, certificate, or contract of insurance after 
March 23, 2010 (because, for example, any previous policy, certificate, 
or contract of insurance is not being renewed), then that policy, 
certificate, or contract of insurance is not a grandfathered health 
plan with respect to the individuals in the group health plan.
    (2) Disclosure of grandfather status--(i) To maintain status as a 
grandfathered health plan, a plan or health insurance coverage must 
include a statement, in any plan materials provided to a participant or 
beneficiary (in the individual market, primary subscriber) describing 
the benefits provided under the plan or health insurance coverage, that 
the plan or coverage believes it is a grandfathered health plan within 
the meaning of section 1251 of the Patient Protection and Affordable 
Care Act and must provide contact information for questions and 
complaints.


[[Page 34567]]


    (ii) The following model language can be used to satisfy this 
disclosure requirement:
    This [group health plan or health insurance issuer] believes 
this [plan or coverage] is a ``grandfathered health plan'' under the 
Patient Protection and Affordable Care Act (the Affordable Care 
Act). As permitted by the Affordable Care Act, a grandfathered 
health plan can preserve certain basic health coverage that was 
already in effect when that law was enacted. Being a grandfathered 
health plan means that your [plan or policy] may not include certain 
consumer protections of the Affordable Care Act that apply to other 
plans, for example, the requirement for the provision of preventive 
health services without any cost sharing. However, grandfathered 
health plans must comply with certain other consumer protections in 
the Affordable Care Act, for example, the elimination of lifetime 
limits on benefits.
    Questions regarding which protections apply and which 
protections do not apply to a grandfathered health plan and what 
might cause a plan to change from grandfathered health plan status 
can be directed to the plan administrator at [insert contact 
information]. [For ERISA plans, insert: You may also contact the 
Employee Benefits Security Administration, U.S. Department of Labor 
at 1-866-444-3272 or www.dol.gov/ebsa/healthreform. This Web site 
has a table summarizing which protections do and do not apply to 
grandfathered health plans.] [For individual market policies and 
nonfederal governmental plans, insert: You may also contact the U.S. 
Department of Health and Human Services at www.healthreform.gov.]

    (3) Documentation of plan or policy terms on March 23, 2010. To 
maintain status as a grandfathered health plan, a group health plan, or 
group or individual health insurance coverage, must, for as long as the 
plan or health insurance coverage takes the position that it is a 
grandfathered health plan--
    (i) Maintain records documenting the terms of the plan or health 
insurance coverage in connection with the coverage in effect on March 
23, 2010, and any other documents necessary to verify, explain, or 
clarify its status as a grandfathered health plan; and
    (ii) Make such records available for examination upon request.
    (4) Family members enrolling after March 23, 2010. With respect to 
an individual who is enrolled in a group health plan or health 
insurance coverage on March 23, 2010, grandfathered health plan 
coverage includes coverage of family members of the individual who 
enroll after March 23, 2010 in the grandfathered health plan coverage 
of the individual.
    (5) Examples. The rules of this paragraph (a) are illustrated by 
the following examples:

    Example 1. (i) Facts. A group health plan not maintained 
pursuant to a collective bargaining agreement provides coverage 
through a group health insurance policy from Issuer X on March 23, 
2010. For the plan year beginning January 1, 2012, the plan enters 
into a new policy with Issuer Z.
    (ii) Conclusion. In this Example 1, for the plan year beginning 
January 1, 2012, the group health insurance coverage issued by Z is 
not a grandfathered health plan under the rules of paragraph 
(a)(1)(ii) of this section because the policy issued by Z did not 
provide coverage on March 23, 2010.
    Example 2. (i) Facts. A group health plan not maintained 
pursuant to a collective bargaining agreement offers three benefit 
packages on March 23, 2010. Option F is a self-insured option. 
Options G and H are insured options. Beginning July 1, 2013, the 
plan replaces the issuer for Option H with a new issuer.
    (ii) Conclusion. In this Example 2, the coverage under Option H 
is not grandfathered health plan coverage as of July 1, 2013, 
consistent with the rule in paragraph (a)(1)(ii) of this section. 
Whether the coverage under Options F and G is grandfathered health 
plan coverage is determined under the rules of this section, 
including paragraph (g) of this section. If the plan enters into a 
new policy, certificate, or contract of insurance for Option G, 
Option G's status as a grandfathered health plan would cease under 
paragraph (a)(1)(ii) of this section.

    (b) Allowance for new employees to join current plan--(1) In 
general. Subject to paragraph (b)(2) of this section, a group health 
plan (including health insurance coverage provided in connection with 
the group health plan) that provided coverage on March 23, 2010 and has 
retained its status as a grandfathered health plan (consistent with the 
rules of this section, including paragraph (g) of this section) is 
grandfathered health plan coverage for new employees (whether newly 
hired or newly enrolled) and their families enrolling in the plan after 
March 23, 2010.
    (2) Anti-abuse rules--(i) Mergers and acquisitions. If the 
principal purpose of a merger, acquisition, or similar business 
restructuring is to cover new individuals under a grandfathered health 
plan, the plan ceases to be a grandfathered health plan.
    (ii) Change in plan eligibility. A group health plan or health 
insurance coverage (including a benefit package under a group health 
plan) ceases to be a grandfathered health plan if--
    (A) Employees are transferred into the plan or health insurance 
coverage (the transferee plan) from a plan or health insurance coverage 
under which the employees were covered on March 23, 2010 (the 
transferor plan);
    (B) Comparing the terms of the transferee plan with those of the 
transferor plan (as in effect on March 23, 2010) and treating the 
transferee plan as if it were an amendment of the transferor plan would 
cause a loss of grandfather status under the provisions of paragraph 
(g)(1) of this section; and
    (C) There was no bona fide employment-based reason to transfer the 
employees into the transferee plan. For this purpose, changing the 
terms or cost of coverage is not a bona fide employment-based reason.
    (3) Examples. The rules of this paragraph (b) are illustrated by 
the following examples:

    Example 1.  (i) Facts. A group health plan offers two benefit 
packages on March 23, 2010, Options F and G. During a subsequent 
open enrollment period, some of the employees enrolled in Option F 
on March 23, 2010 switch to Option G.
    (ii) Conclusion. In this Example 1, the group health coverage 
provided under Option G remains a grandfathered health plan under 
the rules of paragraph (b)(1) of this section because employees 
previously enrolled in Option F are allowed to enroll in Option G as 
new employees.
    Example 2.  (i) Facts. Same facts as Example 1, except that the 
plan sponsor eliminates Option F because of its high cost and 
transfers employees covered under Option F to Option G. If instead 
of transferring employees from Option F to Option G, Option F was 
amended to match the terms of Option G, then Option F would cease to 
be a grandfathered health plan.
    (ii) Conclusion. In this Example 2, the plan did not have a bona 
fide employment-based reason to transfer employees from Option F to 
Option G. Therefore, Option G ceases to be a grandfathered health 
plan with respect to all employees. (However, any other benefit 
package maintained by the plan sponsor is analyzed separately under 
the rules of this section.)
    Example 3. (i) Facts. A group health plan offers two benefit 
packages on March 23, 2010, Options H and I. On March 23, 2010, 
Option H provides coverage only for employees in one manufacturing 
plant. Subsequently, the plant is closed, and some employees in the 
closed plant are moved to another plant. The employer eliminates 
Option H and the employees that are moved are transferred to Option 
I. If instead of transferring employees from Option H to Option I, 
Option H was amended to match the terms of Option I, then Option H 
would cease to be a grandfathered health plan.
    (ii) Conclusion. In this Example 3, the plan has a bona fide 
employment-based reason to transfer employees from Option H to 
Option I. Therefore, Option I does not cease to be a grandfathered 
health plan.

    (c) General grandfathering rule--(1) Except as provided in 
paragraphs (d) and (e) of this section, subtitles A and C of title I of 
the Patient Protection and Affordable Care Act (and the amendments made 
by those subtitles, and the incorporation of those amendments into 
ERISA section 715 and Internal Revenue Code section 9815) do not apply 
to grandfathered health plan coverage. Accordingly, the

[[Page 34568]]

provisions of PHS Act sections 2701, 2702, 2703, 2705, 2706, 2707, 2709 
(relating to coverage for individuals participating in approved 
clinical trials, as added by section 10103 of the Patient Protection 
and Affordable Care Act), 2713, 2715A, 2716, 2717, 2719, and 2719A, as 
added or amended by the Patient Protection and Affordable Care Act, do 
not apply to grandfathered health plans. In addition, the provisions of 
PHS Act section 2704, and PHS Act section 2711 insofar as it relates to 
annual limits, do not apply to grandfathered health plans that are 
individual health insurance coverage.
    (2) To the extent not inconsistent with the rules applicable to a 
grandfathered health plan, a grandfathered health plan must comply with 
the requirements of the PHS Act, ERISA, and the Internal Revenue Code 
applicable prior to the changes enacted by the Patient Protection and 
Affordable Care Act.
    (d) Provisions applicable to all grandfathered health plans. The 
provisions of PHS Act section 2711 insofar as it relates to lifetime 
limits, and the provisions of PHS Act sections 2712, 2714, 2715, and 
2718, apply to grandfathered health plans for plan years (in the 
individual market, policy years) beginning on or after September 23, 
2010. The provisions of PHS Act section 2708 apply to grandfathered 
health plans for plan years (in the individual market, policy years) 
beginning on or after January 1, 2014.
    (e) Applicability of PHS Act sections 2704, 2711, and 2714 to 
grandfathered group health plans and group health insurance coverage--
(1) The provisions of PHS Act section 2704 as it applies with respect 
to enrollees who are under 19 years of age, and the provisions of PHS 
Act section 2711 insofar as it relates to annual limits, apply to 
grandfathered health plans that are group health plans (including group 
health insurance coverage) for plan years beginning on or after 
September 23, 2010. The provisions of PHS Act section 2704 apply 
generally to grandfathered health plans that are group health plans 
(including group health insurance coverage) for plan years beginning on 
or after January 1, 2014.
    (2) For plan years beginning before January 1, 2014, the provisions 
of PHS Act section 2714 apply in the case of an adult child with 
respect to a grandfathered health plan that is a group health plan only 
if the adult child is not eligible to enroll in an eligible employer-
sponsored health plan (as defined in section 5000A(f)(2) of the 
Internal Revenue Code) other than a grandfathered health plan of a 
parent. For plan years beginning on or after January 1, 2014, the 
provisions of PHS Act section 2714 apply with respect to a 
grandfathered health plan that is a group health plan without regard to 
whether an adult child is eligible to enroll in any other coverage.
    (f) Effect on collectively bargained plans--(1) In general. In the 
case of health insurance coverage maintained pursuant to one or more 
collective bargaining agreements between employee representatives and 
one or more employers that was ratified before March 23, 2010, the 
coverage is grandfathered health plan coverage at least until the date 
on which the last of the collective bargaining agreements relating to 
the coverage that was in effect on March 23, 2010 terminates. Any 
coverage amendment made pursuant to a collective bargaining agreement 
relating to the coverage that amends the coverage solely to conform to 
any requirement added by subtitles A and C of title I of the Patient 
Protection and Affordable Care Act (and the amendments made by those 
subtitles, and the incorporation of those amendments into ERISA section 
715 and Internal Revenue Code section 9815) is not treated as a 
termination of the collective bargaining agreement. After the date on 
which the last of the collective bargaining agreements relating to the 
coverage that was in effect on March 23, 2010 terminates, the 
determination of whether health insurance coverage maintained pursuant 
to a collective bargaining agreement is grandfathered health plan 
coverage is made under the rules of this section other than this 
paragraph (f) (comparing the terms of the health insurance coverage 
after the date the last collective bargaining agreement terminates with 
the terms of the health insurance coverage that were in effect on March 
23, 2010) and, for any changes in insurance coverage after the 
termination of the collective bargaining agreement, under the rules of 
paragraph (a)(1)(ii) of this section.
    (2) Examples. The rules of this paragraph (f) are illustrated by 
the following examples:

    Example 1. (i) Facts. A group health plan maintained pursuant to 
a collective bargaining agreement provides coverage through a group 
health insurance policy from Issuer W on March 23, 2010. The 
collective bargaining agreement has not been amended and will not 
expire before December 31, 2011. The group health plan enters into a 
new group health insurance policy with Issuer Y for the plan year 
starting on January 1, 2011.
    (ii) Conclusion. In this Example 1, the group health plan, and 
the group health insurance policy provided by Y, remains a 
grandfathered health plan with respect to existing employees and new 
employees and their families because the coverage is maintained 
pursuant to a collective bargaining agreement ratified prior to 
March 23, 2010 that has not terminated.
    Example 2. (i) Facts. Same facts as Example 1, except the 
coverage with Y is renewed under a new collective bargaining 
agreement effective January 1, 2012, with the only changes since 
March 23, 2010 being changes that do not cause the plan to cease to 
be a grandfathered health plan under the rules of this section, 
including paragraph (g) of this section.
    (ii) Conclusion. In this Example 2, the group health plan 
remains a grandfathered health plan pursuant to the rules of this 
section. Moreover, the group health insurance policy provided by Y 
remains a grandfathered health plan under the rules of this section, 
including paragraph (g) of this section.

    (g) Maintenance of grandfather status--(1) Changes causing 
cessation of grandfather status. Subject to paragraph (g)(2) of this 
section, the rules of this paragraph (g)(1) describe situations in 
which a group health plan or health insurance coverage ceases to be a 
grandfathered health plan.
    (i) Elimination of benefits. The elimination of all or 
substantially all benefits to diagnose or treat a particular condition 
causes a group health plan or health insurance coverage to cease to be 
a grandfathered health plan. For this purpose, the elimination of 
benefits for any necessary element to diagnose or treat a condition is 
considered the elimination of all or substantially all benefits to 
diagnose or treat a particular condition.
    (ii) Increase in percentage cost-sharing requirement. Any increase, 
measured from March 23, 2010, in a percentage cost-sharing requirement 
(such as an individual's coinsurance requirement) causes a group health 
plan or health insurance coverage to cease to be a grandfathered health 
plan.
    (iii) Increase in a fixed-amount cost-sharing requirement other 
than a copayment. Any increase in a fixed-amount cost-sharing 
requirement other than a copayment (for example, deductible or out-of-
pocket limit), determined as of the effective date of the increase, 
causes a group health plan or health insurance coverage to cease to be 
a grandfathered health plan, if the total percentage increase in the 
cost-sharing requirement measured from March 23, 2010 exceeds the 
maximum percentage increase (as defined in paragraph (g)(3)(ii) of this 
section).
    (iv) Increase in a fixed-amount copayment. Any increase in a fixed-
amount copayment, determined as of the effective date of the increase, 
causes a group health plan or health insurance

[[Page 34569]]

coverage to cease to be a grandfathered health plan, if the total 
increase in the copayment measured from March 23, 2010 exceeds the 
greater of:
    (A) An amount equal to $5 increased by medical inflation, as 
defined in paragraph (g)(3)(i) of this section (that is, $5 times 
medical inflation, plus $5), or
    (B) The maximum percentage increase (as defined in paragraph 
(g)(3)(ii) of this section), determined by expressing the total 
increase in the copayment as a percentage.
    (v) Decrease in contribution rate by employers and employee 
organizations--(A) Contribution rate based on cost of coverage. A group 
health plan or group health insurance coverage ceases to be a 
grandfathered health plan if the employer or employee organization 
decreases its contribution rate based on cost of coverage (as defined 
in paragraph (g)(3)(iii)(A) of this section) towards the cost of any 
tier of coverage for any class of similarly situated individuals (as 
described in section 146.121(d) of this subchapter) by more than 5 
percentage points below the contribution rate for the coverage period 
that includes March 23, 2010.
    (B) Contribution rate based on a formula. A group health plan or 
group health insurance coverage ceases to be a grandfathered health 
plan if the employer or employee organization decreases its 
contribution rate based on a formula (as defined in paragraph 
(g)(3)(iii)(B) of this section) towards the cost of any tier of 
coverage for any class of similarly situated individuals (as described 
in section 146.121(d) of this subchapter) by more than 5 percent below 
the contribution rate for the coverage period that includes March 23, 
2010.
    (vi) Changes in annual limits--(A) Addition of an annual limit. A 
group health plan, or group or individual health insurance coverage, 
that, on March 23, 2010, did not impose an overall annual or lifetime 
limit on the dollar value of all benefits ceases to be a grandfathered 
health plan if the plan or health insurance coverage imposes an overall 
annual limit on the dollar value of benefits.
    (B) Decrease in limit for a plan or coverage with only a lifetime 
limit. A group health plan, or group or individual health insurance 
coverage, that, on March 23, 2010, imposed an overall lifetime limit on 
the dollar value of all benefits but no overall annual limit on the 
dollar value of all benefits ceases to be a grandfathered health plan 
if the plan or health insurance coverage adopts an overall annual limit 
at a dollar value that is lower than the dollar value of the lifetime 
limit on March 23, 2010.
    (C) Decrease in limit for a plan or coverage with an annual limit. 
A group health plan, or group or individual health insurance coverage, 
that, on March 23, 2010, imposed an overall annual limit on the dollar 
value of all benefits ceases to be a grandfathered health plan if the 
plan or health insurance coverage decreases the dollar value of the 
annual limit (regardless of whether the plan or health insurance 
coverage also imposed an overall lifetime limit on March 23, 2010 on 
the dollar value of all benefits).
    (2) Transitional rules--(i) Changes made prior to March 23, 2010. 
If a group health plan or health insurance issuer makes the following 
changes to the terms of the plan or health insurance coverage, the 
changes are considered part of the terms of the plan or health 
insurance coverage on March 23, 2010 even though they were not 
effective at that time and such changes do not cause a plan or health 
insurance coverage to cease to be a grandfathered health plan:
    (A) Changes effective after March 23, 2010 pursuant to a legally 
binding contract entered into on or before March 23, 2010;
    (B) Changes effective after March 23, 2010 pursuant to a filing on 
or before March 23, 2010 with a State insurance department; or
    (C) Changes effective after March 23, 2010 pursuant to written 
amendments to a plan that were adopted on or before March 23, 2010.
    (ii) Changes made after March 23, 2010 and adopted prior to 
issuance of regulations. If, after March 23, 2010, a group health plan 
or health insurance issuer makes changes to the terms of the plan or 
health insurance coverage and the changes are adopted prior to June 14, 
2010, the changes will not cause the plan or health insurance coverage 
to cease to be a grandfathered health plan if the changes are revoked 
or modified effective as of the first day of the first plan year (in 
the individual market, policy year) beginning on or after September 23, 
2010, and the terms of the plan or health insurance coverage on that 
date, as modified, would not cause the plan or coverage to cease to be 
a grandfathered health plan under the rules of this section, including 
paragraph (g)(1) of this section. For this purpose, changes will be 
considered to have been adopted prior to June 14, 2010 if:
    (A) The changes are effective before that date;
    (B) The changes are effective on or after that date pursuant to a 
legally binding contract entered into before that date;
    (C) The changes are effective on or after that date pursuant to a 
filing before that date with a State insurance department; or
    (D) The changes are effective on or after that date pursuant to 
written amendments to a plan that were adopted before that date.
    (3) Definitions--(i) Medical inflation defined. For purposes of 
this paragraph (g), the term medical inflation means the increase since 
March 2010 in the overall medical care component of the Consumer Price 
Index for All Urban Consumers (CPI-U) (unadjusted) published by the 
Department of Labor using the 1982-1984 base of 100. For this purpose, 
the increase in the overall medical care component is computed by 
subtracting 387.142 (the overall medical care component of the CPI-U 
(unadjusted) published by the Department of Labor for March 2010, using 
the 1982-1984 base of 100) from the index amount for any month in the 
12 months before the new change is to take effect and then dividing 
that amount by 387.142.
    (ii) Maximum percentage increase defined. For purposes of this 
paragraph (g), the term maximum percentage increase means medical 
inflation (as defined in paragraph (g)(3)(i) of this section), 
expressed as a percentage, plus 15 percentage points.
    (iii) Contribution rate defined. For purposes of paragraph 
(g)(1)(v) of this section:
    (A) Contribution rate based on cost of coverage. The term 
contribution rate based on cost of coverage means the amount of 
contributions made by an employer or employee organization compared to 
the total cost of coverage, expressed as a percentage. The total cost 
of coverage is determined in the same manner as the applicable premium 
is calculated under the COBRA continuation provisions of section 604 of 
ERISA, section 4980B(f)(4) of the Internal Revenue Code, and section 
2204 of the PHS Act. In the case of a self-insured plan, contributions 
by an employer or employee organization are equal to the total cost of 
coverage minus the employee contributions towards the total cost of 
coverage.
    (B) Contribution rate based on a formula. The term contribution 
rate based on a formula means, for plans that, on March 23, 2010, made 
contributions based on a formula (such as hours worked or tons of coal 
mined), the formula.
    (4) Examples. The rules of this paragraph (g) are illustrated by 
the following examples:


[[Page 34570]]


    Example 1. (i) Facts. On March 23, 2010, a grandfathered health 
plan has a coinsurance requirement of 20% for inpatient surgery. The 
plan is subsequently amended to increase the coinsurance requirement 
to 25%.
    (ii) Conclusion. In this Example 1, the increase in the 
coinsurance requirement from 20% to 25% causes the plan to cease to 
be a grandfathered health plan.
    Example 2. (i) Facts. Before March 23, 2010, the terms of a 
group health plan provide benefits for a particular mental health 
condition, the treatment for which is a combination of counseling 
and prescription drugs. Subsequently, the plan eliminates benefits 
for counseling.
    (ii) Conclusion. In this Example 2, the plan ceases to be a 
grandfathered health plan because counseling is an element that is 
necessary to treat the condition. Thus the plan is considered to 
have eliminated substantially all benefits for the treatment of the 
condition.
    Example 3. (i) Facts. On March 23, 2010, a grandfathered health 
plan has a copayment requirement of $30 per office visit for 
specialists. The plan is subsequently amended to increase the 
copayment requirement to $40. Within the 12-month period before the 
$40 copayment takes effect, the greatest value of the overall 
medical care component of the CPI-U (unadjusted) is 475.
    (ii) Conclusion. In this Example 3, the increase in the 
copayment from $30 to $40, expressed as a percentage, is 33.33% (40 
- 30 = 10; 10 / 30 = 0.3333; 0.3333 = 33.33%). Medical inflation (as 
defined in paragraph (g)(3)(i) of this section) from March 2010 is 
0.2269 (475 - 387.142 = 87.858; 87.858 / 387.142 = 0.2269). The 
maximum percentage increase permitted is 37.69% (0.2269 = 22.69%; 
22.69% + 15% = 37.69%). Because 33.33% does not exceed 37.69%, the 
change in the copayment requirement at that time does not cause the 
plan to cease to be a grandfathered health plan.
    Example 4. (i) Facts. Same facts as Example 3, except the 
grandfathered health plan subsequently increases the $40 copayment 
requirement to $45 for a later plan year. Within the 12-month period 
before the $45 copayment takes effect, the greatest value of the 
overall medical care component of the CPI-U (unadjusted) is 485.
    (ii) Conclusion. In this Example 4, the increase in the 
copayment from $30 (the copayment that was in effect on March 23, 
2010) to $45, expressed as a percentage, is 50% (45 - 30 = 15; 15 / 
30 = 0.5; 0.5 = 50%). Medical inflation (as defined in paragraph 
(g)(3)(i) of this section) from March 2010 is 0.2527 (485 - 387.142 
= 97.858; 97.858 / 387.142 = 0.2527). The increase that would cause 
a plan to cease to be a grandfathered health plan under paragraph 
(g)(1)(iv) of this section is the greater of the maximum percentage 
increase of 40.27% (0.2527 = 25.27%; 25.27% + 15% = 40.27%), or 
$6.26 ($5 x 0.2527 = $1.26; $1.26 + $5 = $6.26). Because 50% exceeds 
40.27% and $15 exceeds $6.26, the change in the copayment 
requirement at that time causes the plan to cease to be a 
grandfathered health plan.
    Example 5. (i) Facts. On March 23, 2010, a grandfathered health 
plan has a copayment of $10 per office visit for primary care 
providers. The plan is subsequently amended to increase the 
copayment requirement to $15. Within the 12-month period before the 
$15 copayment takes effect, the greatest value of the overall 
medical care component of the CPI-U (unadjusted) is 415.
    (ii) Conclusion. In this Example 5, the increase in the 
copayment, expressed as a percentage, is 50% (15 - 10 = 5; 5 / 10 = 
0.5; 0.5 = 50%). Medical inflation (as defined in paragraph (g)(3) 
of this section) from March 2010 is 0.0720 (415.0 - 387.142 = 
27.858; 27.858 / 387.142 = 0.0720). The increase that would cause a 
plan to cease to be a grandfathered health plan under paragraph 
(g)(1)(iv) of this section is the greater of the maximum percentage 
increase of 22.20% (0.0720 = 7.20%; 7.20% + 15% = 22.20), or $5.36 
($5 x 0.0720 = $0.36; $0.36 + $5 = $5.36). The $5 increase in 
copayment in this Example 5 would not cause the plan to cease to be 
a grandfathered health plan pursuant to paragraph (g)(1)(iv) this 
section, which would permit an increase in the copayment of up to 
$5.36.
    Example 6. (i) Facts. The same facts as Example 5, except on 
March 23, 2010, the grandfathered health plan has no copayment ($0) 
for office visits for primary care providers. The plan is 
subsequently amended to increase the copayment requirement to $5.
    (ii) Conclusion. In this Example 6, medical inflation (as 
defined in paragraph (g)(3)(i) of this section) from March 2010 is 
0.0720 (415.0 - 387.142 = 27.858; 27.858 / 387.142 = 0.0720). The 
increase that would cause a plan to cease to be a grandfathered 
health plan under paragraph (g)(1)(iv)(A) of this section is $5.36 
($5 x 0.0720 = $0.36; $0.36 + $5 = $5.36). The $5 increase in 
copayment in this Example 6 is less than the amount calculated 
pursuant to paragraph (g)(1)(iv)(A) of this section of $5.36. Thus, 
the $5 increase in copayment does not cause the plan to cease to be 
a grandfathered health plan.
    Example 7.  (i) Facts. On March 23, 2010, a self-insured group 
health plan provides two tiers of coverage--self-only and family. 
The employer contributes 80% of the total cost of coverage for self-
only and 60% of the total cost of coverage for family. Subsequently, 
the employer reduces the contribution to 50% for family coverage, 
but keeps the same contribution rate for self-only coverage.
    (ii) Conclusion. In this Example 7, the decrease of 10 
percentage points for family coverage in the contribution rate based 
on cost of coverage causes the plan to cease to be a grandfathered 
health plan. The fact that the contribution rate for self-only 
coverage remains the same does not change the result.
    Example 8. (i) Facts. On March 23, 2010, a self-insured 
grandfathered health plan has a COBRA premium for the 2010 plan year 
of $5000 for self-only coverage and $12,000 for family coverage. The 
required employee contribution for the coverage is $1000 for self-
only coverage and $4000 for family coverage. Thus, the contribution 
rate based on cost of coverage for 2010 is 80% ((5000 - 1000)/5000) 
for self-only coverage and 67% ((12,000 - 4000)/12,000) for family 
coverage. For a subsequent plan year, the COBRA premium is $6000 for 
self-only coverage and $15,000 for family coverage. The employee 
contributions for that plan year are $1200 for self-only coverage 
and $5000 for family coverage. Thus, the contribution rate based on 
cost of coverage is 80% ((6000 - 1200)/6000) for self-only coverage 
and 67% ((15,000 - 5000)/15,000) for family coverage.
    (ii) Conclusion. In this Example 8, because there is no change 
in the contribution rate based on cost of coverage, the plan retains 
its status as a grandfathered health plan. The result would be the 
same if all or part of the employee contribution was made pre-tax 
through a cafeteria plan under section 125 of the Internal Revenue 
Code.
    Example 9. (i) Facts. Before March 23, 2010, Employer W and 
Individual B enter into a legally binding employment contract that 
promises B lifetime health coverage upon termination. Prior to 
termination, B is covered by W's self-insured grandfathered group 
health plan. B is terminated after March 23, 2010 and W purchases a 
new health insurance policy providing coverage to B, consistent with 
the terms of the employment contract.
    (ii) Conclusion. In this Example 9, because no individual is 
enrolled in the health insurance policy on March 23, 2010, it is not 
a grandfathered health plan.

[FR Doc. 2010-14488 Filed 6-14-10; 11:15 am]
BILLING CODE 4830-01-P, 4510-29-P, 4120-01-P