Introduction
The Department of Labor (DOL), Department of Health and Human Services (HHS), and the Internal Revenue Service (IRS), [collectively, “the Departments”] have recently released proposed rules significantly changing coverage that can be provided by a short-term medical plan and addressing the definition of, and tax treatment of, fixed indemnity plans. The Departments are also requesting comments related to possible additional regulation of level-funded plans.
Short-Term Limited Duration Insurance “STLDI”
Background
Individual STLDI plans are not subject to the same requirements as comprehensive individual health insurance plans, and notably are allowed to exclude coverage for pre-exiting conditions.
For many years STLDI plans were limited to a 3-month maximum duration of coverage. In 2018, the Trump Administration issued new rules expanding STLDI plans to allow for coverage for up to 12 months, with two renewals allowed, effectively allowing for a maximum coverage period of up to 36 months. Many states impose more stringent limits on, or even prohibit, STLDI plans.
Proposed Rules
The proposed rules would again limit STLDI plans to a maximum of 3 months of coverage, with a 1-month extension allowed in some cases. A new expanded notice to individuals who purchase STLDI plan will also be required.
For new STLDI, meaning policies, certificates, or contracts of STLDI sold or issued on or after the effective date of the final rules, the maximum duration amendments to the definition of STLDI in these proposed rules would apply for coverage periods beginning on or after the effective date of the final rules.
However, for STLDI sold or issued before the effective date of the final rules, the current Federal definition of such coverage would continue to apply with respect to the maximum allowable duration.
Hospital and Fixed Indemnity Plans
Background
Hospital indemnity and fixed indemnity insurance plans pay a fixed amount for an occurrence for a specific condition and do not coordinate benefits with other insurance plans.
Their original purpose was to provide additional income to individuals experiencing certain medical events. Under current rules these plans are treated as an “excepted benefit” and are not subject to many of the rules and regulations that apply to comprehensive group or individual health insurance plans.
Regulators are concerned that some fixed indemnity type plans are being designed, and sold, to appear to consumers as if they are providing comprehensive coverage. The new rules would put additional restrictions on what types of plans can be treated as an excepted benefit.
Proposed Rules
To be treated as an excepted benefit, the indemnity plan would only be allowed to pay on a “per period” basis (such as per day of hospitalization) and would not be allowed to pay on a per service basis.
This change is designed to address plans that are being sold as excepted benefit indemnity plans but contain a significant list of “per service” payments that make them look more like a comprehensive fee-for-service health insurance plan.
The rules would also clarify that the indemnity plan could not be offered in conjunction with another medical plan in a manner that makes the indemnity plan payments contingent on the individual having other health coverage.
This change targets the proliferation of “preventive only MEC + indemnity coverage” plans that are being marketed as an alternative to comprehensive group health coverage. The rules would also require that a new expanded notice be provided to participants.
The effective date for these changes is as follows:
- New Group or Individual Coverage: Proposed amendments related to group or individual market fixed indemnity excepted benefits coverage would apply to new coverage that is sold or issued on or after the effective date of the final rules with respect to plan years that begin on or after such date.
- Existing Group Coverage: Proposed amendments related to group market fixed indemnity excepted benefit coverage would apply to existing coverage that is sold or issued before the effective date of the final rules with respect to plan years that begin on or after January 1, 2027. Provisions related to the notice would apply for plan years beginning on or after the effective date of the final rules
- Technical Amendments: Certain other technical amendments and a severability provision would apply to new and existing group market fixed indemnity excepted benefits coverage beginning on the effective date of the final rules.
Tax Treatment of Hospital Indemnity and Fixed Indemnity Plans
Proposed Rules
The IRS is also proposing amending existing regulations regarding the tax treatment indemnity plans which are offered to employees which are paid for through pre-tax contributions made by the employees through the employer’s section 125 cafeteria plan.
These regulatory changes clarify, and reflect, the IRS’s existing interpretation of taxation of indemnity plans that have been communicated in internal memos and sub regulatory guidance.
The regulatory change clarifies that if an employee pays for the coverage using pre-tax deductions from pay, any payment paid by a fixed indemnity plan, that were paid without regard for an actual 213(d) medical expenses incurred by the employee, would need to be treated as taxable compensation for income and payroll tax purposes.
The effective date of these changes will be the later of the date of publication of final rules or January 1, 2024.
Request for Comments on Level Funded Plans
Level funded health insurance plans are principally offered to small employers, that are treated as self-insured. As a self-insured plan they are exempt from some state insurance rules and regulations, and other rules that apply to fully insured small group health insurance.
There is some concern that level funded plans do not provide the same protections to employers and participants that is offered by fully insured small group health plans. The Departments are asking for comments on potential new federal rules that would apply to level funded plans.
Employer Summary
Comments on the proposed rules will be accepted up to 60 days after publication of the proposed rules in the Federal Register.
Employers will need to reconsider the practice of allowing employees to pay for fixed indemnity plans using pre-tax payroll deductions through the employer’s Section 125 plan. This practice could create significant tax consequences for both the employer and employee.
Another significant impact of these proposed rules will be to employers who offer one of the hybrid MEC/fixed indemnity type plans. Some of these plans may need to be significantly changed to meet the new requirements and retain their excepted benefit status. Employers would also be required to provide new notices to participants of these plans.
IMA will continue to monitor regulator guidance and offer meaningful, practical, timely information.
This material should not be considered as a substitute for legal, tax and/or actuarial advice. Contact the appropriate professional counsel for such matters. These materials are not exhaustive and are subject to possible changes in applicable laws, rules, and regulations and their interpretations.