The federal agencies responsible for policing employer compliance with the Affordable Care Act (ACA) – the Internal Revenue Service, U.S. Department of Labor and the Department of Health & Human Services – have issued final regulations on hospital and other fixed indemnity insurance that will apply to plan years beginning on or after Jan. 1, 2025.
The rules will require that group coverage contain a new consumer protection notice explaining the coverage is not comprehensive, major-medical coverage. The plan must present the notice to prospective enrollees at enrollment time and re-enrollment. The new model notice that will be required for group coverage is included at the bottom of this alert.
Executive Summary
Beginning next year, group health plans offering group fixed indemnity coverage will be required to provide a new consumer protection notice to enrollees.
Plan sponsors must provide the notice (set forth at the end of this alert) on any materials provided to participants at or before the time participants are giving the opportunity to enroll (or re-enroll) in the coverage.
The notice must be in at least 14-point font.
The insurer may satisfy this requirement on behalf of the plan.
The agencies may address other issues with fixed indemnity coverage, including the tax treatment of the proceeds, in future guidance.
Saving issues for another day
More significant is what the final rules do not address. The proposed regulations issued last year would have prohibited offering fixed indemnity coverage with “skinny” medical coverage that did not have an actuarial value of at least 60% (often referred to as MEC, bare-bones minimum essential coverage, or skinny plans). Although the agencies remain concerned about the perceived abuses of fixed indemnity coverage, they decided not to address this issue in the final regulations.
In addition, last year’s proposed rules (opens a new window) would also have changed the tax treatment of fixed indemnity proceeds when the coverage is paid by the employer (or on a pre-tax basis by employees). Although the IRS acknowledged uncertainty on the current tax treatment of fixed indemnity coverage, the agency declined to address this issue in final regulations. However, the IRS indicated that it remains concerned about the use of fixed indemnity payments that purport to be tax-free under wellness-type programs in which the participants do not incur any medical expenses, e.g., participants merely complete health-related activities.
Lockton comment: In line with what appears to be an IRS concern as well, we have previously cautioned employers about wellness programs that purport to generate FICA savings (Social Security tax) by taking large employee pre-tax deductions and returning tax-free dollars to employees after they complete health risk assessments.
Also included in the guidance are new rules on short-term limited duration medical insurance (we won’t discuss those). The agencies have also requested comments on specified disease coverage (e.g., cancer insurance) and how level-funded health plans operate but decided to issue guidance on those issues at some point in the future.
Background on fixed indemnity coverage
Traditionally, fixed indemnity coverage has paid a flat dollar amount for each day of inpatient hospitalization. However, more and more, the agencies indicated they are also seeing fixed indemnity coverage paying benefits for doctor visits, lab work, and imaging based on a flat dollar amount per day, or even per visit, regardless of the amount or type of healthcare expense actually incurred or services received. For example, the coverage might pay $200 per day for hospitalization and $100 per day for any office visit (or simply, $100 per visit).
Lockton comment: Fixed indemnity coverage does not include specified disease insurance, critical illness insurance or accident coverage. Those types of insurance are not impacted by the final rules.
In the compliance world, fixed indemnity coverage walks a fine line between group health plan coverage (subject to all the compliance complexities attached to that coverage) and coverage that gets a free pass on much of that complexity. Which side of that line any fixed indemnity contract falls depends on whether, by virtue of the way the benefit is designed, it is considered an “excepted benefit.” Being an excepted benefit means it is excepted from much of the complexity associated with traditional group coverage, including ACA benefit mandates like preventive care, the ban on annual or lifetime dollar limits on essential health benefits and limits on waiting periods, as well the transparency rules under the ACA and the Consolidated Appropriations Act. Some contracts, even if they are filed at the state level as “fixed indemnity,” don’t qualify as an excepted benefit under federal law, which is what matters here.
To qualify as an excepted benefit, fixed indemnity must also satisfy the following conditions:
The coverage must be provided under a separate policy, certificate, or contract of insurance.
There can be no coordination between the fixed indemnity benefits and any exclusion under any plan maintained by that employer.
The group contract must pay a fixed amount per day, regardless of the amount of expenses incurred and without regard to what other coverage pays. Individual coverage must pay a fixed dollar amount for a period of hospitalization or illness. The final regulations do not specifically prohibit payment on a per-item or per-service basis, although the agencies noted their continued interest in the matter.
Lockton comment: So, what happens if an employer offers fixed indemnity coverage that doesn’t qualify as an excepted benefit? The program will be subject to a variety of mandates (such as the ACA mandates described above) which it will fail to satisfy, exposing the plan sponsor to an excise tax of $100 per day under the Tax Code “with respect to each individual to whom such failure relates.” In addition, program participants could also file lawsuits under ERISA to enforce the ACA insurance mandates against the program.
What’s Next
The federal agencies received voluminous comments on the proposed regulations and thankfully decided to leave the difficult issues unaddressed in the final rules. The new notice requirement for plans that will apply in 2025 was the least controversial aspect to the final regulations. We will stay tuned for further agency guidance on these issues.
Model notice to prospective enrollees
IMPORTANT: This is a fixed indemnity policy, NOT health insurance
This fixed indemnity policy may pay you a limited dollar amount if you’re sick or
hospitalized. You’re still responsible for paying the cost of your care.
The payment you get isn’t based on the size of your medical bill.
There might be a limit on how much this policy will pay each year.
This policy isn’t a substitute for comprehensive health insurance.
Since this policy isn’t health insurance, it doesn’t have to include most federal consumer protections that apply to health insurance.
Looking for comprehensive health insurance?
Visit HealthCare.gov or call 1-800-318-2596 (TTY: 1-855-889-4325) to find health coverage options.
To find out if you can get health insurance through your job, or a family member’s job, contact the employer.
Questions about this policy?
For questions or complaints about this policy, contact your state Department of Insurance. Find their number on the National Association of Insurance Commissioners’ website (naic.org) under “Insurance Departments.”
If you have this policy through your job, or a family member’s job, contact the employer.
Not legal advice: Nothing in this publication should be construed as legal advice. Lockton may not be considered your legal counsel, and communications with Lockton's Compliance Consulting group are not privileged under the attorney-client privilege.
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