QUESTION: We are a plan sponsor and want to make sure we understand the rules around rescinding health coverage. Under what circumstances may we rescind a participant’s health plan coverage, and what steps must we follow if we do?
ANSWER: Group health plans and insurers are prohibited from rescinding an individual’s coverage except in cases where the individual has engaged in fraud or made an intentional misrepresentation of material fact, as prohibited by the terms of the plan. Advance notice is required. A “rescission” is a cancellation or discontinuance of coverage that has retroactive effect. But a retroactive cancellation or discontinuance of coverage is specifically not considered a rescission if (1) it is effective retroactively to the extent attributable to a failure to timely pay required premiums or contributions toward the cost of coverage; or (2) it is initiated by the individual, and the plan sponsor or insurer does not, directly or indirectly, take action to influence the individual’s decision or otherwise take any adverse action or retaliate against, interfere with, coerce, intimidate, or threaten the individual.
A rescission is permissible only if a covered individual commits fraud or makes an intentional misrepresentation of material fact, as prohibited by the terms of the plan. The regulations do not define “material fact,” but indicate that inadvertent misstatements or plan errors would not be considered fraud or intentional misrepresentation of material fact. The regulations make clear that a mistake, by the plan or the participant, is not the same as fraud or intentional misrepresentation of material fact. Plans are permitted to correct errors, such as mistakenly covering a part-time employee, by canceling coverage prospectively, but not by retroactively rescinding coverage unless there was some fraud or intentional misrepresentation by the individual.
Even when fraud or misrepresentation is established, procedural requirements must be followed. The plan or insurer is required to provide at least 30 days’ advance written notice to each participant who would be affected before coverage may be rescinded. And a rescission of coverage is considered an adverse benefit determination, triggering the application of ERISA’s claims and appeals procedures.
Importantly, a retroactive termination of coverage is only permissible if the plan document provides notice of when rescission is possible. Thus, the plan document, summary plan description, and other participant communications should clearly state that the plan may rescind coverage due to fraud or intentional misrepresentation of material fact and define what constitutes fraud and what will be considered an intentional misrepresentation of material fact that will trigger the right to rescind coverage.
For more information, see EBIA’s Health Care Reform manual at Section X.D (“Prohibition on Rescissions”) and EBIA’s ERISA Compliance manual at Section XXXIV.D (“Definitions for Group Health Claims Procedures”).
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