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Tri-Agencies Draw the Line on Short-Term, Limited-Duration Insurance
Practical Law Legal Update w-004-2192 (Approx. 6 pages)
Tri-Agencies Draw the Line on Short-Term, Limited-Duration Insurance
by Practical Law Employee Benefits & Executive Compensation
| Published on 31 Oct 2016 • USA (National/Federal) |
The Departments of Labor, Health and Human Services, and Treasury have issued final regulations addressing the meaning of short-term, limited duration insurance. The final regulations also provide standards under which travel insurance and supplemental health insurance coverage are considered excepted benefits.
On October 28, 2016, the Departments of Labor, Health and Human Services, and Treasury (Departments) issued final regulations governing short-term, limited duration insurance, travel insurance, similar supplemental coverage, excepted benefits, and the lifetime and annual limit rules under the Affordable Care Act (ACA).
The regulations, which finalize (in part) proposed regulations issued in June 2016, apply to group health plans and health insurers for plan years beginning on or after January 1, 2017 (see Legal Update, Expatriate Health Plan Rules Address ACA Information Reporting, Code Section 162(m)(6), and More).
Short-Term, Limited-Duration Insurance
Short-term, limited-duration insurance is health insurance coverage intended to fill temporary gaps in coverage when an individual transitions from one plan (or coverage) to another. Although short-term, limited-duration insurance is not an excepted benefit (see Legal Update, Final Excepted Benefit Rules Address Limited Wraparound Coverage), it is exempt from requirements under the Public Health Service Act (PHSA) (regarding the PHSA's requirements, see Practice Note, Grandfathered Health Plans Under the ACA: ACA Provisions That Do Not Apply to Grandfathered Plans).
The final regulations address the Departments' concerns that short-term, limited-duration insurance is being sold as primary coverage and for periods longer than the governing 12-month coverage limit. This is problematic, in the Departments' view, because short-term, limited-duration insurance may impose restrictions that are not allowed for other coverage, including:
- Lifetime and annual dollar limits on essential health benefits (EHBs) (see Practice Note, Lifetime Limits, Annual Limits, and Essential Health Benefits Under the ACA).
- Preexisting condition exclusions (see Practice Note, Preexisting Condition Exclusions and Rescissions Under the ACA).
As a result, the final regulations define short-term, limited-duration insurance as health insurance:
- Provided under a contract with an insurer.
- That has an expiration date specified in the contract (and reflecting any extensions that may be elected with or without the insurer's consent) that is less than three months after the contract's original effective date.
This definition is intended to address the Departments' concern that some insurers were either:
- Automatically renewing short-term, limited duration policies.
- Using a simplified reapplication process so that the coverage would last longer than 12 months and serve as an individual's primary health coverage (notwithstanding that the coverage may lack certain ACA protections).
Notice Requirement
In addition, a short-term, limited duration insurance contract and any application materials provided in connection with enrollment in this insurance must prominently display the following language in at least 14-point type:
THIS IS NOT QUALIFYING HEALTH COVERAGE ("MINIMUM ESSENTIAL COVERAGE") THAT SATISFIES THE HEALTH COVERAGE REQUIREMENT OF THE AFFORDABLE CARE ACT. IF YOU DON’T HAVE MINIMUM ESSENTIAL COVERAGE, YOU MAY OWE AN ADDITIONAL PAYMENT WITH YOUR TAXES.
Regarding minimum essential coverage and the ACA's individual mandate, see Practice Notes, Affordable Care Act (ACA) Overview and Employer Mandate Under the ACA: Overview: Minimum Essential Coverage.
Applicability Date
The Departments' revised definition of short-term, limited-duration insurance applies for policy years beginning on or after January 1, 2017. The Departments acknowledged, however, that some states may have approved short-term, limited duration insurance products for sale in 2017 that met the definition in effect before January 1, 2017. As a result, the Department of Health and Human Services (HHS) will not take enforcement action against an insurer regarding its sale of a short-term, limited-duration insurance product before April 1, 2017 (that is, on the ground that the coverage period is three months or more). To take advantage of this enforcement relief, however, the coverage must:
- End on or before December 31, 2017.
- Otherwise comply with the definition of short-term, limited duration insurance in effect under the regulations.
In addition, the states may choose not to take enforcement action against insurers regarding such coverage sold before April 1, 2017.
Excepted Benefits
Certain provisions under the Employee Retirement Income Security Act (ERISA), the Internal Revenue Code (Code), and the PHSA do not apply to "excepted benefits" (see Legal Update, Final Excepted Benefit Rules Address Limited Wraparound Coverage). The final regulations address whether supplemental coverage and travel insurance qualifies as an excepted benefit.
Supplemental Coverage
Under existing guidance, supplemental coverage is considered an excepted benefit if, among other requirements, it is specifically designed to fill gaps in primary coverage (for example, coinsurance or deductibles).
Under the final regulations, which reflect ACA FAQs (February 2015) on this issue, group or individual supplemental health insurance that covers items and services not included in primary coverage is considered to fill the gaps in primary coverage for purposes of being supplemental excepted benefits. This assumes that none of the benefits under the supplemental policy are EHBs under the ACA (29 C.F.R. § 2590.732(c); see Practice Note, Lifetime Limits, Annual Limits, and Essential Health Benefits Under the ACA).
However, if any benefit provided by the supplemental policy is either included in the primary coverage or is an EHB in the state where the coverage is issued, the insurance coverage is not supplemental excepted benefits under the final regulations.
Travel Insurance
The Departments have indicated that some travel insurance products may include limited health benefits, though the products typically are not designed as major medical coverage. The final regulations define "travel insurance" as insurance coverage for personal risks incidental to planned travel, which may include:
- Interruption or cancellation of a trip or event.
- Loss of baggage or personal effects.
- Damages to accommodations or rental vehicles.
- Sickness, accident, disability, or death occurring during travel, provided that the health benefits are not offered on a stand-alone basis and are incidental to other coverage.
Under this definition, however, travel insurance excludes major medical plans that provide comprehensive medical protection for travelers with trips lasting six months or longer (for example, those working overseas as an expatriate or military personnel being deployed).
The final regulations classify travel insurance as an excepted benefit under the first general category of excepted benefits (that is, consisting of benefits that are not generally health coverage, such as automobile insurance and accidental death and dismemberment (AD&D) coverage).
EHB Definition Under the ACA's Lifetime and Annual Limit Prohibition
The rules implementing the ACA's lifetime and annual limit prohibition reference selection of a "base-benchmark" plan for determining which benefits cannot be subject to lifetime or annual dollar limits (see Practice Note, Lifetime Limits, Annual Limits, and Essential Health Benefits Under the ACA and Legal Update, Final HHS Rules Address Essential Health Benefits and Required Cost-Sharing). According to the Departments, however, the base-benchmark plan selected by a state may not reflect the complete definition of EHB in a particular state.
As a result, the final regulations amend the lifetime and annual limit rules to reflect a fuller definition of EHB. Specifically, the final regulations:
- Reflect the possibility that base-benchmark plans, including the Federal Employees Health Benefit Program (FEHBP) plan options, could require supplementation.
- Include state-required benefit mandates enacted on or before December 31, 2011, which, when coupled with a state's EHB-benchmark plan, establish the definition of EHB in a particular state.