What Is a Grandfathered Health Plan?

A grandfathered health plan is one that was already in effect as of March 23, 2010, when the Affordable Care Act (ACA) was signed into law. Grandfathered plans exist in the individual insurance market, which are insurance plans that people buy themselves, as well as the employer-sponsored market, which are plans that employers buy for people.

People with grandfathered coverage can add dependents to their plan, and employers with grandfathered health plans can add new employees to the plan. The plans themselves, however, have not been available for purchase since 2010, unless an employer with a grandfathered plan obtains a similar (or better) plan issued by a different insurer.

Although grandfathered plans do not have to comply with many of the ACA's regulations, they are still considered minimum essential coverage. In most states, there is no longer a penalty for not having minimum essential coverage, but there are numerous qualifying events that will allow a person to enroll in an ACA-compliant plan in the individual market—as long as they had minimum essential coverage prior to the qualifying event. Grandfathered plans fit that requirement. A large employer offering a grandfathered plan is in compliance with the employer mandate as long as the coverage is affordable for employees and provides minimum value.

In order to retain grandfathered status, a health plan can't make changes that result in a significant reduction in benefits or increase in cost-sharing for enrollees.

When considering enrollee costs, premium increases aren't taken into consideration. But employers cannot decrease the percentage of the premiums that they pay on behalf of their workers by more than 5 percentage points. So for example, if an employer offers a grandfathered plan and pays 75% of the premium—with employees paying the other 25%—the employer can drop their own share of the premiums down as far as 70%, but not below that. If the employer starts to pay only 50% of the premiums, the plan would lose its grandfathered status.

Federal regulations were updated in 2010 to clarify what would and would not cause a health plan to lose its grandfathered status. Plans can add benefits, increase premiums, impose modest increases for cost-sharing, and employers can even purchase coverage from a different insurance company (self-insured plans can also switch their third-party administrators) while retaining their grandfathered plan status.

However, this applies only as long as the new plan doesn't result in a decrease in benefits or a significant increase in cost-sharing for enrollees.

If a health plan cuts benefits, increases the coinsurance percentage, increases copays and/or deductibles beyond an allowable amount, or adds a limit (or imposes a lower limit) to the total amount the health plan will pay, the plan will lose its grandfathered status.

Grandmothered plans are different from grandfathered plans. Grandmothered plans are those that took effect after March 23, 2010, but before the end of 2013. In some states, they had to take effect before the end of September 2013 (since open enrollment for ACA-compliant plans first began on October 1, 2013).

While grandfathered plans may remain in effect indefinitely as long as they comply with the requirements for keeping grandfathered status, grandmothered plans are currently only allowed to remain in force until the end of 2020. This could be extended in future guidance, as extensions have been issued each year thus far. However, there is nothing in the law that allows for grandmothered plans to continue to exist indefinitely the way grandfathered plans can.

There are ACA regulations that do not apply to grandfathered plans. But there are others that they must follow.

Grandfathered plans are not required to:

• cover preventive care for free
• cover essential health benefits
• guarantee a member's right to appeal a coverage or claims decision
• comply with the ACA's rate review process for premium increases
• end yearly benefit caps on essential health benefits in the individual market
• cover pre-existing conditions in the individual market

Though grandfathered plans aren't required to cover essential health benefits, they cannot impose lifetime benefit caps on any essential health benefits that they do cover. Employer-sponsored grandfathered plans had to phase out annual benefit caps by 2014.

On the other hand, grandfathered plans are required to:

• allow dependents to remain on the plan until age 26 (assuming dependents are offered coverage)
• not arbitrarily cancel coverage
• comply with the ACA's medical loss ratio by spending the majority of premiums on medical costs
• not impose lifetime benefit caps on any essential health benefits that they offer (keeping in mind that grandfathered plans are not required to offer essential health benefits)
• provide enrollees with a summary of benefits and coverage

Note that the medical loss ratio rules do not apply to self-insured plans. And very large group plans are often self-insured.

Although grandfathered plans are allowed to remain in effect indefinitely, there is nothing that says they are required to do so. Individuals and employers can choose to switch to ACA-compliant coverage instead, and insurers can choose to terminate grandfathered plans.

Particularly in the individual market, where new enrollees (except new dependents) have been unable to join grandfathered plans since 2010, grandfathered plans become less attractive to insurers over time. The risk pool shrinks since people switch to other plans, but no new enrollees can join the grandfathered plan.

The existing risk pool experiences a slowly deteriorating health status as enrollees get older and develop health conditions. Over time, this makes it more likely that an insurer may opt to terminate its grandfathered plans and switch the enrollees to ACA-compliant plans instead (enrollees in this situation also have the option to select their own new plan, either from their existing insurer or from another insurer).

If your grandfathered plan is terminated by your employer or your health insurer, rest assured that you'll have an option to enroll in a new plan. If your employer terminates a grandfathered plan, chances are they'll replace it with a new plan (which must fully comply with the applicable ACA rules for either large or small employer-sponsored plans, depending on the size of the business).

If not, the loss of employer-sponsored coverage is a qualifying event that allows you a special enrollment period during which you can purchase your own plan in the individual market, either through the exchange or directly through an insurer (note that premium subsidies are only available in the exchange).

If your grandfathered individual market plan is terminated, it triggers the same special enrollment period. Insurers that are terminating a whole block of business generally schedule the termination for the end of the year.

That means that enrollees can simply select a new plan during open enrollment, which occurs each fall from November 1 to December 15 (some states have extended windows, but this is the enrollment period that applies in most states).

However, enrollees also have the option to select a new plan right up until the 31st of December, and their new plan will still be effective on January 1 (the effective date rules are different when the triggering event is the loss of coverage).

The special enrollment period continues for another 60 days into the new year (or after the date of the loss of coverage if it occurs during another time of the year).

If you do enroll before the old plan ends, you'll have seamless coverage, as long as the last day of coverage under the old plan is the final day of a month.

It's also worth noting that there's a special enrollment period in the individual market (on or off-exchange) if you have a non-calendar-year health plan that is renewing at a time other than January 1 and you would rather switch to a new plan (if the plan renews on January 1, enrollees can just use the regular open enrollment period for ACA-compliant plans, with coverage effective January 1).

Grandfathered plans often have non-calendar-year renewal dates. This puts people at a disadvantage if they have one of these plans and get a renewal rate increase mid-year (when it's not open enrollment in the ACA-compliant individual market).

The U.S. Department of Health and Human Services (HHS) created a special enrollment period that applies in this case. If your grandfathered plan is renewing mid-year, you can opt to let it renew, or you can opt to switch to a new plan in the ACA-compliant market.

Before opting to simply renew your grandfathered plan, it's wise to check to see if there are better options in the ACA-compliant market. If you have a grandfathered plan via your employer, you can still opt to shop around, but you won't be eligible for any premium subsidies to offset the cost of a plan you buy on your own—this is as long as the employer-sponsored plan is affordable and provides minimum value.

Be sure to check if you are eligible for premium subsidies if you buy your own new plan in the health insurance exchange in your state. Subsidy eligibility extends well into the middle class. A single person can be eligible for subsidies with an income (ACA-specific Modified Adjusted Gross Income or MAGI) of up to $49,960 in 2020, and a family of four can qualify for subsidies with an income of $103,000 in 2020. Subsidies aren't available for grandfathered plans, so switching to a new plan might result in more robust coverage with a lower net premium.