Proposed Rule Released on Short-Term, Limited-Duration Insurance and Fixed Indemnity Coverage
August 2, 2023
On July 7, 2023, the Departments of Labor, Health and Human Services, and the Treasury (Departments) released a proposed rule on certain types of health coverage that are not subject to the Affordable Care Act’s (ACA) consumer protections, including short-term, limited-duration insurance (STLDI) and fixed indemnity coverage.
The Departments are proposing changes to STLDI and fixed indemnity coverage to help consumers distinguish them from comprehensive health coverage and increase consumer awareness of coverage options that include the ACA’s consumer protections. These protections include, for example, the prohibition of discrimination based on health status, the prohibition of preexisting condition exclusions, and the prohibition of lifetime and annual dollar limits on essential health benefits.
The proposed rule would also clarify the tax treatment of certain benefit payments in fixed amounts received under employer-provided accident and health plans. In addition, the proposal solicits comments regarding specified disease excepted benefits coverage and level-funded health plans to help the Departments determine if additional guidance or rulemaking is needed in these areas.
STLDI is a type of health insurance coverage designed to fill temporary gaps in coverage when an individual is transitioning from one plan or coverage to another plan or coverage. STLDI is specifically exempt from the definition of “individual health insurance coverage” and, therefore, is not subject to the ACA’s requirements for comprehensive coverage.
Final rules from 2018 currently define STLDI as coverage with an initial contract period of less than 12 months and a maximum total duration of up to 36 months, including renewals and extensions. The proposed rule would limit the length of the initial contract period to no more than three months and the maximum coverage period to no more than four months, taking into account any renewals or extensions.
In addition, the proposed rule would:
- Prohibit a practice known as stacking, where the same insurer issues multiple STLDI policies to the same policyholder within a 12-month period; and
- Amend the consumer notice requirement to further clarify the differences between STLDI and comprehensive coverage and identify options for consumers to obtain comprehensive coverage.
The proposed rule includes a reminder that any health insurance sold in connection with employment is group health insurance coverage that must comply with the federal consumer protections in the group market, even if it purports to be STLDI.
Fixed Indemnity Excepted Benefits Coverage
Certain categories of coverage—called “excepted benefits”—are not subject to certain federal consumer protections, including the ACA’s requirement for comprehensive coverage. Fixed indemnity coverage is exempt from these protections because it is designed to provide a source of income replacement rather than full medical coverage.
The proposed rule would create additional requirements for fixed indemnity excepted benefits coverage to ensure that consumers can distinguish between this coverage and comprehensive medical coverage. The Departments’ proposed rule would:
- Require that fixed indemnity excepted benefits coverage in the individual market pay fixed benefits only on a per-period basis (and remove the current option for such coverage to pay fixed benefits on a per-service basis);
- Create new standards related to the payment of benefits under fixed indemnity excepted benefits coverage in the group market, including adding a new example to address the Departments’ proposed interpretation of the prohibition on coordination between fixed indemnity excepted benefits coverage and any group health plan maintained by the same plan sponsor; and
- Require a consumer notice to be provided when offering fixed indemnity excepted benefits coverage in the group market.
Tax Treatment of Fixed Indemnity Health Plans
The proposed rule would clarify that payments from employer-provided fixed indemnity health insurance plans (and other similar plans) are not excluded from a taxpayer’s gross income if the amounts are paid without regard to the actual amount of any incurred medical expenses and where the premiums or contributions for the coverage are paid on a pre-tax basis. Additionally, the proposed rule would clarify that the taxpayer must meet substantiation requirements for reimbursements for qualified medical expenses from any employer-provided accident and health plan to be excluded from the taxpayer’s gross income.
To determine whether additional guidance or rulemaking is needed, the Departments are requesting comments on:
- Coverage for only a specified disease or illness (for example, cancer-only policies); and
- Level funded health plans.
Written comments must be received by September 11, 2023, to be considered
The above information does not constitute advice. Always contact your employee benefits broker or trusted adviser for insurance-related questions.
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