Proposed Regs Would Modify Definition of Short-Term, Limited-Duration Insurance

(Parker Tax Publishing March 2018)

The IRS issued proposed regulations amending the definition of short-term, limited-duration insurance for purposes of its exclusion from the definition of individual health insurance coverage. The purpose of the proposed regulations is to lengthen the maximum period of short-term, limited-duration insurance to provide more affordable consumer choices for health care coverage. REG-133491-17.

Background

Code Sec. 5000A, added by the Patient Protection and Affordable Care Act (PPACA), provides that all non-exempt applicable individuals must maintain minimum essential health insurance coverage or pay the individual shared responsibility payment. On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (TCJA) was signed into law. TCJA includes a provision under which the individual shared responsibility payment included in Code Sec. 5000A is reduced to $0, effective for months beginning after December 31, 2018.

Short-term, limited-duration insurance is a type of health insurance coverage that was designed to fill temporary gaps in coverage that may occur when an individual is transitioning from one plan or coverage to another plan or coverage. Although short-term, limited-duration insurance is not an excepted benefit (i.e., benefits not subject to the Affordable Care Act (ACA) requirements that apply to group health care plans and health insurance plans), it is exempt from a requirement under the Public Health Service (PHS) Act's individual-market requirements because it is not individual health insurance coverage. Section 2791(b)(5) of the PHS Act provides that the term "individual health insurance coverage" means health insurance coverage offered to individuals in the individual market, but does not include short-term limited duration insurance term, limited-duration insurance. Under regulations implementing the Health Insurance Portability and Accountability Act of 1996 (HIPAA), and that continued to apply through 2016, short-term, limited-duration insurance was defined as ''health insurance coverage provided pursuant to a contract with an issuer that has an expiration date specified in the contract (taking into account any extensions that may be elected by the policyholder without the issuer's consent) that is less than 12 months after the original effective date of the contract.''

To address the issue of short-term, limited-duration insurance being sold as a type of primary coverage, as well as concerns regarding possible adverse selection impacts on the risk pool for PPACA-compliant plans, the Department of the Treasury, the Department of Labor, and the Department of Health and Human Services (together, the Departments) published proposed regulations on June 10, 2016, entitled ''Expatriate Health Plans, Expatriate Health Plan Issuers, and Qualified Expatriates; Excepted Benefits; Lifetime and Annual Limits; and Short-Term, Limited-Duration Insurance.'' The June 2016 proposed regulations changed the definition of short-term, limited-duration insurance that had been in place for nearly 20 years by revising the definition to specify that short-term, limited-duration insurance could not provide coverage for three months or longer (including any renewal period(s)).

Some stakeholders who submitted comments on the June 2016 proposed rule supported the rule and the Departments' stated goals. Several commenters agreed that the proposed rule would limit the number of consumers relying on short-term, limited-duration insurance as their primary form of coverage and improve the PPACA's individual market single risk pools. However, other commenters expressed concerns about restricting the use of short-term, limited-duration insurance (as originally defined under the HIPAA regulations) because it provided an additional, often much more affordable coverage option than an insurance policy that complied with all of the requirements of the PPACA. Some commentators explained that individuals who do not qualify for premium tax credits and need temporary coverage, or who cannot afford Consolidated Omnibus Budget Reconciliation Act (COBRA) continuation coverage, or who missed an opportunity to sign up for coverage during open enrollment or special enrollment periods, might need to rely on short-term, limited-duration insurance coverage for three months or longer. Other commentators noted how a person with just a less-than-three-month policy who develops a health condition might have no coverage options for the condition after their coverage expires until the beginning of the plan year that corresponds to the next individual market open enrollment period. Other commentators also expressed opposition to the proposed rule citing their belief that states are in the best position to regulate short-term, limited-duration insurance and that the proposed regulations would limit state flexibility. Finally, several commenters observed that PPACA-compliant policies are often network-based but short-term, limited-duration insurance policies typically are not, thus offering consumers a greater choice of health care providers. This is particularly true in rural areas, one commenter stated. After reviewing public comments and feedback, the proposed regulations were finalized without change on October 31, 2016.

On June 12, 2017, the Department of Health and Human Services (HHS) published a request for information entitled ''Reducing Regulatory Burdens Imposed by the Patient Protection and Affordable Care Act & Improving Healthcare Choices to Empower Patients'' which solicited public comments about potential changes to existing regulations and guidance that could promote consumer choice, enhance affordability of coverage for individual consumers, and affirm the traditional regulatory authority of the states in regulating the business of health insurance, among other goals. Several commentators stated that changes to the October 2016 final rule might provide an opportunity to achieve these goals.

On October 12, 2017, President Trump issued Executive Order 13813 entitled ''Promoting Healthcare Choice and Competition Across the United States." This Executive Order states in relevant part: ''Within 60 days of the date of this order, the Secretaries of the Treasury, Labor, and Health and Human Services shall consider proposing regulations or revising guidance, consistent with law, to expand the availability of [short-term, limited-duration insurance]. To the extent permitted by law and supported by sound policy, the Secretaries should consider allowing such insurance to cover longer periods and be renewed by the consumer.''

Proposed Regulations

On February 21, the IRS issued Prop. Reg. Sec. 2590.701-2, which would amend the definition of short-term, limited-duration insurance so it means health insurance provided pursuant to a contract with an issuer that has an expiration date specified in the contract (taking into account any extensions that may be elected by the policyholder without the issuer's consent) that is less than 12 months after the original effective date of the contract. In addition, the proposed regulations would revise the required notice that must appear in the contract and any application materials for short-term, limited-duration insurance. Because of a concern that short-term, limited-duration insurance policies that provide coverage lasting almost 12 months may be more difficult for some individuals to distinguish from PPACA-compliant coverage which is typically offered on a 12-month basis, the proposed regulations require certain notices to be prominently displayed (in at least 14 point type) in the contract and in any application materials.

The applicability date for the proposed regulations, if finalized, would be 60 days after the publication of the final regulations, and policies sold on or after that date would have to meet the requirements of the final rule in order to constitute short-term, limited- duration insurance.

For a discussion of the penalty for failing to maintain minimum essential health coverage, see Parker Tax ¶190,130.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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