INCOME TAXRev. Rul. 97–20, page 4.Medical savings accounts—high-deductible plan.Guidance is given concerning the definition of the term‘‘high-deductible plan’’ under section 220(c)(2)(A)(ii) ofthe Code.

EXCISE TAXT.D. 8716, page 5.REG–253578–96, page 93.Temporary and proposed regulations relate to grouphealth plan portability, access, and renewability require-ments added to section 9801 of the Code by the HealthInsurance Portability and Accountability Act of 1996.

ADMINISTRATIVE

Announcement 97–47, page 94.New Publication 968, Tax Benefits for Adoption, is nowavailable.

Finding Lists begin on page 97.Announcement of Disbarments and Suspensions begins on page 95.

Bulletin No. 1997–19May 12, 1997

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not be reliedupon as authoritative interpretations.

Mission of the Service

The purpose of the Internal Revenue Service is tocollect the proper amount of tax revenue at the leastcost; serve the public by continually improving the

quality of our products and services; and perform in amanner warranting the highest degree of publicconfidence in our integrity, efficiency and fairness.

Statement of Principlesof Internal RevenueTax AdministrationThe function of the Internal Revenue Service is toadminister the Internal Revenue Code. Tax policyfor raising revenue is determined by Congress.

With this in mind, it is the duty of the Service tocarry out that policy by correctly applying the lawsenacted by Congress; to determine the reasonablemeaning of various Code provisions in light of theCongressional purpose in enacting them; and toperform this work in a fair and impartial manner,with neither a government nor a taxpayer point of view.

At the heart of administration is interpretation of theCode. It is the responsibility of each person in theService, charged with the duty of interpreting thelaw, to try to find the true meaning of the statutoryprovision and not to adopt a strained construction inthe belief that he or she is ‘‘protecting the revenue.’’The revenue is properly protected only when we as-certain and apply the true meaning of the statute.

The Service also has the responsibility of applyingand administering the law in a reasonable,practical manner. Issues should only be raised byexamining officers when they have merit, neverarbitrarily or for trading purposes. At the sametime, the examining officer should never hesitateto raise a meritorious issue. It is also importantthat care be exercised not to raise an issue or toask a court to adopt a position inconsistent withan established Service position.

Administration should be both reasonable andvigorous. It should be conducted with as littledelay as possible and with great cour tesy andconsiderateness. It should never try to overreach,and should be reasonable within the bounds of lawand sound administration. It should, however, bevigorous in requiring compliance with law and itshould be relentless in its attack on unreal taxdevices and fraud.

2

Introduction

The Internal Revenue Bulletin is the authoritative instru-ment of the Commissioner of Internal Revenue forannouncing official rulings and procedures of the Inter-nal Revenue Service and for publishing Treasury Deci-sions, Executive Orders, Tax Conventions, legislation,court decisions, and other items of general interest. It ispublished weekly and may be obtained from the Superin-tendent of Documents on a subscription basis. Bulletincontents of a permanent nature are consolidated semi-annually into Cumulative Bulletins, which are sold on asingle-copy basis.

It is the policy of the Service to publish in the Bulletin allsubstantive rulings necessary to promote a uniformapplication of the tax laws, including all rulings thatsupersede, revoke, modify, or amend any of thosepreviously published in the Bulletin. All published rulingsapply retroactively unless otherwise indicated. Proce-dures relating solely to matters of internal managementare not published; however, statements of internalpractices and procedures that affect the rights andduties of taxpayers are published.

Revenue rulings represent the conclusions of the Ser-vice on the application of the law to the pivotal factsstated in the revenue ruling. In those based on positionstaken in rulings to taxpayers or technical advice toService field offices, identifying details and informationof a confidential nature are deleted to prevent unwar-ranted invasions of privacy and to comply with statutoryrequirements.

Rulings and procedures reported in the Bulletin do nothave the force and effect of Treasury DepartmentRegulations, but they may be used as precedents.Unpublished rulings will not be relied on, used, or citedas precedents by Service personnel in the disposition ofother cases. In applying published rulings and proce-dures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be consid-ered, and Service personnel and others concerned arecautioned against reaching the same conclusions inother cases unless the facts and circumstances aresubstantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based onprovisions of the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows:Subpart A, Tax Conventions, and Subpart B, Legislationand Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references tothese subjects are contained in the other Parts andSubparts. Also included in this part are Bank SecrecyAct Administrative Rulings. Bank Secrecy Act Administra-tive Rulings are issued by the Department of theTreasury’s Office of the Assistant Secretary (Enforce-ment).

Part IV.—Items of General Interest.With the exception of the Notice of Proposed Rulemak-ing and the disbarment and suspension list included inthis part, none of these announcements are consoli-dated in the Cumulative Bulletins.

The first Bulletin for each month includes an index forthe matters published during the preceding month.These monthly indexes are cumulated on a quarterly andsemiannual basis, and are published in the first Bulletinof the succeeding quarterly and semi-annual period,respectively.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents U.S. Government Printing Office, Washington, D.C. 20402.

3

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986Section 220.—Medical SavingsAccounts

Definition of high-deductible healthplan. Guidance is given concerning thedefinition of a ‘‘high-deductible healthplan’’ under section 220(c)(2)(A) of theCode.

Rev. Rul. 97–20

ISSUE

In the case of family coverage, whatconstitutes a ‘‘high-deductible healthplan’’ for purposes of section220(c)(2)(A) of the Code?

FACTS

Situation 1

Plan A is a health plan that providesfor the payment of medical expenses.Taxpayer X and her family are coveredby Plan A. Plan A provides for paymentof covered medical expenses for allmembers of the family after the family’stotal covered medical expenses exceed$3,000 for the year. Plan A does notprovide for payment of covered medicalexpenses until the family’s total coveredmedical expenses exceed $3,000 for theyear, regardless of which family mem-ber or members incur those coveredexpenses. Plan A limits out-of-pocketexpenses to $5,000 for any year.

Situation 2

Plan B is a health plan that providesfor the payment of medical expenses.Taxpayer Y and his family are coveredby Plan B. Plan B provides for paymentof covered medical expenses for allmembers of the family after the familyhas satisfied a family deductible of$3,000 for the year. Plan B also pro-vides for payment of covered medicalexpenses of any member of the familyafter that family member has satisfiedan individual deductible by incurringcovered medical expenses for the yearof at least $1,500. Plan B limits out-of-pocket expenses to $5,000 for any year.Neither of the special rules regarding

the definition of a high-deductible healthplan applies to Plan A or B (see section220(c)(2)(B)).

LAW

The Health Insurance Portability andAccountability Act of 1996, Pub. L.104–191, added section 220 to the Code

to permit eligible individuals to establishmedical savings accounts (MSAs) undera pilot project beginning on January 1,1997.The section 220(c)(1) definition of an

‘‘eligible individual’’ includes, as oneprerequisite for eligibility, the require-ment that an individual be covered un-der a high-deductible health plan. Sec-tion 220(c)(2)(A) provides that ‘‘[t]heterm ‘high-deductible health plan’ meansa health plan —(i) in the case of self-only coverage,

which has an annual deductible which isnot less than $1,500 and not more than$2,250,(ii) in the case of family coverage,

which has an annual deductible which isnot less than $3,000 and not more than$4,500, and(iii) the annual out-of-pocket expenses

required to be paid under the plan (otherthan for premiums) for covered benefitsdoes not exceed —(I) $3,000 for self-only coverage, and(II) $5,500 for family coverage.’’Section 220(c)(5) defines family cov-

erage as coverage that is not self-onlycoverage.

ANALYSIS AND HOLDING

Situation 1

Plan A provides coverage for Tax-payer X and other members of herfamily and is, therefore, family coveragewithin the meaning of section 220(c)(5).Because Plan A provides family cover-age, Plan A is a high-deductible healthplan only if, as required by section220(c)(2)(A)(ii), it has an annual deduct-ible that is not less than $3,000 and notmore than $4,500. Plan A provides forthe payment of covered medical ex-penses for Taxpayer X or her familymembers only after the family has in-curred covered medical expenses duringthe year of $3,000. Accordingly,the deductible under Plan A is $3,000.Because Plan A has a deductible that isnot less than $3,000 and is not morethan $4,500, Plan A meets the require-ment with respect to the minimum andmaximum deductible for a high-deductible health plan under section220(c)(2)(A)(ii). Because the annual out-of-pocket expenses required to be paidunder Plan A can never exceed $5,000,which is less than $5,500, Plan A is ahigh-deductible health plan for purposesof section 220.

Situation 2

Plan B provides coverage for Tax-payer Y and other members of hisfamily and is, therefore, family coveragewithin the meaning of section 220(c)(5).Plan B provides for the payment ofcovered medical expenses of any mem-ber of Taxpayer Y’s family if the mem-ber has incurred covered medical ex-penses during the year in excess of$1,500, even if the family has notincurred covered medical expenses inexcess of $3,000. For example, if Tax-payer Y incurred covered medical ex-penses of $2,000 in a year, Plan Bwould pay $500. Accordingly, depend-ing on which family members incur thecovered medical expenses, benefits arepotentially available under Plan B evenif the family’s covered medical expensesdo not exceed $3,000. Because Plan Bprovides family coverage with an annualdeductible of less than $3,000, Plan B isnot a high-deductible health plan asdefined in section 220(c)(2).

CONCLUSION

In the case of family coverage, exceptas provided in section 220(c)(2)(B), aplan is a ‘‘high-deductible health plan’’under section 220(c)(2)(A) only if, un-der the terms of the plan and withoutregard to which family member ormembers incur expenses:(1) No amounts are payable until the

family has incurred annual coveredmedical expenses in excess of $3,000,(2) Amounts for covered benefits are

always payable after the family hasincurred annual covered medical ex-penses in excess of $4,500, and(3) The annual out-of-pocket expenses

required to be paid under the plan forcovered benefits do not exceed $5,500.

APPLICATION OF SECTION 7805(b)

Section 7805(b) of the Code providesthat the Secretary may prescribe theextent, if any, to which any rulingrelating to the internal revenue lawsshall be applied without retroactive ef-fect.Pursuant to section 7805(b), a health

plan acquired before November 1, 1997that provides family coverage that be-comes effective before November 1,1997 will not fail to be treated as ahigh-deductible health plan merely be-cause the health plan provides for indi-vidual deductibles of at least $1,500 and

4

not in excess of $2,250 (the permittedrange of deductibles for a high-deductible health plan providing self-only coverage). The relief provided inthe preceding sentence will apply untilthe first renewal date on or after De-cember 31, 1997 (in the case of a healthplan that provides for renewal) or forthe term of the health plan (in the caseof a health plan that has a specifiedterm and that does not provide forrenewal). For purposes of this para-graph, a health plan that continues inforce for an indeterminate period aslong as premiums are paid and does nototherwise provide for renewal, will betreated as a health plan that provides forrenewal and each premium due date(determined without regard to any graceperiod) will be treated as a renewal date.In no event will the relief provided inthis paragraph terminate before Decem-ber 31, 1997 or extend beyond Decem-ber 31, 1998.

DRAFTING INFORMATION

The principal author of this revenueruling is Felix Zech of the Office of theAssociate Chief Counsel (EmployeeBenefits and Exempt Organizations). Forfurther information regarding this rev-enue ruling contact Mr. Zech at (202)622–4606 (not a toll-free number).

Section 9801.—IncreasedPortability Through Limitations onPreexisting Condition Exclusions26 CFR 54.9801–5T: Certification and disclosureof previous coverage (temporary).

T.D. 8716

DEPARTMENT OF THE TREASURYInternal Revenue Service26 CFR Part 54

DEPARTMENT OF LABORPension and Welfare BenefitsAdministration29 CFR Part 2590

DEPARTMENT OF HEALTH ANDHUMAN SERVICESHealth Care FinancingAdministration45 CFR subtitle A, Parts 144 and146

Interim Rules for Health InsurancePortability for Group Health Plans

AGENCIES: Internal Revenue Service,Department of the Treasury; Pensionand Welfare Benefits Administration,

Department of Labor; Health Care Fi-nancing Administration, Department ofHealth and Human Services.

ACTION: Interim rules with request forcomments.

SUMMARY: This document containsinterim rules governing access, portabil-ity and renewability requirements forgroup health plans and issuers of healthinsurance coverage offered in connec-tion with a group health plan. The rulescontained in this document implementchanges made to certain provisions ofthe Internal Revenue Code of 1986(Code), the Employee Retirement In-come Security Act of 1974 (ERISA),and the Public Health Service Act (PHSAct) enacted as part of the HealthInsurance Portability and AccountabilityAct of 1996 (HIPAA). Interested per-sons are invited to submit comments onthe interim rules for consideration bythe Department of Health and HumanServices, the Department of Labor, andthe Department of the Treasury (Depart-ments) in developing final rules. Therules contained in this document arebeing adopted on an interim basis toaccommodate statutorily establishedtime frames intended to ensure thatsponsors and administrators of grouphealth plans, participants and beneficia-ries, States, and issuers of group healthinsurance coverage have timely guid-ance concerning compliance with therecently enacted requirements ofHIPAA.

DATES: Effective date.These interimrules are effective on June 1, 1997.

Comment date.Written comments onthese interim rules are invited and mustbe received by the Departments on orbefore July 7, 1997.

Applicability dates. For group healthplans maintained pursuant to one ormore collective bargaining agreementsratified before August 21, 1996, therules (other than the certification re-quirements) do not apply to plan yearsbeginning before the later of July 1,1997 or the date on which the lastcollective bargaining agreement relatingto the plan terminates without regard toany extension agreed to after August 21,1996.The rules implementing the certifica-

tion provisions do not require any actionto be taken before June 1, 1997, al-though certain certification requirementsapply to periods of coverage and eventsthat occur after June 30, 1996. The

certification requirement for events thatoccurred on or after October 1, 1996and before June 1, 1997 may be satis-fied using an optional notice describedin this preamble.

Information collection. Affected partiesdo not have to comply with the informa-tion collection requirements in theseinterim rules until the Departments pub-lish in the Federal Register the controlnumbers assigned by the Office of Man-agement and Budget (OMB) to theseinformation collection requirements.Publication of the control numbers noti-fies the public that OMB has approvedthese information collection require-ments under the Paperwork ReductionAct of 1995. The Departments haveasked for OMB clearance as soon aspossible, and OMB approval is antici-pated by the applicable effective date.

ADDRESSES: Written comments shouldbe submitted with a signed original andthree copies to any of the addressesspecified below. All comments will beavailable for public inspection and copy-ing in their entirety. Interested personsare invited to submit written commentson these interim rules to:Health Care Financing Administra-

tion, Department of Health and HumanServices, Attention: [BPD–890–IFC],P.O. Box 26688, Baltimore, MD 21207Pension and Welfare Benefits Admin-

istration, U.S. Department of Labor,Room N–5669, 200 Constitution Av-enue, NW, Washington, DC 20210, At-tention: Interim Portability and Renew-ability RulesCC:DOM:CORP:T:R (REG–253578–

96), Room 5228, Internal Revenue Ser-vice, POB 7604, Ben Franklin Station,DC 20044Alternatively, comments may be sub-

mitted electronically via the Internet byselecting the ‘‘Tax Regs’’ option on theIRS Home Page, or by submitting com-ments directly to the IRS Internet site athttp://www.irs.ustreas.gov/tax_regs/comments.htmlIn the alternative:Written comments for the Department

of Health and Human Services may behand delivered from 8:30 a.m. to 5:00p.m. to:Room 309–G, Hubert Humphrey

Building, 200 Independence Avenue,SW, Washington, DC 20201, or RoomC5–09–26, 7500 Security Boulevard,Baltimore, MD 21244–1850Written comments for the Department

of Labor may be hand delivered from8:15 a.m. to 4:45 p.m. to the above

5

address for the Pension and WelfareBenefits Administration, U.S. Depart-ment of Labor.Written comments for the Internal

Revenue Service may be hand deliveredbetween the hours of 8 a.m. and 5 p.m.to:CC:DOM:CORP:T:R (REG–253578–

96), Courier’s Desk, Internal RevenueService, room 5228, 1111 ConstitutionAvenue, NW, Washington, DCAll submissions to the Department of

Health and Human Services will beopen to public inspection as they arereceived, generally beginning threeweeks after publication, in room 309–Gof the Department of Health and HumanServices offices at 200 IndependenceAvenue, SW, Washington, DC, from8:30 a.m. to 5:00 p.m. All submissionsto the Department of Labor will be opento public inspection at the Public Docu-ments Room, Pension and Welfare Ben-efits Administration, U.S. Department ofLabor, Room N–5638, 200 ConstitutionAvenue NW, Washington, DC, from8:30 a.m. to 5:30 p.m. All submissionsto the Internal Revenue Service will beopen to public inspection and copying inroom 1621, 1111 Constitution Avenue,NW, Washington, DC, from 9:00 a.m. to4:00 p.m.

FOR FURTHER INFORMATION CON-TACT: Julie Walton, Health Care Fi-nancing Administration, at 410–786–1565; Mark Connor, Office of Regula-tions and Interpretations, Pension andWelfare Benefits Administration, Depart-ment of Labor, at 202–219–4377; DianePedulla, Plan Benefits Security Division,Office of the Solicitor, Department ofLabor, at 202–219–4377; or RussWeinheimer, Internal Revenue Service,at 202–622–4695. These are not toll-freenumbers.

CUSTOMER SERVICE INFORMA-TION: Individuals interested in obtain-ing a copy of the Department of Labor’sbooklet entitled ‘‘Questions and An-swers: Recent Changes in Health CareLaw’’ may obtain a copy by calling thefollowing toll-free number 1–800–998–7542.

SUPPLEMENTARY INFORMATION:

A. Background

The Health Insurance Portability andAccountability Act of 1996 (HIPAA),Pub. L. 104–191, was enacted on Au-gust 21, 1996. HIPAA amended thePublic Health Service Act (PHS Act),

the Employee Retirement Income Secu-rity Act of 1974 (ERISA), and theInternal Revenue Code of 1986 (Code)to provide for, among other things,improved portability and continuity ofhealth insurance coverage in the groupand individual insurance markets, andgroup health plan coverage provided inconnection with employment. Sections102(c)(4), 101(g)(4), and 401(c)(4) ofHIPAA require the Secretaries of Healthand Human Services, Labor, and theTreasury, each to issue regulations nec-essary to carry out these provisions.1

B. Overview of HIPAA and the InterimRules

Areas of Guidance. The access, port-ability, and renewability provisions ofHIPAA affect group health plans andhealth insurance issuers. Group healthplans are generally plans sponsored byemployers or employee organizations orboth. These HIPAA provisions are de-signed to improve the availability andportability of health coverage by:• limiting exclusions for preexisting

medical conditions;• providing credit for prior health

coverage and a process for transmittingcertificates and other information con-cerning prior coverage to a new grouphealth plan or issuer;• providing new rights that allow in-

dividuals to enroll for health coveragewhen they lose other health coverage orhave a new dependent;• prohibiting discrimination in enroll-

ment and premiums against employeesand their dependents based on healthstatus;• guaranteeing availability of health

insurance coverage for small employersand renewability of health insurancecoverage in both the small and largegroup markets; and• preserving, through narrow preemp-

tion provisions, the States’ traditionalrole in regulating health insurance, in-cluding State flexibility to providegreater protections.The regulations provide guidance with

respect to these provisions. In imple-menting these new rules, the regulationsprovide protections for individuals seek-

ing health coverage while minimizingburdens on employers and insurers.Reducing Burdens. The regulations

reduce burdens by:• providing for a simple model cer-

tificate that can be used by plans andissuers;• reducing unnecessary duplication in

the issuance of certificates;• including flexible rules for depen-

dents to receive the coverage informa-tion they need;• allowing coverage information to be

provided by telephone if all partiesagree;• relieving plans and issuers of the

need to report the starting date of cover-age and waiting period informationwhere a certificate shows 18 months ofcreditable coverage;• including a transition rule permit-

ting plans and issuers to give individualsa notice in lieu of a certificate wherecoverage ended before June 1, 1997;and• providing for a model notice that

may be used to satisfy the transition ruleand a model notice for informationrelating to categories of benefits pro-vided under a plan.Implementing Individual Protections.

The regulations protect and assist par-ticipants and their dependents by:• ensuring that individuals are noti-

fied of the length of time that a preex-isting condition exclusion clause in anynew health plan may apply to them aftertaking into account their prior creditablecoverage;• ensuring that individuals are noti-

fied of their rights to special enrollmentunder a plan;• permitting individuals to obtain a

certificate before coverage under a planceases; and• creating practical ways for individu-

als to demonstrate creditable coverage toa new plan (where the individual’s priorplan fails to provide the certificate).

C. Overview of Coordination of GroupMarket Regulation Among Departments

The HIPAA portability provisions re-lating to group health plans and healthinsurance coverage offered in connec-tion with group health plans (referred tobelow as the ‘‘group market’’ provi-sions) are set forth under a new Part Aof Title XXVII of the PHS Act, a newPart 7 of Subtitle B of Title I of ERISA,and a new Subtitle K of the InternalRevenue Code. HIPAA also added pro-visions governing insurance in the indi-

1In addition to the group market regulations in thisdocument, the Department of the Treasury isissuing a proposed Treasury regulation that cross-references these regulations and the Department ofLabor is issuing an interim regulation relating tocertain disclosure requirements under HIPAA.Each of these regulations appears separately in thisissue of the Federal Register.

6

vidual market that are contained only inthe PHS Act, and thus are not within theregulatory jurisdiction of the Departmentof Labor or the Department of theTreasury. (These portability provisionsare referred to below as the ‘‘individualmarket’’ provisions.)In general, the group market provi-

sions create concurrent jurisdiction forthe Secretaries of Health and HumanServices, Labor, and the Treasury. Theseprovisions include similar rules relatingto preexisting conditions exclusions,special enrollment rights, and prohibi-tion of discrimination against individualsbased on health status-related factors.(These group market provisions are re-ferred to below as the ‘‘shared groupmarket’’ provisions.) Accordingly, thethree Departments share regulatory re-sponsibility for most, but not all, of thegroup market provisions.The shared group market provisions

are substantially similar, except as fol-lows:• The shared group market provisions

in the PHS Act apply generally toinsurance issuers that offer health insur-ance in connection with group healthplans (subject to an exception that mayapply for plans with fewer than twoparticipants who are current employees(‘‘very small plans’’)), and certain Stateand local government plans. Only thePHS Act contains group market provi-sions relating to availability and renew-ability of health insurance.2 In addition,the PHS Act imposes certification re-quirements on certain federal entities nototherwise subject to the HIPAA portabil-ity provisions. Further, the States, in thefirst instance, will enforce the PHS Actwith respect to issuers. In addition,individuals may be able to pursueclaims through State mechanisms. Onlyif a State does not substantially enforceany provisions under its insurance laws,will the Department of Health and Hu-man Services enforce the provisions,through the imposition of civil moneypenalties. (The group market provisionsrelating to guaranteed renewability formultiemployer plans and multiple em-ployer welfare arrangements (MEWAs)are in ERISA and the Internal RevenueCode, but not the PHS Act.)• The ERISA shared group market

provisions apply generally to all group

health plans other than governmentalplans, church plans, very small plans,and certain other plans. The sharedgroup market provisions of ERISA alsoapply to health insurance issuers thatoffer health insurance in connectionwith such group health plans. Generally,the Secretary of Labor enforces theprovisions of HIPAA that amendERISA, except that no enforcement ac-tion may be taken by the Secretaryagainst issuers relating to the newshared group market provisions in Part 7of ERISA. However, individuals maygenerally pursue actions against issuersunder ERISA and, in some circum-stances, under State laws.• The shared group market provisions

in the Internal Revenue Code generallyapply to all group health plans otherthan governmental plans and very smallplans, but not to health insurance issu-ers. A taxpayer that fails to comply withthese provisions may be subject to anexcise tax under section 4980D of theCode. (The group market provisionsrelating to preemption and affiliationperiods for HMOs are in the PHS Actand ERISA, but not in the InternalRevenue Code.)The regulations being issued today by

the Secretaries of Health and HumanServices, Labor, and the Treasury havebeen developed on a coordinated basisby the Departments. Except to the extentneeded to reflect the statutory differ-ences described above, the shared groupmarket provisions in these regulations ofeach Department are substantively iden-tical. However, there are certainnonsubstantive differences. The PHS Actregulations are numbered and organizeddifferently. Also, there are differences inthe regulations that are necessary be-cause of statutory provisions that are notcommon to all three Departments (in thedefinitions sections, for example). Fur-ther, the regulations reflect certain sty-listic differences in language and struc-ture to conform to conventions used bya particular Department. These differ-ences have been minimized and anydifferences in wording are not intendedto create any substantive difference, sothat these regulations will have the sameeffect with respect to overlapping statu-tory provisions, as required by section104 of HIPAA.

D. Special Information ConcerningState Insurance Law

For purposes of the PHS Act andsections 144 through 148 in the PHS

Act regulations, all health insurancecoverage in a State generally is sold inone of two markets: the group market(see section 146) and the individualmarket (see section 148). The groupmarket is further divided into the largegroup market and the small group mar-ket. Section 146 of the PHS Act regula-tions applies the group market provi-sions only to insurance sold to grouphealth plans (which are generally planssponsored by employers or employeeorganizations or both), regardless ofwhether State law provides otherwise.State law may expand the definition ofthe small group market to include cer-tain coverage that, under the federal law,would otherwise be considered coveragein the large group market or the indi-vidual market.The protections provided in the PHS

Act to particular individuals and em-ployers are different depending onwhether the coverage involved is ob-tained in the small group market, thelarge group market, or the individualmarket. Small employers are guaranteedavailability of insurance coverage soldin the small group market under thePHS Act. Small and large employers areguaranteed the right to renew theirgroup coverage under the PHS Act,subject to certain exceptions. Eligibleindividuals are guaranteed availability ofcoverage sold in the individual marketunder the PHS Act, and all coverage inthe individual market must be guaran-teed renewable under the PHS Act.Coverage that is provided to associa-

tions, but is not related to employment(so that the coverage is not in connec-tion with a group health plan), is notcoverage in the group market underHIPAA. This coverage is instead cover-age in the individual market under thePHS Act, regardless of whether it isconsidered group coverage under Statelaw.

E. Discussion of the Shared GroupMarket Provisions in the Regulations

The most significant items relating tothe shared group market in these regula-tions are discussed in detail below.

Definitions - 26 CFR § 54.9801–2, 29CFR § 2590.701–2, 45 CFR § 144.103

This section provides most of thedefinitions used in the regulationsimplementing the provisions of HIPAAthat were added to the PHS Act, ERISA,and the Code, relating to the group

2The PHS Act does not include requirements onavailability of insurance for employers in the largegroup market. Under section 2711(b)(3) of thePHS Act, however, the General Accounting Office(GAO) is to report to Congress on such availabil-ity in 1998.

7

market.3 The definitions in this sectionof the regulations include both statutorydefinitions provided in HIPAA, as wellas certain others used in the regulations.

Limitation on Preexisting ConditionExclusion Period- 26 CFR§ 54.9801–3, 29 CFR § 2590.701–3, 45CFR § 146.111

Definition of Preexisting ConditionExclusion. A preexisting condition ex-clusion is defined broadly to be anylimitation or exclusion of benefits basedon the fact the condition was presentbefore the first day of coverage, whetheror not any medical advice, diagnosis,care, or treatment was recommended orreceived before that day. HIPAA im-poses certain limitations (described be-low) on the use of such an exclusion inthe group market (and also uses thisdefinition for purposes of the individualmarket rules, under which no preexistingcondition exclusion is permitted to beimposed on an eligible individual).HIPAA’s broad definition of a preexist-ing condition exclusion is at variancewith some State laws and regulationsbecause the relevant National Associa-tion of Insurance Commissioners(NAIC) models, on which many Statelaws are based, have imposed limitationson coverage for preexisting conditionswithout use of such a definition.New Limitations on Preexisting Con-

dition Exclusions. Paragraph (a) of thissection4 of the regulations describes thelimitations on the preexisting conditionexclusion period. A group health plan,and a health insurance issuer offeringgroup health insurance coverage, is per-mitted to impose a preexisting conditionexclusion with respect to a participant orbeneficiary only if the following condi-tions are met:1. 6-month look-back rule. The pre-

existing condition exclusion must relateto a condition (whether physical ormental, and regardless of the cause ofthe condition) for which medical advice,diagnosis, care, or treatment was recom-mended or received within the 6-monthperiod ending on the enrollment date.For these purposes, genetic information

is not a condition.5 In order to be takeninto account, the medical advice, diag-nosis, care, or treatment must have beenrecommended or received from an indi-vidual licensed or similarly authorizedto provide such services under State lawand operating within the scope of prac-tice authorized by the State law. Underthe new HIPAA standard, a plan wouldgenerally determine that an individualhas a preexisting condition throughmedical records (such as diagnosiscodes on bills, a physician’s notes of avisit or telephone call, pharmacy pre-scription records, HMO encounter data,or other records indicating that medicalservices were actually recommended orreceived during the 6-month look-backperiod). The ‘‘prudent person’’ standardof some State laws (under which acondition is taken into account if aprudent person would have sought carewhether or not care is actually received)no longer may be used to determine apreexisting condition.This 6-month ‘‘look-back’’ period is

based on the 6-month ‘‘anniversarydate’’ of the enrollment date. As a result,an individual whose enrollment date isAugust 1, 1998 has a 6-month look-backperiod from February 1, 1998 throughJuly 31, 1998.2. Length of preexisting condition ex-

clusion period. The exclusion periodcannot extend for more than 12 months(18 months for late enrollees) after theenrollment date. The 12- or 18-month‘‘look-forward’’ period is also based onthe anniversary date of the enrollmentdate. A late enrollee is defined as anindividual who enrolls in a plan at atime other than at the first time theindividual is eligible to enroll or duringa special enrollment period (describedbelow). If an individual loses eligibilityfor coverage as a result of terminatingemployment or a general suspension ofcoverage under the plan, then uponbecoming eligible again due to resump-tion of employment or due to resump-tion of plan coverage, only the mostrecent period of eligibility is consideredfor purposes of determining whether theindividual is a late enrollee.3. Reduction of preexisting condition

exclusion period by prior coverage. Ingeneral, the preexisting condition exclu-

sion period is reduced by the individu-al’s days of creditable coverage6 as ofthe enrollment date. Creditable coverageis defined as coverage of an individualfrom a wide range of specified sources,including group health plans, health in-surance coverage, Medicare, and Medic-aid.Definition of Enrollment Date. The

limitations on preexisting condition ex-clusions are measured from an individu-al’s ‘‘enrollment date.’’ The enrollmentdate is defined as the first day ofcoverage or, if there is a waiting period,the first day of the waiting period(typically the date employment begins).The term ‘‘first day of coverage’’ is

used in the regulations in place of theterm ‘‘date of enrollment’’ in the statute,such as in the definitions of the terms‘‘preexisting condition exclusion’’ and‘‘enrollment date.’’ This is intended toclarify the difference between the statu-tory terms ‘‘date of enrollment’’ and‘‘enrollment date’’ (which have no dif-ference in common usage).The term ‘‘waiting period’’ generally

refers to the period in which there is adelay between the first day of employ-ment and the first day of coverage underthe plan. Accordingly, because the pre-existing condition exclusion period runsfrom the enrollment date, any waitingperiod would run concurrently with anypreexisting condition exclusion period.Further:• The enrollment date for a late en-

rollee or anyone who enrolls on aspecial enrollment date (see the sectionon special enrollment periods below) isthe first date of coverage. Thus, the timebetween the date a late enrollee orspecial enrollee first becomes eligiblefor enrollment under the plan and thefirst day of coverage is not treated as awaiting period.• Because the 6-month look-back

limitation runs from the beginning ofany applicable waiting period, the cur-rent practice of some plans that requirephysical examinations prior to com-mencement of coverage for the purposeof identifying preexisting conditionsmay be affected. If the examination isconducted during the waiting period(after employment begins and beforeenrollment), rather than before employ-

3The regulations for the PHS Act also containcertain definitions relating to those provisionsadded under the PHS Act regarding the individualmarket, in order to create a single, comprehensivereference for the definitions necessary under thePHS Act regulations.4References to paragraphs of a section refer toparagraphs of each regulation section identified inthe heading. For example, this reference is toparagraph (a) in each of 45 CFR § 146.111, 29CFR § 2590.701–3, and 26 CFR § 54.9801–3.

5The definition of genetic information in theregulations was developed taking into accounthearing testimony related to genetic informationgiven in connection with Senate Report 104–156,other legislative initiatives, and public comments(including those submitted in response to therequest for information published by the Depart-ments on December 30, 1996).

6The phrase ‘‘days of creditable coverage’’ is usedinstead of the statutory phrase ‘‘aggregate periodsof creditable coverage’’ for administrative ease inthe calculation of creditable coverage. Use of daysof creditable coverage also conforms to the prac-tice of many States for crediting prior coverageunder pre-HIPAA small group market reforms.

8

ment begins, a plan may not excludecoverage for any condition identified inthe examination (unless, independent ofthe examination, medical advice, diag-nosis, care, or treatment was in factrecommended or received for the condi-tion during the 6-month look-back pe-riod). The use of such examinations forother purposes, such as worker safety, isnot affected.7Elimination of Preexisting Condition

Exclusion for Pregnancy and for CertainChildren. A preexisting condition exclu-sion cannot apply to pregnancy. In addi-tion, a preexisting condition exclusionperiod cannot be applied to a newborn,an adopted child under age 18, or achild placed for adoption under age 18,if the child becomes covered within 30days of birth, adoption, or placement foradoption. This exception does not applyafter the child has a significant break incoverage (63 or more consecutive days).(An example in paragraph (b)(1) of theregulations illustrates these rules.)

Rules Relating to Creditable Coverage-26 CFR § 54.9801–4, 29 CFR§ 2590.701–4, 45 CFR § 146.113

As noted above, a plan or issuer thatimposes a preexisting condition exclu-sion must reduce the length of theexclusion by an individual’s creditablecoverage. This section defines the term‘‘creditable coverage’’ and sets forth therules for how creditable coverage isapplied to reduce such an exclusionperiod.Creditable coverage includes health

insurance coverage and other healthcoverage, such as coverage under grouphealth plans (whether or not providedthrough an issuer), Medicaid, Medicare,and public health plans, as well as othertypes of coverage set forth in HIPAAand the regulations. Comments are re-quested on whether the definition of apublic health plan should include thepublic health systems of other countries.Under the definition of creditable

coverage, all forms of health insurancecoverage are included, whether in theindividual market or group market, andwhether the coverage is short-term,limited-duration coverage or other cov-erage for benefits for medical care forwhich no certificate of creditable cover-age is required. Creditable coveragedoes not include coverage consisting

solely of excepted benefits as defined inthe regulations and described below.8Under paragraph (a)(3) of this section

of the regulation, a group health plan orhealth insurance issuer offering grouphealth insurance coverage may deter-mine the amount of creditable coverageof an individual for purposes of reduc-ing the period of a preexisting conditionexclusion by using either the standardmethod described in paragraph (b) orthe alternative method described in para-graph (c).Standard Method.1. Counting. Under the standard

method, the plan or issuer determinesthe amount of an individual’s creditablecoverage by determining all days duringwhich the individual had one or moretypes of creditable coverage. This deter-mination is made without regard to thespecific benefits included in the cover-age. If creditable coverage is derivedfrom more than one source on a particu-lar day, all of the creditable coveragethat the individual had on that day iscounted as one day of creditable cover-age.2. Significant break in coverage.

Days of creditable coverage that occurbefore a significant break in coverageare not required to be counted by theplan or issuer in reducing a preexistingcondition exclusion. A significant breakin coverage means a period of 63 con-secutive days during all of which theindividual did not have any creditablecoverage.a. Waiting and affiliation periods.

Waiting periods and affiliation periods,as defined in the regulation, are nottaken into account in determining asignificant break in coverage. This is thecase regardless of whether the personultimately fails to obtain coverage underthe plan (such as, where termination ofemployment occurs before coverage be-gins). However, days in a waiting periodor affiliation period are not counted ascreditable coverage.The regulations specify that the pe-

riod between the date an individual files

a substantially complete application forcoverage in the individual market andthe effective date of such coverage is awaiting period, so that the period is nottaken into account in determining asignificant break in coverage. In thisway, an application processing delay oromission of details on a form would notcause an applicant to incur a significantbreak in coverage, which could ad-versely affect an individual who seekscoverage under a group health plan afterpurchasing coverage in the individualmarket.However, the waiting period for pur-

chase of an individual policy tolls abreak in coverage only if the filing ofthe application for the individual marketinsurance actually results in purchase ofthe coverage by the individual. (SeeExamples 7 and 8 in paragraph(b)(2)(iv).) By contrast, days in a wait-ing period for coverage under a grouphealth plan toll a significant break incoverage regardless of whether coverageunder the plan is ultimately obtained.(See Example 6.) The rule regarding theindividual market prevents an individualfrom avoiding a significant break incoverage by repeatedly submitting appli-cations to individual market issuerswithout ever purchasing coverage. Thisrule responds to comments sent to theDepartments in response to the Decem-ber 30, 1996 request for public com-ments. The comments asked for clearrules on when a significant break istolled in the case of an application forindividual market insurance.Issuers of health insurance coverage

in the individual market are subject tothe same certification requirements thatapply to plans and issuers in the groupmarket. Therefore, issuers in the indi-vidual market must provide individualswith certificates that reflect informationregarding the beginning of the waitingperiod (the date of application), theeffective date of coverage, and the datecoverage ends. This will assist peoplewith coverage in the individual marketwho later become covered by a grouphealth plan in demonstrating their credit-able coverage to the plan or issuer inthe group market.b. Effect of State insurance law.

HIPAA provides that the significantbreak in coverage rule does not preemptState insurance laws that provide longerperiods than 63 days for a break incoverage. (The preemption provisionsare described more fully below.) Ac-cordingly, while federal law may allowa plan to disregard prior coverage before

7However, to avoid violating the Americans withDisabilities Act, Pub. L. 101–336, as amended byPub. L. 102–166, the examination should generallybe conducted only after the employer has offeredemployment to the individual.

8Howver, if an individual has coverage of ex-cepted benefits in addition to other forms ofcreditable coverage, coverage of excepted benefitsis creditable coverage. This would make a differ-ence only if a plan or issuer uses the alternativemethod of determining creditable coverage (de-scribed below) with respect to a category thatincludes excepted benefits. For example, coverageof excepted benefits such as limited vision orlimited dental benefits, when offered in combina-tion with other creditable coverage, may be usedto offset a preexisting condition exclusion periodfor a category that includes those benefits underthe alternative method in paragraph(c).

9

a 63-day significant break in coverage,an issuer may be required to take suchcoverage into account in order to com-ply with State insurance law. As aresult, application of the break rules canvary between issuers located in differentStates. Similarly, the break rules mayvary between insured plans and self-insured plans (which are not subject toState insurance laws) within a State, aswell as between the insured and self-insured portions of a single plan. Asillustrated by Example 3 in paragraph(b)(2)(iv), the laws of the State appli-cable to the insurance policy that hasthe preexisting condition exclusion aredeterminative of which break rule ap-plies.Alternative Method. Under the alter-

native method of counting creditablecoverage, the plan or issuer determinesthe amount of an individual’s creditablecoverage for any of five identified cat-egories of benefits. Those categories arecoverage for mental health, substanceabuse treatment, prescription drugs, den-tal care, and vision care. The plan orissuer may use the alternative methodfor any or all of the categories and mayapply a different preexisting conditionexclusion period with respect to eachcategory (as well as to coverage notwithin a category). The creditable cover-age determined for a category of ben-efits applies only for purposes of reduc-ing the preexisting condition exclusionperiod with respect to that category. Thestandard method is used to determine anindividual’s creditable coverage for ben-efits that are not within any category forwhich the alternative method is beingused. Disclosure statements concerningthe plan must indicate that the alterna-tive method is being used, and thisdisclosure must also be given to eachenrollee at the time of enrollment. Thesestatements must include a description ofthe effect of using the alternativemethod. Any issuer in the group marketmust provide similar statements to eachemployer at the time of offer or sale ofthe coverage.For purposes of reducing the preexist-

ing condition exclusion period under thealternative method, the plan or issuerdetermines under the standard methodthe amount of the individual’s creditablecoverage that can be counted, up to atotal of 365 days of the most recentcreditable coverage of the individual(546 days for a late enrollee). Theperiod of this creditable coverage isreferred to as the ‘‘determination pe-riod.’’ The plan or issuer counts all days

of coverage within the applicable cat-egory that occurred during the determi-nation period (without regard to anysignificant breaks in that category ofcoverage). Those days reduce the preex-isting condition exclusion for coveragewithin that category.The regulations do not provide de-

tailed definitions of the benefit catego-ries. Comments are invited on whetheradditional guidance is needed.The regulations under the alternative

method of counting creditable coveragedo not include a category relating tosignificant differences in deductibleamounts. Commentators expressed con-cerns about adverse selection if indi-viduals can change from a high deduct-ible plan when they become ill andobtain ‘‘first dollar’’ coverage from anHMO or other issuer that providesbroad, comprehensive care with onlylow deductibles or copayments.9 How-ever, it is unclear how such a categorywould be defined or applied. Accord-ingly, the Departments solicit commentson this issue.

Certificates and Disclosure of PreviousCoverage- 26 CFR § 54.9801–5, 29CFR § 2590.701–5, 45 CFR § 146.115

This section of the regulations setsforth guidance regarding the certificationrequirements and other requirementsconcerning disclosure of information re-lating to prior creditable coverage. Theprovision of a certificate and other dis-closures of information are intended toenable an individual to establish his orher prior creditable coverage for pur-poses of reducing any preexisting condi-tion exclusion imposed on the individualby any subsequent group health plancoverage.Form of Certificate. In general, the

certificate must be provided in writing,including any form approved by theSecretaries as a writing. In certain cir-cumstances, where the individual re-quests that the certificate be sent toanother plan or issuer instead of to theindividual, and the other plan or issueragrees, the certification information maybe provided by other means, such as bytelephone. In some States, issuers trans-fer coverage information by telephone.Comments are requested as to whether,and under what conditions, other meth-ods of transmitting certification informa-

tion (including electronic communica-tion) should be permitted in futureguidance.Information in Certificate. Paragraph

(a)(3) of this section of the regulationssets forth the information that must beincluded in a certificate. The regulationsallow a plan or issuer in an appropriatecase simply to state in the certificatethat the individual has at least 18months of creditable coverage that wasnot interrupted by a significant break incoverage and to indicate the date cover-age ended. (A certificate would neverhave to reflect coverage in excess of 18months without a 63-day break becausethis is the maximum creditable coveragethat an individual could need under thepreexisting condition exclusion rules andthe rules for access to the individualmarket.) In any other case, the certifi-cate must disclose (1) the date anywaiting or affiliation period began,10 (2)the date coverage began, and (3) thedate coverage ended (or indicate if cov-erage is continuing).11 For individualswith fewer than 18 months of coveragewithout a significant break in coverage,the information about specific dates isessential in order for a subsequent planor issuer in the group or individualmarket to be able to apply the breakrules, especially in light of the possibil-ity that an individual may have othercoverage from various sources and thepotential differences among State breakrules (described above).Certification Events and Timing. Par-

agraph (a)(5) describes the rights ofparticipants and dependents to receivecertificates. In general, individuals havethe right to receive a certificate auto-matically (an ‘‘automatic certificate’’)when they lose coverage under a planand when they have a right to electCOBRA continuation coverage. The cer-tificate must be furnished within thetime periods described below:• First, for an individual who is a

qualified beneficiary entitled to electCOBRA continuation coverage, the cer-tificate is required to be provided nolater than when a notice is required tobe provided for a qualifying event underCOBRA.• Second, for an individual who loses

coverage under a group health plan and

9See also the discussion below under the heading‘‘HMO Affiliation as Alternative to PreexistingCondition Exclusion.’’

10Because the ending date for a waiting or affilia-tion period will always be the date coveragebegins, the ending date does not have to beseparately stated in a certificate.11These dates would include any period of CO-BRA continuation coverage. A COBRA continua-tion coverage period does not have to be sepa-rately identified.

10

who is not a qualified beneficiary en-titled to elect COBRA continuation cov-erage, the certificate is required to beprovided within a reasonable time afterthe coverage ceases. (Typically, thiswould apply to small employers’ plansthat are not subject to COBRA.) Thisrequirement is satisfied if the certificateis provided by the time a notice isrequired to be provided under a Stateprogram similar to COBRA.• Third, for an individual who is a

qualified beneficiary and has electedCOBRA continuation coverage, the cer-tificate is required to be provided withina reasonable time after either cessationof COBRA continuation coverage or, ifapplicable, after the expiration of anygrace period for the payment of COBRApremiums.

In each of these three events, the regula-tions require the certificate to reflectonly the most recent period of continu-ous coverage under the plan.Under COBRA, multiemployer plans

may provide notices within such longerperiod of time as is provided for suchnotices under the terms of the plan.Under the general certification timingrule described above, multiemployerplans may use the same extended timeperiod for providing certificates. Com-ments are requested on how this mayaffect a multiemployer plan and itsparticipants and their families.A certificate may be mailed by first

class mail to the participant’s last knownaddress. A certificate for a participant’sspouse with an address different fromthe participant’s is to be sent to thespouse’s address. A certificate may pro-vide information with respect to both aparticipant and the participant’s depen-dents if the information is identical foreach individual, or if the information isnot identical, a certificate may provideinformation sufficient to satisfy the re-quirements of the regulations with re-spect to each individual on one docu-ment.A certificate is also required to be

provided upon the request of, or onbehalf of, an individual (whether theindividual is a participant, the partici-pant’s spouse, or any other dependent) ifthe request is made within 24 monthsafter the individual loses coverage underthe plan. The certificate is required to beprovided at the earliest time that theplan or issuer, acting in a reasonableand prompt fashion, can provide thecertificate. In this case, the certificatereflects each period of continuous cover-

age ending within the 24 months priorto the Fdate of request.12

Responsibilities of Plans and Is-suers. Paragraph (a)(1) clarifies thestatutory obligation of plans and issuersto provide certificates. The statutoryobligation to furnish a written certificateof information regarding creditable cov-erage is imposed on both the grouphealth plan and the health insuranceissuer offering group health insurancecoverage. This dual obligation was thesubject of many of the comments re-ceived by the three Departments inresponse to the December 30, 1996request for public comments publishedin the Federal Register. Concerns wereraised about superfluous, duplicate cer-tificates being issued and the potentialresponsibility of issuers for reporting onan individual’s coverage under the planafter one issuer has been replaced byanother.Paragraph (a)(1) addresses these con-

cerns by providing that the obligation tofurnish a certificate is imposed on boththe plan and each health insurance is-suer that provides group health insur-ance coverage under the plan, subject tofour exceptions.First, paragraph (a)(1)(ii) provides

that an entity required to provide acertificate is deemed to have satisfiedthis requirement to the extent that anyother party provides the certificate andthe certificate discloses the creditablecoverage (including the waiting periodinformation) that was to be provided bythe entity.Second, paragraph (a)(1)(iii) provides

that a plan is deemed to have satisfiedits obligation if there is an agreementbetween an issuer and a plan underwhich the issuer agrees to provide cer-tificates for individuals covered underthe plan.Third, paragraph (a)(1)(iv)(A) pro-

vides that an issuer is not required toprovide any coverage information re-garding coverage periods for which itwas not responsible.Fourth, paragraph (a)(1)(iv)(B) pro-

vides that if an individual switches fromone issuer to another option allowedunder the plan, or an issuer is replacedby another before an individual’s cover-age in the plan ceases, the first issuer isrequired to provide sufficient informa-tion to the plan (or to another party

designated by the plan), so that whenthe individual leaves the plan, a certifi-cate can be provided that includes theperiod of coverage under the policy ofthe first issuer. In this situation, nocertificate is required to be provided tothe individual, but the issuer must alsocooperate with the plan by providingany information that may be requestedlater pursuant to the alternative method.(This rule will reduce unnecessary andpotentially misleading information frombeing received while the individual’scoverage under the plan is uninter-rupted.) An issuer may presume that it isthe final issuer for an individual if theindividual’s coverage under the policyends at a time other than in connectionwith the plan’s open season.Other Entities Issuing Certificates.

Paragraph (a)(6) identifies the variousstatutory authorities that create responsi-bility for other entities (that are notsubject to a particular Department’sregulations) to provide certificates. Asdescribed above, there are forms ofcreditable coverage other than coverageprovided by group health plans andhealth insurance coverage offered inconnection with a group health plan.Accordingly, individuals who leave cov-erage provided by any such other entityare entitled to have that coveragecounted by a group health plan and mayin many cases receive certificates fortheir creditable coverage. This informa-tion is included in the regulations be-cause plans that impose a preexistingcondition exclusion may find it helpfulto know when creditable coverage willbe provable through presentation of acertificate and when other forms ofdocumentation or attestation may beneeded.In cases where certifications are pro-

vided by entities not subject to ERISA’srequirements, such as Medicaid, the In-dian Health Service, and CHAMPUS,certain adjustments in the certificationrules may be appropriate. The regula-tions do not address how the certifica-tion process applies to these other pro-grams. Comments are requested on howthe certification requirements may beadapted to entities responsible for pro-viding this coverage.Dependent Coverage Information.

Dependents are entitled to a writtencertificate of creditable coverage. Con-cerns were raised in comments receivedfrom the public regarding the certifica-tion of dependent coverage where infor-mation regarding dependents of partici-pants in plans was not available. Plans

12For example, for a participant who has had anumber of interruptions in coverage, a requestedcertificate could consist of copies of all of theautomatic certificates that were previously pro-vided to the individual for each of these periods.

11

and issuers, the commenters stated, of-ten do not know the existence of depen-dents or their coverage periods untilclaims are filed. To address these con-cerns, the regulations have adopted twospecial rules.First, under a transition rule that lasts

through June 30, 1998, a plan or issuermay satisfy its obligation to provide awritten certificate regarding the coverageof a dependent of a participant by pro-viding the name of the participant cov-ered by the plan and specifying the typeof coverage provided in the certificate(such as family coverage or employee-plus-spouse coverage). However, ifasked to provide a certificate relating toa dependent, the plan must make reason-able efforts to obtain and provide thename of the dependent. This rule willprovide plans and issuers with a transi-

tion period to update their data systemsto include information on dependents.Second, the regulations include a spe-

cial rule regarding dependent coveragethat is not limited to the transitionperiod. Under this rule, a plan or issuermust make a reasonable effort to collectthe necessary information for dependentsand include it on the certificate. How-ever, under this special rule, an auto-matic certificate is not required to beissued until the plan or issuer knows (or,making reasonable efforts, should know)of the dependent’s cessation of coverage.This information can be collected annu-ally (during open enrollment).Under the transition rule and the

special rule, an individual may use theprovisions described below to establishcreditable coverage (and waiting andaffiliation period information).

Information for Alternative Method ofCounting Creditable Coverage. Follow-ing receipt of the certificate, an entitythat uses the alternative method ofcounting creditable coverage may re-quest that the entity that issued thecertificate disclose additional informa-tion in order for the requesting entity todetermine the individual’s creditablecoverage with respect to any category ofbenefits described in paragraph (b). Therequested entity may charge the request-ing entity the reasonable cost of disclos-ing the information. The requesting en-tity may ask for a copy of the summaryplan description (SPD) that applied tothe individual’s coverage or may ask formore specific information. Set forth be-low is a model form that may be usedfor specific coverage information aboutthe categories of benefits:

INFORMATION ON CATEGORIES OF BENEFITS

1. Date of original certificate:

2. Name of group health plan providing the coverage:

3. Name of participant:

4. Identification number of participant:

5. Name of individual(s) to whom this information applies:

6. The following information applies to the coverage in the certificate that was provided to the individual(s) identified above:

a. MENTAL HEALTH:

b. SUBSTANCE ABUSE TREATMENT:

c. PRESCRIPTION DRUGS:

d. DENTAL CARE:

e. VISION CARE:

For each category above, enter ‘‘N/A’’ if the individual had no coverage within the category and either (i) enter both the date that the individual’scoverage within the category began and the date that the individual’s coverage within the category ended (or indicate if continuing), or (ii) enter ‘‘same’’ onthe line if the beginning and ending dates for coverage within the category are the same as the beginning and ending dates for the coverage in thecertificate.

Demonstration of Coverage if Certifi-cate is Not Provided. Under HIPAA, inorder to prevent an individual frombeing adversely affected if the indi-vidual does not receive a certificate, theindividual has a right to demonstratecreditable coverage through the presen-tation of documentation or other means.For example, an individual may nothave a certificate because: an entityfailed to provide a certificate within the

required time period; an entity was notrequired to provide a certificate; thecoverage of the individual was for aperiod before July 1, 1996; or, theindividual has an urgent medical condi-tion that necessitates an immediate de-termination of creditable coverage bythe plan or issuer. Under these circum-stances, an individual may present evi-dence of creditable coverage throughdocuments, records, third party state-

ments, or other means, including tele-phone calls by the plan or issuer to athird party provider. The plan adminis-trator is required to take into account allinformation presented in determiningwhether to offset any or all of a preex-isting condition exclusion. A plan orissuer is required to treat the individualas having furnished a certificate pro-vided by a plan or issuer if the indi-vidual attests to the period of creditable

12

coverage, the individual presents rel-evant corroborating evidence of somecreditable coverage during the period,and the individual cooperates with theplan’s or issuer’s efforts to verify theindividual’s coverage.If an individual needs to demonstrate

his or her status as a dependent of aparticipant, the plan or issuer is requiredto treat the individual as having fur-nished a certificate if an attestation tosuch dependency and the period of suchstatus is provided, and if the individualcooperates with the plan’s or issuer’sefforts to verify the dependent status.Similar rules apply relating to deter-

mining creditable coverage under thealternative method.Notice to Individual of Period of

Preexisting Condition Exclusion.Withina reasonable time following the receiptof the certificate, information relating to

the alternative method, or other evi-dence of coverage, a plan or issuer isrequired to make a determination re-garding the length of any preexistingcondition exclusion period that appliesto the individual and notify the indi-vidual of its determination. Whether adetermination and notification is madewithin a reasonable period of time de-pends upon the relevant facts and cir-cumstances including whether the appli-cation of the preexisting conditionexclusion period would prevent accessto urgent medical services. The plan orissuer is required to notify the indi-vidual, however, only if, after consider-ing the evidence, it has determined thata preexisting condition exclusion periodwill still be imposed on the individual.The basis of the determination, includ-ing the source and substance of anyinformation on which the plan or issuer

relied, must be included in the notifica-tion. The notification must also explainthe plan’s appeals procedures and theopportunity of the individual to presentadditional evidence.The plan or issuer may reconsider and

modify its initial determination if itdetermines that the individual did nothave the claimed creditable coverage. Inthis circumstance, the plan or issuermust notify the individual of such re-consideration and, until a final determi-nation is made, must act in accordancewith its initial determination for pur-poses of approving medical services.Model Certificate. The following

model certificate has been authorized bythe Secretary of each of the Depart-ments. Use of the model certificate willsatisfy the requirements of paragraph(a)(3)(ii) of the regulations.

CERTIFICATE OF GROUP HEALTH PLAN COVERAGE

* IMPORTANT - This certificate provides evidence of your prior health coverage. You may need to furnish this certificate if you become eligible under agroup health plan that excludes coverage for certain medical conditions that you have before you enroll. This certificate may need to be provided if medicaladvice, diagnosis, care, or treatment was recommended or received for the condition within the 6-month period prior to your enrollment in the new plan. Ifyou become covered under another group health plan, check with the plan administrator to see if you need to provide this certificate. You may also needthis certificate to buy, for yourself or your family, an insurance policy that does not exclude coverage for medical conditions that are present before youenroll.

1. Date of this certificate:

2. Name of group health plan:

3. Name of participant:

4. Identification number of participant:

5. Name of any dependents to whom this certificate applies:

6. Name, address, and telephone number of plan administrator or issuer responsible for providing this certificate:

7. For further information, call:

8. If the individual(s) identified in line 3 and line 5 has at least 18 months of creditable coverage (disregarding periods of coverage before a 63-day break),check here and skip lines 9 and 10.

9. Date waiting period or affiliation period (if any) began:

10. Date coverage began:

11. Date coverage ended: (or check if coverage is continuing as of the date of this certificate: ).

Note: Separate certificates will be furnished if information is not identical for the participant and each beneficiary.

Special Enrollment Periods-26 CFR§ 54.9801–6, 29 CFR § 2590.701–6, 45CFR § 146.117

This section of the regulations pro-vides guidance regarding the new enroll-

ment rights provided to employees anddependents under HIPAA. A grouphealth plan and a health insurance issueroffering group health insurance coverageare required to provide for special en-rollment periods during which individu-

als who previously declined coverageare allowed to enroll (without having towait until the plan’s next regular openenrollment period). A special enrollmentperiod can occur if a person with otherhealth coverage loses that coverage or if

13

a person becomes a dependent throughmarriage, birth, adoption, or placementfor adoption.A plan must provide a description of

the special enrollment rights to anyonewho declines coverage. The regulationsprovide a model of such a description.A person who enrolls during a special

enrollment period (even if the periodalso corresponds to a regular open en-rollment period) is not treated as a lateenrollee. (Accordingly, the plan or issuermay not impose a preexisting conditionexclusion period longer than 12 monthswith respect to the person.)Special Enrollment for Loss of Other

Coverage.The special enrollment periodfor loss of other coverage is available toemployees and their dependents whomeet certain requirements. The employeeor dependent must otherwise be eligiblefor coverage under the terms of the plan.When the coverage was previously de-clined, the employee or dependent musthave been covered under another grouphealth plan or must have had otherhealth insurance coverage. The plan canrequire that, when coverage in the planwas previously declined, the employeemust have declared in writing that thereason was other coverage, in whichcase the plan must at that time haveprovided notice of this requirement andthe consequences of the employee’s fail-ure to provide the statement.The special enrollment rights may

apply with respect to an employee, adependent of the employee, or both. Anemployee who has not previously en-rolled can enroll under these rules if itis the employee who loses other cover-age. An employee’s dependent can beenrolled under these rules if it is thedependent who loses other coverage andthe employee is already enrolled. Inaddition, both the employee and a de-pendent can be enrolled together underthese rules if either the employee or thedependent loses other coverage.If the other coverage is COBRA con-

tinuation coverage, the special enroll-ment can only be requested after ex-hausting COBRA continuation coverage.If the other coverage is not COBRAcontinuation coverage, special enroll-ment can only be requested after losingeligibility for the other coverage or aftercessation of employer contributions forthe other coverage. In each case, theemployee has 30 days to request specialenrollment. An individual does not haveto elect COBRA continuation coverageor exercise similar continuation rights inorder to preserve the right to special

enrollment. However, an individual doesnot have a special enrollment right if theindividual loses the other coverage as aresult of the individual’s failure to paypremiums or for cause (such as makinga fraudulent claim). Coverage under spe-cial enrollment must be effective nolater than the first day of the monthafter an employee requests the enroll-ment for himself or herself or on behalfof a dependent.Special Enrollment for New

Dependents. A special enrollment periodalso occurs if a person has a newdependent by birth, marriage, adoption,or placement for adoption. The electionto enroll can be made within 30 daysfollowing the birth, marriage, adoption,or placement for adoption. In the case ofa plan that does not offer any coveragefor dependents and is then modified tooffer dependent coverage, the election toenroll can instead be made during the30 days beginning on the date depen-dent coverage is made available.The special enrollment rules allow an

eligible employee to enroll when he orshe marries or has a new child (as aresult of marriage, birth, adoption, orplacement for adoption). A spouse of aparticipant can be enrolled separately atthe time of marriage or when a child isborn, adopted or placed for adoption.The spouse can be enrolled togetherwith the employee when they marry orwhen a child is born, adopted, or placedfor adoption. A child who becomes adependent of a participant as a result ofmarriage, birth, adoption, or placementfor adoption can be enrolled when thechild becomes a dependent. Similarly, achild who becomes a dependent of aneligible employee as a result of mar-riage, birth, adoption, or placement foradoption can be enrolled if the em-ployee enrolls at the same time.In the case of a dependent special

enrollment period, HIPAA provides thatcoverage with respect to a marriage iseffective no later than the first day ofthe month after the date the request forenrollment is received and coveragewith respect to a birth, adoption, orplacement for adoption is effective onthe date of the birth, adoption, or place-ment for adoption.

HMO Affiliation Period as Alternative toPreexisting Condition Exclusion- 29CFR § 2590.701–7 and 45 CFR§ 146.119

This section of the regulations permitsa group health plan offering health in-

surance through an HMO, or an HMOthat offers health insurance coverage inconnection with a group health plan, toimpose an affiliation period, but only ifcertain other requirements are met. An‘‘affiliation period’’ is defined in theregulations as a period of time that mustexpire before health insurance coverageprovided by the HMO becomes effec-tive, and during which the HMO is notrequired to provide benefits.The regulations specify the following

requirements for imposing an affiliationperiod:• no preexisting condition exclusion

may be imposed with respect to cover-age through the HMO;• no premium may be charged to a

participant or beneficiary for the affilia-tion period;• the affiliation period must be ap-

plied uniformly without regard to anyhealth status-related factors; and• the affiliation period must begin on

the enrollment date, cannot exceed twomonths (three months for a late en-rollee), and must run concurrently withany waiting period under the plan.The regulations provide for the affilia-tion period to begin on the enrollmentdate in the plan, not when coverage withthe HMO begins. Accordingly, if a planoffers multiple coverage options simul-taneously, the HMO cannot impose anaffiliation period on plan participantswho change to the HMO option. Com-ments are requested on this rule.The regulations permit an HMO to

use alternatives in lieu of an affiliationperiod to address adverse selection, asapproved by the State insurance com-missioner or other official designated toregulate HMOs. Because an affiliationperiod may be imposed only if nopreexisting condition exclusion is used,an alternative to an affiliation periodmay not encompass an arrangement thatis in the nature of such an exclusion.13

While HMOs usually do not imposepreexisting condition exclusions, theycould choose to apply a preexistingcondition exclusion period for all enroll-ees based on the alternative method ofcounting creditable coverage if the regu-lations were to add a category relatingto deductibles. However, as describedabove under the heading ‘‘AlternativeMethod,’’ the regulations currently donot include such a category.13These alternatives that may be used in lieu of anaffiliation period to address adverse selectionshould not be confused with the use of thealternative method for counting creditable cover-age discussed in the next paragraph.

14

Nondiscrimination In Eligibility andPremiums in the Group Market- 26CFR § 54.9802–1, 29 CFR § 2590.702,45 CFR § 146.121

The regulations include provisionsimplementing the nondiscrimination pro-visions in HIPAA. Comments are wel-comed on these provisions, and, in par-ticular, comments are requested onwhether guidance is needed concerning:• the extent to which the statute pro-

hibits discrimination against individualsin eligibility for particular benefits;• the extent to which the statute may

permit benefit limitations based on thesource of an injury;• the permissible standards for defin-

ing groups of similarly situated indi-viduals;• application of the prohibitions on

discrimination between groups of simi-larly situated individuals; and• the permissible standards for deter-

mining bona fide wellness programs.The Departments intend to issue furtherregulations on the nondiscriminationrules in the near future. In no event willthe period for good faith compliance(specified in HIPAA sections 102(c)(5),101(g)(5), and 401(c)(5)) with respect tosection 2702 of the PHS Act, section702 of ERISA, and section 9802 of theCode end before the additional guidanceis provided.A plan or issuer may not establish

rules for eligibility (including continuedeligibility) of an individual to enrollunder the terms of the plan based on ahealth status-related factor. HIPAA andthe regulations provide a list of healthstatus-related factors. The Departmentsare considering interpreting the statutorylanguage relating to eligibility to enrollso that a plan or issuer would beprohibited from providing lower benefitsto certain individuals based on healthstatus-related factors. Comments arewelcomed on this interpretation.Among the health status-related fac-

tors listed in the statute is ‘‘evidence ofinsurability (including conditions arisingout of acts of domestic violence).’’ TheConference Report states that the inclu-sion of evidence of insurability in thelist of health status-related factors ‘‘isintended to ensure, among other things,that individuals are not excluded fromhealth care coverage due to their partici-pation in activities such as motorcycling,snowmobiling, all-terrain vehicle riding,horseback riding, skiing and other simi-lar activities.’’ However, HIPAA alsoprovides that a plan or issuer is not

required to provide particular benefitsother than those provided under theterms of the plan. Moreover, HIPAAprovides that a plan or issuer mayestablish limitations or restrictions onthe amount, level, extent, or nature ofthe benefits or coverage for similarlysituated individuals enrolled in the plan.Comments have been received indicat-ing that some plans contain provisionsthat exclude coverage for benefits basedon the source of injury (such as benefitsfor injuries sustained in a motorcycleaccident, injuries sustained in a motor-cycle accident as the result of notwearing a helmet, or injuries sustainedin the commission of a felony). Accord-ingly, comments are requested on howfuture guidance should treat benefitlimitations based on the source of aninjury.The Conference Report also states

that ‘‘[t]he term ‘similarly situated’means that a plan or coverage would bepermitted to vary benefits available todifferent groups of employees, such asfull-time versus part-time employees oremployees in different geographic loca-tions. In addition, a plan or coveragecould have different benefit schedulesfor different collective bargaining units.’’Accordingly, comments are requestedconcerning the appropriate standards fordetermining ‘‘similarly situated individu-als,’’ including whether a plan is permit-ted to vary benefits based on an em-ployee’s occupation. Because thesestandards could impact on the smallgroup market, the Department of Healthand Human Services is particularly in-terested in receiving comments fromStates with respect to how varying ben-efits based on occupation could affectrate setting.The Departments also request com-

ments regarding how the prohibitions ondiscrimination should be applied be-tween groups of similarly situated indi-viduals. For example, is guidanceneeded on whether a plan coveringemployees in two different locationscould have a longer waiting period foremployees at one location because thehealth status of those employees resultsin higher health costs?A plan or issuer may not require any

individual (as a condition of enrollmentor continued enrollment) to pay a pre-mium or contribution, that is greaterthan that for a similarly situated indi-vidual enrolled in the plan, based on ahealth status-related factor. However,this limitation does not restrict theamount that an issuer can charge an

employer for the coverage. In addition,this limitation does not prevent a plan orissuer from establishing premium dis-counts or rebates or otherwise modify-ing applicable copayments ordeductibles in return for adherence toprograms of health promotion and dis-ease prevention (bona fide wellness pro-grams). Comments are requested regard-ing the standards for determining bonafide wellness programs, includingwhether such a program may provide adiscount for non-smokers.

Special Rules — Excepted Plans andExcepted Benefits- 26 CFR§ 54.9804–1, 29 CFR § 2590.732, 45CFR § 146.145

This section of the regulations pro-vides special rules for certain plans andcertain benefits.Very Small Plans. The group market

requirements of HIPAA do not apply toa group health plan, or to group healthinsurance coverage offered in connec-tion with a group health plan, for anyplan year if, on the first day of the planyear, the plan has fewer than 2 partici-pants who are current employees. How-ever, a State may apply the groupmarket provisions in the PHS Act toplans with fewer than two participantswho are current employees. In this case,the State would apply its group marketinsurance law requirements to suchsmall group plans (and such planswould not be subject to the individualmarket requirements).Excepted Benefits. The group market

provisions and the related regulationsalso do not apply to any group healthplan or group health insurance issuer inrelation to its provision of exceptedbenefits. The benefits identified in para-graph (b)(2) are generally not healthinsurance coverage and are excepted inall circumstances. In contrast, the ben-efits identified in paragraphs (b)(3), (4),and (5) are generally health insurancecoverage but are excepted if certainconditions are met.Limited-scope dental benefits, limited-

scope vision benefits, and long-termcare benefits are excepted if they areprovided under a separate policy, certifi-cate, or contract of insurance, or areotherwise not an integral part of theplan. For this purpose, limited-scopedental coverage typically provides ben-efits for non-medical services such asroutine dental cleanings, x-rays, andother preventive procedures. Such cover-age may also provide discounts on the

15

cost of common dental procedures suchas fillings, root canals, crowns, full orpartial plates, or orthodontic services.Limited-scope dental coverage typicallydoes not provide benefits for medicalservices, such as those procedures asso-ciated with oral cancer or with a mouthinjury that results in broken, displaced,or lost teeth.Similarly, limited-scope vision cover-

age provides benefits for routine eyeexaminations or the fitting of eyeglassesor contact lenses. This coverage doesnot include benefits for such ophthalmo-logical services as treatment of an eyedisease (e.g., glaucoma or a bacterialeye infection) or an eye injury.Noncoordinated benefits may be ex-

cepted benefits. The term ‘‘noncoor-dinated benefits’’ refers to coverage fora specified disease or illness (such ascancer-only coverage) or hospital in-demnity or other fixed dollar indemnityinsurance (such as insurance that pays$100/day for a hospital stay as its onlyinsurance benefit) if three conditions aremet. First, the benefits are providedunder a separate policy, certificate, orcontract for insurance. Second, there isno coordination between the provisionof these benefits and another exclusionof benefits under a plan maintained bythe same plan sponsor. Third, benefitsare paid without regard to whether ben-efits are provided with respect to thesame event under a group health planmaintained by the same plan sponsor.Certain supplemental benefits are ex-

cepted only if they are provided under aseparate policy, certificate, or contract ofinsurance. This category of exceptedbenefits includes Medicare supplemental(commonly called ‘‘Medigap’’ or‘‘MedSupp’’) policies, CHAMPUSsupplements, and supplements to certainemployer group health plans. Suchsupplemental coverage cannot duplicateprimary coverage and must be specifi-cally designed to fill gaps in primarycoverage, coinsurance, or deductibles.14

The regulations do not address section2721(e) of the PHS Act or section

705(d) of ERISA relating to the treat-ment of partnerships (or the applicationof the Code’s group market rules topartnerships). Comments are requestedon these provisions, including how theseprovisions coordinate with other provi-sions relating to self-employed individu-als and partnerships.

F. Other Group Market Provisions15

Guaranteed Renewability inMultiemployer Plans and MultipleEmployer Welfare Arrangements-Section 703 of ERISA and Section 9803of the Code

Requirements relating to guaranteedrenewability in multiemployer plans andmultiple employer welfare arrangementsare set forth in section 703 of ERISAand section 9803 of the Code (but not inthe PHS Act). These provisions statethat a group health plan that is amultiemployer plan or that is a multipleemployer welfare arrangement may notdeny an employer whose employees arecovered under such a plan continuedaccess to the same or different coverageunder the terms of such plan, other thanfor certain specified reasons. The De-partments are not issuing regulationsunder section 703 of ERISA or section9803 of the Code at this time, butanticipate issuing regulations underthese sections and solicit comments re-garding these sections.In these provisions, the terms ‘‘con-

tinued access’’ and ‘‘same or differentcoverage’’ are not defined. Commentsare requested on how rules under theseprovisions might address variations andchanges in a plan’s benefit packages andcontribution rates, differences in thecharacteristics of multiemployer plansand multiple emplo