The DOL, HHS, and IRS have jointly proposed regulations that would limit the permissible duration of short-term, limited-duration health insurance (STLDI). The proposals would also modify the conditions for certain fixed indemnity insurance to be considered an excepted benefit and clarify the tax treatment of certain benefit payments in fixed amounts received under employer-provided accident and health plans. As background, STLDI is designed to fill temporary gaps in coverage when an individual is transitioning from one source of coverage to another. Individual STLDI typically has higher out-of-pocket costs and covers fewer services than traditional insurance and is generally not subject to certain group health insurance mandates. Hospital indemnity or other fixed indemnity insurance is designed to pay a fixed cash amount after a health-related event. When certain requirements are met, it is considered independent, noncoordinated coverage that is an excepted benefit and is not subject to certain group health plan mandates. Here are highlights of the proposals:
- The proposed regulations would interpret “short term” to mean an initial coverage period of no more than three months and “limited duration” to mean a maximum coverage period of no more than four months (taking into account renewals or extensions). [EBIA Comment: The current rules allow an initial coverage period of fewer than 12 months, with renewals or extensions permitted for up to a total of 36 months (see our article).] Insurers would be prohibited from issuing multiple STLDI policies to the same individual within a 12-month period. The notice requirements would also be revised and enhanced. Noting that some STLDI policies are marketed as employer-sponsored coverage through group trusts and associations, the preamble warns that health insurance sold in connection with employment is subject to group health insurance mandates. However, no specific changes are proposed for STLDI sold through associations.
- Fixed Indemnity Insurance. To be considered an excepted benefit, hospital indemnity or other fixed indemnity insurance would have to pay benefits without regard to the actual or estimated amount of expenses incurred, services or items received, severity of illness or injury experienced, or other characteristics of a course of treatment; benefits could not be paid on any other basis, such as per-item or per-service. A proposed example would clarify that impermissible coordination occurs when fixed indemnity insurance is offered as a coverage option that is coordinated with an exclusion of benefits under the same employer’s group health plan.
- Tax Treatment. The proposals would clarify that payments from employer-provided fixed indemnity health insurance and similar plans are not excluded from a taxpayer’s gross income if the payments are made without regard to the actual amount of incurred medical expenses and premiums for the coverage were paid pre-tax. In addition, the proposals would clarify the substantiation requirements that must be met for medical expense reimbursements from employer-provided accident and health plans to qualify for exclusion from gross income. [EBIA Comment: Echoing a recent Chief Counsel Advice (see our article), the preamble includes a caution about arrangements “marketed as supplemental coverage that saves employers and employees money by avoiding employment taxes,” noting that some arrangements provide monthly payments, purportedly for medical expenses, even if medical expenses are not incurred or if the employee simply completes health-related activities.]
EBIA Comment: Although the STLDI and fixed indemnity proposals follow from a 2022 executive order and come as no surprise, they would have far-reaching implications for some benefit designs. Also worth noting is a comment request on level-funded plan arrangements. These self-insured arrangements—with set monthly plan sponsor payments to a service provider to cover estimated claims and administrative costs— are reportedly increasing, and the agencies seek to better understand their designs and whether additional guidance is needed to clarify the plan sponsor’s obligations. For more information, see EBIA’s Health Care Reform manual at Sections V.C.4.d (“Short-Term, Limited-Duration Insurance Is Generally Not Subject to PHSA Mandates”) and V.F (“Excepted Benefits: Certain Health FSAs, Dental, Vision, and Others”). See also EBIA’s HIPAA Portability, Privacy & Security manual at Section VI.F (“Excepted Benefits: Certain Health FSAs, Dental, Vision, and Others”) and EBIA’s Cafeteria Plans manual at Section X.B.1.c (“Coverage Under Specified Illness or Fixed Indemnity Policies”).
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