Healthcare Reform Updates

Departments Propose Rule on Limited Duration Insurance and Fixed Indemnity Excepted Benefits Coverage

 

On July 7, 2023, the DOL, HHS and IRS (the departments) issued a proposed rule (with an accompanying fact sheet) to amend certain requirements regarding limited duration insurance and excepted benefits coverage. The proposed rule also clarifies the tax treatment of fixed amounts received from accident and health coverage. Additionally, the departments are requesting comments regarding specific disease policies and level-funded plans.

The proposed rule follows several Biden Administration Executive Orders, which directed 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 sought 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 proposed rule imposes new restrictions on coverage not fully subject to the ACA mandates.

First, the proposed rule requires 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 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 requirements (e.g., prohibitions on exclusions for pre-existing conditions and discrimination based on health status).

Specifically, the proposed rule would 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. Additionally, the proposed rule updates STLDI notice requirements to highlight coverage limitations.

Second, the proposed rule changes the requirements for hospital and fixed indemnity plans to qualify as excepted benefits, which are not subject to certain ACA mandates (e.g., preventive care requirements or annual and lifetime limit prohibitions). Generally, to qualify as an excepted benefit, fixed indemnity coverage must pay a fixed amount per day or period under specified conditions (e.g., hospitalization or illness), be provided under a separate insurance policy, and not be coordinated with other employer group health coverage (e.g., with respect to exclusions or benefit payments). The proposed rule explains that fixed indemnity insurance is designed to provide income replacement in the event of a hospitalization or illness but notes that 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).

Therefore, the proposed rule reaffirms that fixed indemnity policies must pay benefits only on a per-period basis (without regard to medical services received, expenses incurred, illness severity or other treatment characteristics) to qualify as excepted benefits. That is, coverage that pays benefits on a per medical item or service basis would not be considered an excepted benefit. Additionally, the departments propose to require that a disclosure notice be provided to employees in relation to group market fixed indemnity excepted benefits coverage.

Third, the proposed rule clarifies the tax treatment of fixed amounts received through certain employment-based accident or health insurance, including hospital indemnity and specified disease coverage, which are paid without regard to the amount of medical expenses incurred. Specifically, if the premiums for the coverage are paid on a pre-tax basis through a cafeteria plan, such fixed amounts are not excludable from income and are subject to payroll taxes.

Fourth, the departments request comments regarding specified disease excepted benefits coverage, including benefit design features, data on policies sold and whether additional protections are needed to distinguish it from comprehensive coverage.

Finally, the departments request comments and data on level-funded plan arrangements to better understand their key features and characteristics and whether guidance is needed to clarify plan sponsors’ obligations regarding level-funded plan coverage.

Employers should be aware of the proposed regulations and consult with their advisors regarding any potential future impact on their coverage offerings. Comments can be submitted to the departments through September 11, 2023. Generally, the changes are proposed to apply to coverage sold or issued after the final rule’s effective date (with respect to plan years that begin on or after such date). However, later effective dates are proposed to apply to coverage sold prior to the final rule’s effective date. Employers should check Compliance Corner for additional updates regarding the proposed changes and final rule issuance.

Federal Register: Short-Term, Limited-Duration Insurance; Independent, Noncoordinated Excepted Benefits Coverage; Level-Funded Plan Arrangements; and Tax Treatment of Certain Accident and Health Insurance »
Fact Sheet »

PPI Benefit Solutions does not provide legal or tax advice. Compliance, regulatory and related content is for general informational purposes and is not guaranteed to be accurate or complete. You should consult an attorney or tax professional regarding the application or potential implications of laws, regulations or policies to your specific circumstances.

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