Agencies Release Final Regulations on Fixed Indemnity Insurance, Refrain from Addressing Level Funded Plans

As discussed in more detail below, these final regulations differ from the proposed regulations released by the Agencies on July 12, 2023. 

The final regulations also include modifications to the definition of short-term limited-duration insurance (“STLDI”) as well as new notice requirements for all STDLI policies and marketing materials when individuals enroll/reenroll in coverage that is effective on or after September 1, 2024. 

The proposed regulations released last year also sought to clarify the tax treatment of certain benefit payments in fixed amounts received under employer-provided accident and health plans (referred to as “fixed indemnity” plans), and sought comments regarding level-funded plans and specified disease coverage; however, the Agencies did not address these issues in the final regulations. Instead, in the preamble, the Agencies indicated that they intend to address proposed changes to fixed indemnity plans, including tax treatment, in future rulemaking and will determine whether additional guidance or rulemaking on specified disease coverage or level-funded plans is warranted in the future. 

The final regulations are effective on June 17, 2024, and apply to plan or policy years as described below.

Fixed-Indemnity Insurance

Under current law and regulations, the ACA’s market reforms do not apply to individual or group health plan coverage that is an excepted benefit.  For purposes of fixed indemnity and hospital indemnity coverage, to be an excepted benefit in the group market, the following requirements must be met: 

1. the benefits are provided under a separate policy, certificate, or contract of insurance; 
2. there is no coordination between these benefits and those under the employer’s group health plan (including any exclusions under the plan); 
3. the individual can access the benefits under the plan regardless of whether they obtain coverage under any of the employer’s other group health plans (or by a policy issued by the same issuer for individual coverage); and 
4. the plan must pay a fixed dollar amount per day (or other period) of hospitalization or illness and/or per service, regardless of the amount of expenses incurred. Different requirements apply in the individual market.

While the proposed regulations released in July 2023, if finalized, would have modified the basis under which hospital indemnity or other fixed indemnity insurance will be considered excepted benefits, the Agencies limited the scope of the final regulations to a new notice requirement (also addressed in the proposed regulations) which, among other things, identifies to individuals that the policy is a fixed indemnity policy that pays a limited amount if they are sick or hospitalized, but is not health insurance, will not cover the cost of the medical care, and is not a substitute for comprehensive medical coverage. The notice must include contact information for the Marketplace or other sources of comprehensive health insurance, and information about where to find states insurance commissioners’ contact information if someone has a question or complaint.

The new notice requirement applies for plans years beginning on or after January 1, 2025. In the group market, it must be provided at or before the time participants are given the opportunity to enroll or reenroll in coverage.  It must be displayed prominently in 14-point font on the first page (whether paper or electronic) of any marketing, application, and enrollment (or reenrollment) materials.  Either the plan or the issuer/carrier can provide the notice necessary to satisfy the notice obligation.

STLDI

STLDI is a type of health insurance coverage primarily designed to fill a gap in coverage that occurs when someone transitions from one plan or coverage to another.  It is typically not employer sponsored.  STLDI has been the subject of prior regulations, including HIPAA portability regulations finalized in 2016 (which limited the duration of STLDI to a maximum coverage period of three months, which could be extended by participants, and required employers and issuers to provide certain notices to members, participants, and beneficiaries). In 2018 regulations, the maximum STLDI duration was extended to less than twelve months after the original date of the contract and allowed individual participants to elect to extend coverage for up to 36 months.

The final regulations reduce the maximum duration of STLDI coverage from 12 months back to a contract term of no more than 3 months after the original effective date of the policy, certificate, or contract of insurance, and taking into account any renewals or extensions, a maximum duration of no more than 4 months.  Renewal or extension includes the term of a new STDLI policy, certificate, or contract of insurance that is issued by the same issuer to the same policyholder within the 12-month period that begins on the original effective date of the initial policy, certificate, or contract of insurance. This prevents “stacking” of multiple policies to avoid the duration limit. 

If an issuer/carrier is a member of a controlled group (i.e., a group treated as a single employer under sections 52(a), 52(b), 414(m), or 414(o) of the Internal Revenue Code of 1986, as amended), then a renewal or extension also includes a term of a new STDLI policy, certificate, or contract of insurance issued by any other issuer who is a member of that controlled group.  This also prevents the stacking of multiple policies to avoid the limited duration by shifting the policy around to other affiliated issuers.

STLDI policies must also include a notice on the first page (in either paper or electronic form) of the policy, certificate or contract of insurance, as well as in any marketing, application, and enrollment or reenrollment materials provided at the time of enrollment/reenrollment, that notifies individuals of the limited scope and duration of the benefits and where they can look for more comprehensive coverage.  The final rule includes model language and specifications for the notice, including font size.

The final rule applies to new STLDI policies sold or issued on or after September 1, 2024; however, any policies sold or issued before September 1, 2024 must include the notice provisions adopted in the final rule for any periods of coverage beginning on or after September 1, 2024.  While the rule (other than the notice provisions) will not impact STLDI policies, certificates, or contracts of insurance sold or issued before the effective date of the final rule, they will still be subject to existing requirements applicable to STLDI coverage which have been in place since 2018.

Conclusion

This alert is limited to the changes to fixed-indemnity insurance requirements in the group market.   In the individual market, the changes to fixed indemnity insurance requirements extend beyond new notice requirements.

Employers offering group hospital or fixed indemnity insurance coverage should coordinate with the carriers to ensure they are prepared to meet the new notice requirements effective for plan years beginning on or after January 1, 2025. Moreover, employers who offer any STLDI, should ensure they work with the carriers to ensure the notice requirements are being met and that they understand the new limitations on offering STDLI.

About the Author

This alert was prepared for Woodruff Sawyer by Barrow Weatherhead Lent LLP, a national law firm with recognized experts on ERISA, Affordable Care Act.  Contact Stacy Barrow or Nicole Quinn-Gato at sbarrow@marbarlaw.com or nquinngato@marbarlaw.com.

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