# Bulletin No. 1997–19

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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

Bulletin No. 1997–19
May 12, 1997

HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be relied
upon as authoritative interpretations.

INCOME TAX

ADMINISTRATIVE

Rev. 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) of
the Code.

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

EXCISE TAX
T.D. 8716, page 5.
REG–253578–96, page 93.
Temporary and proposed regulations relate to group
health plan portability, access, and renewability requirements added to section 9801 of the Code by the Health
Insurance Portability and Accountability Act of 1996.

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

Mission of the Service
The purpose of the Internal Revenue Service is to
collect the proper amount of tax revenue at the least
cost; serve the public by continually improving the

quality of our products and services; and perform in a
manner warranting the highest degree of public
confidence in our integrity, efficiency and fairness.

Statement of Principles
of Internal Revenue
Tax Administration
The Service also has the responsibility of applying
and administering the law in a reasonable,
practical manner. Issues should only be raised by
examining of ficers when they have merit, never
arbitrarily or for trading purposes. At the same
time, the examining officer should never hesitate
to raise a meritorious issue. It is also important
that care be exercised not to raise an issue or to
ask a court to adopt a position inconsistent with
an established Service position.

The function of the Internal Revenue Service is to
administer the Internal Revenue Code. Tax policy
for raising revenue is determined by Congress.
With this in mind, it is the duty of the Service to
carry out that policy by correctly applying the laws
enacted by Congress; to determine the reasonable
meaning of various Code provisions in light of the
Congressional purpose in enacting them; and to
perform this work in a fair and impartial manner,
with neither a government nor a taxpayer point of view.

Administration should be both reasonable and
vigorous. It should be conducted with as little
delay as possible and with great cour tesy and
considerateness. It should never try to overreach,
and should be reasonable within the bounds of law
and sound administration. It should, however, be
vigorous in requiring compliance with law and it
should be relentless in its attack on unreal tax
devices and fraud.

At the heart of administration is interpretation of the
Code. It is the responsibility of each person in the
Service, charged with the duty of interpreting the
law, to try to find the true meaning of the statutory
provision and not to adopt a strained construction in
the belief that he or she is ‘‘protecting the revenue.’’
The revenue is properly protected only when we ascertain and apply the true meaning of the statute.

2

Introduction
The Internal Revenue Bulletin is the authoritative instrument of the Commissioner of Internal Revenue for
announcing official rulings and procedures of the Internal Revenue Service and for publishing Treasury Decisions, Executive Orders, Tax Conventions, legislation,
court decisions, and other items of general interest. It is
published weekly and may be obtained from the Superintendent of Documents on a subscription basis. Bulletin
contents of a permanent nature are consolidated semiannually into Cumulative Bulletins, which are sold on a
single-copy basis.

court decisions, rulings, and procedures must be considered, and Service personnel and others concerned are
cautioned against reaching the same conclusions in
other cases unless the facts and circumstances are
substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on
provisions of the Internal Revenue Code of 1986.

It is the policy of the Service to publish in the Bulletin all
substantive rulings necessary to promote a uniform
application of the tax laws, including all rulings that
supersede, revoke, modify, or amend any of those
previously published in the Bulletin. All published rulings
apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management
are not published; however, statements of internal
practices and procedures that affect the rights and
duties of taxpayers are published.

Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows:
Subpart A, Tax Conventions, and Subpart B, Legislation
and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and
Subparts. Also included in this part are Bank Secrecy
Act Administrative Rulings. Bank Secrecy Act Administrative Rulings are issued by the Department of the
Treasury’s Office of the Assistant Secretary (Enforcement).

Revenue rulings represent the conclusions of the Service on the application of the law to the pivotal facts
stated in the revenue ruling. In those based on positions
taken in rulings to taxpayers or technical advice to
Service field offices, identifying details and information
of a confidential nature are deleted to prevent unwarranted invasions of privacy and to comply with statutory
requirements.

Part IV.—Items of General Interest.
With the exception of the Notice of Proposed Rulemaking and the disbarment and suspension list included in
this part, none of these announcements are consolidated in the Cumulative Bulletins.

Rulings and procedures reported in the Bulletin do not
have the force and effect of Treasury Department
Regulations, but they may be used as precedents.
Unpublished rulings will not be relied on, used, or cited
as precedents by Service personnel in the disposition of
other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations,

The first Bulletin for each month includes an index for
the matters published during the preceding month.
These monthly indexes are cumulated on a quarterly and
semiannual basis, and are published in the first Bulletin
of 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.

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Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 220.—Medical Savings
Accounts
Definition of high-deductible health
plan. Guidance is given concerning the
definition of a ‘‘high-deductible health
plan’’ under section 220(c)(2)(A) of the
Code.
Rev. Rul. 97–20
ISSUE
In the case of family coverage, what
constitutes a ‘‘high-deductible health
plan’’ for purposes of section
220(c)(2)(A) of the Code?
FACTS
Situation 1
Plan A is a health plan that provides
for the payment of medical expenses.
Taxpayer X and her family are covered
by Plan A. Plan A provides for payment
of covered medical expenses for all
members of the family after the family’s
total covered medical expenses exceed
$3,000 for the year. Plan A does not
provide for payment of covered medical
expenses until the family’s total covered
medical expenses exceed $3,000 for the
year, regardless of which family member or members incur those covered
expenses. Plan A limits out-of-pocket
expenses to $5,000 for any year.
Situation 2
Plan B is a health plan that provides
for the payment of medical expenses.
Taxpayer Y and his family are covered
by Plan B. Plan B provides for payment
of covered medical expenses for all
members of the family after the family
has satisfied a family deductible of
$3,000 for the year. Plan B also provides for payment of covered medical
expenses of any member of the family
after that family member has satisfied
an individual deductible by incurring
covered medical expenses for the year
of at least $1,500. Plan B limits out-ofpocket expenses to $5,000 for any year.
Neither of the special rules regarding
the definition of a high-deductible health
plan applies to Plan A or B (see section
220(c)(2)(B)).
LAW
The Health Insurance Portability and
Accountability Act of 1996, Pub. L.
104–191, added section 220 to the Code

to permit eligible individuals to establish
medical savings accounts (MSAs) under
a pilot project beginning on January 1,
1997.
The section 220(c)(1) definition of an
‘‘eligible individual’’ includes, as one
prerequisite for eligibility, the requirement that an individual be covered under a high-deductible health plan. Section 220(c)(2)(A) provides that ‘‘[t]he
term ‘high-deductible health plan’ means
a health plan —
(i) in the case of self-only coverage,
which has an annual deductible which is
not less than $1,500 and not more than
$2,250,
(ii) in the case of family coverage,
which has an annual deductible which is
not 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 (other
than for premiums) for covered benefits
does not exceed —
(I) $3,000 for self-only coverage, and
(II) $5,500 for family coverage.’’
Section 220(c)(5) defines family coverage as coverage that is not self-only
coverage.
ANALYSIS AND HOLDING
Situation 1
Plan A provides coverage for Taxpayer X and other members of her
family and is, therefore, family coverage
within the meaning of section 220(c)(5).
Because Plan A provides family coverage, Plan A is a high-deductible health
plan only if, as required by section
220(c)(2)(A)(ii), it has an annual deductible that is not less than $3,000 and not
more than $4,500. Plan A provides for
the payment of covered medical expenses for Taxpayer X or her family
members only after the family has incurred covered medical expenses during
the year of $3,000. Accordingly,
the deductible under Plan A is $3,000.
Because Plan A has a deductible that is
not less than $3,000 and is not more
than $4,500, Plan A meets the requirement with respect to the minimum and
maximum deductible for a highdeductible health plan under section
220(c)(2)(A)(ii). Because the annual outof-pocket expenses required to be paid
under Plan A can never exceed $5,000,
which is less than $5,500, Plan A is a
high-deductible health plan for purposes
of section 220.

4

Situation 2
Plan B provides coverage for Taxpayer Y and other members of his
family and is, therefore, family coverage
within the meaning of section 220(c)(5).
Plan B provides for the payment of
covered medical expenses of any member of Taxpayer Y’s family if the member has incurred covered medical expenses during the year in excess of
$1,500, even if the family has not
incurred covered medical expenses in
excess of $3,000. For example, if Taxpayer Y incurred covered medical expenses of $2,000 in a year, Plan B
would pay $500. Accordingly, depending on which family members incur the
covered medical expenses, benefits are
potentially available under Plan B even
if the family’s covered medical expenses
do not exceed $3,000. Because Plan B
provides family coverage with an annual
deductible of less than $3,000, Plan B is
not a high-deductible health plan as
defined in section 220(c)(2).
CONCLUSION
In the case of family coverage, except
as provided in section 220(c)(2)(B), a
plan is a ‘‘high-deductible health plan’’
under section 220(c)(2)(A) only if, under the terms of the plan and without
regard to which family member or
members incur expenses:
(1) No amounts are payable until the
family has incurred annual covered
medical expenses in excess of $3,000,
(2) Amounts for covered benefits are
always payable after the family has
incurred annual covered medical expenses in excess of $4,500, and
(3) The annual out-of-pocket expenses
required to be paid under the plan for
covered benefits do not exceed $5,500.
APPLICATION OF SECTION 7805(b)
Section 7805(b) of the Code provides
that the Secretary may prescribe the
extent, if any, to which any ruling
relating to the internal revenue laws
shall be applied without retroactive effect.
Pursuant to section 7805(b), a health
plan acquired before November 1, 1997
that provides family coverage that becomes effective before November 1,
1997 will not fail to be treated as a
high-deductible health plan merely because the health plan provides for individual deductibles of at least $1,500 and

not in excess of $2,250 (the permitted
range of deductibles for a highdeductible health plan providing selfonly coverage). The relief provided in
the preceding sentence will apply until
the first renewal date on or after December 31, 1997 (in the case of a health
plan that provides for renewal) or for
the term of the health plan (in the case
of a health plan that has a specified
term and that does not provide for
renewal). For purposes of this paragraph, a health plan that continues in
force for an indeterminate period as
long as premiums are paid and does not
otherwise provide for renewal, will be
treated as a health plan that provides for
renewal and each premium due date
(determined without regard to any grace
period) will be treated as a renewal date.
In no event will the relief provided in
this paragraph terminate before December 31, 1997 or extend beyond December 31, 1998.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Felix Zech of the Office of the
Associate Chief Counsel (Employee
Benefits and Exempt Organizations). For
further information regarding this revenue ruling contact Mr. Zech at (202)
622–4606 (not a toll-free number).
Section 9801.—Increased
Portability Through Limitations on
Preexisting Condition Exclusions

Department of Labor; Health Care Financing Administration, Department of
Health and Human Services.
ACTION: Interim rules with request for
comments.
SUMMARY: This document contains
interim rules governing access, portability and renewability requirements for
group health plans and issuers of health
insurance coverage offered in connection with a group health plan. The rules
contained in this document implement
changes made to certain provisions of
the Internal Revenue Code of 1986
(Code), the Employee Retirement Income Security Act of 1974 (ERISA),
and the Public Health Service Act (PHS
Act) enacted as part of the Health
Insurance Portability and Accountability
Act of 1996 (HIPAA). Interested persons are invited to submit comments on
the interim rules for consideration by
the Department of Health and Human
Services, the Department of Labor, and
the Department of the Treasury (Departments) in developing final rules. The
rules contained in this document are
being adopted on an interim basis to
accommodate statutorily established
time frames intended to ensure that
sponsors and administrators of group
health plans, participants and beneficiaries, States, and issuers of group health
insurance coverage have timely guidance concerning compliance with the
recently enacted requirements of
HIPAA.

26 CFR 54.9801–5T: Certification and disclosure
of previous coverage (temporary).

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

T.D. 8716

Comment date. Written comments on
these interim rules are invited and must
be received by the Departments on or
before July 7, 1997.

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 54
DEPARTMENT OF LABOR
Pension and Welfare Benefits
Administration
29 CFR Part 2590
DEPARTMENT OF HEALTH AND
HUMAN SERVICES
Health Care Financing
Administration
45 CFR subtitle A, Parts 144 and
146
Interim Rules for Health Insurance
Portability for Group Health Plans
AGENCIES: Internal Revenue Service,
Department of the Treasury; Pension
and Welfare Benefits Administration,

Applicability dates. For group health
plans maintained pursuant to one or
more collective bargaining agreements
ratified before August 21, 1996, the
rules (other than the certification requirements) do not apply to plan years
beginning before the later of July 1,
1997 or the date on which the last
collective bargaining agreement relating
to the plan terminates without regard to
any extension agreed to after August 21,
1996.
The rules implementing the certification provisions do not require any action
to be taken before June 1, 1997, although certain certification requirements
apply to periods of coverage and events
that occur after June 30, 1996. The

5

certification requirement for events that
occurred on or after October 1, 1996
and before June 1, 1997 may be satisfied using an optional notice described
in this preamble.
Information collection. Affected parties
do not have to comply with the information collection requirements in these
interim rules until the Departments publish in the Federal Register the control
numbers assigned by the Office of Management and Budget (OMB) to these
information collection requirements.
Publication of the control numbers notifies the public that OMB has approved
these information collection requirements under the Paperwork Reduction
Act of 1995. The Departments have
asked for OMB clearance as soon as
possible, and OMB approval is anticipated by the applicable effective date.
ADDRESSES: Written comments should
be submitted with a signed original and
three copies to any of the addresses
specified below. All comments will be
available for public inspection and copying in their entirety. Interested persons
are invited to submit written comments
on these interim rules to:
Health Care Financing Administration, Department of Health and Human
Services, Attention: [BPD–890–IFC],
P.O. Box 26688, Baltimore, MD 21207
Pension and Welfare Benefits Administration, U.S. Department of Labor,
Room N–5669, 200 Constitution Avenue, NW, Washington, DC 20210, Attention: Interim Portability and Renewability Rules
CC:DOM:CORP:T:R (REG–253578–
96), Room 5228, Internal Revenue Service, POB 7604, Ben Franklin Station,
DC 20044
Alternatively, comments may be submitted electronically via the Internet by
selecting the ‘‘Tax Regs’’ option on the
IRS Home Page, or by submitting comments directly to the IRS Internet site at
http://www.irs.ustreas.gov/tax_regs/
comments.html
In the alternative:
Written comments for the Department
of Health and Human Services may be
hand delivered from 8:30 a.m. to 5:00
p.m. to:
Room 309–G, Hubert Humphrey
Building, 200 Independence Avenue,
SW, Washington, DC 20201, or Room
C5–09–26, 7500 Security Boulevard,
Baltimore, MD 21244–1850
Written comments for the Department
of Labor may be hand delivered from
8:15 a.m. to 4:45 p.m. to the above

address for the Pension and Welfare
Benefits Administration, U.S. Department of Labor.
Written comments for the Internal
Revenue Service may be hand delivered
between the hours of 8 a.m. and 5 p.m.
to:
CC:DOM:CORP:T:R (REG–253578–
96), Courier’s Desk, Internal Revenue
Service, room 5228, 1111 Constitution
Avenue, NW, Washington, DC
All submissions to the Department of
Health and Human Services will be
open to public inspection as they are
received, generally beginning three
weeks after publication, in room 309–G
of the Department of Health and Human
Services offices at 200 Independence
Avenue, SW, Washington, DC, from
8:30 a.m. to 5:00 p.m. All submissions
to the Department of Labor will be open
to public inspection at the Public Documents Room, Pension and Welfare Benefits Administration, U.S. Department of
Labor, Room N–5638, 200 Constitution
Avenue NW, Washington, DC, from
8:30 a.m. to 5:30 p.m. All submissions
to the Internal Revenue Service will be
open to public inspection and copying in
room 1621, 1111 Constitution Avenue,
NW, Washington, DC, from 9:00 a.m. to
4:00 p.m.
FOR FURTHER INFORMATION CONTACT: Julie Walton, Health Care Financing Administration, at 410–786–
1565; Mark Connor, Office of Regulations and Interpretations, Pension and
Welfare Benefits Administration, Department of Labor, at 202–219–4377; Diane
Pedulla, Plan Benefits Security Division,
Office of the Solicitor, Department of
Labor, at 202–219–4377; or Russ
Weinheimer, Internal Revenue Service,
at 202–622–4695. These are not toll-free
numbers.
CUSTOMER SERVICE INFORMATION: Individuals interested in obtaining a copy of the Department of Labor’s
booklet entitled ‘‘Questions and Answers: Recent Changes in Health Care
Law’’ may obtain a copy by calling the
following toll-free number 1–800–998–
7542.
SUPPLEMENTARY INFORMATION:
A. Background
The Health Insurance Portability and
Accountability Act of 1996 (HIPAA),
Pub. L. 104–191, was enacted on August 21, 1996. HIPAA amended the
Public Health Service Act (PHS Act),

the Employee Retirement Income Security Act of 1974 (ERISA), and the
Internal Revenue Code of 1986 (Code)
to provide for, among other things,
improved portability and continuity of
health insurance coverage in the group
and individual insurance markets, and
group health plan coverage provided in
connection with employment. Sections
102(c)(4), 101(g)(4), and 401(c)(4) of
HIPAA require the Secretaries of Health
and Human Services, Labor, and the
Treasury, each to issue regulations necessary to carry out these provisions.1
B. Overview of HIPAA and the Interim
Rules
Areas of Guidance. The access, portability, and renewability provisions of
HIPAA affect group health plans and
health insurance issuers. Group health
plans are generally plans sponsored by
employers or employee organizations or
both. These HIPAA provisions are designed to improve the availability and
portability of health coverage by:
• limiting exclusions for preexisting
medical conditions;
• providing credit for prior health
coverage and a process for transmitting
certificates and other information concerning prior coverage to a new group
health plan or issuer;
• providing new rights that allow individuals to enroll for health coverage
when they lose other health coverage or
have a new dependent;
• prohibiting discrimination in enrollment and premiums against employees
and their dependents based on health
status;
• guaranteeing availability of health
insurance coverage for small employers
and renewability of health insurance
coverage in both the small and large
group markets; and
• preserving, through narrow preemption provisions, the States’ traditional
role in regulating health insurance, including State flexibility to provide
greater protections.
The regulations provide guidance with
respect to these provisions. In implementing these new rules, the regulations
provide protections for individuals seek1
In addition to the group market regulations in this
document, the Department of the Treasury is
issuing a proposed Treasury regulation that crossreferences these regulations and the Department of
Labor is issuing an interim regulation relating to
certain disclosure requirements under HIPAA.
Each of these regulations appears separately in this
issue of the Federal Register.

6

ing health coverage while minimizing
burdens on employers and insurers.
Reducing Burdens. The regulations
reduce burdens by:
• providing for a simple model certificate that can be used by plans and
issuers;
• reducing unnecessary duplication in
the issuance of certificates;
• including flexible rules for dependents to receive the coverage information they need;
• allowing coverage information to be
provided by telephone if all parties
agree;
• relieving plans and issuers of the
need to report the starting date of coverage and waiting period information
where a certificate shows 18 months of
creditable coverage;
• including a transition rule permitting plans and issuers to give individuals
a notice in lieu of a certificate where
coverage ended before June 1, 1997;
and
• providing for a model notice that
may be used to satisfy the transition rule
and a model notice for information
relating to categories of benefits provided under a plan.
Implementing Individual Protections.
The regulations protect and assist participants and their dependents by:
• ensuring that individuals are notified of the length of time that a preexisting condition exclusion clause in any
new health plan may apply to them after
taking into account their prior creditable
coverage;
• ensuring that individuals are notified of their rights to special enrollment
under a plan;
• permitting individuals to obtain a
certificate before coverage under a plan
ceases; and
• creating practical ways for individuals to demonstrate creditable coverage to
a new plan (where the individual’s prior
plan fails to provide the certificate).
C. Overview of Coordination of Group
Market Regulation Among Departments
The HIPAA portability provisions relating to group health plans and health
insurance coverage offered in connection with group health plans (referred to
below as the ‘‘group market’’ provisions) are set forth under a new Part A
of Title XXVII of the PHS Act, a new
Part 7 of Subtitle B of Title I of ERISA,
and a new Subtitle K of the Internal
Revenue Code. HIPAA also added provisions governing insurance in the indi-

vidual market that are contained only in
the PHS Act, and thus are not within the
regulatory jurisdiction of the Department
of Labor or the Department of the
Treasury. (These portability provisions
are referred to below as the ‘‘individual
market’’ provisions.)
In general, the group market provisions create concurrent jurisdiction for
the Secretaries of Health and Human
Services, Labor, and the Treasury. These
provisions include similar rules relating
to preexisting conditions exclusions,
special enrollment rights, and prohibition of discrimination against individuals
based on health status-related factors.
(These group market provisions are referred to below as the ‘‘shared group
market’’ provisions.) Accordingly, the
three Departments share regulatory responsibility for most, but not all, of the
group market provisions.
The shared group market provisions
are substantially similar, except as follows:
• The shared group market provisions
in the PHS Act apply generally to
insurance issuers that offer health insurance in connection with group health
plans (subject to an exception that may
apply for plans with fewer than two
participants who are current employees
(‘‘very small plans’’)), and certain State
and local government plans. Only the
PHS Act contains group market provisions relating to availability and renewability of health insurance.2 In addition,
the PHS Act imposes certification requirements on certain federal entities not
otherwise subject to the HIPAA portability provisions. Further, the States, in the
first instance, will enforce the PHS Act
with respect to issuers. In addition,
individuals may be able to pursue
claims through State mechanisms. Only
if a State does not substantially enforce
any provisions under its insurance laws,
will the Department of Health and Human Services enforce the provisions,
through the imposition of civil money
penalties. (The group market provisions
relating to guaranteed renewability for
multiemployer plans and multiple employer welfare arrangements (MEWAs)
are in ERISA and the Internal Revenue
Code, but not the PHS Act.)
• The ERISA shared group market
provisions apply generally to all group
2

The PHS Act does not include requirements on
availability of insurance for employers in the large
group market. Under section 2711(b)(3) of the
PHS Act, however, the General Accounting Office
(GAO) is to report to Congress on such availability in 1998.

health plans other than governmental
plans, church plans, very small plans,
and certain other plans. The shared
group market provisions of ERISA also
apply to health insurance issuers that
offer health insurance in connection
with such group health plans. Generally,
the Secretary of Labor enforces the
provisions of HIPAA that amend
ERISA, except that no enforcement action may be taken by the Secretary
against issuers relating to the new
shared group market provisions in Part 7
of ERISA. However, individuals may
generally pursue actions against issuers
under ERISA and, in some circumstances, under State laws.
• The shared group market provisions
in the Internal Revenue Code generally
apply to all group health plans other
than governmental plans and very small
plans, but not to health insurance issuers. A taxpayer that fails to comply with
these provisions may be subject to an
excise tax under section 4980D of the
Code. (The group market provisions
relating to preemption and affiliation
periods for HMOs are in the PHS Act
and ERISA, but not in the Internal
Revenue Code.)
The regulations being issued today by
the Secretaries of Health and Human
Services, Labor, and the Treasury have
been developed on a coordinated basis
by the Departments. Except to the extent
needed to reflect the statutory differences described above, the shared group
market provisions in these regulations of
each Department are substantively identical. However, there are certain
nonsubstantive differences. The PHS Act
regulations are numbered and organized
differently. Also, there are differences in
the regulations that are necessary because of statutory provisions that are not
common to all three Departments (in the
definitions sections, for example). Further, the regulations reflect certain stylistic differences in language and structure to conform to conventions used by
a particular Department. These differences have been minimized and any
differences in wording are not intended
to create any substantive difference, so
that these regulations will have the same
effect with respect to overlapping statutory provisions, as required by section
104 of HIPAA.

Act regulations, all health insurance
coverage in a State generally is sold in
one of two markets: the group market
(see section 146) and the individual
market (see section 148). The group
market is further divided into the large
group market and the small group market. Section 146 of the PHS Act regulations applies the group market provisions only to insurance sold to group
health plans (which are generally plans
sponsored by employers or employee
organizations or both), regardless of
whether State law provides otherwise.
State law may expand the definition of
the small group market to include certain coverage that, under the federal law,
would otherwise be considered coverage
in the large group market or the individual market.
The protections provided in the PHS
Act to particular individuals and employers are different depending on
whether the coverage involved is obtained in the small group market, the
large group market, or the individual
market. Small employers are guaranteed
availability of insurance coverage sold
in the small group market under the
PHS Act. Small and large employers are
guaranteed the right to renew their
group coverage under the PHS Act,
subject to certain exceptions. Eligible
individuals are guaranteed availability of
coverage sold in the individual market
under the PHS Act, and all coverage in
the individual market must be guaranteed renewable under the PHS Act.
Coverage that is provided to associations, but is not related to employment
(so that the coverage is not in connection with a group health plan), is not
coverage in the group market under
HIPAA. This coverage is instead coverage in the individual market under the
PHS Act, regardless of whether it is
considered group coverage under State
law.

D. Special Information Concerning
State Insurance Law

This section provides most of the
definitions used in the regulations
implementing the provisions of HIPAA
that were added to the PHS Act, ERISA,
and the Code, relating to the group

For purposes of the PHS Act and
sections 144 through 148 in the PHS

7

E. Discussion of the Shared Group
Market Provisions in the Regulations
The most significant items relating to
the shared group market in these regulations are discussed in detail below.
Definitions - 26 CFR § 54.9801–2, 29
CFR § 2590.701–2, 45 CFR § 144.103

market.3 The definitions in this section
of the regulations include both statutory
definitions provided in HIPAA, as well
as certain others used in the regulations.
Limitation on Preexisting Condition
Exclusion Period - 26 CFR
§ 54.9801–3, 29 CFR § 2590.701–3, 45
CFR § 146.111
Definition of Preexisting Condition
Exclusion. A preexisting condition exclusion is defined broadly to be any
limitation or exclusion of benefits based
on the fact the condition was present
before the first day of coverage, whether
or not any medical advice, diagnosis,
care, or treatment was recommended or
received before that day. HIPAA imposes certain limitations (described below) on the use of such an exclusion in
the group market (and also uses this
definition for purposes of the individual
market rules, under which no preexisting
condition exclusion is permitted to be
imposed on an eligible individual).
HIPAA’s broad definition of a preexisting condition exclusion is at variance
with some State laws and regulations
because the relevant National Association of Insurance Commissioners
(NAIC) models, on which many State
laws are based, have imposed limitations
on coverage for preexisting conditions
without use of such a definition.
New Limitations on Preexisting Condition Exclusions. Paragraph (a) of this
section4 of the regulations describes the
limitations on the preexisting condition
exclusion period. A group health plan,
and a health insurance issuer offering
group health insurance coverage, is permitted to impose a preexisting condition
exclusion with respect to a participant or
beneficiary only if the following conditions are met:
1. 6-month look-back rule. The preexisting condition exclusion must relate
to a condition (whether physical or
mental, and regardless of the cause of
the condition) for which medical advice,
diagnosis, care, or treatment was recommended or received within the 6-month
period ending on the enrollment date.
For these purposes, genetic information
3

The regulations for the PHS Act also contain
certain definitions relating to those provisions
added under the PHS Act regarding the individual
market, in order to create a single, comprehensive
reference for the definitions necessary under the
PHS Act regulations.
4
References to paragraphs of a section refer to
paragraphs of each regulation section identified in
the heading. For example, this reference is to
paragraph (a) in each of 45 CFR § 146.111, 29
CFR § 2590.701–3, and 26 CFR § 54.9801–3.

is not a condition.5 In order to be taken
into account, the medical advice, diagnosis, care, or treatment must have been
recommended or received from an individual licensed or similarly authorized
to provide such services under State law
and operating within the scope of practice authorized by the State law. Under
the new HIPAA standard, a plan would
generally determine that an individual
has a preexisting condition through
medical records (such as diagnosis
codes on bills, a physician’s notes of a
visit or telephone call, pharmacy prescription records, HMO encounter data,
or other records indicating that medical
services were actually recommended or
received during the 6-month look-back
period). The ‘‘prudent person’’ standard
of some State laws (under which a
condition is taken into account if a
prudent person would have sought care
whether or not care is actually received)
no longer may be used to determine a
preexisting condition.
This 6-month ‘‘look-back’’ period is
based on the 6-month ‘‘anniversary
date’’ of the enrollment date. As a result,
an individual whose enrollment date is
August 1, 1998 has a 6-month look-back
period from February 1, 1998 through
July 31, 1998.
2. Length of preexisting condition exclusion period. The exclusion period
cannot extend for more than 12 months
(18 months for late enrollees) after the
enrollment date. The 12- or 18-month
‘‘look-forward’’ period is also based on
the anniversary date of the enrollment
date. A late enrollee is defined as an
individual who enrolls in a plan at a
time other than at the first time the
individual is eligible to enroll or during
a special enrollment period (described
below). If an individual loses eligibility
for coverage as a result of terminating
employment or a general suspension of
coverage under the plan, then upon
becoming eligible again due to resumption of employment or due to resumption of plan coverage, only the most
recent period of eligibility is considered
for purposes of determining whether the
individual is a late enrollee.
3. Reduction of preexisting condition
exclusion period by prior coverage. In
general, the preexisting condition exclu5
The definition of genetic information in the
regulations was developed taking into account
hearing testimony related to genetic information
given in connection with Senate Report 104–156,
other legislative initiatives, and public comments
(including those submitted in response to the
request for information published by the Departments on December 30, 1996).

8

sion period is reduced by the individual’s days of creditable coverage6 as of
the enrollment date. Creditable coverage
is defined as coverage of an individual
from a wide range of specified sources,
including group health plans, health insurance coverage, Medicare, and Medicaid.
Definition of Enrollment Date. The
limitations on preexisting condition exclusions are measured from an individual’s ‘‘enrollment date.’’ The enrollment
date is defined as the first day of
coverage 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 the
term ‘‘date of enrollment’’ in the statute,
such as in the definitions of the terms
‘‘preexisting condition exclusion’’ and
‘‘enrollment date.’’ This is intended to
clarify the difference between the statutory terms ‘‘date of enrollment’’ and
‘‘enrollment date’’ (which have no difference in common usage).
The term ‘‘waiting period’’ generally
refers to the period in which there is a
delay between the first day of employment and the first day of coverage under
the plan. Accordingly, because the preexisting condition exclusion period runs
from the enrollment date, any waiting
period would run concurrently with any
preexisting condition exclusion period.
Further:
• The enrollment date for a late enrollee or anyone who enrolls on a
special enrollment date (see the section
on special enrollment periods below) is
the first date of coverage. Thus, the time
between the date a late enrollee or
special enrollee first becomes eligible
for enrollment under the plan and the
first day of coverage is not treated as a
waiting period.
• Because the 6-month look-back
limitation runs from the beginning of
any applicable waiting period, the current practice of some plans that require
physical examinations prior to commencement of coverage for the purpose
of identifying preexisting conditions
may be affected. If the examination is
conducted during the waiting period
(after employment begins and before
enrollment), rather than before employ6
The phrase ‘‘days of creditable coverage’’ is used
instead of the statutory phrase ‘‘aggregate periods
of creditable coverage’’ for administrative ease in
the calculation of creditable coverage. Use of days
of creditable coverage also conforms to the practice of many States for crediting prior coverage
under pre-HIPAA small group market reforms.

ment begins, a plan may not exclude
coverage for any condition identified in
the examination (unless, independent of
the examination, medical advice, diagnosis, care, or treatment was in fact
recommended or received for the condition during the 6-month look-back period). The use of such examinations for
other purposes, such as worker safety, is
not affected.7
Elimination of Preexisting Condition
Exclusion for Pregnancy and for Certain
Children. A preexisting condition exclusion cannot apply to pregnancy. In addition, a preexisting condition exclusion
period cannot be applied to a newborn,
an adopted child under age 18, or a
child placed for adoption under age 18,
if the child becomes covered within 30
days of birth, adoption, or placement for
adoption. This exception does not apply
after the child has a significant break in
coverage (63 or more consecutive days).
(An example in paragraph (b)(1) of the
regulations 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 that
imposes a preexisting condition exclusion must reduce the length of the
exclusion by an individual’s creditable
coverage. This section defines the term
‘‘creditable coverage’’ and sets forth the
rules for how creditable coverage is
applied to reduce such an exclusion
period.
Creditable coverage includes health
insurance coverage and other health
coverage, such as coverage under group
health plans (whether or not provided
through an issuer), Medicaid, Medicare,
and public health plans, as well as other
types of coverage set forth in HIPAA
and the regulations. Comments are requested on whether the definition of a
public health plan should include the
public health systems of other countries.
Under the definition of creditable
coverage, all forms of health insurance
coverage are included, whether in the
individual market or group market, and
whether the coverage is short-term,
limited-duration coverage or other coverage for benefits for medical care for
which no certificate of creditable coverage is required. Creditable coverage
does not include coverage consisting
7

However, to avoid violating the Americans with
Disabilities Act, Pub. L. 101–336, as amended by
Pub. L. 102–166, the examination should generally
be conducted only after the employer has offered
employment to the individual.

solely of excepted benefits as defined in
the regulations and described below.8
Under paragraph (a)(3) of this section
of the regulation, a group health plan or
health insurance issuer offering group
health insurance coverage may determine the amount of creditable coverage
of an individual for purposes of reducing the period of a preexisting condition
exclusion by using either the standard
method described in paragraph (b) or
the alternative method described in paragraph (c).
Standard Method.
1. Counting. Under the standard
method, the plan or issuer determines
the amount of an individual’s creditable
coverage by determining all days during
which the individual had one or more
types of creditable coverage. This determination is made without regard to the
specific benefits included in the coverage. If creditable coverage is derived
from more than one source on a particular day, all of the creditable coverage
that the individual had on that day is
counted as one day of creditable coverage.
2. Significant break in coverage.
Days of creditable coverage that occur
before a significant break in coverage
are not required to be counted by the
plan or issuer in reducing a preexisting
condition exclusion. A significant break
in coverage means a period of 63 consecutive days during all of which the
individual did not have any creditable
coverage.
a. Waiting and affiliation periods.
Waiting periods and affiliation periods,
as defined in the regulation, are not
taken into account in determining a
significant break in coverage. This is the
case regardless of whether the person
ultimately fails to obtain coverage under
the plan (such as, where termination of
employment occurs before coverage begins). However, days in a waiting period
or affiliation period are not counted as
creditable coverage.
The regulations specify that the period between the date an individual files
8
Howver, if an individual has coverage of excepted benefits in addition to other forms of
creditable coverage, coverage of excepted benefits
is creditable coverage. This would make a difference only if a plan or issuer uses the alternative
method of determining creditable coverage (described below) with respect to a category that
includes excepted benefits. For example, coverage
of excepted benefits such as limited vision or
limited dental benefits, when offered in combination with other creditable coverage, may be used
to offset a preexisting condition exclusion period
for a category that includes those benefits under
the alternative method in paragraph(c).

9

a substantially complete application for
coverage in the individual market and
the effective date of such coverage is a
waiting period, so that the period is not
taken into account in determining a
significant break in coverage. In this
way, an application processing delay or
omission of details on a form would not
cause an applicant to incur a significant
break in coverage, which could adversely affect an individual who seeks
coverage under a group health plan after
purchasing coverage in the individual
market.
However, the waiting period for purchase of an individual policy tolls a
break in coverage only if the filing of
the application for the individual market
insurance actually results in purchase of
the coverage by the individual. (See
Examples 7 and 8 in paragraph
(b)(2)(iv).) By contrast, days in a waiting period for coverage under a group
health plan toll a significant break in
coverage regardless of whether coverage
under the plan is ultimately obtained.
(See Example 6.) The rule regarding the
individual market prevents an individual
from avoiding a significant break in
coverage by repeatedly submitting applications to individual market issuers
without ever purchasing coverage. This
rule responds to comments sent to the
Departments in response to the December 30, 1996 request for public comments. The comments asked for clear
rules on when a significant break is
tolled in the case of an application for
individual market insurance.
Issuers of health insurance coverage
in the individual market are subject to
the same certification requirements that
apply to plans and issuers in the group
market. Therefore, issuers in the individual market must provide individuals
with certificates that reflect information
regarding the beginning of the waiting
period (the date of application), the
effective date of coverage, and the date
coverage ends. This will assist people
with coverage in the individual market
who later become covered by a group
health plan in demonstrating their creditable coverage to the plan or issuer in
the group market.
b. Effect of State insurance law.
HIPAA provides that the significant
break in coverage rule does not preempt
State insurance laws that provide longer
periods than 63 days for a break in
coverage. (The preemption provisions
are described more fully below.) Accordingly, while federal law may allow
a plan to disregard prior coverage before

a 63-day significant break in coverage,
an issuer may be required to take such
coverage into account in order to comply with State insurance law. As a
result, application of the break rules can
vary between issuers located in different
States. Similarly, the break rules may
vary between insured plans and selfinsured plans (which are not subject to
State insurance laws) within a State, as
well as between the insured and selfinsured portions of a single plan. As
illustrated by Example 3 in paragraph
(b)(2)(iv), the laws of the State applicable to the insurance policy that has
the preexisting condition exclusion are
determinative of which break rule applies.
Alternative Method. Under the alternative method of counting creditable
coverage, the plan or issuer determines
the amount of an individual’s creditable
coverage for any of five identified categories of benefits. Those categories are
coverage for mental health, substance
abuse treatment, prescription drugs, dental care, and vision care. The plan or
issuer may use the alternative method
for any or all of the categories and may
apply a different preexisting condition
exclusion period with respect to each
category (as well as to coverage not
within a category). The creditable coverage determined for a category of benefits applies only for purposes of reducing the preexisting condition exclusion
period with respect to that category. The
standard method is used to determine an
individual’s creditable coverage for benefits that are not within any category for
which the alternative method is being
used. Disclosure statements concerning
the plan must indicate that the alternative method is being used, and this
disclosure must also be given to each
enrollee at the time of enrollment. These
statements must include a description of
the effect of using the alternative
method. Any issuer in the group market
must provide similar statements to each
employer at the time of offer or sale of
the coverage.
For purposes of reducing the preexisting condition exclusion period under the
alternative method, the plan or issuer
determines under the standard method
the amount of the individual’s creditable
coverage that can be counted, up to a
total of 365 days of the most recent
creditable coverage of the individual
(546 days for a late enrollee). The
period of this creditable coverage is
referred to as the ‘‘determination period.’’ The plan or issuer counts all days

of coverage within the applicable category that occurred during the determination period (without regard to any
significant breaks in that category of
coverage). Those days reduce the preexisting condition exclusion for coverage
within that category.
The regulations do not provide detailed definitions of the benefit categories. Comments are invited on whether
additional guidance is needed.
The regulations under the alternative
method of counting creditable coverage
do not include a category relating to
significant differences in deductible
amounts. Commentators expressed concerns about adverse selection if individuals can change from a high deductible plan when they become ill and
obtain ‘‘first dollar’’ coverage from an
HMO or other issuer that provides
broad, comprehensive care with only
low deductibles or copayments.9 However, it is unclear how such a category
would be defined or applied. Accordingly, the Departments solicit comments
on this issue.
Certificates and Disclosure of Previous
Coverage - 26 CFR § 54.9801–5, 29
CFR § 2590.701–5, 45 CFR § 146.115
This section of the regulations sets
forth guidance regarding the certification
requirements and other requirements
concerning disclosure of information relating to prior creditable coverage. The
provision of a certificate and other disclosures of information are intended to
enable an individual to establish his or
her prior creditable coverage for purposes of reducing any preexisting condition exclusion imposed on the individual
by any subsequent group health plan
coverage.
Form of Certificate. In general, the
certificate must be provided in writing,
including any form approved by the
Secretaries as a writing. In certain circumstances, where the individual requests that the certificate be sent to
another plan or issuer instead of to the
individual, and the other plan or issuer
agrees, the certification information may
be provided by other means, such as by
telephone. In some States, issuers transfer coverage information by telephone.
Comments are requested as to whether,
and under what conditions, other methods of transmitting certification informa9
See also the discussion below under the heading
‘‘HMO Affiliation as Alternative to Preexisting
Condition Exclusion.’’

10

tion (including electronic communication) should be permitted in future
guidance.
Information in Certificate. Paragraph
(a)(3) of this section of the regulations
sets forth the information that must be
included in a certificate. The regulations
allow a plan or issuer in an appropriate
case simply to state in the certificate
that the individual has at least 18
months of creditable coverage that was
not interrupted by a significant break in
coverage and to indicate the date coverage ended. (A certificate would never
have to reflect coverage in excess of 18
months without a 63-day break because
this is the maximum creditable coverage
that an individual could need under the
preexisting condition exclusion rules and
the rules for access to the individual
market.) In any other case, the certificate must disclose (1) the date any
waiting or affiliation period began,10 (2)
the date coverage began, and (3) the
date coverage ended (or indicate if coverage is continuing).11 For individuals
with fewer than 18 months of coverage
without a significant break in coverage,
the information about specific dates is
essential in order for a subsequent plan
or issuer in the group or individual
market to be able to apply the break
rules, especially in light of the possibility that an individual may have other
coverage from various sources and the
potential differences among State break
rules (described above).
Certification Events and Timing. Paragraph (a)(5) describes the rights of
participants and dependents to receive
certificates. In general, individuals have
the right to receive a certificate automatically (an ‘‘automatic certificate’’)
when they lose coverage under a plan
and when they have a right to elect
COBRA continuation coverage. The certificate must be furnished within the
time periods described below:
• First, for an individual who is a
qualified beneficiary entitled to elect
COBRA continuation coverage, the certificate is required to be provided no
later than when a notice is required to
be provided for a qualifying event under
COBRA.
• Second, for an individual who loses
coverage under a group health plan and
10
Because the ending date for a waiting or affiliation period will always be the date coverage
begins, the ending date does not have to be
separately stated in a certificate.
11
These dates would include any period of COBRA continuation coverage. A COBRA continuation coverage period does not have to be separately identified.

who is not a qualified beneficiary entitled to elect COBRA continuation coverage, the certificate is required to be
provided within a reasonable time after
the coverage ceases. (Typically, this
would apply to small employers’ plans
that are not subject to COBRA.) This
requirement is satisfied if the certificate
is provided by the time a notice is
required to be provided under a State
program similar to COBRA.
• Third, for an individual who is a
qualified beneficiary and has elected
COBRA continuation coverage, the certificate is required to be provided within
a reasonable time after either cessation
of COBRA continuation coverage or, if
applicable, after the expiration of any
grace period for the payment of COBRA
premiums.
In each of these three events, the regulations require the certificate to reflect
only the most recent period of continuous coverage under the plan.
Under COBRA, multiemployer plans
may provide notices within such longer
period of time as is provided for such
notices under the terms of the plan.
Under the general certification timing
rule described above, multiemployer
plans may use the same extended time
period for providing certificates. Comments are requested on how this may
affect a multiemployer plan and its
participants and their families.
A certificate may be mailed by first
class mail to the participant’s last known
address. A certificate for a participant’s
spouse with an address different from
the participant’s is to be sent to the
spouse’s address. A certificate may provide information with respect to both a
participant and the participant’s dependents if the information is identical for
each individual, or if the information is
not identical, a certificate may provide
information sufficient to satisfy the requirements of the regulations with respect to each individual on one document.
A certificate is also required to be
provided upon the request of, or on
behalf of, an individual (whether the
individual is a participant, the participant’s spouse, or any other dependent) if
the request is made within 24 months
after the individual loses coverage under
the plan. The certificate is required to be
provided at the earliest time that the
plan or issuer, acting in a reasonable
and prompt fashion, can provide the
certificate. In this case, the certificate
reflects each period of continuous cover-

age ending within the 24 months prior
to the Fdate of request.12
Responsibilities of Plans and Issuers. Paragraph (a)(1) clarifies the
statutory obligation of plans and issuers
to provide certificates. The statutory
obligation to furnish a written certificate
of information regarding creditable coverage is imposed on both the group
health plan and the health insurance
issuer offering group health insurance
coverage. This dual obligation was the
subject of many of the comments received by the three Departments in
response to the December 30, 1996
request for public comments published
in the Federal Register. Concerns were
raised about superfluous, duplicate certificates being issued and the potential
responsibility of issuers for reporting on
an individual’s coverage under the plan
after one issuer has been replaced by
another.
Paragraph (a)(1) addresses these concerns by providing that the obligation to
furnish a certificate is imposed on both
the plan and each health insurance issuer that provides group health insurance coverage under the plan, subject to
four exceptions.
First, paragraph (a)(1)(ii) provides
that an entity required to provide a
certificate is deemed to have satisfied
this requirement to the extent that any
other party provides the certificate and
the certificate discloses the creditable
coverage (including the waiting period
information) that was to be provided by
the entity.
Second, paragraph (a)(1)(iii) provides
that a plan is deemed to have satisfied
its obligation if there is an agreement
between an issuer and a plan under
which the issuer agrees to provide certificates for individuals covered under
the plan.
Third, paragraph (a)(1)(iv)(A) provides that an issuer is not required to
provide any coverage information regarding coverage periods for which it
was not responsible.
Fourth, paragraph (a)(1)(iv)(B) provides that if an individual switches from
one issuer to another option allowed
under the plan, or an issuer is replaced
by another before an individual’s coverage in the plan ceases, the first issuer is
required to provide sufficient information to the plan (or to another party
12
For example, for a participant who has had a
number of interruptions in coverage, a requested
certificate could consist of copies of all of the
automatic certificates that were previously provided to the individual for each of these periods.

11

designated by the plan), so that when
the individual leaves the plan, a certificate can be provided that includes the
period of coverage under the policy of
the first issuer. In this situation, no
certificate is required to be provided to
the individual, but the issuer must also
cooperate with the plan by providing
any information that may be requested
later pursuant to the alternative method.
(This rule will reduce unnecessary and
potentially misleading information from
being received while the individual’s
coverage under the plan is uninterrupted.) An issuer may presume that it is
the final issuer for an individual if the
individual’s coverage under the policy
ends at a time other than in connection
with the plan’s open season.
Other Entities Issuing Certificates.
Paragraph (a)(6) identifies the various
statutory authorities that create responsibility for other entities (that are not
subject to a particular Department’s
regulations) to provide certificates. As
described above, there are forms of
creditable coverage other than coverage
provided by group health plans and
health insurance coverage offered in
connection with a group health plan.
Accordingly, individuals who leave coverage provided by any such other entity
are entitled to have that coverage
counted by a group health plan and may
in many cases receive certificates for
their creditable coverage. This information is included in the regulations because plans that impose a preexisting
condition exclusion may find it helpful
to know when creditable coverage will
be provable through presentation of a
certificate and when other forms of
documentation or attestation may be
needed.
In cases where certifications are provided by entities not subject to ERISA’s
requirements, such as Medicaid, the Indian Health Service, and CHAMPUS,
certain adjustments in the certification
rules may be appropriate. The regulations do not address how the certification process applies to these other programs. Comments are requested on how
the certification requirements may be
adapted to entities responsible for providing this coverage.
Dependent Coverage Information.
Dependents are entitled to a written
certificate of creditable coverage. Concerns were raised in comments received
from the public regarding the certification of dependent coverage where information regarding dependents of participants in plans was not available. Plans

and issuers, the commenters stated, often do not know the existence of dependents or their coverage periods until
claims are filed. To address these concerns, the regulations have adopted two
special rules.
First, under a transition rule that lasts
through June 30, 1998, a plan or issuer
may satisfy its obligation to provide a
written certificate regarding the coverage
of a dependent of a participant by providing the name of the participant covered by the plan and specifying the type
of coverage provided in the certificate
(such as family coverage or employeeplus-spouse coverage). However, if
asked to provide a certificate relating to
a dependent, the plan must make reasonable efforts to obtain and provide the
name of the dependent. This rule will
provide plans and issuers with a transi-

tion period to update their data systems
to include information on dependents.
Second, the regulations include a special rule regarding dependent coverage
that is not limited to the transition
period. Under this rule, a plan or issuer
must make a reasonable effort to collect
the necessary information for dependents
and include it on the certificate. However, under this special rule, an automatic certificate is not required to be
issued until the plan or issuer knows (or,
making reasonable efforts, should know)
of the dependent’s cessation of coverage.
This information can be collected annually (during open enrollment).
Under the transition rule and the
special rule, an individual may use the
provisions described below to establish
creditable coverage (and waiting and
affiliation period information).

Information for Alternative Method of
Counting Creditable Coverage. Following receipt of the certificate, an entity
that uses the alternative method of
counting creditable coverage may request that the entity that issued the
certificate disclose additional information in order for the requesting entity to
determine the individual’s creditable
coverage with respect to any category of
benefits described in paragraph (b). The
requested entity may charge the requesting entity the reasonable cost of disclosing the information. The requesting entity may ask for a copy of the summary
plan description (SPD) that applied to
the individual’s coverage or may ask for
more specific information. Set forth below is a model form that may be used
for specific coverage information about
the 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’s
coverage within the category began and the date that the individual’s coverage within the category ended (or indicate if continuing), or (ii) enter ‘‘same’’ on
the 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 the
certificate.

Demonstration of Coverage if Certificate is Not Provided. Under HIPAA, in
order to prevent an individual from
being adversely affected if the individual does not receive a certificate, the
individual has a right to demonstrate
creditable coverage through the presentation of documentation or other means.
For example, an individual may not
have a certificate because: an entity
failed to provide a certificate within the

required time period; an entity was not
required to provide a certificate; the
coverage of the individual was for a
period before July 1, 1996; or, the
individual has an urgent medical condition that necessitates an immediate determination of creditable coverage by
the plan or issuer. Under these circumstances, an individual may present evidence of creditable coverage through
documents, records, third party state-

12

ments, or other means, including telephone calls by the plan or issuer to a
third party provider. The plan administrator is required to take into account all
information presented in determining
whether to offset any or all of a preexisting condition exclusion. A plan or
issuer is required to treat the individual
as having furnished a certificate provided by a plan or issuer if the individual attests to the period of creditable

coverage, the individual presents relevant corroborating evidence of some
creditable coverage during the period,
and the individual cooperates with the
plan’s or issuer’s efforts to verify the
individual’s coverage.
If an individual needs to demonstrate
his or her status as a dependent of a
participant, the plan or issuer is required
to treat the individual as having furnished a certificate if an attestation to
such dependency and the period of such
status is provided, and if the individual
cooperates with the plan’s or issuer’s
efforts to verify the dependent status.
Similar rules apply relating to determining creditable coverage under the
alternative method.
Notice to Individual of Period of
Preexisting Condition Exclusion. Within
a reasonable time following the receipt
of the certificate, information relating to

the alternative method, or other evidence of coverage, a plan or issuer is
required to make a determination regarding the length of any preexisting
condition exclusion period that applies
to the individual and notify the individual of its determination. Whether a
determination and notification is made
within a reasonable period of time depends upon the relevant facts and circumstances including whether the application of the preexisting condition
exclusion period would prevent access
to urgent medical services. The plan or
issuer is required to notify the individual, however, only if, after considering the evidence, it has determined that
a preexisting condition exclusion period
will still be imposed on the individual.
The basis of the determination, including the source and substance of any
information on which the plan or issuer

relied, must be included in the notification. The notification must also explain
the plan’s appeals procedures and the
opportunity of the individual to present
additional evidence.
The plan or issuer may reconsider and
modify its initial determination if it
determines that the individual did not
have the claimed creditable coverage. In
this circumstance, the plan or issuer
must notify the individual of such reconsideration and, until a final determination is made, must act in accordance
with its initial determination for purposes of approving medical services.
Model Certificate. The following
model certificate has been authorized by
the Secretary of each of the Departments. Use of the model certificate will
satisfy 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 a
group health plan that excludes coverage for certain medical conditions that you have before you enroll. This certificate may need to be provided if medical
advice, diagnosis, care, or treatment was recommended or received for the condition within the 6-month period prior to your enrollment in the new plan. If
you become covered under another group health plan, check with the plan administrator to see if you need to provide this certificate. You may also need
this certificate to buy, for yourself or your family, an insurance policy that does not exclude coverage for medical conditions that are present before you
enroll.
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, 45
CFR § 146.117
This section of the regulations provides guidance regarding the new enroll-

ment rights provided to employees and
dependents under HIPAA. A group
health plan and a health insurance issuer
offering group health insurance coverage
are required to provide for special enrollment periods during which individu-

13

als who previously declined coverage
are allowed to enroll (without having to
wait until the plan’s next regular open
enrollment period). A special enrollment
period can occur if a person with other
health coverage loses that coverage or if

a person becomes a dependent through
marriage, birth, adoption, or placement
for adoption.
A plan must provide a description of
the special enrollment rights to anyone
who declines coverage. The regulations
provide a model of such a description.
A person who enrolls during a special
enrollment period (even if the period
also corresponds to a regular open enrollment period) is not treated as a late
enrollee. (Accordingly, the plan or issuer
may not impose a preexisting condition
exclusion period longer than 12 months
with respect to the person.)
Special Enrollment for Loss of Other
Coverage. The special enrollment period
for loss of other coverage is available to
employees and their dependents who
meet certain requirements. The employee
or dependent must otherwise be eligible
for coverage under the terms of the plan.
When the coverage was previously declined, the employee or dependent must
have been covered under another group
health plan or must have had other
health insurance coverage. The plan can
require that, when coverage in the plan
was previously declined, the employee
must have declared in writing that the
reason was other coverage, in which
case the plan must at that time have
provided notice of this requirement and
the consequences of the employee’s failure to provide the statement.
The special enrollment rights may
apply with respect to an employee, a
dependent of the employee, or both. An
employee who has not previously enrolled can enroll under these rules if it
is the employee who loses other coverage. An employee’s dependent can be
enrolled under these rules if it is the
dependent who loses other coverage and
the employee is already enrolled. In
addition, both the employee and a dependent can be enrolled together under
these rules if either the employee or the
dependent loses other coverage.
If the other coverage is COBRA continuation coverage, the special enrollment can only be requested after exhausting COBRA continuation coverage.
If the other coverage is not COBRA
continuation coverage, special enrollment can only be requested after losing
eligibility for the other coverage or after
cessation of employer contributions for
the other coverage. In each case, the
employee has 30 days to request special
enrollment. An individual does not have
to elect COBRA continuation coverage
or exercise similar continuation rights in
order to preserve the right to special

enrollment. However, an individual does
not have a special enrollment right if the
individual loses the other coverage as a
result of the individual’s failure to pay
premiums or for cause (such as making
a fraudulent claim). Coverage under special enrollment must be effective no
later than the first day of the month
after an employee requests the enrollment for himself or herself or on behalf
of a dependent.
Special
Enrollment
for
New
Dependents. A special enrollment period
also occurs if a person has a new
dependent by birth, marriage, adoption,
or placement for adoption. The election
to enroll can be made within 30 days
following the birth, marriage, adoption,
or placement for adoption. In the case of
a plan that does not offer any coverage
for dependents and is then modified to
offer dependent coverage, the election to
enroll can instead be made during the
30 days beginning on the date dependent coverage is made available.
The special enrollment rules allow an
eligible employee to enroll when he or
she marries or has a new child (as a
result of marriage, birth, adoption, or
placement for adoption). A spouse of a
participant can be enrolled separately at
the time of marriage or when a child is
born, adopted or placed for adoption.
The spouse can be enrolled together
with the employee when they marry or
when a child is born, adopted, or placed
for adoption. A child who becomes a
dependent of a participant as a result of
marriage, birth, adoption, or placement
for adoption can be enrolled when the
child becomes a dependent. Similarly, a
child who becomes a dependent of an
eligible employee as a result of marriage, birth, adoption, or placement for
adoption can be enrolled if the employee enrolls at the same time.
In the case of a dependent special
enrollment period, HIPAA provides that
coverage with respect to a marriage is
effective no later than the first day of
the month after the date the request for
enrollment is received and coverage
with respect to a birth, adoption, or
placement for adoption is effective on
the date of the birth, adoption, or placement for adoption.
HMO Affiliation Period as Alternative to
Preexisting Condition Exclusion - 29
CFR § 2590.701–7 and 45 CFR
§ 146.119
This section of the regulations permits
a group health plan offering health in-

14

surance through an HMO, or an HMO
that offers health insurance coverage in
connection with a group health plan, to
impose an affiliation period, but only if
certain other requirements are met. An
‘‘affiliation period’’ is defined in the
regulations as a period of time that must
expire before health insurance coverage
provided by the HMO becomes effective, and during which the HMO is not
required to provide benefits.
The regulations specify the following
requirements for imposing an affiliation
period:
• no preexisting condition exclusion
may be imposed with respect to coverage through the HMO;
• no premium may be charged to a
participant or beneficiary for the affiliation period;
• the affiliation period must be applied uniformly without regard to any
health status-related factors; and
• the affiliation period must begin on
the enrollment date, cannot exceed two
months (three months for a late enrollee), and must run concurrently with
any waiting period under the plan.
The regulations provide for the affiliation period to begin on the enrollment
date in the plan, not when coverage with
the HMO begins. Accordingly, if a plan
offers multiple coverage options simultaneously, the HMO cannot impose an
affiliation period on plan participants
who change to the HMO option. Comments are requested on this rule.
The regulations permit an HMO to
use alternatives in lieu of an affiliation
period to address adverse selection, as
approved by the State insurance commissioner or other official designated to
regulate HMOs. Because an affiliation
period may be imposed only if no
preexisting condition exclusion is used,
an alternative to an affiliation period
may not encompass an arrangement that
is in the nature of such an exclusion.13
While HMOs usually do not impose
preexisting condition exclusions, they
could choose to apply a preexisting
condition exclusion period for all enrollees based on the alternative method of
counting creditable coverage if the regulations were to add a category relating
to deductibles. However, as described
above under the heading ‘‘Alternative
Method,’’ the regulations currently do
not include such a category.
13
These alternatives that may be used in lieu of an
affiliation period to address adverse selection
should not be confused with the use of the
alternative method for counting creditable coverage discussed in the next paragraph.

Nondiscrimination In Eligibility and
Premiums in the Group Market - 26
CFR § 54.9802–1, 29 CFR § 2590.702,
45 CFR § 146.121
The regulations include provisions
implementing the nondiscrimination provisions in HIPAA. Comments are welcomed on these provisions, and, in particular, comments are requested on
whether guidance is needed concerning:
• the extent to which the statute prohibits discrimination against individuals
in eligibility for particular benefits;
• the extent to which the statute may
permit benefit limitations based on the
source of an injury;
• the permissible standards for defining groups of similarly situated individuals;
• application of the prohibitions on
discrimination between groups of similarly situated individuals; and
• the permissible standards for determining bona fide wellness programs.
The Departments intend to issue further
regulations on the nondiscrimination
rules in the near future. In no event will
the period for good faith compliance
(specified in HIPAA sections 102(c)(5),
101(g)(5), and 401(c)(5)) with respect to
section 2702 of the PHS Act, section
702 of ERISA, and section 9802 of the
Code end before the additional guidance
is provided.
A plan or issuer may not establish
rules for eligibility (including continued
eligibility) of an individual to enroll
under the terms of the plan based on a
health status-related factor. HIPAA and
the regulations provide a list of health
status-related factors. The Departments
are considering interpreting the statutory
language relating to eligibility to enroll
so that a plan or issuer would be
prohibited from providing lower benefits
to certain individuals based on health
status-related factors. Comments are
welcomed on this interpretation.
Among the health status-related factors listed in the statute is ‘‘evidence of
insurability (including conditions arising
out of acts of domestic violence).’’ The
Conference Report states that the inclusion of evidence of insurability in the
list of health status-related factors ‘‘is
intended to ensure, among other things,
that individuals are not excluded from
health care coverage due to their participation in activities such as motorcycling,
snowmobiling, all-terrain vehicle riding,
horseback riding, skiing and other similar activities.’’ However, HIPAA also
provides that a plan or issuer is not

required to provide particular benefits
other than those provided under the
terms of the plan. Moreover, HIPAA
provides that a plan or issuer may
establish limitations or restrictions on
the amount, level, extent, or nature of
the benefits or coverage for similarly
situated individuals enrolled in the plan.
Comments have been received indicating that some plans contain provisions
that exclude coverage for benefits based
on the source of injury (such as benefits
for injuries sustained in a motorcycle
accident, injuries sustained in a motorcycle accident as the result of not
wearing a helmet, or injuries sustained
in the commission of a felony). Accordingly, comments are requested on how
future guidance should treat benefit
limitations based on the source of an
injury.
The Conference Report also states
that ‘‘[t]he term ‘similarly situated’
means that a plan or coverage would be
permitted to vary benefits available to
different groups of employees, such as
full-time versus part-time employees or
employees in different geographic locations. In addition, a plan or coverage
could have different benefit schedules
for different collective bargaining units.’’
Accordingly, comments are requested
concerning the appropriate standards for
determining ‘‘similarly situated individuals,’’ including whether a plan is permitted to vary benefits based on an employee’s occupation. Because these
standards could impact on the small
group market, the Department of Health
and Human Services is particularly interested in receiving comments from
States with respect to how varying benefits based on occupation could affect
rate setting.
The Departments also request comments regarding how the prohibitions on
discrimination should be applied between groups of similarly situated individuals. For example, is guidance
needed on whether a plan covering
employees in two different locations
could have a longer waiting period for
employees at one location because the
health status of those employees results
in higher health costs?
A plan or issuer may not require any
individual (as a condition of enrollment
or continued enrollment) to pay a premium or contribution, that is greater
than that for a similarly situated individual enrolled in the plan, based on a
health status-related factor. However,
this limitation does not restrict the
amount that an issuer can charge an

15

employer for the coverage. In addition,
this limitation does not prevent a plan or
issuer from establishing premium discounts or rebates or otherwise modifying
applicable
copayments
or
deductibles in return for adherence to
programs of health promotion and disease prevention (bona fide wellness programs). Comments are requested regarding the standards for determining bona
fide wellness programs, including
whether such a program may provide a
discount for non-smokers.
Special Rules — Excepted Plans and
Excepted Benefits - 26 CFR
§ 54.9804–1, 29 CFR § 2590.732, 45
CFR § 146.145
This section of the regulations provides special rules for certain plans and
certain benefits.
Very Small Plans. The group market
requirements of HIPAA do not apply to
a group health plan, or to group health
insurance coverage offered in connection with a group health plan, for any
plan year if, on the first day of the plan
year, the plan has fewer than 2 participants who are current employees. However, a State may apply the group
market provisions in the PHS Act to
plans with fewer than two participants
who are current employees. In this case,
the State would apply its group market
insurance law requirements to such
small group plans (and such plans
would not be subject to the individual
market requirements).
Excepted Benefits. The group market
provisions and the related regulations
also do not apply to any group health
plan or group health insurance issuer in
relation to its provision of excepted
benefits. The benefits identified in paragraph (b)(2) are generally not health
insurance coverage and are excepted in
all circumstances. In contrast, the benefits identified in paragraphs (b)(3), (4),
and (5) are generally health insurance
coverage but are excepted if certain
conditions are met.
Limited-scope dental benefits, limitedscope vision benefits, and long-term
care benefits are excepted if they are
provided under a separate policy, certificate, or contract of insurance, or are
otherwise not an integral part of the
plan. For this purpose, limited-scope
dental coverage typically provides benefits for non-medical services such as
routine dental cleanings, x-rays, and
other preventive procedures. Such coverage may also provide discounts on the

cost of common dental procedures such
as fillings, root canals, crowns, full or
partial plates, or orthodontic services.
Limited-scope dental coverage typically
does not provide benefits for medical
services, such as those procedures associated with oral cancer or with a mouth
injury that results in broken, displaced,
or lost teeth.
Similarly, limited-scope vision coverage provides benefits for routine eye
examinations or the fitting of eyeglasses
or contact lenses. This coverage does
not include benefits for such ophthalmological services as treatment of an eye
disease (e.g., glaucoma or a bacterial
eye infection) or an eye injury.
Noncoordinated benefits may be excepted benefits. The term ‘‘noncoordinated benefits’’ refers to coverage for
a specified disease or illness (such as
cancer-only coverage) or hospital indemnity or other fixed dollar indemnity
insurance (such as insurance that pays
$100/day for a hospital stay as its only
insurance benefit) if three conditions are
met. First, the benefits are provided
under a separate policy, certificate, or
contract for insurance. Second, there is
no coordination between the provision
of these benefits and another exclusion
of benefits under a plan maintained by
the same plan sponsor. Third, benefits
are paid without regard to whether benefits are provided with respect to the
same event under a group health plan
maintained by the same plan sponsor.
Certain supplemental benefits are excepted only if they are provided under a
separate policy, certificate, or contract of
insurance. This category of excepted
benefits includes Medicare supplemental
(commonly called ‘‘Medigap’’ or
‘‘MedSupp’’) policies, CHAMPUS
supplements, and supplements to certain
employer group health plans. Such
supplemental coverage cannot duplicate
primary coverage and must be specifically designed to fill gaps in primary
coverage, coinsurance, or deductibles.14
The regulations do not address section
2721(e) of the PHS Act or section
14

Note that a group health plan, which provides
primary coverage while an individual is an active
employee, is often extended to retirees. When the
retiree becomes eligible for Medicare, the group
health plan commonly coordinates with Medicare
and may serve a supplemental function similar to
that of a Medigap policy. However, such
employer-provided retiree ‘‘wrap around’’ benefits
are not excepted benefits (because they are expressly excluded from the definition of a Medicare
supplement policy in section 1882(g)(1) of the
Social Security Act).

705(d) of ERISA relating to the treatment of partnerships (or the application
of the Code’s group market rules to
partnerships). Comments are requested
on these provisions, including how these
provisions coordinate with other provisions relating to self-employed individuals and partnerships.
F. Other Group Market Provisions 15
Guaranteed Renewability in
Multiemployer Plans and Multiple
Employer Welfare Arrangements Section 703 of ERISA and Section 9803
of the Code
Requirements relating to guaranteed
renewability in multiemployer plans and
multiple employer welfare arrangements
are set forth in section 703 of ERISA
and section 9803 of the Code (but not in
the PHS Act). These provisions state
that a group health plan that is a
multiemployer plan or that is a multiple
employer welfare arrangement may not
deny an employer whose employees are
covered under such a plan continued
access to the same or different coverage
under the terms of such plan, other than
for certain specified reasons. The Departments are not issuing regulations
under section 703 of ERISA or section
9803 of the Code at this time, but
anticipate issuing regulations under
these sections and solicit comments regarding these sections.
In these provisions, the terms ‘‘continued access’’ and ‘‘same or different
coverage’’ are not defined. Comments
are requested on how rules under these
provisions might address variations and
changes in a plan’s benefit packages and
contribution rates, differences in the
characteristics of multiemployer plans
and multiple employer welfare arrangements, and any possible implications for
the financial integrity of affected plans.
Preemption of State Laws; State
flexibility - 29 CFR § 2590.731 and 45
CFR § 146.190
The McCarran-Ferguson Act of 1945
(Pub. L. 79–15) exempts the business of
insurance from federal antitrust regulation to the extent that it is regulated by
the States and indicates that no federal
law should be interpreted as overriding
15
In this section (‘‘Other Group Market Provisions’’), references conform to usage in 45 CFR
Part 146, which uses ‘‘HCFA’’ in place of ‘‘Department of Health and Human Services’’ or
‘‘Secretary of Health and Human Services’’ and
‘‘HCFA regulations’’ in place of ‘‘PHS Act regulations.’’

16

State insurance regulation unless it
does so explicitly. Section 514(a) of
ERISA preempts State laws relating
to employee benefit plans (including
group health plans). However, section
514(b)(2) of ERISA saves from preemption any State law that regulates insurance. Section 2723 of the PHS Act and
section 731 of ERISA make clear that
Part A of Title XXVII of the PHS Act
and Part 7 of Subtitle B of Title I of
ERISA do not in any way affect or
modify section 514 of ERISA.
In addition, section 2723 of the PHS
Act and section 731(a) of ERISA preempt State insurance laws to the extent
such laws ‘‘prevent the application of’’
Part A of Title XXVII of the PHS Act
and Part 7 of Subtitle B of Title I of
ERISA. (There is no corresponding provision in the Code.) In this regard, the
Conference Report states that the conferees intended the narrowest preemption of State laws with regard to health
insurance issuers (not group health
plans) with respect to all the provisions
of Part A of Title XXVII of the PHS
Act and Part 7 of Subtitle B of Title I of
ERISA (except for preemption with respect to the provisions of section 2701
of the PHS Act and section 701 of
ERISA). Consequently, the Conference
Report states that State laws with regard
to health insurance issuers that are
broader than federal requirements in
certain areas would not ‘‘prevent the
application of’’ the provisions of Part A
of Title XXVII of the PHS Act or Part 7
of Subtitle B of Title I of ERISA.
However, the preemption is broader
for the statutory requirements of section
2701 of the PHS Act and 701 of ERISA
that limit the application of preexisting
condition exclusions. State laws cannot
‘‘differ’’ from the preexisting condition
exclusion requirements of section 2701
of the PHS Act or section 701 of
ERISA, except as specifically permitted
under section 2723(b)(2) of the PHS Act
and section 731(b)(2) of ERISA. These
specific exceptions permit a State to
impose on health insurance issuers certain stricter limitations relating to preexisting condition exclusions.
Comments are also solicited on issues
relating to the coordination of the new
requirements under HIPAA and State
requirements for associations that may
be multiple employer welfare arrangements as defined in section 3(40) of
ERISA.

Guaranteed Availability of Coverage for
Small Employers under the PHS Act
Group Market Provisions - 45 CFR
§ 146.150
Rules relating to guaranteed availability of coverage for employers in the
small group market appear only in the
PHS Act (at section 2711). In general,
this section requires health insurance
issuers that offer coverage in the small
group market to offer to any small
employer all of the products they actively market in that market. This is
generally referred to as an all-products
guarantee. However, as allowed under
applicable State law, the issuer can
require that the employer make a minimum contribution toward the premium
charged and have a minimum level of
participation by eligible individuals. The
issuer must also accept for enrollment
every eligible individual without regard
to health status. For purposes of this
section, an eligible individual is one
who meets the applicable requirements
of the group health plan, the issuer, and
State law for coverage under the plan.
Some States have, in recent years,
made reforms in their small group markets that only require guaranteed issue
of a basic and a standard policy, rather
than an all-products guarantee. They
have urged that an all-products guarantee not be adopted, arguing that the law
does not specifically require it. However, sections 2711 and 2741 of the PHS
Act, as added by HIPAA, contain virtually identical requirements requiring issuers that offer health insurance coverage in either the small group or
individual market to make ‘‘such coverage’’ available to, respectively, small
employers or eligible individuals. While
section 2741 explicitly permits issuers to
limit to two policies the offerings they
are required to make in the individual
market, the small group market provisions contain no similar exception. In
fact, section 2713(b)(1)(D) requires that
an issuer that offers health insurance to
any small employer must provide information concerning ‘‘the benefits and
premiums available under all health insurance coverage for which the employer is qualified.’’ (Emphasis added.)
This indicates that Congress intended to
require an all-products guarantee in the
small group market. (However, a State
that implements an ‘‘alternative mechanism’’ in the individual market under
section 2744 of the PHS Act has the
flexibility either to impose an allproducts guarantee or to use a com-

pletely different mechanism for making
insurance available to individuals guaranteed coverage under the statute.)
Various industry groups and persons
responding to the notice that the three
Departments published on December 30,
1996 asked that the term ‘‘offer’’ be
interpreted to mean ‘‘actively marketed,’’ so that issuers would not be
required to reopen closed blocks of
business. The regulations make this
clear.
Section 2711 also requires issuers to
accept for enrollment any individuals
who are eligible to enroll under the
terms of the plan, and who satisfy the
requirements of the issuer and applicable State law, during the period in
which the individual ‘‘first becomes eligible’’ to enroll under the terms of the
group health plan. Thus, the issuer is
not required to accept late enrollees. The
regulations make it clear that this protection extends to individuals if they
‘‘first become eligible’’ to enroll during
a special enrollment period. The special
enrollment provisions of the statute evidence the intent that individuals who
qualify for special enrollment be given
the same protections given to newlyhired employees and their dependents.
An issue has also been raised as to
whether the statutory definitions of premium contribution and group participation rules, which are repeated in the
regulations, relate only to percentages of
employees or premium dollars or to
absolute numbers of employees or premium amounts. If the latter interpretation were permitted, the effect would be
to undermine the all-products guarantee
by allowing, for example, some products
to be available to ‘‘larger’’ small employers, but not to the smallest employers. The regulations currently leave interpretation of this language to the
States, but comments are welcomed on
this issue.
Section 146.150 also includes rules
regarding the circumstances under which
issuers are permitted to deny coverage
to employers. If the product is a network plan, under which services are
furnished by a defined set of providers,
the issuer can deny coverage to an
employer whose eligible individuals do
not live, work, or reside in the network
plan’s service area. It can also deny
coverage if it has demonstrated to the
State that its network does not have the
capacity to deliver services to additional
groups, but is then barred for 180 days
from offering coverage in that service
area. An issuer may also deny coverage

17

if it demonstrates that it lacks sufficient
financial reserves to underwrite additional coverage, but is barred for 180
days from offering coverage in the small
group market in the State. Both of these
exceptions must be applied to all employers uniformly without consideration
of the health status or claims experience
of an employer’s employees or dependents. Neither of these exceptions relieves a network plan of its responsibility to continue servicing its in-force
business under the guaranteed renewability requirements of the regulations.
Finally, § 146.150 provides that if the
coverage is only made available to
members of ‘‘bona fide associations’’ as
that term is defined in the regulations, it
is not subject to the guaranteed availability requirements. (Accordingly, the
coverage does not have to be offered to
non-members.) However, employers that
obtain coverage through a bona fide
association are assured of guaranteed
access to the association’s coverage options as long as they remain members of
the association. This is because a bona
fide association cannot condition membership in the association on health
status-related factors. Moreover, it must
offer coverage to all employers who are
members without regard to health statusrelated factors relating to their employees or dependents. Therefore, an association cannot legally refuse enrollment
to members on a selective basis so long
as they meet the association’s membership criteria.
Guaranteed Renewability of Coverage
for Employers under the PHS Act Group
Market Provisions - 45 CFR § 146.152
Section 146.152 of the Health Care
Financing Administration (HCFA) regulations implements section 2712 of the
PHS Act, which requires issuers to renew or continue in force any coverage
in the large or small group market at the
option of the plan sponsor. The exceptions to this requirement include nonpayment of premiums, fraud, and violation of minimum participation or
contribution rules, as permitted under
applicable State law. Also, the issuer can
cease to offer either a particular product
or all coverage it offers in the particular
market, and can refuse to renew if the
group health plan’s participants all leave
the service area of a network plan, or if
the coverage is provided through a bona
fide association and the employer’s
membership ends.

Issuers that decide to discontinue offering a particular product or all coverage in the small or large group market
are subject to certain requirements outlined in paragraphs (c) and (d) of this
section of the regulations. Issuers discontinuing only a particular product
must give 90 days’ notice, must offer
the plan sponsor the option to purchase
other coverage the issuer offers in that
market, and must discontinue the product uniformly, without regard to claims
experience or health status of participants or dependents under a particular
group health plan. If the issuer terminates all coverage in a market or markets, it must provide 180 days’ notice to
each plan sponsor, and it is prohibited
from issuing coverage in the market(s)
or State involved for five years following the date of discontinuation. Plans or
issuers may modify the health insurance
coverage at the time of coverage renewal, provided the modification is consistent with State law and, for the small
group market, is effective uniformly
among group health plans with coverage
under that product.
Some States have asked whether an
issuer that chooses to stop selling comprehensive products, such as a basic or
standard policy, in a particular State’s
group market, must also cease selling
policies consisting of excepted benefits.
Because Congress permitted these types
of supplemental policies and limited
benefit plans to be excepted from the
requirements of HIPAA in both the
group and individual markets, HCFA
intends to defer to the States’ judgment
on this issue, and solicit comments.
State law may limit the extent to
which an issuer can abandon a product
or market, and under what circumstances. For example, a State may
choose to require an issuer vacating the
market to transfer its business to another
issuer through assumption reinsurance,
or some other means permitted under
State law.
Paragraph (g) of this section of the
regulations provides that, with respect to
group coverage offered only through
associations, the option of guaranteed
renewability extends to include employer members of an association. This
provision means that all employers covered by an issuer through an association
have the right to renew the coverage
they received if the association ceases to
serve its members, regardless of the
reason.

Disclosure of Information by Issuers to
Employers Seeking Coverage in the
Small Group Market - 45 CFR
§ 146.160
Section 146.160 of the HCFA regulations implements section 2713 of the
PHS Act by setting forth rules relating
to disclosure of information by issuers
to employers seeking coverage in the
small group market. In its solicitation
and sales materials, the issuer must
make a reasonable disclosure that the
specified information is available on
request. The information that must be
provided includes the issuer’s right to
change premium rates and the factors
that may affect changes in premium
rates, renewability of coverage, any preexisting condition exclusion (including
use of the alternative method of counting creditable coverage), any affiliation
periods applied by HMOs, the geographic areas served by HMOs, and the
benefits and premiums available under
all health insurance coverage for which
the employer is qualified under minimum contribution and participation
rules, as permitted by State law. The
issuer is exempted from disclosing proprietary or trade secret information under applicable law.
‘‘Factors that may affect changes in
premium rates’’ and ‘‘proprietary and
trade secret information under applicable
law’’ have not been defined. Comments
are requested regarding whether they
should be defined.
The information described in this section must be provided in language that
is understandable by the average small
employer and sufficient to reasonably
inform small employers of their rights
and obligations under the health insurance coverage. This requirement can be
satisfied by using as a model the outlines of coverage provided under Medicare Supplement insurance. (These outlines are required to provide easy
comparison of the coverage and cost of
all available products.) Reasonable information includes rating schedules for
each product to which more than one
rate applies, and, with respect to network plans, maps of service areas or
lists of counties served.
Exclusion of Certain Plans from the
PHS Act Group Market Requirements 45 CFR § 146.180
Section 146.180 of the HCFA regulations implements section 2721 of the
PHS Act, which permits certain
nonfederal governmental plans to elect

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to be exempted from some or all of the
group market requirements of the HCFA
regulations, although they are subject to
the certification and disclosure requirements of § 146.115. With respect to
nonfederal governmental plans that are
collectively bargained, this section does
not preempt State and local collective
bargaining laws. The regulation establishes the form and manner of the
election, and requires a nonfederal governmental plan making this election to
notify plan participants, at the time of
enrollment and on an annual basis, that
it has made the election and what effect
the election has. The participant notice
and certification and disclosure obligations are integral parts of the election.
Failure to comply with these obligations
invalidates an election and subjects the
nonfederal governmental plan to the
requirements the election would have
permitted the plan to avoid.
Only nonfederal governmental plans
that are self-funded (in whole or in part)
can make the election, and the election
only applies to the self-funded portion.
A health insurance issuer that sells insurance coverage to a nonfederal plan
must comply with all the group market
requirements.
Enforcement of PHS Act Requirements 45 CFR § 146.184
Part 146 imposes requirements on
health insurance issuers that offer coverage in the group market in a State, and
on nonfederal governmental (i..e., State
and local) group health plans. With
respect to issuers, the statute makes it
clear that it is solely within the discretion of the States, in the first instance,
whether to take on the responsibility for
enforcing those requirements or whether
to leave enforcement to the federal
government. HCFA anticipates that the
States will choose to enforce the requirements. However, the statute also
makes clear that if a State does not
substantially enforce the requirements,
HCFA must enforce them. The statute
also requires HCFA to enforce the requirements applicable to nonfederal governmental plans.
Section 146.184(b)(2) sets forth the
procedures that HCFA will follow if a
question is raised about the State’s enforcement with respect to issuers. Under
the procedures, State are given every
opportunity to demonstrate why federal
enforcement is not required. The regulations also make it clear that the procedures will not be triggered unless HCFA

is satisfied that there has first been a
reasonable effort to exhaust any State
remedies. However, if, after giving the
State a reasonable opportunity to enforce, HCFA makes a final determination
that a State is not substantially enforcing
these requirements, HCFA will enforce
the requirements using the civil money
penalties provided for under the statute.
Paragraph (d) describes the process
for imposing civil money penalties
against issuers or nonfederal plans that
fail to comply with the group market
requirements in the PHS Act. If HCFA
receives a complaint or other information that indicates that a right guaranteed by the group market rules is being
denied, HCFA will first determine which
entity is potentially responsible for any
penalty. If the failure is by an issuer, the
issuer will be responsible. If a
nonfederal governmental plan is sponsored by a single employer, the employer will be liable, but if the plan is
sponsored by two or more employers,
the plan will be liable. If, after giving
the entity or entities an opportunity to
respond, HCFA assesses a penalty, the
regulation provides appeal rights. The
penalty can consist of up to $100 for
each day, for each individual whose
rights are violated.

Effective Dates - 26 CFR § 54.9806–1,
29 CFR § 2590.736, 45 CFR § 146.125
The group market provisions are generally effective for plan years beginning
after June 30, 1997.16 In many cases, no
preexisting condition exclusion may be
imposed with respect to an individual on
the effective date because any permitted
preexisting condition exclusion period is
measured from the individual’s enrollment date in the plan (even if the
enrollment date is before the statutory
effective date). An individual who has
not completed the maximum permitted
exclusion period under HIPAA before the
effective date for his or her plan may use
creditable coverage to reduce the remaining preexisting condition exclusion period. The regulations contain examples
illustrating the effect of these rules.
The requirement that a plan or issuer
provide certificates to show creditable
16

In these case of a group health plan maintained
pursuant to one or more collective bargaining
agreements between employee representatives and
one or more employers ratified before August 21,
1996, the group market provisions (other than the
requirements to provide certifications) do not
apply to plan years beginning before the later of
July 1, 1997 or the date on which the last of the
collective bargaining agreements relating to the
plan terminates (determined without regard to any
extension agreed to after August 21, 1996).

coverage applies to events occurring on
or after July 1, 1996, except that in no
case is a certificate required to be
provided before June 1, 1997 or to
reflect coverage before July 1, 1996.
For events occurring on or after July
1, 1996 but before October 1, 1996, a
certificate is required to be provided
only upon a written request by or on
behalf of the individual to whom the
certificate applies. For events occurring
on or after October 1, 1996 and before
June 1, 1997, a certificate must be
furnished no later than June 1, 1997 (or,
if later, any date that would otherwise
apply under the standard rules).
The regulations include an optional
transition rule for events before June 1,
1997. (The transition rule applies to
automatic certificate events; it does not
apply where a certificate is requested.) A
group health plan or health insurance
issuer offering group health coverage is
deemed to satisfy the automatic certificate requirements if a special notice is
provided no later than June 1, 1997. The
notice must be in writing and must
include information substantially similar
to the information included in a model
notice authorized by the Secretaries. For
this purpose, the following model notice
is authorized:

IMPORTANT NOTICE OF YOUR RIGHT TO DOCUMENTATION OF HEALTH COVERAGE
Recent changes in Federal law may affect your health coverage if you are enrolled or become eligible to enroll in health coverage that excludes coverage
for preexisting medical conditions.
The Health Insurance Portability and Accountability Act of 1996 (HIPAA) limits the circumstances under which coverage may be excluded for medical
conditions present before you enroll. Under the law, a preexisting condition exclusion generally may not be imposed for more than 12 months (18 months
for a late enrollee). The 12-month (or 18-month) exclusion period is reduced by your prior health coverage. You are entitled to a certificate that will show
evidence of your prior health coverage. If you buy health insurance other than through an employer group health plan, a certificate of prior coverage may
help you obtain coverage without a preexisting condition exclusion. Contact your State insurance department for further information.
For employer group health plans, these changes generally take effect at the beginning of the first plan year starting after June 30, 1997. For example, if
your employer’s plan year begins on January 1, 1998, the plan is not required to give you credit for your prior coverage until January 1, 1998.
You have the right to receive a certificate of prior health coverage since July 1, 1996. You may need to provide other documentation for earlier periods of
health care coverage. Check with your new plan administrator to see if your new plan excludes coverage for preexisting conditions and if you need to
provide a certificate or other documentation of your previous coverage.
To get a certificate, complete the attached form and return it to:
[Insert Name of Entity]:
[Insert Address]:
For additional information contact [Insert Telephone Number]:
The certificate must be provided to you promptly. Keep a copy of this completed form. You may also request certificates for any of your dependents
(including your spouse) who were enrolled under your health coverage.
**************************************************************************************************
REQUEST FOR CERTIFICATE OF HEALTH COVERAGE
Date:
Name of Participant:
Address:
Telephone Number:
Name and relationship of any dependents for whom certificates are requested (and their address if different from above):

19

The provisions in the regulations relating to method of delivery and entities
required to provide a certificate apply
with respect to the provision of the
notice. If an individual requests a certificate following receipt of the notice, the
certificate must be provided at the time
of the request as set forth in the regulations relating to certificates provided
upon request.
HIPAA provides that no enforcement
action is to be taken against a group
health plan or health insurance issuer
with respect to a violation of the group
market rules before January 1, 1998 if
the plan or issuer has sought to comply
in good faith with such requirements.
Compliance with the regulations is
deemed to be good faith compliance
with the group market rules.
G. Interim Rules and Request for
Comments
Section 707 of ERISA (redesignated
as section 734 by section 603(a)(3) of
the NMHPA), Section 2707 of the PHS
Act, and Section 9806 of the Code
added by HIPAA, provide, in part, that
the Secretaries of Labor, Treasury and
HHS may promulgate any interim final
rules as they determine are appropriate
to carry out the portability provisions of
HIPAA.
Under Section 553(b) of the Administrative Procedure Act (5 U.S.C. 551 et
seq.) a general notice of proposed
rulemaking is not required when the
agency, for good cause, finds that notice
and public comment thereon are impracticable, unnecessary or contrary to the
public interest.
These rules are being adopted on an
interim basis because the Secretaries
have determined that without prompt
guidance, some members of the regulated community will have difficulty
complying with the HIPAA’s certification requirements, and will be in violation of the statute. Congress expressly
intended that the certification and prior
creditable coverage provisions serve as
the mechanism for increasing the portability of health coverage for plan participants and their beneficiaries. Without
the Departments’ guidance, plans would
likely be unable to produce the necessary amendments to plan documents
reflecting HIPAA’s new requirements, as
well as the appropriate certifications of
prior coverage that would help participants and beneficiaries reduce any applicable preexisting condition exclusion periods imposed by a new health plan.

Thus, without the Departments’ prompt
guidance, participants and beneficiaries
will not have the benefit of a convenient
certificate of prior coverage to present
upon changing health coverage, and will
likely have greater difficulty proving
that they are entitled to health coverage
immediately, or soon after joining a new
health plan.
Moreover, HIPAA’s portability requirements will affect the regulated
community in the immediate future.
HIPAA’s certification requirements are
effective for all group health plans on
June 1, 1997. HIPAA’s underlying requirements concerning establishing periods of prior creditable coverage, preexisting condition exclusion provisions,
and the special enrollment requirements,
are generally applicable for group health
plans for plan years beginning on or
after July 1, 1997. Plan administrators
and sponsors, and participants and beneficiaries will need guidance on how to
comply with the new statutory provisions before these effective dates. These
rules have been written in order to
ensure that plan sponsors and administrators of group health plans, as well as
participants and beneficiaries, are provided timely guidance concerning compliance with these recently enacted
amendments to ERISA, the PHS Act
and the Code. These rules provide guidance on these statutory changes, and are
being adopted on an interim basis because the Departments find that issuance
of such regulations in interim final form
with a request for comments is appropriate to carry out the new regulatory
structure imposed by HIPAA on group
health plans and health insurance issuers. In addition, these rules are necessary to ensure that plan sponsors and
administrators of group health plans, as
well as participants and beneficiaries,
are provided timely guidance concerning
compliance with new and important disclosure obligations imposed by HIPAA.
Sections 101(g)(4), 102(c)(4), AND
401(c)(4) of HIPAA also mandate that
the Secretaries issue regulations necessary to carry out the portability amendments by April 1, 1997. Issuance of a
notice of proposed rule making with
public comment thereon prior to issuing
a final rule could delay significantly the
issuance of essential guidance and prevent the Departments from complying
with their statutory rule making deadline. Furthermore, these rules are being
adopted on an interim basis and the
Departments are inviting interested persons to submit written comments on the

20

rules for consideration in the development of the final rules relating to
HIPAA. Such final rules may be issued
in advance of January 1, 1998, after
affording the public an opportunity to
review and comment.
For the foregoing reasons, the Departments find that the publication of a
proposed regulation, for the purpose of
notice and public comment thereon,
would be impracticable, unnecessary,
and contrary to the public interest.
H. Regulatory Flexibility Act
The Regulatory Flexibility Act (5
U.S.C. 601 et seq.) (RFA) imposes
certain requirements with respect to
rules which would have significant economic impact on a substantial number
of small entities. Section 603 of the
RFA requires an agency publishing a
general notice of proposed rulemaking
(NPRM) under section 553 of the APA
to present at the time of the publication
of its NPRM an initial regulatory flexibility analysis, describing the impact of
the rule on small entities, and seeking
public comment on such impact.
Small entities include small businesses, non-profit organizations, and
governmental agencies. A ‘‘rule’’ under
the Regulatory Flexibility Act is one for
which a general notice of proposed
rulemaking is required under section
553(b) of the APA.
Since these rules are issued as interim
rules, and not as a general notice of
proposed rulemaking, for the reasons
stated above, an Initial Regulatory Flexibility analysis has not been prepared.
While these rules are being promulgated as interim final rules, the Departments nevertheless invite interested persons to submit comments for
consideration in the development of the
final rules regulating to HIPAA. Consistent with the policy of the Regulatory
Flexibility Act, the public is encouraged
to submit comments that suggest alternative rules that accomplish the stated
purpose of the statute and minimize the
impact on small entities. Specifically,
the public is encouraged to address:
• What information relating to prior
coverage, preexisting condition exclusions, health status, waiting periods and
similar issues do employers, plans and
issuers currently rely on in maintaining
health care coverage systems?
• What are the estimated costs of
complying with the statute’s requirements on certification of periods of prior
creditable coverage?

• How many small issuers offer products that may be subject to the regulations? Is there an anticipated effect on
these small companies’ competitiveness
due to the regulations?
• To what extent do group health
plans currently use service providers to
fulfill the administrative obligations, including reporting and disclosure, previously imposed by ERISA? To what
extent would group health plans also use
service providers to comply with this
regulation’s certification requirements?
I. Executive Order 12866, the Unfunded
Mandates Reform Act and the Small
Business Regulatory Enforcement
Fairness Act of 1995
These rules have been determined to
be a significant regulatory action under
Section 3(f) of Executive Order 12866.
The following analysis is consistent with
Section 6(a)(3)(C) of the Order.
These rules are not subject to the
Unfund

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3Ae3187d6e02dd6bcc. Public record. Not legal advice.