Internal Revenue Bulletin: 2008-7
February 19, 2008
Supplemental Health Insurance Coverage as Excepted Benefits Under HIPAA and Related Legislation
Table of Contents
This notice provides a safe harbor for supplemental group health insurance to be considered excepted from the requirements that generally apply under Chapter 100 of the Internal Revenue Code (sections 9801 - 9833) to benefits provided under a group health plan. It is expected that the standards of this safe harbor will be incorporated as requirements (rather than just as a safe harbor) in a notice of proposed rulemaking in the future.
Titles I and IV of the Health Insurance Portability and Accountability Act of 1996, Pub. L. 104-191, 110 Stat. 1936 (HIPAA) amended the Code, the Employee Retirement Income Security Act (ERISA), and the Public Health Service Act (PHS Act) to improve portability, access, and continuity with respect to group health plan coverage provided in connection with employment. These laws include limitations on preexisting condition exclusions, require issuance of certificates of creditable coverage, provide special enrollment rights, and prohibit discrimination on the basis of any health factor. Later amendments to these laws provide protections relating to mental health parity and hospital lengths of stay following childbirth. Regulations issued by the Departments of the Treasury, of Labor, and of Health and Human Services (the Departments) on these group market provisions are contained in 26 CFR Part 54, 29 CFR Part 2590, and 45 CFR Parts 144 and 146. Additional reforms were provided in the PHS Act for health coverage in the individual market and are contained in 45 CFR Parts 144 and 148.
In general, these health reform provisions apply to group health plans (generally plans established or maintained by employers or employee organizations, or both) and health insurance issuers in the group or individual market. However, these provisions do not apply to certain excepted benefits. In general, if all benefits under a plan or coverage are excepted benefits, then the plan and any health insurance coverage under the plan do not have to comply with the health reform requirements, and the coverage may not qualify as creditable coverage.
One category of excepted benefits is supplemental excepted benefits. Benefits are supplemental excepted benefits only if they are provided under a separate policy, certificate, or contract of insurance and are either Medicare supplemental health insurance, TRICARE supplemental programs, or similar supplemental coverage provided to coverage under a group health plan. The phrase “similar supplemental coverage provided to coverage under a group health plan” is not defined in the statute or regulations. However, the regulations clarify that one requirement to be similar supplemental coverage is that the coverage must be specifically designed to fill gaps in primary coverage, such as coinsurance or deductibles (but similar supplemental coverage does not include coverage that becomes secondary or supplemental only under a coordination-of-benefits provision). § 54.9831-1(c)(5)(i)(C) of the Miscellaneous Excise Tax Regulations, 29 CFR 2590.732(c)(5)(i)(C), and 45 CFR 146.145(c)(5)(i)(C).
Various situations have come to the attention of the Departments that raise concerns about whether all of the coverage that is being marketed as similar supplemental coverage actually qualifies as such.
Section 104 of HIPAA requires the Secretaries of the Treasury, of Labor, and of Health and Human Services to ensure that guidance under HIPAA issued by the Departments that relates to the same matter be administered so as to have the same effect at all times. In accordance with section 104 of HIPAA, each of the Departments is issuing guidance for “similar supplemental coverage” to be considered benefits excepted from the requirements of HIPAA. The guidance being issued has been developed on a coordinated basis by the Departments. HHS is also issuing guidance on similar supplemental coverage for the individual market.
The section immediately below (SAFE HARBOR STANDARDS) provides that if the standards in that section are satisfied, the supplemental health insurance will be considered to satisfy the conditions for being excepted benefits for purposes of chapter 100. Supplemental health insurance not satisfying the conditions for the safe harbor is subject to further examination for a determination whether it is not “similar supplemental coverage to coverage under a group health plan” and thus is subject to all the requirements of chapter 100.
To fall within that safe harbor, the policy, certificate, or contract of insurance must be issued by an entity that does not provide the primary coverage under the plan and must be specifically designed to fill gaps in primary coverage.
To be “similar supplemental coverage to coverage under a group health plan”, the value of the supplemental coverage must be significantly less than the value of the primary coverage that it supplements. To fall within the safe harbor below, the cost of supplemental coverage may not exceed 15 percent of the cost of the plan’s primary coverage. Cost is determined in the same manner as the “applicable premium” is calculated under a COBRA continuation provision. Some plans subject to HIPAA titles I or IV are not subject to the COBRA continuation coverage requirements, such as church plans and plans maintained by an employer with fewer than 20 employees. These plans should compute cost as if they were subject to COBRA. (For insured coverage — all supplemental coverage and primary coverage to the extent insured — the COBRA cost is, for purposes of this notice, the cost of the insurance coverage.)
Issuers of Medicare supplemental health insurance (commonly referred to as “Medigap”) generally are subject to prohibitions against discrimination based on enrollees’ or potential enrollees’ health status. Accordingly, to fall within the safe harbor below, supplemental health insurance also must not differentiate among individuals in eligibility, benefits, or premiums based upon any health factor of the individual.
Supplemental health insurance under a group health plan will be considered to be “similar supplemental coverage provided to coverage under a group health plan” under § 54.9831-1(c)(5)(i)(C) if it is provided through a policy, certificate, or contract of insurance separate from the primary coverage under the plan and if it satisfies all of the following requirements:
(1) Independent of Primary Coverage. The supplemental policy, certificate, or contract of insurance must be issued by an entity that does not provide the primary coverage under the plan. For this purpose, entities that are part of the same controlled group of corporations or part of the same group of trades or businesses under common control, within the meaning of section 52(a) or (b) of the Code, are considered a single entity.
(2) Supplemental for Gaps in Primary Coverage. The supplemental policy, certificate, or contract of insurance must be specifically designed to fill gaps in primary coverage, such as coinsurance or deductibles, but does not include a policy, certificate, or contract of insurance that becomes secondary or supplemental only under a coordination-of-benefits provision.
(3) Supplemental in Value of Coverage. The cost of coverage under the supplemental policy, certificate, or contract of insurance must not exceed 15 percent of the cost of primary coverage. Cost is determined in the same manner as the applicable premium is calculated under a COBRA continuation provision.
(4) Similar to Medicare Supplemental Coverage. The supplemental policy, certificate, or contract of insurance that is group health insurance coverage must not differentiate among individuals in eligibility, benefits, or premiums based on any health factor of an individual (or any dependent of the individual).
The principal author of this notice is Russ Weinheimer of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt & Government Entities). For further information regarding this notice, contact Russ Weinheimer at (202) 622-6080 (not a toll-free call).
 Under the COBRA rules, plans are generally permitted to charge up to 102 percent of the applicable premium. Thus, COBRA cost for purposes of this notice is 100 percent of the applicable premium, not 102 percent of the applicable premium that the plan is generally permitted to charge under the COBRA rules.
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