FAQ A A C A
S  BOUT  FFORDABLE  ARE  CT 
I (P VI)  
MPLEMENTATION  ART   
April 1, 2011 
 
 
 
Set out below are additional Frequently Asked Questions (FAQs) regarding implementation of 
the market reform provisions of the Affordable Care Act.  These FAQs have been prepared 
jointly by the Departments of Health and Human Services (HHS), Labor and the Treasury (the 
Departments).  Like previously issued FAQs (available at 
http://www.dol.gov/ebsa/healthreform/index.html), these FAQs answer questions from 
stakeholders to help people understand the new law and benefit from it, as intended.  
 
GRANDFATHERED HEALTH PLANS  
 
Q1:  What is the scope of the anti-abuse rule in paragraph (b)(2) of the interim 
final regulations relating to grandfather status?  In particular, what is a bona 
fide employment-based reason for employees enrolled in a benefit package 
that is being eliminated to be transferred into another benefit package?   
 
The interim final regulations relating to status as a grandfathered health plan generally state 
that transferring employees from one grandfathered plan or benefit package (transferor plan) 
to another (transferee plan) will cause the transferee plan to relinquish grandfather status if 
amending the transferor plan to replicate the terms of the transferee plan would have caused 
the transferor plan to relinquish grandfather status.  However, the interim final regulations 
also provide that this rule applies only if there was no bona fide employment-based reason to 
transfer the employees.   
 
For purposes of paragraph (b)(2) of the interim final regulations relating to status as a 
grandfathered health plan, the Departments interpret the term bona fide employment-based 
reason to embrace a variety of circumstances.  These circumstances (under which a transfer 
would not cause cessation of grandfather status) include, but are not limited to, any of the 
following: 
 
1)  When a benefit package is being eliminated because the issuer is exiting the market;  
2)  When a benefit package is being eliminated because the issuer no longer offers the 
product to the employer (for example, because the employer no longer satisfies the 
issuers minimum participation requirement);  
3)  When low or declining participation by plan participants in the benefit package makes 
it impractical for the plan sponsor to continue to offer the benefit package; 
4)  When a benefit package is eliminated from a multiemployer plan as agreed upon as 
part of the collective bargaining process; or  
1   
5)  When a benefit package is eliminated for any reason and multiple benefit packages 
covering a significant portion of other employees remain available to the employees 
being transferred.   
 
The foregoing is not intended to be an exhaustive list of circumstances that will be deemed to 
satisfy the bona fide employment-based reason condition.  There may be many other 
circumstances in which a benefit package is considered to be eliminated for a bona fide 
employment-based reason.  
 
Q2:  My plan bases the level of cost sharing for brand-name prescription drugs 
on the classification of the drugs under the plan as having or not having 
generic alternatives.  The classification of a drug that had no generic 
alternative changes because a generic alternative becomes available and is 
added to the formulary, with a resulting increase in the cost-sharing level for 
the brand-name drug.  Does that increase cause my plan to relinquish its 
grandfather status? 
 
No.  For example, if, on March 23, 2010, the terms of the plan included prescription drug 
benefits with different cost sharing divided into tiers as follows: 
 
  Tier 1 includes generic drugs only;  
  Tier 2 includes brand name drugs with no generic available;  
  Tier 3 includes brand name drugs with a generic available in Tier 1; and  
  Tier 4 includes IV chemotherapy drugs.   
 
A drug was previously classified in Tier 2 as a brand name drug with no generic available.  
However, a generic alternative for the drug has just been released and is added to the 
formulary.  Since the generic is now available, the plan moves the brand name drug into Tier 3 
and adds the generic to Tier 1.  This movement of the brand name drug into a higher cost-
sharing tier does not cause the plan to relinquish grandfather status.   
 
Q3:  A previous FAQ addressed the interaction of value-based insurance design 
(VBID) and the no cost-sharing preventive care services requirements.  See 
http://www.dol.gov/ebsa/faqs/faq-aca5.html.  In that example, a group 
health plan did not impose a copayment for colorectal cancer preventive 
services when performed in an in-network ambulatory surgery center.  In 
contrast, the same preventive service provided at an in-network outpatient 
hospital setting generally required a $250 copayment, although the 
copayment was waived for individuals for whom it would be medically 
inappropriate to have the preventive service provided in the ambulatory 
setting.  The FAQ indicated that this VBID did not cause the plan to fail to 
comply with the no cost-sharing preventive care requirements. 
 
A question about a different situation has been raised.  Under a group 
health plan, similar preventive services are available both at an in-network 
ambulatory surgery center and at an in-network outpatient hospital setting, 
2   
but currently no copayment is imposed for these services in either setting.  
This has been the case since March 23, 2010.   If this plan wished to adopt 
the VBID approach described in the example above by imposing a $250 
copayment for these preventive services only when performed in the in-
network outpatient hospital setting (i.e., not when performed in an in-
network ambulatory surgery center), and with the same waiver of the 
copayment for any individuals for whom it would be medically 
inappropriate to have these preventive services provided in the ambulatory 
setting, would implementation of that new design now cause the plan to 
relinquish grandfather status? 
 
No.  This increase in the copayment for these preventive services solely in the in-network 
outpatient hospital setting (subject to the waiver arrangement described above) without any 
change in the copayment in the in-network ambulatory surgery center setting would not be 
considered to exceed the thresholds described in paragraph (g)(1) of the interim final 
regulations on grandfather status and thus would not cause the plan to relinquish grandfather 
status. 
 
The Departments are seeking further information on VBID and wellness programs and are 
planning to address issues relating to those designs and programs in future regulations. 
Comments from plan sponsors have expressed an interest in being able to retain grandfather 
status notwithstanding certain changes in plan terms that are intended to implement VBID and 
wellness programs. As the regulatory process progresses, the Departments will be giving close 
attention to these comments, and further guidance may be issued addressing other 
circumstances in which plan changes implementing those designs and programs may be made 
without relinquishing grandfather status. 
 
Q4:  A plan operating on a calendar plan year is considering an amendment to 
plan terms that will exceed the thresholds described in paragraph (g)(1) of 
the interim final regulations and cause it to relinquish grandfather status.  If 
the plan sponsor decides to adopt this amendment on July 1, 2011, and the 
change becomes effective for the plan year beginning on January 1, 2012, at 
what point in time does the plan relinquish grandfather status? 
 
A plan or coverage will cease to be a grandfathered health plan when an amendment to plan 
terms, which exceeds the thresholds described in paragraph (g)(1) of the interim final 
regulations, becomes effective  regardless of when the amendment is adopted.  Therefore, in 
this example, the plan would cease to be a grandfathered health plan on January 1, 2012, the 
first day of the first plan year for which the change is effective. 
 
Q5:  A plan operating on a calendar plan year is considering an amendment to 
plan terms that will cause it to relinquish grandfather status, but wants the 
amendment to become effective before the first day of the next plan year.  If 
the plan sponsor decides to make this amendment effective on July 1, 2011, 
does the plan relinquish grandfather status in the middle of the plan year? 
 
3   
Yes.  A plan or coverage will cease to be a grandfathered health plan when a plan amendment 
becomes effective.  Therefore, if a plan sponsor chooses to make an amendment to plan terms 
effective in the middle of a plan year, the plan will cease to be a grandfathered health plan at 
that time.   
 
If a plan sponsor wishes to avoid relinquishing grandfathered status in the middle of a plan 
year, any changes that will cause a plan or coverage to relinquish grandfather status should be 
made effective   the first day of a plan year that begins after the change is adopted.  
 
Q6:  A plan covers both retirees and active employees and is subject to the 
market reform requirements of the Affordable Care Act.  For retirees, the 
employer that sponsors the plan contributes $300 per year multiplied by the 
individuals years of service for the employer, capped at $10,000 per year.  
As the cost of coverage increases over time, how is it determined whether 
the employers contribution rate has decreased for purposes of maintaining 
grandfather status?  
 
In this example, the employer makes contributions based on a formula.  Accordingly, the plan 
will cease to be a grandfathered health plan if the employer decreases its contribution rate 
towards the cost of coverage by more than five percent below the contribution rate on March 
23, 2010.  If the formula does not change, the employer is not considered to have reduced its 
contribution rate, regardless of any increase in the total cost of coverage.  However, if the 
dollar amount that is multiplied by years of service decreases by more than five percent (or if 
the $10,000 maximum employer contribution cap decreases by more than five percent), the 
plan will cease to be a grandfathered health plan.  
4