The federal agencies responsible for policing employer compliance with the Affordable Care Act (ACA) have issued proposed regulations on fixed indemnity insurance that would effectively force employers to offer those coverages on an after-tax basis. The proposed rules also attempt to fix perceived abuses where the agencies believe the fixed indemnity coverage is pitched as comprehensive medical coverage.
Also included in the treasure trove of guidance are new proposed rules on short-term limited duration medical insurance (we won’t discuss those) and further clarification on what does and does not qualify as fixed indemnity coverage. The agencies have also requested comments on specified disease coverage (e.g., cancer insurance) and how level-funded health plans operate, a likely precursor to future agency guidance on those programs.
Executive Summary
These are proposed rules, so action is only required if they are finalized.
The proposed rules outline the requirements for fixed indemnity policies to fall into the “excepted benefit” category.
The proposed rules would cause a loss of excepted benefit status for fixed indemnity coverage that is paired with minimum essential coverage (MEC) plans.
The rules also address the tax treatment of such coverage.
Background
The ACA has prompted employers to provide more tailored – and often more limited – health coverage options to their workforce. Some employers have turned to offering fixed indemnity coverage, intending that coverage:
Provides modest healthcare coverage to employees who are not ACA full-time employees or who are but who may not want more robust (and expensive) coverage.
Supplements a bare-bones minimum essential coverage offering, like a “preventive care only” plan, for ACA full-time employees.
Provides benefits to enrollees in a health savings account (HSA) compatible high-deductible health plan (HDHP) before they have met their high deductible under the HDHP.
Depending on what the employer is trying to accomplish (and, more importantly, how the indemnity coverage is designed), the fixed indemnity coverage might not entirely fit the bill or, worse, create unanticipated compliance problems.
The skinny on fixed indemnity coverage and what the proposal would change in that 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 actually 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 proposed rules.
In the compliance world, fixed indemnity coverage walks a fine line between group health plan coverage (subject to all the compliance complexities that attach to that coverage) and coverage that gets a free pass on much of that complexity. On which side of that line any fixed indemnity contract falls turns 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 may be 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 contract must pay benefits for an event regardless of whether benefits are provided for the same event under any group health plan maintained by the same plan sponsor.
The contract cannot pay benefits other than on a “per day” or other “per fixed period” basis (e.g., a contract that pays on a “per visit” basis does not qualify as an excepted benefit).
With respect to #4, federal regulators have now proposed that a fixed amount must be payable per day (or per another period of time), regardless of the actual or estimated amount of expenses incurred, services or items received, the severity of illness or injury experienced by a covered person, or other characteristics particular to a course of treatment received, and not on any other basis (such as on a per item or per-service basis). The rules provide the following examples of defective coverage:
Coverage that pays up a percentage of expenses to a maximum of $100 per day
Coverage fails because it doesn’t pay a fixed dollar amount per day (even if the coverage always pays $100 per day, in practice).
Coverage that pays $50 per blood test or $100 per visit.
Coverage fails because it doesn’t pay a fixed dollar amount per day amount (even if the coverage were to indicate “$50 per blood test per day” because benefits are not paid regardless of the services or items received).
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.
The proposed rule would also require fixed indemnity insurers to display a consumer notice that the coverage is not comprehensive medical coverage. The model notice is included on the last page of this alert.
Proposal: no offer of fixed indemnity with MEC
Worst of all, the proposed rules would prohibit coupling an offer of fixed indemnity insurance with a bare-bones minimum essential coverage offering, like a “preventive care only” program. Why? Because the agencies believe the fixed indemnity coverage is coordinated with an exclusion of benefits under another group health plan maintained by the same plan sponsor (that is, the preventive-services-only benefit package). This purportedly runs afoul of the non-coordination provision (#2 above).
Lockton comment: If the proposal is later finalized, this would force employers to uncouple the fixed indemnity coverage from the skinny plan. Arguably, this would leave affected employees in a worse financial situation because they would have no coverage beyond the skinny plan.
IRS also proposes change to tax treatment of employer-provided fixed indemnity
IRS has also proposed a change to the tax treatment of employer-provided fixed indemnity benefits that are payable to the insured employee. By “employer-provided,” we mean fixed indemnity coverage where the premium is paid by the employer or pretax by the employee under a Section 125 plan.
Under the proposal, any claim payment made by the insurance would have to be substantiated by the plan in order to verify that the related expense was for tax-free medical care. While health plans always adjudicate expenses, that is never the case for fixed indemnity coverage, the result being that the employer-provided fixed indemnity payments to employees would be taxable under the proposal.
Lockton comment: We wrote an alert (opens a new window) on this topic in 2017. At that time, IRS indicated that under its longstanding guidance, if the indemnity coverage is paid by the employer (or pretax by the employee), only the amount reimbursed in excess of the medical expense is taxable. Most practitioners believed this was an income tax issue for the employee when they filed their federal income tax return. Better yet, not all insurers issued a Form 1099 to the employee, reflecting the payments.
The proposal would make the employer liable for withholding income and payroll taxes from the payments if the coverage was employer-provided. Suffice it to say that most fixed indemnity insurers do not have processes in place to withhold taxes on behalf of the employer. The best practice, however, is to have employees pay their portion of fixed indemnity premiums on a post-tax basis or have the employer treat any employer contribution as imputed taxable income to the employee. Either approach would moot any tax withholding obligations.
Next steps
The agencies will accept comments on the proposed rules for 60 days. The rules would only apply after final regulations are issued, with phased-in effective dates depending on when the coverage renews. While no changes are currently required, employers offering fixed indemnity coverage need to be ready to pivot if and when final rules are issued.
Lockton comment: Lockton intends to issue a comment letter to the agencies echoing how the proposal would drastically change the regulatory landscape for fixed indemnity coverage. Employers offering fixed indemnity coverage, especially with MEC, should seriously consider submitting a comment letter on the proposed rules.
Proposed required model statement for fixed indemnity coverage
IMPORTANT: This is fixed indemnity insurance. This isn’t comprehensive health insurance and doesn’t have to include most Federal consumer protections for health insurance.
Visit HealthCare.gov online or call 1-800-318-2596 (TTY: 1-855-889-4325) to review your options for comprehensive health insurance. If you’re eligible for coverage through your employer or a family member’s employer, contact the employer for more information. Contact your State department of insurance if you have questions or complaints about this policy.
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