This section of the final regulations provides most of the definitions used in the regulations implementing HIPAA. In addition to some minor restructuring of the April 1997 interim rules (i.e., some definitions have been moved into other sections of the regulations), some additional terms have been added. Among the new terms is the definition of the term dependent. Dependent is defined as any individual who is or may become eligible for coverage under the terms of a group health plan because of a relationship to a participant. This is intended to clarify that for purposes of HIPAA the terms of the group health plan determine which individuals are eligible for coverage as a dependent under the plan. Thus, for example, the plan terms control the age (if any) at which and conditions under which a child of a participant ceases to be eligible for coverage as a dependent. Moreover, whether an individual is eligible for special enrollment as a dependent is determined in part based on the plan’s definition of dependent.

This section of the final regulations addresses HIPAA’s limitations on a plan’s or issuer’s ability to impose a preexisting condition exclusion. Comments addressing this topic generally approved of the approach taken in the Departments’ April 1997 interim rules. Accordingly, these final regulations do not modify significantly the April 1997 interim rules but instead add several clarifications to the general framework already established. Also, some comments reflect a misunderstanding of the notice requirements for plans and issuers that impose a preexisting condition exclusion. Thus, these final regulations are restructured to clarify these notice obligations. In addition, an example in the regulations contains language that plans and issuers can use to satisfy the notice requirements.

In these final regulations, a preexisting condition exclusion continues to be defined broadly. A preexisting condition exclusion is any limitation or exclusion of benefits relating to a condition based on the fact that the condition was present before the effective date of coverage, whether or not any medical advice, diagnosis, care, or treatment was recommended or received before that day. This definition has been moved to this section on limitations on preexisting condition exclusions to emphasize the difference between the broadness of the definition and the narrowness of permissible preexisting condition exclusions. The definition has also been modified slightly from the previous definition and clarifications of its application have been added.

If a plan exclusion satisfies the definition of a preexisting condition exclusion, it is subject to the rules of this section for preexisting condition exclusions. Under the April 1997 interim rules, whether an exclusion is a preexisting condition exclusion is determined by whether the plan provision restricts benefits for a condition because it was present before the “first day of coverage.” These final regulations have replaced the term first day of coverage with effective date of coverage under a group health plan or health insurance coverage. In the case of a plan that changes health insurance issuers, “first day of coverage” can be read to mean only the first day of coverage under the plan and not the first day of coverage under the new issuer’s policy or contract (because “first day of coverage” is thus defined for purposes of determining the enrollment date). This reading would mean that an exclusion of benefits based on the fact that a condition existed before the effective date of coverage in the health insurance of the succeeding issuer would not be a preexisting condition (because it would not apply based on the fact that a condition existed before the first day of coverage under the plan). The phrase “effective date of coverage under a group health plan or health insurance coverage” under the final regulations thus applies to coverage either under a plan or health insurance coverage. Therefore, a provision used by a succeeding issuer to deny benefits for a condition because it arose before the effective date of coverage under the new policy would also fit the definition of a preexisting condition exclusion.

Since the April 1997 interim rules were published, several situations have repeatedly arisen in which a plan exclusion is not designated as a preexisting condition exclusion but nevertheless satisfies the definition of a preexisting condition exclusion. Examples have been added to illustrate some of these common plan provisions. These situations include a plan provision that provides coverage for accidental injury only if the injury occurred while covered under the plan, a plan provision that counts against a lifetime limit benefits received under prior health coverage, and a plan provision that denies benefits for pregnancy until 12 months after an individual generally becomes eligible for benefits under the plan.^[1] The regulations also include a series of examples relating to exclusions for congenital conditions. These examples illustrate that a plan that generally provides benefits for a condition cannot exclude benefits for the condition in instances where it arises congenitally without complying with these limitations on preexisting condition exclusions. However, these limitations would not apply if a plan excludes benefits for all instances of a condition, even if all instances are likely to be congenital. Plans and policies that contain these types of preexisting condition exclusions that are not designated as such should be modified to comply with HIPAA’s requirements for preexisting condition exclusions, or the exclusions should be deleted. In addition, because a preexisting condition exclusion discriminates against individuals based on one or more health factors, unless a preexisting condition exclusion complies with HIPAA’s limitations on preexisting condition exclusions, the plan provision will also violate the HIPAA nondiscrimination provisions.^[2]

In addition to modifying the definition of a preexisting condition exclusion, these final regulations set forth HIPAA’s limitations on preexisting condition exclusions, as follows:

The final regulations retain the 6-month look back rule set forth in the April 1997 interim rules. In addition, these regulations clarify that a plan or issuer can use a period shorter than 6 months for purposes of applying the 6-month look-back rule. Examples in these final regulations also clarify that if a doctor’s recommendation for treatment occurs before the 6-month look-back period, an individual can be subject to a preexisting condition exclusion only if the individual receives the recommended treatment within the 6-month look-back period.

The final regulations retain the rule set forth in the April 1997 interim rules that a preexisting condition exclusion is not permitted to extend for more than 12 months (18 months in the case of a late enrollee) after the enrollment date.

The final regulations retain the rule set forth in the April 1997 interim rules. Accordingly, under these final regulations, the period of any preexisting condition exclusion that would otherwise apply to an individual under a group health plan is reduced by the number of days of creditable coverage^[3] the individual has as of the enrollment date (not including any days before a significant break in coverage). Some comments asked how this rule applies to individuals who currently have coverage under another plan (that is, the coverage has not yet ended). An example clarifies that a plan or issuer must count all days of creditable coverage prior to an individual’s enrollment date, even if that coverage is still in effect.

The final regulations retain the statement that other legal standards may apply to group health coverage preexisting condition exclusions. In this connection, the Department of Labor’s Veterans’ Employment and Training Service (VETS) has commented that the Uniformed Services Employment and Reemployment Rights Act (USERRA) provides reemployment rights for persons who leave civilian employment to perform service in the uniformed services and prohibits employer discrimination against any person on the basis of the person’s military service, obligations, intent to join or certain other protected activities. In general, USERRA reemployment rights apply to persons who leave civilian employment to serve a single enlistment period in the active military or to employees who are members of the National Guard or Reserve and are required to perform intermittent military service or training. USERRA provides rights regarding both continuation of group health plan coverage by an employee who is absent to perform service in the uniformed services and reinstatement of group health plan coverage upon reemployment if the coverage was interrupted by the service. In response to this comment, the final regulations include a statement that USERRA can affect the application of a preexisting condition exclusion to certain individuals who are reinstated in a group health plan following active military service. For more information, a VETS directory and additional USERRA information is available at www.dol.gov/vets.

Both the 6-month look-back period and the maximum length of preexisting condition exclusion are measured with respect to an individual’s enrollment date. The final regulations generally retain the enrollment definitions that were set forth in the April 1997 interim rules (including definitions of enrollment date, waiting period, and late enrollee). Under HIPAA, the April 1997 interim rules, and these final regulations, the enrollment date is the first day of coverage under the plan or, if there is a waiting period, the first day of the waiting period. These final regulations clarify that if an individual receiving benefits under a group health plan changes benefit package options, or if the plan changes group health insurance issuers, the individual’s enrollment date remains the same.

The Departments received several comments reflecting confusion about the relationship between the preexisting condition exclusion rules and the definitions of enrollment date and waiting period. Accordingly, guidance concerning waiting periods previously located in the definitions section has been moved to this section of the regulations and expanded. In addition, the definition of waiting period has been modified with respect to individuals seeking individual market coverage. Specifically, these final rules clarify that if an individual seeks coverage in the individual market, a waiting period begins on the date the individual submits a substantially complete application for coverage and ends on either the date coverage begins (if the application results in coverage), or the date on which the application is denied by the issuer or the date on which the offer of coverage lapses (if the application does not result in coverage). Under the statute, the April 1997 interim rules, and these final regulations, the effect of considering this period a waiting period is that the period is not counted when determining the length of any break in coverage. This rule modifies the rule contained in the April 1997 interim rules (which provided a waiting period only if the individual actually obtained coverage). The modification addresses situations where some individuals have been denied individual market policies or individuals declined coverage because, for example, the policies had an exorbitant premium.

Additional examples illustrate the interaction between a waiting period and the 6-month look-back period, the application of the 6-month look-back and maximum preexisting condition exclusion period rules to plans with more than one benefit package option at open season, and the interaction between these rules and other eligibility criteria under the plan.

Under HIPAA, the April 1997 interim rules, and these final rules, a preexisting condition exclusion cannot be applied to pregnancy. Nor can a preexisting condition exclusion be applied to a newborn, adopted child, or child placed for adoption if the child is covered under a group health plan (or other creditable coverage) within 30 days after birth, adoption, or placement for adoption.

One comment noted that the rule for newborns in the April 1997 interim rules is expressed inconsistently. Some of those expressions are inconsistent with the rule for adopted children. Specifically, the rule for adopted children and one expression of the rule for newborns refers to eligibility being conditioned on being covered under any creditable coverage as of the last day of the 30-day period after birth, adoption, or placement for adoption. However, in other expressions of the rule for newborns, a reference is made to being covered under creditable coverage within 30 days after birth. These final regulations use one term consistently, referring to coverage within 30 days after birth, adoption, or placement for adoption. This accords with the conference report. H.R. Conf. Rep. No. 736, 104^th Cong. 2d Session 184-185 (1996). Consequently, if, for example, a child is covered within 30 days of birth, the child cannot be subject to a preexisting condition exclusion even if the child is no longer covered under the plan on the 30^th day after birth (unless the child has a significant break in coverage).

Several comments noted that state laws applicable to health insurance issuers sometimes require that a mother’s health coverage must provide benefits for health care expenses incurred for the child for a specified period following birth and cannot be recouped even if the child never enrolls in the plan under which the mother is covered. A new example clarifies that, in this situation, the child has creditable coverage within 30 days after birth and, therefore, no preexisting condition exclusion may be imposed on the child unless the child has a subsequent significant break in coverage.

Finally, HIPAA, the April 1997 interim rules, and these final regulations provide that a group health plan, and a health insurance issuer offering group health insurance coverage, may not impose a preexisting condition exclusion relating to a condition based solely on genetic information. Comments expressed concern that the definition of genetic information in the April 1997 interim rules was too broad and would prevent the application of a preexisting condition exclusion to conditions that would be otherwise permitted independent of any genetic information. Although these regulations have not changed the definition of genetic information, the regulations clarify that if an individual is diagnosed with a condition, even if the condition relates to genetic information, the plan may impose a preexisting condition exclusion with respect to the condition, subject to the other limitations of this section. This rule was located in the definition of medical condition in the April 1997 interim rules. Some comments indicated this rule was difficult to locate. Thus, it has been moved to this section, and an example illustrating the rule has been added.

Under these final regulations, as with the April 1997 interim rules, a group health plan imposing a preexisting condition exclusion, and a health insurance issuer offering group health insurance coverage under a plan imposing a preexisting condition exclusion, must provide a written general notice of preexisting condition exclusion before it can impose a preexisting condition exclusion.

After publication of the April 1997 interim rules, the Departments received questions about the operation of this requirement. The April 1997 interim rules provided that a plan or issuer could not impose a preexisting condition exclusion with respect to a participant or dependent before providing the general notice to the participant. Several comments asked whether plans and issuers could delay providing the general notice until a large claim was filed and then pend the claim until the general notice was sent. Other comments expressed concern that if plans do not notify individuals upon enrollment about the benefit exclusions that apply to their coverage, individuals will not be able to make informed decisions about their health care choices.

The Departments had contemplated under the April 1997 interim rules that individuals should be provided the information required in the general notice before they incurred claims that could be denied under a preexisting condition exclusion. These final regulations clarify the procedural requirements for the general notice of preexisting condition exclusion. Specifically, under the final regulations, the general notice of preexisting condition exclusion must be provided as part of any written application materials distributed by the plan or issuer for enrollment. If the plan or issuer does not distribute such materials, the notice must be provided by the earliest date following a request for enrollment that the plan or issuer, acting in a reasonable and prompt fashion, can provide the notice. Moreover, regarding the content of this general notice, the final regulations clarify precisely what is required when disclosing the existence and terms of the plan’s preexisting condition exclusion. In addition, these final regulations require the notice to include the person to contact (including an address or telephone number) for obtaining additional information or assistance regarding the preexisting condition exclusion. An example in these final regulations sets forth sample language that plans and issuers can use when developing the general notice for their coverages.

Issuers that sell different policies to different plans should also be aware that when describing the existence and terms of the maximum preexisting condition exclusion period, the issuer must describe to individuals the actual maximum exclusion period under their policy. Therefore, if an issuer sells two policies, one with a 6-month and one with a 12-month maximum preexisting condition exclusion, the issuer could not send one notice to individuals under both policies indicating that the maximum preexisting condition exclusion is 12 months. Instead, the issuer is required to send one notice to participants under the policy with the 6-month preexisting condition exclusion (indicating that the maximum exclusion period is 6 months) and a different notice to participants under the policy with the 12-month preexisting condition exclusion (indicating that the maximum exclusion period is 12 months).

These final regulations require a plan or issuer that imposes a preexisting condition exclusion to make a determination of creditable coverage within a reasonable time after receiving information regarding prior health coverage. This rule was included in the section of the April 1997 interim rules addressing certification and disclosure of previous coverage, and it has been moved to this section on preexisting condition exclusions unchanged. These final regulations clarify that a plan or issuer may not impose any limit on the amount of time that an individual has to present a certificate or other evidence of creditable coverage.^[4]

These final regulations retain the requirement to provide an individual a written notice of the length of preexisting condition exclusion that remains after offsetting for prior creditable coverage. These final regulations clarify that this individual notice is not required to identify any medical conditions specific to the individual that could be subject to the exclusion. Also, a plan or issuer is not required to provide this notice if the plan or issuer does not impose any preexisting condition exclusion on the individual or if the plan’s preexisting condition exclusion is completely offset by the individual’s prior creditable coverage. These final regulations add a new example that illustrates how the notice works and includes sample language that may be helpful to plans and issuers in developing this type of notice with respect to their coverage.

Consistent with the April 1997 interim rules, these final regulations do not prevent a plan or issuer from modifying an initial determination of creditable coverage if it determines that the individual did not have the claimed creditable coverage and if certain procedural requirements are met. The final regulations have been slightly reorganized and modified to make clearer that a plan or issuer is permitted to modify its initial determination if a notice of the new determination (that meets the requirements of the second, individual notice of preexisting condition exclusion, described above) is provided and, until the notice of the new determination is provided, the plan or issuer acts in a manner consistent with the initial determination for purposes of approving access to medical services (such as pre-surgery authorization).

This section of the final regulations describes the varieties of health coverage that constitute creditable coverage and sets forth rules for how to count creditable coverage for purposes of the rule requiring plans and issuers to offset the maximum length of a preexisting condition exclusion by prior creditable coverage.

The rules in the final regulations describing the varieties of health coverage that constitute creditable coverage generally follow the April 1997 interim rules, with two modifications. The April 1997 interim rules contain ten categories of creditable coverage. After publication of the April 1997 interim rules, Congress created the State Children’s Health Insurance Program (S-CHIP), which allows states to provide health coverage to eligible children through Medicaid expansion or private market mechanisms. This coverage meets the definition of creditable coverage as either Medicaid coverage, group health plan coverage, or health insurance coverage. In addition, Congress specifically provides^[5] that S-CHIP coverage is creditable coverage under HIPAA. Therefore, these final regulations have added coverage under S-CHIP as an eleventh category of creditable coverage.

The second modification is to the definition of public health plan. This definition has been changed in two ways. The first change relates to the type of health coverage provided by a public health plan. The statute does not define the term. The April 1997 interim rules limit the definition of public health plans to certain plans provided through health insurance coverage. Some comments suggested it was unnecessary to restrict the definition to insured coverage and argued that the term public health plan should be expanded. These final regulations delete the word “insurance” from that requirement so that any health coverage provided by a governmental entity, regardless of whether it has the risk-shifting or risk-distributing effects of insurance, is a public health plan.

The second change to the definition of public health plan relates to the type of governmental entity that can establish or maintain a public health plan. Under the April 1997 interim rules, only health coverage provided under a plan established or maintained by a state, a county, or another political subdivision of a state can be a public health plan. This definition does not include a plan established or maintained by a foreign government or the U.S. government. The preamble to the April 1997 interim rules specifically solicited comments on whether public health systems of foreign countries should be considered public health plans.

Many comments addressed this issue, arguing both for and against including public health systems of foreign governments in the definition of public health plan. The comments in favor of inclusion argued that generally the health coverage provided through public health systems in foreign countries is more comprehensive than that received in this country. Some comments argued that the exclusion of foreign public health systems from the definition of public health plan arbitrarily penalizes individuals who maintain continuous health coverage through a foreign public health system. The comments against inclusion focused on the difficulty for a plan or issuer to verify whether someone had the coverage they claimed under a foreign public health system.

Under these final regulations, the definition of a public health plan includes health coverage provided under a plan established or maintained by a foreign country or a political subdivision. While this result can inconvenience plans and issuers, verifying this type of coverage may be no more inconvenient than verifying certain other types of coverage, such as group health coverage provided through foreign employers. In addition, this result is much less inequitable than denying an individual coverage for a preexisting condition in a case in which the individual can provide reliable evidence of having coverage under the public health system of a foreign government. Under the rules for establishing creditable coverage in the absence of a certificate of creditable coverage, an individual is required to present at a minimum some corroborating evidence of the claimed creditable coverage and is required to cooperate with a plan’s or issuer’s efforts to verify coverage. Thus, in the case of an individual claiming coverage under the public health system of a foreign country, a plan or issuer could require some evidence of residency in the foreign country (or evidence that some other eligibility standard had been met) and the individual would have to cooperate with the plan’s or issuer’s efforts to verify that the individual had coverage under that country’s health system.

Under the revised definition in these final regulations, health coverage provided under a plan established or maintained by the U.S. Government is also a public health plan.

The rules in the final regulations for how to count creditable coverage are adopted with stylistic and conforming changes from the April 1997 interim rules. In addition, a technical modification was added, as required by a statutory change made by the Trade Act of 2002 (“the Trade Act”, Public Law 107-210, enacted on August 6, 2002). Under the Trade Act, workers whose employment is adversely affected by international trade may become entitled to receive trade adjustment assistance (TAA) and a 65% health coverage tax credit (HCTC). The Trade Act also amended COBRA continuation coverage provisions in ERISA, the Public Health Service Act, and the Internal Revenue Code, to provide a second opportunity to elect COBRA for individuals who are eventually determined to qualify for TAA, but who did not elect COBRA after their original loss of health coverage. Because this could result in a “significant break in coverage” for purposes of HIPAA, the Trade Act specifies that the period beginning with the loss of coverage, and ending on the first day of the second election period, for individuals who elect COBRA during this second election period, should be disregarded for purposes of the HIPAA pre-existing condition provisions. Accordingly, as required by the Trade Act, under these final rules the days between the date an individual lost group health plan coverage and the first day of the second COBRA election period are not taken into account in determining whether a significant break in coverage has occurred. For more information on TAA, contact the Department of Labor’s Employment and Training Administration at 877-US2-JOBS or at www.doleta.gov/tradeact. For more information on the HCTC, contact the IRS toll-free at 866-628-4282.

The existing examples relating to the tolling of the period for determining a significant break in coverage in the case of individuals seeking coverage in the individual market have also been modified to conform to the change in the definition of waiting period, which under these final regulations includes the period beginning when an individual submits a substantially complete application for coverage in the individual market and ends when the application is denied or when the offer of coverage lapses. In addition, here, as throughout these final regulations, references in the April 1997 interim rules to “plan or policy” have been revised so that the reference includes health insurance coverage not offered through a policy of insurance, such as health insurance coverage offered through a contract of a health maintenance organization.

Published elsewhere in this issue of the Bulletin is a proposed rule that provides that the period that determines whether a significant break in coverage has occurred (generally 63 days) is tolled in cases in which a certificate of creditable coverage is not provided on or before the day coverage ceases. In those cases, the significant-break-in-coverage period would be tolled until a certificate is provided or, if earlier, until 44 days after the coverage ceases.

These final regulations retain the methods in the April 1997 interim rules for counting creditable coverage, that is, the standard method and the alternative method. Comments requested that the alternative method be expanded so that a plan or issuer could elect to have it apply to categories in addition to the five categories prescribed in the April 1997 interim rules (mental health; substance abuse treatment; prescription drugs; dental care; and vision care). The types of categories described in the comments were significant differences in deductibles, cost-sharing, or out-of-pocket maximums between plans. One comment suggested that any comparison between plans on the basis of difference in deductibles or cost sharing was unworkable.

It is the view of the Departments that a comparison between plans, and allowing one plan not to count creditable coverage (in whole or in part) under another plan, based solely on differences in deductibles or in some other cost-sharing mechanism or in all cost-sharing mechanisms, is an insufficient basis for determining the comparative value of benefits under the plans. A plan with a low deductible or low co-payments might also have an annual or per-incident limit on benefits so low as to make the plan with the higher deductible or higher cost sharing actually more valuable. Similarly, a plan with a higher deductible or coinsurance might also have a higher table of usual, customary, and reasonable costs, might be much more liberal in covering treatments considered experimental, and might provide a much broader base of benefits than the plan with the lower deductible or coinsurance. Because of the numerous ways that plans or issuers can limit the amount of benefits available under the plan, it is very complicated to compare the value of one plan or coverage with another. Singling out one or several of these features is insufficient for making a true comparison of the value of the benefits.

This section of the final regulations sets forth guidance regarding the certification requirements and other requirements for disclosure of information relating to prior creditable coverage. The provision of a certificate and certain other disclosures of information provided for in the statute, the April 1997 interim rules, and these final regulations are intended to enable an individual to establish prior creditable coverage for purposes of reducing or eliminating any preexisting condition exclusion imposed on the individual by any subsequent group health plan coverage. The Departments received generally favorable comments on the April 1997 interim rules from interested parties who submitted comments with regard to the certification requirements. For example, several comments praised the Departments’ promulgation of a model certificate in the April 1997 interim rules as a vehicle that helped reduce compliance burdens associated with the statutory requirements under HIPAA.

These final regulations retain the requirement that the certificate must generally be provided in writing. The April 1997 interim rules clarified that for this purpose a writing included any form approved by the Secretaries as a writing. These final regulations modify that standard to include any other medium approved by the Secretary. As with the April 1997 interim rules, these final regulations provide that where an individual requests that the certificate be sent to another plan or issuer instead of the individual, and the other plan or issuer agrees, the certification information may be provided by other means, such as by telephone.

The information required to be provided in a certificate under these final regulations is the same as required under the April 1997 interim rules with one addition. In response to recommendations made by the U.S. General Accounting Office (GAO)^[6] and several comments, the Departments have modified the April 1997 interim rules to require that an educational statement be provided as part of a certificate of creditable coverage in order to inform consumers of their HIPAA rights. Some comments stated that such educational language was not necessary, but indicated that if the Departments adopted such an approach they should provide language for compliance purposes. In response to the GAO recommendation, the Departments have amended the requirements for the certificate of creditable coverage in the final regulations to include the provision of an educational statement regarding certain HIPAA protections. Model educational language is provided in the model certificate (set forth below). This eliminates the burden on plans and issuers of developing language to satisfy this requirement.

The first model certificate below has been authorized by the Secretary of each of the Departments. The model educational statement is set forth under the heading “Statement of HIPAA Portability Rights.” Use of the model certificate by group health plans and group health insurance issuers will satisfy the requirements of paragraph (a)(3)(ii) of the regulations. The second model certificate below has been authorized by the Secretary of Health and Human Services. State Medicaid programs may use this version. Once these final regulations are applicable, use of the previously-published model certificate (published in the preamble to the April 1997 interim rules) will no longer satisfy paragraph (a)(3)(ii) of the regulations.

In addition to these model certificates, the Departments are publishing a different model certificate for group health plans and group health insurance issuers in the preamble to the proposed rules published elsewhere in this issue of the Bulletin. That model certificate includes in its educational statement an additional paragraph regarding coordination with rules under the Family and Medical Leave Act (FMLA). The Secretaries of the Departments authorize plans and issuers to use either model certificate in fulfillment of their obligations under paragraph (a)(3)(ii) of this section in the final regulations. State Medicaid programs may use either the model certificate below that is designated for Medicaid programs, or the model certificate in the proposed rules that is so designated and includes an additional paragraph on FMLA.

The April 1997 interim rules require plans and health insurance issuers to establish a procedure for individuals to request and receive certificates of creditable coverage. The Departments have received requests to clarify whether such procedures need to be in writing. These final regulations clarify that the procedures need to be in writing, helping to ensure that individuals are aware of their right to request a certificate and how to make the request.

In addition, the Departments have become aware that some plans and issuers believe they are not required to provide a certificate to individuals who request one while their coverage is still in effect. This requirement exists under the April 1997 interim rules. However, due to these questions being raised, the final regulations more explicitly state this requirement.

Under HIPAA, plans and health insurance issuers are required to issue certificates of creditable coverage (automatically, and upon request) to dependents who are or were covered under a group health plan. In response to comments, and in order to allow entities responsible for issuing certificates adequate time to modify their data collection systems, the Departments established a transitional rule in the April 1997 interim rules for providing dependent coverage information. Under this transitional rule, a group health plan or health insurance issuer that, after having made reasonable efforts, could not provide a certificate of creditable coverage for a dependent could satisfy the requirements for providing a certificate to the dependent by providing the name of the participant covered by the group health plan or health insurance issuer and specifying that the type of coverage described in the certificate was for dependent coverage (for example, family coverage or employee-plus-spouse coverage). This transitional rule was effective through June 30, 1998.

Under these final regulations, the transitional rule is no longer in effect and dependents are entitled to receive individualized certificates of creditable coverage under the same circumstances as other individuals. As with the April 1997 interim rules, these final regulations permit a single certificate of creditable coverage to be provided with respect to both a participant and the participant’s dependents if the information is identical for each individual. In addition, these final regulations retain the provisions of the April 1997 interim rules permitting the combining of information for families. As a result, in situations where coverage information is not identical for a participant and the participant’s dependents, these final regulations allow certificates for all individuals to be provided on one form if the form provides all the required information for each individual and separately states the information that is not identical.

Section 2791(a)(3) of the PHS Act provides that certain entities not otherwise subject to HIPAA’s requirements are to comply with the statutory certification of coverage requirements that apply to group health plans, with respect to providing certificates of creditable coverage for Medicare, Medicaid, TRICARE, and medical care programs provided through the Indian Health Service or a tribal organization. These rules further establish that such entities are required to comply with the general statutory requirement to provide certificates. However, the Departments recognize that these programs operate in a different manner than do private employment-based group health plans, nonfederal governmental group health plans, and health insurance issuers. In addition, the populations served by these programs are unique. Therefore, it may be appropriate to allow these programs to implement the certification process in a manner that addresses these unique characteristics and better serves the individuals covered by these programs, including requiring different information elements (for example, see the above model certificate of creditable coverage for use by state Medicaid programs). HHS will coordinate with the appropriate entities responsible for issuing these certificates and will issue separate guidance to these entities on how they must comply with the certification requirements.

Under HIPAA, the April 1997 interim rules, and these final regulations, a group health plan and a health insurance issuer offering group health insurance coverage are required to provide for special enrollment periods during which certain individuals are allowed to enroll (without having to wait until a late enrollment opportunity and regardless of whether the plan offers late enrollment). A special enrollment right can arise if a person with other health coverage loses eligibility for that coverage or employer contributions toward the other coverage cease, or if a person becomes a dependent through marriage, birth, adoption, or placement for adoption.

In order to qualify for special enrollment, an individual must be otherwise eligible for coverage under the plan. Being otherwise eligible for coverage means having met the plan’s substantive eligibility requirements (such as satisfying any waiting period, being in an eligible job classification, or working full time), regardless of whether the individual previously satisfied the plan’s procedural requirements for becoming enrolled (such as completing written application materials or providing them to the plan within a specified time frame) during any enrollment opportunity prior to special enrollment.

The special enrollment rules have been reorganized and clarified. As discussed below, the special enrollment rules have also been modified in response to comments.

A special enrollment right resulting from loss of eligibility for other coverage is available to employees and their dependents who meet certain requirements. As under the April 1997 interim rules, the employee or dependent must otherwise be eligible for coverage under the terms of the plan. When coverage was previously declined, the employee or dependent must have been covered under another group health plan or must have had other health insurance coverage. The plan can require that, when coverage in the plan was previously declined, the employee must have declared in writing that the reason was other coverage, in which case the plan must at that time have provided notice of this requirement and the consequences of the employee’s failure to provide the statement.

These regulations include an example that clarifies that the initial opportunity for enrollment (generally provided when employment begins) is not the only time when an individual with other health coverage may decline coverage for purposes of satisfying the prerequisites to special enrollment upon loss of other coverage. (Other examples discussed below also illustrate this principle.) An individual who initially did not enroll for coverage without having other health coverage might later be eligible for special enrollment. This could occur if, after subsequently enrolling in other coverage, the individual had an opportunity for late enrollment or special enrollment under the plan, but again chose not to enroll.

These final regulations, like the April 1997 interim rules, contain a list of situations when an individual loses eligibility for other coverage. While the list is not exhaustive, it has nonetheless been expanded in these final regulations to address situations that have prompted frequent questions. Thus, these regulations clarify that a loss of eligibility for coverage occurs, in the case of individual coverage provided through an HMO, when an individual no longer resides, lives, or works in the service area of the HMO (whether or not within the choice of the individual) and the HMO does not provide coverage for that reason. In the case of group coverage provided through an HMO, the same rule applies, provided that there is no other coverage under the plan available to the individual. For purposes of this rule, the HMO service area is typically defined by state law. In addition, the regulations clarify that a loss of eligibility for coverage occurs due to the cessation of dependent status. For example, a child who “ages out” of dependent coverage — who attains an age in excess of the maximum age for coverage of a dependent child — incurs a loss of eligibility for coverage for purposes of special enrollment.

The regulations also clarify that a loss of eligibility for coverage occurs when a plan no longer offers any benefits to a class of similarly situated individuals. Thus, if a plan terminated health coverage for all part-time workers, the part-time workers incur a loss of eligibility for coverage, even if the plan continues to provide coverage to other employees. An example in the final regulations also illustrates how the loss of eligibility rule applies to a plan that terminates a benefit package option. Similarly, if an issuer providing one of the options ceases to operate in the group market, thus terminating one of the options offered by the plan, the individuals formerly in the terminated option would incur a loss of eligibility for coverage for purposes of special enrollment, unless the plan otherwise provided a current right to enroll in alternative health coverage. In addition, the final regulations clarify that an employee who is already enrolled in a benefit package may enroll in another benefit package under the plan if a dependent of that employee has a special enrollment right in the plan because the dependent lost eligibility for other coverage.

These regulations clarify that a loss of eligibility for coverage is still considered to exist even if there are subsequent coverage opportunities. As under the April 1997 interim rules, an individual does not have to elect COBRA continuation coverage or exercise similar continuation rights in order to preserve the right to special enrollment. Moreover, a special enrollment right exists even if an individual who lost coverage elects COBRA continuation coverage. In that case, if an individual declines special enrollment, and instead elects and exhausts COBRA continuation coverage, the individual has a second special enrollment right upon exhausting the COBRA continuation coverage.

In addition, as under the statute and the April 1997 interim rules, even if there is no loss of eligibility for coverage, a special enrollment right can result when employer contributions towards other coverage terminate. This is the case even if an individual continues the other coverage by paying the amount previously paid by the employer.

Comments asked how the special enrollment rules apply when an individual reaches a lifetime limit on all benefits under a plan. The regulations clarify that where an individual has a claim denied due to the operation of a lifetime limit on all benefits, there is a loss of eligibility for coverage for special enrollment purposes. In this regard, an individual has a special enrollment right when a claim that would exceed a lifetime limit on all benefits is incurred, and the right continues at least until 30 days after the earliest date that a claim is denied due to the operation of the lifetime limit. Accordingly, because individuals who are keeping track of claims in relation to a lifetime limit can request enrollment immediately (after the claim is incurred, but before it is denied by the plan), the period for requesting special enrollment can be longer than 30 days. (Timeframes for providing certificates of creditable coverage and determining when COBRA is exhausted for individuals who have reached a lifetime limit on all benefits are set forth elsewhere in these final regulations, under the certificate and the definition provisions, respectively.)

Proposed rules, published elsewhere in this issue of the Bulletin, would toll the beginning of the 30-day period for requesting special enrollment until a certificate of creditable coverage is provided to the person losing coverage, up to a maximum of 44 days of tolling. This tolling rule would be in the paragraph reserved for special enrollment procedures in these final regulations.

Comments asked for clarification of the interaction of coverage for children under a State Children’s Health Insurance Program (S-CHIP) and special enrollment. In particular, it was asked whether a child would have a right to special enrollment in a group health plan if the child becomes eligible for benefits under S-CHIP and the child is otherwise eligible for dependent coverage under the plan. This situation would arise if a state creates a children’s health program that provides payments to a parent to cover the increased cost of enrolling a dependent child in the parent’s employer’s group health. However, without a special enrollment right, the parent might not be able to take advantage of the program until the next late enrollment opportunity, if the plan allows late enrollment at all. The statutory language of HIPAA, however, only provides special enrollment if there is loss of eligibility for other coverage, loss of employer contributions, or addition of a new dependent to the employee’s family. Becoming eligible under a health program such as S-CHIP does not fall under any of these categories.^[7]

Under these final regulations, as under the April 1997 interim rules, the special enrollment of dependents is subject to the plan’s general eligibility requirements. For example, a plan may require an employee to remain enrolled, or to special enroll, in order to special enroll the employee’s dependent. However, a plan’s general eligibility requirements cannot prevent the application of a special enrollment right. For example, a plan may not deny special enrollment to an otherwise eligible dependent merely because the individual became a dependent of the participant after the participant’s first day of coverage under the plan.

Under proposed rules, published elsewhere in this issue of the Bulletin, more detailed procedures are described for how plans and issuers would have to enroll individuals requesting special enrollment.

Where the special enrollment right results from marriage or a loss of eligibility, coverage generally begins no later than the first day of the first calendar month after the date the plan or issuer receives the request for special enrollment. Where the special enrollment right results from a birth, coverage must begin on the date of birth. In the case of adoption or placement for adoption, coverage must begin no later than the date of such adoption or placement for adoption.

The April 1997 interim rules provided a definition of the term special enrollment date. The purpose of the definition and accompanying examples was to illustrate that if an individual who qualified for special enrollment enrolled during a coinciding late enrollment opportunity, the individual could not be treated as a late enrollee. The final regulations eliminate the term special enrollment date and clarify this issue by providing that if an individual requests enrollment while the individual is entitled to special enrollment, the individual is a special enrollee, even if the request coincides with a late enrollment opportunity under the plan. Thus, the individual cannot be treated as a late enrollee.

The preamble to the April 1997 interim rules stated that a plan must provide a description of the special enrollment rights to anyone who declines coverage. However, the text of the April 1997 interim rules required the notice to be provided to all eligible employees. Even employees who enroll may need to avail themselves of their special enrollment rights in the future, either for a spouse or other dependent, or if they lose the present coverage. Thus, these regulations reiterate the requirement in the April 1997 interim rules that a plan must provide all employees (those who enroll as well as those who decline enrollment) with a notice of special enrollment at or before the time the employee is initially offered the opportunity to enroll in the plan. The regulation also provides model language that plans can use to satisfy this requirement.

HIPAA provides that a late enrollee does not include an individual who enrolls when first eligible or who enrolls during a special enrollment period. These regulations further clarify that individuals who enroll during a special enrollment period must generally be treated the same as individuals who enroll when first eligible. That is, relative to similarly situated individuals who enroll when first eligible, special enrollees must be offered all the same benefit packages, cannot be required to pay more for coverage, and cannot be subject to a longer preexisting condition exclusion.

Under HIPAA, the April 1997 interim rules, and these final regulations, a group health plan that offers health insurance coverage through an HMO, or an HMO that offers health insurance coverage in connection with a group health plan, may impose an affiliation period under certain conditions. An affiliation period is a period of time that must expire before health insurance coverage provided by an HMO becomes effective and during which time the HMO is not required to provide benefits. Under these final regulations, an affiliation period can be imposed if each of the following requirements is satisfied:

The requirements related to HMO affiliation periods contained in these final regulations clarify that a group health plan offering health insurance through an HMO or an HMO that offers health insurance coverage in connection with a group health plan may impose different affiliation periods, so long as the affiliation period complies with the requirements of the HIPAA nondiscrimination provisions. To illustrate this clarification, these final regulations contain an example where a group health plan that provides benefits through an HMO imposes an affiliation period with respect to salaried employees but does not impose an affiliation period with respect to hourly employees. This example illustrates that it is permissible to impose an affiliation period on salaried employees but not hourly employees, so long as treating these two groups differently complies with the requirements of the HIPAA nondiscrimination provisions.

The April 1997 interim rules and these final regulations specify that the affiliation period begins on the enrollment date (which is the first day of coverage under the plan, or if there is a waiting period for coverage under the plan, the first day of the waiting period), not when coverage under a particular benefit package option begins. Accordingly, an example in these final regulations illustrates that if a group health plan offers multiple benefit package options simultaneously, the HMO cannot impose an affiliation period on a plan participant who later switches to the HMO benefit package option, assuming the period of time that has elapsed since the enrollment date (during which the participant was covered under the first benefit package option) exceeds the duration of the HMO affiliation period. Moreover, these regulations clarify that, in the case of a late enrollee, the affiliation period begins on the day that would be the first day of coverage, but for the affiliation period.

The April 1997 interim rules and these final regulations allow an HMO to use alternative methods in lieu of an affiliation period to address adverse selection, as approved by the state insurance commissioner or other official designated to regulate HMOs. Because an affiliation period may be imposed only if no preexisting condition exclusion is imposed, an alternative to an affiliation period may not encompass an arrangement that is in the nature of a preexisting condition exclusion.

This section has been reserved. For proposed rules on the interaction with the Family and Medical Leave Act, see the Departments’ notice of proposed rulemaking, published elsewhere in this issue of the Bulletin.

This section of the final regulations contains special rules that apply for Chapter 100 of the Code, Part 7 of Subtitle B of Title I of ERISA (Part 7 of ERISA), and Title XXVII of the PHS Act. For ease in applying these rules, the definition of group health plan has been moved from the definitions section to this section (and the reference to employees in that definition has been modified to clarify that the term includes both current and former employees). New rules have been added for defining limited scope dental and vision benefits and for determining the extent to which benefits provided under a health flexible spending arrangement are excepted benefits. Special rules for partnerships have also been clarified.

A paragraph has been reserved in the final regulation for determining the number of plans an employer or employee organization maintains. For proposed rules on this topic, see the Departments’ notice of proposed rulemaking, published elsewhere in this issue of the Bulletin.

If an employer provides coverage to its employees through two or more individual policies, the coverage may be considered coverage offered in connection with a group health plan and, therefore, subject to the group market provisions under HIPAA. A determination of whether there is a group health plan depends on the particular facts and circumstances surrounding the extent of the employer’s involvement. For example, one significant factor in establishing whether there is a group health plan is the extent to which the employer makes contributions to health insurance premiums. The fact that health insurance coverage is provided through a contract regulated under state law as individual health insurance coverage does not necessarily prevent the coverage from being treated for HIPAA purposes as coverage sold in the group market. Similarly, the policy that provides the coverage does not have to be considered a “group” policy under state law in order for the group market requirements to apply. Further, the mere fact that an employer forwards employee payroll deductions to a health insurance issuer will not, alone, cause the coverage to become group health plan coverage. However, the employer need not be a party to the insurance policy, or arrange or pay for it directly, in order for its coverage to be considered group health plan coverage. For example, if an employer’s actions appear to endorse one or more policies offered by a health insurance issuer (or issuers), the coverage might be considered group health plan coverage.

Under HIPAA, the April 1997 interim rules, and these final regulations, the group market requirements do not apply to a group health plan or to group health insurance coverage offered in connection with a group health plan for any plan year if, on the first day of the plan year, the plan has fewer than two participants who are current employees. As noted in the preamble to the April 1997 interim rules, a state may apply some or all of the group market provisions in the PHS Act to health insurance issuers in connection with group health plans with fewer than two participants who are current employees on the first day of the plan year. In this case, to the extent the state applies its group market provisions to such insurance, the insurance would not be subject to the individual market requirements.

In the event a group health plan has two or more participants who are current employees on the first day of the plan year but the number of participants who are current employees drops below two during the plan year, under these final regulations the group market requirements continue to apply to the group health plan for the duration of the plan year.

To the extent a health insurance issuer offers group health insurance that is subject to HIPAA’s group health insurance requirements, HIPAA generally prohibits the issuer from terminating or failing to offer to renew the insurance (see 45 CFR 146.152). With respect to very small employers, whether group health insurance is subject to the requirements of 45 CFR 146.152 is generally determined by whether the group health plan has two or more participants who are current employees on the first day of the plan year. If so, the issuer generally must provide such coverage throughout the plan year, and is prohibited from terminating coverage in the midst of that plan year merely because the number of current-employee participants drops below two.^[8] However, an issuer is permitted to terminate an employer’s coverage in the midst of a plan year if the employer fails to satisfy any valid plan participation requirements in the midst of that plan year (see 45 CFR 146.152(a)(3)), including instances where such failure causes the number of current-employee participants to drop below two.

Under HIPAA, the April 1997 interim rules, and these final regulations, certain benefits are excepted from HIPAA in all circumstances, including coverage only for accident (including accidental death and dismemberment); disability income coverage; liability insurance, including general liability insurance and automotive liability insurance; coverage issued as a supplement to liability insurance; workers’ compensation or similar coverage; automobile medical payment insurance; credit-only insurance (for example, mortgage insurance); and coverage for on-site medical clinics.

Under HIPAA, the April 1997 interim rules, and these final regulations, limited scope dental benefits, limited scope vision benefits, and long-term care benefits^[9] are excepted if they are provided under a separate policy, certificate, or contract of insurance, or are otherwise not an integral part of a plan that is subject to these regulations. Benefits are not an integral part of such a plan if participants have the right not to elect coverage for the benefits, and if participants who elect such coverage must pay an additional premium or contribution for it. These regulations clarify that whether limited scope dental benefits, limited scope vision benefits, or long-term care benefits are provided through a plan that is subject to these regulations, or through a separate plan, is irrelevant to determining whether such benefits are an integral part of a plan that is subject to these regulations. Thus, if participants can decline coverage for the limited-scope benefits, and those electing such coverage must pay an additional premium or contribution, the limited scope benefits could be considered not to be an integral part of a plan that is subject to these regulations, even if such benefits are not provided through that plan.

These regulations define limited scope dental benefits as benefits substantially all of which are for treatment of the mouth (including any organ or structure within the mouth). These regulations also define limited scope vision benefits as benefits substantially all of which are for treatment of the eye. Thus, if benefits meet the definition of limited scope dental benefits or limited scope vision benefits, they will be excepted benefits if they satisfy the requirements set forth in these regulations.

These definitions were added in response to questions raised in comments about the prior guidance. The April 1997 interim rules did not define these terms. The preamble to the April 1997 interim rules suggested that the term limited scope dental benefits typically does not include medical services, such as those procedures associated with oral cancer or with a mouth injury that results in broken, displaced, or lost teeth. Similarly, the preamble to the April 1997 interim rules suggested that the term limited scope vision benefits does not include benefits for such ophthalmological services as treatment of an eye disease (such as glaucoma or a bacterial eye infection) or an eye injury. Comments indicated that typically most independent dental and vision coverages include benefits for these types of medical services. Accordingly, these regulations include definitions of limited scope dental benefits and limited scope vision benefits that reflect this market reality.

Some comments asked about the extent to which health flexible spending arrangements (FSAs) are subject to these regulations. A health FSA generally is a benefit program that provides employees with coverage under which specified, incurred expenses may be reimbursed (subject to reimbursement maximums and any other reasonable conditions) and under which the maximum amount of reimbursement that is reasonably available to a participant for a period of coverage is not substantially in excess of the total premium (including both employee-paid and employer-paid portions of the premium) for the participant’s coverage. Coverage and reimbursements provided to an individual under a group health plan that is a health FSA and that conforms to the generally applicable rules for accident or health plans qualify for the same tax-favored treatment that generally is extended to coverage and reimbursements under employer-provided accident or health plans. Health FSA reimbursements typically provide coverage for medical care expenses not otherwise covered by the employer’s primary group health plan. A health FSA is permitted to operate under a cafeteria plan described in section 125 of the Code. Pursuant to the rules of section 125, an employee can elect to reduce the employee’s salary in order to pay for health FSA coverage without the employee having to include that portion of the salary in gross income. Commonly, the maximum benefit payable under a health FSA for any year is equal to the amount of the employee’s salary reduction election for the year, plus any additional employer contribution for the year.

The April 1997 interim rules did not address the extent to which health FSAs qualify as excepted benefits. On December 29, 1997, a clarification to the April 1997 interim rules was published that specified the circumstances under which a health FSA qualifies as excepted benefits. (62 FR 67688) That clarification stated that benefits under a health FSA are treated as excepted benefits if the FSA meets certain requirements. Specifically, FSA benefits are treated as excepted benefits if the maximum benefit payable for the employee under the FSA for the year does not exceed two times the employee’s salary reduction election under the FSA for the year (or, if greater, the amount of the employee’s salary reduction election under the FSA for the year, plus $500). In addition, the employee must have other coverage available under a group health plan of the employer for the year, and that other coverage cannot be limited to benefits that are excepted benefits.

Based on section 9832(c)(2)(C) of the Code, section 733(c)(2)(C) of ERISA, and section 2791(c)(2)(C) of the PHS Act, these regulations adopt the December 29, 1997 guidance with some additional clarifications. Specifically, these regulations clarify that to be considered excepted benefits, a health FSA must meet the definition of a health FSA in section 106(c)(2) of the Code. Also, these regulations clarify that other group health plan coverage not limited to excepted benefits must be made available for the year to the class of participants by reason of their employment. Similarly, the maximum amount payable to any participant in the class for the year is the amount to consider when determining whether the maximum amount payable under the FSA for the year complies with the limit specified in the previous paragraph. Additionally, these regulations clarify that an employer credit under a health FSA that an employee can elect to receive as taxable income is considered an employee salary reduction election. However, if the employee cannot receive the employer credit as taxable income (that is, the credit is lost unless the employee uses the amount for nontaxable benefits under a cafeteria plan), then the amount is not considered an employee salary reduction election.

Section 1201 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Public Law No. 108-173, added section 223 to the Internal Revenue Code to permit individuals to establish Health Savings Accounts (HSAs). HSAs are established to receive tax-favored contributions and amounts in an HSA may be used to pay or reimburse qualified medical expenses. Questions have arisen concerning the application of HIPAA to HSAs.

In order to establish and contribute to an HSA, an individual must be covered by a High Deductible Health Plan (HDHP). An HDHP is a health plan that satisfies certain requirements with respect to deductibles and out-of-pocket expenses. An HDHP may be a group health plan sponsored by an employer or individual health insurance coverage purchased in the individual market. There is no provision in the HIPAA rules that excludes an HDHP, by virtue of qualifying as an HDHP, from the respective HIPAA requirements for group health plans or individual health insurance coverage. Generally, employer-sponsored HDHPs are employee welfare benefit plans. See Department of Labor Field Assistance Bulletin 2004-01 (FAB 2004-01), issued on April 7, 2004. Because an employer-sponsored HDHP provides medical care, it is generally subject to the portability requirements of HIPAA and the applicable regulations.

FAB 2004-01 concluded that HSAs, in contrast to HDHPs, generally will not constitute employee welfare benefit plans. See Department of Labor Field Assistance Bulletin 2004-01 (FAB 2004-01), issued on April 7, 2004. Because HSAs are generally not employee welfare benefit plans, the HIPAA portability requirements under ERISA or the PHS Act generally will not apply.

Moreover, the HIPAA portability requirements generally are not relevant for purposes of HSAs. Due to the rules imposed by the Internal Revenue Code with respect to HSAs, employers or HSA trustees do not have discretion with respect to the coverage provided by an HSA, both with respect to what expenses qualify for reimbursement as well as which individuals’ expenses are eligible. For example, expenses reimbursable by an HSA cannot generally be restricted by the employer or HSA trustee. Under the statute and administrative guidance, any expense incurred after an HSA is established is eligible for reimbursement, without restriction by an employer contributing to the HSA or trustee of the HSA. Thus, as a practical matter, whether or not an expense relates to a preexisting condition cannot determine the reimbursement. As such HSAs by design cannot impose a preexisting condition exclusion. Similarly, due to comparability rules requiring uniform contributions to HSAs by employers, employers and trustees generally cannot use differing amounts of contributions to impose a preexisting condition exclusion.

The eligibility for tax-free reimbursement from an HSA is also determined by statute; namely, the qualified medical expenses of the HSA owner and the HSA owner’s dependents incurred after the HSA is established may be reimbursed on a tax-free basis by the HSA. Special enrollment rules for dependent children or spouses are not relevant because once an HSA is established they are eligible for tax-free reimbursements immediately. With respect to special enrollment upon loss of coverage, the rules for employer contributions generally require that all employees who are eligible for HSA contributions and participating in the employer’s HDHP receive comparable HSA contributions. Thus, the combination of the comparability rules and the application of the special enrollment rules to the HDHP will generally ensure compliance with respect to employer HSA contributions because once an employee is enrolled in an employer-provided HDHP due to the special enrollment rules, the employer must make comparable contributions to the employee’s HSA.

Under HIPAA, the April 1997 interim rules, and these final regulations, hospital indemnity and other fixed-dollar indemnity insurance are excepted benefits if the benefits are provided under a separate policy, certificate, or contract of insurance; if there is no coordination of benefits between the provision of the benefits and an exclusion of benefits under any group health plan maintained by the same plan sponsor; and if the benefits are paid with respect to an event regardless of whether benefits are provided with respect to the event under any group health plan maintained by the same plan sponsor. These regulations clarify that, for hospital indemnity or other fixed-dollar indemnity insurance to qualify as excepted benefits, such insurance must pay a fixed dollar amount per day (or other period), regardless of the amount of expenses incurred. An example clarifies that if a policy provides benefits only for hospital stays at a fixed percentage of hospital expenses up to a maximum amount per day, the benefits are not excepted benefits. This is the result even if, in practice, the policy pays the maximum for every day of hospitalization.

Under HIPAA, the April 1997 interim rules, and these final regulations, Medicare supplemental health insurance (as defined under section 1882(g)(1) of the Social Security Act); coverage supplemental to TRICARE; and similar coverage that is supplemental to a group health plan are excepted benefits if they are provided under a separate policy, certificate, or contract of insurance. These regulations clarify that, for coverage supplemental to a group health plan to qualify as excepted benefits, the coverage must be specifically designed to fill gaps in primary coverage, such as coinsurance or deductibles. Coverage that becomes secondary or supplemental only under a coordination-of-benefits provision in the insurance contract or plan documents does not qualify as excepted supplemental benefits.

Any plan, fund, or program that is established or maintained by a partnership and that provides medical care to present or former partners or their dependents, and that otherwise would not be an employee welfare benefit plan, is considered an employee welfare benefit plan that is a group health plan under Part 7 of ERISA and Title XXVII of the PHS Act.^[10] As such, the partnership is considered the employer with respect to any partner. Participants in the plan include individuals who are partners of the partnership. Additionally, with respect to group health plans maintained by self-employed individuals (under which one or more employees are participants), the self-employed individual is considered a participant if this individual is or may become eligible to receive a benefit under the plan or if the individual’s beneficiaries may be so eligible. These regulations clarify that, for purposes of Part 7 of ERISA and Title XXVII of PHS Act, a partner must be a bona fide partner in order to be considered an employee, and the partnership is considered the employer of a partner only if the partner is a bona fide partner. These final regulations also clarify that whether an individual is a bona fide partner is determined based on all the relevant facts and circumstances, including whether the individual performs services on behalf of the partnership.

A paragraph has been reserved in the final rules for determining the average number of employees employed by an employer for a year. For proposed rules on this topic, see the Departments’ notice of proposed rulemaking, published elsewhere in this issue of the Bulletin.

HIPAA’s group market portability provisions, which include limitations on the scope and application of preexisting condition exclusions, and special enrollment rights, provide a minimum standard of protection designed to increase access to health coverage. The Departments crafted these final regulations to secure these protections, consistent with the intent of Congress, and to do so in a manner that is economically efficient.

The primary economic effects of HIPAA’s portability provisions ensue directly from the statute. These regulations, by clarifying and securing HIPAA’s statutory protections, will delineate and possibly expand HIPAA’s effects at the margin.

HIPAA’s statutory group market portability provisions extend coverage to certain individuals and preexisting conditions not otherwise covered. This extension of coverage entails both benefits and costs. Individuals enjoying expanded coverage will realize benefits. In some instances these individuals will gain coverage for services they otherwise would have purchased out-of-pocket. In other instances the extension of coverage will induce individuals to consume more (or different) health care services, which in some cases may improve health outcomes. The dollar value of the extended coverage is estimated to be $515 million annually. Potential additional benefits from improved health outcomes are difficult to quantify (and the Departments have not attempted to do so), but may be large in aggregate, and will be large for at least some individuals whose health outcomes may be substantially improved. Another indirect benefit of HIPAA’s portability provisions is a reduction in so-called “job lock” — a phenomenon in which individuals keep jobs they would prefer to leave to avoid losing coverage for preexisting conditions. If workers move into more productive jobs, the overall economy will benefit.

It should be noted that the benefits of HIPAA’s portability provisions in any given year will be concentrated in a relatively small population that gains coverage under HIPAA for needed care that would otherwise not be covered. The number that might so benefit has been estimated at 100,000 individuals.

The direct costs of HIPAA’s portability provisions generally include the cost of extending coverage to additional services, as well as certain attendant administrative costs. The cost of extended coverage is estimated at $515 million annually. The major administrative costs include the cost of providing certificates of creditable coverage, and possibly the cost of carrying out special enrollments and offsets of preexisting condition exclusion periods. The Departments did not attempt to fully estimate the administrative costs of the HIPAA statute but in crafting this regulation did attempt to constrain these costs.

The Departments believe that the cost of HIPAA is borne by covered workers. Cost can be shifted to workers through increases in employee premium shares or reductions (or smaller increases) in pay or other components of compensation, or by increases in deductibles or other cost sharing or other reductions in the richness of health benefits. Whereas the benefits of HIPAA are concentrated in a relatively small population, the costs are distributed broadly across plans and enrollees.

The Departments have considered whether the costs imposed by HIPAA’s statutory portability provisions have had any major indirect negative effects, and concluded that such effects are possible but probably small.

Any mandate to increase the richness or availability of health insurance adds to the cost of insurance. It is possible that some small number of employers and employees already at the brink of affordability would drop coverage in response to the implementation of HIPAA. The Departments also note that the estimated $515 million cost associated with extensions of coverage under HIPAA amounts to a small fraction of one percent of total expenditures by private group health plans. This suggests that the cost of HIPAA is a small, possibly negligible, factor in most employers’ decisions to offer health coverage and workers’ decisions to enroll. The Departments believe that the benefits of HIPAA’s statutory group market portability provisions justify their cost. The Departments’ full assessment of the costs and benefits of HIPAA’s statutory provisions and their basis for that assessment is detailed later in the preamble.

By clarifying and securing HIPAA’s statutory portability protections, these regulations will help ensure that HIPAA rights are fully realized. The result is likely to be a small increase at the margin in the direct and indirect economic effects of HIPAA’s statutory portability provisions. The Departments believe that the regulation’s benefits will justify its costs.

Additional economic benefits derive from the regulations’ clarifications of HIPAA’s portability requirements. By clarifying employees’ rights and plan sponsors’ obligations under HIPAA’s portability provisions, the regulations will reduce uncertainty over health benefits, thereby fostering labor market efficiency and the establishment and continuation of group health plans by employers.

Many provisions of the final regulations closely resemble provisions included in the interim final regulations that the final regulations supplant. This regulatory action, however, adds or amends both certain provisions directed at the scope of HIPAA’s portability protections and certain provisions establishing administrative requirements intended to safeguard those protections.

These final regulations are intended to secure and implement HIPAA’s group market portability provisions under certain special circumstances. The final regulations therefore contain a number of provisions intended to clearly delimit the scope of HIPAA’s portability protections. Most of these provisions closely resemble and will have the same effect as provisions of the interim final regulations. Others, however, clarify or expand at the margin the range of situations to which HIPAA’s portability protections apply or in which a loss of eligibility may trigger special enrollment rights. These include the requirement that health coverage under foreign government programs be treated as creditable coverage for purposes of limiting the application of preexisting condition exclusions; the extension of special enrollment rights to individuals who lose eligibility for coverage in connection with the application of lifetime benefit limits, movement out of an HMO’s service area, or the termination of a health coverage option previously offered under a group health plan; and the establishment of a special enrollment right for a participant to change among available coverage options under a group health plan when adding one or more dependents in connection with marriage, adoption, or placement for adoption. Each of these provisions is expected to result in a small increase in the economic effects of HIPAA’s statutory portability protections. The Departments have no basis to quantify these small increases. The potential size of affected sub populations is explored later in the preamble.

In order to secure and implement HIPAA’s group market special enrollment and portability provisions, both the HIPAA statute and these final regulations establish certain administrative requirements.

As noted above, the HIPAA statute generally requires plans and issuers to provide certifications of prior coverage to individuals leaving coverage. These regulations additionally require plans and issuers to notify individuals of their special enrollments rights, any preexisting condition exclusion provisions, and the applicability of such exclusions where individuals provide evidence of prior coverage that is of insufficient duration to fully offset exclusion periods. Plans will incur cost to comply with these administrative requirements. The Departments estimate the administrative cost to prepare and distribute certifications and notices to be $97 million per year. Nearly all of this, or $96 million, is attributable to the preparation and distribution of certifications as required under HIPAA’s statutory provisions. These final regulations include numerous special provisions that serve to reduce plans’ cost of providing certifications. A more strict interpretation of the statute would require plans to send an individual certificate to each affected enrollee. Such strict interpretation would result in plans sending 80.1 million certificates annually at cost of $157.6 million, which is $61.6 million more than the burden imposed by the final regulations.

Generally all of the major administrative requirements included in the final regulations were also included in the interim final regulations. The final regulations make minor additions to two requirements, however. They require plans to include educational statements in certificates of creditable coverage and to maintain in writing their procedures for requesting certificates. The cost of these additional requirements is expected to be small, and was not estimated separately from the overall cost of providing certificates.

Other changes included in these final regulations are likely to slightly reduce plans’ cost to provide certain HIPAA-required notices. Included with the final regulation is new sample language for general and specific notices of preexisting condition exclusions, which may serve to reduce some plans’ costs of providing these notices, and revised sample language for special enrollment rights notices. The final regulations also clarify the narrow scope of the requirement to notify certain affected participants of the specific application of preexisting condition exclusions. The Departments did not estimate the impact of these provisions separately from the overall cost of providing general and specific notices of preexisting condition exclusions and notices of special enrollment rights.

The Departments’ full assessment of the costs and benefits of this regulation and their basis for that assessment is detailed later in this preamble.

Under Executive Order 12866 (58 FR 551735, Oct. 4, 1993), the Departments must determine whether a regulatory action is “significant” and therefore subject to the requirements of the Executive Order and subject to review by the Office of Management and Budget (OMB). Under section 3(f), the order defines a “significant regulatory action” as an action that is likely to result in a rule: (1) having an annual effect on the economy of $100 million or more, or adversely and materially affecting a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or state, local or tribal governments or communities (also referred to as “economically significant”); (2) creating serious inconsistency or otherwise interfering with an action taken or planned by another agency; (3) materially altering the budgetary impacts of entitlement grants, user fees, or loan programs or the rights and obligations of recipients thereof; or (4) raising novel legal or policy issues arising out of legal mandates, the President’s priorities, or the principles set forth in the Executive Order.

Pursuant to the terms of the Executive Order, this action is “economically significant” and subject to OMB review under Section 3(f) of the Executive Order. Consistent with the Executive Order, the Departments have assessed the costs and benefits of this action. The Departments’ assessment, and the analysis underlying that assessment, is detailed below. The Departments performed a comprehensive, unified analysis to estimate the costs and benefits attributable to the regulations for purposes of compliance with Executive Order 12866, the Regulatory Flexibility Act, and the Paperwork Reduction Act.

These final regulations are needed to clarify and interpret the HIPAA portability provisions (increased portability through limitation on preexisting condition exclusions) under Section 701 of the Employee Retirement Income Security Act of 1974 (ERISA), Section 2701 of the Public Health Service Act, and Section 9801 of the Internal Revenue Code of 1986. The provisions are needed to improve the availability and portability of health coverage by limiting preexisting condition exclusions and their use, and requiring that group health plans and group health insurance issuers allow individuals to enroll under certain circumstances (special enrollment). Additional guidance was required to clarify certain definitions, such as the definition of creditable coverage; to clarify the method of determining the proper length of a preexisting condition exclusion period for an individual; to describe the circumstances under which an individual must be allowed a special enrollment opportunity; and to describe notices that group health plans and group health insurance issuers must provide to individuals.

The Departments believe that this regulation’s benefits will justify its costs. This belief is grounded in the assessment of costs and benefit that is summarized earlier in the preamble and detailed below.

The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes certain requirements with respect to Federal rules that are subject to the notice and comment requirements of section 553(b) of the Administrative Procedure Act (5 U.S.C. 551 et seq.) that are likely to have a significant economic impact on a substantial number of small entities. Unless an agency certifies that a rule will not have a significant economic impact on a substantial number of small entities, section 604 of the RFA requires the agency to present a final regulatory flexibility analysis at the time of the publication of the notice of final rulemaking describing the impact of the rule on small entities. Small entities include small businesses, organizations, and governmental jurisdictions.

Because these final rules are being issued without prior notices of proposed rulemaking, the RFA does not apply, and the Departments are not required to either certify that the rule will not have a significant impact on a substantial number of small entities or conduct a regulatory flexibility analysis. The Departments nonetheless crafted these regulations in careful consideration of their effects on small entities.

For purposes of this discussion, the Departments consider a small entity to be an employee benefit plan with fewer than 100 participants. The basis for this definition is found in section 104(a)(2) of ERISA, which permits the Secretary of Labor to prescribe simplified annual reports for pension plans which cover fewer than 100 participants. Under section 104(a)(3), the Secretary may also provide for simplified annual reporting and disclosure if the statutory requirements of part 1 of Title I of ERISA would otherwise be inappropriate for welfare benefit plans. Pursuant to the authority of section 104(a)(3), the Department of Labor has previously issued at 29 CFR 2520.104-20, 2520.104-21, 2520.104-41, 2520.104-46 and 2520.104b-10, certain simplified reporting provisions and limited exemptions from reporting and disclosure requirements for small plans, including unfunded or insured welfare plans covering fewer than 100 participants and which satisfy certain other requirements.

Further, while some small plans are maintained by large employers, most are maintained by small employers. Both small and large plans may enlist small third party service providers to perform administrative functions, but it is generally understood that third party service providers transfer their costs to their plan clients in the form of fees. Thus, the Departments believe that assessing the impact of this rule on small plans is an appropriate substitute for evaluating the effect on small entities. The definition of small entity considered appropriate for this purpose differs, however, from a definition of small business based on size standards promulgated by the Small Business Administration (SBA) (13 CFR 121.201) pursuant to the Small Business Act (5 U.S.C. 631 et seq.). The Department of Labor solicited comments on the use of this standard for evaluating the effects of the interim final regulations on small entities. No comments were received with respect to the standard.

The Departments believe that the benefits of this regulation will justify its costs. This belief is grounded in the assessment of costs and benefit that is summarized earlier in the preamble and detailed below in the “Basis for Assessment of Economic Impact” section. The direct financial value of coverage extensions pursuant to HIPAA’s portability provisions are estimated to be approximately $180 million for small plans, or a small fraction of one percent of total small plan expenditures.^[11]

In order to secure and implement HIPAA’s portability provisions, the HIPAA statute and interim final regulations established certain administrative requirements, including requirements to provide certifications of creditable coverage and notices of special enrollment rights and preexisting condition exclusions. The Departments estimate the cost for small plans to prepare and distribute certifications and notices to be $13 million per year.^[12] These costs will initially be borne by issuers who supply small group insurance products and by third-party administrators who provide services to small insured plans. These two types of entities will spread the costs across a much larger pool of small plans who will in turn transfer cost broadly to plan enrollees.

Notwithstanding the determinations of the Departments of Labor and of Health and Human Services, for purposes of the Department of the Treasury it has been determined that this Treasury decision is not a significant regulatory action. Pursuant to sections 603(a) and 605(b) of the Regulatory Flexibility Act, it is hereby certified that the collections of information referenced in this Treasury decision (see §§54.9801-3, 54.9801-4, 54.9801-5, and 54.9801-6) will not have a significant economic impact on a substantial number of small entities. Although a substantial number of small entities will be subject to the collection of information requirements in these regulations, the requirements will not have a significant economic impact on these entities. The average time required to complete a certification required under these regulations is estimated to be 4 to 5 minutes for all employers. This average is based on the assumption that most employers will automate the certification process. The paperwork requirements other than certifications that are contained in the regulations are estimated to impose less than 2% of the burden imposed by the certifications. Many small employers that maintain group health plans have their plans administered by an insurance company or third party administrators (TPAs). Most insurers and TPAs are expected to automate the certification process and therefore their average time to produce a certificate should be similar to the 4 to 5 minute average estimated for all employers. However, even for small employers that do not automate the certification process, the collection of information requirements in the regulation will not have a significant impact. Even if it is conservatively assumed that their average time to produce a certificate is 3 times as long as the highest estimate for all employers (i.e., 15 minutes per certificate) and that all of their employees are covered by their group health plan and that half of the employees receive a certificate each year, the average burden per employee is less than 8 minutes per year. This can be rounded up to 8 minutes to more than account for the additional burden imposed by the other paperwork requirements of the final regulations. Thus, for example, for an employer with 10 employees, the annual burden would be not more than 1 hour and 20 minutes per year. At an estimated cost of $18 per hour, this would result in a cost of not more than $24 per year for the employer, which is not a significant economic impact. Because the collection of information requirements of this Treasury decision will not have a significant economic impact on a substantial number of small entities, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking preceding these regulations was submitted to the Small Business Administration for comment on its impact on small business.

These final regulations include three separate collections of information as that term is defined in the Paperwork Reduction Act of 1995 (PRA 95), 44 U.S.C. 3502(3): the Notice of Enrollment Rights, Notice of Preexisting Condition Exclusion, and Certificate of Creditable Coverage. Each of these disclosures is currently approved by the Office of Management and Budget (OMB) through October 31, 2006, in accordance with PRA 95 under control numbers 1210-0101, 1210-0102, and 1210-0103.

These final regulations include a collection of information as that term is defined in PRA 95: the Notice of Enrollment Rights, Notice of Preexisting Condition Exclusion, and Certificate of Creditable Coverage. Each of these disclosures is currently approved by OMB under control number 1545-1537.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

These final regulations include three separate collections of information as that term is defined in PRA 95: the Notice of Enrollment Rights, Notice of Preexisting Condition Exclusion, and Certificate of Creditable Coverage. Each of these disclosures is currently approved by OMB through June 30, 2006, in accordance with PRA 95 under control number 0938-0702.

This final rule is subject to the provisions of the Small Business Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 801 et seq.) and is being transmitted to Congress and the Comptroller General for review. The final rule, is a “major rule,” as that term is defined in 5 U.S.C. 804, because it may result in (1) an annual effect on the economy of $100 million or more; (2) a major increase in costs or prices for consumers, individual industries, or federal, state or local government agencies, or geographic regions; or (3) significant adverse effects on competition, employment, investment, productivity, innovation, or on the ability of United States-based enterprises to compete with foreign-based enterprises in domestic or export markets.

Section 202 of the Unfunded Mandates Reform Act of 1995 requires that agencies assess anticipated costs and benefits before issuing any rule that may result in an expenditure in any 1 year by state, local, or tribal governments, in the aggregate, or by the private sector, of $100 million. These final regulations have no such mandated consequential effect on state, local, or tribal governments, or on the private sector.

Executive Order 13132 outlines fundamental principles of federalism. It requires adherence to specific criteria by federal agencies in formulating and implementing policies that have “substantial direct effects” on the States, the relationship between the national government and States, or on the distribution of power and responsibilities among the various levels of government. Federal agencies promulgating regulations that have these federalism implications must consult with State and local officials, and describe the extent of their consultation and the nature of the concerns of State and local officials in the preamble to the regulation.

In the Departments’ view, these final regulations have federalism implications because they may have substantial direct effects on the States, the relationship between the national government and States, or on the distribution of power and responsibilities among the various levels of government. However, in the Departments’ view, the federalism implications of these final regulations are substantially mitigated because, with respect to health insurance issuers, the vast majority of States have enacted laws which meet or exceed the federal HIPAA portability standards.

In general, through section 514, ERISA supersedes State laws to the extent that they relate to any covered employee benefit plan, and preserves State laws that regulate insurance, banking or securities. While ERISA prohibits States from regulating a plan as an insurance or investment company or bank, HIPAA added a new section to ERISA (as well as to the PHS Act) narrowly preempting State requirements for issuers of group health insurance coverage. Specifically, with respect to seven provisions of the HIPAA portability rules, states may impose stricter obligations on health insurance issuers.^[13] Moreover, with respect to other requirements for health insurance issuers, states may continue to apply state law requirements except to the extent that such requirements prevent the application of HIPAA’s portability, access, and renewability provisions.

In enacting these new preemption provisions, Congress intended to preempt State insurance requirements only to the extent that they prevent the application of the basic protections set forth in HIPAA. HIPAA’s conference report states that the conferees intended the narrowest preemption of State laws with regard to health insurance issuers. H.R. Conf. Rep. No. 736, 104^th Cong. 2d Session 205 (1996). State insurance laws that are more stringent than the federal requirements are unlikely to “prevent the application of” the HIPAA portability provisions, and be preempted. Accordingly, States have significant latitude to impose requirements on health insurance insurers that are more restrictive than the federal law.

Guidance conveying this interpretation of HIPAA’s preemption provisions was published in the Federal Register on April 8, 1997. 62 F.R. 16904. These final regulations clarify and implement the statute’s minimum standards and do not significantly reduce the discretion given the States by the statute. Moreover, the Departments understand that the vast majority of States have requirements that meet or exceed the minimum requirements of the HIPAA portability provisions.

HIPAA provides that the States may enforce the provisions of HIPAA as they pertain to issuers, but that the Secretary of Health and Human Services must enforce any provisions that a State fails to substantially enforce. Currently, HHS enforces the HIPAA portability provisions in only one State in accordance with that State’s specific request to do so. When exercising its responsibility to enforce the provisions of HIPAA, HHS works cooperatively with the State for the purpose of addressing the State’s concerns and avoiding conflicts with the exercise of State authority. HHS has developed procedures to implement its enforcement responsibilities, and to afford the States the maximum opportunity to enforce HIPAA’s requirements in the first instance. HHS’s procedures address the handling of reports that States may not be substantially enforcing HIPAA’s requirements, and the mechanism for allocating responsibility between the States and HHS. In compliance with Executive Order 13132’s requirement that agencies examine closely any policies that may have federalism implications or limit the policymaking discretion of the States, DOL and HHS have engaged in numerous efforts to consult and work cooperatively with affected State and local officials.

For example, the Departments sought and received input from State insurance regulators and the National Association of Insurance Commissioners (NAIC). The NAIC is a non-profit corporation established by the insurance commissioners of the 50 States, the District of Columbia, and the four U.S. territories. In most States the Insurance Commissioner is appointed by the Governor, in approximately 14 States, the insurance commissioner is an elected official. Among other activities, it provides a forum for the development of uniform policy when uniformity is appropriate. Its members meet, discuss and offer solutions to mutual problems. The NAIC sponsors quarterly meetings to provide a forum for the exchange of ideas and in-depth consideration of insurance issues by regulators, industry representatives and consumers. CMS and the Department of Labor staff have consistently attended these quarterly meetings to listen to the concerns of the State Insurance Departments regarding HIPAA portability issues. In addition to the general discussions, committee meetings, and task groups, the NAIC sponsors the standing CMS/DOL meeting on HIPAA issues for members during the quarterly conferences. This meeting provides CMS and the Department of Labor with the opportunity to provide updates on regulations, bulletins, enforcement actions, and outreach efforts regarding HIPAA.

The Departments received written comments on the interim regulation from the NAIC and from ten States. In general, these comments raised technical issues that the Departments considered in conjunction with similar issues raised by other commenters. In a letter sent before issuance of the interim regulation, the NAIC expressed concerns that the Departments interpret the new preemption provisions of HIPAA narrowly so as to give the States flexibility to impose more stringent requirements. As discussed above, the Departments address this concern in the preamble to the interim regulation.

In addition, the Departments specifically consulted with the NAIC in developing these final regulations. Through the NAIC, the Departments sought and received the input of State insurance departments regarding certain insurance industry definitions, enrollment procedures and standard coverage terms. This input is generally reflected in the discussion of comments received and changes made in Section B — Overview of the Regulations of the preamble to these regulations.

The Departments have also cooperated with the States in several ongoing outreach initiatives, through which information on HIPAA is shared among federal regulators, State regulators and the regulated community. In particular, the Department of Labor has established a Health Benefits Education Campaign with more than 70 partners, including CMS, NAIC and many business and consumer groups. CMS has sponsored conferences with the States — the Consumer Outreach and Advocacy conferences in March 1999 and June 2000, and the Implementation and Enforcement of HIPAA National State-Federal Conferences in August 1999, 2000, 2001, 2002, and 2003. Furthermore, both the Department of Labor and CMS websites offer links to important State websites and other resources, facilitating coordination between the State and federal regulators and the regulated community.

Throughout the process of developing these regulations, to the extent feasible within the specific preemption provisions of HIPAA, the Departments have attempted to balance the States’ interests in regulating health insurance issuers, and the Congress’ intent to provide uniform minimum protections to consumers in every State. By doing so, it is the Departments’ view that they have complied with the requirements of Executive Order 13132.

Pursuant to the requirements set forth in Section 8(a) of Executive Order 13132, and by the signatures affixed to these final regulations, the Departments certify that the Employee Benefits Security Administration and the Centers for Medicare & Medicaid Services have complied with the requirements of Executive Order 13132 for the attached final regulation, Final Regulations for Health Coverage Portability for Group Health Plans and Group Health Insurance Issuers (RIN 1210-AA54 and RIN 0938-AL43), in a meaningful and timely manner.

As noted above, the primary economic effects of HIPAA’s portability provisions ensue directly from the statute. These regulations, by clarifying and securing HIPAA’s statutory protections, will delineate and possibly expand HIPAA’s effects at the margin.

In order to determine how many workers could benefit from crediting prior coverage against a new health plan’s preexisting condition exclusion period, we examined the 18 million individuals who changed jobs in 2002. Of these, approximately 1 in 3 had health care coverage at those jobs and an additional 8 million dependents also received employer-sponsored health care coverage through these job changers. By allowing prior creditable coverage, 4 million job changers, who had at least 12 months of prior creditable coverage, were able to change jobs without the risk of a preexisting condition exclusions for them or their 5 million dependents. An additional 2 million workers who changed jobs and had some smaller amount of prior coverage, faced reduced waiting periods before receiving full coverage for them and their 3 million dependents.^[14]

The most direct effect of HIPAA’s statutory group market portability provisions is the extension of coverage to individuals and preexisting conditions not otherwise covered. This extension of coverage entails both benefits and costs. Individuals enjoying expanded coverage will realize benefits. In some instances these individuals will gain coverage for services they otherwise would have purchased out-of-pocket, thereby reaping a simple and direct financial benefit. In other instances the extension of coverage will induce individuals to consume more (or different) health care services, reaping a benefit which has financial value, and which in some cases will produce additional indirect benefits both to the individual (improved health) and possibly to the economy at large (increased productivity).^[15] The simple financial value of the direct benefits (essentially the dollar value of the extended coverage) is estimated to be $515 million.^[16]

The indirect benefits are difficult to quantify (and the Departments have not attempted to do so), but may be large in aggregate, and will be large for at least some individuals whose health outcomes may be substantially improved.

Another indirect (though intended) benefit of HIPAA’s portability provisions is a reduction in so-called “job lock.” Job lock occurs when an individual stays in a job with health insurance that he or she would prefer to leave out of concern that he or she would lose coverage for care of his or her own or a covered dependent’s preexisting condition.^[17]

No attempt is made here to quantify increases in labor force mobility attributable to reduced job lock under HIPAA. However, it is noted that at least two indirect economic effects are likely to follow such increased mobility. First, the cost of coverage for some preexisting conditions will be transferred from one plan or issuer to another.^[18] Second, if, as is likely, a result is movement of workers into more productive jobs, the overall economy will benefit.

It should be noted that the benefits of HIPAA’s portability provisions in any given year will be concentrated in a relatively small population — generally, individuals who because of some combination of family health status and use of health services, job mobility, and plan provisions related to preexisting condition exclusions or enrollment opportunities, gain coverage under HIPAA for needed care that would otherwise not be covered.

According to CBO, any point in time, about 100,000 individuals would have a preexisting condition exclusion reduced for prior creditable coverage. An additional 45,000 would gain added coverage in the individual market.^[19]

The direct costs of HIPAA’s portability provisions generally include the cost of extending coverage to additional services, as well as certain attendant administrative costs. The cost of extended coverage is estimated at $515 million annually. The major administrative costs include the cost of providing certificates of creditable coverage, and possibly the cost of carrying out special enrollments and offsets of preexisting condition exclusion periods. The Departments did not attempt to fully estimate the administrative costs of the HIPAA statute but did, in crafting this regulation, attempt to constrain these costs, where possible. without compromising HIPAA’s intent, as discussed below.

The Departments considered the probable incidence of these costs. The Departments believe that by and large the cost of HIPAA, like all of the cost of group health benefits, are borne by covered workers.^[20] The most direct ways this cost can be shifted to workers is through increases in employee premium shares or reductions (or smaller increases) in pay or other components of compensation. Other paths for shifting of HIPAA’s cost to workers might include increases in deductibles or other cost sharing, or other reductions in the richness of health benefits.

Whereas the benefits of HIPAA are concentrated in a relatively small population, the costs are distributed broadly across plans and enrollees. The cost for affected large, self-insured or experience rated group plans is spread across all enrollees in the plan. The cost for small insured plans typically is spread across large populations of small plans and their enrollees, partly as a result of state laws that compress small group premium rates.

The Departments have considered whether the costs imposed by HIPAA’s statutory portability provisions have had any major indirect negative effects, and concluded that such effects are possible but probably small.

Any mandate to increase the richness or availability of health insurance adds to the cost of insurance. It is possible that some small number of employers already at the brink of affordability would drop coverage in response to the implementation of HIPAA. The number of employers so affected is probably limited in part because as noted above, employers can shift HIPAA’s cost to workers in various ways, including through increases in employee premium shares or cost sharing — though such increases might prompt some workers at the margin to decline coverage. Economic literature provides some estimates of the responsiveness of employers and workers to increases in the price of insurance.^[21]

The Departments note, however, that cost increases attributable to HIPAA are not price increases per se but reflect the cost to enrich benefits, implying that negative responses should be smaller than would be expected in connection with pure price increases. The Departments also note that the estimated $515 million cost associated with extensions of coverage under HIPAA amounts to a small fraction of one percent of total expenditures by private group health plans.^[22] This compares with average annual group premium growth of 9.4 percent for family coverage between 1996 and 2002.^[23] To the extent that such increases are small, they are likely to have a negligible effect on employers’ decisions to provide health insurance and in workers’ decisions to enroll.

Various other studies to date suggest that any negative indirect effects of HIPAA are relatively minor. In one study^[24], large employers and health benefit consultants reported few ongoing problems in adopting HIPAA’s portability provisions. Many issuers interviewed for the report said that their plans tended to require few changes to comply with HIPAA. This is probably because many large employer plans had already incorporated portability protections, similar to those of HIPAA. A second study indicates that while the share of small firms (those with fewer than 200 workers) offering health insurance has increased slightly from 1996 to 2004, the share has drifted downward from its high of 68 percent in the economic boom year of 2000.^[25] In addition, in aggregate, employers covered a larger proportion of health care costs for family plans in 2002 than in 1996, with a slight decrease in the share of single plans over the same time period.^[26]

The data above suggest that the HIPAA changes may have been less significant in the decision about health insurance coverage than overall economic conditions and labor market forces. In fact, there is no evidence that any indirect economic effect, positive or negative, can be readily attributed to the statute. Therefore, it appears that HIPAA has not placed an unreasonable burden on health plans.

There has been a significant decrease in the prevalence of preexisting condition exclusion clauses among large plans. A major employee benefits survey^[27] reported that in 1996, 59 percent of the employees in small firms (less than 200 employees) were subject to pre-existing condition limitations. In 2002, the figure had dropped to 33 percent. If pre-existing condition limitation exists for new employees, the average number of months to wait before coverage declined from 10.7 months in 1996 to 10.0 months in 2002. A discussion of results from a 1998 version of the same survey noted that, overall, 42 percent of employers reported making changes to their plans’ preexisting condition clauses due to HIPAA. The Departments are not aware of any surveys that have consistently tracked the prevalence of preexisting condition exclusions in smaller plans (less than 200 employees) since 1996.

Another significant trend involves the use of waiting periods. According to a survey of employers with 200 or more employees, the average number of days that new enrollees must wait before health coverage takes effect increased from 40 days in 1996 to 58 days in 1998. Some attribute this increase indirectly to HIPAA, suggesting that some plans may be replacing the preexisting condition exclusion period with a longer waiting period.

By clarifying and securing HIPAA’s statutory portability protections, these regulations will help ensure that HIPAA rights are fully realized. The result is likely to be a small increase at the margin in the direct and indirect economic effects of HIPAA’s statutory portability provisions.

Additional economic benefits derive from the regulations’ clarifications of HIPAA’s portability requirements. The regulations provide clarity through both their provisions and their examples of how those provisions apply in various circumstances. By clarifying employees’ rights and plan sponsors’ obligations under HIPAA’s portability provisions, the regulations will reduce uncertainty and costly disputes over these rights and obligations. They will promote employers’ and employees’ common understanding of the value of group health plan benefits and confidence in the security and predictability of those benefits, thereby improving labor market efficiency and fostering the establishment and continuation of group health plans by employers.

Many provisions of the final regulations closely resemble provisions included in the interim final regulations that the final regulations supplant. The economic impact of this regulatory action therefore generally will be limited to the impact of provisions that were not so included. These include both provisions directed at the scope of HIPAA’s portability protections and provisions establishing administrative requirements intended to safeguard those protections.

These final regulations are intended to secure and implement HIPAA’s group market portability provisions under certain special circumstances. The final regulations therefore contain a number of provisions intended to clearly delimit the scope of HIPAA’s portability protections. Most of these provisions closely resemble and will have the same effect as provisions of the interim final regulations. Others, however, clarify or expand at the margin the range of situations to which HIPAA’s portability protections explicitly apply. These include the requirement that health coverage under foreign government programs be treated as creditable coverage for purposes of limiting the application of preexisting condition exclusions; the extension of special enrollment rights to individuals who lose eligibility for coverage in connection with the application of lifetime benefit limits, movement out of an HMO’s service area, or the termination of a health coverage option previously offered under a group health plan; and the establishment of a special enrollment right for a participant to change among available coverage options under a group health plan when adding one or more dependents in connection with marriage, adoption, or placement for adoption. Each of these provisions is expected to result in a small increase in the economic effects of HIPAA’s statutory portability protections.

The Departments lack any firm basis for quantifying the number of individuals likely to be affected by these provisions, and therefore were unable to quantify the resultant increase in transfers. However, given the special and narrow circumstances to which these provisions apply, the number of affected individuals, and therefore the increase in transfers under these regulations, is expected to be small. In reaching this conclusion, the Departments considered the following.

In 2002, an estimated 359,000 employer sponsored insurance enrollees had moved from abroad in the previous year.^[28] It is not known what fraction of these had been covered under foreign government programs, or of those, what fraction joined group health plans that included preexisting condition exclusions while suffering from and requiring additional care for preexisting conditions. Comparing GAO’s estimate of the number of individuals who could potentially benefit from HIPAA’s portability protections (20 million or more individuals with prior creditable coverage who join new health plans in a given year) with CBO estimates of the number who might actually have added coverage for needed care (145,000) produces a ratio of about 1 percent. If this proportion holds for group health plan enrollees who moved to the U.S. from abroad, and if all such enrollees were previously covered under a foreign government program (an upper bound), then about 4,000 individuals annually might gain coverage for needed care under the final regulation’s provision treating coverage under such programs as creditable coverage.^[29]

The provision that clarifies the special enrollment rights of individuals who lose eligibility for coverage in connection with the movement out of an HMO’s service area is expected mainly to benefit certain individuals with COBRA continuation coverage. The number of individuals affected in any given year is expected to be small. It is estimated that in 2002, fewer than 10,000 COBRA enrollees were covered by HMOs, moved across state or county lines, and were potentially eligible for coverage under another family member’s group plan.^[30]

Lifetime benefit limits (LBL) are fairly common in-group health plans and are typically set at $1 million or more.^[31] Based on tabulations made by an actuarial consulting firm,^[32] in plans with LBLs of $1 million, annually about 27 per one million enrollees will exceed the benefit limits. In plans with a $500,000 LBL, the comparable figure is 181 per million enrollees; and in plans with a $2 million LBL, 5 per million enrollees. Combining these proportions with a distribution of LBLs by plan enrollment reported by a national employer survey, yields about 8,700 plan enrollees who will annually reach their plan’s LBL. The Departments recognize that those individuals who do encounter such limits by definition have very high expenses, a large portion of which would be transferred to the group health plans into which they special enroll. It is possible, however, that a large share of such transfers would have occurred even without the provisions of these final regulations establishing a right to special enroll upon encountering lifetime limits. For example, the same individuals might have enrolled in these plans during open enrollment opportunities, either before or after encountering the limits. Alternatively, participants who have met their LBL might have left their jobs in order to create a special enrollment opportunity.

The Departments estimate that annually about 1 million families will be eligible for special enrollments due to marriage, 2 million due to births. About one-half of employees offered coverage at work have a choice of plan options.^[33] Taken together, this suggests that the number of individuals gaining special enrollment rights to switch among options within group health plans when adding dependents may be large. However, it is unclear how many will elect to switch, or how many who do would have been so permitted even absent the applicable requirement of these final regulations. More important, it is unclear whether merely switching among options will increase or decrease the transfer from the affected health plans to the affected individuals. In any event, individuals exercising this special enrollment right to switch options are not gaining coverage under any particular group health plan but are merely modifying that coverage.

In order to secure and implement HIPAA’s group market special enrollment and portability provisions, both the HIPAA statute and these final regulations establish certain administrative requirements. As noted above, the HIPAA statute generally requires plans and issuers to provide certifications of prior coverage to individuals leaving coverage. These regulations additionally require plans and issuers to notify individuals of their special enrollments rights, any preexisting condition exclusion provisions, and the applicability of such exclusions where individuals provide evidence of prior coverage that is of insufficient duration to fully offset exclusion periods. Plans will incur cost to comply with these administrative requirements. The Departments estimate the administrative cost to prepare and distribute certifications and notices to be $97 million per year.^[34]

Nearly all of this, or $96 million, is attributable to the preparation and distribution of certifications as required under HIPAA’s statutory provisions. These final regulations include numerous special provisions that serve to reduce plans’ cost of providing certifications. These provisions serve to streamline and standardize certifications’ content and format, minimize the number of duplicative certifications issued, and encourage the use of telephone calls and other modes of communication when they will suffice in lieu of written certifications. The provisions are designed to minimize certifications’ cost while ensuring that individuals and plans (respectively) can efficiently and effectively demonstrate and verify prior coverage. Demonstration and verification of prior coverage enable individuals to secure and plans to appropriately honor individuals’ portability rights under HIPAA.

First, an intermediate issuer will not have to issue a certificate of creditable coverage when an individual changes options under the same health plan. In lieu of the certificate, the issuer could simply transmit to the plan information regarding individuals’ effective date of coverage and the last date of coverage. An individual would retain the right to get a certificate automatically and upon request if he/she leaves the plan.

Second, telephonic certification will fulfill the requirement to send a certificate if the receiving plan, prior plan, and the participant mutually agree to that arrangement. The individual can get a written certificate upon request.

Third, in situations where the issuer and the plan contract for the issuer to complete the certificates, the plan would not remain liable even if the issuer failed to send the certificates.

Fourth, the period of coverage listed on automatic certificates will be only the last continuous period of coverage without any break. This is the most efficient and simplest method of record keeping for plans and issuers.

Fifth, the period of coverage contained in the on-request certification will be all periods of coverage ending within 24 months before the date of the request. Essentially, a plan may simply look back two years and send copies of any automatic certificates issued during that period.

Sixth, a single certificate of creditable coverage can be provided with respect to both a participant and the participant’s dependent if the information is identical for each individual. In addition, certificates may contain combined information for families.

Seventh, plans and issuers are not required to furnish an individual an automatic certificate with respect to a dependent until they know or should know of the dependent’s cessation of coverage under the plan.

The above reductions in burdens on plans and issuers may cause more frequent circumstances in which participants are required to demonstrate creditable coverage. In order to help offset some of the additional burdens that will be shifted to the participants, the regulations provide the following protections:

First, if an individual is required to demonstrate dependent status, the group health plan or issuer is required to treat the individual as having furnished a certificate showing the dependent status if the individual attests to such dependency and the period of dependent status, and the individual cooperates with the plan’s or issuer’s efforts to verify the dependent status.

Second, if the accuracy of a certificate is contested or a certificate is unavailable when needed, individuals have the right to demonstrate creditable coverage through the presentation of relevant corroborating evidence of creditable coverage during the relevant time period and by cooperating with the plan’s efforts to verify the individual’s coverage.

Third, plans and issuers that impose preexisting condition exclusion periods must notify participants of this fact. They must also explain that prior creditable coverage can reduce the length of a preexisting condition exclusion period, and that the plan or issuer will assist in obtaining a certificate of creditable coverage from any prior plan or issuer, if necessary. An exclusion may not be imposed until this notice is given. This is beneficial to participants insofar as it forewarns them of potential claim denials and enables them to more easily exercise their right to protection from such denials under HIPAA’s portability provisions.

Fourth, after an individual has presented evidence of creditable coverage, the plan or issuer must give the individual a written notice of the length of any preexisting condition exclusion that remains after offsetting for creditable coverage.

Fifth, certificates of creditable coverage now contain educational language that more explicitly informs consumers of their HIPAA rights.

As noted earlier in this preamble, GAO and others recommended that educational statements be added to certifications. The Departments have provided a suitable statement for use by plans, thereby eliminating any need for plans to develop their own. The cost of providing such statements is therefore expected to be minimal.

The administrative cost associated with provision of certifications under the HIPAA statute and these final regulations was estimated as follows.

The ongoing burden associated with the issuance of automatic certifications by group plans is estimated as a function of (1) the number of events that trigger such issuances; (2) the statutory and regulatory specifications for the content of the certificates; and (3) the assumed burden associated with the preparation and distribution of each certificate.

Certifications must be issued when an event, defined as the loss of health coverage by a participant or by a dependent, occurs. Survey tabulations indicate that there were 54.3 million events in 2002.^[35] Additionally, results from the March 1999 CPS indicate that about 3 percent of the events involve a dependent who lives at a different address than the participant. In such cases the plan is required to send out at least 2 separate certificates.

The model certificate illustrates how plans may incur a lesser burden when it is certified that prior periods of coverage were of at least 18 months duration; that is, in lieu of a specific date that coverage began and waiting/affiliation period information, such certifications may simply indicate that the prior period of coverage lasted at least 18 months. In contrast, certifications of shorter periods of prior coverage must contain the specific dates when coverage — and waiting/affiliation periods, if applicable — began.

Combining the options for the addresses with the time periods results in four categories of certifications: (1) one address and less than 18 months of prior creditable coverage (12 million annual events); (2) one address and 18 months or more of prior creditable coverage (42.3 million); (3) more than one address and prior creditable coverage of less than 18 months (.4 million); and (4) more than one address and 18 months or more of prior creditable coverage (1.3 million).

Consistent with the interim regulations, we assume that the per-certificate preparation effort requires 5 minutes for prior creditable coverage of less than 18 months and 4 minutes for creditable coverage that is greater than or equal to 18 months. The additional cost involved in sending certificates to multiple addresses for a given participant is assumed to be 50 percent of the cost of sending a certificate to one address.

The Departments assumed that the certificates would be generated by a clerical-level employee who costs the plans $17.24 per-hour in wages, benefits, and overhead.^[36] The cost of printing/copying, envelope and postage is assumed to be $0.53 per envelope. The resulting annual burden is $96 million.

A more strict interpretation of the statute would require plans to send an individual certificate to each affected enrollee. Obviously, this requirement would significantly increase the administrative burden. Such strict interpretation would result in plans sending 80.1 million certificates annually at cost of $157.6 million, which is $61.6 million more than the burden imposed by the final regulations.

The final regulations require that plans, in response to requests made by or on behalf of individuals, provide certificates at any time while the individual is covered under the plan and for up to 24 months after coverage ceases. Such requests are most likely to be made by an individual who is unable to locate the certificate of creditable coverage from his/her prior health plan and is seeking to enroll in a group health plan that imposes preexisting condition exclusions or is seeking to reduce or eliminate any preexisting condition exclusions that may otherwise be applied by a source of individual coverage.

The Departments believe that the requested certificate burden is negligible for several reasons. First, as reported by a major health benefits survey^[37] the proportion of enrollees that are in plans with preexisting condition exclusion has not changed from the 2000 share of 30 percent, which is down from the pre-HIPAA level of 60 percent. In addition, the educational statement contained within the certificate serves to highlight the importance of the document, thus encouraging its retention. Furthermore, the final rules permit individuals to establish and verify creditable coverage through other means. Finally, evidence of creditable coverage may be transmitted through means other than documentation, such as by a telephone call from the plan to a third party.

Apart from the provision of certifications of prior creditable coverage, the remaining $1 million in administrative expenses is attributable to notices of special enrollment rights and of the existence and application of preexisting condition exclusions, which are required under these final regulations. The Departments believe that these notices are necessary to ensure that individuals understand and can effectively exercise their special enrollment and portability rights under HIPAA, and that the benefits of ensuring this outweigh the associated administrative cost.

The regulations provide that a plan must provide all employees with a notice describing special enrollment rights at or before the time the employee is initially offered the opportunity to enroll in the plan. The final regulations provide model language that can be used to satisfy the special enrollment notice requirement.

The Departments believe that the vast majority of plans have incorporated special enrollment language into their plan enrollment materials. Thus, the cost of the special enrollment notice is assumed to be a minor component of the overall cost of providing plan enrollment materials.

The number of employees who are hired annually by firms that offer health coverage and who are eligible for such coverage was developed by using the proportion of workers with less than one year of tenure as reported by the 2002 MEPS-HC. We find that 10.8 million employees will be newly hired and eligible for health coverage on an annual basis. We assume that the special enrollment notice is a component of plan enrollment materials and requires one-third of a sheet of paper. Using a printing/copying cost of $0.05 per page, we assume that the per-notice cost is $0.0167. The resulting burden is estimated to be $180,687.

The final regulations provide that every plan with a preexisting condition exclusion must provide in writing a general notice of such provisions to individuals eligible for enrollment under the plan. The regulations specify what is required of the plan when it discusses the amount and terms of its preexisting condition exclusion, including the person to contact for further information regarding the exclusions. In addition, the regulations clarify that issuers must describe the actual maximum exclusion period that is applicable to a specific plan. A regulatory example provides sample language that the plans can use to develop the general notice.

Based on results from the 2000 Kaiser/HRET Employer survey, we assume that 35 percent of plans with fewer than 100 participants, and 28 percent of plans with 100 or more participants, apply preexisting condition exclusions to new enrollees. If we apply these proportions to the number of new employees hired each year by employers that offer health coverage, we find that 3.1 million employees will annually receive the general notice.

As with the special enrollment notice, we assume that the general notice of preexisting condition exclusions is a component of standard plan enrollment materials and also requires one-third of a sheet of paper. Assuming a printing/copying cost of $0.05 per page, the per-notice cost is $0.0167. The annual cost to distribute the notices is therefore estimated to be $51,852.

The regulations provide sample notice language, thus relieving the plans of the burden of developing their own forms.

Plans that impose preexisting condition exclusions must, in writing, notify participants who have failed to demonstrate sufficient prior coverage that the exclusions will affect them and indicate what the length of the preexisting condition exclusion period is, with respect to each individual. This notice is required only in situations in which the individual presents evidence of prior creditable coverage and its duration is less than the maximum length of the preexisting condition exclusion period. These final regulations clarify that the notice does not have to identify any medical conditions that are specific to the individual and subject to the exclusion.

Tabulations from the 2002 MEPS-HC indicate that, of those individuals in the private sector who changed jobs and hold insurance, 16 percent have prior creditable coverage of between 1 day and 12 months, which is the statutory preexisting condition exclusion maximum for individuals who enroll when first eligible. The comparable proportion for state and local governmental plans is 18 percent. Applying these proportion to the number of general preexisting exclusion notices required, yields 478,569 notices that will be prepared annually.

Because the notice must be customized to reflect each individual’s applicable preexisting condition exclusion period, the per-notice time burden will be greater than that for the general notice of preexisting condition exclusions. Consistent with the interim final regulations, the Departments assume that the preparation of each notice will take two minutes of a clerical-level employee’s time, plus $0.47 for printing, envelope, and postage, yielding a per-notice cost of $1.05. The resulting annual burden is estimated to be $582,497.

The estimated burden represents only the cost of producing and distributing the notices and does not include the expense involved in determining the adequacy of a participant’s prior coverage, since such expense is considered to be part of the regular business practices necessary to comply with HIPAA’s statutory portability protections.

Generally, all of the major administrative requirements included in the final regulations were also included in the interim final regulations. The final regulations make minor additions to two requirements, however. They require plans to include educational statements in certificates of creditable coverage and to maintain in writing their procedures for requesting certificates. The cost of these additional requirements is expected to be small, and was not estimated separately from the overall cost of providing certificates.

The requirement that certification request procedures be in writing is essentially a clarification of the interim final regulations’ requirement that plans have such procedures. The Departments believe it is likely that most plans already maintain written procedures, and therefore expect the cost of this requirement to be small. The Departments did not estimate the cost of this requirement separately from the cost of providing certifications on request.

Other changes included in these final regulations are likely to slightly reduce plans’ cost to provide certain HIPAA-required notices. Included with the final regulation is new sample language for general and specific notices of preexisting condition exclusions, which may serve to reduce some plans’ costs of providing these notices, and revised sample language for special enrollment rights notices. The final regulations also clarify the narrow scope of the requirement to notify certain affected participants of the specific application of preexisting condition exclusions, thereby potentially relieving some plans of the burden associated with a more expansive interpretation of that requirement. The Departments did not estimate the impact of these provisions separately from the overall cost of providing general and specific notices of preexisting condition exclusions and notices of special enrollment rights.

(a) Statutory basis. Sections 54.9801-1 through 54.9801-6, 54.9802-1, 54.9802-1T, 54.9811-1T, 54.9812-1T, 54.9831-1, and 54.9833-1 (portability sections) implement Chapter 100 of Subtitle K of the Internal Revenue Code of 1986.

(b) Scope. A group health plan may provide greater rights to participants and beneficiaries than those set forth in these portability sections. These portability sections set forth minimum requirements for group health plans concerning:

(1) Limitations on a preexisting condition exclusion period.

(2) Certificates and disclosure of previous coverage.

(3) Rules relating to creditable coverage.

(4) Special enrollment periods.

(5) Prohibition against discrimination on the basis of health factors.

(c) Similar Requirements under the Employee Retirement Income Security Act and the Public Health Service Act. Sections 701, 702, 703, 711, 712, 732, and 733 of the Employee Retirement Income Security Act of 1974 and sections 2701, 2702, 2704, 2705, 2721, and 2791 of the Public Health Service Act impose requirements similar to those imposed under Chapter 100 of Subtitle K with respect to health insurance issuers offering group health insurance coverage. See 29 CFR Part 2590 and 45 CFR Parts 144, 146, and 148. See also Part B of Title XXVII of the Public Health Service Act and 45 CFR Part 148 for other rules applicable to health insurance offered in the individual market (defined in §54.9801-2)

Unless otherwise provided, the definitions in this section govern in applying the provisions of §§54.9801-1 through 54.9801-6, 54.9802-1, 54.9802-1T, 54.9811-1T, 54.9812-1T, 54.9831-1, and 54.9833-1.

Affiliation period means a period of time that must expire before health insurance coverage provided by an HMO becomes effective, and during which the HMO is not required to provide benefits.

COBRA definitions:

(1) COBRA means Title X of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended.

(2) COBRA continuation coverage means coverage, under a group health plan, that satisfies an applicable COBRA continuation provision.

(3) COBRA continuation provision means section 4980B (other than paragraph (f)(1) of section 4980B insofar as it relates to pediatric vaccines), sections 601-608 of ERISA, or Title XXII of the PHS Act.

(4) Exhaustion of COBRA continuation coverage means that an individual’s COBRA continuation coverage ceases for any reason other than either failure of the individual to pay premiums on a timely basis, or for cause (such as making a fraudulent claim or an intentional misrepresentation of a material fact in connection with the plan). An individual is considered to have exhausted COBRA continuation coverage if such coverage ceases —

(i) Due to the failure of the employer or other responsible entity to remit premiums on a timely basis;

(ii) When the individual no longer resides, lives, or works in the service area of an HMO or similar program (whether or not within the choice of the individual) and there is no other COBRA continuation coverage available to the individual; or

(iii) When the individual incurs a claim that would meet or exceed a lifetime limit on all benefits and there is no other COBRA continuation coverage available to the individual.

Condition means a medical condition.

Creditable coverage means creditable coverage within the meaning of §54.9801-4(a).

Dependent means any individual who is or may become eligible for coverage under the terms of a group health plan because of a relationship to a participant.

Employee Retirement Income Security Act of 1974 (ERISA) means the Employee Retirement Income Security Act of 1974, as amended (29 U.S.C. 1001 et seq.).

Enroll means to become covered for benefits under a group health plan (that is, when coverage becomes effective), without regard to when the individual may have completed or filed any forms that are required in order to become covered under the plan. For this purpose, an individual who has health coverage under a group health plan is enrolled in the plan regardless of whether the individual elects coverage, the individual is a dependent who becomes covered as a result of an election by a participant, or the individual becomes covered without an election.

Enrollment date definitions (enrollment date, first day of coverage, and waiting period) are set forth in §54.9801-3(a)(3)(i), (ii), and (iii).

Excepted benefits means the benefits described as excepted in §54.9831(c).

Genetic information means information about genes, gene products, and inherited characteristics that may derive from the individual or a family member. This includes information regarding carrier status and information derived from laboratory tests that identify mutations in specific genes or chromosomes, physical medical examinations, family histories, and direct analysis of genes or chromosomes.

Group health insurance coverage means health insurance coverage offered in connection with a group health plan.

Group health plan or plan means a group health plan within the meaning of §54.9831(a).

Group market means the market for health insurance coverage offered in connection with a group health plan. (However, certain very small plans may be treated as being in the individual market, rather than the group market; see the definition of individual market in this section.)

Health insurance coverage means benefits consisting of medical care (provided directly, through insurance or reimbursement, or otherwise) under any hospital or medical service policy or certificate, hospital or medical service plan contract, or HMO contract offered by a health insurance issuer. Health insurance coverage includes group health insurance coverage, individual health insurance coverage, and short-term, limited-duration insurance. However, benefits described in §54.9831(c)(2) are not treated as benefits consisting of medical care.

Health insurance issuer or issuer means an insurance company, insurance service, or insurance organization (including an HMO) that is required to be licensed to engage in the business of insurance in a state and that is subject to state law that regulates insurance (within the meaning of section 514(b)(2) of ERISA). Such term does not include a group health plan.

Health maintenance organization or HMO means —

(1) A federally qualified health maintenance organization (as defined in section 1301(a) of the PHS Act);

(2) An organization recognized under state law as a health maintenance organization; or

(3) A similar organization regulated under state law for solvency in the same manner and to the same extent as such a health maintenance organization.

Individual health insurance coverage means health insurance coverage offered to individuals in the individual market, but does not include short-term, limited-duration insurance. Individual health insurance coverage can include dependent coverage.

Individual market means the market for health insurance coverage offered to individuals other than in connection with a group health plan. Unless a state elects otherwise in accordance with section 2791(e)(1)(B)(ii) of the PHS Act, such term also includes coverage offered in connection with a group health plan that has fewer than two participants who are current employees on the first day of the plan year.

Issuer means a health insurance issuer.

Late enrollment definitions (late enrollee and late enrollment) are set forth in §54.9801-3(a)(3)(v) and (vi) .

Medical care has the meaning given such term by section 213(d), determined without regard to section 213(d)(1)(C) and so much of section 213(d)(1)(D) as relates to qualified long-term care insurance.

Medical condition or condition means any condition, whether physical or mental, including, but not limited to, any condition resulting from illness, injury (whether or not the injury is accidental), pregnancy, or congenital malformation. However, genetic information is not a condition.

Participant means participant within the meaning of section 3(7) of ERISA.

Placement, or being placed, for adoption means the assumption and retention of a legal obligation for total or partial support of a child by a person with whom the child has been placed in anticipation of the child’s adoption. The child’s placement for adoption with such person ends upon the termination of such legal obligation.

Plan year means the year that is designated as the plan year in the plan document of a group health plan, except that if the plan document does not designate a plan year or if there is no plan document, the plan year is —

(1) The deductible or limit year used under the plan;

(2) If the plan does not impose deductibles or limits on a yearly basis, then the plan year is the policy year;

(3) If the plan does not impose deductibles or limits on a yearly basis, and either the plan is not insured or the insurance policy is not renewed on an annual basis, then the plan year is the employer’s taxable year; or

(4) In any other case, the plan year is the calendar year.

Preexisting condition exclusion means preexisting condition exclusion within the meaning of §54.9801-3(a)(1).

Public health plan means public health plan within the meaning of §54.9801-4(a)(1)(ix).

Public Health Service Act (PHS Act) means the Public Health Service Act (42 U.S.C. 201, et seq.).

Short-term, limited-duration insurance means health insurance coverage provided pursuant to a contract with an issuer that has an expiration date specified in the contract (taking into account any extensions that may be elected by the policyholder without the issuer’s consent) that is less than 12 months after the original effective date of the contract.

Significant break in coverage means a significant break in coverage within the meaning of §54.9801-4(b)(2)(iii).

Special enrollment means enrollment in a group health plan under the rights described in §54.9801-6 or in group health insurance coverage under the rights described in 29 CFR 2590.701-6 or 45 CFR 146.117.

State health benefits risk pool means a state health benefits risk pool within the meaning of §54.9801-4(a)(1)(vii).

Waiting period means waiting period within the meaning of §54.9801-3(a)(3)(iii).

(a) Preexisting condition exclusion — (1) Defined — (i) A preexisting condition exclusion means a limitation or exclusion of benefits relating to a condition based on the fact that the condition was present before the effective date of coverage under a group health plan or group health insurance coverage, whether or not any medical advice, diagnosis, care, or treatment was recommended or received before that day. A preexisting condition exclusion includes any exclusion applicable to an individual as a result of information relating to an individual’s health status before the individual’s effective date of coverage under a group health plan or group health insurance coverage, such as a condition identified as a result of a pre-enrollment questionnaire or physical examination given to the individual, or review of medical records relating to the pre-enrollment period.

(ii) Examples. The rules of this paragraph (a)(1) are illustrated by the following examples:

Example 1. (i) Facts. A group health plan provides benefits solely through an insurance policy offered by Issuer S. At the expiration of the policy, the plan switches coverage to a policy offered by Issuer T. Issuer T’s policy excludes benefits for any prosthesis if the body part was lost before the effective date of coverage under the policy.

(ii) Conclusion. In this Example 1, the exclusion of benefits for any prosthesis if the body part was lost before the effective date of coverage is a preexisting condition exclusion because it operates to exclude benefits for a condition based on the fact that the condition was present before the effective date of coverage under the policy. (Therefore, the exclusion of benefits is required to comply with the limitations on preexisting condition exclusions in this section. For an example illustrating the application of these limitations to a succeeding insurance policy, see Example 3 of paragraph (a)(3)(iv) of this section.)

Example 2. (i) Facts. A group health plan provides coverage for cosmetic surgery in cases of accidental injury, but only if the injury occurred while the individual was covered under the plan.

(ii) Conclusion. In this Example 2, the plan provision excluding cosmetic surgery benefits for individuals injured before enrolling in the plan is a preexisting condition exclusion because it operates to exclude benefits relating to a condition based on the fact that the condition was present before the effective date of coverage. The plan provision, therefore, is subject to the limitations on preexisting condition exclusions in this section.

Example 3. (i) Facts. A group health plan provides coverage for the treatment of diabetes, generally not subject to any lifetime dollar limit. However, if an individual was diagnosed with diabetes before the effective date of coverage under the plan, diabetes coverage is subject to a lifetime limit of $10,000.

(ii) Conclusion. In this Example 3, the $10,000 lifetime limit is a preexisting condition exclusion because it limits benefits for a condition based on the fact that the condition was present before the effective date of coverage. The plan provision, therefore, is subject to the limitations on preexisting condition exclusions in this section.

Example 4. (i) Facts. A group health plan provides coverage for the treatment of acne, subject to a lifetime limit of $2,000. The plan counts against this $2,000 lifetime limit acne treatment benefits provided under prior health coverage.

(ii) Conclusion. In this Example 4, counting benefits for a specific condition provided under prior health coverage against a lifetime limit for that condition is a preexisting condition exclusion because it operates to limit benefits for a condition based on the fact that the condition was present before the effective date of coverage. The plan provision, therefore, is subject to the limitations on preexisting condition exclusions in this section.

Example 5. (i) Facts. When an individual’s coverage begins under a group health plan, the individual generally becomes eligible for all benefits. However, benefits for pregnancy are not available until the individual has been covered under the plan for 12 months.

(ii) Conclusion. In this Example 5, the requirement to be covered under the plan for 12 months to be eligible for pregnancy benefits is a subterfuge for a preexisting condition exclusion because it is designed to exclude benefits for a condition (pregnancy) that arose before the effective date of coverage. Because a plan is prohibited under paragraph (b)(5) of this section from imposing any preexisting condition exclusion on pregnancy, the plan provision is prohibited. However, if the plan provision included an exception for women who were pregnant before the effective date of coverage under the plan (so that the provision applied only to women who became pregnant on or after the effective date of coverage) the plan provision would not be a preexisting condition exclusion (and would not be prohibited by paragraph (b)(5) of this section).

Example 6. (i) Facts. A group health plan provides coverage for medically necessary items and services, generally including treatment of heart conditions. However, the plan does not cover those same items and services when used for treatment of congenital heart conditions.

(ii) Conclusion. In this Example 6, the exclusion of coverage for treatment of congenital heart conditions is a preexisting condition exclusion because it operates to exclude benefits relating to a condition based on the fact that the condition was present before the effective date of coverage. The plan provision, therefore, is subject to the limitations on preexisting condition exclusions in this section.

Example 7. (i) Facts. A group health plan generally provides coverage for medically necessary items and services. However, the plan excludes coverage for the treatment of cleft palate.

(ii) Conclusion. In this Example 7, the exclusion of coverage for treatment of cleft palate is not a preexisting condition exclusion because the exclusion applies regardless of when the condition arose relative to the effective date of coverage. The plan provision, therefore, is not subject to the limitations on preexisting condition exclusions in this section.

Example 8. (i) Facts. A group health plan provides coverage for treatment of cleft palate, but only if the individual being treated has been continuously covered under the plan from the date of birth.

(ii) Conclusion. In this Example 8, the exclusion of coverage for treatment of cleft palate for individuals who have not been covered under the plan from the date of birth operates to exclude benefits in relation to a condition based on the fact that the condition was present before the effective date of coverage. The plan provision, therefore, is subject to the limitations on preexisting condition exclusions in this section.

(2) General rules. Subject to paragraph (b) of this section (prohibiting the imposition of a preexisting condition exclusion with respect to certain individuals and conditions), a group health plan may impose, with respect to a participant or beneficiary, a preexisting condition exclusion only if the requirements of this paragraph (a)(2) are satisfied. (See section 701 of ERISA and section 2701 of the PHS Act, under which these requirements are also imposed on a health insurance issuer offering group health insurance coverage.)

(i) 6-month look-back rule. A preexisting condition exclusion must relate to a condition (whether physical or mental), regardless of the cause of the condition, for which medical advice, diagnosis, care, or treatment was recommended or received within the 6-month period (or such shorter period as applies under the plan) ending on the enrollment date.

(A) For purposes of this paragraph (a)(2)(i), medical advice, diagnosis, care, or treatment is taken into account only if it is recommended by, or received from, an individual licensed or similarly authorized to provide such services under state law and operating within the scope of practice authorized by state law.

(B) For purposes of this paragraph (a)(2)(i), the 6-month period ending on the enrollment date begins on the 6-month anniversary date preceding the enrollment date. For example, for an enrollment date of August 1, 1998, the 6-month period preceding the enrollment date is the period commencing on February 1, 1998, and continuing through July 31, 1998. As another example, for an enrollment date of August 30, 1998, the 6-month period preceding the enrollment date is the period commencing on February 28, 1998, and continuing through August 29, 1998.

(C) The rules of this paragraph (a)(2)(i) are illustrated by the following examples:

Example 1. (i) Facts. Individual A is diagnosed with a medical condition 8 months before A’s enrollment date in Employer R’s group health plan. A’s doctor recommends that A take a prescription drug for 3 months, and A follows the recommendation.

(ii) Conclusion. In this Example 1, Employer R’s plan may impose a preexisting condition exclusion with respect to A’s condition because A received treatment during the 6-month period ending on A’s enrollment date in Employer R’s plan by taking the prescription medication during that period. However, if A did not take the prescription drug during the 6-month period, Employer R’s plan would not be able to impose a preexisting condition exclusion with respect to that condition.

Example 2. (i) Facts. Individual B is treated for a medical condition 7 months before the enrollment date in Employer S’s group health plan. As part of such treatment, B’s physician recommends that a follow-up examination be given 2 months later. Despite this recommendation, B does not receive a follow-up examination, and no other medical advice, diagnosis, care, or treatment for that condition is recommended to B or received by B during the 6-month period ending on B’s enrollment date in Employer S’s plan.

(ii) Conclusion. In this Example 2, Employer S’s plan may not impose a preexisting condition exclusion with respect to the condition for which B received treatment 7 months prior to the enrollment date.

Example 3. (i) Facts. Same facts as Example 2, except that Employer S’s plan learns of the condition and attaches a rider to B’s certificate of coverage excluding coverage for the condition. Three months after enrollment, B’s condition recurs, and Employer S’s plan denies payment under the rider.

(ii) Conclusion. In this Example 3, the rider is a preexisting condition exclusion and Employer S’s plan may not impose a preexisting condition exclusion with respect to the condition for which B received treatment 7 months prior to the enrollment date. (In addition, such a rider would violate the provisions of §54.9802-1, even if B had received treatment for the condition within the 6-month period ending on the enrollment date.)

Example 4. (i) Facts. Individual C has asthma and is treated for that condition several times during the 6-month period before C’s enrollment date in Employer T’s plan. Three months after the enrollment date, C begins coverage under Employer T’s plan. Two months later, C is hospitalized for asthma.

(ii) Conclusion. In this Example 4, Employer T’s plan may impose a preexisting condition exclusion with respect to C’s asthma because care relating to C’s asthma was received during the 6-month period ending on C’s enrollment date (which, under the rules of paragraph (a)(3)(i) of this section, is the first day of the waiting period).

Example 5. (i) Facts. Individual D, who is subject to a preexisting condition exclusion imposed by Employer U’s plan, has diabetes, as well as retinal degeneration, a foot condition, and poor circulation (all of which are conditions that may be directly attributed to diabetes). D receives treatment for these conditions during the 6-month period ending on D’s enrollment date in Employer U’s plan. After enrolling in the plan, D stumbles and breaks a leg.

(ii) Conclusion. In this Example 5, the leg fracture is not a condition related to D’s diabetes, retinal degeneration, foot condition, or poor circulation, even though they may have contributed to the accident. Therefore, benefits to treat the leg fracture cannot be subject to a preexisting condition exclusion. However, any additional medical services that may be needed because of D’s preexisting diabetes, poor circulation, or retinal degeneration that would not be needed by another patient with a broken leg who does not have these conditions may be subject to the preexisting condition exclusion imposed under Employer U’s plan.

(ii) Maximum length of preexisting condition exclusion. A preexisting condition exclusion is not permitted to extend for more than 12 months (18 months in the case of a late enrollee) after the enrollment date. For example, for an enrollment date of August 1, 1998, the 12-month period after the enrollment date is the period commencing on August 1, 1998, and continuing through July 31, 1999; the 18-month period after the enrollment date is the period commencing on August 1, 1998, and continuing through January 31, 2000.

(iii) Reducing a preexisting condition exclusion period by creditable coverage — (A) The period of any preexisting condition exclusion that would otherwise apply to an individual under a group health plan is reduced by the number of days of creditable coverage the individual has as of the enrollment date, as counted under §54.9801-4. Creditable coverage may be evidenced through a certificate of creditable coverage (required under §54.9801-5(a)), or through other means in accordance with the rules of §54.9801-5(c).

(B) The rules of this paragraph (a)(2)(iii) are illustrated by the following example:

Example. (i) Facts. Individual D works for Employer X and has been covered continuously under X’s group health plan. D’s spouse works for Employer Y. Y maintains a group health plan that imposes a 12-month preexisting condition exclusion (reduced by creditable coverage) on all new enrollees. D enrolls in Y’s plan, but also stays covered under X’s plan. D presents Y’s plan with evidence of creditable coverage under X’s plan.

(ii) Conclusion. In this Example, Y’s plan must reduce the preexisting condition exclusion period that applies to D by the number of days of coverage that D had under X’s plan as of D’s enrollment date in Y’s plan (even though D’s coverage under X’s plan was continuing as of that date).

(iv) Other standards. See §54.9802-1 for other standards that may apply with respect to certain benefit limitations or restrictions under a group health plan. Other laws may also apply, such as the Uniformed Services Employment and Reemployment Rights Act (USERRA), which can affect the application of a preexisting condition exclusion to certain individuals who are reinstated in a group health plan following active military service.

(3) Enrollment definitions — (i) Enrollment date means the first day of coverage (as described in paragraph (a)(3)(ii) of this section) or, if there is a waiting period, the first day of the waiting period. If an individual receiving benefits under a group health plan changes benefit packages, or if the plan changes group health insurance issuers, the individual’s enrollment date does not change.

(ii) First day of coverage means, in the case of an individual covered for benefits under a group health plan, the first day of coverage under the plan and, in the case of an individual covered by health insurance coverage in the individual market, the first day of coverage under the policy or contract.

(iii) Waiting period means the period that must pass before coverage for an employee or dependent who is otherwise eligible to enroll under the terms of a group health plan can become effective. If an employee or dependent enrolls as a late enrollee or special enrollee, any period before such late or special enrollment is not a waiting period. If an individual seeks coverage in the individual market, a waiting period begins on the date the individual submits a substantially complete application for coverage and ends on —

(A) If the application results in coverage, the date coverage begins;

(B) If the application does not result in coverage, the date on which the application is denied by the issuer or the date on which the offer of coverage lapses.

(iv) The rules of paragraphs (a)(3)(i), (ii), and (iii) of this section are illustrated by the following examples:

Example 1. (i) Facts. Employer V’s group health plan provides for coverage to begin on the first day of the first payroll period following the date an employee is hired and completes the applicable enrollment forms, or on any subsequent January 1 after completion of the applicable enrollment forms. Employer V’s plan imposes a preexisting condition exclusion for 12 months (reduced by the individual’s creditable coverage) following an individual’s enrollment date. Employee E is hired by Employer V on October 13, 1998, and on October 14, 1998, E completes and files all the forms necessary to enroll in the plan. E’s coverage under the plan becomes effective on October 25, 1998 (which is the beginning of the first payroll period after E’s date of hire).

(ii) Conclusion. In this Example 1, E’s enrollment date is October 13, 1998 (which is the first day of the waiting period for E’s enrollment and is also E’s date of hire). Accordingly, with respect to E, the permissible 6-month period in paragraph (a)(2)(i) is the period from April 13, 1998 through October 12, 1998, the maximum permissible period during which Employer V’s plan can apply a preexisting condition exclusion under paragraph (a)(2)(ii) is the period from October 13, 1998 through October 12, 1999, and this period must be reduced under paragraph (a)(2)(iii) by E’s days of creditable coverage as of October 13, 1998.

Example 2. (i) Facts. A group health plan has two benefit package options, Option 1 and Option 2. Under each option a 12-month preexisting condition exclusion is imposed. Individual B is enrolled in Option 1 on the first day of employment with the employer maintaining the plan, remains enrolled in Option 1 for more than one year, and then decides to switch to Option 2 at open season.

(ii) Conclusion. In this Example 2, B cannot be subject to any preexisting condition exclusion under Option 2 because any preexisting condition exclusion period would have to begin on B’s enrollment date, which is B’s first day of coverage, rather than the date that B enrolled in Option 2. Therefore, the preexisting condition exclusion period expired before B switched to Option 2.

Example 3. (i) Facts. On May 13, 1997, Individual E is hired by an employer and enrolls in the employer’s group health plan. The plan provides benefits solely through an insurance policy offered by Issuer S. On December 27, 1998, E’s leg is injured in an accident and the leg is amputated. On January 1, 1999, the plan switches coverage to a policy offered by Issuer T. Issuer T’s policy excludes benefits for any prosthesis if the body part was lost before the effective date of coverage under the policy.

(ii) Conclusion. In this Example 3, E’s enrollment date is May 13, 1997, E’s first day of coverage. Therefore, the permissible 6-month look-back period for the preexisting condition exclusion imposed under Issuer T’s policy begins on November 13, 1996, and ends on May 12, 1997. In addition, the 12-month maximum permissible preexisting condition exclusion period begins on May 13, 1997, and ends on May 12, 1998. Accordingly, because no medical advice, diagnosis, care, or treatment was recommended to or received by E for the leg during the 6-month look-back period (even though medical care was provided within the 6-month period preceding the effective date of E’s coverage under Issuer T’s policy), the plan may not impose any preexisting condition exclusion with respect to E. Moreover, even if E had received treatment during the 6-month look-back period, the plan still would not be permitted to impose a preexisting condition exclusion because the 12-month maximum permissible preexisting condition exclusion period expired on May 12, 1998 (before the effective date of E’s coverage under Issuer T’s policy). See 29 CFR 2590.701-3(a)(3)(iv) Example 3 and 45 CFR 146.111(a)(3)(iv) Example 3 for a conclusion that Issuer T is similarly prohibited from imposing a preexisting condition exclusion with respect to E.

Example 4. (i) Facts. A group health plan limits eligibility for coverage to full-time employees of Employer Y. Coverage becomes effective on the first day of the month following the date the employee becomes eligible. Employee C begins working full-time for Employer Y on April 11. Prior to this date, C worked part-time for Y. C enrolls in the plan and coverage is effective May 1.

(ii) Conclusion. In this Example 4, C’s enrollment date is April 11 and the period from April 11 through April 30 is a waiting period. The period while C was working part-time, and therefore not in an eligible class of employees, is not part of the waiting period.

Example 5. (i) Facts. To be eligible for coverage under a multiemployer group health plan in the current calendar quarter, the plan requires an individual to have worked 250 hours in covered employment during the previous quarter. If the hours requirement is satisfied, coverage becomes effective on the first day of the current calendar quarter. Employee D begins work on January 28 and does not work 250 hours in covered employment during the first quarter (ending March 31). D works at least 250 hours in the second quarter (ending June 30) and is enrolled in the plan with coverage effective July 1 (the first day of the third quarter).

(ii) Conclusion. In this Example 5, D’s enrollment date is the first day of the quarter during which D satisfies the hours requirement, which is April 1. The period from April 1 through June 30 is a waiting period.

(v) Late enrollee means an individual whose enrollment in a plan is a late enrollment.

(vi) (A) Late enrollment means enrollment of an individual under a group health plan other than —

(1) On the earliest date on which coverage can become effective for the individual under the terms of the plan; or

(2) Through special enrollment. (For rules relating to special enrollment, see §54.9801-6.)

(B) If an individual ceases to be eligible for coverage under the plan, and then subsequently becomes eligible for coverage under the plan, only the individual’s most recent period of eligibility is taken into account in determining whether the individual is a late enrollee under the plan with respect to the most recent period of coverage. Similar rules apply if an individual again becomes eligible for coverage following a suspension of coverage that applied generally under the plan.

(vii) Examples. The rules of paragraphs (a)(3)(v) and (vi) of this section are illustrated by the following examples:

Example 1. (i) Facts. Employee F first becomes eligible to be covered by Employer W’s group health plan on January 1, 1999, but elects not to enroll in the plan until a later annual open enrollment period, with coverage effective January 1, 2001. F has no special enrollment right at that time.

(ii) Conclusion. In this Example 1, F is a late enrollee with respect to F’s coverage that became effective under the plan on January 1, 2001.

Example 2. (i) Facts. Same facts as Example 1, except that F terminates employment with Employer W on July 1, 1999, without having had any health insurance coverage under the plan. F is rehired by Employer W on January 1, 2000, and is eligible for and elects coverage under Employer W’s plan effective on January 1, 2000.

(ii) Conclusion. In this Example 2, F would not be a late enrollee with respect to F’s coverage that became effective on January 1, 2000.

(b) Exceptions pertaining to preexisting condition exclusions — (1) Newborns — (i) In general. Subject to paragraph (b)(3) of this section, a group health plan may not impose any preexisting condition exclusion on a child who, within 30 days after birth, is covered under any creditable coverage. Accordingly, if a child is enrolled in a group health plan (or other creditable coverage) within 30 days after birth and subsequently enrolls in another group health plan without a significant break in coverage (as described in §54.9801-4(b)(2)(iii)), the other plan may not impose any preexisting condition exclusion on the child.

(ii) Examples. The rules of this paragraph (b)(1) are illustrated by the following examples:

Example 1. (i) Facts. Individual E, who has no prior creditable coverage, begins working for Employer W and has accumulated 210 days of creditable coverage under Employer W’s group health plan on the date E gives birth to a child. Within 30 days after the birth, the child is enrolled in the plan. Ninety days after the birth, both E and the child terminate coverage under the plan. Both E and the child then experience a break in coverage of 45 days before E is hired by Employer X and the two are enrolled in Employer X’s group health plan.

(ii) Conclusion. In this Example 1, because E’s child is enrolled in Employer W’s plan within 30 days after birth, no preexisting condition exclusion may be imposed with respect to the child under Employer W’s plan. Likewise, Employer X’s plan may not impose any preexisting condition exclusion on E’s child because the child was covered under creditable coverage within 30 days after birth and had no significant break in coverage before enrolling in Employer X’s plan. On the other hand, because E had only 300 days of creditable coverage prior to E’s enrollment date in Employer X’s plan, Employer X’s plan may impose a preexisting condition exclusion on E for up to 65 days (66 days if the 12-month period after E’s enrollment date in X’s plan includes February 29).

Example 2. (i) Facts. Individual F is enrolled in a group health plan in which coverage is provided through a health insurance issuer. F gives birth. Under state law applicable to the health insurance issuer, health care expenses incurred for the child during the 30 days following birth are covered as part of F’s coverage. Although F may obtain coverage for the child beyond 30 days by timely requesting special enrollment and paying an additional premium, the issuer is prohibited under state law from recouping the cost of any expenses incurred for the child within the 30-day period if the child is not later enrolled.

(ii) Conclusion. In this Example 2, the child is covered under creditable coverage within 30 days after birth, regardless of whether the child enrolls as a special enrollee under the plan. Therefore, no preexisting condition exclusion may be imposed on the child unless the child has a significant break in coverage.

(2) Adopted children. Subject to paragraph (b)(3) of this section, a group health plan may not impose any preexisting condition exclusion on a child who is adopted or placed for adoption before attaining 18 years of age and who, within 30 days after the adoption or placement for adoption, is covered under any creditable coverage. Accordingly, if a child is enrolled in a group health plan (or other creditable coverage) within 30 days after adoption or placement for adoption and subsequently enrolls in another group health plan without a significant break in coverage (as described in §54.9801-4(b)(2)(iii)), the other plan may not impose any preexisting condition exclusion on the child. This rule does not apply to coverage before the date of such adoption or placement for adoption.

(3) Significant break in coverage. Paragraphs (b)(1) and (2) of this section no longer apply to a child after a significant break in coverage. (See §54.9801-4(b)(2)(iii) for rules relating to the determination of a significant break in coverage.)

(4) Special enrollment. For special enrollment rules relating to new dependents, see §54.9801-6(b).

(5) Pregnancy. A group health plan may not impose a preexisting condition exclusion relating to pregnancy.

(6) Genetic information — (i) A group health plan may not impose a preexisting condition exclusion relating to a condition based solely on genetic information. However, if an individual is diagnosed with a condition, even if the condition relates to genetic information, the plan may impose a preexisting condition exclusion with respect to the condition, subject to the other limitations of this section.

(ii) The rules of this paragraph (b)(6) are illustrated by the following example:

Example. (i) Facts. Individual A enrolls in a group health plan that imposes a 12-month maximum preexisting condition exclusion. Three months before A’s enrollment, A’s doctor told A that, based on genetic information, A has a predisposition towards breast cancer. A was not diagnosed with breast cancer at any time prior to A’s enrollment date in the plan. Nine months after A’s enrollment date in the plan, A is diagnosed with breast cancer.

(ii) Conclusion. In this Example, the plan may not impose a preexisting condition exclusion with respect to A’s breast cancer because, prior to A’s enrollment date, A was not diagnosed with breast cancer.

(c) General notice of preexisting condition exclusion. A group health plan imposing a preexisting condition exclusion must provide a written general notice of preexisting condition exclusion to participants under the plan and cannot impose a preexisting condition exclusion with respect to a participant or a dependent of the participant until such a notice is provided. (See 29 CFR 2590.701-3(c) and 45 CFR 146.111(c), which also impose this requirement on a health insurance issuer offering group health insurance coverage subject to a preexisting condition exclusion.)

(1) Manner and timing. A plan must provide the general notice of preexisting condition exclusion as part of any written application materials distributed by the plan for enrollment. If the plan does not distribute such materials, the notice must be provided by the earliest date following a request for enrollment that the plan, acting in a reasonable and prompt fashion, can provide the notice.

(2) Content. The general notice of preexisting condition exclusion must notify participants of the following:

(i) The existence and terms of any preexisting condition exclusion under the plan. This description includes the length of the plan’s look-back period (which is not to exceed 6 months under paragraph (a)(2)(i) of this section); the maximum preexisting condition exclusion period under the plan (which cannot exceed 12 months (or 18-months for late enrollees) under paragraph (a)(2)(ii) of this section); and how the plan will reduce the maximum preexisting condition exclusion period by creditable coverage (described in paragraph (a)(2)(iii) of this section).

(ii) A description of the rights of individuals to demonstrate creditable coverage, and any applicable waiting periods, through a certificate of creditable coverage (as required by §54.9801-5(a)) or through other means (as described in §54.9801-5(c)). This must include a description of the right of the individual to request a certificate from a prior plan or issuer, if necessary, and a statement that the current plan will assist in obtaining a certificate from any prior plan or issuer, if necessary.

(iii) A person to contact (including an address or telephone number) for obtaining additional information or assistance regarding the preexisting condition exclusion.

(3) Duplicate notices not required. If a notice satisfying the requirements of this paragraph (c) is provided to an individual by another party, the plan’s obligation to provide a general notice of preexisting condition exclusion with respect to that individual is satisfied. (See 29 CFR 2590.701-3(c)(3) and 45 CFR 146.111(c)(3), which provide that the issuer’s obligation is similarly satisfied.)

(4) Example with sample language. The rules of this paragraph (c) are illustrated by the following example, which includes sample language that plans can use as a basis for preparing their own notices to satisfy the requirements of this paragraph (c):

Example. (i) Facts. A group health plan makes coverage effective on the first day of the first calendar month after hire and on each January 1 following an open season. The plan imposes a 12-month maximum preexisting condition exclusion (18 months for late enrollees) and uses a 6-month look-back period. As part of the enrollment application materials, the plan provides the following statement:

(ii) Conclusion. In this Example, the plan satisfies the general notice requirement of this paragraph (c).

(d) Determination of creditable coverage — (1) Determination within reasonable time. If a group health plan receives creditable coverage information under §54.9801-5, the plan is required, within a reasonable time following receipt of the information, to make a determination regarding the amount of the individual’s creditable coverage and the length of any exclusion that remains. Whether this determination is made within a reasonable time depends on the relevant facts and circumstances. Relevant facts and circumstances include whether a plan’s application of a preexisting condition exclusion would prevent an individual from having access to urgent medical care. (See 29 CFR 2590.701-3(d) and 45 CFR 146.111(d), which also impose this requirement on a health insurance issuer offering group health insurance coverage.)

(2) No time limit on presenting evidence of creditable coverage. A plan may not impose any limit on the amount of time that an individual has to present a certificate or other evidence of creditable coverage.

(3) Example. The rules of this paragraph (d) are illustrated by the following example:

Example. (i) Facts. A group health plan imposes a preexisting condition exclusion period of 12 months. After receiving the general notice of preexisting condition exclusion, Individual H develops an urgent health condition before receiving a certificate of creditable coverage from H’s prior group health plan. H attests to the period of prior coverage, presents corroborating documentation of the coverage period, and authorizes the plan to request a certificate on H’s behalf in accordance with the rules of §54.9801-5.

(ii) Conclusion. In this Example, the plan must review the evidence presented by H and make a determination of creditable coverage within a reasonable time that is consistent with the urgency of H’s health condition. (This determination may be modified as permitted under paragraph (f) of this section.)

(e) Individual notice of period of preexisting condition exclusion. After an individual has presented evidence of creditable coverage and after the plan has made a determination of creditable coverage under paragraph (d) of this section, the plan must provide the individual a written notice of the length of preexisting condition exclusion that remains after offsetting for prior creditable coverage. This individual notice is not required to identify any medical conditions specific to the individual that could be subject to the exclusion. A plan is not required to provide this notice if the plan does not impose any preexisting condition exclusion on the individual or if the plan’s preexisting condition exclusion is completely offset by the individual’s prior creditable coverage. (See 29 CFR 2590.701-3(e) and 45 CFR 146.111(e), which also impose this requirement on a health insurance issuer offering group health insurance coverage.)

(1) Manner and timing. The individual notice must be provided by the earliest date following a determination that the plan, acting in a reasonable and prompt fashion, can provide the notice.

(2) Content. A plan must disclose —

(i) Its determination of any preexisting condition exclusion period that applies to the individual (including the last day on which the preexisting condition exclusion applies);

(ii) The basis for such determination, including the source and substance of any information on which the plan relied;

(iii) An explanation of the individual’s right to submit additional evidence of creditable coverage; and

(iv) A description of any applicable appeal procedures established by the plan.

(3) Duplicate notices not required. If a notice satisfying the requirements of this paragraph (e) is provided to an individual by another party, the plan’s obligation to provide this individual notice of preexisting condition exclusion with respect to that individual is satisfied. (See 29 CFR 2590.701-3(e)(3) and 45 CFR 146.111(e)(3), which provide that the issuer’s obligation is similarly satisfied.)

(4) Examples. The rules of this paragraph (e) are illustrated by the following examples:

Example 1. (i) Facts. A group health plan imposes a preexisting condition exclusion period of 12 months. After receiving the general notice of preexisting condition exclusion, Individual G presents a certificate of creditable coverage indicating 240 days of creditable coverage. Within seven days of receipt of the certificate, the plan determines that G is subject to a preexisting condition exclusion of 125 days, the last day of which is March 5. Five days later, the plan notifies G that, based on the certificate G submitted, G is subject to a preexisting condition exclusion period of 125 days, ending on March 5. The notice also explains the opportunity to submit additional evidence of creditable coverage and the plan’s appeal procedures. The notice does not identify any of G’s medical conditions that could be subject to the exclusion.

(ii) Conclusion. In this Example 1, the plan satisfies the requirements of this paragraph (e).

Example 2. (i) Facts. Same facts as in Example 1, except that the plan determines that G has 430 days of creditable coverage based on G’s certificate indicating 430 days of creditable coverage under G’s prior plan.

(ii) Conclusion. In this Example 2, the plan is not required to notify G that G will not be subject to a preexisting condition exclusion.

(f) Reconsideration. Nothing in this section prevents a plan from modifying an initial determination of creditable coverage if it determines that the individual did not have the claimed creditable coverage, provided that —

(1) A notice of the new determination (consistent with the requirements of paragraph (e) of this section) is provided to the individual; and

(2) Until the notice of the new determination is provided, the plan, for purposes of approving access to medical services (such as a pre-surgery authorization), acts in a manner consistent with the initial determination.

(a) General rules — (1) Creditable coverage. For purposes of this section, except as provided in paragraph (a)(2) of this section, the term creditable coverage means coverage of an individual under any of the following:

(i) A group health plan as defined in §54.9831-1(a).

(ii) Health insurance coverage as defined in §54.9801-2 (whether or not the entity offering the coverage is subject to Chapter 100 of Subtitle K, and without regard to whether the coverage is offered in the group market, the individual market, or otherwise).

(iii) Part A or B of Title XVIII of the Social Security Act (Medicare).

(iv) Title XIX of the Social Security Act (Medicaid), other than coverage consisting solely of benefits under section 1928 of the Social Security Act (the program for distribution of pediatric vaccines).

(v) Title 10 U.S.C. Chapter 55 (medical and dental care for members and certain former members of the uniformed services, and for their dependents; for purposes of Title 10 U.S.C. Chapter 55, uniformed services means the armed forces and the Commissioned Corps of the National Oceanic and Atmospheric Administration and of the Public Health Service).

(vi) A medical care program of the Indian Health Service or of a tribal organization.

(vii) A state health benefits risk pool. For purposes of this section, a state health benefits risk pool means —

(A) An organization qualifying under section 501(c)(26);

(B) A qualified high risk pool described in section 2744(c)(2) of the PHS Act; or

(C) Any other arrangement sponsored by a state, the membership composition of which is specified by the state and which is established and maintained primarily to provide health coverage for individuals who are residents of such state and who, by reason of the existence or history of a medical condition —

(1) Are unable to acquire medical care coverage for such condition through insurance or from an HMO, or

(2) Are able to acquire such coverage only at a rate which is substantially in excess of the rate for such coverage through the membership organization.

(viii) A health plan offered under Title 5 U.S.C. Chapter 89 (the Federal Employees Health Benefits Program).

(ix) A public health plan. For purposes of this section, a public health plan means any plan established or maintained by a state, the U.S. government, a foreign country, or any political subdivision of a state, the U.S. government, or a foreign country that provides health coverage to individuals who are enrolled in the plan.

(x) A health benefit plan under section 5(e) of the Peace Corps Act (22 U.S.C. 2504(e)).

(xi) Title XXI of the Social Security Act (State Children’s Health Insurance Program).

(2) Excluded coverage. Creditable coverage does not include coverage of solely excepted benefits (described in §54.9831-1).

(3) Methods of counting creditable coverage. For purposes of reducing any preexisting condition exclusion period, as provided under §54.9801-3(a)(2)(iii), the amount of an individual’s creditable coverage generally is determined by using the standard method described in paragraph (b) of this section. A plan may use the alternative method under paragraph (c) of this section with respect to any or all of the categories of benefits described under paragraph (c)(3) of this section or may provide that a health insurance issuer offering health insurance coverage under the plan may use the alternative method of counting creditable coverage.

(b) Standard method — (1) Specific benefits not considered. Under the standard method, the amount of creditable coverage is determined without regard to the specific benefits included in the coverage.

(2) Counting creditable coverage — (i) Based on days. For purposes of reducing the preexisting condition exclusion period that applies to an individual, the amount of creditable coverage is determined by counting all the days on which the individual has one or more types of creditable coverage. Accordingly, if on a particular day an individual has creditable coverage from more than one source, all the creditable coverage on that day is counted as one day. Any days in a waiting period for coverage are not creditable coverage.

(ii) Days not counted before significant break in coverage. Days of creditable coverage that occur before a significant break in coverage are not required to be counted.

(iii) Significant break in coverage defined — A significant break in coverage means a period of 63 consecutive days during each of which an individual does not have any creditable coverage. (See section 731(b)(2)(iii) of ERISA and section 2723(b)(2)(iii) of the PHS Act, which exclude from preemption state insurance laws that require a break of more than 63 days before an individual has a significant break in coverage for purposes of state law.)

(iv) Periods that toll a significant break. Days in a waiting period and days in an affiliation period are not taken into account in determining whether a significant break in coverage has occurred. In addition, for an individual who elects COBRA continuation coverage during the second election period provided under the Trade Act of 2002, the days between the date the individual lost group health plan coverage and the first day of the second COBRA election period are not taken into account in determining whether a significant break in coverage has occurred.

(v) Examples. The rules of this paragraph (b)(2) are illustrated by the following examples:

Example 1. (i) Facts. Individual A has creditable coverage under Employer P’s plan for 18 months before coverage ceases. A is provided a certificate of creditable coverage on A’s last day of coverage. Sixty-four days after the last date of coverage under P’s plan, A is hired by Employer Q and enrolls in Q’s group health plan. Q’s plan has a 12-month preexisting condition exclusion.

(ii) Conclusion. In this Example 1, A has a break in coverage of 63 days. Because A’s break in coverage is a significant break in coverage, Q’s plan may disregard A’s prior coverage and A may be subject to a 12-month preexisting condition exclusion.

Example 2. (i) Facts. Same facts as Example 1, except that A is hired by Q and enrolls in Q’s plan on the 63rd day after the last date of coverage under P’s plan.

(ii) Conclusion. In this Example 2, A has a break in coverage of 62 days. Because A’s break in coverage is not a significant break in coverage, Q’s plan must count A’s prior creditable coverage for purposes of reducing the plan’s preexisting condition exclusion period that applies to A.

Example 3. (i) Facts. Same facts as Example 1, except that Q’s plan provides benefits through an insurance policy that, as required by applicable state insurance laws, defines a significant break in coverage as 90 days.

(ii) Conclusion. In this Example 3, under state law, the issuer that provides group health insurance coverage to Q’s plan must count A’s period of creditable coverage prior to the 63-day break. (However, if Q’s plan was a self-insured plan, the coverage would not be subject to state law. Therefore, the health coverage would not be governed by the longer break rules and A’s previous health coverage could be disregarded.)

Example 4. [Reserved]

Example 5. (i) Facts. Individual C has creditable coverage under Employer S’s plan for 200 days before coverage ceases. C is provided a certificate of creditable coverage on C’s last day of coverage. C then does not have any creditable coverage for 51 days before being hired by Employer T. T’s plan has a 3-month waiting period. C works for T for 2 months and then terminates employment. Eleven days after terminating employment with T, C begins working for Employer U. U’s plan has no waiting period, but has a 6-month preexisting condition exclusion.

(ii) Conclusion. In this Example 5, C does not have a significant break in coverage because, after disregarding the waiting period under T’s plan, C had only a 62-day break in coverage (51 days plus 11 days). Accordingly, C has 200 days of creditable coverage, and U’s plan may not apply its 6-month preexisting condition exclusion with respect to C.

Example 6. [Reserved]

Example 7. (i) Facts. Individual E has creditable coverage under Employer X’s plan. E is provided a certificate of creditable coverage on E’s last day of coverage. On the 63rd day without coverage, E submits a substantially complete application for a health insurance policy in the individual market. E’s application is accepted and coverage is made effective 10 days later.

(ii) Conclusion. In this Example 7, because E applied for the policy before the end of the 63rd day, the period between the date of application and the first day of coverage is a waiting period and no significant break in coverage occurred even though the actual period without coverage was 73 days.

Example 8. (i) Facts. Same facts as Example 7, except that E’s application for a policy in the individual market is denied.

(ii) Conclusion. In this Example 8, even though E did not obtain coverage following application, the period between the date of application and the date the coverage was denied is a waiting period. However, to avoid a significant break in coverage, no later than the day after the application for the policy is denied E would need to do one of the following: submit a substantially complete application for a different individual market policy; obtain coverage in the group market; or be in a waiting period for coverage in the group market.

(vi) Other permissible counting methods — (A) Rule. Notwithstanding any other provisions of this paragraph (b)(2), for purposes of reducing a preexisting condition exclusion period (but not for purposes of issuing a certificate under §54.9801-5), a group health plan may determine the amount of creditable coverage in any other manner that is at least as favorable to the individual as the method set forth in this paragraph (b)(2), subject to the requirements of other applicable law.

(B) Example. The rule of this paragraph (b)(2)(vi) is illustrated by the following example:

Example. (i) Facts. Individual F has coverage under Group Health Plan Y from January 3, 1997, through March 25, 1997. F then becomes covered by Group Health Plan Z. F’s enrollment date in Plan Z is May 1, 1997. Plan Z has a 12-month preexisting condition exclusion.

(ii) Conclusion. In this Example, Plan Z may determine, in accordance with the rules prescribed in paragraphs (b)(2)(i), (ii), and (iii) of this section, that F has 82 days of creditable coverage (29 days in January, 28 days in February, and 25 days in March). Thus, the preexisting condition exclusion will no longer apply to F on February 8, 1998 (82 days before the 12-month anniversary of F’s enrollment (May 1)). For administrative convenience, however, Plan Z may consider that the preexisting condition exclusion will no longer apply to F on the first day of the month (February 1).

(c) Alternative method — (1) Specific benefits considered. Under the alternative method, a group health plan determines the amount of creditable coverage based on coverage within any category of benefits described in paragraph (c)(3) of this section and not based on coverage for any other benefits. The plan may use the alternative method for any or all of the categories. The plan may apply a different preexisting condition exclusion period with respect to each category (and may apply a different preexisting condition exclusion period for benefits that are not within any category). The creditable coverage determined for a category of benefits applies only for purposes of reducing the preexisting condition exclusion period with respect to that category. An individual’s creditable coverage for benefits that are not within any category for which the alternative method is being used is determined under the standard method of paragraph (b) of this section.

(2) Uniform application. A plan using the alternative method is required to apply it uniformly to all participants and beneficiaries under the plan. A plan that provides benefits (in part or in whole) through one or more policies or contracts of insurance will not fail the uniform application requirement of this paragraph (c)(2) if the alternative method is used (or not used) separately with respect to participants and beneficiaries under any policy or contact, provided that the alternative method is applied uniformly with respect to all coverage under that policy or contract. The use of the alternative method is required to be set forth in the plan.

(3) Categories of benefits. The alternative method for counting creditable coverage may be used for coverage for the following categories of benefits —

(i) Mental health;

(ii) Substance abuse treatment;

(iii) Prescription drugs;

(iv) Dental care; or

(v) Vision care.

(4) Plan notice. If the alternative method is used, the plan is required to —

(i) State prominently that the plan is using the alternative method of counting creditable coverage in disclosure statements concerning the plan, and state this to each enrollee at the time of enrollment under the plan; and

(ii) Include in these statements a description of the effect of using the alternative method, including an identification of the categories used.

(5) Disclosure of information on previous benefits. See §54.9801-5(b) for special rules concerning disclosure of coverage to a plan (or issuer) using the alternative method of counting creditable coverage under this paragraph (c).

(6) Counting creditable coverage — (i) In general. Under the alternative method, the group health plan counts creditable coverage within a category if any level of benefits is provided within the category. Coverage under a reimbursement account or arrangement, such as a flexible spending arrangement (as defined in section 106(c)(2)), does not constitute coverage within any category.

(ii) Special rules. In counting an individual’s creditable coverage under the alternative method, the group health plan first determines the amount of the individual’s creditable coverage that may be counted under paragraph (b) of this section, up to a total of 365 days of the most recent creditable coverage (546 days for a late enrollee). The period over which this creditable coverage is determined is referred to as the determination period. Then, for the category specified under the alternative method, the plan counts within the category all days of coverage that occurred during the determination period (whether or not a significant break in coverage for that category occurs), and reduces the individual’s preexisting condition exclusion period for that category by that number of days. The plan may determine the amount of creditable coverage in any other reasonable manner, uniformly applied, that is at least as favorable to the individual.

(iii) Example. The rules of this paragraph (c)(6) are illustrated by the following example:

Example. (i) Facts. Individual D enrolls in Employer V’s plan on January 1, 2001. Coverage under the plan includes prescription drug benefits. On April 1, 2001, the plan ceases providing prescription drug benefits. D’s employment with Employer V ends on January 1, 2002, after D was covered under Employer V’s group health plan for 365 days. D enrolls in Employer Y’s plan on February 1, 2002 (D’s enrollment date). Employer Y’s plan uses the alternative method of counting creditable coverage and imposes a 12-month preexisting condition exclusion on prescription drug benefits.

(ii) Conclusion. In this Example, Employer Y’s plan may impose a 275-day preexisting condition exclusion with respect to D for prescription drug benefits because D had 90 days of creditable coverage relating to prescription drug benefits within D’s determination period.

(a) Certificate of creditable coverage — (1) Entities required to provide certificate — (i) In general. A group health plan is required to furnish certificates of creditable coverage in accordance with this paragraph (a). (See section 701(e) of ERISA and section 2701(e) of the PHS Act, under which this obligation is also imposed on each health insurance issuer offering group health insurance coverage under the plan.)

(ii) Duplicate certificates not required. An entity required to provide a certificate under this paragraph (a) with respect to an individual satisfies that requirement if another party provides the certificate, but only to the extent that the certificate contains the information required in paragraph (a)(3) of this section. For example, a group health plan is deemed to have satisfied the certification requirement with respect to a participant or beneficiary if any other entity actually provides a certificate that includes the information required under paragraph (a)(3) of this section with respect to the participant or beneficiary.

(iii) Special rule for group health plans. To the extent coverage under a plan consists of group health insurance coverage, the plan satisfies the certification requirements under this paragraph (a) if any issuer offering the coverage is required to provide the certificates pursuant to an agreement between the plan and the issuer. For example, if there is an agreement between an issuer and an employer sponsoring a plan under which the issuer agrees to provide certificates for individuals covered under the plan, and the issuer fails to provide a certificate to an individual when the plan would have been required to provide one under this paragraph (a), then the plan does not violate the certification requirements of this paragraph (a) (though the issuer would have violated the certification requirements pursuant to section 701(e) of ERISA and section 2701(e) of the PHS Act).

(iv) Special rules relating to issuers providing coverage under a plan — (A)(1) Responsibility of issuer for coverage period. See 29 CFR 2590.701-5 and 45 CFR 146.115, under which an issuer is not required to provide information regarding coverage provided to an individual by another party.

(2) Example. The rule referenced by this paragraph (a)(1)(iv)(A) is illustrated by the following example:

Example. (i) Facts. A plan offers coverage with an HMO option from one issuer and an indemnity option from a different issuer. The HMO has not entered into an agreement with the plan to provide certificates as permitted under paragraph (a)(1)(iii) of this section.

(ii) Conclusion. In this Example, if an employee switches from the indemnity option to the HMO option and later ceases to be covered under the plan, any certificate provided by the HMO is not required to provide information regarding the employee’s coverage under the indemnity option.

(B)(1) Cessation of issuer coverage prior to cessation of coverage under a plan. If an individual’s coverage under an issuer’s policy or contract ceases before the individual’s coverage under the plan ceases, the issuer is required (under section 701(e) of ERISA and section 2701(e) of the PHS Act) to provide sufficient information to the plan (or to another party designated by the plan) to enable the plan (or other party), after cessation of the individual’s coverage under the plan, to provide a certificate that reflects the period of coverage under the policy or contract. By providing that information to the plan, the issuer satisfies its obligation to provide an automatic certificate for that period of creditable coverage with respect to the individual under paragraph (a)(2)(ii) of this section. The issuer, however, must still provide a certificate upon request as required under paragraph (a)(2)(iii) of this section. In addition, the issuer is required to cooperate with the plan in responding to any request made under paragraph (b)(2) of this section (relating to the alternative method of counting creditable coverage). Moreover, if the individual’s coverage under the plan ceases at the time the individual’s coverage under the issuer’s policy or contract ceases, the issuer must still provide an automatic certificate under paragraph (a)(2)(ii) of this section. If an individual’s coverage under an issuer’s policy or contract ceases on the effective date for changing enrollment options under the plan, the issuer may presume (absent information to the contrary) that the individual’s coverage under the plan continues. Therefore, the issuer is required to provide information to the plan in accordance with this paragraph (a)(1)(iv)(B)(1) (and is not required to provide an automatic certificate under paragraph (a)(2)(ii) of this section).

(2) Example. The rule of this paragraph (a)(1)(iv)(B) is illustrated by the following example:

Example. (i) Facts. A group health plan provides coverage under an HMO option and an indemnity option through different issuers, and only allows employees to switch on each January 1. Neither the HMO nor the indemnity issuer has entered into an agreement with the plan to provide certificates as permitted under paragraph (a)(1)(iii) of this section.

(ii) Conclusion. In this Example, if an employee switches from the indemnity option to the HMO option on January 1, the indemnity issuer must provide the plan (or a person designated by the plan) with appropriate information with respect to the individual’s coverage with the indemnity issuer. However, if the individual’s coverage with the indemnity issuer ceases at a date other than January 1, the issuer is instead required to provide the individual with an automatic certificate.

(2) Individuals for whom certificate must be provided; timing of issuance — (i) Individuals. A certificate must be provided, without charge, for participants or dependents who are or were covered under a group health plan upon the occurrence of any of the events described in paragraph (a)(2)(ii) or (iii) of this section.

(ii) Issuance of automatic certificates. The certificates described in this paragraph (a)(2)(ii) are referred to as automatic certificates.

(A) Qualified beneficiaries upon a qualifying event. In the case of an individual who is a qualified beneficiary (as defined in section 4980B(g)(3)) entitled to elect COBRA continuation coverage, an automatic certificate is required to be provided at the time the individual would lose coverage under the plan in the absence of COBRA continuation coverage or alternative coverage elected instead of COBRA continuation coverage. A plan satisfies this requirement if it provides the automatic certificate no later than the time a notice is required to be furnished for a qualifying event under section 4980B(f)(6) (relating to notices required under COBRA ).

(B) Other individuals when coverage ceases. In the case of an individual who is not a qualified beneficiary entitled to elect COBRA continuation coverage, an automatic certificate must be provided at the time the individual ceases to be covered under the plan. A plan satisfies the requirement to provide an automatic certificate at the time the individual ceases to be covered if it provides the automatic certificate within a reasonable time after coverage ceases (or after the expiration of any grace period for nonpayment of premiums).

(1) The cessation of temporary continuation coverage (TCC) under Title 5 U.S.C. Chapter 89 (the Federal Employees Health Benefit Program) is a cessation of coverage upon which an automatic certificate must be provided.

(2) In the case of an individual who is entitled to elect to continue coverage under a state program similar to COBRA and who receives the automatic certificate not later than the time a notice is required to be furnished under the state program, the certificate is deemed to be provided within a reasonable time after coverage ceases under the plan.

(3) If an individual’s coverage ceases due to the operation of a lifetime limit on all benefits, coverage is considered to cease for purposes of this paragraph (a)(2)(ii)(B) on the earliest date that a claim is denied due to the operation of the lifetime limit.

(C) Qualified beneficiaries when COBRA ceases. In the case of an individual who is a qualified beneficiary and has elected COBRA continuation coverage (or whose coverage has continued after the individual became entitled to elect COBRA continuation coverage), an automatic certificate is to be provided at the time the individual’s coverage under the plan ceases. A plan satisfies this requirement if it provides the automatic certificate within a reasonable time after coverage ceases (or after the expiration of any grace period for nonpayment of premiums). An automatic certificate is required to be provided to such an individual regardless of whether the individual has previously received an automatic certificate under paragraph (a)(2)(ii)(A) of this section.

(iii) Any individual upon request. A certificate must be provided in response to a request made by, or on behalf of, an individual at any time while the individual is covered under a plan and up to 24 months after coverage ceases. Thus, for example, a plan in which an individual enrolls may, if authorized by the individual, request a certificate of the individual’s creditable coverage on behalf of the individual from a plan in which the individual was formerly enrolled. After the request is received, a plan or issuer is required to provide the certificate by the earliest date that the plan, acting in a reasonable and prompt fashion, can provide the certificate. A certificate is required to be provided under this paragraph (a)(2)(iii) even if the individual has previously received a certificate under this paragraph (a)(2)(iii) or an automatic certificate under paragraph (a)(2)(ii) of this section.

(iv) Examples. The rules of this paragraph (a)(2) are illustrated by the following examples:

Example 1. (i) Facts. Individual A terminates employment with Employer Q. A is a qualified beneficiary entitled to elect COBRA continuation coverage under Employer Q’s group health plan. A notice of the rights provided under COBRA is typically furnished to qualified beneficiaries under the plan within 10 days after a covered employee terminates employment.

(ii) Conclusion. In this Example 1, the automatic certificate may be provided at the same time that A is provided the COBRA notice.

Example 2. (i) Facts. Same facts as Example 1, except that the automatic certificate for A is not completed by the time the COBRA notice is furnished to A.

(ii) Conclusion. In this Example 2, the automatic certificate may be provided after the COBRA notice but must be provided within the period permitted by law for the delivery of notices under COBRA.

Example 3. (i) Facts. Employer R maintains an insured group health plan. R has never had 20 employees and thus R’s plan is not subject to the COBRA continuation provisions. However, R is in a state that has a state program similar to COBRA. B terminates employment with R and loses coverage under R’s plan.

(ii) Conclusion. In this Example 3, the automatic certificate must be provided not later than the time a notice is required to be furnished under the state program.

Example 4. (i) Facts. Individual C terminates employment with Employer S and receives both a notice of C’s rights under COBRA and an automatic certificate. C elects COBRA continuation coverage under Employer S’s group health plan. After four months of COBRA continuation coverage and the expiration of a 30-day grace period, S’s group health plan determines that C’s COBRA continuation coverage has ceased due to a failure to make a timely payment for continuation coverage.

(ii) Conclusion. In this Example 4, the plan must provide an updated automatic certificate to C within a reasonable time after the end of the grace period.

Example 5. (i) Facts. Individual D is currently covered under the group health plan of Employer T. D requests a certificate, as permitted under paragraph (a)(2)(iii) of this section. Under the procedure for T’s plan, certificates are mailed (by first class mail) 7 business days following receipt of the request. This date reflects the earliest date that the plan, acting in a reasonable and prompt fashion, can provide certificates.

(ii) Conclusion. In this Example 5, the plan’s procedure satisfies paragraph (a)(2)(iii) of this section.

(3) Form and content of certificate — (i) Written certificate — (A) In general. Except as provided in paragraph (a)(3)(i)(B) of this section, the certificate must be provided in writing (including any form approved by the Secretary as a writing).

(B) Other permissible forms. No written certificate is required to be provided under this paragraph (a) with respect to a particular event described in paragraph (a)(2)(ii) or (iii) of this section, if —

(1) An individual who is entitled to receive the certificate requests that the certificate be sent to another plan or issuer instead of to the individual;

(2) The plan or issuer that would otherwise receive the certificate agrees to accept the information in this paragraph (a)(3) through means other than a written certificate (such as by telephone); and

(3) The receiving plan or issuer receives the information from the sending plan or issuer through such means within the time required under paragraph (a)(2) of this section.

(ii) Required information. The certificate must include the following —

(A) The date the certificate is issued;

(B) The name of the group health plan that provided the coverage described in the certificate;

(C) The name of the participant or dependent with respect to whom the certificate applies, and any other information necessary for the plan providing the coverage specified in the certificate to identify the individual, such as the individual’s identification number under the plan and the name of the participant if the certificate is for (or includes) a dependent;

(D) The name, address, and telephone number of the plan administrator or issuer required to provide the certificate;

(E) The telephone number to call for further information regarding the certificate (if different from paragraph (a)(3)(ii)(D) of this section);

(F) Either —

(1) A statement that an individual has at least 18 months (for this purpose, 546 days is deemed to be 18 months) of creditable coverage, disregarding days of creditable coverage before a significant break in coverage, or

(2) The date any waiting period (and affiliation period, if applicable) began and the date creditable coverage began;

(G) The date creditable coverage ended, unless the certificate indicates that creditable coverage is continuing as of the date of the certificate; and

(H) An educational statement regarding HIPAA, which explains:

(1) The restrictions on the ability of a plan or issuer to impose a preexisting condition exclusion (including an individual’s ability to reduce a preexisting condition exclusion by creditable coverage);

(2) Special enrollment rights;

(3) The prohibitions against discrimination based on any health factor;

(4) The right to individual health coverage;

(5) The fact that state law may require issuers to provide additional protections to individuals in that state; and

(6) Where to get more information.

(iii) Periods of coverage under the certificate. If an automatic certificate is provided pursuant to paragraph (a)(2)(ii) of this section, the period that must be included on the certificate is the last period of continuous coverage ending on the date coverage ceased. If an individual requests a certificate pursuant to paragraph (a)(2)(iii) of this section, the certificate provided must include each period of continuous coverage ending within the 24-month period ending on the date of the request (or continuing on the date of the request). A separate certificate may be provided for each such period of continuous coverage.

(iv) Combining information for families. A certificate may provide information with respect to both a participant and the participant’s dependents if the information is identical for each individual. If the information is not identical, certificates may be provided on one form if the form provides all the required information for each individual and separately states the information that is not identical.

(v) Model certificate. The requirements of paragraph (a)(3)(ii) of this section are satisfied if the plan provides a certificate in accordance with a model certificate authorized by the Secretary.

(vi) Excepted benefits; categories of benefits. No certificate is required to be furnished with respect to excepted benefits described in §54.9831-1(c). In addition, the information in the certificate regarding coverage is not required to specify categories of benefits described in §54.9801-4(c) (relating to the alternative method of counting creditable coverage). However, if excepted benefits are provided concurrently with other creditable coverage (so that the coverage does not consist solely of excepted benefits), information concerning the benefits may be required to be disclosed under paragraph (b) of this section.

(4) Procedures — (i) Method of delivery. The certificate is required to be provided to each individual described in paragraph (a)(2) of this section or an entity requesting the certificate on behalf of the individual. The certificate may be provided by first-class mail. If the certificate or certificates are provided to the participant and the participant’s spouse at the participant’s last known address, then the requirements of this paragraph (a)(4) are satisfied with respect to all individuals residing at that address. If a dependent’s last known address is different than the participant’s last known address, a separate certificate is required to be provided to the dependent at the dependent’s last known address. If separate certificates are being provided by mail to individuals who reside at the same address, separate mailings of each certificate are not required.

(ii) Procedure for requesting certificates. A plan or issuer must establish a written procedure for individuals to request and receive certificates pursuant to paragraph (a)(2)(iii) of this section. The written procedure must include all contact information necessary to request a certificate (such as name and phone number or address).

(iii) Designated recipients. If an automatic certificate is required to be provided under paragraph (a)(2)(ii) of this section, and the individual entitled to receive the certificate designates another individual or entity to receive the certificate, the plan or issuer responsible for providing the certificate is permitted to provide the certificate to the designated individual or entity. If a certificate is required to be provided upon request under paragraph (a)(2)(iii) of this section and the individual entitled to receive the certificate designates another individual or entity to receive the certificate, the plan or issuer responsible for providing the certificate is required to provide the certificate to the designated individual or entity.

(5) Special rules concerning dependent coverage — (i)(A) Reasonable efforts. A plan is required to use reasonable efforts to determine any information needed for a certificate relating to dependent coverage. In any case in which an automatic certificate is required to be furnished with respect to a dependent under paragraph (a)(2)(ii) of this section, no individual certificate is required to be furnished until the plan knows (or making reasonable efforts should know) of the dependent’s cessation of coverage under the plan.

(B) Example. The rules of this paragraph (a)(5)(i) are illustrated by the following example:

Example. (i) Facts. A group health plan covers employees and their dependents. The plan annually requests all employees to provide updated information regarding dependents, including the specific date on which an employee has a new dependent or on which a person ceases to be a dependent of the employee.

(ii) Conclusion. In this Example, the plan has satisfied the standard in this paragraph (a)(5)(i) of this section that it make reasonable efforts to determine the cessation of dependents’ coverage and the related dependent coverage information.

(ii) Special rules for demonstrating coverage. If a certificate furnished by a plan or issuer does not provide the name of any dependent covered by the certificate, the procedures described in paragraph (c)(5) of this section may be used to demonstrate dependent status. In addition, these procedures may be used to demonstrate that a child was covered under any creditable coverage within 30 days after birth, adoption, or placement for adoption. See also §54.9801-3(b), under which such a child cannot be subject to a preexisting condition exclusion.

(6) Special certification rules for entities not subject to Chapter 100 of Subtitle K — (i) Issuers. For rules requiring that issuers in the group and individual markets provide certificates consistent with the rules in this section, see section 701(e) of ERISA and sections 2701(e), 2721(b)(1)(B), and 2743 of the PHS Act.

(ii) Other entities. For special rules requiring that certain other entities not subject to Chapter 100 of Subtitle K provide certificates consistent with the rules in this section, see section 2791(a)(3) of the PHS Act applicable to entities described in sections 2701(c)(1)(C), (D), (E), and (F) of the PHS Act (relating to Medicare, Medicaid, TRICARE, and Indian Health Service), section 2721(b)(1)(A) of the PHS Act applicable to nonfederal governmental plans generally, and section 2721(b)(2)(C)(ii) of the PHS Act applicable to nonfederal governmental plans that elect to be excluded from the requirements of Subparts 1 through 3 of Part A of Title XXVII of the PHS Act.

(b) Disclosure of coverage to a plan or issuer using the alternative method of counting creditable coverage — (1) In general. After an individual provides a certificate of creditable coverage to a plan (or issuer) using the alternative method under §54.9801-4(c), that plan (or issuer) (requesting entity) must request that the entity that issued the certificate (prior entity) disclose the information set forth in paragraph (b)(2) of this section. The prior entity is required to disclose this information promptly.

(2) Information to be disclosed. The prior entity is required to identify to the requesting entity the categories of benefits with respect to which the requesting entity is using the alternative method of counting creditable coverage, and the requesting entity may identify specific information that the requesting entity reasonably needs in order to determine the individual’s creditable coverage with respect to any such category.

(3) Charge for providing information. The prior entity may charge the requesting entity for the reasonable cost of disclosing such information.

(c) Ability of an individual to demonstrate creditable coverage and waiting period information — (1) Purpose. The rules in this paragraph (c) implement section 9801(c)(4), which permits individuals to demonstrate the duration of creditable coverage through means other than certificates, and section 9801(e)(3), which requires the Secretary to establish rules designed to prevent an individual’s subsequent coverage under a group health plan or health insurance coverage from being adversely affected by an entity’s failure to provide a certificate with respect to that individual.

(2) In general. If the accuracy of a certificate is contested or a certificate is unavailable when needed by an individual, the individual has the right to demonstrate creditable coverage (and waiting or affiliation periods) through the presentation of documents or other means. For example, the individual may make such a demonstration when —

(i) An entity has failed to provide a certificate within the required time;

(ii) The individual has creditable coverage provided by an entity that is not required to provide a certificate of the coverage pursuant to paragraph (a) of this section;

(iii) The individual has an urgent medical condition that necessitates a determination before the individual can deliver a certificate to the plan; or

(iv) The individual lost a certificate that the individual had previously received and is unable to obtain another certificate.

(3) Evidence of creditable coverage — (i) Consideration of evidence — (A) A plan is required to take into account all information that it obtains or that is presented on behalf of an individual to make a determination, based on the relevant facts and circumstances, whether an individual has creditable coverage. A plan shall treat the individual as having furnished a certificate under paragraph (a) of this section if —

(1) The individual attests to the period of creditable coverage;

(2) The individual also presents relevant corroborating evidence of some creditable coverage during the period; and

(3) The individual cooperates with the plan’s efforts to verify the individual’s coverage.

(B) For purposes of this paragraph (c)(3)(i), cooperation includes providing (upon the plan’s or issuer’s request) a written authorization for the plan to request a certificate on behalf of the individual, and cooperating in efforts to determine the validity of the corroborating evidence and the dates of creditable coverage. While a plan may refuse to credit coverage where the individual fails to cooperate with the plan’s or issuer’s efforts to verify coverage, the plan may not consider an individual’s inability to obtain a certificate to be evidence of the absence of creditable coverage.

(ii) Documents. Documents that corroborate creditable coverage (and waiting or affiliation periods) include explanations of benefits (EOBs) or other correspondence from a plan or issuer indicating coverage, pay stubs showing a payroll deduction for health coverage, a health insurance identification card, a certificate of coverage under a group health policy, records from medical care providers indicating health coverage, third party statements verifying periods of coverage, and any other relevant documents that evidence periods of health coverage.

(iii) Other evidence. Creditable coverage (and waiting or affiliation periods) may also be corroborated through means other than documentation, such as by a telephone call from the plan or provider to a third party verifying creditable coverage.

(iv) Example. The rules of this paragraph (c)(3) are illustrated by the following example:

Example. (i) Facts. Individual F terminates employment with Employer W and, a month later, is hired by Employer X. X’s group health plan imposes a preexisting condition exclusion of 12 months on new enrollees under the plan and uses the standard method of determining creditable coverage. F fails to receive a certificate of prior coverage from the self-insured group health plan maintained by F’s prior employer, W, and requests a certificate. However, F (and X’s plan, on F’s behalf and with F’s cooperation) is unable to obtain a certificate from W’s plan. F attests that, to the best of F’s knowledge, F had at least 12 months of continuous coverage under W’s plan, and that the coverage ended no earlier than F’s termination of employment from W. In addition, F presents evidence of coverage, such as an explanation of benefits for a claim that was made during the relevant period.

(ii) Conclusion. In this Example, based solely on these facts, F has demonstrated creditable coverage for the 12 months of coverage under W’s plan in the same manner as if F had presented a written certificate of creditable coverage.

(4) Demonstrating categories of creditable coverage. Procedures similar to those described in this paragraph (c) apply in order to determine the duration of an individual’s creditable coverage with respect to any category under paragraph (b) of this section (relating to determining creditable coverage under the alternative method).

(5) Demonstrating dependent status. If, in the course of providing evidence (including a certificate) of creditable coverage, an individual is required to demonstrate dependent status, the group health plan or issuer is required to treat the individual as having furnished a certificate showing the dependent status if the individual attests to such dependency and the period of such status and the individual cooperates with the plan’s or issuer’s efforts to verify the dependent status.

(a) Special enrollment for certain individuals who lose coverage — (1) In general. A group health plan is required to permit current employees and dependents (as defined in §54.9801-2) who are described in paragraph (a)(2) of this section to enroll for coverage under the terms of the plan if the conditions in paragraph (a)(3) of this section are satisfied. The special enrollment rights under this paragraph (a) apply without regard to the dates on which an individual would otherwise be able to enroll under the plan. (See section 701(f)(1) of ERISA and section 2701(f)(1) of the PHS Act, under which this obligation is also imposed on a health insurance issuer offering group health insurance coverage.)

(2) Individuals eligible for special enrollment — (i) When employee loses coverage. A current employee and any dependents (including the employee’s spouse) each are eligible for special enrollment in any benefit package under the plan (subject to plan eligibility rules conditioning dependent enrollment on enrollment of the employee) if —

(A) The employee and the dependents are otherwise eligible to enroll in the benefit package;

(B) When coverage under the plan was previously offered, the employee had coverage under any group health plan or health insurance coverage; and

(C) The employee satisfies the conditions of paragraph (a)(3)(i), (ii), or (iii) of this section and, if applicable, paragraph (a)(3)(iv) of this section.

(ii) When dependent loses coverage — (A) A dependent of a current employee (including the employee’s spouse) and the employee each are eligible for special enrollment in any benefit package under the plan (subject to plan eligibility rules conditioning dependent enrollment on enrollment of the employee) if —

(1) The dependent and the employee are otherwise eligible to enroll in the benefit package;

(2) When coverage under the plan was previously offered, the dependent had coverage under any group health plan or health insurance coverage; and

(3) The dependent satisfies the conditions of paragraph (a)(3)(i), (ii), or (iii) of this section and, if applicable, paragraph (a)(3)(iv) of this section.

(B) However, the plan is not required to enroll any other dependent unless that dependent satisfies the criteria of this paragraph (a)(2)(ii), or the employee satisfies the criteria of paragraph (a)(2)(i) of this section.

(iii) Examples. The rules of this paragraph (a)(2) are illustrated by the following examples:

Example 1. (i) Facts. Individual A works for Employer X. A, A’s spouse, and A’s dependent children are eligible but not enrolled for coverage under X’s group health plan. A’s spouse works for Employer Y and at the time coverage was offered under X’s plan, A was enrolled in coverage under Y’s plan. Then, A loses eligibility for coverage under Y’s plan.

(ii) Conclusion. In this Example 1, because A satisfies the conditions for special enrollment under paragraph (a)(2)(i) of this section, A, A’s spouse, and A’s dependent children are eligible for special enrollment under X’s plan.

Example 2. (i) Facts. Individual A and A’s spouse are eligible but not enrolled for coverage under Group Health Plan P maintained by A’s employer. When A was first presented with an opportunity to enroll A and A’s spouse, they did not have other coverage. Later, A and A’s spouse enroll in Group Health Plan Q maintained by the employer of A’s spouse. During a subsequent open enrollment period in P, A and A’s spouse did not enroll because of their coverage under Q. They then lose eligibility for coverage under Q.

(ii) Conclusion. In this Example 2, because A and A’s spouse were covered under Q when they did not enroll in P during open enrollment, they satisfy the conditions for special enrollment under paragraphs (a)(2)(i) and (ii) of this section. Consequently, A and A’s spouse are eligible for special enrollment under P.

Example 3. (i) Facts. Individual B works for Employer X. B and B’s spouse are eligible but not enrolled for coverage under X’s group health plan. B’s spouse works for Employer Y and at the time coverage was offered under X’s plan, B’s spouse was enrolled in self-only coverage under Y’s group health plan. Then, B’s spouse loses eligibility for coverage under Y’s plan.

(ii) Conclusion. In this Example 3, because B’s spouse satisfies the conditions for special enrollment under paragraph (a)(2)(ii) of this section, both B and B’s spouse are eligible for special enrollment under X’s plan.

Example 4. (i) Facts. Individual A works for Employer X. X maintains a group health plan with two benefit packages — an HMO option and an indemnity option. Self-only and family coverage are available under both options. A enrolls for self-only coverage in the HMO option. A’s spouse works for Employer Y and was enrolled for self-only coverage under Y’s plan at the time coverage was offered under X’s plan. Then, A’s spouse loses coverage under Y’s plan. A requests special enrollment for A and A’s spouse under the plan’s indemnity option.

(ii) Conclusion. In this Example 4, because A’s spouse satisfies the conditions for special enrollment under paragraph (a)(2)(ii) of this section, both A and A’s spouse can enroll in either benefit package under X’s plan. Therefore, if A requests enrollment in accordance with the requirements of this section, the plan must allow A and A’s spouse to enroll in the indemnity option.

(3) Conditions for special enrollment — (i) Loss of eligibility for coverage. In the case of an employee or dependent who has coverage that is not COBRA continuation coverage, the conditions of this paragraph (a)(3)(i) are satisfied at the time the coverage is terminated as a result of loss of eligibility (regardless of whether the individual is eligible for or elects COBRA continuation coverage). Loss of eligibility under this paragraph (a)(3)(i) does not include a loss due to the failure of the employee or dependent to pay premiums on a timely basis or termination of coverage for cause (such as making a fraudulent claim or an intentional misrepresentation of a material fact in connection with the plan). Loss of eligibility for coverage under this paragraph (a)(3)(i) includes (but is not limited to) —

(A) Loss of eligibility for coverage as a result of legal separation, divorce, cessation of dependent status (such as attaining the maximum age to be eligible as a dependent child under the plan), death of an employee, termination of employment, reduction in the number of hours of employment, and any loss of eligibility for coverage after a period that is measured by reference to any of the foregoing;

(B) In the case of coverage offered through an HMO, or other arrangement, in the individual market that does not provide benefits to individuals who no longer reside, live, or work in a service area, loss of coverage because an individual no longer resides, lives, or works in the service area (whether or not within the choice of the individual);

(C) In the case of coverage offered through an HMO, or other arrangement, in the group market that does not provide benefits to individuals who no longer reside, live, or work in a service area, loss of coverage because an individual no longer resides, lives, or works in the service area (whether or not within the choice of the individual), and no other benefit package is available to the individual;

(D) A situation in which an individual incurs a claim that would meet or exceed a lifetime limit on all benefits; and

(E) A situation in which a plan no longer offers any benefits to the class of similarly situated individuals (as described in §54.9802-1(d)) that includes the individual.

(ii) Termination of employer contributions. In the case of an employee or dependent who has coverage that is not COBRA continuation coverage, the conditions of this paragraph (a)(3)(ii) are satisfied at the time employer contributions towards the employee’s or dependent’s coverage terminate. Employer contributions include contributions by any current or former employer that was contributing to coverage for the employee or dependent.

(iii) Exhaustion of COBRA continuation coverage. In the case of an employee or dependent who has coverage that is COBRA continuation coverage, the conditions of this paragraph (a)(3)(iii) are satisfied at the time the COBRA continuation coverage is exhausted. For purposes of this paragraph (a)(3)(iii), an individual who satisfies the conditions for special enrollment of paragraph (a)(3)(i) of this section, does not enroll, and instead elects and exhausts COBRA continuation coverage satisfies the conditions of this paragraph (a)(3)(iii). (Exhaustion of COBRA continuation coverage is defined in §54.9801-2.)

(iv) Written statement. A plan may require an employee declining coverage (for the employee or any dependent of the employee) to state in writing whether the coverage is being declined due to other health coverage only if, at or before the time the employee declines coverage, the employee is provided with notice of the requirement to provide the statement (and the consequences of the employee’s failure to provide the statement). If a plan requires such a statement, and an employee does not provide it, the plan is not required to provide special enrollment to the employee or any dependent of the employee under this paragraph (a)(3). A plan must treat an employee as having satisfied the plan requirement permitted under this paragraph (a)(3)(iv) if the employee provides a written statement that coverage was being declined because the employee or dependent had other coverage; a plan cannot require anything more for the employee to satisfy the plan’s requirement to provide a written statement. (For example, the plan cannot require that the statement be notarized.)

(v) The rules of this paragraph (a)(3) are illustrated by the following examples:

Example 1. (i) Facts. Individual D enrolls in a group health plan maintained by Employer Y. At the time D enrolls, Y pays 70 percent of the cost of employee coverage and D pays the rest. Y announces that beginning January 1, Y will no longer make employer contributions towards the coverage. Employees may maintain coverage, however, if they pay the total cost of the coverage.

(ii) Conclusion. In this Example 1, employer contributions towards D’s coverage ceased on January 1 and the conditions of paragraph (a)(3)(ii) of this section are satisfied on this date (regardless of whether D elects to pay the total cost and continue coverage under Y’s plan).

Example 2. (i) Facts. A group health plan provides coverage through two options — Option 1 and Option 2. Employees can enroll in either option only within 30 days of hire or on January 1 of each year. Employee A is eligible for both options and enrolls in Option 1. Effective July 1 the plan terminates coverage under Option 1 and the plan does not create an immediate open enrollment opportunity into Option 2.

(ii) Conclusion. In this Example 2, A has experienced a loss of eligibility for coverage that satisfies paragraph (a)(3)(i) of this section, and has satisfied the other conditions for special enrollment under paragraph (a)(2)(i) of this section. Therefore, if A satisfies the other conditions of this paragraph (a), the plan must permit A to enroll in Option 2 as a special enrollee. (A may also be eligible to enroll in another group health plan, such as a plan maintained by the employer of A’s spouse, as a special enrollee.) The outcome would be the same if Option 1 was terminated by an issuer and the plan made no other coverage available to A.

Example 3. (i) Facts. Individual C is covered under a group health plan maintained by Employer X. While covered under X’s plan, C was eligible for but did not enroll in a plan maintained by Employer Z, the employer of C’s spouse. C terminates employment with X and loses eligibility for coverage under X’s plan. C has a special enrollment right to enroll in Z’s plan, but C instead elects COBRA continuation coverage under X’s plan. C exhausts COBRA continuation coverage under X’s plan and requests special enrollment in Z’s plan.

(ii) Conclusion. In this Example 3, C has satisfied the conditions for special enrollment under paragraph (a)(3)(iii) of this section, and has satisfied the other conditions for special enrollment under paragraph (a)(2)(i) of this section. The special enrollment right that C had into Z’s plan immediately after the loss of eligibility for coverage under X’s plan was an offer of coverage under Z’s plan. When C later exhausts COBRA coverage under X’s plan, C has a second special enrollment right in Z’s plan.

(4) Applying for special enrollment and effective date of coverage — (i) A plan or issuer must allow an employee a period of at least 30 days after an event described in paragraph (a)(3) of this section (other than an event described in paragraph (a)(3)(i)(D)) to request enrollment (for the employee or the employee’s dependent). In the case of an event described in paragraph (a)(3)(i)(D) of this section (relating to loss of eligibility for coverage due to the operation of a lifetime limit on all benefits), a plan or issuer must allow an employee a period of at least 30 days after a claim is denied due to the operation of a lifetime limit on all benefits.

(ii) Coverage must begin no later than the first day of the first calendar month beginning after the date the plan or issuer receives the request for special enrollment.

(b) Special enrollment with respect to certain dependent beneficiaries — (1) In general. A group health plan that makes coverage available with respect to dependents is required to permit individuals described in paragraph (b)(2) of this section to be enrolled for coverage in a benefit package under the terms of the plan. Paragraph (b)(3) of this section describes the required special enrollment period and the date by which coverage must begin. The special enrollment rights under this paragraph (b) apply without regard to the dates on which an individual would otherwise be able to enroll under the plan. (See 29 CFR 2590.701-6(b) and 45 CFR 146.117(b), under which this obligation is also imposed on a health insurance issuer offering group health insurance coverage.)

(2) Individuals eligible for special enrollment. An individual is described in this paragraph (b)(2) if the individual is otherwise eligible for coverage in a benefit package under the plan and if the individual is described in paragraph (b)(2)(i), (ii), (iii), (iv), (v), or (vi) of this section.

(i) Current employee only. A current employee is described in this paragraph (b)(2)(i) if a person becomes a dependent of the individual through marriage, birth, adoption, or placement for adoption.

(ii) Spouse of a participant only. An individual is described in this paragraph (b)(2)(ii) if either —

(A) The individual becomes the spouse of a participant; or

(B) The individual is a spouse of a participant and a child becomes a dependent of the participant through birth, adoption, or placement for adoption.

(iii) Current employee and spouse. A current employee and an individual who is or becomes a spouse of such an employee, are described in this paragraph (b)(2)(iii) if either —

(A) The employee and the spouse become married; or

(B) The employee and spouse are married and a child becomes a dependent of the employee through birth, adoption, or placement for adoption.

(iv) Dependent of a participant only. An individual is described in this paragraph (b)(2)(iv) if the individual is a dependent (as defined in §54.9801-2) of a participant and the individual has become a dependent of the participant through marriage, birth, adoption, or placement for adoption.

(v) Current employee and a new dependent. A current employee and an individual who is a dependent of the employee, are described in this paragraph (b)(2)(v) if the individual becomes a dependent of the employee through marriage, birth, adoption, or placement for adoption.

(vi) Current employee, spouse, and a new dependent. A current employee, the employee’s spouse, and the employee’s dependent are described in this paragraph (b)(2)(vi) if the dependent becomes a dependent of the employee through marriage, birth, adoption, or placement for adoption.

(3) Applying for special enrollment and effective date of coverage — (i) Request. A plan must allow an individual a period of at least 30 days after the date of the marriage, birth, adoption, or placement for adoption (or, if dependent coverage is not generally made available at the time of the marriage, birth, adoption, or placement for adoption, a period of at least 30 days after the date the plan makes dependent coverage generally available) to request enrollment (for the individual or the individual’s dependent).

(ii) Reasonable procedures for special enrollment. [Reserved.]

(iii) Date coverage must begin — (A) Marriage. In the case of marriage, coverage must begin no later than the first day of the first calendar month beginning after the date the plan (or any issuer offering health insurance coverage under the plan) receives the request for special enrollment.

(B) Birth, adoption, or placement for adoption. Coverage must begin in the case of a dependent’s birth on the date of birth and in the case of a dependent’s adoption or placement for adoption no later than the date of such adoption or placement for adoption (or, if dependent coverage is not made generally available at the time of the birth, adoption, or placement for adoption, the date the plan makes dependent coverage available).

(4) Examples. The rules of this paragraph (b) are illustrated by the following examples:

Example 1. (i) Facts. An employer maintains a group health plan that offers all employees employee-only coverage, employee-plus-spouse coverage, or family coverage. Under the terms of the plan, any employee may elect to enroll when first hired (with coverage beginning on the date of hire) or during an annual open enrollment period held each December (with coverage beginning the following January 1). Employee A is hired on September 3. A is married to B, and they have no children. On March 15 in the following year a child C is born to A and B. Before that date, A and B have not been enrolled in the plan.

(ii) Conclusion. In this Example 1, the conditions for special enrollment of an employee with a spouse and new dependent under paragraph (b)(2)(vi) of this section are satisfied. If A satisfies the conditions of paragraph (b)(3) of this section for requesting enrollment timely, the plan will satisfy this paragraph (b) if it allows A to enroll either with employee-only coverage, with employee-plus-spouse coverage (for A and B), or with family coverage (for A, B, and C). The plan must allow whatever coverage is chosen to begin on March 15, the date of C’s birth.

Example 2. (i) Facts. Individual D works for Employer X. X maintains a group health plan with two benefit packages — an HMO option and an indemnity option. Self-only and family coverage are available under both options. D enrolls for self-only coverage in the HMO option. Then, a child, E, is placed for adoption with D. Within 30 days of the placement of E for adoption, D requests enrollment for D and E under the plan’s indemnity option.

(ii) Conclusion. In this Example 2, D and E satisfy the conditions for special enrollment under paragraphs (b)(2)(v) and (b)(3) of this section. Therefore, the plan must allow D and E to enroll in the indemnity coverage, effective as of the date of the placement for adoption.

(c) Notice of special enrollment. At or before the time an employee is initially offered the opportunity to enroll in a group health plan, the plan must furnish the employee with a notice of special enrollment that complies with the requirements of this paragraph (c).

(1) Description of special enrollment rights. The notice of special enrollment must include a description of special enrollment rights. The following model language may be used to satisfy this requirement:

(2) Additional information that may be required. The notice of special enrollment must also include, if applicable, the notice described in paragraph (a)(3)(iv) of this section (the notice required to be furnished to an individual declining coverage if the plan requires the reason for declining coverage to be in writing).

(d) Treatment of special enrollees — (1) If an individual requests enrollment while the individual is entitled to special enrollment under either paragraph (a) or (b) of this section, the individual is a special enrollee, even if the request for enrollment coincides with a late enrollment opportunity under the plan. Therefore, the individual cannot be treated as a late enrollee.

(2) Special enrollees must be offered all the benefit packages available to similarly situated individuals who enroll when first eligible. For this purpose, any difference in benefits or cost-sharing requirements for different individuals constitutes a different benefit package. In addition, a special enrollee cannot be required to pay more for coverage than a similarly situated individual who enrolls in the same coverage when first eligible. The length of any preexisting condition exclusion that may be applied to a special enrollee cannot exceed the length of any preexisting condition exclusion that is applied to similarly situated individuals who enroll when first eligible. For rules prohibiting the application of a preexisting condition exclusion to certain newborns, adopted children, and children placed for adoption, see §54.9801-3(b).

(3) The rules of this section are illustrated by the following example:

Example. (i) Facts. Employer Y maintains a group health plan that has an enrollment period for late enrollees every November 1 through November 30 with coverage effective the following January 1. On October 18, Individual B loses coverage under another group health plan and satisfies the requirements of paragraphs (a)(2), (3), and (4) of this section. B submits a completed application for coverage on November 2.

(ii) Conclusion. In this Example, B is a special enrollee. Therefore, even though B’s request for enrollment coincides with an open enrollment period, B’s coverage is required to be made effective no later than December 1 (rather than the plan’s January 1 effective date for late enrollees).

(a) Group health plan — (1) Defined. A group health plan means a plan (including a self-insured plan) of, or contributed to by, an employer (including a self-employed person) or employee organization to provide health care (directly or otherwise) to the employees, former employees, the employer, others associated or formerly associated with the employer in a business relationship, or their families.

(2) Determination of number of plans. [Reserved.]

(b) General exception for certain small group health plans. The requirements of §§54.9801-1 through 54.9801-6, 54.9802-1, 54.9802-1T, 54.9811-1T, 54.9812-1T, and 54.9833-1 do not apply to any group health plan for any plan year if, on the first day of the plan year, the plan has fewer than two participants who are current employees.

(c) Excepted benefits — (1) In general. The requirements of §§54.9801-1 through 54.9801-6, 54.9802-1, 54.9802-1T, 54.9811-1T, 54.9812-1T, and 54.9833-1 do not apply to any group health plan in relation to its provision of the benefits described in paragraph (c)(2), (3), (4), or (5) of this section (or any combination of these benefits).

(2) Benefits excepted in all circumstances. The following benefits are excepted in all circumstances —

(i) Coverage only for accident (including accidental death and dismemberment);

(ii) Disability income coverage;

(iii) Liability insurance, including general liability insurance and automobile liability insurance;

(iv) Coverage issued as a supplement to liability insurance;

(v) Workers’ compensation or similar coverage;

(vi) Automobile medical payment insurance;

(vii) Credit-only insurance (for example, mortgage insurance); and

(viii) Coverage for on-site medical clinics.

(3) Limited excepted benefits — (i) In general. Limited-scope dental benefits, limited-scope vision benefits, or long-term care benefits are excepted if they are provided under a separate policy, certificate, or contract of insurance, or are otherwise not an integral part of a group health plan as described in paragraph (c)(3)(ii) of this section. In addition, benefits provided under a health flexible spending arrangement are excepted benefits if they satisfy the requirements of paragraph (c)(3)(v) of this section.

(ii) Not an integral part of a group health plan. For purposes of this paragraph (c)(3), benefits are not an integral part of a group health plan (whether the benefits are provided through the same plan or a separate plan) only if the following two requirements are satisfied—

(A) Participants must have the right to elect not to receive coverage for the benefits; and

(B) If a participant elects to receive coverage for the benefits, the participant must pay an additional premium or contribution for that coverage.

(iii) Limited scope — (A) Dental benefits. Limited scope dental benefits are benefits substantially all of which are for treatment of the mouth (including any organ or structure within the mouth).

(B) Vision benefits. Limited scope vision benefits are benefits substantially all of which are for treatment of the eye.

(iv) Long-term care. Long-term care benefits are benefits that are either—

(A) Subject to state long-term care insurance laws;

(B) For qualified long-term care services, as defined in section 7702B(c)(1), or provided under a qualified long-term care insurance contract, as defined in section 7702B(b); or

(C) Based on cognitive impairment or a loss of functional capacity that is expected to be chronic.

(v) Health flexible spending arrangements. Benefits provided under a health flexible spending arrangement (as defined in section 106(c)(2)) are excepted for a class of participants only if they satisfy the following two requirements—

(A) Other group health plan coverage, not limited to excepted benefits, is made available for the year to the class of participants by reason of their employment; and

(B) The arrangement is structured so that the maximum benefit payable to any participant in the class for a year cannot exceed two times the participant’s salary reduction election under the arrangement for the year (or, if greater, cannot exceed $500 plus the amount of the participant’s salary reduction election). For this purpose, any amount that an employee can elect to receive as taxable income but elects to apply to the health flexible spending arrangement is considered a salary reduction election (regardless of whether the amount is characterized as salary or as a credit under the arrangement).

(4) Noncoordinated benefits — (i) Excepted benefits that are not coordinated. Coverage for only a specified disease or illness (for example, cancer-only policies) or hospital indemnity or other fixed indemnity insurance is excepted only if it meets each of the conditions specified in paragraph (c)(4)(ii) of this section. To be hospital indemnity or other fixed indemnity insurance, the insurance must pay a fixed dollar amount per day (or per other period) of hospitalization or illness (for example, $100/day) regardless of the amount of expenses incurred.

(ii) Conditions. Benefits are described in paragraph (c)(4)(i) of this section only if—

(A) The benefits are provided under a separate policy, certificate, or contract of insurance;

(B) There is no coordination between the provision of the benefits and an exclusion of benefits under any group health plan maintained by the same plan sponsor; and

(C) The benefits are paid with respect to an event without regard to whether benefits are provided with respect to the event under any group health plan maintained by the same plan sponsor.

(iii) Example. The rules of this paragraph (c)(4) are illustrated by the following example:

Example. (i) Facts. An employer sponsors a group health plan that provides coverage through an insurance policy. The policy provides benefits only for hospital stays at a fixed percentage of hospital expenses up to a maximum of $100 a day.

(ii) Conclusion. In this Example, even though the benefits under the policy satisfy the conditions in paragraph (c)(4)(ii) of this section, because the policy pays a percentage of expenses incurred rather than a fixed dollar amount, the benefits under the policy are not excepted benefits under this paragraph (c)(4). This is the result even if, in practice, the policy pays the maximum of $100 for every day of hospitalization.

(5) Supplemental benefits. (i) The following benefits are excepted only if they are provided under a separate policy, certificate, or contract of insurance—

(A) Medicare supplemental health insurance (as defined under section 1882(g)(1) of the Social Security Act; also known as Medigap or MedSupp insurance);

(B) Coverage supplemental to the coverage provided under Chapter 55, Title 10 of the United States Code (also known as TRICARE supplemental programs); and

(C) Similar supplemental coverage provided to coverage under a group health plan. To be similar supplemental coverage, the coverage must be specifically designed to fill gaps in primary coverage, such as coinsurance or deductibles. Similar supplemental coverage does not include coverage that becomes secondary or supplemental only under a coordination-of-benefits provision.

(ii) The rules of this paragraph (c)(5) are illustrated by the following example:

Example. (i) Facts. An employer sponsors a group health plan that provides coverage for both active employees and retirees. The coverage for retirees supplements benefits provided by Medicare, but does not meet the requirements for a supplemental policy under section 1882(g)(1) of the Social Security Act.

(ii) Conclusion. In this Example, the coverage provided to retirees does not meet the definition of supplemental excepted benefits under this paragraph (c)(5) because the coverage is not Medicare supplemental insurance as defined under section 1882(g)(1) of the Social Security Act, is not a TRICARE supplemental program, and is not supplemental to coverage provided under a group health plan.

(d) Treatment of partnerships. For purposes of this part:

(1) Treatment as a group health plan. (See 29 CFR 2590.732(d)(1) and 45 CFR 146.145(d)(1), under which a plan providing medical care, maintained by a partnership, and usually not treated as an employee welfare benefit plan under ERISA is treated as a group health plan for purposes of Part 7 of Subtitle B of Title I of ERISA and Title XXVII of the PHS Act.)

(2) Employment relationship. In the case of a group health plan, the term employer also includes the partnership in relation to any bona fide partner. In addition, the term employee also includes any bona fide partner. Whether or not an individual is a bona fide partner is determined based on all the relevant facts and circumstances, including whether the individual performs services on behalf of the partnership.

(3) Participants of group health plans. In the case of a group health plan, the term participant also includes any individual described in paragraph (d)(3)(i) or (ii) of this section if the individual is, or may become, eligible to receive a benefit under the plan or the individual’s beneficiaries may be eligible to receive any such benefit.

(i) In connection with a group health plan maintained by a partnership, the individual is a partner in relation to the partnership.

(ii) In connection with a group health plan maintained by a self-employed individual (under which one or more employees are participants), the individual is the self-employed individual.

(e) Determining the average number of employees. [Reserved.]

Sections 54.9801-1 through 54.9801-6, 54.9831-1, and this section are applicable for plan years beginning on or after July 1, 2005.

* * * * *

(b) * * *

Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.

Approved July 14, 2004.

Gregory F. Jenner,
Acting Assistant Secretary of the Treasury.

These proposed rules would modify the 63-day break-in-coverage rules with one significant substantive change. Under the proposed rules, the beginning of the period that is used for determining whether a significant break in coverage has occurred (generally 63 days) is tolled in cases in which a certificate of creditable coverage is not provided on or before the day coverage ceases. In those cases, the significant-break-in-coverage period is tolled until a certificate is provided but not beyond 44 days after the coverage ceases.

The Departments have fashioned this tolling rule (and a similar tolling rule for the 30-day period for requesting special enrollment) in an effort to address the inequity of individuals’ losing coverage without being aware that the coverage has ended while minimizing the burdens on subsequent plans and issuers that are not responsible for providing the missing or untimely certificates. Numerous situations have come to the attention of the Departments in which an individual’s health coverage is terminated but in which the individual does not learn of the termination of coverage until well after it occurs. The statute generally requires that a certificate of creditable coverage be provided at the time an individual ceases to be covered under a plan. The statute, the April 1997 interim rules, and the final regulations (published elsewhere in this issue of the Bulletin) all permit a plan or issuer to provide the certificate at a later date if it is provided at a time consistent with notices required under a COBRA continuation provision. The statute also directs the Secretaries to establish rules to prevent a plan or issuer’s failure to provide a certificate timely from adversely affecting the individual’s subsequent coverage. If a plan or issuer chooses to provide a certificate later than the date an individual loses coverage, as the regulations permit in certain circumstances, these proposed rules provide that an individual should not suffer from this rule of convenience for the plan or issuer. However, to prevent the abuse that might result from an open-ended tolling rule, an outside limit of 44 days is placed on this relief. This reflects the fact that, in most cases, plans and issuers are required to provide certificates within 44 days (although some plans and issuers may be required to provide certificates sooner than 44 days after coverage ceases and some entities are not required to provide certificates at all). The Departments have adopted this uniform limit on the tolling rule for purposes of consistency. New examples have been added to illustrate the tolling rule.

These proposed rules would modify the required elements for the educational statement in certificates of creditable coverage to require a disclosure about the Family and Medical Leave Act. Use of the first model certificate below by group health plans and group health insurance issuers, or use of the appropriate model certificate that appears in the preamble to the related final regulations published elsewhere in this issue of the Bulletin, will satisfy the requirements of paragraph (a)(3)(ii) in this section of the final regulations. Similarly, for purposes of complying with those final regulations, State Medicaid programs may use the second version below, or may use the appropriate model certificate that appears in the preamble to those final regulations. Thus, until this proposed regulation is published as a final regulation, entities may use either the model certificates published below, or those published elsewhere in this issue of the Bulletin. For entities that choose not to use the model certificates below until this proposed regulation is published as a final regulation, we welcome comments as to the applicability date for using them.

Under HIPAA, the April 1997 interim rules, and the final regulations, an individual wishing to special enroll following a loss of coverage is generally required to request enrollment not later than 30 days after the loss of eligibility, termination of employer contributions, or exhaustion of COBRA continuation coverage. For individuals whose coverage ceases and a certificate of creditable coverage is not provided on or before the date coverage ceases, this regulation provides for proposed tolling rules similar to those described above for determining a significant break. That is, the special enrollment period terminates at the end of the 30-day period that begins on the first day after the earlier of the date that a certificate of creditable coverage is provided or the date 44 days after coverage ceases.

The April 1997 interim rules did not establish procedures for processing requests for special enrollment beyond affirming the statutory requirement that requests be made not later than 30 days after the event giving rise to the special enrollment right and providing that the same requirements could be imposed on special enrollees that were imposed on other enrollees (e.g., that the request be made in writing). Some examples in the April 1997 interim rules could be read to suggest that plans and issuers could require individuals requesting special enrollment to file completed applications for health coverage by the end of the special enrollment period.

It has been brought to the Departments’ attention that some plans and issuers were imposing application requirements that could not reasonably be completed within the special enrollment period (for example, requiring the social security number of a newborn within 30 days of the birth), effectively denying individuals their right to special enroll their dependents. In this regard, the statute merely requires an employee to request special enrollment, or an individual to seek to enroll, during the special enrollment period. These proposed regulations preserve individuals’ access to special enrollment by clarifying that during the special enrollment period individuals are only required to make an oral or written request for special enrollment.

The proposed regulations provide further that after a timely request, the plan or issuer may require the individual to complete all enrollment materials within a reasonable time after the end of the special enrollment period. However, the enrollment procedure may only require information required from individuals who enroll when first eligible and information about the event giving rise to the special enrollment right. While a plan can impose a deadline for submitting the completed enrollment materials, the deadline must be extended for information that an individual making reasonable efforts cannot obtain within that deadline.

Thus, even where a plan requires social security numbers from individuals who enroll when first eligible, the plan must provide an extended deadline for receiving the social security number in the case of a newborn. In no event could a plan deny special enrollment for newborns because an employee could not provide a social security number for the newborn within the special enrollment period.

As regards the effective date of coverage for special enrollments, the proposed rules generally follow the statute, the April 1997 interim final rules, and the final regulations being published elsewhere in this issue of the Bulletin. However clarifications of the effective date of coverage are added to conform to the clarification of the special enrollment procedures. Where the special enrollment right results from a loss of eligibility for coverage or marriage, coverage generally must begin no later than the first day of the first calendar month after the date the plan or issuer receives the request for special enrollment. However, if the plan or issuer requires completion of additional enrollment materials, coverage must begin no later than the first day of the first calendar month after the plan or issuer receives enrollment materials that are substantially complete.

Where the special enrollment right results from a birth, coverage must begin on the date of birth. In the case of adoption or placement for adoption, coverage must begin no later than the date of such adoption or placement for adoption. If a plan or issuer requires completion of additional enrollment materials, the plan or issuer must provide benefits once the plan or issuer receives substantially complete enrollment materials. However, the benefits provided at that time must be retroactive to the date of birth, adoption, or placement for adoption.

The Departments welcome comments on these aspects of the proposed rule.

Various provisions in Chapter 100 of the Code, Part 7 of Subtitle B of Title I of ERISA, and Title XXVII of the PHS Act apply when an individual commences coverage or terminates coverage under a group health plan. For example, a certificate of creditable coverage must be provided when an individual ceases to be covered under a group health plan. Under the April 1997 interim rules, it was not always clear whether an individual changing benefit elections among those offered by an employer or employee organization was merely switching between benefit packages under a single plan or was switching from one plan to another. These proposed regulations add rules to remove this uncertainty.

Under these proposed regulations, all medical care benefits made available by an employer or employee organization (including a board of trustees of a multiemployer trust) are generally considered to constitute one group health plan (the default rule). However, the employer or employee organization can establish more than one group health plan if it is clear from the instruments governing the arrangements to provide medical care benefits that the benefits are being provided under separate plans and if the arrangements are operated pursuant to the instruments as separate plans. A multiemployer plan and a nonmultiemployer plan are always separate plans. Under an anti-abuse rule, separate plans are aggregated to the extent necessary to prevent the evasion of any legal requirement.

These rules provide plan sponsors great flexibility while minimizing the burden of making decisions about how many plans to maintain. For example, many employers may wish to minimize the number of certificates of creditable coverage required to be furnished to continuing employees. Under the default rule, because all health benefits provided by an employer are considered a single group health plan, there is no need to furnish a certificate of creditable coverage when an employee merely switches coverage among the options made available by the employer. This need would arise only if the employer designated separate benefit packages as separate plans in the plan documents and only if the benefit packages were also operated pursuant to the plan documents as separate plans.

The anti-abuse rule limits the flexibility of these rules to prevent evasions. For example, a plan sponsor might design an arrangement under which the participation of each of many employees in the arrangement would be considered a separate plan. On the face of it, such an arrangement might appear to satisfy the requirement for a plan being exempt from the requirements of Chapter 100 of the Code, Part 7 of ERISA, and Title XXVII of the PHS Act because on the first day of the plan year each plan would have fewer than two participants who are current employees. This would give the impression that the plans would not have to comply with the prohibitions against discriminating based on one or more health factors, with the restrictions on preexisting condition exclusions, nor with any of the other requirements of Chapter 100 of the Code, Part 7 of ERISA, and Title XXVII of the PHS Act. The anti-abuse rule would require the aggregation of plans under such an arrangement to the extent necessary to make the plans subject to the requirements of Chapter 100 of the Code, Part 7 of ERISA, and Title XXVII of the PHS Act. The anti-abuse rule would apply in similar fashion to prevent the evasion of any other law that applies to group health plans or to the parties administering them or providing benefits under them.

These proposed regulations add rules for counting the average number of employees employed by an employer during a year.^[38] Various rules in Chapter 100 of the Code, Part 7 of ERISA, and Title XXVII of the PHS Act require the determination of such an average number, including the Mental Health Parity Act provisions, the guaranteed access provisions under the PHS Act for small employers, and the exemption from the excise tax under the Code for certain small employers.

Under these proposed regulations, the average number of employees employed by an employer is determined by using a full-time equivalents method. Each full-time employee employed for the entire previous calendar year counts as one employee. Full-time employees employed less than the entire previous calendar year and part-time employees are counted by totaling their employment hours in the previous calendar year (but not to exceed 40 hours for any week) and dividing that number by the annual full-time hours under the employer’s general employment practices (but not exceeding 40 hours per week). Any resulting fraction is disregarded. For example, if these calculations produce a result of 50.9, the average number of employees is considered to be 50. If an employer existed for less than the entire previous calendar year (including not being in existence at all), then the determination of the average number of employees is made by estimating the average number of employees that it is reasonably expected that the employer will employ on business days in the current calendar year. For a multiemployer plan, the number of employees employed by the employer with the most employees is attributed to each employer with at least one employee participating in the plan.

HIPAA’s group market portability provisions, which limit the scope and application of preexisting condition exclusions and establish special enrollment rights, provide a minimum standard of protection designed to increase access to health coverage. The Departments crafted these proposed regulations to secure these protections under certain special circumstances, consistent with the intent of Congress, and to do so in a manner that is economically efficient. The Departments are unable to quantify the regulations’ economic benefits and costs, but believe that their benefits will justify their costs.

HIPAA’s primary economic effects ensue directly from its statutory provisions. HIPAA’s statutory group market portability provisions extend coverage to certain individuals and preexisting conditions not otherwise covered. This extension of coverage entails both benefits and costs. Individuals enjoying expanded coverage will realize benefits, sometimes including improvements in health and relief from so-called “job lock.” The costs of HIPAA’s portability provisions generally include the cost of extending coverage, as well as certain attendant administrative costs. The Departments believe that the benefits of HIPAA are concentrated in a relatively small population, while the costs are distributed broadly across group plan enrollees. The economic effects of HIPAA’s statutory portability provisions are discussed in detail in the preamble to the final regulation under the “Effects of the Statute” of the “Basis for Assessment of Economic Impact” section, published elsewhere in this issue of the Bulletin.

By clarifying and securing HIPAA’s statutory portability protections, these proposed regulations will help ensure that HIPAA rights are fully realized. The result is likely to be a small increase at the margin in the economic effects of HIPAA’s statutory portability provisions.

These proposed regulations are intended to secure and implement HIPAA’s group market portability and special enrollment provisions under certain special circumstances. The regulations will secure HIPAA’s portability rights for individuals who are not timely notified that their coverage has ended and for individuals whose coverage ends in connection with the taking of leave that is guaranteed under FMLA. The regulations also will clarify and thereby secure individuals’ special enrollment rights under HIPAA, and clarify the methodologies to be used by employers to determine the number of plans offered and the average number of individuals employed during a given year.

Additional economic benefits derive from the regulations’ clarifications of HIPAA requirements. The regulations will reduce uncertainty and costly disputes between employees, employers and issuers, and promote confidence among employees in health benefits’ value, thereby promoting labor market efficiency and fostering the establishment and continuation by employers of group health plans.

Benefits under these regulations will be concentrated among a small number of affected individuals while costs will be spread thinly across group plan enrollees.

Affected individuals will generally include those who would have lost access to coverage for needed medical care after being denied HIPAA portability and/or special enrollment rights due to time spent without coverage prior to receiving a certificate or while on FMLA-guaranteed leave. The benefits of these regulations for any particular affected individual may be significant. As noted above and under “Effects of the Statute” in the “Basis for Assessment of Economic Impact” section of the preamble to the final regulation, published elsewhere in this issue of the Bulletin, access to coverage for needed medical care is important to individuals’ health and productivity. However, the number of affected individuals, and therefore the aggregate cost of extended access to coverage under these regulations, is expected to be small, for several reasons. First, these regulations extend HIPAA rights only in instances where individuals are not timely notified that their coverage has ended or their coverage ends in connection with the taking of FMLA-guaranteed leave. Second, the period over which this regulation extends rights will often be short, insofar as certificates are often provided promptly after coverage ends and many family leave periods are far shorter than the guaranteed 12 weeks. Third, it is generally in individuals’ interest to minimize periods of uninsurance. Individuals are likely to exercise their portability and special enrollment rights as soon as possible after coverage ends, which will often be before any extension of such rights under these regulations becomes effective. Fourth, only a portion of individuals who enroll in health plans in circumstances where these regulations alone guarantee their special enrollment or portability rights would otherwise have been denied such rights. Fifth, only a small minority of individuals who avoid a significant break in coverage as a direct result of these regulations would otherwise have lost coverage for needed medical care. (The affected minority would be those who suffer from preexisting conditions, join health plans that exclude coverage for such conditions, and require treatment of such conditions during the exclusion periods.)

Affected individuals may also include some who would have been denied special enrollment rights if plans or issuers failed to recognize their requests for special enrollment or imposed unreasonable deadlines or requirements for completion of enrollment materials.

As noted above, the Departments expect that these regulations will increase at the margin the economic effects of HIPAA’s statutory portability provisions. For the reasons stated immediately above, the Departments believe that these increases will be small on aggregate, adding only a small increment to the costs attributable to HIPAA’s statutory portability provisions, which themselves amount to a small fraction of one percent of health plan expenditures. Additionally, as with the cost of HIPAA’s statutory portability provisions, the majority of these costs will be borne by group plan enrollees. The Departments expect these regulations to have little or no perceptible negative impact on employers’ propensity to offer health benefit plans or on the generosity of those plans. In sum, the Departments expect that the benefits of these regulations, which can be very large for a particular affected individual, will justify their costs. The basis for the Departments’ conclusions is detailed below.

The Departments solicit comments on their conclusions and their basis for them, and empirical data or other information that would support a fuller or more accurate analysis.

Under Executive Order 12866 (58 FR 551735, Oct. 4, 1993), the Departments must determine whether a regulatory action is “significant” and therefore subject to the requirements of the Executive Order and subject to review by the Office of Management and Budget (OMB). Under section 3(f), the order defines a “significant regulatory action” as an action that is likely to result in a rule: (1) having an annual effect on the economy of $100 million or more, or adversely and materially affecting a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or state, local or tribal governments or communities (also referred to as “economically significant”); (2) creating serious inconsistency or otherwise interfering with an action taken or planned by another agency; (3) materially altering the budgetary impacts of entitlement grants, user fees, or loan programs or the rights and obligations of recipients thereof; or (4) raising novel legal or policy issues arising out of legal mandates, the President’s priorities, or the principles set forth in the Executive Order.

Pursuant to the terms of the Executive Order, the Departments have determined that this action raises novel policy issues arising out of legal mandates. Therefore, this notice is “significant” and subject to OMB review under Section 3(f)(4) of the Executive Order. Consistent with the Executive Order, the Departments have assessed the costs and benefits of this regulatory action. The Departments’ assessment, and the analysis underlying that assessment, is detailed below. The Departments performed a comprehensive, unified analysis to estimate the costs and benefits attributable to the regulations for purposes of compliance with Executive Order 12866, the Regulatory Flexibility Act, and the Paperwork Reduction Act.

These proposed regulations clarify and interpret the HIPAA portability provisions under Section 701 of the Employee Retirement Income Security Act of 1974 (ERISA), Section 2701 of the Public Health Service Act, and Section 9801 of the Internal Revenue Code of 1986. The regulations are needed to secure and implement HIPAA’s portability rights for individuals who are not timely notified that their coverage has ended and for individuals whose coverage ends in connection with the taking of leave that is guaranteed under FMLA, and to clarify and secure individuals’ special enrollment rights under HIPAA.

As noted above, HIPAA’s primary economic effects ensue directly from its statutory provisions. HIPAA’s statutory group market portability provisions extend coverage to certain individuals and preexisting conditions not otherwise covered. This extension of coverage entails both benefits and costs. The economic effects of HIPAA’s statutory portability provisions is summarized above and discussed in detail under the “Basis for Assessment of Economic Impact” section of the preamble to the final regulation, published elsewhere in this issue of the Bulletin.

Also as noted above, by clarifying and securing HIPAA’s statutory portability protections, these regulations will help ensure that HIPAA rights are fully realized. The result is likely to be a small increase at the margin in the economic effects of HIPAA’s statutory portability provisions. The benefits of these regulations will be concentrated among a small number of affected individuals, while their costs will be spread thinly across plans and issuers. The regulations also will reduce uncertainty about health benefits’ scope and value, thereby promoting employee health benefit coverage and labor market efficiency. The Departments believe that the regulations’ benefits will justify their cost. The Departments assessment of the expected economic effects of the regulation are summarized above and discussed in detail below.

The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA), imposes certain requirements with respect to Federal rules that are subject to the notice and comment requirements of section 553(b) of the Administrative Procedure Act ( 5 U.S.C. 551 et seq.) and which are likely to have a significant economic impact on a substantial number of small entities. Section 603 of the RFA stipulates that an agency, unless it certifies that a proposed rule will not have a significant economic impact on a substantial number of small entities, must present an initial regulatory flexibility analysis at the time of publication of the notice of proposed rulemaking that describes the impact of the rule on small entities and seeks public comment on such impact. Small entities include small businesses, organizations, and governmental jurisdictions.

For purposes of analysis under the RFA, the Departments consider a small entity to be an employee benefit plan with fewer than 100 participants. The basis for this definition is found in section 104(a)(2) of ERISA, which permits the Secretary of Labor to prescribe simplified annual reports for pension plans which cover fewer than 100 participants. Under section 104(a)(3), the Secretary may also provide for simplified annual reporting and disclosure if the statutory requirements of part 1 of Title I of ERISA would otherwise be inappropriate for welfare benefit plans. Pursuant to the authority of section 104(a)(3), the Department of Labor has previously issued at 29 CFR 2520.104-20, 2520.104-21, 2520.104-41, 2520.104-46 and 2520.104b-10 certain simplified reporting provisions and limited exemptions from reporting and disclosure requirements for small plans, including unfunded or insured welfare plans covering fewer than 100 participants and which satisfy certain other requirements.

Further, while some small plans are maintained by large employers, most are maintained by small employers. Both small and large plans may enlist small third party service providers to perform administrative functions, but it is generally understood that third party service providers transfer their costs to their plan clients in the form of fees. Thus, the Departments believe that assessing the impact of this rule on small plans is an appropriate substitute for evaluating the effect on small entities. The definition of small entity considered appropriate for this purpose differs, however, from a definition of small business based on size standards promulgated by the Small Business Administration (SBA) (13 CFR 121.201) pursuant to the Small Business Act (5 U.S.C. 631 et seq.). The Department of Labor solicited comments on the use of this standard for evaluating the effects of the proposal on small entities. No comments were received with respect to the standard. Therefore, a summary of the initial regulatory flexibility analysis based on the 100 participant size standard is presented below.

The economic effects of HIPAA’s statutory provisions on small plans are discussed extensively under the “Regulatory Flexibility Act — Department of Labor and Department of Health and Human Services” section of the preamble to the final regulation, published elsewhere in this issue of the Bulletin.

By clarifying and securing HIPAA’s statutory portability protections, these regulations will help ensure that these benefits are fully realized. The result is likely to be a small increase in the economic effects of HIPAA’s statutory provisions. The Departments were unable to estimate the amount of this increase. However, the direct financial value of coverage extensions pursuant to HIPAA’s statutory portability provisions are estimated to be approximately $180 million for small plans, or a small fraction of one percent of total small plan expenditures.^[39]

The regulations also will reduce uncertainty about health benefits’ scope and value, thereby promoting employee health benefit coverage, including coverage under small plans, and labor market efficiency.

The benefits of these regulations will be concentrated among a small number of affected small group plan enrollees, while their costs will be spread thinly across small group plans enrollees. The benefits of these regulations for any particular affected individual, which may include improved health and productivity, may be significant. However, as previously noted, the number of affected individuals, and therefore the aggregate cost of these regulations, is expected to be small. The Departments believe that the benefits to affected individuals of the application of these regulations to small plans justify the cost to small plans of such application. The basis for the Departments’ conclusions is detailed below.

The Departments generally expect the impact of the regulations on any particular small plan to be small. A very large majority of small plans are fully insured, so the cost will fall nominally on issuers rather than from plans. Issuers are expected to pass this cost back to plans and enrollees, but will spread much of it across a large number of plans, thereby minimizing the impact on any particular plan. However, it is possible that small plans that self-insure, or fully insured small plans whose premiums are tied closely to their particular claims experience, might bear all or most of the cost associated with extensions of coverage attributable directly to these regulations. The Departments have no way to quantify the incidence or magnitude of such costs, and solicit comments on such incidence and magnitude, and on whether these regulations would have a significant impact on a substantial number of small plans.

Notwithstanding the determinations of the Departments of Labor and of Health and Human Services, for purposes of the Department of the Treasury this notice of proposed rulemaking is not a significant regulatory action. Because this notice of proposed rulemaking does not impose a collection of information on small entities and is not subject to section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5), the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply pursuant to 5 U.S.C. 603(a), which exempts from the Regulatory Flexibility Act’s requirements certain rules involving the internal revenue laws. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

These final regulations include three separate collections of information as that term is defined in the Paperwork Reduction Act of 1995 (PRA 95), 44 U.S.C. 3502(3): the Notice of Enrollment Rights, Notice of Preexisting Condition Exclusion, and Certificate of Creditable Coverage. Each of these disclosures is currently approved by the Office of Management and Budget (OMB) through October 31, 2006, in accordance with PRA 95 under control numbers 1210-0101, 1210-0102, and 1210-0103.

These final regulations include a collection of information as that term is defined in PRA 95: the Notice of Enrollment Rights, Notice of Preexisting Condition Exclusion, and Certificate of Creditable Coverage. Each of these disclosures is currently approved by OMB under control number 1545-1537.

These final regulations include three separate collections of information as that term is defined in PRA 95: the Notice of Enrollment Rights, Notice of Preexisting Condition Exclusion, and Certificate of Creditable Coverage. Each of these disclosures is currently approved by OMB through June 30, 2006, in accordance with PRA 95 under control number 0938-0702.

The rule being issued here is subject to the provisions of the Small Business Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 801 et seq.) and, if finalized, will be transmitted to Congress and the Comptroller General for review. The rule is not a “major rule” as that term is defined in 5 U.S.C. 804, because it is not likely to result in (1) an annual effect on the economy of $100 million or more; (2) a major increase in costs or prices for consumers, individual industries, or federal, state, or local government agencies, or geographic regions; or (3) significant adverse effects on competition, employment, investment, productivity, innovation, or on the ability of United States-based enterprises to compete with foreign-based enterprises in domestic or export markets.

Section 202 of the Unfunded Mandates Reform Act of 1995 requires that agencies assess anticipated costs and benefits before issuing any rule that may result in an expenditure in any 1 year by state, local, or tribal governments, in the aggregate, or by the private sector, of $100 million. These proposed regulations have no such mandated consequential effect on state, local, or tribal governments, or on the private sector.

Executive Order 13132 outlines fundamental principles of federalism. It requires adherence to specific criteria by federal agencies in formulating and implementing policies that have “substantial direct effects” on the States, the relationship between the national government and States, or on the distribution of power and responsibilities among the various levels of government. Federal agencies promulgating regulations that have these federalism implications must consult with State and local officials, and describe the extent of their consultation and the nature of the concerns of State and local officials in the preamble to the regulation.

In the Departments’ view, these proposed regulations have federalism implications because they may have substantial direct effects on the States, the relationship between the national government and States, or on the distribution of power and responsibilities among the various levels of government. However, in the Departments’ view, the federalism implications of these proposed regulations are substantially mitigated because, with respect to health insurance issuers, the vast majority of States have enacted laws which meet or exceed the federal HIPAA portability standards.

In general, through section 514, ERISA supersedes State laws to the extent that they relate to any covered employee benefit plan, and preserves State laws that regulate insurance, banking or securities. While ERISA prohibits States from regulating a plan as an insurance or investment company or bank, HIPAA added a new section to ERISA (as well as to the PHS Act) narrowly preempting State requirements for issuers of group health insurance coverage. Specifically, with respect to seven provisions of the HIPAA portability rules, states may impose stricter obligations on health insurance issuers.^[40] Moreover, with respect to other requirements for health insurance issuers, states may continue to apply state law requirements except to the extent that such requirements prevent the application of HIPAA’s portability, access, and renewability provisions.

In enacting these new preemption provisions, Congress intended to preempt State insurance requirements only to the extent that they prevent the application of the basic protections set forth in HIPAA. HIPAA’s conference report states that the conferees intended the narrowest preemption of State laws with regard to health insurance issuers. H.R. Conf. Rep. No. 736, 104^th Cong. 2d Session 205 (1996). State insurance laws that are more stringent than the federal requirements are unlikely to “prevent the application of” the HIPAA portability provisions, and be preempted. Accordingly, States have significant latitude to impose requirements on health insurance insurers that are more restrictive than the federal law.

Guidance conveying this interpretation of HIPAA’s preemption provisions was published in the Federal Register on April 8, 1997, 62 F.R. 16904. These proposed regulations clarify and implement the statute’s minimum standards and do not significantly reduce the discretion given the States by the statute. Moreover, the Departments understand that the vast majority of States have requirements that meet or exceed the minimum requirements of the HIPAA portability provisions.

HIPAA provides that the States may enforce the provisions of HIPAA as they pertain to issuers, but that the Secretary of Health and Human Services must enforce any provisions that a State fails to substantially enforce. To date, CMS enforces the HIPAA portability provisions in only one State in accordance with that State’s specific request to do so. When exercising its responsibility to enforce the provisions of HIPAA, CMS works cooperatively with the State for the purpose of addressing the State’s concerns and avoiding conflicts with the exercise of State authority. CMS has developed procedures to implement its enforcement responsibilities, and to afford the States the maximum opportunity to enforce HIPAA’s requirements in the first instance. CMS’s procedures address the handling of reports that States may not be enforcing HIPAA’s requirements, and the mechanism for allocating responsibility between the States and CMS. In compliance with Executive Order 13132’s requirement that agencies examine closely any policies that may have federalism implications or limit the policymaking discretion of the States, the Department of Labor and CMS have engaged in numerous efforts to consult and work cooperatively with affected State and local officials.

For example, the Departments sought and received input from State insurance regulators and the National Association of Insurance Commissioners (NAIC). The NAIC is a non-profit corporation established by the insurance commissioners of the 50 States, the District of Columbia, and the four U.S. territories. In most States the Insurance Commissioner is appointed by the Governor, in approximately 14 States, the insurance commissioner is an elected official. Among other activities, it provides a forum for the development of uniform policy when uniformity is appropriate. Its members meet, discuss and offer solutions to mutual problems. The NAIC sponsors quarterly meetings to provide a forum for the exchange of ideas and in-depth consideration of insurance issues by regulators, industry representatives and consumers. CMS and the Department of Labor staff have consistently attended these quarterly meetings to listen to the concerns of the State Insurance Departments regarding HIPAA portability issues. In addition to the general discussions, committee meetings, and task groups, the NAIC sponsors the standing CMS/DOL meeting on HIPAA issues for members during the quarterly conferences. This meeting provides CMS and the Department of Labor with the opportunity to provide updates on regulations, bulletins, enforcement actions, and outreach efforts regarding HIPAA.

The Departments received written comments on the interim regulation from the NAIC and from ten States. In general, these comments raised technical issues that the Departments considered in conjunction with similar issues raised by other commenters. In a letter sent before issuance of the interim regulation, the NAIC expressed concerns that the Departments interpret the new preemption provisions of HIPAA narrowly so as to give the States flexibility to impose more stringent requirements. As discussed above, the Departments address this concern in the preamble to the interim regulation.

In addition, the Departments specifically consulted with the NAIC in developing these proposed regulations. Through the NAIC, the Departments sought and received the input of State insurance departments regarding certain insurance industry definitions, enrollment procedures and standard coverage terms. This input is generally reflected in the discussion of comments received and changes made in Section B — Overview of the Regulations of the preamble to the final regulations published elsewhere in this issue of the Bulletin.

The Departments have also cooperated with the States in several ongoing outreach initiatives, through which information on HIPAA is shared among federal regulators, State regulators and the regulated community. In particular, the Department of Labor has established a Health Benefits Education Campaign with more than 70 partners, including CMS, NAIC and many business and consumer groups. CMS has sponsored conferences with the States — the Consumer Outreach and Advocacy conferences in March 1999 and June 2000, and the Implementation and Enforcement of HIPAA National State-Federal Conferences in August 1999, 2000, 2001, 2002, and 2003. Furthermore, both the Department of Labor and CMS websites offer links to important State websites and other resources, facilitating coordination between the State and federal regulators and the regulated community.

Throughout the process of developing these regulations, to the extent feasible within the specific preemption provisions of HIPAA, the Departments have attempted to balance the States’ interests in regulating health insurance issuers, and the Congress’ intent to provide uniform minimum protections to consumers in every State. By doing so, it is the Departments’ view that they have complied with the requirements of Executive Order 13132.

Pursuant to the requirements set forth in Section 8(a) of Executive Order 13132, and by the signatures affixed to proposed final regulations, the Departments certify that the Employee Benefits Security Administration and the Centers for Medicare & Medicaid Services have complied with the requirements of Executive Order 13132 for the attached proposed regulation, Notice of Proposed Rulemaking for Health Coverage Portability: Tolling and Certain Time Periods and Interaction with the Family and Medical Leave Act under HIPAA Titles I & IV (RIN 1210-AA54 and RIN 0938-AL88), in a meaningful and timely manner.

As noted above, the primary economic effects of HIPAA’s portability provisions ensue directly from the statute. The Department’s assessment of the economic effects of HIPAA’s statutory portability provisions and the basis for the assessment is presented in detail under the “Basis for Assessment of Economic Impact” section of the preamble to the final regulation, published elsewhere in this issue of the Bulletin. By clarifying and securing HIPAA’s statutory portability protections, these regulations will help ensure that HIPAA rights are fully realized. The result is likely to be a small increase in the economic effects of HIPAA’s statutory portability provisions.

Additional economic benefits derive from the regulations’ clarifications of HIPAA’s portability requirements. The regulations provide clarity through both their provisions and their examples of how those provisions apply in various circumstances. By clarifying employees’ rights and plan sponsors’ obligations under HIPAA’s portability provisions, the regulations will reduce uncertainty and costly disputes over these rights and obligations. They will promote employers’ and employees’ common understanding of the value of group health plan benefits and confidence in the security and predictability of those benefits, thereby improving labor market efficiency and fostering the establishment and continuation of group health plans by employers.^[41]

These proposed regulations are intended to secure and implement HIPAA’s group market portability provisions under certain special circumstances. The regulations will secure HIPAA’s portability rights for individuals who are not timely notified that their coverage has ended and for individuals whose coverage ends in connection with the taking of leave that is guaranteed under FMLA. The regulations also will clarify and thereby secure individuals’ special enrollment rights under HIPAA, and clarify the methodologies to be used by employers to determine the number of plans offered and the average number of individuals employed during a given year.

The benefits of these regulations will be concentrated among a small number of affected individuals.

Affected individuals will generally include those who would have lost access to coverage for needed medical care after forfeiting HIPAA portability and/or special enrollment rights due to time spent without coverage prior to receiving a certificate or while on FMLA-guaranteed leave. Affected individuals may also include some who would have been denied special enrollment rights if plans or issuers failed to recognize their requests for special enrollment or imposed unreasonable deadlines or requirements for completion of enrollment materials. The benefits of these regulations for any particular affected individual may be large. As noted above, access to coverage for needed medical care is important to individuals’ health and productivity. However, the number of affected individuals, and therefore the aggregate cost of extended access to coverage under these regulations, is expected to be small, for several reasons.

First, these regulations extend HIPAA rights only in instances where individuals do not receive certificates immediately when coverage ends or their coverage ends in connection with the taking of FMLA-guaranteed leave. The Departments know of no source of data on the timeliness with which certificates are typically provided. The final regulations that accompany these proposed regulations permit plans to provide certificates with COBRA notices, up to 44 days after coverage ends. Plans, however, often do have the option of providing certificates immediately when coverage ends or even in advance, for example as part of exit packages given to terminating employees or in mailings to covered dependents in advance of birthdays that will end their eligibility for coverage. With respect to FMLA-protected leave, data provided in a 1996 report to Congress suggests that the number of employees who lose coverage in connection with FMLA-protected leave is likely to be small. The report notes that over an 18-month period just 1.2 percent of surveyed employees took what they reported to be FMLA leave. A similar survey of employers found that 3.6 percent of employees took such leave. Nearly all of those taking leave continued their health coverage. (This is not surprising, given that FMLA requires covered employers to extend eligibility for health insurance to employees on FMLA-protected leave on the same terms that applied when the employees were not on leave.) Just 9 percent of leave-takers reported that they lost some kind of employee benefit, with one-third of these reporting that they lost health insurance.^[42] Putting these numbers together and converting to an annual basis, in a given year between 0.02 percent and 0.07 percent of employees, or well under one in one thousand, might lose health coverage in connection with FMLA-protected leave. Many of these will ultimately exercise their right to be reinstated in the job from which they took leave and to exercise their FMLA-guaranteed right to resume their previous health coverage. Therefore, the number of employees who will lose coverage and then, later and at the conclusion of FMLA-protected leave, enjoy extended portability rights under HIPAA as a result of these regulations, is likely to be very small.

Second, the period over which this regulation extends rights will often be short, insofar as certificates are often provided promptly after coverage ends and many family leave periods are far shorter than the guaranteed 12 weeks. As noted above, plans generally are required to provide certificates no later than 44 days after coverage ends and may provide them sooner. According to the aforementioned report to Congress on FMLA-protected leave, 41 percent of employees taking FMLA-protected leave did so for less than 8 days. Fifty-eight percent were on leave for less than 15 days, and two-thirds were on leave for less than 29 days. (FMLA protects leaves of up to 12 weeks, or 84 days.)

Third, it is generally in individuals’ interest to minimize periods of uninsurance. Individuals are likely to exercise their portability and special enrollment rights as soon as possible after coverage ends, which will often be before any extension of such rights under these regulations becomes effective. Over one 36-month period prior to HIPAA, 71 percent of Americans had continuous coverage — that is, incurred not even a single, one-month break in coverage. Just 4 percent were uninsured for the entire period. About one-half of observed spells without insurance lasted less than 5 months. As noted above, few employees taking FMLA-protected leave had a lapse in health coverage.

Fourth, only a portion of individuals who enroll in health plans in circumstances where these regulations alone guarantee their special enrollment or portability rights would otherwise have been denied such rights. HIPAA special enrollment and portability requirements, both as specified under the final regulations and as modified under these proposed regulations, are minimum standards. Plans are free to provide additional enrollment opportunities.

Fifth, only a small minority of individuals who avoid a significant break in coverage solely as a direct result of these regulations would otherwise have lost coverage for needed medical care. The affected minority would be those who suffer from preexisting conditions, join health plans that exclude coverage for such conditions, and require treatment of such conditions during the exclusion periods. GAO estimated that HIPAA could ensure continued coverage for up to 25 million Americans.^[43] More recent estimates suggest that the number of individual policy holders and their dependents which could be helped by HIPAA’s portability provisions are more in the 14 million range.^[44] As noted above, however, the number of workers and dependents actually gaining coverage for a preexisting condition due to credit for prior coverage following a job change under HIPAA will be smaller than this. Both GAO’s and our estimates of people who could benefit include all job changers with prior coverage and their dependents, irrespective of whether their new employer offers a plan, whether their new plan imposed a preexisting condition exclusion period, and whether they actually suffer from a preexisting condition. Accounting for these narrower criteria, CBO estimated that, at any point in time, about 100,000 individuals would have a preexisting condition exclusion reduced for prior creditable coverage. An additional 45,000 would gain added coverage in the individual market. The CBO estimate demonstrates that the number of individuals actually gaining coverage for needed medical services will be a small fraction of all those whose right to such coverage HIPAA’s portability provisions guarantee. Accordingly, the Departments expect that the number gaining coverage for needed services as a direct result of these regulations will be a small fraction of the already small number whose right to such coverage these regulations would establish.

The Departments attempted to estimate the number of individuals who might avoid a break in coverage because of the provision of these proposed regulations that tolls the break until the individual receives a certification but not more than 44 days. The Departments examined coverage patterns evident in the Survey of Income and Program Participation (SIPP), a longitudinal household survey that tracks transitions in coverage. SIPP interviews households once every four months. The Departments estimate that, in a given year, about 7 million individuals have breaks in coverage lasting 4 months or less. The survey data suffer from so-called “seam bias” — respondents tend to report that status as unchanged over 4-month increments. Of the 7 million reporting breaks of 4 months or less, 6.5 million report breaks of exactly 4 months. This finding is consistent with the more general finding that breaks of 4 months or less are far more common than longer breaks. It seems likely that the 7 million breaks of 4 months or less actually included proportionate or disproportionately large share of breaks of 1 or 2 months. Assuming the breaks are actually distributed evenly by length between 1 day and 4 months, then about one-half of the breaks, or 3.5 million breaks, would have lasted less than 63 days and therefore would not have constituted breaks for purposes of HIPAA’s portability protections even without reference to the provision of this proposed regulation that tolls the break until the individual receives a certification but not more than 44 days. Approximately three-fourths of the remaining breaks or about 2.6 million breaks, would have lasted between 1 and 44 additional days and thereby potentially have been tolled until the individuals received their certifications but not more than 44 days. Thus 2.6 million provides a reasonable upper bound on the number of individuals who might avoid a break in coverage in a given year because of this tolling provision. It is not known what fraction of these would subsequently join group health plans that include preexisting condition exclusions while suffering from and requiring additional care for preexisting conditions. Comparing GAO’s (20 million or more) and our (14 million) estimates of the number of individuals who could potentially benefit from HIPAA’s portability protections (individuals with prior creditable coverage who join new health plans in a given year) with the CBO estimate of the number who might actually have added group coverage for needed care (100,000) produces a ratio of about 1 percent. If this proportion holds for group health plan enrollees who avoid breaks because of this tolling provision, then an upper bound of about 26,000 individuals annually might gain coverage for needed care under the proposed regulation’s provision treating coverage under such programs as creditable coverage.

The Departments considered whether certain individuals whose HIPAA portability rights these proposed regulations would extend may be disproportionately likely to be in (or have dependents who are in) poor health. Specifically, individuals taking FMLA-protected leave, especially those who elect not to be reinstated in their prior jobs following FMLA-protected leave, may be so likely. On the other hand, individuals in such circumstances are also particularly unlikely to allow their health insurance from their prior job to lapse while they are on leave. Accordingly, most such individuals’ special enrollment periods and countable breaks in coverage (if any) would probably have begun at the conclusion of the FMLA-protected leave even in absence of these proposed regulations. The Departments are therefore uncertain whether individuals who would exercise HIPAA portability rights extended solely by these regulations would be more costly to insure than others exercising HIPAA portability rights, and solicit comments on this question.

Affected individuals may also include some who would have been denied special enrollment rights if plans or issuers failed to recognize their requests for special enrollment or imposed unreasonable deadlines or requirements for completion of enrollment materials.

As noted above, the Departments expect that these regulations will result in a small increase in the economic effects of HIPAA’s statutory provisions. For the reasons stated immediately above, the Departments believe that this increase will be small on aggregate, adding only a small increment to the cost attributable to HIPAA’s statutory portability provisions, which themselves amount to a small fraction of one percent of health plan expenditures. Thus the increase will be negligible relative to typical year-to-year increases in premiums charged by issuers, which can amount to several percentage points or more. Therefore, the Departments expect these regulations to have little or no perceptible negative impact on employers’ propensity to offer health benefit plans or on the generosity of those plans. In sum, the Departments expect that the benefits of these regulations, which can be very large for a particular affected individual, will justify their costs.

* * * * *

* * * * *

(b) Standard method.* * *

(2) Counting creditable coverage. * * *

(iii) Significant break in coverage defined. A significant break in coverage means a period of 63 consecutive days during each of which an individual does not have any creditable coverage, except that periods described in paragraph (b)(2)(iv) of this section are not taken into account in determining a significant break in coverage. (See section 731(b)(2)(iii) of ERISA and section 2723(b)(2)(iii) of the PHS Act, which exclude from preemption state insurance laws that require a break of more than 63 days before an individual has a significant break in coverage for purposes of state law.)

(iv) Periods that toll a significant break. Days in a waiting period and days in an affiliation period are not taken into account in determining whether a significant break in coverage has occurred. In addition, for an individual who elects COBRA continuation coverage during the second election period provided under the Trade Act of 2002, the days between the date the individual lost group health plan coverage and the first day of the second COBRA election period are not taken into account in determining whether a significant break in coverage has occurred. Moreover, in the case of an individual whose coverage ceases, if a certificate of creditable coverage with respect to that cessation is not provided on or before the date coverage ceases, then the period that begins on the first date that an individual has no creditable coverage and that continues through the earlier of the following two dates is not taken into account in determining whether a significant break in coverage has occurred:

(A) The date that a certificate of creditable coverage with respect to that cessation is provided; or

(B) The date 44 days after coverage ceases.

(v) Examples. * * *

Example 4. (i) Facts. Individual B terminates coverage under a group health plan, and a certificate of creditable coverage is provided 10 days later. B begins employment with Employer R and begins enrollment in R’s plan 60 days after the certificate is provided.

(ii) Conclusion. In this Example 4, even though B had no coverage for 69 days, the 10 days before the certificate of creditable coverage is provided are not taken into account in determining a significant break in coverage. Therefore, B’s break in coverage is only 59 days and is not a significant break in coverage. Accordingly, B’s prior coverage must be counted by R’s plan.

* * * * *

Example 6. (i) Facts. Employer V sponsors a group health plan. Under the terms of the plan, the only benefits provided are those provided under an insurance policy. Individual D works for V and has creditable coverage under V’s plan. V fails to pay the issuer the premiums for the coverage period beginning March 1. Consistent with applicable state law, the issuer terminates the policy so that the last day of coverage is April 30. V goes out of business on July 31. On August 15 D begins employment with Employer W and enrolls in W’s group health plan. W’s plan imposes a 12-month preexisting condition exclusion on all enrollees. D never receives a certificate of creditable coverage for coverage under V’s plan.

(ii) Conclusion. In this Example 6, the period from May 1 (the first day without coverage) through June 13 (the date 44 days after coverage under V’s plan ceases) is not taken into account in determining a 63-day break in coverage. This is because, in cases in which a certificate of creditable coverage is not provided by the date coverage is lost, the break begins on the date the certificate is provided, or the date 44 days after coverage ceases, if earlier. Therefore, even though D’s actual period without coverage was 106 days (May 1 through August 14), because the period from May 1 through June 13 is not taken into account, D’s break in coverage is only 62 days (June 14 through August 14). Thus, D has not experienced a significant break in coverage, and D’s prior coverage must be counted by W’s plan.

* * * * *

Par. 5. Section 54.9801-5 is amended by:

a. Redesignating paragraphs (a)(3)(ii)(H)(5) and (6) as paragraphs (a)(3)(ii)(H)(6) and (7), respectively.

b. Adding a new paragraph (a)(3)(ii)(H)(5).

The addition reads as follows:

(a) Certificate of creditable coverage. * * *

(3) Form and content of certificate. * * *

(ii) Required information. * * *

(H) * * *

(5) The interaction with the Family and Medical Leave Act;

* * * * *

Par. 6. Section 54.9801-6 is amended by:

a. Revising paragraph (a)(1).

b. Revising paragraph (a)(4).

c. Revising paragraph (b)(1).

d. Revising paragraph (b)(3).

e. Revising Example 2 in paragraph (b)(4).

f. Adding Examples 3, 4, and 5 in paragraph (b)(4).

The additions and revisions read as follows:

(a) Special enrollment for certain individuals who lose coverage — (1) In general. A group health plan is required to permit current employees and dependents (as defined in §54.9801-2) who are described in paragraph (a)(2) of this section to enroll for coverage under the terms of the plan if the conditions in paragraph (a)(3) of this section are satisfied. Paragraph (a)(4) of this section describes procedures that a plan may require an employee to follow and describes the date by which coverage must begin. The special enrollment rights under this paragraph (a) apply without regard to the dates on which an individual would otherwise be able to enroll under the plan. (See section 701(f)(1) of ERISA and section 2701(f)(1) of the PHS Act, under which this obligation is also imposed on a health insurance issuer offering group health insurance coverage.)

* * * * *

(4) Applying for special enrollment and effective date of coverage — (i) Request. A plan must allow an employee a period of at least 30 days after an event described in paragraph (a)(3) of this section (loss of eligibility for coverage, termination of employer contributions, or exhaustion of COBRA continuation coverage) to request enrollment (for the employee or the employee’s dependent). For this purpose, any written or oral request made to any of the following constitutes a request for enrollment —

(A) The plan administrator;

(B) An issuer offering health insurance coverage under the plan;

(C) A person who customarily handles claims for the plan (such as a third party administrator); or

(D) Any other designated representative.

(ii) Tolling of period for requesting special enrollment. (A) In the case of an individual whose coverage ceases, if a certificate of creditable coverage with respect to that cessation is not provided on or before the date coverage ceases, then the period for requesting special enrollment described in paragraph (a)(4)(i) of this section does not end until 30 days after the earlier of —

(1) The date that a certificate of creditable coverage with respect to that cessation is provided; or

(2) The date 44 days after coverage ceases.

(B) For purposes of this paragraph (a)(4), if an individual’s coverage ceases due to the operation of a lifetime limit on all benefits, coverage is considered to cease on the earliest date that a claim is denied due to the operation of the lifetime limit. (Nonetheless, the date of a loss of eligibility for coverage is determined under the rules of paragraph (a)(3) of this section, which provides that a loss of eligibility occurs when a claim that would meet or exceed a lifetime limit on all benefits is incurred, not when it is denied.)

(C) The rules of this paragraph (a)(4)(ii) are illustrated by the following examples:

Example 1. (i) Facts. Employer V provides group health coverage through a policy provided by Issuer M. Individual D works for V and is covered under V’s plan. V fails to pay M the premiums for the coverage period beginning March 1. Consistent with applicable state law, M terminates the policy so that the last day of coverage is April 30. On May 15, M provides D with a certificate of creditable coverage with respect to D’s cessation of coverage under V’s plan.

(ii) Conclusion. In this Example 1, the period to request special enrollment ends no earlier than June 14 (which is 30 days after May 15, the day a certificate of creditable coverage is provided with respect to D).

Example 2. (i) Facts. Same facts as Example 1, except D is never provided with a certificate of creditable coverage.

(ii) Conclusion. In this Example 2, the period to request special enrollment ends no earlier than July 13. (July 13 is 74 days after April 30, the date coverage ceases. That is, July 13 is 30 days after the end of the 44-day maximum tolling period.)

Example 3. (i) Facts. Individual E works for Employer W and has coverage under W’s plan. W’s plan has a lifetime limit of $1 million on all benefits under the plan. On September 13, E incurs a claim that would exceed the plan’s lifetime limit. On September 28, W denies the claim due to the operation of the lifetime limit and a certificate of creditable coverage is provided on October 3. E is otherwise eligible to enroll in the group health plan of the employer of E’s spouse.

(ii) Conclusion. In this Example 3, the period to request special enrollment in the plan of the employer of E’s spouse ends no earlier than November 2 (30 days after the date the certificate is provided) and begins not later than September 13, the date E lost eligibility for coverage.

(iii) Reasonable procedures for special enrollment. After an individual has requested enrollment under paragraph (a)(4)(i) of this section, a plan may require the individual to complete enrollment materials within a reasonable time after the end of the 30-day period described in paragraph (a)(4)(i) of this section. In these enrollment materials, the plan may require the individual only to provide information required of individuals who enroll when first eligible and information about the event giving rise to the special enrollment right. A plan may establish a deadline for receiving completed enrollment materials, but such a deadline must be extended for information that an individual making reasonable efforts does not obtain by that deadline.

(iv) Date coverage must begin. If the plan requires completion of additional enrollment materials in accordance with paragraph (a)(4)(iii) of this section, coverage must begin no later than the first day of the first calendar month beginning after the date the plan receives enrollment materials that are substantially complete. If the plan does not require completion of additional enrollment materials, coverage must begin no later than the first day of the first calendar month beginning after the date the plan receives the request for special enrollment under paragraph (a)(4)(i) of this section.

(b) Special enrollment with respect to certain dependent beneficiaries — (1) In general. A group health plan that makes coverage available with respect to dependents is required to permit individuals described in paragraph (b)(2) of this section to be enrolled for coverage in a benefit package under the terms of the plan. Paragraph (b)(3) of this section describes procedures that a plan may require an individual to follow and describes the date by which coverage must begin. The special enrollment rights under this paragraph (b) apply without regard to the dates on which an individual would otherwise be able to enroll under the plan. (See 29 CFR 2590.701-6(b) and 45 CFR 146.117(b), under which this obligation is also imposed on a health insurance issuer offering group health insurance coverage.)

* * * * *

(3) Applying for special enrollment and effective date of coverage — (i) Request. A plan must allow an individual a period of at least 30 days after the date of the marriage, birth, adoption, or placement for adoption (or, if dependent coverage is not generally made available at the time of the marriage, birth, adoption, or placement for adoption, a period of at least 30 days after the date the plan makes dependent coverage generally available) to request enrollment (for the individual or the individual’s dependent). For this purpose, any written or oral request made to any of the following constitutes a request for enrollment —

(A) The plan administrator;

(B) An issuer offering health insurance coverage under the plan;

(C) A person who customarily handles claims for the plan (such as a third party administrator); or

(D) Any other designated representative.

(ii) Reasonable procedures for special enrollment. After an individual has requested enrollment under paragraph (b)(3)(i) of this section, a plan may require the individual to complete enrollment materials within a reasonable time after the end of the 30-day period described in paragraph (b)(3)(i) of this section. In these enrollment materials, the plan may require the individual only to provide information required of individuals who enroll when first eligible and information about the event giving rise to the special enrollment right. A plan may establish a deadline for receiving completed enrollment materials, but such a deadline must be extended for information that an individual making reasonable efforts does not obtain by that deadline.

(iii) Date coverage must begin — (A) Marriage. In the case of marriage, if the plan requires completion of additional enrollment materials in accordance with paragraph (b)(3)(ii) of this section, coverage must begin no later than the first day of the first calendar month beginning after the date the plan receives enrollment materials that are substantially complete. If the plan does not require such additional enrollment materials, coverage must begin no later than the first day of the first calendar month beginning after the date the plan receives the request for special enrollment under paragraph (b)(3)(i) of this section.

(B) Birth, adoption, or placement for adoption. Coverage must begin in the case of a dependent’s birth on the date of birth and in the case of a dependent’s adoption or placement for adoption no later than the date of such adoption or placement for adoption (or, if dependent coverage is not made generally available at the time of the birth, adoption, or placement for adoption, the date the plan makes dependent coverage available). If the plan requires completion of additional enrollment materials in accordance with paragraph (b)(3)(ii) of this section, the plan must provide benefits (including benefits retroactively to the date of birth, adoption, or placement for adoption) once the plan receives enrollment materials that are substantially complete.

(4) Examples. * * *

Example 2. (i) Facts. Individual D works for Employer X. X maintains a group health plan with two benefit packages — an HMO option and an indemnity option. Self-only and family coverage are available under both options. D enrolls for self-only coverage in the HMO option. Then, a child, E, is placed for adoption with D. Within 30 days of the placement of E for adoption, D requests enrollment for D and E under the plan’s indemnity option and submits completed enrollment materials timely.

(ii) Conclusion. In this Example 2, D and E satisfy the conditions for special enrollment under paragraphs (b)(2)(v) and (b)(3) of this section. Therefore, the plan must allow D and E to enroll in the indemnity coverage, effective as of the date of the placement for adoption.

Example 3. (i) Facts. Same facts as Example 1. On March 17 (two days after the birth of C), A telephones the plan administrator and requests special enrollment of A, B, and C. The plan administrator sends A an enrollment form. Under the terms of the plan, enrollment is denied unless a completed form is submitted within 30 days of the event giving rise to the special enrollment right (in this case, C’s birth).

(ii) Conclusion. In this Example 3, the plan does not satisfy paragraph (b)(3) of this section. The plan may require only that A request enrollment during the 30-day period after C’s birth. A did so by telephoning the plan administrator. The plan may not condition special enrollment on filing additional enrollment materials during the 30-day period. To comply with paragraph (b)(3) of this section, the plan must allow A a reasonable time after the end of the 30-day period to submit any additional enrollment materials. Once these enrollment materials are received, the plan must allow whatever coverage is chosen to begin on March 15, the date of C’s birth.

Example 4. (i) Facts. Same facts as Example 3, except that A telephones the plan administrator to request enrollment on April 13 (29 days after C’s birth). Also, under the terms of the plan, the deadline for submitting the enrollment form is 14 days after the end of the 30-day period for requesting special enrollment (thus, in this case, April 28, which is 44 days after C’s birth). The form requests the same information for A, B, and C (name, date of birth, and place of birth) as well as a copy of C’s birth certificate. A fills out the enrollment form and delivers it to the plan administrator on April 28. At that time A does not have a birth certificate for C but applies on that day for one from the appropriate government office. A receives the birth certificate on June 1 and furnishes a copy of the birth certificate to the plan administrator shortly thereafter.

(ii) Conclusion. In this Example 4, A, B, and C are entitled to special enrollment under the plan even though A did not satisfy the plan’s requirement of providing a copy of C’s birth certificate by the plan’s 14-day deadline. While a plan may establish such a deadline, the plan must extend the deadline for information that an individual making reasonable efforts does not obtain by that deadline. A delivered the enrollment form to the plan administrator by the deadline and made reasonable efforts to furnish the birth certificate that the plan requires.

Example 5. (i) Facts. Same facts as Example 4. On May 3 (after A has delivered the enrollment form to the plan administrator but before A provides the birth certificate) A submits claims for all medical expenses incurred for B and C from the date of C’s birth.

(ii) Conclusion. In this Example 5, the plan must pay all of the claims submitted by A. Because the plan requires that individuals seeking special enrollment complete additional enrollment materials, it is required to provide benefits once it receives enrollment materials that are substantially complete. The form that A submitted on April 28 was substantially complete. Because C’s birth is the event giving rise to the special enrollment right, on April 28 A, B, and C become entitled to benefits under the plan retroactive to the date of C’s birth.

* * * * *

Par. 7. A new §54.9801-7 is added to read as follows:

(a) In general. The rules of §§54.9801-1 through 54.9801-6 apply with respect to an individual on leave under the Family and Medical Leave Act of 1993 (29 U.S.C. 2601) (FMLA), and apply with respect to a dependent of such an individual, except to the extent otherwise provided in this section.

(b) Tolling of significant break in coverage during FMLA leave. In the case of an individual (or a dependent of the individual) who is covered under a group health plan, if the individual takes FMLA leave and does not continue group health coverage for any period of FMLA leave, that period is not taken into account in determining whether a significant break in coverage has occurred under §54.9801-4(b)(2)(iii).

(c) Application of certification provisions — (1) Timing of issuance of certificate — (i) In the case of an individual (or a dependent of the individual) who is covered under a group health plan, if the individual takes FMLA leave and the individual’s group health coverage is terminated during FMLA leave, an automatic certificate must be provided in accordance with the timing rules set forth in §54.9801-5(a)(2)(ii)(B) (which generally require plans to provide certificates within a reasonable time after coverage ceases).

(ii) In the case of an individual (or a dependent of the individual) who is covered under a group health plan, if the individual takes FMLA leave and continues group health coverage for the period of FMLA leave, but then ceases coverage under the plan at the end of FMLA leave, an automatic certificate must be provided in accordance with the timing rules set forth in §54.9801-5(a)(2)(ii)(A) (which generally require plans to provide a certificate no later than the time a notice is required to be furnished for a qualifying event under a COBRA continuation provision).

(2) Demonstrating FMLA leave. (i) A plan is required to take into account all information about FMLA leave that it obtains or that is presented on behalf of an individual. A plan must treat the individual as having been on FMLA leave for a period if —

(A) The individual attests to the period of FMLA leave; and

(B) The individual cooperates with the plan’s efforts to verify the individual’s FMLA leave.

(ii) Nothing in this section prevents a plan from modifying its initial determination of FMLA leave if it determines that the individual did not have the claimed FMLA leave, provided that the plan follows procedures for reconsideration similar to those set forth in §54.9801-3(f).

(d) Relationship to loss of eligibility special enrollment rules. In the case of an individual (or a dependent of the individual) who is covered under a group health plan and who takes FMLA leave, a loss of eligibility for coverage under §54.9801-6(a) occurs when the period of FMLA leave ends if —

(1) The individual’s group health coverage is terminated at any time during FMLA leave; and

(2) The individual does not return to work for the employer at the end of FMLA leave.

Par. 8. Section 54.9831-1 is amended by:

a. Adding paragraph (a)(2).

b. Revising paragraph (b).

c. Revising paragraph (c)(1).

d. Adding paragraph (e).

The additions and revisions read as follows:

(a) Group health plan. * * *

(2) Determination of number of plans. The number of group health plans that an employer or employee organization (including for this purpose a joint board of trustees of a multiemployer trust affiliated with one or more multiemployer plans) maintains is determined under the rules of this paragraph (a)(2).

(i) Except as provided in paragraph (a)(2)(ii) or (iii) of this section, health care benefits provided by a corporation, partnership, or other entity or trade or business, or by an employee organization, constitute one group health plan, unless —

(A) It is clear from the instruments governing the arrangement or arrangements to provide health care benefits that the benefits are being provided under separate plans; and

(B) The arrangement or arrangements are operated pursuant to such instruments as separate plans.

(ii) A multiemployer plan and a nonmultiemployer plan are always separate plans.

(iii) If a principal purpose of establishing separate plans is to evade any requirement of law, then the separate plans will be considered a single plan to the extent necessary to prevent the evasion.

(b) General exception for certain small group health plans. The requirements of §§54.9801-1 through 54.9801-7, 54.9802-1, 54.9802-2, 54.9811-1T, 54.9812-1T, and 54.9833-1 do not apply to any group health plan for any plan year if, on the first day of the plan year, the plan has fewer than two participants who are current employees.

(c) Excepted benefits — (1) In general. The requirements of §§54.9801-1 through 54.9801-7, 54.9802-1, 54.9802-2, 54.9811-1T, 54.9812-1T, and 54.9833-1 do not apply to any group health plan in relation to its provision of the benefits described in paragraph (c)(2), (3), (4), or (5) of this section (or any combination of these benefits).

* * * * *

(e) Determining the average number of employees — (1) Scope. Whenever the application of a rule in this part depends upon the average number of employees employed by an employer, the determination of that number is made in accordance with the rules of this paragraph (e).

(2) Full-time equivalents. The average number of employees is determined by calculating the average number of full-time equivalents on business days during the preceding calendar year.

(3) Methodology. For the preceding calendar year, the average number of full-time equivalents is determined by —

(i) Determining the number of employees who were employed full-time by the employer throughout the entire calendar year;

(ii) Totaling all employment hours (not to exceed 40 hours per week) for each part-time employee, and for each full-time employee who was not employed full-time with the employer throughout the entire calendar year;

(iii) Dividing the total determined under paragraph (e)(3)(ii) of this section by a figure that represents the annual full-time hours under the employer’s general employment practices, such as 2,080 hours (although for this purpose not more than 40 hours per week may be used); and

(iv) Adding the quotient determined under paragraph (e)(3)(iii) of this section to the number determined under paragraph (e)(3)(i).

(4) Rounding. For purposes of paragraph (e)(3)(iv) of this section, all fractions are disregarded. For instance, a figure of 50.9 is deemed to be 50.

(5) Employers not in existence in the preceding year. In the case of an employer that was in existence for less than the entire preceding calendar year (including an employer that was not in existence at all), a determination of the average number of employees that the employer employs is based on the average number of employees that it is reasonably expected the employer will employ on business days in the current calendar year.

(6) Scope of the term “employer”. For purposes of this paragraph (e), employer includes any predecessor of the employer. In addition, all persons treated as a single employer under section 414(b), (c), (m), or (o) are treated as one employer.

(7) Special rule for multiemployer plans. (i) With respect to the application of a rule in this part to a multiemployer plan (as defined in section 3(37) of ERISA), each employer with at least one employee participating in the plan is considered to employ the same average number of employees. That number is the highest number that results by applying the rules of paragraphs (e)(1) through (6) of this section separately to each of the employers.

(ii) The rules of this paragraph (e)(7) are illustrated by the following example:

Example. (i) Facts. Twenty five employers have at least one employee who participates in Multiemployer Plan M. Among these 25 employers, Employer K has 51 employees, determined under the rules of paragraphs (e)(1) through (6) of this section. Each of the other 24 employers has fewer than 50 employees.

(ii) Conclusion. With respect to the application of a rule in this part to M, each of the 25 employers is considered to employ 51 employees.

Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.