Seyfarth Synopsis: The agencies have finalized a portion of their proposed rules impacting so-called "junk insurance" regarding short-term limited-duration insurance, but deferred finalizing the more significant changes that would have impacted most fixed indemnity policies.
In early April 2024, the Treasury Department, Department of Labor, and Health and Human Services (the "agencies") issued final rules regarding short-term limited-duration insurance (STLDI). Avid readers of this blog may recall our earlier post on the proposed rules, found here, which impacted STLDI as well as other issues surrounding excepted benefits. The new final rules primarily address the STLDI portion of the proposed rules, and generally adopt them as proposed. Aside from a new notice requirement, the agencies delayed finalizing the rules on fixed indemnity insurance, but warned that the delay should not be an endorsement of the abusive practices that have emerged in this space.
Short-Term, Limited-Duration Insurance
To recap, STLDI is a type of insurance that is excluded from the general concept of comprehensive health insurance (and therefore not subject to the market consumer protections) due to its being, well ... short-term and of limited-duration. STLDI is designed to fill temporary gaps in medical coverage that may occur, for example, when an individual is changing jobs.
The prior regulations limited the maximum duration for such policies to a 12 month term, or 36 months total when taking into account renewals. The agencies deemed this too long of a period for the exclusion to apply and therefore proposed two notable changes to STLDI insurance:
- Shorter Coverage Window. Reducing the 12-month maximum term (with renewals/extensions no longer than 36 months in total duration) to a maximum 3-month contract term with a 4-month maximum total duration taking into account renewals. For this purpose, "renewals" include any new policy issued by same carrier to policy holder within a 12 month period beginning with original effective date. The 3-month maximum dovetails with the maximum permitted waiting period allowed for group health plans. For longer gaps, the regulators reason that the individual can rely on COBRA or federal marketplace coverage.
- New Notice Requirement. A new (enhanced) notice requirement to ensure consumer awareness, that would also have to be included in marketing materials for the product (not just the policy itself).
The final regulations adopt the proposal and are applicable to new policies sold or issued on and after September 1, 2024 (although the new notice requirement would apply to any policy renewal/extension on or after that date).
Other Types Of "Junk" Insurance
As described in our prior alert, while the proposed regulations had suggested fairly significant changes to so-called fixed indemnity insurance policies, the agencies deferred finalization of most of the elements of those proposed regulations in order to further study their potential impact. The agencies reiterated that they remain deeply concerned about the potential impact of these types of the policies in the marketplace, including the potential risk that they may mislead consumers into believing the policy constitutes fully comprehensive health insurance. Similarly, the IRS deferred finalization of the rules that would have codified the IRS's intended tax treatment of payments from fixed indemnity policies. (As noted in prior alerts, the IRS has issued various informal memoranda and other guidance over the last several years indicating how they believe such payments should be taxed.) The agencies noted that no inference should be drawn from the delay in finalizing.
The agencies did, however, finalize the new notice requirement that applies to these policies and issued a model notice that must be included (in 14 pt font, without modification) in policies and marketing materials (including open enrollment materials) describing these benefits. The new notice requirement applies for plan years beginning on or after January 1, 2025.
As the agencies did not address in these final regulations these other types of insurance, it raises the question whether that means there will be little or no change in the rules for those programs. Comments from Treasury representatives, however, make this answer a clear "no". The agencies appear to be pausing to consider the various comments received, and how the proposed changes to a rule written 50 years ago with decades of interpretation behind it, would impact different stakeholders. The rules need to be comprehensive and yet flexible enough to address arrangements they deem abusive as well as non-abusive. We also understand that the agencies intend to add guidance about reporting for income and employment tax treatment, which was missing from the proposed rule.
We will remain on watch for the release of final regulations on these other types of insurance and provide an update on any future changes or developments in this space.
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