Final Rules Issued on Fixed Indemnity Coverage and Short-Term Limited-Duration Insurance Includes New Group Plan Notice Requirement

The final rules follow several Biden Administration Executive Orders, which direct the departments to review policies for consistency with the goals of strengthening ACA protections and providing access to affordable, comprehensive healthcare. The Biden Administration also seeks to ensure individuals understand their coverage options so they do not unknowingly purchase low-quality coverage (referred to as “junk insurance”) that may result in burdensome household medical debts. Accordingly, the final rules impose new restrictions on coverage not fully subject to the ACA mandates, such as preventive care requirements, annual and lifetime limits, and prohibitions on pre-existing condition exclusions (known as “excepted benefits”).

First, the final rules reaffirm that in order to qualify as excepted benefits, fixed indemnity policies must pay benefits per day (or other time period) of hospitalization or illness regardless of the expenses incurred, medical services received, or illness severity. Group coverage that pays benefits on a per medical item or service basis would not be considered an excepted benefit. While the proposed rules were poised to amend certain requirements on coordination of benefits (with respect to exclusions or payments) between an employer’s fixed indemnity policy and group health plan, the final rules did not include these changes, citing the need for additional time to study the concerns raised by commenters.

The final rules explain that while fixed indemnity insurance is designed to provide income replacement in the event of a hospitalization or illness, policies sold today often include certain features resembling comprehensive coverage (e.g., benefits paid based on receipt of a medical service or directly to a healthcare provider). To address this, the final rules add a required consumer protection notice be provided to employees in relation to group fixed indemnity excepted benefits coverage, applicable to plan years beginning on or after January 1, 2025. The notice is designed to highlight the differences between fixed indemnity excepted benefits and comprehensive major medical coverage and must be prominently displayed in any marketing, application, and enrollment materials. Insurers can satisfy this new notice requirement on behalf of the plan sponsor.

Second, the final rules require short-term limited duration insurance (STLDI) to be truly short-term. STLDI is health insurance primarily designed to fill temporary gaps in coverage when an individual is transitioning from one plan or coverage to another, such as during a waiting period for a new employer’s plan. Under the ACA, STLDI is not health insurance, so it is not subject to certain ACA protections (e.g., prohibitions on exclusions for pre-existing conditions, discrimination based on health status, or dollar limits on essential health benefits). Specifically, the final rules change the maximum duration of STLDI policies to four months (a three-month initial term with a one-month extension or renewal permitted within a year of the original effective date). This proposed duration is much shorter than the current 36-month maximum permitted under a 2018 Trump Administration rule. The final rules also update the STLDI notice requirements to highlight coverage limitations in concise, easy-to-understand, and prominently displayed language. To further consumer protection, the notice must be included in any marketing, application, and enrollment materials.

The departments declined to finalize proposed rules on the tax treatment of employer-provided fixed indemnity accident or health insurance plans (including hospital indemnity and specified disease coverage), citing the need for additional time to study the concerns raised by commenters. In addition, while the proposed rules requested comments on the design and operation of specified disease coverage (e.g., cancer insurance) and level-funded plan arrangements, no new guidance has been provided.

Employers should consult with their advisors regarding any potential future impact on their coverage offerings, including confirming that their plan’s fixed indemnity insurer will satisfy the new consumer protection notice requirement on behalf of the plan. Note that these final rules only partially addressed the proposed rules. Employers should continue to monitor Compliance Corner for updates regarding additional final rules or new related guidance.

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