[Federal Register Volume 69, Number 250 (Thursday, December 30, 2004)]
[Rules and Regulations]
[Pages 78720-78799]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-28112]



[[Page 78719]]

  
  
  
  
  
  
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Part III





Department of the Treasury





Internal Revenue Service



26 CFR Parts 54 and 602





Department of Labor





Employee Benefits Security Administration

29 CFR Part 2590





Department of Health and Human Services





Centers for Medicare & Medicaid Services

45 CFR Parts 144 and 146



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Final Regulations for Health Coverage Portability; Final Rule



Notice of Proposed Rulemaking for Health Coverage Portability and 
Request for Information on Benefit-Specific Waiting Periods Under HIPAA 
Titles I & IV; Proposed Rules

Federal Register / Vol. 69, No. 250 / Thursday, December 30, 2004 / 
Rules and Regulations

[[Page 78720]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 54 and 602

[TD 9166]
RIN 1545-AX84

DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2590

RIN 1210-AA54

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

45 CFR Parts 144 and 146

RIN 0938-AL43


Final Regulations for Health Coverage Portability for Group 
Health Plans and Group Health Insurance Issuers Under HIPAA Titles I & 
IV

AGENCIES: Internal Revenue Service, Department of the Treasury; 
Employee Benefits Security Administration, Department of Labor; Centers 
for Medicare & Medicaid Services, Department of Health and Human 
Services.

ACTION: Final regulation.

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SUMMARY: This document contains final regulations governing portability 
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 the Internal 
Revenue Code, the Employee Retirement Income Security Act, and the 
Public Health Service Act enacted as part of the Health Insurance 
Portability and Accountability Act of 1996.

DATES: Effective date. These final regulations are effective February 
28, 2005.
    Applicability date. These final regulations apply for plan years 
beginning on or after July 1, 2005.

FOR FURTHER INFORMATION CONTACT: Dave Mlawsky, Centers for Medicare & 
Medicaid Services (CMS), Department of Health and Human Services, at 1-
877-267-2323 ext. 61565; Amy Turner, Employee Benefits Security 
Administration, Department of Labor, at (202) 693-8335; or Russ 
Weinheimer, Internal Revenue Service, Department of the Treasury, at 
(202) 622-6080.

SUPPLEMENTARY INFORMATION:

Customer Service Information

    To assist consumers and the regulated community, the Departments 
have issued questions and answers concerning HIPAA. Individuals 
interested in obtaining copies of Department of Labor publications 
concerning changes in health care law may call a toll free number, 1-
866-444-EBSA (3272), or access the publications on-line at www.dol.gov/ebsa, the Department of Labor's Web site. These regulations as well as 
other information on the new health care laws are also available on the 
Department of Labor's interactive web pages, Health Elaws. In addition, 
CMS's publication entitled ``Protecting Your Health Insurance 
Coverage'' is available by calling 1-800-633-4227 or on the Department 
of Health and Human Services' Web site (www.cms.hhs.gov/hipaa1), which 
includes the interactive webpages, HIPAA Online. Copies of the HIPAA 
regulations, as well as notices and press releases related to HIPAA and 
other health care laws, are also available at the above-referenced Web 
sites.

A. Background

    The Health Insurance Portability and Accountability Act of 1996 
(HIPAA), Public Law 104-191, was enacted on August 21, 1996. HIPAA 
amended the Internal Revenue Code of 1986 (Code), the Employee 
Retirement Income Security Act of 1974 (ERISA), and the Public Health 
Service Act (PHS Act) to provide for, among other things, improved 
portability and continuity of health coverage. Interim final 
regulations implementing the HIPAA provisions were first made available 
to the public on April 1, 1997 (published in the Federal Register on 
April 8, 1997, 62 FR 16894) (April 1997 interim rules). On December 29, 
1997, the Departments published in the Federal Register (62 FR 67688) a 
clarification of the April 1997 interim rules as they relate to 
excepted benefits. On October 25, 1999, the Departments published a 
notice in the Federal Register (64 FR 57520) soliciting additional 
comments on the portability requirements based on the experience of 
plans and issuers operating under the April 1997 interim rules.
    After consideration of all the comments received on the portability 
provisions, the Departments are publishing these final regulations. 
These final regulations do not significantly modify the framework 
established in the April 1997 interim rules. Instead, these final 
regulations implement changes to improve the portability of health 
coverage while seeking to minimize burdens on group health plans and 
group health insurance issuers. These final regulations become 
applicable to plans and issuers on the first day of the plan year 
beginning on or after July 1, 2005. Each plan or issuer must continue 
to comply with the April 1997 interim rules until these final 
regulations become applicable to that plan or issuer. In addition, the 
Departments are publishing proposed regulations elsewhere in this issue 
of the Federal Register to address additional and discrete issues.

B. Overview of the Final Regulations

1. Definitions--26 CFR 54.9801-2, 29 CFR 2590-701-2, 45 CFR 144.103

    This section of the final regulations provides most of the 
definitions used in the regulations implementing HIPAA. In addition to 
some minor restructuring of the April 1997 interim rules (i.e., some 
definitions have been moved into other sections of the regulations), 
some additional terms have been added. Among the new terms is the 
definition of the term dependent. Dependent is defined as any 
individual who is or may become eligible for coverage under the terms 
of a group health plan because of a relationship to a participant. This 
is intended to clarify that for purposes of HIPAA the terms of the 
group health plan determine which individuals are eligible for coverage 
as a dependent under the plan. Thus, for example, the plan terms 
control the age (if any) at which and conditions under which a child of 
a participant ceases to be eligible for coverage as a dependent. 
Moreover, whether an individual is eligible for special enrollment as a 
dependent is determined in part based on the plan's definition of 
dependent.

2. Limitations on Preexisting Condition Exclusions--26 CFR 54.9801-3, 
29 CFR 2590.701-3, 45 CFR 146.111

    This section of the final regulations addresses HIPAA's limitations 
on a plan's or issuer's ability to impose a preexisting condition 
exclusion. Comments addressing this topic generally approved of the 
approach taken in the Departments' April 1997 interim rules. 
Accordingly, these final regulations do not modify significantly the 
April 1997 interim rules but instead add several clarifications to the 
general framework already established. Also, some comments reflect a 
misunderstanding of the notice requirements for plans and issuers that 
impose a preexisting condition exclusion. Thus, these final regulations 
are restructured to clarify these notice

[[Page 78721]]

obligations. In addition, an example in the regulations contains 
language that plans and issuers can use to satisfy the notice 
requirements.
Definition of a Preexisting Condition Exclusion
    In these final regulations, a preexisting condition exclusion 
continues to be defined broadly. A preexisting condition exclusion is 
any limitation or exclusion of benefits relating to a condition based 
on the fact that the condition was present before the effective date of 
coverage, whether or not any medical advice, diagnosis, care, or 
treatment was recommended or received before that day. This definition 
has been moved to this section on limitations on preexisting condition 
exclusions to emphasize the difference between the broadness of the 
definition and the narrowness of permissible preexisting condition 
exclusions. The definition has also been modified slightly from the 
previous definition and clarifications of its application have been 
added.
    If a plan exclusion satisfies the definition of a preexisting 
condition exclusion, it is subject to the rules of this section for 
preexisting condition exclusions. Under the April 1997 interim rules, 
whether an exclusion is a preexisting condition exclusion is determined 
by whether the plan provision restricts benefits for a condition 
because it was present before the ``first day of coverage.'' These 
final regulations have replaced the term first day of coverage with 
effective date of coverage under a group health plan or health 
insurance coverage. In the case of a plan that changes health insurance 
issuers, ``first day of coverage'' can be read to mean only the first 
day of coverage under the plan and not the first day of coverage under 
the new issuer's policy or contract (because ``first day of coverage'' 
is thus defined for purposes of determining the enrollment date). This 
reading would mean that an exclusion of benefits based on the fact that 
a condition existed before the effective date of coverage in the health 
insurance of the succeeding issuer would not be a preexisting condition 
(because it would not apply based on the fact that a condition existed 
before the first day of coverage under the plan). The phrase 
``effective date of coverage under a group health plan or health 
insurance coverage'' under the final regulations thus applies to 
coverage either under a plan or health insurance coverage. Therefore, a 
provision used by a succeeding issuer to deny benefits for a condition 
because it arose before the effective date of coverage under the new 
policy would also fit the definition of a preexisting condition 
exclusion.
    Since the April 1997 interim rules were published, several 
situations have repeatedly arisen in which a plan exclusion is not 
designated as a preexisting condition exclusion but nevertheless 
satisfies the definition of a preexisting condition exclusion. Examples 
have been added to illustrate some of these common plan provisions. 
These situations include a plan provision that provides coverage for 
accidental injury only if the injury occurred while covered under the 
plan, a plan provision that counts against a lifetime limit benefits 
received under prior health coverage, and a plan provision that denies 
benefits for pregnancy until 12 months after an individual generally 
becomes eligible for benefits under the plan.\1\ The regulations also 
include a series of examples relating to exclusions for congenital 
conditions. These examples illustrate that a plan that generally 
provides benefits for a condition cannot exclude benefits for the 
condition in instances where it arises congenitally without complying 
with these limitations on preexisting condition exclusions. However, 
these limitations would not apply if a plan excludes benefits for all 
instances of a condition, even if all instances are likely to be 
congenital. Plans and policies that contain these types of preexisting 
condition exclusions that are not designated as such should be modified 
to comply with HIPAA's requirements for preexisting condition 
exclusions, or the exclusions should be deleted. In addition, because a 
preexisting condition exclusion discriminates against individuals based 
on one or more health factors, unless a preexisting condition exclusion 
complies with HIPAA's limitations on preexisting condition exclusions, 
the plan provision will also violate the HIPAA nondiscrimination 
provisions.\2\
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    \1\ Several comments (including those of several State insurance 
commissioner's offices) have asked the Departments to clarify that a 
preexisting condition exclusion would also include any waiting 
period or other temporary benefit exclusion (other than a waiting 
period on all benefits). The Departments are publishing separately 
in this issue of the Federal Register a Request for Information, 
which invites further comments on this issue of benefit-specific 
waiting periods.
    \2\ See 26 CFR 54.9802-1T(b)(3), 29 CFR 2590.702(b)(3), and 45 
CFR 146.121(b)(3), published on January 8, 2001 at 66 FR 1378.
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General Rules Governing Preexisting Condition Exclusions
    In addition to modifying the definition of a preexisting condition 
exclusion, these final regulations set forth HIPAA's limitations on 
preexisting condition exclusions, as follows:
Six-Month Look-Back Rule
    The final regulations retain the 6-month look-back rule set forth 
in the April 1997 interim rules. In addition, these regulations clarify 
that a plan or issuer can use a period shorter than 6 months for 
purposes of applying the 6-month look-back rule. Examples in these 
final regulations also clarify that if a doctor's recommendation for 
treatment occurs before the 6-month look-back period, an individual can 
be subject to a preexisting condition exclusion only if the individual 
receives the recommended treatment within the 6-month look-back period.
Maximum Length of Preexisting Condition Exclusion
    The final regulations retain the rule set forth in the April 1997 
interim rules that a preexisting condition exclusion is not permitted 
to extend for more than 12 months (18 months in the case of a late 
enrollee) after the enrollment date.
Reducing a Preexisting Condition Exclusion Period by Creditable 
Coverage
    The final regulations retain the rule set forth in the April 1997 
interim rules. Accordingly, under these final regulations, the period 
of any preexisting condition exclusion that would otherwise apply to an 
individual under a group health plan is reduced by the number of days 
of creditable coverage \3\ the individual has as of the enrollment date 
(not including any days before a significant break in coverage). Some 
comments asked how this rule applies to individuals who currently have 
coverage under another plan (that is, the coverage has not yet ended). 
An example clarifies that a plan or issuer must count all days of 
creditable coverage prior to an individual's enrollment date, even if 
that coverage is still in effect.
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    \3\ For purposes of these regulations, the phrase ``days of 
creditable coverage'' has the same meaning as the phrase ``aggregate 
of the periods of creditable coverage'' as such phrase is used in 
the statute.
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Other Standards
    The final regulations retain the statement that other legal 
standards may apply to group health coverage preexisting condition 
exclusions. In this connection, the Department of Labor's Veterans' 
Employment and Training Service (VETS) has commented that the Uniformed 
Services Employment and Reemployment Rights Act (USERRA) provides 
reemployment rights for persons who leave civilian employment to 
perform service in the uniformed

[[Page 78722]]

services and prohibits employer discrimination against any person on 
the basis of the person's military service, obligations, intent to join 
or certain other protected activities. In general, USERRA reemployment 
rights apply to persons who leave civilian employment to serve a single 
enlistment period in the active military or to employees who are 
members of the National Guard or Reserve and are required to perform 
intermittent military service or training. USERRA provides rights 
regarding both continuation of group health plan coverage by an 
employee who is absent to perform service in the uniformed services and 
reinstatement of group health plan coverage upon reemployment if the 
coverage was interrupted by the service. In response to this comment, 
the final regulations include a statement that USERRA can affect the 
application of a preexisting condition exclusion to certain individuals 
who are reinstated in a group health plan following active military 
service. For more information, a VETS directory and additional USERRA 
information is available at www.dol.gov/vets.
Enrollment Definitions
    Both the 6-month look-back period and the maximum length of 
preexisting condition exclusion are measured with respect to an 
individual's enrollment date. The final regulations generally retain 
the enrollment definitions that were set forth in the April 1997 
interim rules (including definitions of enrollment date, waiting 
period, and late enrollee). Under HIPAA, the April 1997 interim rules, 
and these final regulations, the enrollment date is the first day of 
coverage under the plan or, if there is a waiting period, the first day 
of the waiting period. These final regulations clarify that if an 
individual receiving benefits under a group health plan changes benefit 
package options, or if the plan changes group health insurance issuers, 
the individual's enrollment date remains the same.
    The Departments received several comments reflecting confusion 
about the relationship between the preexisting condition exclusion 
rules and the definitions of enrollment date and waiting period. 
Accordingly, guidance concerning waiting periods previously located in 
the definitions section has been moved to this section of the 
regulations and expanded. In addition, the definition of waiting period 
has been modified with respect to individuals seeking individual market 
coverage. Specifically, these final rules clarify that if an individual 
seeks coverage in the individual market, a waiting period begins on the 
date the individual submits a substantially complete application for 
coverage and ends on either the date coverage begins (if the 
application results in coverage), or the date on which the application 
is denied by the issuer or the date on which the offer of coverage 
lapses (if the application does not result in coverage). Under the 
statute, the April 1997 interim rules, and these final regulations, the 
effect of considering this period a waiting period is that the period 
is not counted when determining the length of any break in coverage. 
This rule modifies the rule contained in the April 1997 interim rules 
(which provided a waiting period only if the individual actually 
obtained coverage). The modification addresses situations where some 
individuals have been denied individual market policies or individuals 
declined coverage because, for example, the policies had an exorbitant 
premium.
    Additional examples illustrate the interaction between a waiting 
period and the 6-month look-back period, the application of the 6-month 
look-back and maximum preexisting condition exclusion period rules to 
plans with more than one benefit package option at open season, and the 
interaction between these rules and other eligibility criteria under 
the plan.
Individuals and Conditions That Cannot Be Subject to a Preexisting 
Condition Exclusion
    Under HIPAA, the April 1997 interim rules, and these final rules, a 
preexisting condition exclusion cannot be applied to pregnancy. Nor can 
a preexisting condition exclusion be applied to a newborn, adopted 
child, or child placed for adoption if the child is covered under a 
group health plan (or other creditable coverage) within 30 days after 
birth, adoption, or placement for adoption.
    One comment noted that the rule for newborns in the April 1997 
interim rules is expressed inconsistently. Some of those expressions 
are inconsistent with the rule for adopted children. Specifically, the 
rule for adopted children and one expression of the rule for newborns 
refers to eligibility being conditioned on being covered under any 
creditable coverage as of the last day of the 30-day period after 
birth, adoption, or placement for adoption. However, in other 
expressions of the rule for newborns, a reference is made to being 
covered under creditable coverage within 30 days after birth. These 
final regulations use one term consistently, referring to coverage 
within 30 days after birth, adoption, or placement for adoption. This 
accords with the conference report. H.R. Conf. Rep. No. 736, 104th 
Cong. 2d Session 184-185 (1996). Consequently, if, for example, a child 
is covered within 30 days of birth, the child cannot be subject to a 
preexisting condition exclusion even if the child is no longer covered 
under the plan on the 30th day after birth (unless the child has a 
significant break in coverage).
    Several comments noted that State laws applicable to health 
insurance issuers sometimes require that a mother's health coverage 
must provide benefits for health care expenses incurred for the child 
for a specified period following birth and cannot be recouped even if 
the child never enrolls in the plan under which the mother is covered. 
A new example clarifies that, in this situation, the child has 
creditable coverage within 30 days after birth and, therefore, no 
preexisting condition exclusion may be imposed on the child unless the 
child has a subsequent significant break in coverage.
    Finally, HIPAA, the April 1997 interim rules, and these final 
regulations provide that a group health plan, and a health insurance 
issuer offering group health insurance coverage, may not impose a 
preexisting condition exclusion relating to a condition based solely on 
genetic information. Comments expressed concern that the definition of 
genetic information in the April 1997 interim rules was too broad and 
would prevent the application of a preexisting condition exclusion to 
conditions that would be otherwise permitted independent of any genetic 
information. Although these regulations have not changed the definition 
of genetic information, the regulations clarify that if an individual 
is diagnosed with a condition, even if the condition relates to genetic 
information, the plan may impose a preexisting condition exclusion with 
respect to the condition, subject to the other limitations of this 
section. This rule was located in the definition of medical condition 
in the April 1997 interim rules. Some comments indicated this rule was 
difficult to locate. Thus, it has been moved to this section, and an 
example illustrating the rule has been added.
First Notice of Preexisting Condition Exclusion--General Notice
    Under these final regulations, as with the April 1997 interim 
rules, a group health plan imposing a preexisting condition exclusion, 
and a health insurance issuer offering group health insurance coverage 
under a plan imposing a preexisting condition

[[Page 78723]]

exclusion, must provide a written general notice of preexisting 
condition exclusion before it can impose a preexisting condition 
exclusion.
    After publication of the April 1997 interim rules, the Departments 
received questions about the operation of this requirement. The April 
1997 interim rules provided that a plan or issuer could not impose a 
preexisting condition exclusion with respect to a participant or 
dependent before providing the general notice to the participant. 
Several comments asked whether plans and issuers could delay providing 
the general notice until a large claim was filed and then pend the 
claim until the general notice was sent. Other comments expressed 
concern that if plans do not notify individuals upon enrollment about 
the benefit exclusions that apply to their coverage, individuals will 
not be able to make informed decisions about their health care choices.
    The Departments had contemplated under the April 1997 interim rules 
that individuals should be provided the information required in the 
general notice before they incurred claims that could be denied under a 
preexisting condition exclusion. These final regulations clarify the 
procedural requirements for the general notice of preexisting condition 
exclusion. Specifically, under the final regulations, the general 
notice of preexisting condition exclusion must be provided as part of 
any written application materials distributed by the plan or issuer for 
enrollment. If the plan or issuer does not distribute such materials, 
the notice must be provided by the earliest date following a request 
for enrollment that the plan or issuer, acting in a reasonable and 
prompt fashion, can provide the notice. Moreover, regarding the content 
of this general notice, the final regulations clarify precisely what is 
required when disclosing the existence and terms of the plan's 
preexisting condition exclusion. In addition, these final regulations 
require the notice to include the person to contact (including an 
address or telephone number) for obtaining additional information or 
assistance regarding the preexisting condition exclusion. An example in 
these final regulations sets forth sample language that plans and 
issuers can use when developing the general notice for their coverages.
    Issuers that sell different policies to different plans should also 
be aware that when describing the existence and terms of the maximum 
preexisting condition exclusion period, the issuer must describe to 
individuals the actual maximum exclusion period under their policy. 
Therefore, if an issuer sells two policies, one with a 6-month and one 
with a 12-month maximum preexisting condition exclusion, the issuer 
could not send one notice to individuals under both policies indicating 
that the maximum preexisting condition exclusion is 12 months. Instead, 
the issuer is required to send one notice to participants under the 
policy with the 6-month preexisting condition exclusion (indicating 
that the maximum exclusion period is 6 months) and a different notice 
to participants under the policy with the 12-month preexisting 
condition exclusion (indicating that the maximum exclusion period is 12 
months).
Determination of Creditable Coverage
    These final regulations require a plan or issuer that imposes a 
preexisting condition exclusion to make a determination of creditable 
coverage within a reasonable time after receiving information regarding 
prior health coverage. This rule was included in the section of the 
April 1997 interim rules addressing certification and disclosure of 
previous coverage, and it has been moved to this section on preexisting 
condition exclusions unchanged. These final regulations clarify that a 
plan or issuer may not impose any limit on the amount of time that an 
individual has to present a certificate or other evidence of creditable 
coverage.\4\
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    \4\ Of course, after a claim has been denied under a preexisting 
condition exclusion, other laws, such as section 503 of ERISA, may 
set forth timing rules for an individual to appeal a denied claim.
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Second Notice of Preexisting Condition Exclusion--Individual Notice
    These final regulations retain the requirement to provide an 
individual a written notice of the length of preexisting condition 
exclusion that remains after offsetting for prior creditable coverage. 
These final regulations clarify that this individual notice is not 
required to identify any medical conditions specific to the individual 
that could be subject to the exclusion. Also, a plan or issuer is not 
required to provide this notice if the plan or issuer does not impose 
any preexisting condition exclusion on the individual or if the plan's 
preexisting condition exclusion is completely offset by the 
individual's prior creditable coverage. These final regulations add a 
new example that illustrates how the notice works and includes sample 
language that may be helpful to plans and issuers in developing this 
type of notice with respect to their coverage.
Reconsideration
    Consistent with the April 1997 interim rules, these final 
regulations do not prevent a plan or issuer from modifying an initial 
determination of creditable coverage if it determines that the 
individual did not have the claimed creditable coverage and if certain 
procedural requirements are met. The final regulations have been 
slightly reorganized and modified to make clearer that a plan or issuer 
is permitted to modify its initial determination if a notice of the new 
determination (that meets the requirements of the second, individual 
notice of preexisting condition exclusion, described above) is provided 
and, until the notice of the new determination is provided, the plan or 
issuer acts in a manner consistent with the initial determination for 
purposes of approving access to medical services (such as pre-surgery 
authorization).

3. Rules Relating to Creditable Coverage--26 CFR 54.9801-4, 29 CFR 
2590.701-4, 45 CFR 146.113

    This section of the final regulations describes the varieties of 
health coverage that constitute creditable coverage and sets forth 
rules for how to count creditable coverage for purposes of the rule 
requiring plans and issuers to offset the maximum length of a 
preexisting condition exclusion by prior creditable coverage.
Creditable Coverage
    The rules in the final regulations describing the varieties of 
health coverage that constitute creditable coverage generally follow 
the April 1997 interim rules, with two modifications. The April 1997 
interim rules contain ten categories of creditable coverage. After 
publication of the April 1997 interim rules, Congress created the State 
Children's Health Insurance Program (S-CHIP), which allows states to 
provide health coverage to eligible children through Medicaid expansion 
or private market mechanisms. This coverage meets the definition of 
creditable coverage as either Medicaid coverage, group health plan 
coverage, or health insurance coverage. In addition, Congress 
specifically provides \5\ that S-CHIP coverage is creditable coverage 
under HIPAA. Therefore, these final regulations have added coverage 
under S-CHIP as an eleventh category of creditable coverage.
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    \5\ Section 2109 of the Social Security Act, enacted by section 
4901 of the Balanced Budget Act of 1997, Pub. L. 105-33, 111 Stat. 
567.
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    The second modification is to the definition of public health plan. 
This

[[Page 78724]]

definition has been changed in two ways. The first change relates to 
the type of health coverage provided by a public health plan. The 
statute does not define the term. The April 1997 interim rules limit 
the definition of public health plans to certain plans provided through 
health insurance coverage. Some comments suggested it was unnecessary 
to restrict the definition to insured coverage and argued that the term 
public health plan should be expanded. These final regulations delete 
the word ``insurance'' from that requirement so that any health 
coverage provided by a governmental entity, regardless of whether it 
has the risk-shifting or risk-distributing effects of insurance, is a 
public health plan.
    The second change to the definition of public health plan relates 
to the type of governmental entity that can establish or maintain a 
public health plan. Under the April 1997 interim rules, only health 
coverage provided under a plan established or maintained by a State, a 
county, or another political subdivision of a State can be a public 
health plan. This definition does not include a plan established or 
maintained by a foreign government or the U.S. government. The preamble 
to the April 1997 interim rules specifically solicited comments on 
whether public health systems of foreign countries should be considered 
public health plans.
    Many comments addressed this issue, arguing both for and against 
including public health systems of foreign governments in the 
definition of public health plan. The comments in favor of inclusion 
argued that generally the health coverage provided through public 
health systems in foreign countries is more comprehensive than that 
received in this country. Some comments argued that the exclusion of 
foreign public health systems from the definition of public health plan 
arbitrarily penalizes individuals who maintain continuous health 
coverage through a foreign public health system. The comments against 
inclusion focused on the difficulty for a plan or issuer to verify 
whether someone had the coverage they claimed under a foreign public 
health system.
    Under these final regulations, the definition of a public health 
plan includes health coverage provided under a plan established or 
maintained by a foreign country or a political subdivision. While this 
result can inconvenience plans and issuers, verifying this type of 
coverage may be no more inconvenient than verifying certain other types 
of coverage, such as group health coverage provided through foreign 
employers. In addition, this result is much less inequitable than 
denying an individual coverage for a preexisting condition in a case in 
which the individual can provide reliable evidence of having coverage 
under the public health system of a foreign government. Under the rules 
for establishing creditable coverage in the absence of a certificate of 
creditable coverage, an individual is required to present at a minimum 
some corroborating evidence of the claimed creditable coverage and is 
required to cooperate with a plan's or issuer's efforts to verify 
coverage. Thus, in the case of an individual claiming coverage under 
the public health system of a foreign country, a plan or issuer could 
require some evidence of residency in the foreign country (or evidence 
that some other eligibility standard had been met) and the individual 
would have to cooperate with the plan's or issuer's efforts to verify 
that the individual had coverage under that country's health system.
    Under the revised definition in these final regulations, health 
coverage provided under a plan established or maintained by the U.S. 
Government is also a public health plan.
Counting Creditable Coverage
    The rules in the final regulations for how to count creditable 
coverage are adopted with stylistic and conforming changes from the 
April 1997 interim rules. In addition, a technical modification was 
added, as required by a statutory change made by the Trade Act of 2002 
(``the Trade Act'', Public Law 107-210, enacted on August 6, 2002). 
Under the Trade Act, workers whose employment is adversely affected by 
international trade may become entitled to receive trade adjustment 
assistance (TAA) and a 65% health coverage tax credit (HCTC). The Trade 
Act also amended COBRA continuation coverage provisions in ERISA, the 
Public Health Service Act, and the Internal Revenue Code, to provide a 
second opportunity to elect COBRA for individuals who are eventually 
determined to qualify for TAA, but who did not elect COBRA after their 
original loss of health coverage. Because this could result in a 
``significant break in coverage'' for purposes of HIPAA, the Trade Act 
specifies that the period beginning with the loss of coverage, and 
ending on the first day of the second election period, for individuals 
who elect COBRA during this second election period, should be 
disregarded for purposes of the HIPAA pre-existing condition 
provisions. Accordingly, as required by the Trade Act, under these 
final rules the days between the date an individual lost group health 
plan coverage and the first day of the second COBRA election period are 
not taken into account in determining whether a significant break in 
coverage has occurred. For more information on TAA, contact the 
Department of Labor's Employment and Training Administration at 877-
US2-JOBS or at www.doleta.gov/tradeact. For more information on the 
HCTC, contact the IRS toll-free at 866-628-4282.
    The existing examples relating to the tolling of the period for 
determining a significant break in coverage in the case of individuals 
seeking coverage in the individual market have also been modified to 
conform to the change in the definition of waiting period, which under 
these final regulations includes the period beginning when an 
individual submits a substantially complete application for coverage in 
the individual market and ends when the application is denied or when 
the offer of coverage lapses. In addition, here, as throughout these 
final regulations, references in the April 1997 interim rules to ``plan 
or policy'' have been revised so that the reference includes health 
insurance coverage not offered through a policy of insurance, such as 
health insurance coverage offered through a contract of a health 
maintenance organization.
    Published elsewhere in this issue of the Federal Register is a 
proposed rule that provides that the period that determines whether a 
significant break in coverage has occurred (generally 63 days) is 
tolled in cases in which a certificate of creditable coverage is not 
provided on or before the day coverage ceases. In those cases, the 
significant-break-in-coverage period would be tolled until a 
certificate is provided or, if earlier, until 44 days after the 
coverage ceases.
    These final regulations retain the methods in the April 1997 
interim rules for counting creditable coverage, that is, the standard 
method and the alternative method. Comments requested that the 
alternative method be expanded so that a plan or issuer could elect to 
have it apply to categories in addition to the five categories 
prescribed in the April 1997 interim rules (mental health; substance 
abuse treatment; prescription drugs; dental care; and vision care). The 
types of categories described in the comments were significant 
differences in deductibles, cost-sharing, or out-of-pocket maximums 
between plans. One comment suggested that any comparison between plans 
on the basis of difference in deductibles or cost sharing was 
unworkable.

[[Page 78725]]

    It is the view of the Departments that a comparison between plans, 
and allowing one plan not to count creditable coverage (in whole or in 
part) under another plan, based solely on differences in deductibles or 
in some other cost-sharing mechanism or in all cost-sharing mechanisms, 
is an insufficient basis for determining the comparative value of 
benefits under the plans. A plan with a low deductible or low co-
payments might also have an annual or per-incident limit on benefits so 
low as to make the plan with the higher deductible or higher cost 
sharing actually more valuable. Similarly, a plan with a higher 
deductible or coinsurance might also have a higher table of usual, 
customary, and reasonable costs, might be much more liberal in covering 
treatments considered experimental, and might provide a much broader 
base of benefits than the plan with the lower deductible or 
coinsurance. Because of the numerous ways that plans or issuers can 
limit the amount of benefits available under the plan, it is very 
complicated to compare the value of one plan or coverage with another. 
Singling out one or several of these features is insufficient for 
making a true comparison of the value of the benefits.

4. Evidence of Creditable Coverage--26 CFR 54.9801-5, 29 CFR 2590.701-
5, 45 CFR 146.115

    This section of the final regulations sets forth guidance regarding 
the certification requirements and other requirements for disclosure of 
information relating to prior creditable coverage. The provision of a 
certificate and certain other disclosures of information provided for 
in the statute, the April 1997 interim rules, and these final 
regulations are intended to enable an individual to establish prior 
creditable coverage for purposes of reducing or eliminating any 
preexisting condition exclusion imposed on the individual by any 
subsequent group health plan coverage. The Departments received 
generally favorable comments on the April 1997 interim rules from 
interested parties who submitted comments with regard to the 
certification requirements. For example, several comments praised the 
Departments' promulgation of a model certificate in the April 1997 
interim rules as a vehicle that helped reduce compliance burdens 
associated with the statutory requirements under HIPAA.
Form of Certificate
    These final regulations retain the requirement that the certificate 
must generally be provided in writing. The April 1997 interim rules 
clarified that for this purpose a writing included any form approved by 
the Secretaries as a writing. These final regulations modify that 
standard to include any other medium approved by the Secretary. As with 
the April 1997 interim rules, these final regulations provide that 
where an individual requests that the certificate be sent to another 
plan or issuer instead of the individual, and the other plan or issuer 
agrees, the certification information may be provided by other means, 
such as by telephone.
Information in Certificate
    The information required to be provided in a certificate under 
these final regulations is the same as required under the April 1997 
interim rules with one addition. In response to recommendations made by 
the U.S. General Accounting Office (GAO) \6\ and several comments, the 
Departments have modified the April 1997 interim rules to require that 
an educational statement be provided as part of a certificate of 
creditable coverage in order to inform consumers of their HIPAA rights. 
Some comments stated that such educational language was not necessary, 
but indicated that if the Departments adopted such an approach they 
should provide language for compliance purposes. In response to the GAO 
recommendation, the Departments have amended the requirements for the 
certificate of creditable coverage in the final regulations to include 
the provision of an educational statement regarding certain HIPAA 
protections. Model educational language is provided in the model 
certificate (set forth below). This eliminates the burden on plans and 
issuers of developing language to satisfy this requirement.
---------------------------------------------------------------------------

    \6\ In the report entitled ``PRIVATE HEALTH INSURANCE: Progress 
and Challenges in Implementing 1996 Federal Standards'' (GAO/HEHS-
99-100, May 12, 1999) the GAO recommended that the Departments 
revise the model certificate of creditable health plan coverage to 
more explicitly inform consumers of their new rights under HIPAA. At 
a minimum, the GAO recommended that the certificate of creditable 
coverage should inform consumers about appropriate contacts for 
additional information about HIPAA and highlight key provisions and 
restrictions, including (1) the limits on preexisting condition 
exclusion periods and the guaranteed renewability of all health 
coverage; (2) the reduction or elimination of preexisting condition 
exclusion periods for employees changing jobs; (3) the prohibition 
against excluding an individual from an employer health plan on the 
basis of health status; and (4) the guarantee of access to insurance 
products for certain individuals losing group health coverage and 
the restrictions placed on that guarantee.
---------------------------------------------------------------------------

Model Certificate
    The first model certificate below has been authorized by the 
Secretary of each of the Departments. The model educational statement 
is set forth under the heading ``Statement of HIPAA Portability 
Rights.'' Use of the model certificate by group health plans and group 
health insurance issuers will satisfy the requirements of paragraph 
(a)(3)(ii) of the regulations. The second model certificate below has 
been authorized by the Secretary of Health and Human Services. State 
Medicaid programs may use this version. Once these final regulations 
are applicable, use of the previously-published model certificate 
(published in the preamble to the April 1997 interim rules) will no 
longer satisfy paragraph (a)(3)(ii) of the regulations.
    In addition to these model certificates, the Departments are 
publishing a different model certificate for group health plans and 
group health insurance issuers in the preamble to the proposed rules 
published elsewhere in this issue of the Federal Register. That model 
certificate includes in its educational statement an additional 
paragraph regarding coordination with rules under the Family and 
Medical Leave Act (FMLA). The Secretaries of the Departments authorize 
plans and issuers to use either model certificate in fulfillment of 
their obligations under paragraph (a)(3)(ii) of this section in the 
final regulations. State Medicaid programs may use either the model 
certificate below that is designated for Medicaid programs, or the 
model certificate in the proposed rules that is so designated and 
includes an additional paragraph on FMLA.
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[[Page 78730]]

Procedure for Requesting Certificates
    The April 1997 interim rules require plans and health insurance 
issuers to establish a procedure for individuals to request and receive 
certificates of creditable coverage. The Departments have received 
requests to clarify whether such procedures need to be in writing. 
These final regulations clarify that the procedures need to be in 
writing, helping to ensure that individuals are aware of their right to 
request a certificate and how to make the request.
    In addition, the Departments have become aware that some plans and 
issuers believe they are not required to provide a certificate to 
individuals who request one while their coverage is still in effect. 
This requirement exists under the April 1997 interim rules. However, 
due to these questions being raised, the final regulations more 
explicitly state this requirement.
Dependent Coverage Information
    Under HIPAA, plans and health insurance issuers are required to 
issue certificates of creditable coverage (automatically, and upon 
request) to dependents who are or were covered under a group health 
plan. In response to comments, and in order to allow entities 
responsible for issuing certificates adequate time to modify their data 
collection systems, the Departments established a transitional rule in 
the April 1997 interim rules for providing dependent coverage 
information. Under this transitional rule, a group health plan or 
health insurance issuer that, after having made reasonable efforts, 
could not provide a certificate of creditable coverage for a dependent 
could satisfy the requirements for providing a certificate to the 
dependent by providing the name of the participant covered by the group 
health plan or health insurance issuer and specifying that the type of 
coverage described in the certificate was for dependent coverage (for 
example, family coverage or employee-plus-spouse coverage). This 
transitional rule was effective through June 30, 1998.
    Under these final regulations, the transitional rule is no longer 
in effect and dependents are entitled to receive individualized 
certificates of creditable coverage under the same circumstances as 
other individuals. As with the April 1997 interim rules, these final 
regulations permit a single certificate of creditable coverage to be 
provided with respect to both a participant and the participant's 
dependents if the information is identical for each individual. In 
addition, these final regulations retain the provisions of the April 
1997 interim rules permitting the combining of information for 
families. As a result, in situations where coverage information is not 
identical for a participant and the participant's dependents, these 
final regulations allow certificates for all individuals to be provided 
on one form if the form provides all the required information for each 
individual and separately states the information that is not identical.
Special Rules for Certain Entities
    Section 2791(a)(3) of the PHS Act provides that certain entities 
not otherwise subject to HIPAA's requirements are to comply with the 
statutory certification of coverage requirements that apply to group 
health plans, with respect to providing certificates of creditable 
coverage for Medicare, Medicaid, TRICARE, and medical care programs 
provided through the Indian Health Service or a tribal organization. 
These rules further establish that such entities are required to comply 
with the general statutory requirement to provide certificates. 
However, the Departments recognize that these programs operate in a 
different manner than do private employment-based group health plans, 
nonfederal governmental group health plans, and health insurance 
issuers. In addition, the populations served by these programs are 
unique. Therefore, it may be appropriate to allow these programs to 
implement the certification process in a manner that addresses these 
unique characteristics and better serves the individuals covered by 
these programs, including requiring different information elements (for 
example, see the above model certificate of creditable coverage for use 
by State Medicaid programs). HHS will coordinate with the appropriate 
entities responsible for issuing these certificates and will issue 
separate guidance to these entities on how they must comply with the 
certification requirements.

5. Special Enrollment Periods--26 CFR 54.9801-6, 29 CFR 2590.701-6, 45 
CFR 146.117

    Under HIPAA, the April 1997 interim rules, and these final 
regulations, a group health plan and a health insurance issuer offering 
group health insurance coverage are required to provide for special 
enrollment periods during which certain individuals are allowed to 
enroll (without having to wait until a late enrollment opportunity and 
regardless of whether the plan offers late enrollment). A special 
enrollment right can arise if a person with other health coverage loses 
eligibility for that coverage or employer contributions toward the 
other coverage cease, or if a person becomes a dependent through 
marriage, birth, adoption, or placement for adoption.
    In order to qualify for special enrollment, an individual must be 
otherwise eligible for coverage under the plan. Being otherwise 
eligible for coverage means having met the plan's substantive 
eligibility requirements (such as satisfying any waiting period, being 
in an eligible job classification, or working full time), regardless of 
whether the individual previously satisfied the plan's procedural 
requirements for becoming enrolled (such as completing written 
application materials or providing them to the plan within a specified 
time frame) during any enrollment opportunity prior to special 
enrollment.
    The special enrollment rules have been reorganized and clarified. 
As discussed below, the special enrollment rules have also been 
modified in response to comments.
Loss of Eligibility for Other Coverage
    A special enrollment right resulting from loss of eligibility for 
other coverage is available to employees and their dependents who meet 
certain requirements. As under the April 1997 interim rules, the 
employee or dependent must otherwise be eligible for coverage under the 
terms of the plan. When 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.
    These regulations include an example that clarifies that the 
initial opportunity for enrollment (generally provided when employment 
begins) is not the only time when an individual with other health 
coverage may decline coverage for purposes of satisfying the 
prerequisites to special enrollment upon loss of other coverage. (Other 
examples discussed below also illustrate this principle.) An individual 
who initially did not enroll for coverage without having other health 
coverage might later be eligible for special enrollment. This could 
occur if, after subsequently enrolling in other coverage, the 
individual had an opportunity for late

[[Page 78731]]

enrollment or special enrollment under the plan, but again chose not to 
enroll.
    These final regulations, like the April 1997 interim rules, contain 
a list of situations when an individual loses eligibility for other 
coverage. While the list is not exhaustive, it has nonetheless been 
expanded in these final regulations to address situations that have 
prompted frequent questions. Thus, these regulations clarify that a 
loss of eligibility for coverage occurs, in the case of individual 
coverage provided through an HMO, when an individual no longer resides, 
lives, or works in the service area of the HMO (whether or not within 
the choice of the individual) and the HMO does not provide coverage for 
that reason. In the case of group coverage provided through an HMO, the 
same rule applies, provided that there is no other coverage under the 
plan available to the individual. For purposes of this rule, the HMO 
service area is typically defined by State law. In addition, the 
regulations clarify that a loss of eligibility for coverage occurs due 
to the cessation of dependent status. For example, a child who ``ages 
out'' of dependent coverage--who attains an age in excess of the 
maximum age for coverage of a dependent child--incurs a loss of 
eligibility for coverage for purposes of special enrollment.
    The regulations also clarify that a loss of eligibility for 
coverage occurs when a plan no longer offers any benefits to a class of 
similarly situated individuals. Thus, if a plan terminated health 
coverage for all part-time workers, the part-time workers incur a loss 
of eligibility for coverage, even if the plan continues to provide 
coverage to other employees. An example in the final regulations also 
illustrates how the loss of eligibility rule applies to a plan that 
terminates a benefit package option. Similarly, if an issuer providing 
one of the options ceases to operate in the group market, thus 
terminating one of the options offered by the plan, the individuals 
formerly in the terminated option would incur a loss of eligibility for 
coverage for purposes of special enrollment, unless the plan otherwise 
provided a current right to enroll in alternative health coverage. In 
addition, the final regulations clarify that an employee who is already 
enrolled in a benefit package may enroll in another benefit package 
under the plan if a dependent of that employee has a special enrollment 
right in the plan because the dependent lost eligibility for other 
coverage.
    These regulations clarify that a loss of eligibility for coverage 
is still considered to exist even if there are subsequent coverage 
opportunities. As under the April 1997 interim rules, an individual 
does not have to elect COBRA continuation coverage or exercise similar 
continuation rights in order to preserve the right to special 
enrollment. Moreover, a special enrollment right exists even if an 
individual who lost coverage elects COBRA continuation coverage. In 
that case, if an individual declines special enrollment, and instead 
elects and exhausts COBRA continuation coverage, the individual has a 
second special enrollment right upon exhausting the COBRA continuation 
coverage.
    In addition, as under the statute and the April 1997 interim rules, 
even if there is no loss of eligibility for coverage, a special 
enrollment right can result when employer contributions towards other 
coverage terminate. This is the case even if an individual continues 
the other coverage by paying the amount previously paid by the 
employer.
Lifetime Benefit Limits
    Comments asked how the special enrollment rules apply when an 
individual reaches a lifetime limit on all benefits under a plan. The 
regulations clarify that where an individual has a claim denied due to 
the operation of a lifetime limit on all benefits, there is a loss of 
eligibility for coverage for special enrollment purposes. In this 
regard, an individual has a special enrollment right when a claim that 
would exceed a lifetime limit on all benefits is incurred, and the 
right continues at least until 30 days after the earliest date that a 
claim is denied due to the operation of the lifetime limit. 
Accordingly, because individuals who are keeping track of claims in 
relation to a lifetime limit can request enrollment immediately (after 
the claim is incurred, but before it is denied by the plan), the period 
for requesting special enrollment can be longer than 30 days. 
(Timeframes for providing certificates of creditable coverage and 
determining when COBRA is exhausted for individuals who have reached a 
lifetime limit on all benefits are set forth elsewhere in these final 
regulations, under the certificate and the definition provisions, 
respectively.)
Tolling of the Special Enrollment Period
    Proposed rules, published elsewhere in this issue of the Federal 
Register, would toll the beginning of the 30-day period for requesting 
special enrollment until a certificate of creditable coverage is 
provided to the person losing coverage, up to a maximum of 44 days of 
tolling. This tolling rule would be in the paragraph reserved for 
special enrollment procedures in these final regulations.
Dependent Special Enrollment
    Comments asked for clarification of the interaction of coverage for 
children under a State Children's Health Insurance Program (S-CHIP) and 
special enrollment. In particular, it was asked whether a child would 
have a right to special enrollment in a group health plan if the child 
becomes eligible for benefits under S-CHIP and the child is otherwise 
eligible for dependent coverage under the plan. This situation would 
arise if a State creates a children's health program that provides 
payments to a parent to cover the increased cost of enrolling a 
dependent child in the parent's employer's group health. However, 
without a special enrollment right, the parent might not be able to 
take advantage of the program until the next late enrollment 
opportunity, if the plan allows late enrollment at all. The statutory 
language of HIPAA, however, only provides special enrollment if there 
is loss of eligibility for other coverage, loss of employer 
contributions, or addition of a new dependent to the employee's family. 
Becoming eligible under a health program such as S-CHIP does not fall 
under any of these categories.\7\
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    \7\ Nonetheless, in addition to the dependent special enrollment 
rights under HIPAA, for plans subject to ERISA, section 609 of ERISA 
imposes additional requirements on group health plans to provide 
benefits to certain children, including in cases where a qualified 
medical child support order applies, as well as in cases of 
adoption. HIPAA does not prevent States from imposing similar 
requirements on nonfederal governmental plans.
---------------------------------------------------------------------------

    Under these final regulations, as under the April 1997 interim 
rules, the special enrollment of dependents is subject to the plan's 
general eligibility requirements. For example, a plan may require an 
employee to remain enrolled, or to special enroll, in order to special 
enroll the employee's dependent. However, a plan's general eligibility 
requirements cannot prevent the application of a special enrollment 
right. For example, a plan may not deny special enrollment to an 
otherwise eligible dependent merely because the individual became a 
dependent of the participant after the participant's first day of 
coverage under the plan.
Modification of Special Enrollment Procedures
    Under proposed rules, published elsewhere in this issue of the 
Federal Register, more detailed procedures are described for how plans 
and issuers would have to enroll individuals requesting special 
enrollment.

[[Page 78732]]

When Coverage Begins Under Special Enrollment
    Where the special enrollment right results from marriage or a loss 
of eligibility, coverage generally begins no later than the first day 
of the first calendar month after the date the plan or issuer receives 
the request for special enrollment. Where the special enrollment right 
results from a birth, coverage must begin on the date of birth. In the 
case of adoption or placement for adoption, coverage must begin no 
later than the date of such adoption or placement for adoption.
Clarification of Special Enrollment During a Late Enrollment 
Opportunity
    The April 1997 interim rules provided a definition of the term 
special enrollment date. The purpose of the definition and accompanying 
examples was to illustrate that if an individual who qualified for 
special enrollment enrolled during a coinciding late enrollment 
opportunity, the individual could not be treated as a late enrollee. 
The final regulations eliminate the term special enrollment date and 
clarify this issue by providing that if an individual requests 
enrollment while the individual is entitled to special enrollment, the 
individual is a special enrollee, even if the request coincides with a 
late enrollment opportunity under the plan. Thus, the individual cannot 
be treated as a late enrollee.
Notice of Special Enrollment
    The preamble to the April 1997 interim rules stated that a plan 
must provide a description of the special enrollment rights to anyone 
who declines coverage. However, the text of the April 1997 interim 
rules required the notice to be provided to all eligible employees. 
Even employees who enroll may need to avail themselves of their special 
enrollment rights in the future, either for a spouse or other 
dependent, or if they lose the present coverage. Thus, these 
regulations reiterate the requirement in the April 1997 interim rules 
that a plan must provide all employees (those who enroll as well as 
those who decline enrollment) with a notice of special enrollment at or 
before the time the employee is initially offered the opportunity to 
enroll in the plan. The regulation also provides model language that 
plans can use to satisfy this requirement.
Treatment of Special Enrollees
    HIPAA provides that a late enrollee does not include an individual 
who enrolls when first eligible or who enrolls during a special 
enrollment period. These regulations further clarify that individuals 
who enroll during a special enrollment period must generally be treated 
the same as individuals who enroll when first eligible. That is, 
relative to similarly situated individuals who enroll when first 
eligible, special enrollees must be offered all the same benefit 
packages, cannot be required to pay more for coverage, and cannot be 
subject to a longer preexisting condition exclusion.

6. HMO Affiliation Period as an Alternative to a Preexisting Condition 
Exclusion--29 CFR 2590.701-7, 45 CFR 146.119

    Under HIPAA, the April 1997 interim rules, and these final 
regulations, a group health plan that offers health insurance coverage 
through an HMO, or an HMO that offers health insurance coverage in 
connection with a group health plan, may impose an affiliation period 
under certain conditions. An affiliation period is a period of time 
that must expire before health insurance coverage provided by an HMO 
becomes effective and during which time the HMO is not required to 
provide benefits. Under these final regulations an affiliation period 
can be imposed if each of the following requirements is satisfied:
    (1) No preexisting condition exclusion is imposed with respect to 
any coverage offered by the HMO in connection with the particular group 
health plan.
    (2) No premium is charged to a participant or beneficiary for the 
affiliation period.
    (3) The affiliation period for the HMO coverage is imposed 
consistent with the requirements of the HIPAA nondiscrimination 
provisions.
    (4) The affiliation period does not exceed 2 months (or 3 months 
for a late enrollee).
    (5) The affiliation period begins on the enrollment date (or, in 
the case of a late enrollee, the affiliation period begins on the day 
that would be the first day of coverage, but for the affiliation 
period).
    (6) The affiliation period for enrollment in the HMO under a plan 
runs concurrently with any waiting period.
    The requirements related to HMO affiliation periods contained in 
these final regulations clarify that a group health plan offering 
health insurance through an HMO or an HMO that offers health insurance 
coverage in connection with a group health plan may impose different 
affiliation periods, so long as the affiliation period complies with 
the requirements of the HIPAA nondiscrimination provisions. To 
illustrate this clarification, these final regulations contain an 
example where a group health plan that provides benefits through an HMO 
imposes an affiliation period with respect to salaried employees but 
does not impose an affiliation period with respect to hourly employees. 
This example illustrates that it is permissible to impose an 
affiliation period on salaried employees but not hourly employees, so 
long as treating these two groups differently complies with the 
requirements of the HIPAA nondiscrimination provisions.
    The April 1997 interim rules and these final regulations specify 
that the affiliation period begins on the enrollment date (which is the 
first day of coverage under the plan, or if there is a waiting period 
for coverage under the plan, the first day of the waiting period), not 
when coverage under a particular benefit package option begins. 
Accordingly, an example in these final regulations illustrates that if 
a group health plan offers multiple benefit package options 
simultaneously, the HMO cannot impose an affiliation period on a plan 
participant who later switches to the HMO benefit package option, 
assuming the period of time that has elapsed since the enrollment date 
(during which the participant was covered under the first benefit 
package option) exceeds the duration of the HMO affiliation period. 
Moreover, these regulations clarify that, in the case of a late 
enrollee, the affiliation period begins on the day that would be the 
first day of coverage, but for the affiliation period.
    The April 1997 interim rules and these final regulations allow an 
HMO to use alternative methods 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 imposed, an alternative to an affiliation period may not 
encompass an arrangement that is in the nature of a preexisting 
condition exclusion.

7. Interaction With the Family and Medical Leave Act--26 CFR 54.9801-7, 
29 CFR 701-8, 45 CFR 146.120

    This section has been reserved. For proposed rules on the 
interaction with the Family and Medical Leave Act, see the Departments' 
notice of proposed rulemaking, published elsewhere in this issue of the 
Federal Register.

8. Special Rules; Excepted Plans and Excepted Benefits--26 CFR 54.9831-
1, 29 2590.732, 45 CFR 146.145

    This section of the final regulations contains special rules that 
apply for

[[Page 78733]]

Chapter 100 of the Code, Part 7 of Subtitle B of Title I of ERISA (Part 
7 of ERISA), and Title XXVII of the PHS Act. For ease in applying these 
rules, the definition of group health plan has been moved from the 
definitions section to this section (and the reference to employees in 
that definition has been modified to clarify that the term includes 
both current and former employees). New rules have been added for 
defining limited scope dental and vision benefits and for determining 
the extent to which benefits provided under a health flexible spending 
arrangement are excepted benefits. Special rules for partnerships have 
also been clarified.
Determination of the Number of Plans
    A paragraph has been reserved in the final regulation for 
determining the number of plans an employer or employee organization 
maintains. For proposed rules on this topic, see the Departments' 
notice of proposed rulemaking, published elsewhere in this issue of the 
Federal Register.
Coverage Provided by an Employer Through Two or More Individual 
Policies
    If an employer provides coverage to its employees through two or 
more individual policies, the coverage may be considered coverage 
offered in connection with a group health plan and, therefore, subject 
to the group market provisions under HIPAA. A determination of whether 
there is a group health plan depends on the particular facts and 
circumstances surrounding the extent of the employer's involvement. For 
example, one significant factor in establishing whether there is a 
group health plan is the extent to which the employer makes 
contributions to health insurance premiums. The fact that health 
insurance coverage is provided through a contract regulated under State 
law as individual health insurance coverage does not necessarily 
prevent the coverage from being treated for HIPAA purposes as coverage 
sold in the group market. Similarly, the policy that provides the 
coverage does not have to be considered a ``group'' policy under State 
law in order for the group market requirements to apply. Further, the 
mere fact that an employer forwards employee payroll deductions to a 
health insurance issuer will not, alone, cause the coverage to become 
group health plan coverage. However, the employer need not be a party 
to the insurance policy, or arrange or pay for it directly, in order 
for its coverage to be considered group health plan coverage. For 
example, if an employer's actions appear to endorse one or more 
policies offered by a health insurance issuer (or issuers), the 
coverage might be considered group health plan coverage.
General Exception for Certain Small Group Health Plans
    Under HIPAA, the April 1997 interim rules, and these final 
regulations, the group market requirements 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 two participants who are current 
employees. As noted in the preamble to the April 1997 interim rules, a 
State may apply some or all of the group market provisions in the PHS 
Act to health insurance issuers in connection with group health plans 
with fewer than two participants who are current employees on the first 
day of the plan year. In this case, to the extent the State applies its 
group market provisions to such insurance, the insurance would not be 
subject to the individual market requirements.
    In the event a group health plan has two or more participants who 
are current employees on the first day of the plan year but the number 
of participants who are current employees drops below two during the 
plan year, under these final regulations the group market requirements 
continue to apply to the group health plan for the duration of the plan 
year.
    To the extent a health insurance issuer offers group health 
insurance that is subject to HIPAA's group health insurance 
requirements, HIPAA generally prohibits the issuer from terminating or 
failing to offer to renew the insurance (see 45 CFR 146.152). With 
respect to very small employers, whether group health insurance is 
subject to the requirements of 45 CFR 146.152 is generally determined 
by whether the group health plan has two or more participants who are 
current employees on the first day of the plan year. If so, the issuer 
generally must provide such coverage throughout the plan year, and is 
prohibited from terminating coverage in the midst of that plan year 
merely because the number of current-employee participants drops below 
two.\8\ However, an issuer is permitted to terminate an employer's 
coverage in the midst of a plan year if the employer fails to satisfy 
any valid plan participation requirements in the midst of that plan 
year (see 45 CFR 146.152(a)(3)), including instances where such failure 
causes the number of current-employee participants to drop below two.
---------------------------------------------------------------------------

    \8\ See CMS Program Memorandum No. 99-03, Group Size Issues 
Under Title XXVII of the Public Health Service Act, September 1999.
---------------------------------------------------------------------------

Excepted Benefits
    Under HIPAA, the April 1997 interim rules, and these final 
regulations, certain benefits are excepted from HIPAA in all 
circumstances, including coverage only for accident (including 
accidental death and dismemberment); disability income coverage; 
liability insurance, including general liability insurance and 
automotive liability insurance; coverage issued as a supplement to 
liability insurance; workers' compensation or similar coverage; 
automobile medical payment insurance; credit-only insurance (for 
example, mortgage insurance); and coverage for on-site medical clinics.
Limited Excepted Benefits
    Under HIPAA, the April 1997 interim rules, and these final 
regulations, limited scope dental benefits, limited scope vision 
benefits, and long-term care benefits\9\ are excepted if they are 
provided under a separate policy, certificate, or contract of 
insurance, or are otherwise not an integral part of a plan that is 
subject to these regulations. Benefits are not an integral part of such 
a plan if participants have the right not to elect coverage for the 
benefits, and if participants who elect such coverage must pay an 
additional premium or contribution for it. These regulations clarify 
that whether limited scope dental benefits, limited scope vision 
benefits, or long-term care benefits are provided through a plan that 
is subject to these regulations, or through a separate plan, is 
irrelevant to determining whether such benefits are an integral part of 
a plan that is subject to these regulations. Thus, if participants can 
decline coverage for the limited-scope benefits, and those electing 
such coverage must pay an additional premium or contribution, the 
limited scope benefits could be considered not to be an integral part 
of a plan that is subject to these regulations, even if such benefits 
are not provided through that plan.
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    \9\ Long term care benefits are defined as benefits that are 
either subject to State long-term care insurance laws; that meet the 
qualifications of section 7702B(c)(1) or 7702B0(b) of the Internal 
Revenue Code; or are based on cognitive impairment or loss of 
functional capacity that is expected to be chronic.
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Limited Scope Vision and Dental Benefits
    These regulations define limited scope dental benefits as benefits

[[Page 78734]]

substantially all of which are for treatment of the mouth (including 
any organ or structure within the mouth). These regulations also define 
limited scope vision benefits as benefits substantially all of which 
are for treatment of the eye. Thus, if benefits meet the definition of 
limited scope dental benefits or limited scope vision benefits, they 
will be excepted benefits if they satisfy the requirements set forth in 
these regulations.
    These definitions were added in response to questions raised in 
comments about the prior guidance. The April 1997 interim rules did not 
define these terms. The preamble to the April 1997 interim rules 
suggested that the term limited scope dental benefits typically does 
not include medical services, such as those procedures associated with 
oral cancer or with a mouth injury that results in broken, displaced, 
or lost teeth. Similarly, the preamble to the April 1997 interim rules 
suggested that the term limited scope vision benefits does not include 
benefits for such ophthalmological services as treatment of an eye 
disease (such as glaucoma or a bacterial eye infection) or an eye 
injury. Comments indicated that typically most independent dental and 
vision coverages include benefits for these types of medical services. 
Accordingly, these regulations include definitions of limited scope 
dental benefits and limited scope vision benefits that reflect this 
market reality.
Health FSAs
    Some comments asked about the extent to which health flexible 
spending arrangements (FSAs) are subject to these regulations. A health 
FSA generally is a benefit program that provides employees with 
coverage under which specified, incurred expenses may be reimbursed 
(subject to reimbursement maximums and any other reasonable conditions) 
and under which the maximum amount of reimbursement that is reasonably 
available to a participant for a period of coverage is not 
substantially in excess of the total premium (including both employee-
paid and employer-paid portions of the premium) for the participant's 
coverage. Coverage and reimbursements provided to an individual under a 
group health plan that is a health FSA and that conforms to the 
generally applicable rules for accident or health plans qualify for the 
same tax-favored treatment that generally is extended to coverage and 
reimbursements under employer-provided accident or health plans. Health 
FSA reimbursements typically provide coverage for medical care expenses 
not otherwise covered by the employer's primary group health plan. A 
health FSA is permitted to operate under a cafeteria plan described in 
section 125 of the Code. Pursuant to the rules of section 125, an 
employee can elect to reduce the employee's salary in order to pay for 
health FSA coverage without the employee having to include that portion 
of the salary in gross income. Commonly, the maximum benefit payable 
under a health FSA for any year is equal to the amount of the 
employee's salary reduction election for the year, plus any additional 
employer contribution for the year.
    The April 1997 interim rules did not address the extent to which 
health FSAs qualify as excepted benefits. On December 29, 1997, a 
clarification to the April 1997 interim rules was published that 
specified the circumstances under which a health FSA qualifies as 
excepted benefits. (62 FR 67688) That clarification stated that 
benefits under a health FSA are treated as excepted benefits if the FSA 
meets certain requirements. Specifically, FSA benefits are treated as 
excepted benefits if the maximum benefit payable for the employee under 
the FSA for the year does not exceed two times the employee's salary 
reduction election under the FSA for the year (or, if greater, the 
amount of the employee's salary reduction election under the FSA for 
the year, plus $500). In addition, the employee must have other 
coverage available under a group health plan of the employer for the 
year, and that other coverage cannot be limited to benefits that are 
excepted benefits.
    Based on section 9832(c)(2)(C) of the Code, section 733(c)(2)(C) of 
ERISA, and section 2791(c)(2)(C) of the PHS Act, these regulations 
adopt the December 29, 1997 guidance with some additional 
clarifications. Specifically, these regulations clarify that to be 
considered excepted benefits, a health FSA must meet the definition of 
a health FSA in section 106(c)(2) of the Code. Also, these regulations 
clarify that other group health plan coverage not limited to excepted 
benefits must be made available for the year to the class of 
participants by reason of their employment. Similarly, the maximum 
amount payable to any participant in the class for the year is the 
amount to consider when determining whether the maximum amount payable 
under the FSA for the year complies with the limit specified in the 
previous paragraph. Additionally, these regulations clarify that an 
employer credit under a health FSA that an employee can elect to 
receive as taxable income is considered an employee salary reduction 
election. However, if the employee cannot receive the employer credit 
as taxable income (that is, the credit is lost unless the employee uses 
the amount for nontaxable benefits under a cafeteria plan), then the 
amount is not considered an employee salary reduction election.
Application to HSAs and HDHPs
    Section 1201 of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003, Public Law 108-173, added section 223 to the 
Internal Revenue Code to permit individuals to establish Health Savings 
Accounts (HSAs). HSAs are established to receive tax-favored 
contributions and amounts in an HSA may be used to pay or reimburse 
qualified medical expenses. Questions have arisen concerning the 
application of HIPAA to HSAs.
    In order to establish and contribute to an HSA, an individual must 
be covered by a High Deductible Health Plan (HDHP). An HDHP is a health 
plan that satisfies certain requirements with respect to deductibles 
and out-of-pocket expenses. An HDHP may be a group health plan 
sponsored by an employer or individual health insurance coverage 
purchased in the individual market. There is no provision in the HIPAA 
rules that excludes an HDHP, by virtue of qualifying as an HDHP, from 
the respective HIPAA requirements for group health plans or individual 
health insurance coverage. Generally, employer-sponsored HDHPs are 
employee welfare benefit plans. See Department of Labor Field 
Assistance Bulletin 2004-01 (FAB 2004-01), issued on April 7, 2004. 
Because an employer-sponsored HDHP provides medical care, it is 
generally subject to the portability requirements of HIPAA and the 
applicable regulations.
    FAB 2004-01 concluded that HSAs, in contrast to HDHPs, generally 
will not constitute employee welfare benefit plans. See Department of 
Labor Field Assistance Bulletin 2004-01 (FAB 2004-01), issued on April 
7, 2004. Because HSAs are generally not employee welfare benefit plans, 
the HIPAA portability requirements under ERISA or the PHS Act generally 
will not apply.
    Moreover, the HIPAA portability requirements generally are not 
relevant for purposes of HSAs. Due to the rules imposed by the Internal 
Revenue Code with respect to HSAs, employers or HSA trustees do not 
have discretion with respect to the coverage provided by an HSA, both 
with respect to what expenses qualify for reimbursement as well as 
which individuals' expenses are eligible. For example, expenses 
reimbursable by an HSA cannot

[[Page 78735]]

generally be restricted by the employer or HSA trustee. Under the 
statute and administrative guidance, any expense incurred after an HSA 
is established is eligible for reimbursement, without restriction by an 
employer contributing to the HSA or trustee of the HSA. Thus, as a 
practical matter, whether or not an expense relates to a preexisting 
condition cannot determine the reimbursement. As such HSAs by design 
cannot impose a preexisting condition exclusion. Similarly, due to 
comparability rules requiring uniform contributions to HSAs by 
employers, employers and trustees generally cannot use differing 
amounts of contributions to impose a preexisting condition exclusion.
    The eligibility for tax-free reimbursement from an HSA is also 
determined by statute; namely, the qualified medical expenses of the 
HSA owner and the HSA owner's dependents incurred after the HSA is 
established may be reimbursed on a tax-free basis by the HSA. Special 
enrollment rules for dependent children or spouses are not relevant 
because once an HSA is established they are eligible for tax-free 
reimbursements immediately. With respect to special enrollment upon 
loss of coverage, the rules for employer contributions generally 
require that all employees who are eligible for HSA contributions and 
participating in the employer's HDHP receive comparable HSA 
contributions. Thus, the combination of the comparability rules and the 
application of the special enrollment rules to the HDHP will generally 
ensure compliance with respect to employer HSA contributions because 
once an employee is enrolled in an employer-provided HDHP due to the 
special enrollment rules, the employer must make comparable 
contributions to the employee's HSA.
Indemnity Insurance
    Under HIPAA, the April 1997 interim rules, and these final 
regulations, hospital indemnity and other fixed-dollar indemnity 
insurance are excepted benefits if the benefits are provided under a 
separate policy, certificate, or contract of insurance; if there is no 
coordination of benefits between the provision of the benefits and an 
exclusion of benefits under any group health plan maintained by the 
same plan sponsor; and if the benefits are paid with respect to an 
event regardless of whether benefits are provided with respect to the 
event under any group health plan maintained by the same plan sponsor. 
These regulations clarify that, for hospital indemnity or other fixed-
dollar indemnity insurance to qualify as excepted benefits, such 
insurance must pay a fixed dollar amount per day (or other period), 
regardless of the amount of expenses incurred. An example clarifies 
that if a policy provides benefits only for hospital stays at a fixed 
percentage of hospital expenses up to a maximum amount per day, the 
benefits are not excepted benefits. This is the result even if, in 
practice, the policy pays the maximum for every day of hospitalization.
Supplemental Insurance
    Under HIPAA, the April 1997 interim rules, and these final 
regulations, Medicare supplemental health insurance (as defined under 
section 1882(g)(1) of the Social Security Act); coverage supplemental 
to TRICARE; and similar coverage that is supplemental to a group health 
plan are excepted benefits if they are provided under a separate 
policy, certificate, or contract of insurance. These regulations 
clarify that, for coverage supplemental to a group health plan to 
qualify as excepted benefits, the coverage must be specifically 
designed to fill gaps in primary coverage, such as coinsurance or 
deductibles. Coverage that becomes secondary or supplemental only under 
a coordination-of-benefits provision in the insurance contract or plan 
documents does not qualify as excepted supplemental benefits.
Treatment of Partnerships
    Any plan, fund, or program that is established or maintained by a 
partnership and that provides medical care to present or former 
partners or their dependents, and that otherwise would not be an 
employee welfare benefit plan, is considered an employee welfare 
benefit plan that is a group health plan under Part 7 of ERISA and 
Title XXVII of the PHS Act.\10\ As such, the partnership is considered 
the employer with respect to any partner. Participants in the plan 
include individuals who are partners of the partnership. Additionally, 
with respect to group health plans maintained by self-employed 
individuals (under which one or more employees are participants), the 
self-employed individual is considered a participant if this individual 
is or may become eligible to receive a benefit under the plan or if the 
individual's beneficiaries may be so eligible. These regulations 
clarify that, for purposes of Part 7 of ERISA and Title XXVII of PHS 
Act, a partner must be a bona fide partner in order to be considered an 
employee, and the partnership is considered the employer of a partner 
only if the partner is a bona fide partner. These final regulations 
also clarify that whether an individual is a bona fide partner is 
determined based on all the relevant facts and circumstances, including 
whether the individual performs services on behalf of the partnership.
---------------------------------------------------------------------------

    \10\ Such a plan, fund, or program is also considered a group 
health plan under section 5000(b)(1) and Chapter 100 of the Code.
---------------------------------------------------------------------------

Counting the Average Number of Employees
    A paragraph has been reserved in the final rules for determining 
the average number of employees employed by an employer for a year. For 
proposed rules on this topic, see the Departments' notice of proposed 
rulemaking, published elsewhere in this issue of the Federal Register.

C. Economic Impact and Paperwork Burden

Summary--Department of Labor and Department of Health and Human 
Services

    HIPAA's group market portability provisions, which include 
limitations on the scope and application of preexisting condition 
exclusions, and special enrollment rights, provide a minimum standard 
of protection designed to increase access to health coverage. The 
Departments crafted these final regulations to secure these 
protections, consistent with the intent of Congress, and to do so in a 
manner that is economically efficient.
    The primary economic effects of HIPAA's portability provisions 
ensue directly from the statute. These regulations, by clarifying and 
securing HIPAA's statutory protections, will delineate and possibly 
expand HIPAA's effects at the margin.
Effects of the Statute
    HIPAA's statutory group market portability provisions extend 
coverage to certain individuals and preexisting conditions not 
otherwise covered. This extension of coverage entails both benefits and 
costs. Individuals enjoying expanded coverage will realize benefits. In 
some instances these individuals will gain coverage for services they 
otherwise would have purchased out-of-pocket. In other instances the 
extension of coverage will induce individuals to consume more (or 
different) health care services, which in some cases may improve health 
outcomes. The dollar value of the extended coverage is estimated to be 
$515 million annually. Potential additional benefits from improved 
health outcomes are difficult

[[Page 78736]]

to quantify (and the Departments have not attempted to do so), but may 
be large in aggregate, and will be large for at least some individuals 
whose health outcomes may be substantially improved. Another indirect 
benefit of HIPAA's portability provisions is a reduction in so-called 
``job lock''--a phenomenon in which individuals keep jobs they would 
prefer to leave to avoid losing coverage for preexisting conditions. If 
workers move into more productive jobs, the overall economy will 
benefit.
    It should be noted that the benefits of HIPAA's portability 
provisions in any given year will be concentrated in a relatively small 
population that gains coverage under HIPAA for needed care that would 
otherwise not be covered. The number that might so benefit has been 
estimated at 100,000 individuals.
    The direct costs of HIPAA's portability provisions generally 
include the cost of extending coverage to additional services, as well 
as certain attendant administrative costs. The cost of extended 
coverage is estimated at $515 million annually. The major 
administrative costs include the cost of providing certificates of 
creditable coverage, and possibly the cost of carrying out special 
enrollments and offsets of preexisting condition exclusion periods. The 
Departments did not attempt to fully estimate the administrative costs 
of the HIPAA statute but in crafting this regulation did attempt to 
constrain these costs.
    The Departments believe that the cost of HIPAA is borne by covered 
workers. Cost can be shifted to workers through increases in employee 
premium shares or reductions (or smaller increases) in pay or other 
components of compensation, or by increases in deductibles or other 
cost sharing or other reductions in the richness of health benefits. 
Whereas the benefits of HIPAA are concentrated in a relatively small 
population, the costs are distributed broadly across plans and 
enrollees.
    The Departments have considered whether the costs imposed by 
HIPAA's statutory portability provisions have had any major indirect 
negative effects, and concluded that such effects are possible but 
probably small.
    Any mandate to increase the richness or availability of health 
insurance adds to the cost of insurance. It is possible that some small 
number of employers and employees already at the brink of affordability 
would drop coverage in response to the implementation of HIPAA. The 
Departments also note that the estimated $515 million cost associated 
with extensions of coverage under HIPAA amounts to a small fraction of 
one percent of total expenditures by private group health plans. This 
suggests that the cost of HIPAA is a small, possibly negligible, factor 
in most employers' decisions to offer health coverage and workers' 
decisions to enroll. The Departments believe that the benefits of 
HIPAA's statutory group market portability provisions justify their 
cost. The Departments' full assessment of the costs and benefits of 
HIPAA's statutory provisions and their basis for that assessment is 
detailed later in the preamble.
Effects of the Final Regulations
    By clarifying and securing HIPAA's statutory portability 
protections, these regulations will help ensure that HIPAA rights are 
fully realized. The result is likely to be a small increase at the 
margin in the direct and indirect economic effects of HIPAA's statutory 
portability provisions. The Departments believe that the regulation's 
benefits will justify its costs.
    Additional economic benefits derive from the regulations' 
clarifications of HIPAA's portability requirements. By clarifying 
employees' rights and plan sponsors' obligations under HIPAA's 
portability provisions, the regulations will reduce uncertainty over 
health benefits, thereby fostering labor market efficiency and the 
establishment and continuation of group health plans by employers.
    Many provisions of the final regulations closely resemble 
provisions included in the interim final regulations that the final 
regulations supplant. This regulatory action, however, adds or amends 
both certain provisions directed at the scope of HIPAA's portability 
protections and certain provisions establishing administrative 
requirements intended to safeguard those protections.
Scope of Protections
    These final regulations are intended to secure and implement 
HIPAA's group market portability provisions under certain special 
circumstances. The final regulations therefore contain a number of 
provisions intended to clearly delimit the scope of HIPAA's portability 
protections. Most of these provisions closely resemble and will have 
the same effect as provisions of the interim final regulations. Others, 
however, clarify or expand at the margin the range of situations to 
which HIPAA's portability protections apply or in which a loss of 
eligibility may trigger special enrollment rights. These include the 
requirement that health coverage under foreign government programs be 
treated as creditable coverage for purposes of limiting the application 
of preexisting condition exclusions; the extension of special 
enrollment rights to individuals who lose eligibility for coverage in 
connection with the application of lifetime benefit limits, movement 
out of an HMO's service area, or the termination of a health coverage 
option previously offered under a group health plan; and the 
establishment of a special enrollment right for a participant to change 
among available coverage options under a group health plan when adding 
one or more dependents in connection with marriage, adoption, or 
placement for adoption. Each of these provisions is expected to result 
in a small increase in the economic effects of HIPAA's statutory 
portability protections. The Departments have no basis to quantify 
these small increases. The potential size of affected sub populations 
is explored later in the preamble.
Administrative Requirements
    In order to secure and implement HIPAA's group market special 
enrollment and portability provisions, both the HIPAA statute and these 
final regulations establish certain administrative requirements.
    As noted above, the HIPAA statute generally requires plans and 
issuers to provide certifications of prior coverage to individuals 
leaving coverage. These regulations additionally require plans and 
issuers to notify individuals of their special enrollments rights, any 
preexisting condition exclusion provisions, and the applicability of 
such exclusions where individuals provide evidence of prior coverage 
that is of insufficient duration to fully offset exclusion periods. 
Plans will incur cost to comply with these administrative requirements. 
The Departments estimate the administrative cost to prepare and 
distribute certifications and notices to be $97 million per year. 
Nearly all of this, or $96 million, is attributable to the preparation 
and distribution of certifications as required under HIPAA's statutory 
provisions. These final regulations include numerous special provisions 
that serve to reduce plans' cost of providing certifications. A more 
strict interpretation of the statute would require plans to send an 
individual certificate to each affected enrollee. Such strict 
interpretation would result in plans sending 80.1 million certificates 
annually at cost of $157.6 million, which is $61.6 million more than 
the burden imposed by the final regulations.

[[Page 78737]]

    Generally all of the major administrative requirements included in 
the final regulations were also included in the interim final 
regulations. The final regulations make minor additions to two 
requirements, however. They require plans to include educational 
statements in certificates of creditable coverage and to maintain in 
writing their procedures for requesting certificates. The cost of these 
additional requirements is expected to be small, and was not estimated 
separately from the overall cost of providing certificates.
    Other changes included in these final regulations are likely to 
slightly reduce plans' cost to provide certain HIPAA-required notices. 
Included with the final regulation is new sample language for general 
and specific notices of preexisting condition exclusions, which may 
serve to reduce some plans' costs of providing these notices, and 
revised sample language for special enrollment rights notices. The 
final regulations also clarify the narrow scope of the requirement to 
notify certain affected participants of the specific application of 
preexisting condition exclusions. The Departments did not estimate the 
impact of these provisions separately from the overall cost of 
providing general and specific notices of preexisting condition 
exclusions and notices of special enrollment rights.
    The Departments' full assessment of the costs and benefits of this 
regulation and their basis for that assessment is detailed later in 
this preamble.

Executive Order 12866--Department of Labor and Department of Health and 
Human Services

    Under Executive Order 12866 (58 FR 551735, Oct. 4, 1993), the 
Departments must determine whether a regulatory action is 
``significant'' and therefore subject to the requirements of the 
Executive Order and subject to review by the Office of Management and 
Budget (OMB). Under section 3(f), the order defines a ``significant 
regulatory action'' as an action that is likely to result in a rule: 
(1) Having an annual effect on the economy of $100 million or more, or 
adversely and materially affecting a sector of the economy, 
productivity, competition, jobs, the environment, public health or 
safety, or State, local or tribal governments or communities (also 
referred to as ``economically significant''); (2) creating serious 
inconsistency or otherwise interfering with an action taken or planned 
by another agency; (3) materially altering the budgetary impacts of 
entitlement grants, user fees, or loan programs or the rights and 
obligations of recipients thereof; or (4) raising novel legal or policy 
issues arising out of legal mandates, the President's priorities, or 
the principles set forth in the Executive Order.
    Pursuant to the terms of the Executive Order, this action is 
``economically significant'' and subject to OMB review under Section 
3(f) of the Executive Order. Consistent with the Executive Order, the 
Departments have assessed the costs and benefits of this action. The 
Departments' assessment, and the analysis underlying that assessment, 
is detailed below. The Departments performed a comprehensive, unified 
analysis to estimate the costs and benefits attributable to the 
regulations for purposes of compliance with Executive Order 12866, the 
Regulatory Flexibility Act, and the Paperwork Reduction Act.
Statement of Need for Action
    These final regulations are needed to clarify and interpret the 
HIPAA portability provisions (increased portability through limitation 
on preexisting condition exclusions) under Section 701 of the Employee 
Retirement Income Security Act of 1974 (ERISA), Section 2701 of the 
Public Health Service Act, and Section 9801 of the Internal Revenue 
Code of 1986. The provisions are needed to improve the availability and 
portability of health coverage by limiting preexisting condition 
exclusions and their use, and requiring that group health plans and 
group health insurance issuers allow individuals to enroll under 
certain circumstances (special enrollment). Additional guidance was 
required to clarify certain definitions, such as the definition of 
creditable coverage; to clarify the method of determining the proper 
length of a preexisting condition exclusion period for an individual; 
to describe the circumstances under which an individual must be allowed 
a special enrollment opportunity; and to describe notices that group 
health plans and group health insurance issuers must provide to 
individuals.
Economic Effects
    The Departments believe that this regulation's benefits will 
justify its costs. This belief is grounded in the assessment of costs 
and benefit that is summarized earlier in the preamble and detailed 
below.

Regulatory Flexibility Act--Department of Labor and Department of 
Health and Human Services

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes 
certain requirements with respect to Federal rules that are subject to 
the notice and comment requirements of section 553(b) of the 
Administrative Procedure Act (5 U.S.C. 551 et seq.) that are likely to 
have a significant economic impact on a substantial number of small 
entities. Unless an agency certifies that a rule will not have a 
significant economic impact on a substantial number of small entities, 
section 604 of the RFA requires the agency to present a final 
regulatory flexibility analysis at the time of the publication of the 
notice of final rulemaking describing the impact of the rule on small 
entities. Small entities include small businesses, organizations, and 
governmental jurisdictions.
    Because these final rules are being issued without prior notices of 
proposed rulemaking, the RFA does not apply, and the Departments are 
not required to either certify that the rule will not have a 
significant impact on a substantial number of small entities or conduct 
a regulatory flexibility analysis. The Departments nonetheless crafted 
these regulations in careful consideration of their effects on small 
entities.
    For purposes of this discussion, the Departments consider a small 
entity to be an employee benefit plan with fewer than 100 participants. 
The basis for this definition is found in section 104(a)(2) of ERISA, 
which permits the Secretary of Labor to prescribe simplified annual 
reports for pension plans which cover fewer than 100 participants. 
Under section 104(a)(3), the Secretary may also provide for simplified 
annual reporting and disclosure if the statutory requirements of part 1 
of Title I of ERISA would otherwise be inappropriate for welfare 
benefit plans. Pursuant to the authority of section 104(a)(3), the 
Department of Labor has previously issued at 29 CFR 2520.104-20, 
2520.104-21, 2520.104-41, 2520.104-46 and 2520.104b-10, certain 
simplified reporting provisions and limited exemptions from reporting 
and disclosure requirements for small plans, including unfunded or 
insured welfare plans covering fewer than 100 participants and which 
satisfy certain other requirements.
    Further, while some small plans are maintained by large employers, 
most are maintained by small employers. Both small and large plans may 
enlist small third party service providers to perform administrative 
functions, but it is generally understood that third party service 
providers transfer their costs to their plan clients in the form of 
fees. Thus, the Departments believe that assessing the impact of this 
rule on small plans is an appropriate substitute for evaluating the 
effect on small entities. The definition of small entity

[[Page 78738]]

considered appropriate for this purpose differs, however, from a 
definition of small business based on size standards promulgated by the 
Small Business Administration (SBA) (13 CFR 121.201) pursuant to the 
Small Business Act (5 U.S.C. 631 et seq.). The Department of Labor 
solicited comments on the use of this standard for evaluating the 
effects of the interim final on small entities. No comments were 
received with respect to the standard.
    The Departments believe that the benefits of this regulation will 
justify its costs. This belief is grounded in the assessment of costs 
and benefit that is summarized earlier in the preamble and detailed 
below in the ``Basis for Assessment of Economic Impact'' section. The 
direct financial value of coverage extensions pursuant to HIPAA's 
portability provisions are estimated to be approximately $180 million 
for small plans, or a small fraction of one percent of total small plan 
expenditures.\11\
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    \11\ Computer runs using Medical Expenditure Survey Household 
Component (MEPS-HC) and the Robert Wood Johnson Employer Healthy 
Benefits Survey determined that the share of covered private-sector 
job leavers at small firms average 35 percent of all covered private 
sector job leavers. From this, we inferred that the financial burden 
borne by small plans is approximately 35 percent of the total 
expenditures by private-sector group health plans.
---------------------------------------------------------------------------

    In order to secure and implement HIPAA's portability provisions, 
the HIPAA statute and interim final regulations established certain 
administrative requirements, including requirements to provide 
certifications of creditable coverage and notices of special enrollment 
rights and preexisting condition exclusions. The Departments estimate 
the cost for small plans to prepare and distribute certifications and 
notices to be $13 million per year.\12\ These costs will initially be 
borne by issuers who supply small group insurance products and by 
third-party administrators who provide services to small insured plans. 
These two types of entities will spread the costs across a much larger 
pool of small plans who will in turn transfer cost broadly to plan 
enrollees.
---------------------------------------------------------------------------

    \12\ As noted above, the total cost for certificates and notices 
is estimated to be $97 million. We estimate that 13 percent of 
individuals receiving certificates and notices receive them from 
small group health plans, and on that basis estimates that 13% of 
the total cost falls on such plans. As noted below, we estimate that 
out of a total of 54 million individuals who leave coverage under 
group health plans, individual health insurance policies or public 
programs, 20 million, or 44 percent, are leaving private-sector 
group plans. Assuming that the proportion of these that are leaving 
small plans is equal to the proportion of covered, private-sector 
job leavers who leave small firms (estimated to be 35 percent, as 
noted above), 13 percent of those leaving any type of coverage are 
leaving coverage under small group plans.
---------------------------------------------------------------------------

Special Analyses--Department of the Treasury

    Notwithstanding the determinations of the Departments of Labor and 
of Health and Human Services, for purposes of the Department of the 
Treasury it has been determined that this Treasury decision is not a 
significant regulatory action. Pursuant to sections 603(a) and 605(b) 
of the Regulatory Flexibility Act, it is hereby certified that the 
collections of information referenced in this Treasury decision (see 
Sec. Sec.  54.9801-3, 54.9801-4, 54.9801-5, and 54.9801-6) will not 
have a significant economic impact on a substantial number of small 
entities. Although a substantial number of small entities will be 
subject to the collection of information requirements in these 
regulations, the requirements will not have a significant economic 
impact on these entities. The average time required to complete a 
certification required under these regulations is estimated to be 4 to 
5 minutes for all employers. This average is based on the assumption 
that most employers will automate the certification process. The 
paperwork requirements other than certifications that are contained in 
the regulations are estimated to impose less than 2% of the burden 
imposed by the certifications. Many small employers that maintain group 
health plans have their plans administered by an insurance company or 
third party administrators (TPAs). Most insurers and TPAs are expected 
to automate the certification process and therefore their average time 
to produce a certificate should be similar to the 4 to 5 minute average 
estimated for all employers. However, even for small employers that do 
not automate the certification process, the collection of information 
requirements in the regulation will not have a significant impact. Even 
if it is conservatively assumed that their average time to produce a 
certificate is 3 times as long as the highest estimate for all 
employers (i.e., 15 minutes per certificate) and that all of their 
employees are covered by their group health plan and that half of the 
employees receive a certificate each year, the average burden per 
employee is less than 8 minutes per year. This can be rounded up to 8 
minutes to more than account for the additional burden imposed by the 
other paperwork requirements of the final regulations. Thus, for 
example, for an employer with 10 employees, the annual burden would be 
not more than 1 hour and 20 minutes per year. At an estimated cost of 
$18 per hour, this would result in a cost of not more than $24 per year 
for the employer, which is not a significant economic impact. Because 
the collection of information requirements of this Treasury decision 
will not have a significant economic impact on a substantial number of 
small entities, a Regulatory Flexibility Analysis under the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to 
section 7805(f) of the Code, the notice of proposed rulemaking 
preceding these regulations was submitted to the Small Business 
Administration for comment on its impact on small business.

Paperwork Reduction Act

Department of Labor
    These final regulations include three separate collections of 
information as that term is defined in the Paperwork Reduction Act of 
1995 (PRA 95), 44 U.S.C. 3502(3): the Notice of Enrollment Rights, 
Notice of Preexisting Condition Exclusion, and Certificate of 
Creditable Coverage. Each of these disclosures is currently approved by 
the Office of Management and Budget (OMB) through October 31, 2006 in 
accordance with PRA 95 under control numbers 1210-0101, 1210-0102, and 
1210-0103.
Department of the Treasury
    These final regulations include a collection of information as that 
term is defined in PRA 95: the Notice of Enrollment Rights, Notice of 
Preexisting Condition Exclusion, and Certificate of Creditable 
Coverage. Each of these disclosures is currently approved by OMB under 
control number 1545-1537.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.
Department of Health and Human Services
    These final regulations include three separate collections of 
information as that term is defined in PRA 95: the Notice of Enrollment 
Rights, Notice of Preexisting Condition Exclusion, and Certificate of 
Creditable Coverage. Each of these disclosures is currently approved by 
OMB through June 30, 2006 in accordance with PRA 95 under control 
number 0938-0702.

[[Page 78739]]

Small Business Regulatory Enforcement Fairness Act

    This final rule is subject to the provisions of the Small Business 
Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 801 et seq.) and 
is being transmitted to Congress and the Comptroller General for 
review. The final rule, is a ``major rule,'' as that term is defined in 
5 U.S.C. 804, because it may result in (1) an annual effect on the 
economy of $100 million or more; (2) a major increase in costs or 
prices for consumers, individual industries, or federal, State or local 
government agencies, or geographic regions; or (3) significant adverse 
effects on competition, employment, investment, productivity, 
innovation, or on the ability of United States-based enterprises to 
compete with foreign-based enterprises in domestic or export markets.

Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 requires 
that agencies assess anticipated costs and benefits before issuing any 
rule that may result in an expenditure in any 1 year by State, local, 
or tribal governments, in the aggregate, or by the private sector, of 
$100 million. These final regulations have no such mandated 
consequential effect on State, local, or tribal governments, or on the 
private sector.

Federalism Statement Under Executive Order 13132--Department of Labor 
and Department of Health and Human Services

    Executive Order 13132 outlines fundamental principles of 
federalism. It requires adherence to specific criteria by federal 
agencies in formulating and implementing policies that have 
``substantial direct effects'' on the States, the relationship between 
the national government and States, or on the distribution of power and 
responsibilities among the various levels of government. Federal 
agencies promulgating regulations that have these federalism 
implications must consult with State and local officials, and describe 
the extent of their consultation and the nature of the concerns of 
State and local officials in the preamble to the regulation.
    In the Departments' view, these final regulations have federalism 
implications because they may have substantial direct effects on the 
States, the relationship between the national government and States, or 
on the distribution of power and responsibilities among the various 
levels of government. However, in the Departments' view, the federalism 
implications of these final regulations are substantially mitigated 
because, with respect to health insurance issuers, the vast majority of 
States have enacted laws which meet or exceed the federal HIPAA 
portability standards.
    In general, through section 514, ERISA supersedes State laws to the 
extent that they relate to any covered employee benefit plan, and 
preserves State laws that regulate insurance, banking or securities. 
While ERISA prohibits States from regulating a plan as an insurance or 
investment company or bank, HIPAA added a new section to ERISA (as well 
as to the PHS Act) narrowly preempting State requirements for issuers 
of group health insurance coverage. Specifically, with respect to seven 
provisions of the HIPAA portability rules, States may impose stricter 
obligations on health insurance issuers.\13\ Moreover, with respect to 
other requirements for health insurance issuers, States may continue to 
apply State law requirements except to the extent that such 
requirements prevent the application of HIPAA's portability, access, 
and renewability provisions.
---------------------------------------------------------------------------

    \13\ States may shorten the six-month look-back period prior to 
the enrollment date; shorten the 12-month and 18-month maximum 
preexisting condition exclusion periods; increase the 63-day 
significant break in coverage period; increase the 30-day period for 
newborns, adopted children, and children placed for adoption to 
enroll in the plan with no preexisting condition exclusion; further 
limit the circumstances in which a preexisting condition exclusion 
may be applied (beyond the federal exceptions for certain newborns, 
adopted children, children placed for adoption, pregnancy, and 
genetic information in the absence of a diagnosis; require 
additional special enrollment periods; and reduced the HMO 
affiliation period to less than 2 months (3 months for late 
enrollees).
---------------------------------------------------------------------------

    In enacting these new preemption provisions, Congress intended to 
preempt State insurance requirements only to the extent that they 
prevent the application of the basic protections set forth in HIPAA. 
HIPAA's conference report States that the conferees intended the 
narrowest preemption of State laws with regard to health insurance 
issuers. H.R. Conf. Rep. No. 736, 104th Cong. 2d Session 205 (1996). 
State insurance laws that are more stringent than the federal 
requirements are unlikely to ``prevent the application of'' the HIPAA 
portability provisions, and be preempted. Accordingly, States have 
significant latitude to impose requirements on health insurance 
insurers that are more restrictive than the federal law.
    Guidance conveying this interpretation of HIPAA's preemption 
provisions was published in the Federal Register on April 8, 1997. 62 
FR 16904. These final regulations clarify and implement the statute's 
minimum standards and do not significantly reduce the discretion given 
the States by the statute. Moreover, the Departments understand that 
the vast majority of States have requirements that meet or exceed the 
minimum requirements of the HIPAA portability provisions.
    HIPAA provides that the States may enforce the provisions of HIPAA 
as they pertain to issuers, but that the Secretary of Health and Human 
Services must enforce any provisions that a State fails to 
substantially enforce. Currently, HHS enforces the HIPAA portability 
provisions in only one State in accordance with that State's specific 
request to do so. When exercising its responsibility to enforce the 
provisions of HIPAA, HHS works cooperatively with the State for the 
purpose of addressing the State's concerns and avoiding conflicts with 
the exercise of State authority. HHS has developed procedures to 
implement its enforcement responsibilities, and to afford the States 
the maximum opportunity to enforce HIPAA's requirements in the first 
instance. HHS's procedures address the handling of reports that States 
may not be substantially enforcing HIPAA's requirements, and the 
mechanism for allocating responsibility between the States and HHS. In 
compliance with Executive Order 13132's requirement that agencies 
examine closely any policies that may have federalism implications or 
limit the policymaking discretion of the States, DOL and HHS have 
engaged in numerous efforts to consult and work cooperatively with 
affected State and local officials.
    For example, the Departments sought and received input from State 
insurance regulators and the National Association of Insurance 
Commissioners (NAIC). The NAIC is a non-profit corporation established 
by the insurance commissioners of the 50 States, the District of 
Columbia, and the four U.S. territories. In most States the Insurance 
Commissioner is appointed by the Governor, in approximately 14 States, 
the insurance commissioner is an elected official. Among other 
activities, it provides a forum for the development of uniform policy 
when uniformity is appropriate. Its members meet, discuss and offer 
solutions to mutual problems. The NAIC sponsors quarterly meetings to 
provide a forum for the exchange of ideas and in-depth consideration of 
insurance issues by regulators, industry representatives and consumers. 
CMS and the Department of Labor staff have consistently attended these 
quarterly meetings to listen to the concerns of the

[[Page 78740]]

State Insurance Departments regarding HIPAA portability issues. In 
addition to the general discussions, committee meetings, and task 
groups, the NAIC sponsors the standing CMS/DOL meeting on HIPAA issues 
for members during the quarterly conferences. This meeting provides CMS 
and the Department of Labor with the opportunity to provide updates on 
regulations, bulletins, enforcement actions, and outreach efforts 
regarding HIPAA.
    The Departments received written comments on the interim regulation 
from the NAIC and from ten States. In general, these comments raised 
technical issues that the Departments considered in conjunction with 
similar issues raised by other commenters. In a letter sent before 
issuance of the interim regulation, the NAIC expressed concerns that 
the Departments interpret the new preemption provisions of HIPAA 
narrowly so as to give the States flexibility to impose more stringent 
requirements. As discussed above, the Departments address this concern 
in the preamble to the interim regulation.
    In addition, the Departments specifically consulted with the NAIC 
in developing these final regulations. Through the NAIC, the 
Departments sought and received the input of State insurance 
departments regarding certain insurance industry definitions, 
enrollment procedures and standard coverage terms. This input is 
generally reflected in the discussion of comments received and changes 
made in Section B--Overview of the Regulations of the preamble to these 
regulations.
    The Departments have also cooperated with the States in several 
ongoing outreach initiatives, through which information on HIPAA is 
shared among federal regulators, State regulators and the regulated 
community. In particular, the Department of Labor has established a 
Health Benefits Education Campaign with more than 70 partners, 
including CMS, NAIC and many business and consumer groups. CMS has 
sponsored conferences with the States--the Consumer Outreach and 
Advocacy conferences in March 1999 and June 2000, and the 
Implementation and Enforcement of HIPAA National State-Federal 
Conferences in August 1999, 2000, 2001, 2002, and 2003. Furthermore, 
both the Department of Labor and CMS Web sites offer links to important 
State Web sites and other resources, facilitating coordination between 
the State and federal regulators and the regulated community.
    Throughout the process of developing these regulations, to the 
extent feasible within the specific preemption provisions of HIPAA, the 
Departments have attempted to balance the States' interests in 
regulating health insurance issuers, and the Congress' intent to 
provide uniform minimum protections to consumers in every State. By 
doing so, it is the Departments' view that they have complied with the 
requirements of Executive Order 13132.
    Pursuant to the requirements set forth in Section 8(a) of Executive 
Order 13132, and by the signatures affixed to these final regulations, 
the Departments certify that the Employee Benefits Security 
Administration and the Centers for Medicare & Medicaid Services have 
complied with the requirements of Executive Order 13132 for the 
attached final regulation, Final Regulations for Health Coverage 
Portability for Group Health Plans and Group Health Insurance Issuers 
(RIN 1210-AA54 and RIN 0938-AL43), in a meaningful and timely manner.

Basis for Assessment of Economic Impact--Department of Labor and 
Department of Health and Human Services

    As noted above, the primary economic effects of HIPAA's portability 
provisions ensue directly from the statute. These regulations, by 
clarifying and securing HIPAA's statutory protections, will delineate 
and possibly expand HIPAA's effects at the margin.
Effects of the Statute
    In order to determine how many workers could benefit from crediting 
prior coverage against a new health plan's preexisting condition 
exclusion period, we examined the 18 million individuals who changed 
jobs in 2002. Of these, approximately 1 in 3 had health care coverage 
at those jobs and an additional 8 million dependents also received 
employer-sponsored health care coverage through these job changers. By 
allowing prior creditable coverage, 4 million job changers, who had at 
least 12 months of prior creditable coverage, were able to change jobs 
without the risk of a preexisting condition exclusions for them or 
their 5 million dependents. An additional 2 million workers who changed 
jobs and had some smaller amount of prior coverage, faced reduced 
waiting periods before receiving full coverage for them and their 3 
million dependents.\14\
---------------------------------------------------------------------------

    \14\ We calculated these estimates using internal runs off the 
MEPS-HC. These runs gave the number of total job changers, total job 
changers that had employer-sponsored insurance (ESI), and whether 
this coverage had been for less than 12 months or not. Estimates for 
dependents were based off the ratio of policy-holders to total 
dependents from the March 2003 Current Population Survey (March 
CPS). This approach to the question of how many people are impacted 
by increased portability parallels that of the September 1995 U.S. 
General Accounting Office (GAO), Report HEHS-95-257, ``Health 
Insurance Portability: Reform Could Ensure Continued Coverage for up 
to 25 Million Americans,'' September 1995.
---------------------------------------------------------------------------

    The most direct effect of HIPAA's statutory group market 
portability provisions is the extension of coverage to individuals and 
preexisting conditions not otherwise covered. This extension of 
coverage entails both benefits and costs. Individuals enjoying expanded 
coverage will realize benefits. In some instances these individuals 
will gain coverage for services they otherwise would have purchased 
out-of-pocket, thereby reaping a simple and direct financial benefit In 
other instances the extension of coverage will induce individuals to 
consume more (or different) health care services, reaping a benefit 
which has financial value, and which in some cases will produce 
additional indirect benefits both to the individual (improved health) 
and possibly to the economy at large (increased productivity).\15\ The 
simple financial value of the direct benefits (essentially the dollar 
value of the extended coverage) is estimated to be $515 million.\16\ 
The indirect benefits are

[[Page 78741]]

difficult to quantify (and the Departments have not attempted to do 
so), but may be large in aggregate, and will be large for at least some 
individuals whose health outcomes may be substantially improved.
---------------------------------------------------------------------------

    \15\ For more detailed information, see Ellen O'Brien's article 
``Employer' Benefits from Workers' Health Insurance'' Milbank 
Quarterly, Vol. 1 No. 1, 2003. She provides an extensive analysis of 
the literature on benefits accruing to employers from offering 
health benefits. She reports that researchers are beginning to 
calculate the costs to employers of unhealthy employees. Her work 
provides information on studies that have demonstrated that poor 
health may be related to lower productivity. For example, she 
discusses studies that have examined the effects on workplace 
productivity of specific health conditions and show that poor health 
reduces workers' productivity at work, and that effective health 
care treatments can reduce productivity losses and may even pay for 
themselves in terms of increased productivity.
    \16\ The estimate of $515 million is the 1999 projection 
published in the August 1, 1996 Congressional Budget Office (CBO) 
report, ``Estimate of Costs of Private Sector Mandates;'' Bill 
Number H.R. 3103, indexed. The index is derived from the average 
annual percent change from 1999 to 2004 in aggregate private health 
insurance expenditures, as reported in Table 3 of the ``National 
Health Care Projections Tables'' by the Centers for Medicare & 
Medicaid Services, Office of the Actuary. CBO estimated the direct 
cost to the private sector would total about $300 million in 1999. 
The specific items included in the estimate are: (1) Limiting the 
length of time employer-sponsored and group insurance plans could 
withhold coverage for pre-existing conditions, and (2) requiring 
that periods of continuous prior health plan coverage be credited 
against pre-existing condition exclusions of a new plan.
    According to CBO, two-thirds of the cost reflects the provision 
to limit exclusions for pre-existing conditions. The key components 
of this estimate are: (1) The number of people who would have more 
of their medical expenses covered by insurance if exclusions were 
limited to one year or less, and (2) the average cost to insurers of 
that newly insured medical care. The provision crediting prior 
coverage against current exclusions will account for a third of the 
cost. This estimate is based on two components: (1) The number of 
people who would receive some added coverage, and (2) the additional 
full-year cost of coverage, adjusted to reflect the estimated number 
of months of that coverage.
---------------------------------------------------------------------------

    Another indirect (though intended) benefit of HIPAA's portability 
provisions is a reduction in so-called ``job lock.'' Job lock occurs 
when an individual stays in a job with health insurance that he or she 
would prefer to leave out of concern that he or she would lose coverage 
for care of his or her own or a covered dependent's preexisting 
condition\17\.
---------------------------------------------------------------------------

    \17\ Findings on the effect of health insurance coverage on job 
mobility have been mixed. A thorough assessment of the job lock 
literature in the past 10 years concluded that the most convincing 
evidence suggests that health insurance plays an important role in 
job mobility decisions, but is unclear as to its implications (see 
Gruber, Jonathan and Brigitte C. Madrian, 2002, Health Insurance, 
Labor Supply and Job Mobility: A Critical Review of the Literature, 
NBER Working Paper Series, No. 8817). A major concern in this 
literature has been to find an identification strategy able to 
overcome the potential correlation between the holding of employer-
sponsored health insurance and other factors affecting job mobility 
independent from health insurance (see Anna Sanz de Galdeano, 2004. 
Health Insurance and Job Mobility: Evidence from Clinton's Second 
Mandate, Center for Studies in Economics and Finance Working Paper, 
No. 122). This is illustrated by the 2004 Health Confidence Survey 
which finds that 27 percent of the non-aged population reported that 
they or an immediate family member had experienced some form of job 
lock, but only 15 percent of those attributed the job-lock to a 
preexisting condition (see Ruth Helman & Paul Frostin, ``Public 
Attitudes on the U.S. Health Care System: Findings from the Health 
Confidence Survey.'' Employee Benefits Research Institute, Issue 
Brief no. 275 (EBRI, November 2004)).
---------------------------------------------------------------------------

    No attempt is made here to quantify increases in labor force 
mobility attributable to reduced job lock under HIPAA. However, it is 
noted that at least two indirect economic effects are likely to follow 
such increased mobility. First, the cost of coverage for some 
preexisting conditions will be transferred from one plan or issuer to 
another.\18\ Second, if, as is likely, a result is movement of workers 
into more productive jobs, the overall economy will benefit.
---------------------------------------------------------------------------

    \18\ This transfer generally implies offsetting costs and 
benefits. It is possible, however, that in some instances 
individuals' mobility will allow them to exploit opportunities for 
adverse selection by moving into a richer health plan (see Cutler, 
D. and Reber, S., 1998. Paying for health insurance: the tradeoff 
between competition and adverse selection. Quarterly Journal of 
Economics 113, 433-466, and Cutler, D. and Zeckhauser, R. 2000. The 
anatomy of health insurance, in Culyer, A., Newhouse, J.P. (Eds.), 
Handbook of Health Economics, Vol. 1A. Elsevier, Amsterdam, pp. 564-
629. For a contrasting study see, Pauly, M.V., Mitchell, O. and 
Zeng, Y. 2004 ``Death Spiral Or Euthanasia? The Demise Of Generous 
Group Health Insurance Coverage'' NBER Working Paper No. 10464, for 
a discussion). Such movements would constitute extensions of 
coverage with costs and benefits resembling those of direct 
extensions of coverage under HIPAA.
---------------------------------------------------------------------------

    It should be noted that the benefits of HIPAA's portability 
provisions in any given year will be concentrated in a relatively small 
population--generally, individuals who because of some combination of 
family health status and use of health services, job mobility, and plan 
provisions related to preexisting condition exclusions or enrollment 
opportunities, gain coverage under HIPAA for needed care that would 
otherwise not be covered.
    According to CBO, any point in time, about 100,000 individuals 
would have a preexisting condition exclusion reduced for prior 
creditable coverage. An additional 45,000 would gain added coverage in 
the individual market.\19\
---------------------------------------------------------------------------

    \19\ Congressional Budget Office, ``Estimate of Costs of Private 
Sector Mandates; Bill Number H.R. 3103, August 1, 1996.
---------------------------------------------------------------------------

    The direct costs of HIPAA's portability provisions generally 
include the cost of extending coverage to additional services, as well 
as certain attendant administrative costs. The cost of extended 
coverage is estimated at $515 million annually. The major 
administrative costs include the cost of providing certificates of 
creditable coverage, and possibly the cost of carrying out special 
enrollments and offsets of preexisting condition exclusion periods. The 
Departments did not attempt to fully estimate the administrative costs 
of the HIPAA statute but did, in crafting this regulation, attempt to 
constrain these costs, where possible. without compromising HIPAA's 
intent, as discussed below.
    The Departments considered the probable incidence of these costs. 
The Departments believe that by and large the cost of HIPAA, like all 
of the cost of group health benefits, are borne by covered workers.\20\ 
The most direct ways this cost can be shifted to workers is through 
increases in employee premium shares or reductions (or smaller 
increases) in pay or other components of compensation. Other paths for 
shifting of HIPAA's cost to workers might include increases in 
deductibles or other cost sharing, or other reductions in the richness 
of health benefits.
---------------------------------------------------------------------------

    \20\ The voluntary nature of the employment-based health benefit 
system in conjunction with the open and dynamic character of labor 
markets make explicit as well as implicit negotiations on 
compensation a key determinant of the prevalence of employee 
benefits coverage. It is likely that 80% to 100% of the cost of 
employee benefits is borne by workers through reduced wages (see for 
example Jonathan Gruber and Alan B. Krueger, ``The Incidence of 
Mandated Employer-Provided Insurance: Lessons from Workers 
Compensation Insurance,'' Tax Policy and Economy (1991); Jonathan 
Gruber, ``The Incidence of Mandated Maternity Benefits,'' American 
Economic Review, Vol. 84 (June 1994), pp. 622-641; Lawrence H. 
Summers, ``Some Simple Economics of Mandated Benefits,'' American 
Economic Review, Vol. 79, No. 2 (May 1989); Louise Sheiner, ``Health 
Care Costs, Wages, and Aging,'' Federal Reserve Board of Governors 
working paper, April 1999; and Edward Montgomery, Kathryn Shaw, and 
Mary Ellen Benedict, ``Pensions and Wages: An Hedonic Price Theory 
Approach,'' International Economic Review, Vol. 33 No. 1, Feb. 
1992). The prevalence of benefits is therefore largely dependent on 
the efficacy of this exchange. If workers perceive that there is the 
potential for inappropriate denial of benefits they will discount 
their value to adjust for this risk. This discount drives a wedge in 
the compensation negotiation, limiting its efficiency. With workers 
unwilling to bear the full cost of the benefit, fewer benefits will 
be provided. To the extent which workers perceive a federal 
regulation supported by enforcement authority to improve the 
security and quality of benefits, the differential between the 
employers' costs and workers' willingness to accept wage offsets is 
minimized.
---------------------------------------------------------------------------

    Whereas the benefits of HIPAA are concentrated in a relatively 
small population, the costs are distributed broadly across plans and 
enrollees. The cost for affected large, self-insured or experience 
rated group plans is spread across all enrollees in the plan. The cost 
for small insured plans typically is spread across large populations of 
small plans and their enrollees, partly as a result of State laws that 
compress small group premium rates.
    The Departments have considered whether the costs imposed by 
HIPAA's statutory portability provisions have had any major indirect 
negative effects, and concluded that such effects are possible but 
probably small.
    Any mandate to increase the richness or availability of health 
insurance adds to the cost of insurance. It is possible that some small 
number of employers already at the brink of affordability would drop 
coverage in response to the implementation of HIPAA. The number of 
employers so affected is probably limited in part because as noted 
above, employers can shift HIPAA's cost to workers in various ways, 
including through increases in employee premium shares or cost 
sharing--though such increases might prompt some workers at the margin 
to decline coverage. Economic literature provides some estimates of the 
responsiveness of employers and workers to increases in the price of 
insurance.\21\
---------------------------------------------------------------------------

    \21\ Research shows that while the share of employers offering 
insurance is generally stable and eligibility rates have only 
declined slightly over time, the overall increase in uninsured 
workers is due to the decline in worker take-up rates, which workers 
primarily attribute to cost. Research on elasticity of coverage, 
however, has focused on getting uninsured workers to adopt coverage 
(which appears to require large subsidies) rather than covered 
workers opting out of coverage. This makes it difficult to ascertain 
the loss in coverage that would result from a marginal increase in 
costs. (See, for example, David M. Cutler ``Employee Costs and the 
Decline in Health Insurance Coverage'' NBER Working Paper 
<greek-i>9036. July 2002; Gruber, Jonathon and Ebonya Washington. 
``Subsidies to Employee Health Insurance Premiums and the Health 
Insurance Market'' NBER Working Paper <greek-i>9567. March 2003; and 
Cooper, PF and J. Vistnes. ``Workers' Decisions to Take-up Offered 
Insurance Coverage: Assessing the Importance of Out-of-Pocket 
Costs'' Med Care 2003, 41(7 Suppl): III35-43.) Finally, economic 
discussions on elasticity of insurance tend to view coverage as a 
discrete concept and does not consider that the value of coverage 
may have also changed.

---------------------------------------------------------------------------

[[Page 78742]]

    The Departments note, however, that cost increases attributable to 
HIPAA are not price increases per se but reflect the cost to enrich 
benefits, implying that negative responses should be smaller than would 
be expected in connection with pure price increases. The Departments 
also note that the estimated $515 million cost associated with 
extensions of coverage under HIPAA amounts to a small fraction of one 
percent of total expenditures by private group health plans.\22\ This 
compares with average annual group premium growth of 9.4 percent for 
family coverage between 1996 and 2002.\23\ To the extent that such 
increases are small, they are likely to have a negligible effect on 
employers' decisions to provide health insurance and in workers' 
decisions to enroll.
---------------------------------------------------------------------------

    \22\ While these costs are expected in aggregate to be less than 
one percent of total expenditures by group health plans, the statute 
may disproportionately affect particular plans.
    \23\ This is the average annual rate of increase in total family 
premiums as reported in the Medical Expenditure Panel Survey, 
Insurance Component (MEPS-IC) public tables, 1996-2002.
---------------------------------------------------------------------------

    Various other studies to date suggest that any negative indirect 
effects of HIPAA are relatively minor. In one study,\24\ large 
employers and health benefit consultants reported few ongoing problems 
in adopting HIPAA's portability provisions. Many issuers interviewed 
for the report said that their plans tended to require few changes to 
comply with HIPAA. This is probably because many large employer plans 
had already incorporated portability protections, similar to those of 
HIPAA. A second study indicates that while the share of small firms 
(those with fewer than 200 workers) offering health insurance has 
increased slightly from 1996 to 2004, the share has drifted downward 
from its high of 68 percent in the economic boom year of 2000.\25\ In 
addition, in aggregate, employers covered a larger proportion of health 
care costs for family plans in 2002 than in 1996, with a slight 
decrease in the share of single plans over the same time period.\26\
---------------------------------------------------------------------------

    \24\ U.S. General Accounting Office, Report HEH-99-100, 
``Private Health Insurance: Progress and Challenges in Implementing 
1996 Federal Standards,'' pp. 6-7, May 1999.
    \25\ Gabel, Jon R. et al. ``Health Benefits in 2004: Four Years 
of Double Digit Premium Increases Take Their Toll on Coverage'' 
Health Affairs, Volume 23, Number 5, September/October 2004.
    \26\ As reported in the MEPS-IC 1996-2002 public tables.
---------------------------------------------------------------------------

    The data above suggest that the HIPAA changes may have been less 
significant in the decision about health insurance coverage than 
overall economic conditions and labor market forces. In fact, there is 
no evidence that any indirect economic effect, positive or negative, 
can be readily attributed to the statute. Therefore, it appears that 
HIPAA has not placed an unreasonable burden on health plans.
    There has been a significant decrease in the prevalence of 
preexisting condition exclusion clauses among large plans. A major 
employee benefits survey \27\ reported that in 1996, 59 percent of the 
employees in small firms (less than 200 employees) were subject to pre-
existing condition limitations. In 2002, the figure had dropped to 33 
percent. If preexisting condition limitation exists for new employees, 
the average number of months to wait before coverage declined from 10.7 
months in 1996 to 10.0 months in 2002. A discussion of results from a 
1998 version of the same survey noted that, overall, 42 percent of 
employers reported making changes to their plans' preexisting condition 
clauses due to HIPAA. The Departments are not aware of any surveys that 
have consistently tracked the prevalence of preexisting condition 
exclusions in smaller plans (less than 200 employees) since 1996.
---------------------------------------------------------------------------

    \27\ Employee Health Benefits 2002 Study, Kaiser Family 
Foundation.
---------------------------------------------------------------------------

    Another significant trend involves the use of waiting periods. 
According to a survey of employers with 200 or more employees, the 
average number of days that new enrollees must wait before health 
coverage takes effect increased from 40 days in 1996 to 58 days in 
1998. Some attribute this increase indirectly to HIPAA, suggesting that 
some plans may be replacing the preexisting condition exclusion period 
with a longer waiting period.
Effects of the Final Regulations
    By clarifying and securing HIPAA's statutory portability 
protections, these regulations will help ensure that HIPAA rights are 
fully realized. The result is likely to be a small increase at the 
margin in the direct and indirect economic effects of HIPAA's statutory 
portability provisions.
    Additional economic benefits derive from the regulations' 
clarifications of HIPAA's portability requirements. The regulations 
provide clarity through both their provisions and their examples of how 
those provisions apply in various circumstances. By clarifying 
employees' rights and plan sponsors' obligations under HIPAA's 
portability provisions, the regulations will reduce uncertainty and 
costly disputes over these rights and obligations. They will promote 
employers' and employees' common understanding of the value of group 
health plan benefits and confidence in the security and predictability 
of those benefits, thereby improving labor market efficiency and 
fostering the establishment and continuation of group health plans by 
employers.
    Many provisions of the final regulations closely resemble 
provisions included in the interim final regulations that the final 
regulations supplant. The economic impact of this regulatory action 
therefore generally will be limited to the impact of provisions that 
were not so included. These include both provisions directed at the 
scope of HIPAA's portability protections and provisions establishing 
administrative requirements intended to safeguard those protections.
Scope of Protections
    These final regulations are intended to secure and implement 
HIPAA's group market portability provisions under certain special 
circumstances. The final regulations therefore contain a number of 
provisions intended to clearly delimit the scope of HIPAA's portability 
protections. Most of these provisions closely resemble and will have 
the same effect as provisions of the interim final regulations. Others, 
however, clarify or expand at the margin the range of situations to 
which HIPAA's portability protections explicitly apply. These include 
the requirement that health coverage under foreign government programs 
be treated as creditable coverage for purposes of limiting the 
application of preexisting condition exclusions; the extension of 
special enrollment rights to individuals who lose eligibility for 
coverage in connection with the application of lifetime benefit limits, 
movement out of an HMO's service area, or the termination of a health 
coverage option previously offered under a group health plan; and the 
establishment of a special enrollment right for a participant to change 
among available coverage options under a group health plan when

[[Page 78743]]

adding one or more dependents in connection with marriage, adoption, or 
placement for adoption. Each of these provisions is expected to result 
in a small increase in the economic effects of HIPAA's statutory 
portability protections.
    The Departments lack any firm basis for quantifying the number of 
individuals likely to be affected by these provisions, and therefore 
were unable to quantify the resultant increase in transfers. However, 
given the special and narrow circumstances to which these provisions 
apply, the number of affected individuals, and therefore the increase 
in transfers under these regulations, is expected to be small. In 
reaching this conclusion, the Departments considered the following.
    In 2002, an estimated 359,000 employer sponsored insurance 
enrollees had moved from abroad in the previous year.\28\ It is not 
known what fraction of these had been covered under foreign government 
programs, or of those, what fraction joined group health plans that 
included preexisting condition exclusions while suffering from and 
requiring additional care for preexisting conditions. Comparing GAO's 
estimate of the number of individuals who could potentially benefit 
from HIPAA's portability protections (20 million or more individuals 
with prior creditable coverage who join new health plans in a given 
year) with CBO estimates of the number who might actually have added 
coverage for needed care (145,000) produces a ratio of about 1 percent. 
If this proportion holds for group health plan enrollees who moved to 
the U.S. from abroad, and if all such enrollees were previously covered 
under a foreign government program (an upper bound), then about 4,000 
individuals annually might gain coverage for needed care under the 
final regulation's provision treating coverage under such programs as 
creditable coverage.\29\
---------------------------------------------------------------------------

    \28\ Calculation from the 2003 March CPS.
    \29\ This number is 1 percent of the number of ESI holders in 
2002 who moved from abroad the previous year.
---------------------------------------------------------------------------

    The provision that clarifies the special enrollment rights of 
individuals who lose eligibility for coverage in connection with the 
movement out of an HMO's service area is expected mainly to benefit 
certain individuals with COBRA continuation coverage. The number of 
individuals affected in any given year is expected to be small. It is 
estimated that in 2002, fewer than 10,000 COBRA enrollees were covered 
by HMOs, moved across State or county lines, and were potentially 
eligible for coverage under another family member's group plan.\30\
---------------------------------------------------------------------------

    \30\ Estimates using the March 2003 CPS. It should be noted that 
CPS is a weighted survey and that the number of actual observations 
of individuals that were COBRA enrollees with HMO coverage, moved 
across counties and/or States and were eligible for coverage under 
another family member's group plan was extremely small. As a result, 
this estimate is extremely noisy.
---------------------------------------------------------------------------

    Lifetime benefit limits (LBL) are fairly common in-group health 
plans and are typically set at $1 million or more.\31\ Based on 
tabulations made by an actuarial consulting firm,\32\ in plans with 
LBLs of $1 million, annually about 27 per one million enrollees will 
exceed the benefit limits. In plans with a $500,000 LBL, the comparable 
figure is 181 per million enrollees; and in plans with a $2 million 
LBL, 5 per million enrollees. Combining these proportions with a 
distribution of LBLs by plan enrollment reported by a national employer 
survey, yields about 8,700 plan enrollees who will annually reach their 
plan's LBL. The Departments recognize that those individuals who do 
encounter such limits by definition have very high expenses, a large 
portion of which would be transferred to the group health plans into 
which they special enroll. It is possible, however, that a large share 
of such transfers would have occurred even without the provisions of 
these final regulations establishing a right to special enroll upon 
encountering lifetime limits. For example, the same individuals might 
have enrolled in these plans during open enrollment opportunities, 
either before or after encountering the limits. Alternatively, 
participants who have met their LBL might have left their jobs in order 
to create a special enrollment opportunity.
---------------------------------------------------------------------------

    \31\ See, for example, U.S. Bureau of Labor Statistics, Employee 
Benefits in Medium and Large Establishments, 2000 (Washington, DC: 
U.S. Government Printing Office, 2003).
    \32\ Milliman USA memorandum dated December 6, 2001.
---------------------------------------------------------------------------

    The Departments estimate that annually about 1 million families 
will be eligible for special enrollments due to marriage, 2 million due 
to births. About one-half of employees offered coverage at work have a 
choice of plan options.\33\ Taken together, this suggests that the 
number of individuals gaining special enrollment rights to switch among 
options within group health plans when adding dependents may be large. 
However, it is unclear how many will elect to switch, or how many who 
do would have been so permitted even absent the applicable requirement 
of these final regulations. More important, it is unclear whether 
merely switching among options will increase or decrease the transfer 
from the affected health plans to the affected individuals. In any 
event, individuals exercising this special enrollment right to switch 
options are not gaining coverage under any particular group health plan 
but are merely modifying that coverage.
---------------------------------------------------------------------------

    \33\ Sally Trude, ``Who Has A Choice of Health Plans?'' Center 
for Studying Health Systems Change, Issue Brief: Findings from HSC, 
No. 27, Feb. 2000.
---------------------------------------------------------------------------

Administrative Requirements
    In order to secure and implement HIPAA's group market special 
enrollment and portability provisions, both the HIPAA statute and these 
final regulations establish certain administrative requirements. As 
noted above, the HIPAA statute generally requires plans and issuers to 
provide certifications of prior coverage to individuals leaving 
coverage. These regulations additionally require plans and issuers to 
notify individuals of their special enrollments rights, any preexisting 
condition exclusion provisions, and the applicability of such 
exclusions where individuals provide evidence of prior coverage that is 
of insufficient duration to fully offset exclusion periods. Plans will 
incur cost to comply with these administrative requirements. The 
Departments estimate the administrative cost to prepare and distribute 
certifications and notices to be $97 million per year.\34\
---------------------------------------------------------------------------

    \34\ The Departments assumed that a clerical-level employee at a 
total labor cost (wages, fringe benefits, and overhead) of $17.24 
per-hour would generate the certificates. The Departments further 
assumed that the average time required to complete a certification 
is 4 to 5 minutes for all employers. This average is based on the 
assumption that most employers will automate the certification 
process. The cost of printing/copying, an envelope and postage is 
assumed to be $0.53 per employee.
---------------------------------------------------------------------------

    Nearly all of this, or $96 million, is attributable to the 
preparation and distribution of certifications as required under 
HIPAA's statutory provisions. These final regulations include numerous 
special provisions that serve to reduce plans' cost of providing 
certifications. These provisions serve to streamline and standardize 
certifications' content and format, minimize the number of duplicative 
certifications issued, and encourage the use of telephone calls and 
other modes of communication when they will suffice in lieu of written 
certifications. The provisions are designed to minimize certifications' 
cost while ensuring that individuals and plans (respectively) can 
efficiently and effectively demonstrate and verify prior coverage. 
Demonstration and verification of prior coverage enable individuals to 
secure and plans to

[[Page 78744]]

appropriately honor individuals' portability rights under HIPAA.
    First, an intermediate issuer will not have to issue a certificate 
of creditable coverage when an individual changes options under the 
same health plan. In lieu of the certificate, the issuer could simply 
transmit to the plan information regarding individuals' effective date 
of coverage and the last date of coverage. An individual would retain 
the right to get a certificate automatically and upon request if he/she 
leaves the plan.
    Second, telephonic certification will fulfill the requirement to 
send a certificate if the receiving plan, prior plan, and the 
participant mutually agree to that arrangement. The individual can get 
a written certificate upon request.
    Third, in situations where the issuer and the plan contract for the 
issuer to complete the certificates, the plan would not remain liable 
even if the issuer failed to send the certificates.
    Fourth, the period of coverage listed on automatic certificates 
will be only the last continuous period of coverage without any break. 
This is the most efficient and simplest method of record keeping for 
plans and issuers.
    Fifth, the period of coverage contained in the on-request 
certification will be all periods of coverage ending within 24 months 
before the date of the request. Essentially, a plan may simply look 
back two years and send copies of any automatic certificates issued 
during that period.
    Sixth, a single certificate of creditable coverage can be provided 
with respect to both a participant and the participant's dependent if 
the information is identical for each individual. In addition, 
certificates may contain combined information for families.
    Seventh, plans and issuers are not required to furnish an 
individual an automatic certificate with respect to a dependent until 
they know or should know of the dependent's cessation of coverage under 
the plan.
    The above reductions in burdens on plans and issuers may cause more 
frequent circumstances in which participants are required to 
demonstrate creditable coverage. In order to help offset some of the 
additional burdens that will be shifted to the participants, the 
regulations provide the following protections:
    First, if an individual is required to demonstrate dependent 
status, the group health plan or issuer is required to treat the 
individual as having furnished a certificate showing the dependent 
status if the individual attests to such dependency and the period of 
dependent status, and the individual cooperates with the plan's or 
issuer's efforts to verify the dependent status.
    Second, if the accuracy of a certificate is contested or a 
certificate is unavailable when needed, individuals have the right to 
demonstrate creditable coverage through the presentation of relevant 
corroborating evidence of creditable coverage during the relevant time 
period and by cooperating with the plan's efforts to verify the 
individual's coverage.
    Third, plans and issuers that impose preexisting condition 
exclusion periods must notify participants of this fact. They must also 
explain that prior creditable coverage can reduce the length of a 
preexisting condition exclusion period, and that the plan or issuer 
will assist in obtaining a certificate of creditable coverage from any 
prior plan or issuer, if necessary. An exclusion may not be imposed 
until this notice is given. This is beneficial to participants insofar 
as it forewarns them of potential claim denials and enables them to 
more easily exercise their right to protection from such denials under 
HIPAA's portability provisions.
    Fourth, after an individual has presented evidence of creditable 
coverage, the plan or issuer must give the individual a written notice 
of the length of any preexisting condition exclusion that remains after 
offsetting for creditable coverage.
    Fifth, certificates of creditable coverage now contain educational 
language that more explicitly informs consumers of their HIPAA rights.
    As noted earlier in this preamble, GAO and others recommended that 
educational statements be added to certifications. The Departments have 
provided a suitable statement for use by plans, thereby eliminating any 
need for plans to develop their own. The cost of providing such 
statements is therefore expected to be minimal.
    The administrative cost associated with provision of certifications 
under the HIPAA statute and these final regulations was estimated as 
follows.
    The ongoing burden associated with the issuance of automatic 
certifications by group plans is estimated as a function of (1) the 
number of events that trigger such issuances; (2) the statutory and 
regulatory specifications for the content of the certificates; and (3) 
the assumed burden associated with the preparation and distribution of 
each certificate.
    Certifications must be issued when an event, defined as the loss of 
health coverage by a participant or by a dependent, occurs. Survey 
tabulations indicate that there were 54.3 million events in 2002.\35\ 
Additionally, results from the March 1999 CPS indicate that about 3 
percent of the events involve a dependent who lives at a different 
address than the participant. In such cases the plan is required to 
send out at least 2 separate certificates.
---------------------------------------------------------------------------

    \35\ This total is based on internal estimates. The ESI total 
(24.0 million or 20.4 private-sector and 3.6 public sector) was the 
sum of policy-holders who left jobs, according to the 2002 MEPS-HC, 
and their dependents, which were derived by multiplying this number 
by the CPS ratio of dependents to policy holders. Based on counts of 
the number of people with partial year coverage off the March 2003 
CPS, we estimated the SCHIP and Medicaid total to be 14.9 million 
and the private individual market to be 15.4 million.
---------------------------------------------------------------------------

    The model certificate illustrates how plans may incur a lesser 
burden when it is certified that prior periods of coverage were of at 
least 18 months duration; that is, in lieu of a specific date that 
coverage began and waiting/affiliation period information, such 
certifications may simply indicate that the prior period of coverage 
lasted at least 18 months. In contrast, certifications of shorter 
periods of prior coverage must contain the specific dates when 
coverage--and waiting/affiliation periods, if applicable--began.
    Combining the options for the addresses with the time periods 
results in four categories of certifications: (1) One address and less 
than 18 months of prior creditable coverage (12 million annual events); 
(2) one address and 18 months or more of prior creditable coverage 
(42.3 million); (3) more than one address and prior creditable coverage 
of less than 18 months (.4 million); and (4) more than one address and 
18 months or more of prior creditable coverage (1.3 million).
    Consistent with the interim regulations, we assume that the per-
certificate preparation effort requires 5 minutes for prior creditable 
coverage of less than 18 months and 4 minutes for creditable coverage 
that is greater than or equal to 18 months. The additional cost 
involved in sending certificates to multiple addresses for a given 
participant is assumed to be 50 percent of the cost of sending a 
certificate to one address.
    The Departments assumed that the certificates would be generated by 
a clerical-level employee who costs the plans $17.24 per-hour in wages, 
benefits, and overhead \36\. The cost of printing/copying, envelope and 
postage is assumed to be $0.53 per envelope.

[[Page 78745]]

The resulting annual burden is $96 million.
---------------------------------------------------------------------------

    \36\ The total labor cost is derived from wage and compensation 
data from the Bureau of Labor Statistics and includes an overhead 
componenet, which is a multiple of compensation based on the 
Government Cost Estimate.
---------------------------------------------------------------------------

    A more strict interpretation of the statute would require plans to 
send an individual certificate to each affected enrollee. Obviously, 
this requirement would significantly increase the administrative 
burden. Such strict interpretation would result in plans sending 80.1 
million certificates annually at cost of $157.6 million, which is $61.6 
million more than the burden imposed by the final regulations.
    The final regulations require that plans, in response to requests 
made by or on behalf of individuals, provide certificates at any time 
while the individual is covered under the plan and for up to 24 months 
after coverage ceases. Such requests are most likely to be made by an 
individual who is unable to locate the certificate of creditable 
coverage from his/her prior health plan and is seeking to enroll in a 
group health plan that imposes preexisting condition exclusions or is 
seeking to reduce or eliminate any preexisting condition exclusions 
that may otherwise be applied by a source of individual coverage.
    The Departments believe that the requested certificate burden is 
negligible for several reasons. First, as reported by a major health 
benefits survey \37\ the proportion of enrollees that are in plans with 
preexisting condition exclusion has not changed from the 2000 share of 
30 percent, which is down from the pre-HIPAA level of 60 percent. In 
addition, the educational statement contained within the certificate 
serves to highlight the importance of the document, thus encouraging 
its retention. Furthermore, the final rules permit individuals to 
establish and verify creditable coverage through other means. Finally, 
evidence of creditable coverage may be transmitted through means other 
than documentation, such as by a telephone call from the plan to a 
third party.
---------------------------------------------------------------------------

    \37\ Kaiser Family Foundation and Health Research and 
Educational Trust, Employer Health Benefits 2002 Annual Survey.
---------------------------------------------------------------------------

    Apart from the provision of certifications of prior creditable 
coverage, the remaining $1 million in administrative expenses is 
attributable to notices of special enrollment rights and of the 
existence and application of preexisting condition exclusions, which 
are required under these final regulations. The Departments believe 
that these notices are necessary to ensure that individuals understand 
and can effectively exercise their special enrollment and portability 
rights under HIPAA, and that the benefits of ensuring this outweigh the 
associated administrative cost.
    The regulations provide that a plan must provide all employees with 
a notice describing special enrollment rights at or before the time the 
employee is initially offered the opportunity to enroll in the plan. 
The final regulations provide model language that can be used to 
satisfy the special enrollment notice requirement.
    The Departments believe that the vast majority of plans have 
incorporated special enrollment language into their plan enrollment 
materials. Thus, the cost of the special enrollment notice is assumed 
to be a minor component of the overall cost of providing plan 
enrollment materials.
    The number of employees who are hired annually by firms that offer 
health coverage and who are eligible for such coverage was developed by 
using the proportion of workers with less than one year of tenure as 
reported by the 2002 MEPS-HC. We find that 10.8 million employees will 
be newly hired and eligible for health coverage on an annual basis. We 
assume that the special enrollment notice is a component of plan 
enrollment materials and requires one-third of a sheet of paper. Using 
a printing/copying cost of $0.05 per page, we assume that the per-
notice cost is $0.0167. The resulting burden is estimated to be 
$180,687.
    The final regulations provide that every plan with a preexisting 
condition exclusion must provide in writing a general notice of such 
provisions to individuals eligible for enrollment under the plan. The 
regulations specify what is required of the plan when it discusses the 
amount and terms of its preexisting condition exclusion, including the 
person to contact for further information regarding the exclusions. In 
addition, the regulations clarify that issuers must describe the actual 
maximum exclusion period that is applicable to a specific plan. A 
regulatory example provides sample language that the plans can use to 
develop the general notice.
    Based on results from the 2000 Kaiser/HRET Employer survey, we 
assume that 35 percent of plans with fewer than 100 participants, and 
28 percent of plans with 100 or more participants, apply preexisting 
condition exclusions to new enrollees. If we apply these proportions to 
the number of new employees hired each year by employers that offer 
health coverage, we find that 3.1 million employees will annually 
receive the general notice.
    As with the special enrollment notice, we assume that the general 
notice of preexisting condition exclusions is a component of standard 
plan enrollment materials and also requires one-third of a sheet of 
paper. Assuming a printing/copying cost of $0.05 per page, the per-
notice cost is $0.0167. The annual cost to distribute the notices is 
therefore estimated to be $51,852.
    The regulations provide sample notice language, thus relieving the 
plans of the burden of developing their own forms.
    Plans that impose preexisting condition exclusions must, in 
writing, notify participants who have failed to demonstrate sufficient 
prior coverage that the exclusions will affect them and indicate what 
the length of the preexisting condition exclusion period is, with 
respect to each individual. This notice is required only in situations 
in which the individual presents evidence of prior creditable coverage 
and its duration is less than the maximum length of the preexisting 
condition exclusion period. These final regulations clarify that the 
notice does not have to identify any medical conditions that are 
specific to the individual and subject to the exclusion.
    Tabulations from the 2002 MEPS-HC indicate that, of those 
individuals in the private sector who changed jobs and hold insurance, 
16 percent have prior creditable coverage of between 1 day and 12 
months, which is the statutory preexisting condition exclusion maximum 
for individuals who enroll when first eligible. The comparable 
proportion for State and local governmental plans is 18 percent. 
Applying these proportion to the number of general preexisting 
exclusion notices required, yields 478,569 notices that will be 
prepared annually.
    Because the notice must be customized to reflect each individual's 
applicable preexisting condition exclusion period, the per-notice time 
burden will be greater than that for the general notice of preexisting 
condition exclusions. Consistent with the interim final regulations, 
the Departments assume that the preparation of each notice will take 
two minutes of a clerical-level employee's time, plus $0.47 for 
printing, envelope, and postage, yielding a per-notice cost of $1.05. 
The resulting annual burden is estimated to be $582,497.
    The estimated burden represents only the cost of producing and 
distributing the notices and does not include the expense involved in 
determining the adequacy of a participant's prior coverage, since such 
expense is considered to be part of the regular business practices 
necessary to comply with HIPAA's statutory portability protections.

[[Page 78746]]

    Generally all of the major administrative requirements included in 
the final regulations were also included in the interim final 
regulations. The final regulations make minor additions to two 
requirements, however. They require plans to include educational 
statements in certificates of creditable coverage and to maintain in 
writing their procedures for requesting certificates. The cost of these 
additional requirements is expected to be small, and was not estimated 
separately from the overall cost of providing certificates.
    The requirement that certification request procedures be in writing 
is essentially a clarification of the interim final regulations' 
requirement that plans have such procedures. The Departments believe it 
is likely that most plans already maintain written procedures, and 
therefore expect the cost of this requirement to be small. The 
Departments did not estimate the cost of this requirement separately 
from the cost of providing certifications on request.
    Other changes included in these final regulations are likely to 
slightly reduce plans' cost to provide certain HIPAA-required notices. 
Included with the final regulation is new sample language for general 
and specific notices of preexisting condition exclusions, which may 
serve to reduce some plans' costs of providing these notices, and 
revised sample language for special enrollment rights notices. The 
final regulations also clarify the narrow scope of the requirement to 
notify certain affected participants of the specific application of 
preexisting condition exclusions, thereby potentially relieving some 
plans of the burden associated with a more expansive interpretation of 
that requirement. The Departments did not estimate the impact of these 
provisions separately from the overall cost of providing general and 
specific notices of preexisting condition exclusions and notices of 
special enrollment rights.

Statutory Authority

    The Department of the Treasury final rule is adopted pursuant to 
the authority contained in sections 7805 and 9833 of the Code (26 
U.S.C. 7805, 9833).
    The Department of Labor final rule is adopted pursuant to the 
authority contained in 29 U.S.C. 1027, 1059, 1135, 1161-1168, 1169, 
1181-1183, 1181 note, 1185, 1185a, 1185b, 1191, 1191a, 1191b, and 
1191c, sec. 101(g), Public Law 104-191, 101 Stat. 1936; sec. 401(b), 
Public Law 105-200, 112 Stat. 645 (42 U.S.C. 651 note); Secretary of 
Labor's Order 1-2003, 68 FR 5374 (Feb. 3, 2003).
    The Department of HHS final rule is adopted pursuant to the 
authority contained in sections 2701 through 2763, 2791, and 2792 of 
the PHS Act (42 U.S.C. 300gg through 300gg-63, 300gg-91, and 300gg-92), 
as added by HIPAA (Public Law 104-191, 110 Stat. 1936), and amended by 
MHPA and NMHPA (Public Law 104-204, 110 Stat. 2935), and WHCRA (Public 
Law 105-277, 112 Stat. 2681-436).

List of Subjects

26 CFR Part 54

    Excise taxes, Health care, Health insurance, Pensions, Reporting 
and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

29 CFR Part 2590

    Continuation coverage, Disclosure, Employee benefit plans, Group 
health plans, Health care, Health insurance, Medical child support, 
Reporting and recordkeeping requirements.

45 CFR Parts 144 and 146

    Health care, Health insurance, Reporting and recordkeeping 
requirements, and State regulation of health insurance.

Adoption of Amendments to the Regulations

Internal Revenue Service

26 CFR Chapter I

0
Accordingly, 26 CFR parts 54 and 602 are amended as follows:

PART 54--PENSION EXCISE TAXES

0
Paragraph 1. The authority citation for part 54 is amended by:
0
1. Removing the citations for 54.9801-1T, 54.9801-2T, 54.9801-3T, 
54.9801-4T, 54.9801-5T, 54.9801-6T, 54.9831-1T, and 54.9833-1T.
0
2. Adding entries in numerical order for 54.9801-1, 54.9801-2, 54.9801-
3, 54.9801-4, 54.9801-5, 54.9801-6, 54.9802-1, 54.9831-1, and 54.9833-
1.
    The additions read as follows:

    Authority: 26 U.S.C. 7805. * * *

    Section 54.9801-1 also issued under 26 U.S.C. 9833.
    Section 54.9801-2 also issued under 26 U.S.C. 9833.
    Section 54.9801-3 also issued under 26 U.S.C. 9801(c)(4), 
9801(e)(3), and 9833.
    Section 54.9801-4 also issued under 26 U.S.C. 9801(c)(1)(I) and 
9833.
    Section 54.9801-5 also issued under 26 U.S.C. 9801(c)(4), 
9801(e)(3), and 9833.
    Section 54.9801-6 also issued under 26 U.S.C. 9833.
    Section 54.9802-1 also issued under 26 U.S.C. 9833. * * *
    Section 54.9831-1 also issued under 26 U.S.C. 9833.
    Section 54.9833-1 also issued under 26 U.S.C. 9833.


0
Par. 2. Sections 54.9801-1T, 54.9801-2T, 54.9801-3T, 54.9801-4T, 
54.9801-5T, 54.9801-6T, 54.9831-1T, and 54.9833-1T are removed.

0
Par. 3. Sections 54.9801-1, 54.9801-2, 54.9801-3, 54.9801-4, 54.9801-5, 
54.9801-6, 54.9831-1, and 54.9833-1 are added to read as follows:


Sec.  54.9801-1  Basis and scope.

    (a) Statutory basis. Sections 54.9801-1 through 54.9801-6, 54.9802-
1, 54.9802-1T, 54.9811-1T, 54.9812-1T, 54.9831-1, and 54.9833-1 
(portability sections) implement Chapter 100 of Subtitle K of the 
Internal Revenue Code of 1986.
    (b) Scope. A group health plan may provide greater rights to 
participants and beneficiaries than those set forth in these 
portability sections. These portability sections set forth minimum 
requirements for group health plans concerning:
    (1) Limitations on a preexisting condition exclusion period.
    (2) Certificates and disclosure of previous coverage.
    (3) Rules relating to creditable coverage.
    (4) Special enrollment periods.
    (5) Prohibition against discrimination on the basis of health 
factors.
    (c) Similar requirements under the Employee Retirement Income 
Security Act and the Public Health Service Act. Sections 701, 702, 703, 
711, 712, 732, and 733 of the Employee Retirement Income Security Act 
of 1974 and sections 2701, 2702, 2704, 2705, 2721, and 2791 of the 
Public Health Service Act impose requirements similar to those imposed 
under Chapter 100 of Subtitle K with respect to health insurance 
issuers offering group health insurance coverage. See 29 CFR part 2590 
and 45 CFR parts 144, 146, and 148. See also part B of Title XXVII of 
the Public Health Service Act and 45 CFR part 148 for other rules 
applicable to health insurance offered in the individual market 
(defined in Sec.  54.9801-2).


Sec.  54.9801-2  Definitions.

    Unless otherwise provided, the definitions in this section govern 
in applying the provisions of Sec. Sec.  54.9801-1 through 54.9801-6, 
54.9802-1, 54.9802-1T, 54.9811-1T, 54.9812-1T, 54.9831-1, and 54.9833-
1.
    Affiliation period means a period of time that must expire before 
health insurance coverage provided by an HMO becomes effective, and 
during which the HMO is not required to provide benefits.

[[Page 78747]]

    COBRA definitions:
    (1) COBRA means Title X of the Consolidated Omnibus Budget 
Reconciliation Act of 1985, as amended.
    (2) COBRA continuation coverage means coverage, under a group 
health plan, that satisfies an applicable COBRA continuation provision.
    (3) COBRA continuation provision means section 4980B (other than 
paragraph (f)(1) of section 4980B insofar as it relates to pediatric 
vaccines), sections 601-608 of ERISA, or Title XXII of the PHS Act.
    (4) Exhaustion of COBRA continuation coverage means that an 
individual's COBRA continuation coverage ceases for any reason other 
than either failure of the individual to pay premiums on a timely 
basis, or for cause (such as making a fraudulent claim or an 
intentional misrepresentation of a material fact in connection with the 
plan). An individual is considered to have exhausted COBRA continuation 
coverage if such coverage ceases--
    (i) Due to the failure of the employer or other responsible entity 
to remit premiums on a timely basis;
    (ii) When the individual no longer resides, lives, or works in the 
service area of an HMO or similar program (whether or not within the 
choice of the individual) and there is no other COBRA continuation 
coverage available to the individual; or
    (iii) When the individual incurs a claim that would meet or exceed 
a lifetime limit on all benefits and there is no other COBRA 
continuation coverage available to the individual.
    Condition means a medical condition.
    Creditable coverage means creditable coverage within the meaning of 
Sec.  54.9801-4(a).
    Dependent means any individual who is or may become eligible for 
coverage under the terms of a group health plan because of a 
relationship to a participant.
    Employee Retirement Income Security Act of 1974 (ERISA) means the 
Employee Retirement Income Security Act of 1974, as amended (29 U.S.C. 
1001 et seq.).
    Enroll means to become covered for benefits under a group health 
plan (that is, when coverage becomes effective), without regard to when 
the individual may have completed or filed any forms that are required 
in order to become covered under the plan. For this purpose, an 
individual who has health coverage under a group health plan is 
enrolled in the plan regardless of whether the individual elects 
coverage, the individual is a dependent who becomes covered as a result 
of an election by a participant, or the individual becomes covered 
without an election.
    Enrollment date definitions (enrollment date, first day of 
coverage, and waiting period) are set forth in Sec.  54.9801-
3(a)(3)(i), (ii), and (iii).
    Excepted benefits means the benefits described as excepted in Sec.  
54.9831(c).
    Genetic information means information about genes, gene products, 
and inherited characteristics that may derive from the individual or a 
family member. This includes information regarding carrier status and 
information derived from laboratory tests that identify mutations in 
specific genes or chromosomes, physical medical examinations, family 
histories, and direct analysis of genes or chromosomes.
    Group health insurance coverage means health insurance coverage 
offered in connection with a group health plan.
    Group health plan or plan means a group health plan within the 
meaning of Sec.  54.9831(a).
    Group market means the market for health insurance coverage offered 
in connection with a group health plan. (However, certain very small 
plans may be treated as being in the individual market, rather than the 
group market; see the definition of individual market in this section.)
    Health insurance coverage means benefits consisting of medical care 
(provided directly, through insurance or reimbursement, or otherwise) 
under any hospital or medical service policy or certificate, hospital 
or medical service plan contract, or HMO contract offered by a health 
insurance issuer. Health insurance coverage includes group health 
insurance coverage, individual health insurance coverage, and short-
term, limited-duration insurance. However, benefits described in Sec.  
54.9831(c)(2) are not treated as benefits consisting of medical care.
    Health insurance issuer or issuer means an insurance company, 
insurance service, or insurance organization (including an HMO) that is 
required to be licensed to engage in the business of insurance in a 
State and that is subject to State law that regulates insurance (within 
the meaning of section 514(b)(2) of ERISA). Such term does not include 
a group health plan.
    Health maintenance organization or HMO means--
    (1) A federally qualified health maintenance organization (as 
defined in section 1301(a) of the PHS Act);
    (2) An organization recognized under State law as a health 
maintenance organization; or
    (3) A similar organization regulated under State law for solvency 
in the same manner and to the same extent as such a health maintenance 
organization.
    Individual health insurance coverage means health insurance 
coverage offered to individuals in the individual market, but does not 
include short-term, limited-duration insurance. Individual health 
insurance coverage can include dependent coverage.
    Individual market means the market for health insurance coverage 
offered to individuals other than in connection with a group health 
plan. Unless a State elects otherwise in accordance with section 
2791(e)(1)(B)(ii) of the PHS Act, such term also includes coverage 
offered in connection with a group health plan that has fewer than two 
participants who are current employees on the first day of the plan 
year.
    Issuer means a health insurance issuer.
    Late enrollment definitions (late enrollee and late enrollment) are 
set forth in Sec.  54.9801-3(a)(3)(v) and (vi) .
    Medical care has the meaning given such term by section 213(d), 
determined without regard to section 213(d)(1)(C) and so much of 
section 213(d)(1)(D) as relates to qualified long-term care insurance.
    Medical condition or condition means any condition, whether 
physical or mental, including, but not limited to, any condition 
resulting from illness, injury (whether or not the injury is 
accidental), pregnancy, or congenital malformation. However, genetic 
information is not a condition.
    Participant means participant within the meaning of section 3(7) of 
ERISA.
    Placement, or being placed, for adoption means the assumption and 
retention of a legal obligation for total or partial support of a child 
by a person with whom the child has been placed in anticipation of the 
child's adoption. The child's placement for adoption with such person 
ends upon the termination of such legal obligation.
    Plan year means the year that is designated as the plan year in the 
plan document of a group health plan, except that if the plan document 
does not designate a plan year or if there is no plan document, the 
plan year is--
    (1) The deductible or limit year used under the plan;
    (2) If the plan does not impose deductibles or limits on a yearly 
basis, then the plan year is the policy year;
    (3) If the plan does not impose deductibles or limits on a yearly 
basis, and either the plan is not insured or the insurance policy is 
not renewed on an annual basis, then the plan year is the employer's 
taxable year; or

[[Page 78748]]

    (4) In any other case, the plan year is the calendar year.
    Preexisting condition exclusion means preexisting condition 
exclusion within the meaning of Sec.  54.9801-3(a)(1).
    Public health plan means public health plan within the meaning of 
Sec.  54.9801-4(a)(1)(ix).
    Public Health Service Act (PHS Act) means the Public Health Service 
Act (42 U.S.C. 201, et seq.).
    Short-term, limited-duration insurance means health insurance 
coverage provided pursuant to a contract with an issuer that has an 
expiration date specified in the contract (taking into account any 
extensions that may be elected by the policyholder without the issuer's 
consent) that is less than 12 months after the original effective date 
of the contract.
    Significant break in coverage means a significant break in coverage 
within the meaning of Sec.  54.9801-4(b)(2)(iii).
    Special enrollment means enrollment in a group health plan under 
the rights described in Sec.  54.9801-6 or in group health insurance 
coverage under the rights described in 29 CFR 2590.701-6 or 45 CFR 
146.117.
    State health benefits risk pool means a State health benefits risk 
pool within the meaning of Sec.  54.9801-4(a)(1)(vii).
    Waiting period means waiting period within the meaning of Sec.  
54.9801-3(a)(3)(iii).


Sec.  54.9801-3  Limitations on preexisting condition exclusion period.

    (a) Preexisting condition exclusion--(1) Defined--(i) A preexisting 
condition exclusion means a limitation or exclusion of benefits 
relating to a condition based on the fact that the condition was 
present before the effective date of coverage under a group health plan 
or group health insurance coverage, whether or not any medical advice, 
diagnosis, care, or treatment was recommended or received before that 
day. A preexisting condition exclusion includes any exclusion 
applicable to an individual as a result of information relating to an 
individual's health status before the individual's effective date of 
coverage under a group health plan or group health insurance coverage, 
such as a condition identified as a result of a pre-enrollment 
questionnaire or physical examination given to the individual, or 
review of medical records relating to the pre-enrollment period.
    (ii) Examples. The rules of this paragraph (a)(1) are illustrated 
by the following examples:

    Example 1. (i) Facts. A group health plan provides benefits 
solely through an insurance policy offered by Issuer S. At the 
expiration of the policy, the plan switches coverage to a policy 
offered by Issuer T. Issuer T's policy excludes benefits for any 
prosthesis if the body part was lost before the effective date of 
coverage under the policy.
    (ii) Conclusion. In this Example 1, the exclusion of benefits 
for any prosthesis if the body part was lost before the effective 
date of coverage is a preexisting condition exclusion because it 
operates to exclude benefits for a condition based on the fact that 
the condition was present before the effective date of coverage 
under the policy. (Therefore, the exclusion of benefits is required 
to comply with the limitations on preexisting condition exclusions 
in this section. For an example illustrating the application of 
these limitations to a succeeding insurance policy, see Example 3 of 
paragraph (a)(3)(iv) of this section.)
    Example 2.  (i) Facts. A group health plan provides coverage for 
cosmetic surgery in cases of accidental injury, but only if the 
injury occurred while the individual was covered under the plan.
    (ii) Conclusion. In this Example 2, the plan provision excluding 
cosmetic surgery benefits for individuals injured before enrolling 
in the plan is a preexisting condition exclusion because it operates 
to exclude benefits relating to a condition based on the fact that 
the condition was present before the effective date of coverage. The 
plan provision, therefore, is subject to the limitations on 
preexisting condition exclusions in this section.
    Example 3.  (i) Facts. A group health plan provides coverage for 
the treatment of diabetes, generally not subject to any lifetime 
dollar limit. However, if an individual was diagnosed with diabetes 
before the effective date of coverage under the plan, diabetes 
coverage is subject to a lifetime limit of $10,000.
    (ii) Conclusion. In this Example 3, the $10,000 lifetime limit 
is a preexisting condition exclusion because it limits benefits for 
a condition based on the fact that the condition was present before 
the effective date of coverage. The plan provision, therefore, is 
subject to the limitations on preexisting condition exclusions in 
this section.
    Example 4.  (i) Facts. A group health plan provides coverage for 
the treatment of acne, subject to a lifetime limit of $2,000. The 
plan counts against this $2,000 lifetime limit on acne treatment 
benefits provided under prior health coverage.
    (ii) Conclusion. In this Example 4, counting benefits for a 
specific condition provided under prior health coverage against a 
lifetime limit for that condition is a preexisting condition 
exclusion because it operates to limit benefits for a condition 
based on the fact that the condition was present before the 
effective date of coverage. The plan provision, therefore, is 
subject to the limitations on preexisting condition exclusions in 
this section.
    Example 5.  (i) Facts. When an individual's coverage begins 
under a group health plan, the individual generally becomes eligible 
for all benefits. However, benefits for pregnancy are not available 
until the individual has been covered under the plan for 12 months.
    (ii) Conclusion. In this Example 5, the requirement to be 
covered under the plan for 12 months to be eligible for pregnancy 
benefits is a subterfuge for a preexisting condition exclusion 
because it is designed to exclude benefits for a condition 
(pregnancy) that arose before the effective date of coverage. 
Because a plan is prohibited under paragraph (b)(5) of this section 
from imposing any preexisting condition exclusion on pregnancy, the 
plan provision is prohibited. However, if the plan provision 
included an exception for women who were pregnant before the 
effective date of coverage under the plan (so that the provision 
applied only to women who became pregnant on or after the effective 
date of coverage) the plan provision would not be a preexisting 
condition exclusion (and would not be prohibited by paragraph (b)(5) 
of this section).
    Example 6.  (i) Facts. A group health plan provides coverage for 
medically necessary items and services, generally including 
treatment of heart conditions. However, the plan does not cover 
those same items and services when used for treatment of congenital 
heart conditions.
    (ii) Conclusion. In this Example 6, the exclusion of coverage 
for treatment of congenital heart conditions is a preexisting 
condition exclusion because it operates to exclude benefits relating 
to a condition based on the fact that the condition was present 
before the effective date of coverage. The plan provision, 
therefore, is subject to the limitations on preexisting condition 
exclusions in this section.
    Example 7.  (i) Facts. A group health plan generally provides 
coverage for medically necessary items and services. However, the 
plan excludes coverage for the treatment of cleft palate.
    (ii) Conclusion. In this Example 7, the exclusion of coverage 
for treatment of cleft palate is not a preexisting condition 
exclusion because the exclusion applies regardless of when the 
condition arose relative to the effective date of coverage. The plan 
provision, therefore, is not subject to the limitations on 
preexisting condition exclusions in this section.
    Example 8.  (i) Facts. A group health plan provides coverage for 
treatment of cleft palate, but only if the individual being treated 
has been continuously covered under the plan from the date of birth.
    (ii) Conclusion. In this Example 8, the exclusion of coverage 
for treatment of cleft palate for individuals who have not been 
covered under the plan from the date of birth operates to exclude 
benefits in relation to a condition based on the fact that the 
condition was present before the effective date of coverage. The 
plan provision, therefore, is subject to the limitations on 
preexisting condition exclusions in this section.

    (2) General rules. Subject to paragraph (b) of this section 
(prohibiting the imposition of a preexisting condition exclusion with 
respect to certain individuals and conditions), a group health plan may 
impose, with respect to a participant or beneficiary, a preexisting 
condition exclusion only if the requirements of this paragraph (a)(2) 
are satisfied. (See section 701 of ERISA

[[Page 78749]]

and section 2701 of the PHS Act, under which these requirements are 
also imposed on a health insurance issuer offering group health 
insurance coverage.)
    (i) 6-month look-back rule. A preexisting condition exclusion must 
relate to a condition (whether physical or mental), regardless of the 
cause of the condition, for which medical advice, diagnosis, care, or 
treatment was recommended or received within the 6-month period (or 
such shorter period as applies under the plan) ending on the enrollment 
date.
    (A) For purposes of this paragraph (a)(2)(i), medical advice, 
diagnosis, care, or treatment is taken into account only if it is 
recommended by, 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 State law.
    (B) For purposes of this paragraph (a)(2)(i), the 6-month period 
ending on the enrollment date begins on the 6-month anniversary date 
preceding the enrollment date. For example, for an enrollment date of 
August 1, 1998, the 6-month period preceding the enrollment date is the 
period commencing on February 1, 1998 and continuing through July 31, 
1998. As another example, for an enrollment date of August 30, 1998, 
the 6-month period preceding the enrollment date is the period 
commencing on February 28, 1998 and continuing through August 29, 1998.
    (C) The rules of this paragraph (a)(2)(i) are illustrated by the 
following examples:

    Example 1.  (i) Facts. Individual A is diagnosed with a medical 
condition 8 months before A's enrollment date in Employer R's group 
health plan. A's doctor recommends that A take a prescription drug 
for 3 months, and A follows the recommendation.
    (ii) Conclusion. In this Example 1, Employer R's plan may impose 
a preexisting condition exclusion with respect to A's condition 
because A received treatment during the 6-month period ending on A's 
enrollment date in Employer R's plan by taking the prescription 
medication during that period. However, if A did not take the 
prescription drug during the 6-month period, Employer R's plan would 
not be able to impose a preexisting condition exclusion with respect 
to that condition.
    Example 2.  (i) Facts. Individual B is treated for a medical 
condition 7 months before the enrollment date in Employer S's group 
health plan. As part of such treatment, B's physician recommends 
that a follow-up examination be given 2 months later. Despite this 
recommendation, B does not receive a follow-up examination, and no 
other medical advice, diagnosis, care, or treatment for that 
condition is recommended to B or received by B during the 6-month 
period ending on B's enrollment date in Employer S's plan.
    (ii) Conclusion. In this Example 2, Employer S's plan may not 
impose a preexisting condition exclusion with respect to the 
condition for which B received treatment 7 months prior to the 
enrollment date.
    Example 3.  (i) Facts. Same facts as Example 2, except that 
Employer S's plan learns of the condition and attaches a rider to 
B's certificate of coverage excluding coverage for the condition. 
Three months after enrollment, B's condition recurs, and Employer 
S's plan denies payment under the rider.
    (ii) Conclusion. In this Example 3, the rider is a preexisting 
condition exclusion and Employer S's plan may not impose a 
preexisting condition exclusion with respect to the condition for 
which B received treatment 7 months prior to the enrollment date. 
(In addition, such a rider would violate the provisions of Sec.  
54.9802-1, even if B had received treatment for the condition within 
the 6-month period ending on the enrollment date.)
    Example 4.  (i) Facts. Individual C has asthma and is treated 
for that condition several times during the 6-month period before 
C's enrollment date in Employer T's plan. Three months after the 
enrollment date, C begins coverage under Employer T's plan. Two 
months later, C is hospitalized for asthma.
    (ii) Conclusion. In this Example 4, Employer T's plan may impose 
a preexisting condition exclusion with respect to C's asthma because 
care relating to C's asthma was received during the 6-month period 
ending on C's enrollment date (which, under the rules of paragraph 
(a)(3)(i) of this section, is the first day of the waiting period).
    Example 5.  (i) Facts. Individual D, who is subject to a 
preexisting condition exclusion imposed by Employer U's plan, has 
diabetes, as well as retinal degeneration, a foot condition, and 
poor circulation (all of which are conditions that may be directly 
attributed to diabetes). D receives treatment for these conditions 
during the 6-month period ending on D's enrollment date in Employer 
U's plan. After enrolling in the plan, D stumbles and breaks a leg.
    (ii) Conclusion. In this Example 5, the leg fracture is not a 
condition related to D's diabetes, retinal degeneration, foot 
condition, or poor circulation, even though they may have 
contributed to the accident. Therefore, benefits to treat the leg 
fracture cannot be subject to a preexisting condition exclusion. 
However, any additional medical services that may be needed because 
of D's preexisting diabetes, poor circulation, or retinal 
degeneration that would not be needed by another patient with a 
broken leg who does not have these conditions may be subject to the 
preexisting condition exclusion imposed under Employer U's plan.

    (ii) Maximum length of preexisting condition exclusion. A 
preexisting condition exclusion is not permitted to extend for more 
than 12 months (18 months in the case of a late enrollee) after the 
enrollment date. For example, for an enrollment date of August 1, 1998, 
the 12-month period after the enrollment date is the period commencing 
on August 1, 1998 and continuing through July 31, 1999; the 18-month 
period after the enrollment date is the period commencing on August 1, 
1998 and continuing through January 31, 2000.
    (iii) Reducing a preexisting condition exclusion period by 
creditable coverage--(A) The period of any preexisting condition 
exclusion that would otherwise apply to an individual under a group 
health plan is reduced by the number of days of creditable coverage the 
individual has as of the enrollment date, as counted under Sec.  
54.9801-4. Creditable coverage may be evidenced through a certificate 
of creditable coverage (required under Sec.  54.9801-5(a)), or through 
other means in accordance with the rules of Sec.  54.9801-5(c).
    (B) The rules of this paragraph (a)(2)(iii) are illustrated by the 
following example:

    Example.  (i) Facts. Individual D works for Employer X and has 
been covered continuously under X's group health plan. D's spouse 
works for Employer Y. Y maintains a group health plan that imposes a 
12-month preexisting condition exclusion (reduced by creditable 
coverage) on all new enrollees. D enrolls in Y's plan, but also 
stays covered under X's plan. D presents Y's plan with evidence of 
creditable coverage under X's plan.
    (ii) Conclusion. In this Example, Y's plan must reduce the 
preexisting condition exclusion period that applies to D by the 
number of days of coverage that D had under X's plan as of D's 
enrollment date in Y's plan (even though D's coverage under X's plan 
was continuing as of that date).

    (iv) Other standards. See Sec.  54.9802-1 for other standards that 
may apply with respect to certain benefit limitations or restrictions 
under a group health plan. Other laws may also apply, such as the 
Uniformed Services Employment and Reemployment Rights Act (USERRA), 
which can affect the application of a preexisting condition exclusion 
to certain individuals who are reinstated in a group health plan 
following active military service.
    (3) Enrollment definitions--(i) Enrollment date means the first day 
of coverage (as described in paragraph (a)(3)(ii) of this section) or, 
if there is a waiting period, the first day of the waiting period. If 
an individual receiving benefits under a group health plan changes 
benefit packages, or if the plan changes group health insurance 
issuers, the individual's enrollment date does not change.

[[Page 78750]]

    (ii) First day of coverage means, in the case of an individual 
covered for benefits under a group health plan, the first day of 
coverage under the plan and, in the case of an individual covered by 
health insurance coverage in the individual market, the first day of 
coverage under the policy or contract.
    (iii) Waiting period means the period that must pass before 
coverage for an employee or dependent who is otherwise eligible to 
enroll under the terms of a group health plan can become effective. If 
an employee or dependent enrolls as a late enrollee or special 
enrollee, any period before such late or special enrollment is not a 
waiting period. If an individual seeks coverage in the individual 
market, a waiting period begins on the date the individual submits a 
substantially complete application for coverage and ends on --
    (A) If the application results in coverage, the date coverage 
begins;
    (B) If the application does not result in coverage, the date on 
which the application is denied by the issuer or the date on which the 
offer of coverage lapses.
    (iv) The rules of paragraphs (a)(3)(i), (ii), and (iii) of this 
section are illustrated by the following examples:

    Example 1.  (i) Facts. Employer V's group health plan provides 
for coverage to begin on the first day of the first payroll period 
following the date an employee is hired and completes the applicable 
enrollment forms, or on any subsequent January 1 after completion of 
the applicable enrollment forms. Employer V's plan imposes a 
preexisting condition exclusion for 12 months (reduced by the 
individual's creditable coverage) following an individual's 
enrollment date. Employee E is hired by Employer V on October 13, 
1998, and on October 14, 1998 E completes and files all the forms 
necessary to enroll in the plan. E's coverage under the plan becomes 
effective on October 25, 1998 (which is the beginning of the first 
payroll period after E's date of hire).
    (ii) Conclusion. In this Example 1, E's enrollment date is 
October 13, 1998 (which is the first day of the waiting period for 
E's enrollment and is also E's date of hire). Accordingly, with 
respect to E, the permissible 6-month period in paragraph (a)(2)(i) 
is the period from April 13, 1998 through October 12, 1998, the 
maximum permissible period during which Employer V's plan can apply 
a preexisting condition exclusion under paragraph (a)(2)(ii) is the 
period from October 13, 1998 through October 12, 1999, and this 
period must be reduced under paragraph (a)(2)(iii) by E's days of 
creditable coverage as of October 13, 1998.
    Example 2.  (i) Facts. A group health plan has two benefit 
package options, Option 1 and Option 2. Under each option a 12-month 
preexisting condition exclusion is imposed. Individual B is enrolled 
in Option 1 on the first day of employment with the employer 
maintaining the plan, remains enrolled in Option 1 for more than one 
year, and then decides to switch to Option 2 at open season.
    (ii) Conclusion. In this Example 2, B cannot be subject to any 
preexisting condition exclusion under Option 2 because any 
preexisting condition exclusion period would have to begin on B's 
enrollment date, which is B's first day of coverage, rather than the 
date that B enrolled in Option 2. Therefore, the preexisting 
condition exclusion period expired before B switched to Option 2.
    Example 3.  (i) Facts. On May 13, 1997, Individual E is hired by 
an employer and enrolls in the employer's group health plan. The 
plan provides benefits solely through an insurance policy offered by 
Issuer S. On December 27, 1998, E's leg is injured in an accident 
and the leg is amputated. On January 1, 1999, the plan switches 
coverage to a policy offered by Issuer T. Issuer T's policy excludes 
benefits for any prosthesis if the body part was lost before the 
effective date of coverage under the policy.
    (ii) Conclusion. In this Example 3, E's enrollment date is May 
13, 1997, E's first day of coverage. Therefore, the permissible 6-
month look-back period for the preexisting condition exclusion 
imposed under Issuer T's policy begins on November 13, 1996 and ends 
on May 12, 1997. In addition, the 12-month maximum permissible 
preexisting condition exclusion period begins on May 13, 1997 and 
ends on May 12, 1998. Accordingly, because no medical advice, 
diagnosis, care, or treatment was recommended to or received by E 
for the leg during the 6-month look-back period (even though medical 
care was provided within the 6-month period preceding the effective 
date of E's coverage under Issuer T's policy), the plan may not 
impose any preexisting condition exclusion with respect to E. 
Moreover, even if E had received treatment during the 6-month look-
back period, the plan still would not be permitted to impose a 
preexisting condition exclusion because the 12-month maximum 
permissible preexisting condition exclusion period expired on May 
12, 1998 (before the effective date of E's coverage under Issuer T's 
policy). See 29 CFR 2590.701-3(a)(3)(iv) Example 3 and 45 CFR 
146.111(a)(3)(iv) Example 3 for a conclusion that Issuer T is 
similarly prohibited from imposing a preexisting condition exclusion 
with respect to E.
    Example 4.  (i) Facts. A group health plan limits eligibility 
for coverage to full-time employees of Employer Y. Coverage becomes 
effective on the first day of the month following the date the 
employee becomes eligible. Employee C begins working full-time for 
Employer Y on April 11. Prior to this date, C worked part-time for 
Y. C enrolls in the plan and coverage is effective May 1.
    (ii) Conclusion. In this Example 4, C's enrollment date is April 
11 and the period from April 11 through April 30 is a waiting 
period. The period while C was working part-time, and therefore not 
in an eligible class of employees, is not part of the waiting 
period.
    Example 5.  (i) Facts. To be eligible for coverage under a 
multiemployer group health plan in the current calendar quarter, the 
plan requires an individual to have worked 250 hours in covered 
employment during the previous quarter. If the hours requirement is 
satisfied, coverage becomes effective on the first day of the 
current calendar quarter. Employee D begins work on January 28 and 
does not work 250 hours in covered employment during the first 
quarter (ending March 31). D works at least 250 hours in the second 
quarter (ending June 30) and is enrolled in the plan with coverage 
effective July 1 (the first day of the third quarter).
    (ii) Conclusion. In this Example 5, D's enrollment date is the 
first day of the quarter during which D satisfies the hours 
requirement, which is April 1. The period from April 1 through June 
30 is a waiting period.

    (v) Late enrollee means an individual whose enrollment in a plan is 
a late enrollment.
    (vi) (A) Late enrollment means enrollment of an individual under a 
group health plan other than--
    (1) On the earliest date on which coverage can become effective for 
the individual under the terms of the plan; or
    (2) Through special enrollment. (For rules relating to special 
enrollment, see Sec.  54.9801-6.)
    (B) If an individual ceases to be eligible for coverage under the 
plan, and then subsequently becomes eligible for coverage under the 
plan, only the individual's most recent period of eligibility is taken 
into account in determining whether the individual is a late enrollee 
under the plan with respect to the most recent period of coverage. 
Similar rules apply if an individual again becomes eligible for 
coverage following a suspension of coverage that applied generally 
under the plan.
    (vii) Examples. The rules of paragraphs (a)(3)(v) and (vi) of this 
section are illustrated by the following examples:

    Example 1.  (i) Facts. Employee F first becomes eligible to be 
covered by Employer W's group health plan on January 1, 1999 but 
elects not to enroll in the plan until a later annual open 
enrollment period, with coverage effective January 1, 2001. F has no 
special enrollment right at that time.
    (ii) Conclusion. In this Example 1, F is a late enrollee with 
respect to F's coverage that became effective under the plan on 
January 1, 2001.
    Example 2.  (i) Facts. Same facts as Example 1, except that F 
terminates employment with Employer W on July 1, 1999 without having 
had any health insurance coverage under the plan. F is rehired by 
Employer W on January 1, 2000 and is eligible for and elects 
coverage under Employer W's plan effective on January 1, 2000.
    (ii) Conclusion. In this Example 2, F would not be a late 
enrollee with respect to F's coverage that became effective on 
January 1, 2000.


[[Page 78751]]


    (b) Exceptions pertaining to preexisting condition exclusions--(1) 
Newborns--(i) In general. Subject to paragraph (b)(3) of this section, 
a group health plan may not impose any preexisting condition exclusion 
on a child who, within 30 days after birth, is covered under any 
creditable coverage. Accordingly, if a child is enrolled in a group 
health plan (or other creditable coverage) within 30 days after birth 
and subsequently enrolls in another group health plan without a 
significant break in coverage (as described in Sec.  54.9801-
4(b)(2)(iii)), the other plan may not impose any preexisting condition 
exclusion on the child.
    (ii) Examples. The rules of this paragraph (b)(1) are illustrated 
by the following examples:

    Example 1.  (i) Facts. Individual E, who has no prior creditable 
coverage, begins working for Employer W and has accumulated 210 days 
of creditable coverage under Employer W's group health plan on the 
date E gives birth to a child. Within 30 days after the birth, the 
child is enrolled in the plan. Ninety days after the birth, both E 
and the child terminate coverage under the plan. Both E and the 
child then experience a break in coverage of 45 days before E is 
hired by Employer X and the two are enrolled in Employer X's group 
health plan.
    (ii) Conclusion. In this Example 1, because E's child is 
enrolled in Employer W's plan within 30 days after birth, no 
preexisting condition exclusion may be imposed with respect to the 
child under Employer W's plan. Likewise, Employer X's plan may not 
impose any preexisting condition exclusion on E's child because the 
child was covered under creditable coverage within 30 days after 
birth and had no significant break in coverage before enrolling in 
Employer X's plan. On the other hand, because E had only 300 days of 
creditable coverage prior to E's enrollment date in Employer X's 
plan, Employer X's plan may impose a preexisting condition exclusion 
on E for up to 65 days (66 days if the 12-month period after E's 
enrollment date in X's plan includes February 29).
    Example 2.  (i) Facts. Individual F is enrolled in a group 
health plan in which coverage is provided through a health insurance 
issuer. F gives birth. Under State law applicable to the health 
insurance issuer, health care expenses incurred for the child during 
the 30 days following birth are covered as part of F's coverage. 
Although F may obtain coverage for the child beyond 30 days by 
timely requesting special enrollment and paying an additional 
premium, the issuer is prohibited under State law from recouping the 
cost of any expenses incurred for the child within the 30-day period 
if the child is not later enrolled.
    (ii) Conclusion. In this Example 2, the child is covered under 
creditable coverage within 30 days after birth, regardless of 
whether the child enrolls as a special enrollee under the plan. 
Therefore, no preexisting condition exclusion may be imposed on the 
child unless the child has a significant break in coverage.

    (2) Adopted children. Subject to paragraph (b)(3) of this section, 
a group health plan may not impose any preexisting condition exclusion 
on a child who is adopted or placed for adoption before attaining 18 
years of age and who, within 30 days after the adoption or placement 
for adoption, is covered under any creditable coverage. Accordingly, if 
a child is enrolled in a group health plan (or other creditable 
coverage) within 30 days after adoption or placement for adoption and 
subsequently enrolls in another group health plan without a significant 
break in coverage (as described in Sec.  54.9801-4(b)(2)(iii)), the 
other plan may not impose any preexisting condition exclusion on the 
child. This rule does not apply to coverage before the date of such 
adoption or placement for adoption.
    (3) Significant break in coverage. Paragraphs (b)(1) and (2) of 
this section no longer apply to a child after a significant break in 
coverage. (See Sec.  54.9801-4(b)(2)(iii) for rules relating to the 
determination of a significant break in coverage.)
    (4) Special enrollment. For special enrollment rules relating to 
new dependents, see Sec.  54.9801-6(b).
    (5) Pregnancy. A group health plan may not impose a preexisting 
condition exclusion relating to pregnancy.
    (6) Genetic information--(i) A group health plan may not impose a 
preexisting condition exclusion relating to a condition based solely on 
genetic information. However, if an individual is diagnosed with a 
condition, even if the condition relates to genetic information, the 
plan may impose a preexisting condition exclusion with respect to the 
condition, subject to the other limitations of this section.
    (ii) The rules of this paragraph (b)(6) are illustrated by the 
following example:

    Example.  (i) Facts. Individual A enrolls in a group health plan 
that imposes a 12-month maximum preexisting condition exclusion. 
Three months before A's enrollment, A's doctor told A that, based on 
genetic information, A has a predisposition towards breast cancer. A 
was not diagnosed with breast cancer at any time prior to A's 
enrollment date in the plan. Nine months after A's enrollment date 
in the plan, A is diagnosed with breast cancer.
    (ii) Conclusion. In this Example, the plan may not impose a 
preexisting condition exclusion with respect to A's breast cancer 
because, prior to A's enrollment date, A was not diagnosed with 
breast cancer.

    (c) General notice of preexisting condition exclusion. A group 
health plan imposing a preexisting condition exclusion must provide a 
written general notice of preexisting condition exclusion to 
participants under the plan and cannot impose a preexisting condition 
exclusion with respect to a participant or a dependent of the 
participant until such a notice is provided. (See 29 CFR 2590.701-3(c) 
and 45 CFR 146.111(c), which also impose this requirement on a health 
insurance issuer offering group health insurance coverage subject to a 
preexisting condition exclusion.)
    (1) Manner and timing. A plan must provide the general notice of 
preexisting condition exclusion as part of any written application 
materials distributed by the plan for enrollment. If the plan does not 
distribute such materials, the notice must be provided by the earliest 
date following a request for enrollment that the plan, acting in a 
reasonable and prompt fashion, can provide the notice.
    (2) Content. The general notice of preexisting condition exclusion 
must notify participants of the following:
    (i) The existence and terms of any preexisting condition exclusion 
under the plan. This description includes the length of the plan's 
look-back period (which is not to exceed 6 months under paragraph 
(a)(2)(i) of this section); the maximum preexisting condition exclusion 
period under the plan (which cannot exceed 12 months (or 18 months for 
late enrollees) under paragraph (a)(2)(ii) of this section); and how 
the plan will reduce the maximum preexisting condition exclusion period 
by creditable coverage (described in paragraph (a)(2)(iii) of this 
section).
    (ii) A description of the rights of individuals to demonstrate 
creditable coverage, and any applicable waiting periods, through a 
certificate of creditable coverage (as required by Sec.  54.9801-5(a)) 
or through other means (as described in Sec.  54.9801-5(c)). This must 
include a description of the right of the individual to request a 
certificate from a prior plan or issuer, if necessary, and a statement 
that the current plan will assist in obtaining a certificate from any 
prior plan or issuer, if necessary.
    (iii) A person to contact (including an address or telephone 
number) for obtaining additional information or assistance regarding 
the preexisting condition exclusion.
    (3) Duplicate notices not required. If a notice satisfying the 
requirements of this paragraph (c) is provided to an individual by 
another party, the plan's obligation to provide a general notice of 
preexisting condition exclusion with respect to that individual is 
satisfied. (See 29 CFR 2590.701-3(c)(3) and 45 CFR 146.111(c)(3), which 
provide that

[[Page 78752]]

the issuer's obligation is similarly satisfied.)
    (4) Example with sample language. The rules of this paragraph (c) 
are illustrated by the following example, which includes sample 
language that plans can use as a basis for preparing their own notices 
to satisfy the requirements of this paragraph (c):

    Example.  (i) Facts. A group health plan makes coverage 
effective on the first day of the first calendar month after hire 
and on each January 1 following an open season. The plan imposes a 
12-month maximum preexisting condition exclusion (18 months for late 
enrollees) and uses a 6-month look-back period. As part of the 
enrollment application materials, the plan provides the following 
statement:
    This plan imposes a preexisting condition exclusion. This means 
that if you have a medical condition before coming to our plan, you 
might have to wait a certain period of time before the plan will 
provide coverage for that condition. This exclusion applies only to 
conditions for which medical advice, diagnosis, care, or treatment 
was recommended or received within a six-month period. Generally, 
this six-month period ends the day before your coverage becomes 
effective. However, if you were in a waiting period for coverage, 
the six-month period ends on the day before the waiting period 
begins. The preexisting condition exclusion does not apply to 
pregnancy nor to a child who is enrolled in the plan within 30 days 
after birth, adoption, or placement for adoption.
    This exclusion may last up to 12 months (18 months if you are a 
late enrollee) from your first day of coverage, or, if you were in a 
waiting period, from the first day of your waiting period. However, 
you can reduce the length of this exclusion period by the number of 
days of your prior ``creditable coverage.'' Most prior health 
coverage is creditable coverage and can be used to reduce the 
preexisting condition exclusion if you have not experienced a break 
in coverage of at least 63 days. To reduce the 12-month (or 18-
month) exclusion period by your creditable coverage, you should give 
us a copy of any certificates of creditable coverage you have. If 
you do not have a certificate, but you do have prior health 
coverage, we will help you obtain one from your prior plan or 
issuer. There are also other ways that you can show you have 
creditable coverage. Please contact us if you need help 
demonstrating creditable coverage.
    All questions about the preexisting condition exclusion and 
creditable coverage should be directed to Individual B at Address M 
or Telephone Number N.

    (ii) Conclusion. In this Example, the plan satisfies the general 
notice requirement of this paragraph (c).
    (d) Determination of creditable coverage--(1) Determination within 
reasonable time. If a group health plan receives creditable coverage 
information under Sec.  54.9801-5, the plan is required, within a 
reasonable time following receipt of the information, to make a 
determination regarding the amount of the individual's creditable 
coverage and the length of any exclusion that remains. Whether this 
determination is made within a reasonable time depends on the relevant 
facts and circumstances. Relevant facts and circumstances include 
whether a plan's application of a preexisting condition exclusion would 
prevent an individual from having access to urgent medical care. (See 
29 CFR 2590.701-3(d) and 45 CFR 146.111(d), which also impose this 
requirement on a health insurance issuer offering group health 
insurance coverage.)
    (2) No time limit on presenting evidence of creditable coverage. A 
plan may not impose any limit on the amount of time that an individual 
has to present a certificate or other evidence of creditable coverage.
    (3) Example. The rules of this paragraph (d) are illustrated by the 
following example:

    Example.  (i) Facts. A group health plan imposes a preexisting 
condition exclusion period of 12 months. After receiving the general 
notice of preexisting condition exclusion, Individual H develops an 
urgent health condition before receiving a certificate of creditable 
coverage from H's prior group health plan. H attests to the period 
of prior coverage, presents corroborating documentation of the 
coverage period, and authorizes the plan to request a certificate on 
H's behalf in accordance with the rules of Sec.  54.9801-5.
    (ii) Conclusion. In this Example, the plan must review the 
evidence presented by H and make a determination of creditable 
coverage within a reasonable time that is consistent with the 
urgency of H's health condition. (This determination may be modified 
as permitted under paragraph (f) of this section.)

    (e) Individual notice of period of preexisting condition exclusion. 
After an individual has presented evidence of creditable coverage and 
after the plan has made a determination of creditable coverage under 
paragraph (d) of this section, the plan must provide the individual a 
written notice of the length of preexisting condition exclusion that 
remains after offsetting for prior creditable coverage. This individual 
notice is not required to identify any medical conditions specific to 
the individual that could be subject to the exclusion. A plan is not 
required to provide this notice if the plan does not impose any 
preexisting condition exclusion on the individual or if the plan's 
preexisting condition exclusion is completely offset by the 
individual's prior creditable coverage. (See 29 CFR 2590.701-3(e) and 
45 CFR 146.111(e), which also impose this requirement on a health 
insurance issuer offering group health insurance coverage.)
    (1) Manner and timing. The individual notice must be provided by 
the earliest date following a determination that the plan, acting in a 
reasonable and prompt fashion, can provide the notice.
    (2) Content. A plan must disclose--
    (i) Its determination of any preexisting condition exclusion period 
that applies to the individual (including the last day on which the 
preexisting condition exclusion applies);
    (ii) The basis for such determination, including the source and 
substance of any information on which the plan relied;
    (iii) An explanation of the individual's right to submit additional 
evidence of creditable coverage; and
    (iv) A description of any applicable appeal procedures established 
by the plan.
    (3) Duplicate notices not required. If a notice satisfying the 
requirements of this paragraph (e) is provided to an individual by 
another party, the plan's obligation to provide this individual notice 
of preexisting condition exclusion with respect to that individual is 
satisfied. (See 29 CFR 2590.701-3(e)(3) and 45 CFR 146.111(e)(3), which 
provide that the issuer's obligation is similarly satisfied.)
    (4) Examples. The rules of this paragraph (e) are illustrated by 
the following examples:

    Example 1.  (i) Facts. A group health plan imposes a preexisting 
condition exclusion period of 12 months. After receiving the general 
notice of preexisting condition exclusion, Individual G presents a 
certificate of creditable coverage indicating 240 days of creditable 
coverage. Within seven days of receipt of the certificate, the plan 
determines that G is subject to a preexisting condition exclusion of 
125 days, the last day of which is March 5. Five days later, the 
plan notifies G that, based on the certificate G submitted, G is 
subject to a preexisting condition exclusion period of 125 days, 
ending on March 5. The notice also explains the opportunity to 
submit additional evidence of creditable coverage and the plan's 
appeal procedures. The notice does not identify any of G's medical 
conditions that could be subject to the exclusion.
    (ii) Conclusion. In this Example 1, the plan satisfies the 
requirements of this paragraph (e).
    Example 2.  (i) Facts. Same facts as in Example 1, except that 
the plan determines that G has 430 days of creditable coverage based 
on G's certificate indicating 430 days of creditable coverage under 
G's prior plan.
    (ii) Conclusion. In this Example 2, the plan is not required to 
notify G that G will not be subject to a preexisting condition 
exclusion.

    (f) Reconsideration. Nothing in this section prevents a plan from 
modifying

[[Page 78753]]

an initial determination of creditable coverage if it determines that 
the individual did not have the claimed creditable coverage, provided 
that--
    (1) A notice of the new determination (consistent with the 
requirements of paragraph (e) of this section) is provided to the 
individual; and
    (2) Until the notice of the new determination is provided, the 
plan, for purposes of approving access to medical services (such as a 
pre-surgery authorization), acts in a manner consistent with the 
initial determination.


Sec.  54.9801-4  Rules relating to creditable coverage.

    (a) General rules--(1) Creditable coverage. For purposes of this 
section, except as provided in paragraph (a)(2) of this section, the 
term creditable coverage means coverage of an individual under any of 
the following:
    (i) A group health plan as defined in Sec.  54.9831-1(a).
    (ii) Health insurance coverage as defined in Sec.  54.9801-2 
(whether or not the entity offering the coverage is subject to Chapter 
100 of Subtitle K, and without regard to whether the coverage is 
offered in the group market, the individual market, or otherwise).
    (iii) Part A or B of Title XVIII of the Social Security Act 
(Medicare).
    (iv) Title XIX of the Social Security Act (Medicaid), other than 
coverage consisting solely of benefits under section 1928 of the Social 
Security Act (the program for distribution of pediatric vaccines).
    (v) Title 10 U.S.C. Chapter 55 (medical and dental care for members 
and certain former members of the uniformed services, and for their 
dependents; for purposes of Title 10 U.S.C. Chapter 55, uniformed 
services means the armed forces and the Commissioned Corps of the 
National Oceanic and Atmospheric Administration and of the Public 
Health Service).
    (vi) A medical care program of the Indian Health Service or of a 
tribal organization.
    (vii) A State health benefits risk pool. For purposes of this 
section, a State health benefits risk pool means--
    (A) An organization qualifying under section 501(c)(26);
    (B) A qualified high risk pool described in section 2744(c)(2) of 
the PHS Act; or
    (C) Any other arrangement sponsored by a State, the membership 
composition of which is specified by the State and which is established 
and maintained primarily to provide health coverage for individuals who 
are residents of such State and who, by reason of the existence or 
history of a medical condition --
    (1) Are unable to acquire medical care coverage for such condition 
through insurance or from an HMO, or
    (2) Are able to acquire such coverage only at a rate which is 
substantially in excess of the rate for such coverage through the 
membership organization.
    (viii) A health plan offered under Title 5 U.S.C. Chapter 89 (the 
Federal Employees Health Benefits Program).
    (ix) A public health plan. For purposes of this section, a public 
health plan means any plan established or maintained by a State, the 
U.S. government, a foreign country, or any political subdivision of a 
State, the U.S. government, or a foreign country that provides health 
coverage to individuals who are enrolled in the plan.
    (x) A health benefit plan under section 5(e) of the Peace Corps Act 
(22 U.S.C. 2504(e)).
    (xi) Title XXI of the Social Security Act (State Children's Health 
Insurance Program).
    (2) Excluded coverage. Creditable coverage does not include 
coverage of solely excepted benefits (described in Sec.  54.9831-1).
    (3) Methods of counting creditable coverage. For purposes of 
reducing any preexisting condition exclusion period, as provided under 
Sec.  54.9801-3(a)(2)(iii), the amount of an individual's creditable 
coverage generally is determined by using the standard method described 
in paragraph (b) of this section. A plan may use the alternative method 
under paragraph (c) of this section with respect to any or all of the 
categories of benefits described under paragraph (c)(3) of this section 
or may provide that a health insurance issuer offering health insurance 
coverage under the plan may use the alternative method of counting 
creditable coverage.
    (b) Standard method--(1) Specific benefits not considered. Under 
the standard method, the amount of creditable coverage is determined 
without regard to the specific benefits included in the coverage.
    (2) Counting creditable coverage--(i) Based on days. For purposes 
of reducing the preexisting condition exclusion period that applies to 
an individual, the amount of creditable coverage is determined by 
counting all the days on which the individual has one or more types of 
creditable coverage. Accordingly, if on a particular day an individual 
has creditable coverage from more than one source, all the creditable 
coverage on that day is counted as one day. Any days in a waiting 
period for coverage are not creditable coverage.
    (ii) Days not counted before significant break in coverage. Days of 
creditable coverage that occur before a significant break in coverage 
are not required to be counted.
    (iii) Significant break in coverage defined--A significant break in 
coverage means a period of 63 consecutive days during each of which an 
individual does not have any creditable coverage. (See section 
731(b)(2)(iii) of ERISA and section 2723(b)(2)(iii) of the PHS Act, 
which exclude from preemption State insurance laws that require a break 
of more than 63 days before an individual has a significant break in 
coverage for purposes of State law.)
    (iv) Periods that toll a significant break. Days in a waiting 
period and days in an affiliation period are not taken into account in 
determining whether a significant break in coverage has occurred. In 
addition, for an individual who elects COBRA continuation coverage 
during the second election period provided under the Trade Act of 2002, 
the days between the date the individual lost group health plan 
coverage and the first day of the second COBRA election period are not 
taken into account in determining whether a significant break in 
coverage has occurred.
    (v) Examples. The rules of this paragraph (b)(2) are illustrated by 
the following examples:

    Example 1. (i) Facts. Individual A has creditable coverage under 
Employer P's plan for 18 months before coverage ceases. A is 
provided a certificate of creditable coverage on A's last day of 
coverage. Sixty-four days after the last date of coverage under P's 
plan, a is hired by Employer Q and enrolls in Q's group health plan. 
Q's plan has a 12-month preexisting condition exclusion.
    (ii) Conclusion. In this Example 1, A has a break in coverage of 
63 days. Because A's break in coverage is a significant break in 
coverage, Q's plan may disregard A's prior coverage and a may be 
subject to a 12-month preexisting condition exclusion.
    Example 2. (i) Facts. Same facts as Example 1, except that A is 
hired by Q and enrolls in Q's plan on the 63rd day after the last 
date of coverage under P's plan.
    (ii) Conclusion. In this Example 2, A has a break in coverage of 
62 days. Because A's break in coverage is not a significant break in 
coverage, Q's plan must count A's prior creditable coverage for 
purposes of reducing the plan's preexisting condition exclusion 
period that applies to A.
    Example 3. (i) Facts. Same facts as Example 1, except that Q's 
plan provides benefits through an insurance policy that, as required 
by applicable State insurance laws, defines a significant break in 
coverage as 90 days.
    (ii) Conclusion. In this Example 3, under State law, the issuer 
that provides group health insurance coverage to Q's plan must count 
A's period of creditable coverage prior

[[Page 78754]]

to the 63-day break. (However, if Q's plan was a self-insured plan, 
the coverage would not be subject to State law. Therefore, the 
health coverage would not be governed by the longer break rules and 
A's previous health coverage could be disregarded.)
    Example 4. [Reserved]
    Example 5. (i) Facts. Individual C has creditable coverage under 
Employer S's plan for 200 days before coverage ceases. C is provided 
a certificate of creditable coverage on C's last day of coverage. C 
then does not have any creditable coverage for 51 days before being 
hired by Employer T. T's plan has a 3-month waiting period. C works 
for T for 2 months and then terminates employment. Eleven days after 
terminating employment with T, C begins working for Employer U. U's 
plan has no waiting period, but has a 6-month preexisting condition 
exclusion.
    (ii) Conclusion. In this Example 5, C does not have a 
significant break in coverage because, after disregarding the 
waiting period under T's plan, C had only a 62-day break in coverage 
(51 days plus 11 days). accordingly, C has 200 days of creditable 
coverage, and U's plan may not apply its 6-month preexisting 
condition exclusion with respect to C.
    Example 6. [Reserved]
    Example 7. (i) Facts. Individual E has creditable coverage under 
Employer X's plan. E is provided a certificate of creditable 
coverage on E's last day of coverage. On the 63rd day without 
coverage, E submits a substantially complete application for a 
health insurance policy in the individual market. E's application is 
accepted and coverage is made effective 10 days later.
    (ii) Conclusion.
    In this Example 7, because E applied for the policy before the 
end of the 63rd day, the period between the date of application and 
the first day of coverage is a waiting period and no significant 
break in coverage occurred even though the actual period without 
coverage was 73 days.
    Example 8. (i) Facts. Same facts as Example 7, except that E's 
application for a policy in the individual market is denied.
    (ii) Conclusion. In this Example 8, even though E did not obtain 
coverage following application, the period between the date of 
application and the date the coverage was denied is a waiting 
period. However, to avoid a significant break in coverage, no later 
than the day after the application for the policy is denied E would 
need to do one of the following: submit a substantially complete 
application for a different individual market policy; obtain 
coverage in the group market; or be in a waiting period for coverage 
in the group market.

    (vi) Other permissible counting methods--(a) Rule. Notwithstanding 
any other provisions of this paragraph (b)(2), for purposes of reducing 
a preexisting condition exclusion period (but not for purposes of 
issuing a certificate under Sec.  54.9801-5), a group health plan may 
determine the amount of creditable coverage in any other manner that is 
at least as favorable to the individual as the method set forth in this 
paragraph (b)(2), subject to the requirements of other applicable law.
    (B) Example. The rule of this paragraph (b)(2)(vi) is illustrated 
by the following example:

    Example. (i) Facts. Individual F has coverage under Group Health 
Plan Y from January 3, 1997 through March 25, 1997. F then becomes 
covered by Group Health Plan Z. F's enrollment date in Plan Z is May 
1, 1997. Plan Z has a 12-month preexisting condition exclusion.
    (ii) Conclusion. In this Example, Plan Z may determine, in 
accordance with the rules prescribed in paragraphs (b)(2)(i), (ii), 
and (iii) of this section, that F has 82 days of creditable coverage 
(29 days in January, 28 days in February, and 25 days in March). 
Thus, the preexisting condition exclusion will no longer apply to F 
on February 8, 1998 (82 days before the 12-month anniversary of F's 
enrollment (May 1)). For administrative convenience, however, Plan Z 
may consider that the preexisting condition exclusion will no longer 
apply to F on the first day of the month (February 1).

    (c) Alternative method--(1) Specific benefits considered. Under the 
alternative method, a group health plan determines the amount of 
creditable coverage based on coverage within any category of benefits 
described in paragraph (c)(3) of this section and not based on coverage 
for any other benefits. The plan may use the alternative method for any 
or all of the categories. The plan may apply a different preexisting 
condition exclusion period with respect to each category (and may apply 
a different preexisting condition exclusion period for benefits that 
are not within any 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. 
An individual's creditable coverage for benefits that are not within 
any category for which the alternative method is being used is 
determined under the standard method of paragraph (b) of this section.
    (2) Uniform application. A plan using the alternative method is 
required to apply it uniformly to all participants and beneficiaries 
under the plan. A plan that provides benefits (in part or in whole) 
through one or more policies or contracts of insurance will not fail 
the uniform application requirement of this paragraph (c)(2) if the 
alternative method is used (or not used) separately with respect to 
participants and beneficiaries under any policy or contact, provided 
that the alternative method is applied uniformly with respect to all 
coverage under that policy or contract. The use of the alternative 
method is required to be set forth in the plan.
    (3) Categories of benefits. The alternative method for counting 
creditable coverage may be used for coverage for the following 
categories of benefits--
    (i) Mental health;
    (ii) Substance abuse treatment;
    (iii) Prescription drugs;
    (iv) Dental care; or
    (v) Vision care.
    (4) Plan notice. If the alternative method is used, the plan is 
required to--
    (i) State prominently that the plan is using the alternative method 
of counting creditable coverage in disclosure statements concerning the 
plan, and State this to each enrollee at the time of enrollment under 
the plan; and
    (ii) Include in these statements a description of the effect of 
using the alternative method, including an identification of the 
categories used.
    (5) Disclosure of information on previous benefits. See Sec.  
54.9801-5(b) for special rules concerning disclosure of coverage to a 
plan (or issuer) using the alternative method of counting creditable 
coverage under this paragraph (c).
    (6) Counting creditable coverage--(i) In general. Under the 
alternative method, the group health plan counts creditable coverage 
within a category if any level of benefits is provided within the 
category. Coverage under a reimbursement account or arrangement, such 
as a flexible spending arrangement (as defined in section 106(c)(2)), 
does not constitute coverage within any category.
    (ii) Special rules. In counting an individual's creditable coverage 
under the alternative method, the group health plan first determines 
the amount of the individual's creditable coverage that may be counted 
under paragraph (b) of this section, up to a total of 365 days of the 
most recent creditable coverage (546 days for a late enrollee). The 
period over which this creditable coverage is determined is referred to 
as the determination period. Then, for the category specified under the 
alternative method, the plan counts within the category all days of 
coverage that occurred during the determination period (whether or not 
a significant break in coverage for that category occurs), and reduces 
the individual's preexisting condition exclusion period for that 
category by that number of days. The plan may determine the amount of 
creditable coverage in any other reasonable manner, uniformly applied, 
that is at least as favorable to the individual.

[[Page 78755]]

    (iii) Example. The rules of this paragraph (c)(6) are illustrated 
by the following example:

    Example. (i) Facts. Individual D enrolls in Employer V's plan on 
January 1, 2001. Coverage under the plan includes prescription drug 
benefits. On April 1, 2001, the plan ceases providing prescription 
drug benefits. D's employment with Employer V ends on January 1, 
2002, after D was covered under Employer V's group health plan for 
365 days. D enrolls in Employer Y's plan on February 1, 2002 (D's 
enrollment date). Employer Y's plan uses the alternative method of 
counting creditable coverage and imposes a 12-month preexisting 
condition exclusion on prescription drug benefits.
    (ii) Conclusion. In this Example, Employer Y's plan may impose a 
275-day preexisting condition exclusion with respect to D for 
prescription drug benefits because D had 90 days of creditable 
coverage relating to prescription drug benefits within D's 
determination period.


Sec.  54.9801-5  Evidence of creditable coverage.

    (a) Certificate of creditable coverage--(1) Entities required to 
provide certificate--(i) In general. A group health plan is required to 
furnish certificates of creditable coverage in accordance with this 
paragraph (a). (See section 701(e) of ERISA and section 2701(e) of the 
PHS Act, under which this obligation is also imposed on each health 
insurance issuer offering group health insurance coverage under the 
plan.)
    (ii) Duplicate certificates not required. An entity required to 
provide a certificate under this paragraph (a) with respect to an 
individual satisfies that requirement if another party provides the 
certificate, but only to the extent that the certificate contains the 
information required in paragraph (a)(3) of this section. For example, 
a group health plan is deemed to have satisfied the certification 
requirement with respect to a participant or beneficiary if any other 
entity actually provides a certificate that includes the information 
required under paragraph (a)(3) of this section with respect to the 
participant or beneficiary.
    (iii) Special rule for group health plans. To the extent coverage 
under a plan consists of group health insurance coverage, the plan 
satisfies the certification requirements under this paragraph (a) if 
any issuer offering the coverage is required to provide the 
certificates pursuant to an agreement between the plan and the issuer. 
For example, if there is an agreement between an issuer and an employer 
sponsoring a plan under which the issuer agrees to provide certificates 
for individuals covered under the plan, and the issuer fails to provide 
a certificate to an individual when the plan would have been required 
to provide one under this paragraph (a), then the plan does not violate 
the certification requirements of this paragraph (a) (though the issuer 
would have violated the certification requirements pursuant to section 
701(e) of ERISA and section 2701(e) of the PHS Act).
    (iv) Special rules relating to issuers providing coverage under a 
plan--(A)(1) Responsibility of issuer for coverage period. See 29 CFR 
2590.701-5 and 45 CFR 146.115, under which an issuer is not required to 
provide information regarding coverage provided to an individual by 
another party.
    (2) Example. The rule referenced by this paragraph (a)(1)(iv)(A) is 
illustrated by the following example:

    Example. (i) Facts. A plan offers coverage with an HMO option 
from one issuer and an indemnity option from a different issuer. The 
HMO has not entered into an agreement with the plan to provide 
certificates as permitted under paragraph (a)(1)(iii) of this 
section.
    (ii) Conclusion. In this Example, if an employee switches from 
the indemnity option to the HMO option and later ceases to be 
covered under the plan, any certificate provided by the HMO is not 
required to provide information regarding the employee's coverage 
under the indemnity option.

    (B)(1) Cessation of issuer coverage prior to cessation of coverage 
under a plan. If an individual's coverage under an issuer's policy or 
contract ceases before the individual's coverage under the plan ceases, 
the issuer is required (under section 701(e) of ERISA and section 
2701(e) of the PHS Act) to provide sufficient information to the plan 
(or to another party designated by the plan) to enable the plan (or 
other party), after cessation of the individual's coverage under the 
plan, to provide a certificate that reflects the period of coverage 
under the policy or contract. By providing that information to the 
plan, the issuer satisfies its obligation to provide an automatic 
certificate for that period of creditable coverage with respect to the 
individual under paragraph (a)(2)(ii) of this section. The issuer, 
however, must still provide a certificate upon request as required 
under paragraph (a)(2)(iii) of this section. In addition, the issuer is 
required to cooperate with the plan in responding to any request made 
under paragraph (b)(2) of this section (relating to the alternative 
method of counting creditable coverage). Moreover, if the individual's 
coverage under the plan ceases at the time the individual's coverage 
under the issuer's policy or contract ceases, the issuer must still 
provide an automatic certificate under paragraph (a)(2)(ii) of this 
section. If an individual's coverage under an issuer's policy or 
contract ceases on the effective date for changing enrollment options 
under the plan, the issuer may presume (absent information to the 
contrary) that the individual's coverage under the plan continues. 
Therefore, the issuer is required to provide information to the plan in 
accordance with this paragraph (a)(1)(iv)(B)(1) (and is not required to 
provide an automatic certificate under paragraph (a)(2)(ii) of this 
section).
    (2) Example. The rule of this paragraph (a)(1)(iv)(B) is 
illustrated by the following example:

    Example. (i) Facts. A group health plan provides coverage under 
an HMO option and an indemnity option through different issuers, and 
only allows employees to switch on each January 1. Neither the HMO 
nor the indemnity issuer has entered into an agreement with the plan 
to provide certificates as permitted under paragraph (a)(1)(iii) of 
this section.
    (ii) Conclusion. In this Example, if an employee switches from 
the indemnity option to the HMO option on January 1, the indemnity 
issuer must provide the plan (or a person designated by the plan) 
with appropriate information with respect to the individual's 
coverage with the indemnity issuer. However, if the individual's 
coverage with the indemnity issuer ceases at a date other than 
January 1, the issuer is instead required to provide the individual 
with an automatic certificate.

    (2) Individuals for whom certificate must be provided; timing of 
issuance--(i) Individuals. A certificate must be provided, without 
charge, for participants or dependents who are or were covered under a 
group health plan upon the occurrence of any of the events described in 
paragraph (a)(2)(ii) or (iii) of this section.
    (ii) Issuance of automatic certificates. The certificates described 
in this paragraph (a)(2)(ii) are referred to as automatic certificates.
    (A) Qualified beneficiaries upon a qualifying event. In the case of 
an individual who is a qualified beneficiary (as defined in section 
4980B(g)(3)) entitled to elect COBRA continuation coverage, an 
automatic certificate is required to be provided at the time the 
individual would lose coverage under the plan in the absence of COBRA 
continuation coverage or alternative coverage elected instead of COBRA 
continuation coverage. A plan satisfies this requirement if it provides 
the automatic certificate no later than the time a notice is required 
to be furnished for a qualifying event under section 4980B(f)(6) 
(relating to notices required under COBRA).
    (B) Other individuals when coverage ceases. In the case of an 
individual who

[[Page 78756]]

is not a qualified beneficiary entitled to elect COBRA continuation 
coverage, an automatic certificate must be provided at the time the 
individual ceases to be covered under the plan. A plan satisfies the 
requirement to provide an automatic certificate at the time the 
individual ceases to be covered if it provides the automatic 
certificate within a reasonable time after coverage ceases (or after 
the expiration of any grace period for nonpayment of premiums).
    (1) The cessation of temporary continuation coverage (TCC) under 
Title 5 U.S.C. Chapter 89 (the Federal Employees Health Benefit 
Program) is a cessation of coverage upon which an automatic certificate 
must be provided.
    (2) In the case of an individual who is entitled to elect to 
continue coverage under a State program similar to COBRA and who 
receives the automatic certificate not later than the time a notice is 
required to be furnished under the State program, the certificate is 
deemed to be provided within a reasonable time after coverage ceases 
under the plan.
    (3) If an individual's coverage ceases due to the operation of a 
lifetime limit on all benefits, coverage is considered to cease for 
purposes of this paragraph (a)(2)(ii)(B) on the earliest date that a 
claim is denied due to the operation of the lifetime limit.
    (C) Qualified beneficiaries when COBRA ceases. In the case of an 
individual who is a qualified beneficiary and has elected COBRA 
continuation coverage (or whose coverage has continued after the 
individual became entitled to elect COBRA continuation coverage), an 
automatic certificate is to be provided at the time the individual' s 
coverage under the plan ceases. A plan satisfies this requirement if it 
provides the automatic certificate within a reasonable time after 
coverage ceases (or after the expiration of any grace period for 
nonpayment of premiums). An automatic certificate is required to be 
provided to such an individual regardless of whether the individual has 
previously received an automatic certificate under paragraph 
(a)(2)(ii)(A) of this section.
    (iii) Any individual upon request. A certificate must be provided 
in response to a request made by, or on behalf of, an individual at any 
time while the individual is covered under a plan and up to 24 months 
after coverage ceases. Thus, for example, a plan in which an individual 
enrolls may, if authorized by the individual, request a certificate of 
the individual's creditable coverage on behalf of the individual from a 
plan in which the individual was formerly enrolled. After the request 
is received, a plan or issuer is required to provide the certificate by 
the earliest date that the plan, acting in a reasonable and prompt 
fashion, can provide the certificate. A certificate is required to be 
provided under this paragraph (a)(2)(iii) even if the individual has 
previously received a certificate under this paragraph (a)(2)(iii) or 
an automatic certificate under paragraph (a)(2)(ii) of this section.
    (iv) Examples. The rules of this paragraph (a)(2) are illustrated 
by the following examples:

    Example 1. (i) Facts. Individual A terminates employment with 
Employer Q. A is a qualified beneficiary entitled to elect COBRA 
continuation coverage under Employer Q's group health plan. A notice 
of the rights provided under COBRA is typically furnished to 
qualified beneficiaries under the plan within 10 days after a 
covered employee terminates employment.
    (ii) Conclusion. In this Example 1, the automatic certificate 
may be provided at the same time that A is provided the COBRA 
notice.
    Example 2. (i) Facts. Same facts as Example 1, except that the 
automatic certificate for A is not completed by the time the COBRA 
notice is furnished to A.
    (ii) Conclusion. In this Example 2, the automatic certificate 
may be provided after the COBRA notice but must be provided within 
the period permitted by law for the delivery of notices under COBRA.
    Example 3. (i) Facts. Employer R maintains an insured group 
health plan. R has never had 20 employees and thus R's plan is not 
subject to the COBRA continuation provisions. However, R is in a 
State that has a State program similar to COBRA. B terminates 
employment with R and loses coverage under R's plan.
    (ii) Conclusion. In this Example 3, the automatic certificate 
must be provided not later than the time a notice is required to be 
furnished under the State program.
    Example 4. (i) Facts. Individual C terminates employment with 
Employer S and receives both a notice of C's rights under COBRA and 
an automatic certificate. C elects COBRA continuation coverage under 
Employer S's group health plan. After four months of COBRA 
continuation coverage and the expiration of a 30-day grace period, 
S's group health plan determines that C's COBRA continuation 
coverage has ceased due to a failure to make a timely payment for 
continuation coverage.
    (ii) Conclusion. In this Example 4, the plan must provide an 
updated automatic certificate to C within a reasonable time after 
the end of the grace period.
    Example 5. (i) Facts. Individual D is currently covered under 
the group health plan of Employer T. D requests a certificate, as 
permitted under paragraph (a)(2)(iii) of this section. Under the 
procedure for T's plan, certificates are mailed (by first class 
mail) 7 business days following receipt of the request. This date 
reflects the earliest date that the plan, acting in a reasonable and 
prompt fashion, can provide certificates.
    (ii) Conclusion. In this Example 5, the plan's procedure 
satisfies paragraph (a)(2)(iii) of this section.

    (3) Form and content of certificate--(i) Written certificate--(A) 
In general. Except as provided in paragraph (a)(3)(i)(B) of this 
section, the certificate must be provided in writing (including any 
form approved by the Secretary as a writing).
    (B) Other permissible forms. No written certificate is required to 
be provided under this paragraph (a) with respect to a particular event 
described in paragraph (a)(2)(ii) or (iii) of this section, if --
    (1) An individual who is entitled to receive the certificate 
requests that the certificate be sent to another plan or issuer instead 
of to the individual;
    (2) The plan or issuer that would otherwise receive the certificate 
agrees to accept the information in this paragraph (a)(3) through means 
other than a written certificate (such as by telephone); and
    (3) The receiving plan or issuer receives the information from the 
sending plan or issuer through such means within the time required 
under paragraph (a)(2) of this section.
    (ii) Required information. The certificate must include the 
following--
    (A) The date the certificate is issued;
    (B) The name of the group health plan that provided the coverage 
described in the certificate;
    (C) The name of the participant or dependent with respect to whom 
the certificate applies, and any other information necessary for the 
plan providing the coverage specified in the certificate to identify 
the individual, such as the individual's identification number under 
the plan and the name of the participant if the certificate is for (or 
includes) a dependent;
    (D) The name, address, and telephone number of the plan 
administrator or issuer required to provide the certificate;
    (E) The telephone number to call for further information regarding 
the certificate (if different from paragraph (a)(3)(ii)(D) of this 
section);
    (F) Either--
    (1) A statement that an individual has at least 18 months (for this 
purpose, 546 days is deemed to be 18 months) of creditable coverage, 
disregarding days of creditable coverage before a significant break in 
coverage, or
    (2) The date any waiting period (and affiliation period, if 
applicable) began and the date creditable coverage began;
    (G) The date creditable coverage ended, unless the certificate 
indicates that creditable coverage is continuing as of the date of the 
certificate; and

[[Page 78757]]

    (H) An educational statement regarding HIPAA, which explains:
    (1) The restrictions on the ability of a plan or issuer to impose a 
preexisting condition exclusion (including an individual's ability to 
reduce a preexisting condition exclusion by creditable coverage);
    (2) Special enrollment rights;
    (3) The prohibitions against discrimination based on any health 
factor;
    (4) The right to individual health coverage;
    (5) The fact that State law may require issuers to provide 
additional protections to individuals in that State; and
    (6) Where to get more information.
    (iii) Periods of coverage under the certificate. If an automatic 
certificate is provided pursuant to paragraph (a)(2)(ii) of this 
section, the period that must be included on the certificate is the 
last period of continuous coverage ending on the date coverage ceased. 
If an individual requests a certificate pursuant to paragraph 
(a)(2)(iii) of this section, the certificate provided must include each 
period of continuous coverage ending within the 24-month period ending 
on the date of the request (or continuing on the date of the request). 
A separate certificate may be provided for each such period of 
continuous coverage.
    (iv) Combining information for families. A certificate may provide 
information with respect to both a participant and the participant's 
dependents if the information is identical for each individual. If the 
information is not identical, certificates may be provided on one form 
if the form provides all the required information for each individual 
and separately states the information that is not identical.
    (v) Model certificate. The requirements of paragraph (a)(3)(ii) of 
this section are satisfied if the plan provides a certificate in 
accordance with a model certificate authorized by the Secretary.
    (vi) Excepted benefits; categories of benefits. No certificate is 
required to be furnished with respect to excepted benefits described in 
Sec.  54.9831-1(c). In addition, the information in the certificate 
regarding coverage is not required to specify categories of benefits 
described in Sec.  54.9801-4(c) (relating to the alternative method of 
counting creditable coverage). However, if excepted benefits are 
provided concurrently with other creditable coverage (so that the 
coverage does not consist solely of excepted benefits), information 
concerning the benefits may be required to be disclosed under paragraph 
(b) of this section.
    (4) Procedures--(i) Method of delivery. The certificate is required 
to be provided to each individual described in paragraph (a)(2) of this 
section or an entity requesting the certificate on behalf of the 
individual. The certificate may be provided by first-class mail. If the 
certificate or certificates are provided to the participant and the 
participant's spouse at the participant's last known address, then the 
requirements of this paragraph (a)(4) are satisfied with respect to all 
individuals residing at that address. If a dependent's last known 
address is different than the participant's last known address, a 
separate certificate is required to be provided to the dependent at the 
dependent's last known address. If separate certificates are being 
provided by mail to individuals who reside at the same address, 
separate mailings of each certificate are not required.
    (ii) Procedure for requesting certificates. A plan or issuer must 
establish a written procedure for individuals to request and receive 
certificates pursuant to paragraph (a)(2)(iii) of this section. The 
written procedure must include all contact information necessary to 
request a certificate (such as name and phone number or address).
    (iii) Designated recipients. If an automatic certificate is 
required to be provided under paragraph (a)(2)(ii) of this section, and 
the individual entitled to receive the certificate designates another 
individual or entity to receive the certificate, the plan or issuer 
responsible for providing the certificate is permitted to provide the 
certificate to the designated individual or entity. If a certificate is 
required to be provided upon request under paragraph (a)(2)(iii) of 
this section and the individual entitled to receive the certificate 
designates another individual or entity to receive the certificate, the 
plan or issuer responsible for providing the certificate is required to 
provide the certificate to the designated individual or entity.
    (5) Special rules concerning dependent coverage--(i)(A) Reasonable 
efforts. A plan is required to use reasonable efforts to determine any 
information needed for a certificate relating to dependent coverage. In 
any case in which an automatic certificate is required to be furnished 
with respect to a dependent under paragraph (a)(2)(ii) of this section, 
no individual certificate is required to be furnished until the plan 
knows (or making reasonable efforts should know) of the dependent's 
cessation of coverage under the plan.
    (B) Example. The rules of this paragraph (a)(5)(i) are illustrated 
by the following example:

    Example. (i) Facts. A group health plan covers employees and 
their dependents. The plan annually requests all employees to 
provide updated information regarding dependents, including the 
specific date on which an employee has a new dependent or on which a 
person ceases to be a dependent of the employee.
    (ii) Conclusion. In this Example, the plan has satisfied the 
standard in this paragraph (a)(5)(i) of this section that it make 
reasonable efforts to determine the cessation of dependents' 
coverage and the related dependent coverage information.

    (ii) Special rules for demonstrating coverage. If a certificate 
furnished by a plan or issuer does not provide the name of any 
dependent covered by the certificate, the procedures described in 
paragraph (c)(5) of this section may be used to demonstrate dependent 
status. In addition, these procedures may be used to demonstrate that a 
child was covered under any creditable coverage within 30 days after 
birth, adoption, or placement for adoption. See also Sec.  54.9801-
3(b), under which such a child cannot be subject to a preexisting 
condition exclusion.
    (6) Special certification rules for entities not subject to Chapter 
100 of Subtitle K--(i) Issuers. For rules requiring that issuers in the 
group and individual markets provide certificates consistent with the 
rules in this section, see section 701(e) of ERISA and sections 
2701(e), 2721(b)(1)(B), and 2743 of the PHS Act.
    (ii) Other entities. For special rules requiring that certain other 
entities not subject to Chapter 100 of Subtitle K provide certificates 
consistent with the rules in this section, see section 2791(a)(3) of 
the PHS Act applicable to entities described in sections 2701(c)(1)(C), 
(D), (E), and (F) of the PHS Act (relating to Medicare, Medicaid, 
TRICARE, and Indian Health Service), section 2721(b)(1)(A) of the PHS 
Act applicable to nonfederal governmental plans generally, and section 
2721(b)(2)(C)(ii) of the PHS Act applicable to nonfederal governmental 
plans that elect to be excluded from the requirements of Subparts 1 
through 3 of Part A of Title XXVII of the PHS Act.
    (b) Disclosure of coverage to a plan or issuer using the 
alternative method of counting creditable coverage--(1) In general. 
After an individual provides a certificate of creditable coverage to a 
plan (or issuer) using the alternative method under Sec.  54.9801-4(c), 
that plan (or issuer) (requesting entity) must request that the entity 
that issued the certificate (prior entity) disclose the

[[Page 78758]]

information set forth in paragraph (b)(2) of this section. The prior 
entity is required to disclose this information promptly.
    (2) Information to be disclosed. The prior entity is required to 
identify to the requesting entity the categories of benefits with 
respect to which the requesting entity is using the alternative method 
of counting creditable coverage, and the requesting entity may identify 
specific information that the requesting entity reasonably needs in 
order to determine the individual's creditable coverage with respect to 
any such category.
    (3) Charge for providing information. The prior entity may charge 
the requesting entity for the reasonable cost of disclosing such 
information.
    (c) Ability of an individual to demonstrate creditable coverage and 
waiting period information--(1) Purpose. The rules in this paragraph 
(c) implement section 9801(c)(4), which permits individuals to 
demonstrate the duration of creditable coverage through means other 
than certificates, and section 9801(e)(3), which requires the Secretary 
to establish rules designed to prevent an individual's subsequent 
coverage under a group health plan or health insurance coverage from 
being adversely affected by an entity's failure to provide a 
certificate with respect to that individual.
    (2) In general. If the accuracy of a certificate is contested or a 
certificate is unavailable when needed by an individual, the individual 
has the right to demonstrate creditable coverage (and waiting or 
affiliation periods) through the presentation of documents or other 
means. For example, the individual may make such a demonstration when--
    (i) An entity has failed to provide a certificate within the 
required time;
    (ii) The individual has creditable coverage provided by an entity 
that is not required to provide a certificate of the coverage pursuant 
to paragraph (a) of this section;
    (iii) The individual has an urgent medical condition that 
necessitates a determination before the individual can deliver a 
certificate to the plan; or
    (iv) The individual lost a certificate that the individual had 
previously received and is unable to obtain another certificate.
    (3) Evidence of creditable coverage--(i) Consideration of 
evidence--(A) A plan is required to take into account all information 
that it obtains or that is presented on behalf of an individual to make 
a determination, based on the relevant facts and circumstances, whether 
an individual has creditable coverage. A plan shall treat the 
individual as having furnished a certificate under paragraph (a) of 
this section if--
    (1) The individual attests to the period of creditable coverage;
    (2) The individual also presents relevant corroborating evidence of 
some creditable coverage during the period; and
    (3) The individual cooperates with the plan's efforts to verify the 
individual's coverage.
    (B) For purposes of this paragraph (c)(3)(i), cooperation includes 
providing (upon the plan's or issuer's request) a written authorization 
for the plan to request a certificate on behalf of the individual, and 
cooperating in efforts to determine the validity of the corroborating 
evidence and the dates of creditable coverage. While a plan may refuse 
to credit coverage where the individual fails to cooperate with the 
plan's or issuer's efforts to verify coverage, the plan may not 
consider an individual's inability to obtain a certificate to be 
evidence of the absence of creditable coverage.
    (ii) Documents. Documents that corroborate creditable coverage (and 
waiting or affiliation periods) include explanations of benefits (EOBs) 
or other correspondence from a plan or issuer indicating coverage, pay 
stubs showing a payroll deduction for health coverage, a health 
insurance identification card, a certificate of coverage under a group 
health policy, records from medical care providers indicating health 
coverage, third party statements verifying periods of coverage, and any 
other relevant documents that evidence periods of health coverage.
    (iii) Other evidence. Creditable coverage (and waiting or 
affiliation periods) may also be corroborated through means other than 
documentation, such as by a telephone call from the plan or provider to 
a third party verifying creditable coverage.
    (iv) Example. The rules of this paragraph (c)(3) are illustrated by 
the following example:

    Example.  (i) Facts. Individual F terminates employment with 
Employer W and, a month later, is hired by Employer X. X's group 
health plan imposes a preexisting condition exclusion of 12 months 
on new enrollees under the plan and uses the standard method of 
determining creditable coverage. F fails to receive a certificate of 
prior coverage from the self-insured group health plan maintained by 
F's prior employer, W, and requests a certificate. However, F (and 
X's plan, on F's behalf and with F's cooperation) is unable to 
obtain a certificate from W's plan. F attests that, to the best of 
F's knowledge, F had at least 12 months of continuous coverage under 
W's plan, and that the coverage ended no earlier than F's 
termination of employment from W. In addition, F presents evidence 
of coverage, such as an explanation of benefits for a claim that was 
made during the relevant period.
    (ii) Conclusion. In this Example, based solely on these facts, F 
has demonstrated creditable coverage for the 12 months of coverage 
under W's plan in the same manner as if F had presented a written 
certificate of creditable coverage.

    (4) Demonstrating categories of creditable coverage. Procedures 
similar to those described in this paragraph (c) apply in order to 
determine the duration of an individual's creditable coverage with 
respect to any category under paragraph (b) of this section (relating 
to determining creditable coverage under the alternative method).
    (5) Demonstrating dependent status. If, in the course of providing 
evidence (including a certificate) of creditable coverage, an 
individual is required to demonstrate dependent status, the group 
health plan or issuer is required to treat the individual as having 
furnished a certificate showing the dependent status if the individual 
attests to such dependency and the period of such status and the 
individual cooperates with the plan's or issuer's efforts to verify the 
dependent status.


Sec.  54.9801-6  Special enrollment periods.

    (a) Special enrollment for certain individuals who lose coverage--
(1) In general. A group health plan is required to permit current 
employees and dependents (as defined in Sec.  54.9801-2) who are 
described in paragraph (a)(2) of this section to enroll for coverage 
under the terms of the plan if the conditions in paragraph (a)(3) of 
this section are satisfied. The special enrollment rights under this 
paragraph (a) apply without regard to the dates on which an individual 
would otherwise be able to enroll under the plan. (See section 
701(f)(1) of ERISA and section 2701(f)(1) of the PHS Act, under which 
this obligation is also imposed on a health insurance issuer offering 
group health insurance coverage.)
    (2) Individuals eligible for special enrollment--(i) When employee 
loses coverage. A current employee and any dependents (including the 
employee's spouse) each are eligible for special enrollment in any 
benefit package under the plan (subject to plan eligibility rules 
conditioning dependent enrollment on enrollment of the employee) if--
    (A) The employee and the dependents are otherwise eligible to 
enroll in the benefit package;
    (B) When coverage under the plan was previously offered, the 
employee had coverage under any group health plan or health insurance 
coverage; and

[[Page 78759]]

    (C) The employee satisfies the conditions of paragraph (a)(3)(i), 
(ii), or (iii) of this section and, if applicable, paragraph (a)(3)(iv) 
of this section.
    (ii) When dependent loses coverage--(A) A dependent of a current 
employee (including the employee's spouse) and the employee each are 
eligible for special enrollment in any benefit package under the plan 
(subject to plan eligibility rules conditioning dependent enrollment on 
enrollment of the employee) if--
    (1) The dependent and the employee are otherwise eligible to enroll 
in the benefit package;
    (2) When coverage under the plan was previously offered, the 
dependent had coverage under any group health plan or health insurance 
coverage; and
    (3) The dependent satisfies the conditions of paragraph (a)(3)(i), 
(ii), or (iii) of this section and, if applicable, paragraph (a)(3)(iv) 
of this section.
    (B) However, the plan is not required to enroll any other dependent 
unless that dependent satisfies the criteria of this paragraph 
(a)(2)(ii), or the employee satisfies the criteria of paragraph 
(a)(2)(i) of this section.
    (iii) Examples. The rules of this paragraph (a)(2) are illustrated 
by the following examples:

    Example 1.  (i) Facts. Individual A works for Employer X. A,A's 
spouse, and A's dependent children are eligible but not enrolled for 
coverage under X's group health plan. A's spouse works for Employer 
Y and at the time coverage was offered under X's plan, A was 
enrolled in coverage under Y's plan. Then, A loses eligibility for 
coverage under Y's plan.
    (ii) Conclusion. In this Example 1, because A satisfies the 
conditions for special enrollment under paragraph (a)(2)(i) of this 
section, A, A's spouse, and A's dependent children are eligible for 
special enrollment under X's plan.
    Example 2.  (i) Facts. Individual A and A's spouse are eligible 
but not enrolled for coverage under Group Health Plan P maintained 
by A's employer. When A was first presented with an opportunity to 
enroll A and A's spouse, they did not have other coverage. Later, A 
and A's spouse enroll in Group Health Plan Q maintained by the 
employer of A's spouse. During a subsequent open enrollment period 
in P, A and A's spouse did not enroll because of their coverage 
under Q. They then lose eligibility for coverage under Q.
    (ii) Conclusion. In this Example 2, because A and A's spouse 
were covered under Q when they did not enroll in P during open 
enrollment, they satisfy the conditions for special enrollment under 
paragraphs (a)(2)(i) and (ii) of this section. Consequently, A and 
A's spouse are eligible for special enrollment under P.
    Example 3.  (i) Facts. Individual B works for Employer X. B and 
B's spouse are eligible but not enrolled for coverage under X's 
group health plan. B's spouse works for Employer Y and at the time 
coverage was offered under X's plan, B's spouse was enrolled in 
self-only coverage under Y's group health plan. Then, B's spouse 
loses eligibility for coverage under Y's plan.
    (ii) Conclusion. In this Example 3, because B's spouse satisfies 
the conditions for special enrollment under paragraph (a)(2)(ii) of 
this section, both B and B's spouse are eligible for special 
enrollment under X's plan.
    Example 4.  (i) Facts. Individual A works for Employer X. X 
maintains a group health plan with two benefit packages--an HMO 
option and an indemnity option. Self-only and family coverage are 
available under both options. A enrolls for self-only coverage in 
the HMO option. A's spouse works for Employer Y and was enrolled for 
self-only coverage under Y's plan at the time coverage was offered 
under X's plan. Then, A's spouse loses coverage under Y's plan. A 
requests special enrollment for A and A's spouse under the plan's 
indemnity option.
    (ii) Conclusion. In this Example 4, because A's spouse satisfies 
the conditions for special enrollment under paragraph (a)(2)(ii) of 
this section, both A and A's spouse can enroll in either benefit 
package under X's plan. Therefore, if A requests enrollment in 
accordance with the requirements of this section, the plan must 
allow A and A's spouse to enroll in the indemnity option.

    (3) Conditions for special enrollment--(i) Loss of eligibility for 
coverage. In the case of an employee or dependent who has coverage that 
is not COBRA continuation coverage, the conditions of this paragraph 
(a)(3)(i) are satisfied at the time the coverage is terminated as a 
result of loss of eligibility (regardless of whether the individual is 
eligible for or elects COBRA continuation coverage). Loss of 
eligibility under this paragraph (a)(3)(i) does not include a loss due 
to the failure of the employee or dependent to pay premiums on a timely 
basis or termination of coverage for cause (such as making a fraudulent 
claim or an intentional misrepresentation of a material fact in 
connection with the plan). Loss of eligibility for coverage under this 
paragraph (a)(3)(i) includes (but is not limited to)--
    (A) Loss of eligibility for coverage as a result of legal 
separation, divorce, cessation of dependent status (such as attaining 
the maximum age to be eligible as a dependent child under the plan), 
death of an employee, termination of employment, reduction in the 
number of hours of employment, and any loss of eligibility for coverage 
after a period that is measured by reference to any of the foregoing;
    (B) In the case of coverage offered through an HMO, or other 
arrangement, in the individual market that does not provide benefits to 
individuals who no longer reside, live, or work in a service area, loss 
of coverage because an individual no longer resides, lives, or works in 
the service area (whether or not within the choice of the individual);
    (C) In the case of coverage offered through an HMO, or other 
arrangement, in the group market that does not provide benefits to 
individuals who no longer reside, live, or work in a service area, loss 
of coverage because an individual no longer resides, lives, or works in 
the service area (whether or not within the choice of the individual), 
and no other benefit package is available to the individual;
    (D) A situation in which an individual incurs a claim that would 
meet or exceed a lifetime limit on all benefits; and
    (E) A situation in which a plan no longer offers any benefits to 
the class of similarly situated individuals (as described in Sec.  
54.9802-1(d)) that includes the individual.
    (ii) Termination of employer contributions. In the case of an 
employee or dependent who has coverage that is not COBRA continuation 
coverage, the conditions of this paragraph (a)(3)(ii) are satisfied at 
the time employer contributions towards the employee's or dependent's 
coverage terminate. Employer contributions include contributions by any 
current or former employer that was contributing to coverage for the 
employee or dependent.
    (iii) Exhaustion of COBRA continuation coverage. In the case of an 
employee or dependent who has coverage that is COBRA continuation 
coverage, the conditions of this paragraph (a)(3)(iii) are satisfied at 
the time the COBRA continuation coverage is exhausted. For purposes of 
this paragraph (a)(3)(iii), an individual who satisfies the conditions 
for special enrollment of paragraph (a)(3)(i) of this section, does not 
enroll, and instead elects and exhausts COBRA continuation coverage 
satisfies the conditions of this paragraph (a)(3)(iii). (Exhaustion of 
COBRA continuation coverage is defined in Sec.  54.9801-2.)
    (iv) Written statement. A plan may require an employee declining 
coverage (for the employee or any dependent of the employee) to State 
in writing whether the coverage is being declined due to other health 
coverage only if, at or before the time the employee declines coverage, 
the employee is provided with notice of the requirement to provide the 
statement (and the consequences of the employee's failure to provide 
the statement). If a plan requires such a statement, and an employee 
does not provide it, the plan is not required to provide special 
enrollment to the employee or any dependent of the

[[Page 78760]]

employee under this paragraph (a)(3). A plan must treat an employee as 
having satisfied the plan requirement permitted under this paragraph 
(a)(3)(iv) if the employee provides a written statement that coverage 
was being declined because the employee or dependent had other 
coverage; a plan cannot require anything more for the employee to 
satisfy the plan's requirement to provide a written statement. (For 
example, the plan cannot require that the statement be notarized.)
    (v) The rules of this paragraph (a)(3) are illustrated by the 
following examples:

    Example 1.  (i) Facts. Individual D enrolls in a group health 
plan maintained by Employer Y. At the time D enrolls, Y pays 70 
percent of the cost of employee coverage and D pays the rest. Y 
announces that beginning January 1, Y will no longer make employer 
contributions towards the coverage. Employees may maintain coverage, 
however, if they pay the total cost of the coverage.
    (ii) Conclusion. In this Example 1, employer contributions 
towards D's coverage ceased on January 1 and the conditions of 
paragraph (a)(3)(ii) of this section are satisfied on this date 
(regardless of whether D elects to pay the total cost and continue 
coverage under Y's plan).
    Example 2.  (i) Facts. A group health plan provides coverage 
through two options--Option 1 and Option 2. Employees can enroll in 
either option only within 30 days of hire or on January 1 of each 
year. Employee A is eligible for both options and enrolls in Option 
1. Effective July 1 the plan terminates coverage under Option 1 and 
the plan does not create an immediate open enrollment opportunity 
into Option 2.
    (ii) Conclusion. In this Example 2, A has experienced a loss of 
eligibility for coverage that satisfies paragraph (a)(3)(i) of this 
section, and has satisfied the other conditions for special 
enrollment under paragraph (a)(2)(i) of this section. Therefore, if 
A satisfies the other conditions of this paragraph (a), the plan 
must permit A to enroll in Option 2 as a special enrollee. (A may 
also be eligible to enroll in another group health plan, such as a 
plan maintained by the employer of A's spouse, as a special 
enrollee.) The outcome would be the same if Option 1 was terminated 
by an issuer and the plan made no other coverage available to A.
    Example 3.  (i) Facts. Individual C is covered under a group 
health plan maintained by Employer X. While covered under X's plan, 
C was eligible for but did not enroll in a plan maintained by 
Employer Z, the employer of C's spouse. C terminates employment with 
X and loses eligibility for coverage under X's plan. C has a special 
enrollment right to enroll in Z's plan, but C instead elects COBRA 
continuation coverage under X's plan. C exhausts COBRA continuation 
coverage under X's plan and requests special enrollment in Z's plan.
    (ii) Conclusion. In this Example 3, C has satisfied the 
conditions for special enrollment under paragraph (a)(3)(iii) of 
this section, and has satisfied the other conditions for special 
enrollment under paragraph (a)(2)(i) of this section. The special 
enrollment right that C had into Z's plan immediately after the loss 
of eligibility for coverage under X's plan was an offer of coverage 
under Z's plan. When C later exhausts COBRA coverage under X's plan, 
C has a second special enrollment right in Z's plan.

    (4) Applying for special enrollment and effective date of 
coverage--(i) A plan or issuer must allow an employee a period of at 
least 30 days after an event described in paragraph (a)(3) of this 
section (other than an event described in paragraph (a)(3)(i)(D)) to 
request enrollment (for the employee or the employee's dependent). In 
the case of an event described in paragraph (a)(3)(i)(D) of this 
section (relating to loss of eligibility for coverage due to the 
operation of a lifetime limit on all benefits), a plan or issuer must 
allow an employee a period of at least 30 days after a claim is denied 
due to the operation of a lifetime limit on all benefits.
    (ii) Coverage must begin no later than the first day of the first 
calendar month beginning after the date the plan or issuer receives the 
request for special enrollment.
    (b) Special enrollment with respect to certain dependent 
beneficiaries--(1) In general. A group health plan that makes coverage 
available with respect to dependents is required to permit individuals 
described in paragraph (b)(2) of this section to be enrolled for 
coverage in a benefit package under the terms of the plan. Paragraph 
(b)(3) of this section describes the required special enrollment period 
and the date by which coverage must begin. The special enrollment 
rights under this paragraph (b) apply without regard to the dates on 
which an individual would otherwise be able to enroll under the plan. 
(See 29 CFR 2590.701-6(b) and 45 CFR 146.117(b), under which this 
obligation is also imposed on a health insurance issuer offering group 
health insurance coverage.)
    (2) Individuals eligible for special enrollment. An individual is 
described in this paragraph (b)(2) if the individual is otherwise 
eligible for coverage in a benefit package under the plan and if the 
individual is described in paragraph (b)(2)(i), (ii), (iii), (iv), (v), 
or (vi) of this section.
    (i) Current employee only. A current employee is described in this 
paragraph (b)(2)(i) if a person becomes a dependent of the individual 
through marriage, birth, adoption, or placement for adoption.
    (ii) Spouse of a participant only. An individual is described in 
this paragraph (b)(2)(ii) if either--
    (A) The individual becomes the spouse of a participant; or
    (B) The individual is a spouse of a participant and a child becomes 
a dependent of the participant through birth, adoption, or placement 
for adoption.
    (iii) Current employee and spouse. A current employee and an 
individual who is or becomes a spouse of such an employee, are 
described in this paragraph (b)(2)(iii) if either--
    (A) The employee and the spouse become married; or
    (B) The employee and spouse are married and a child becomes a 
dependent of the employee through birth, adoption, or placement for 
adoption.
    (iv) Dependent of a participant only. An individual is described in 
this paragraph (b)(2)(iv) if the individual is a dependent (as defined 
in Sec.  54.9801-2) of a participant and the individual has become a 
dependent of the participant through marriage, birth, adoption, or 
placement for adoption.
    (v) Current employee and a new dependent. A current employee and an 
individual who is a dependent of the employee, are described in this 
paragraph (b)(2)(v) if the individual becomes a dependent of the 
employee through marriage, birth, adoption, or placement for adoption.
    (vi) Current employee, spouse, and a new dependent. A current 
employee, the employee's spouse, and the employee's dependent are 
described in this paragraph (b)(2)(vi) if the dependent becomes a 
dependent of the employee through marriage, birth, adoption, or 
placement for adoption.
    (3) Applying for special enrollment and effective date of 
coverage--(i) Request. A plan must allow an individual a period of at 
least 30 days after the date of the marriage, birth, adoption, or 
placement for adoption (or, if dependent coverage is not generally made 
available at the time of the marriage, birth, adoption, or placement 
for adoption, a period of at least 30 days after the date the plan 
makes dependent coverage generally available) to request enrollment 
(for the individual or the individual's dependent).
    (ii) Reasonable procedures for special enrollment. [Reserved]
    (iii) Date coverage must begin--(A) Marriage. In the case of 
marriage, coverage must begin no later than the first day of the first 
calendar month beginning after the date the plan (or any issuer 
offering health insurance

[[Page 78761]]

coverage under the plan) receives the request for special enrollment.
    (B) Birth, adoption, or placement for adoption. Coverage must begin 
in the case of a dependent's birth on the date of birth and in the case 
of a dependent's adoption or placement for adoption no later than the 
date of such adoption or placement for adoption (or, if dependent 
coverage is not made generally available at the time of the birth, 
adoption, or placement for adoption, the date the plan makes dependent 
coverage available).
    (4) Examples. The rules of this paragraph (b) are illustrated by 
the following examples:

    Example 1.  (i) Facts. An employer maintains a group health plan 
that offers all employees employee-only coverage, employee-plus-
spouse coverage, or family coverage. Under the terms of the plan, 
any employee may elect to enroll when first hired (with coverage 
beginning on the date of hire) or during an annual open enrollment 
period held each December (with coverage beginning the following 
January 1). Employee A is hired on September 3. A is married to B, 
and they have no children. On March 15 in the following year a child 
C is born to A and B. Before that date, A and B have not been 
enrolled in the plan.
    (ii) Conclusion. In this Example 1, the conditions for special 
enrollment of an employee with a spouse and new dependent under 
paragraph (b)(2)(vi) of this section are satisfied. If A satisfies 
the conditions of paragraph (b)(3) of this section for requesting 
enrollment timely, the plan will satisfy this paragraph (b) if it 
allows A to enroll either with employee-only coverage, with 
employee-plus-spouse coverage (for A and B), or with family coverage 
(for A, B, and C). The plan must allow whatever coverage is chosen 
to begin on March 15, the date of C's birth.
    Example 2. (i) Facts. Individual D works for Employer X. X 
maintains a group health plan with two benefit packages--an HMO 
option and an indemnity option. Self-only and family coverage are 
available under both options. D enrolls for self-only coverage in 
the HMO option. Then, a child, E, is placed for adoption with D. 
Within 30 days of the placement of E for adoption, D requests 
enrollment for D and E under the plan's indemnity option.
    (ii) Conclusion. In this Example 2, D and E satisfy the 
conditions for special enrollment under paragraphs (b)(2)(v) and 
(b)(3) of this section. Therefore, the plan must allow D and E to 
enroll in the indemnity coverage, effective as of the date of the 
placement for adoption.

    (c) Notice of special enrollment. At or before the time an employee 
is initially offered the opportunity to enroll in a group health plan, 
the plan must furnish the employee with a notice of special enrollment 
that complies with the requirements of this paragraph (c).
    (1) Description of special enrollment rights. The notice of special 
enrollment must include a description of special enrollment rights. The 
following model language may be used to satisfy this requirement:

    If you are declining enrollment for yourself or your dependents 
(including your spouse) because of other health insurance or group 
health plan coverage, you may be able to enroll yourself and your 
dependents in this plan if you or your dependents lose eligibility 
for that other coverage (or if the employer stops contributing 
towards your or your dependents' other coverage). However, you must 
request enrollment within [insert ``30 days'' or any longer period 
that applies under the plan] after your or your dependents' other 
coverage ends (or after the employer stops contributing toward the 
other coverage).
    In addition, if you have a new dependent as a result of 
marriage, birth, adoption, or placement for adoption, you may be 
able to enroll yourself and your dependents. However, you must 
request enrollment within [insert ``30 days'' or any longer period 
that applies under the plan] after the marriage, birth, adoption, or 
placement for adoption.
    To request special enrollment or obtain more information, 
contact [insert the name, title, telephone number, and any 
additional contact information of the appropriate plan 
representative].

    (2) Additional information that may be required. The notice of 
special enrollment must also include, if applicable, the notice 
described in paragraph (a)(3)(iv) of this section (the notice required 
to be furnished to an individual declining coverage if the plan 
requires the reason for declining coverage to be in writing).
    (d) Treatment of special enrollees--(1) If an individual requests 
enrollment while the individual is entitled to special enrollment under 
either paragraph (a) or (b) of this section, the individual is a 
special enrollee, even if the request for enrollment coincides with a 
late enrollment opportunity under the plan. Therefore, the individual 
cannot be treated as a late enrollee.
    (2) Special enrollees must be offered all the benefit packages 
available to similarly situated individuals who enroll when first 
eligible. For this purpose, any difference in benefits or cost-sharing 
requirements for different individuals constitutes a different benefit 
package. In addition, a special enrollee cannot be required to pay more 
for coverage than a similarly situated individual who enrolls in the 
same coverage when first eligible. The length of any preexisting 
condition exclusion that may be applied to a special enrollee cannot 
exceed the length of any preexisting condition exclusion that is 
applied to similarly situated individuals who enroll when first 
eligible. For rules prohibiting the application of a preexisting 
condition exclusion to certain newborns, adopted children, and children 
placed for adoption, see Sec.  54.9801-3(b).
    (3) The rules of this section are illustrated by the following 
example:

    Example 2. (i) Facts. Employer Y maintains a group health plan 
that has an enrollment period for late enrollees every November 1 
through November 30 with coverage effective the following January 1. 
On October 18, Individual B loses coverage under another group 
health plan and satisfies the requirements of paragraphs (a)(2), 
(3), and (4) of this section. B submits a completed application for 
coverage on November 2.
    (ii) Conclusion. In this Example, B is a special enrollee. 
Therefore, even though B's request for enrollment coincides with an 
open enrollment period, B's coverage is required to be made 
effective no later than December 1 (rather than the plan's January 1 
effective date for late enrollees).


Sec.  54.9831-1  Special rules relating to group health plans.

    (a) Group health plan--(1) Defined. A group health plan means a 
plan (including a self-insured plan) of, or contributed to by, an 
employer (including a self-employed person) or employee organization to 
provide health care (directly or otherwise) to the employees, former 
employees, the employer, others associated or formerly associated with 
the employer in a business relationship, or their families.
    (2) Determination of number of plans. [Reserved]
    (b) General exception for certain small group health plans. The 
requirements of Sec. Sec.  54.9801-1 through 54.9801-6, 54.9802-1, 
54.9802-1T, 54.9811-1T, 54.9812-1T, and 54.9833-1 do not apply to any 
group health plan for any plan year if, on the first day of the plan 
year, the plan has fewer than two participants who are current 
employees.
    (c) Excepted benefits--(1) In general. The requirements of 
Sec. Sec.  54.9801-1 through 54.9801-6, 54.9802-1, 54.9802-1T, 54.9811-
1T, 54.9812-1T, and 54.9833-1 do not apply to any group health plan in 
relation to its provision of the benefits described in paragraph 
(c)(2), (3), (4), or (5) of this section (or any combination of these 
benefits).
    (2) Benefits excepted in all circumstances. The following benefits 
are excepted in all circumstances--
    (i) Coverage only for accident (including accidental death and 
dismemberment);
    (ii) Disability income coverage;
    (iii) Liability insurance, including general liability insurance 
and automobile liability insurance;
    (iv) Coverage issued as a supplement to liability insurance;

[[Page 78762]]

    (v) Workers' compensation or similar coverage;
    (vi) Automobile medical payment insurance;
    (vii) Credit-only insurance (for example, mortgage insurance); and
    (viii) Coverage for on-site medical clinics.
    (3) Limited excepted benefits--(i) In general. Limited-scope dental 
benefits, limited-scope vision benefits, or 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 a group 
health plan as described in paragraph (c)(3)(ii) of this section. In 
addition, benefits provided under a health flexible spending 
arrangement are excepted benefits if they satisfy the requirements of 
paragraph (c)(3)(v) of this section.
    (ii) Not an integral part of a group health plan. For purposes of 
this paragraph (c)(3), benefits are not an integral part of a group 
health plan (whether the benefits are provided through the same plan or 
a separate plan) only if the following two requirements are satisfied--
    (A) Participants must have the right to elect not to receive 
coverage for the benefits; and
    (B) If a participant elects to receive coverage for the benefits, 
the participant must pay an additional premium or contribution for that 
coverage.
    (iii) Limited scope--(A) Dental benefits. Limited scope dental 
benefits are benefits substantially all of which are for treatment of 
the mouth (including any organ or structure within the mouth).
    (B) Vision benefits. Limited scope vision benefits are benefits 
substantially of which are for treatment of the eye.
    (iv) Long-term care. Long-term care benefits are benefits that are 
either--
    (A) Subject to State long-term care insurance laws;
    (B) For qualified long-term care services, as defined in section 
7702B(c)(1), or provided under a qualified long-term care insurance 
contract, as defined in section 7702B(b); or
    (C) Based on cognitive impairment or a loss of functional capacity 
that is expected to be chronic.
    (v) Health flexible spending arrangements. Benefits provided under 
a health flexible spending arrangement (as defined in section 
106(c)(2)) are excepted for a class of participants only if they 
satisfy the following two requirements--
    (A) Other group health plan coverage, not limited to excepted 
benefits, is made available for the year to the class of participants 
by reason of their employment; and
    (B) The arrangement is structured so that the maximum benefit 
payable to any participant in the class for a year cannot exceed two 
times the participant's salary reduction election under the arrangement 
for the year (or, if greater, cannot exceed $500 plus the amount of the 
participant's salary reduction election). For this purpose, any amount 
that an employee can elect to receive as taxable income but elects to 
apply to the health flexible spending arrangement is considered a 
salary reduction election (regardless of whether the amount is 
characterized as salary or as a credit under the arrangement).
    (4) Noncoordinated benefits--(i) Excepted benefits that are not 
coordinated. Coverage for only a specified disease or illness (for 
example, cancer-only policies) or hospital indemnity or other fixed 
indemnity insurance is excepted only if it meets each of the conditions 
specified in paragraph (c)(4)(ii) of this section. To be hospital 
indemnity or other fixed indemnity insurance, the insurance must pay a 
fixed dollar amount per day (or per other period) of hospitalization or 
illness (for example, $100/day) regardless of the amount of expenses 
incurred.
    (ii) Conditions. Benefits are described in paragraph (c)(4)(i) of 
this section only if--
    (A) The benefits are provided under a separate policy, certificate, 
or contract of insurance;
    (B) There is no coordination between the provision of the benefits 
and an exclusion of benefits under any group health plan maintained by 
the same plan sponsor; and
    (C) The benefits are paid with respect to an event without regard 
to whether benefits are provided with respect to the event under any 
group health plan maintained by the same plan sponsor.
    (iii) Example. The rules of this paragraph (c)(4) are illustrated 
by the following example:

    Example. (i) Facts. An employer sponsors a group health plan 
that provides coverage through an insurance policy. The policy 
provides benefits only for hospital stays at a fixed percentage of 
hospital expenses up to a maximum of $100 a day.
    (ii) Conclusion. In this Example, even though the benefits under 
the policy satisfy the conditions in paragraph (c)(4)(ii) of this 
section, because the policy pays a percentage of expenses incurred 
rather than a fixed dollar amount, the benefits under the policy are 
not excepted benefits under this paragraph (c)(4). This is the 
result even if, in practice, the policy pays the maximum of $100 for 
every day of hospitalization.

    (5) Supplemental benefits. (i) The following benefits are excepted 
only if they are provided under a separate policy, certificate, or 
contract of insurance--
    (A) Medicare supplemental health insurance (as defined under 
section 1882(g)(1) of the Social Security Act; also known as Medigap or 
MedSupp insurance);
    (B) Coverage supplemental to the coverage provided under Chapter 
55, Title 10 of the United States Code (also known as TRICARE 
supplemental programs); and
    (C) Similar supplemental coverage provided to coverage under a 
group health plan. To be similar supplemental coverage, the coverage 
must be specifically designed to fill gaps in primary coverage, such as 
coinsurance or deductibles. Similar supplemental coverage does not 
include coverage that becomes secondary or supplemental only under a 
coordination-of-benefits provision.
    (ii) The rules of this paragraph (c)(5) are illustrated by the 
following example:

    Example. (i) Facts. An employer sponsors a group health plan 
that provides coverage for both active employees and retirees. The 
coverage for retirees supplements benefits provided by Medicare, but 
does not meet the requirements for a supplemental policy under 
section 1882(g)(1) of the Social Security Act.
    (ii) Conclusion. In this Example, the coverage provided to 
retirees does not meet the definition of supplemental excepted 
benefits under this paragraph (c)(5) because the coverage is not 
Medicare supplemental insurance as defined under section 1882(g)(1) 
of the Social Security Act, is not a TRICARE supplemental program, 
and is not supplemental to coverage provided under a group health 
plan.

    (d) Treatment of partnerships. For purposes of this part:
    (1) Treatment as a group health plan. (See 29 CFR 2590.732(d)(1) 
and 45 CFR 146.145(d)(1), under which a plan providing medical care, 
maintained by a partnership, and usually not treated as an employee 
welfare benefit plan under ERISA is treated as a group health plan for 
purposes of Part 7 of Subtitle B of Title I of ERISA and Title XXVII of 
the PHS Act.)
    (2) Employment relationship. In the case of a group health plan, 
the term employer also includes the partnership in relation to any bona 
fide partner. In addition, the term employee also includes any bona 
fide partner. Whether or not an individual is a bona fide partner is 
determined based on all the relevant facts and circumstances, including 
whether the individual performs services on behalf of the partnership.

[[Page 78763]]

    (3) Participants of group health plans. In the case of a group 
health plan, the term participant also includes any individual 
described in paragraph (d)(3)(i) or (ii) of this section if the 
individual is, or may become, eligible to receive a benefit under the 
plan or the individual's beneficiaries may be eligible to receive any 
such benefit.
    (i) In connection with a group health plan maintained by a 
partnership, the individual is a partner in relation to the 
partnership.
    (ii) In connection with a group health plan maintained by a self-
employed individual (under which one or more employees are 
participants), the individual is the self-employed individual.
    (e) Determining the average number of employees. [Reserved]


Sec.  54.9833-1  Effective dates.

    Sections 54.9801-1 through 54.9801-6, 54.9831-1, and this section 
are applicable for plan years beginning on or after July 1, 2005.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

0
Par. 4. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.


0
Par. 5. In Sec.  602.101, paragraph (b) is amended by:
0
a. Removing the entries in the table for Sec. Sec.  54.9801-3T, 
54.9801-4T, 54.9801-5T, and 54.9801-6T.
0
b. Adding the following entries in numerical order to the table:


Sec.  602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                           Current OMB
   CFR part or section where identified and described      control No.
------------------------------------------------------------------------
                                * * * * *
54.9801-3..............................................        1545-1537
54.9801-4..............................................        1545-1537
54.9801-5..............................................        1545-1537
54.9801-6..............................................        1545-1537
                                * * * * *
------------------------------------------------------------------------


Mark E. Matthews,
Deputy Commissioner for Services and Enforcement, Internal Revenue 
Service.
    Approved: July 14, 2004.
Gregory F. Jenner,
Acting Assistant Secretary of the Treasury.

Employee Benefits Security Administration

29 CFR Chapter XXV

0
For the reasons set forth above, Chapter XXV of Title 29 of the Code of 
Federal Regulations is amended as set forth below:

PART 2590--RULES AND REGULATIONS FOR GROUP HEALTH PLANS

0
1. The authority citation for Part 2590 is revised to read as follows:

    Authority: 29 U.S.C. 1027, 1059, 1135, 1161-1168, 1169, 1181-
1183, 1181 note, 1185, 1185a, 1185b, 1191, 1191a, 1191b, and 1191c, 
sec. 101(g), Public Law 104-191, 101 Stat. 1936; sec. 401(b), Public 
Law 105-200, 112 Stat. 645 (42 U.S.C. 651 note); Secretary of 
Labor's Order 1-2003, 68 FR 5374 (Feb. 3, 2003).


0
2. The heading for Subpart B is revised to read as follows:

Subpart B--Health Coverage Portability, Nondiscrimination, and 
Renewability

0
3. Sections 2590.701-1, 2590.701-2, 2590.701-3, 2590.701-4, 2590.701-5, 
2590.701-6, and 2590.701-7 are revised to read as follows:


Sec.  2590.701-1  Basis and scope.

    (a) Statutory basis. This Subpart B implements Part 7 of Subtitle B 
of Title I of the Employee Retirement Income Security Act of 1974, as 
amended (hereinafter ERISA or the Act).
    (b) Scope. A group health plan or health insurance issuer offering 
group health insurance coverage may provide greater rights to 
participants and beneficiaries than those set forth in this Subpart B. 
This Subpart B sets forth minimum requirements for group health plans 
and health insurance issuers offering group health insurance coverage 
concerning:
    (1) Limitations on a preexisting condition exclusion period.
    (2) Certificates and disclosure of previous coverage.
    (3) Rules relating to counting creditable coverage.
    (4) Special enrollment periods.
    (5) Prohibition against discrimination on the basis of health 
factors.
    (6) Use of an affiliation period by an HMO as an alternative to a 
preexisting condition exclusion.


Sec.  2590.701-2  Definitions.

    Unless otherwise provided, the definitions in this section govern 
in applying the provisions of Sec. Sec.  2590.701 through 2590.734.
    Affiliation period means a period of time that must expire before 
health insurance coverage provided by an HMO becomes effective, and 
during which the HMO is not required to provide benefits.
    COBRA definitions:
    (1) COBRA means Title X of the Consolidated Omnibus Budget 
Reconciliation Act of 1985, as amended.
    (2) COBRA continuation coverage means coverage, under a group 
health plan, that satisfies an applicable COBRA continuation provision.
    (3) COBRA continuation provision means sections 601-608 of the Act, 
section 4980B of the Internal Revenue Code (other than paragraph (f)(1) 
of such section 4980B insofar as it relates to pediatric vaccines), or 
Title XXII of the PHS Act.
    (4) Exhaustion of COBRA continuation coverage means that an 
individual's COBRA continuation coverage ceases for any reason other 
than either failure of the individual to pay premiums on a timely 
basis, or for cause (such as making a fraudulent claim or an 
intentional misrepresentation of a material fact in connection with the 
plan). An individual is considered to have exhausted COBRA continuation 
coverage if such coverage ceases--
    (i) Due to the failure of the employer or other responsible entity 
to remit premiums on a timely basis;
    (ii) When the individual no longer resides, lives, or works in the 
service area of an HMO or similar program (whether or not within the 
choice of the individual) and there is no other COBRA continuation 
coverage available to the individual; or
    (iii) When the individual incurs a claim that would meet or exceed 
a lifetime limit on all benefits and there is no other COBRA 
continuation coverage available to the individual.
    Condition means a medical condition.
    Creditable coverage means creditable coverage within the meaning of 
Sec.  2590.701-4(a).
    Dependent means any individual who is or may become eligible for 
coverage under the terms of a group health plan because of a 
relationship to a participant.
    Enroll means to become covered for benefits under a group health 
plan (that is, when coverage becomes effective), without regard to when 
the individual may have completed or filed any forms that are required 
in order to become covered under the plan. For this purpose, an 
individual who has health coverage under a group health plan is 
enrolled in the plan regardless of whether the individual elects 
coverage, the individual is a dependent who becomes covered as a result 
of an election by a participant, or the individual becomes covered 
without an election.
    Enrollment date definitions (enrollment date, first day of 
coverage,

[[Page 78764]]

and waiting period) are set forth in Sec.  2590.701-3(a)(3)(i), (ii), 
and (iii).
    Excepted benefits means the benefits described as excepted in Sec.  
2590.732(c).
    Genetic information means information about genes, gene products, 
and inherited characteristics that may derive from the individual or a 
family member. This includes information regarding carrier status and 
information derived from laboratory tests that identify mutations in 
specific genes or chromosomes, physical medical examinations, family 
histories, and direct analysis of genes or chromosomes.
    Group health insurance coverage means health insurance coverage 
offered in connection with a group health plan.
    Group health plan or plan means a group health plan within the 
meaning of Sec.  2590.732(a).
    Group market means the market for health insurance coverage offered 
in connection with a group health plan. (However, certain very small 
plans may be treated as being in the individual market, rather than the 
group market; see the definition of individual market in this section.)
    Health insurance coverage means benefits consisting of medical care 
(provided directly, through insurance or reimbursement, or otherwise) 
under any hospital or medical service policy or certificate, hospital 
or medical service plan contract, or HMO contract offered by a health 
insurance issuer. Health insurance coverage includes group health 
insurance coverage, individual health insurance coverage, and short-
term, limited-duration insurance.
    Health insurance issuer or issuer means an insurance company, 
insurance service, or insurance organization (including an HMO) that is 
required to be licensed to engage in the business of insurance in a 
State and that is subject to State law that regulates insurance (within 
the meaning of section 514(b)(2) of the Act). Such term does not 
include a group health plan.
    Health maintenance organization or HMO means--
    (1) A federally qualified health maintenance organization (as 
defined in section 1301(a) of the PHS Act);
    (2) An organization recognized under State law as a health 
maintenance organization; or
    (3) A similar organization regulated under State law for solvency 
in the same manner and to the same extent as such a health maintenance 
organization.
    Individual health insurance coverage means health insurance 
coverage offered to individuals in the individual market, but does not 
include short-term, limited-duration insurance. Individual health 
insurance coverage can include dependent coverage.
    Individual market means the market for health insurance coverage 
offered to individuals other than in connection with a group health 
plan. Unless a State elects otherwise in accordance with section 
2791(e)(1)(B)(ii) of the PHS Act, such term also includes coverage 
offered in connection with a group health plan that has fewer than two 
participants who are current employees on the first day of the plan 
year.
    Internal Revenue Code means the Internal Revenue Code of 1986, as 
amended (Title 26, United States Code).
    Issuer means a health insurance issuer.
    Late enrollment definitions (late enrollee and late enrollment) are 
set forth in Sec.  2590.701-3(a)(3)(v) and (vi).
    Medical care means amounts paid for--
    (1) The diagnosis, cure, mitigation, treatment, or prevention of 
disease, or amounts paid for the purpose of affecting any structure or 
function of the body;
    (2) Transportation primarily for and essential to medical care 
referred to in paragraph (1) of this definition; and
    (3) Insurance covering medical care referred to in paragraphs (1) 
and (2) of this definition.
    Medical condition or condition means any condition, whether 
physical or mental, including, but not limited to, any condition 
resulting from illness, injury (whether or not the injury is 
accidental), pregnancy, or congenital malformation. However, genetic 
information is not a condition.
    Participant means participant within the meaning of section 3(7) of 
the Act.
    Placement, or being placed, for adoption means the assumption and 
retention of a legal obligation for total or partial support of a child 
by a person with whom the child has been placed in anticipation of the 
child's adoption. The child's placement for adoption with such person 
ends upon the termination of such legal obligation.
    Plan year means the year that is designated as the plan year in the 
plan document of a group health plan, except that if the plan document 
does not designate a plan year or if there is no plan document, the 
plan year is--
    (1) The deductible or limit year used under the plan;
    (2) If the plan does not impose deductibles or limits on a yearly 
basis, then the plan year is the policy year;
    (3) If the plan does not impose deductibles or limits on a yearly 
basis, and either the plan is not insured or the insurance policy is 
not renewed on an annual basis, then the plan year is the employer's 
taxable year; or
    (4) In any other case, the plan year is the calendar year.
    Preexisting condition exclusion means preexisting condition 
exclusion within the meaning of Sec.  2590.701-3(a)(1).
    Public health plan means public health plan within the meaning of 
Sec.  2590.701-4(a)(1)(ix).
    Public Health Service Act (PHS Act) means the Public Health Service 
Act (42 U.S.C. 201, et seq.).
    Short-term, limited-duration insurance means health insurance 
coverage provided pursuant to a contract with an issuer that has an 
expiration date specified in the contract (taking into account any 
extensions that may be elected by the policyholder without the issuer's 
consent) that is less than 12 months after the original effective date 
of the contract.
    Significant break in coverage means a significant break in coverage 
within the meaning of Sec.  2590.701-4(b)(2)(iii).
    Special enrollment means enrollment in a group health plan or group 
health insurance coverage under the rights described in Sec.  2590.701-
6.
    State means each of the several States, the District of Columbia, 
Puerto Rico, the Virgin Islands, Guam, American Samoa, and the Northern 
Mariana Islands.
    State health benefits risk pool means a State health benefits risk 
pool within the meaning of Sec.  2590.701-4(a)(1)(vii).
    Waiting period means waiting period within the meaning of Sec.  
2590.701-3(a)(3)(iii).


Sec.  2590.701-3  Limitations on preexisting condition exclusion 
period.

    (a) Preexisting condition exclusion--(1) Defined--(i) A preexisting 
condition exclusion means a limitation or exclusion of benefits 
relating to a condition based on the fact that the condition was 
present before the effective date of coverage under a group health plan 
or group health insurance coverage, whether or not any medical advice, 
diagnosis, care, or treatment was recommended or received before that 
day. A preexisting condition exclusion includes any exclusion 
applicable to an individual as a result of information relating to an 
individual's health status before the individual's effective date of 
coverage under a group health plan or group health insurance coverage, 
such as a condition identified as a result of a pre-enrollment 
questionnaire or physical examination given to the individual, or 
review of medical records relating to the pre-enrollment period.
    (ii) Examples. The rules of this paragraph (a)(1) are illustrated 
by the following examples:


[[Page 78765]]


    Example 1. (i) Facts. A group health plan provides benefits 
solely through an insurance policy offered by Issuer S. At the 
expiration of the policy, the plan switches coverage to a policy 
offered by Issuer T. Issuer T's policy excludes benefits for any 
prosthesis if the body part was lost before the effective date of 
coverage under the policy.
    (ii) Conclusion. In this Example 1, the exclusion of benefits 
for any prosthesis if the body part was lost before the effective 
date of coverage is a preexisting condition exclusion because it 
operates to exclude benefits for a condition based on the fact that 
the condition was present before the effective date of coverage 
under the policy. (Therefore, the exclusion of benefits is required 
to comply with the limitations on preexisting condition exclusions 
in this section. For an example illustrating the application of 
these limitations to a succeeding insurance policy, see Example 3 of 
paragraph (a)(3)(iv) of this section.)
    Example 2. (i) Facts. A group health plan provides coverage for 
cosmetic surgery in cases of accidental injury, but only if the 
injury occurred while the individual was covered under the plan.
    (ii) Conclusion. In this Example 2, the plan provision excluding 
cosmetic surgery benefits for individuals injured before enrolling 
in the plan is a preexisting condition exclusion because it operates 
to exclude benefits relating to a condition based on the fact that 
the condition was present before the effective date of coverage. The 
plan provision, therefore, is subject to the limitations on 
preexisting condition exclusions in this section.
    Example 3. (i) Facts. A group health plan provides coverage for 
the treatment of diabetes, generally not subject to any lifetime 
dollar limit. However, if an individual was diagnosed with diabetes 
before the effective date of coverage under the plan, diabetes 
coverage is subject to a lifetime limit of $10,000.
    (ii) Conclusion. In this Example 3, the $10,000 lifetime limit 
is a preexisting condition exclusion because it limits benefits for 
a condition based on the fact that the condition was present before 
the effective date of coverage. The plan provision, therefore, is 
subject to the limitations on preexisting condition exclusions in 
this section.
    Example 4. (i) Facts. A group health plan provides coverage for 
the treatment of acne, subject to a lifetime limit of $2,000. The 
plan counts against this $2,000 lifetime limit acne treatment 
benefits provided under prior health coverage.
    (ii) Conclusion. In this Example 4, counting benefits for a 
specific condition provided under prior health coverage against a 
lifetime limit for that condition is a preexisting condition 
exclusion because it operates to limit benefits for a condition 
based on the fact that the condition was present before the 
effective date of coverage. The plan provision, therefore, is 
subject to the limitations on preexisting condition exclusions in 
this section.
    Example 5. (i) Facts. When an individual's coverage begins under 
a group health plan, the individual generally becomes eligible for 
all benefits. However, benefits for pregnancy are not available 
until the individual has been covered under the plan for 12 months.
    (ii) Conclusion. In this Example 5, the requirement to be 
covered under the plan for 12 months to be eligible for pregnancy 
benefits is a subterfuge for a preexisting condition exclusion 
because it is designed to exclude benefits for a condition 
(pregnancy) that arose before the effective date of coverage. 
Because a plan is prohibited under paragraph (b)(5) of this section 
from imposing any preexisting condition exclusion on pregnancy, the 
plan provision is prohibited. However, if the plan provision 
included an exception for women who were pregnant before the 
effective date of coverage under the plan (so that the provision 
applied only to women who became pregnant on or after the effective 
date of coverage) the plan provision would not be a preexisting 
condition exclusion (and would not be prohibited by paragraph (b)(5) 
of this section).
    Example 6. (i) Facts. A group health plan provides coverage for 
medically necessary items and services, generally including 
treatment of heart conditions. However, the plan does not cover 
those same items and services when used for treatment of congenital 
heart conditions.
    (ii) Conclusion. In this Example 6, the exclusion of coverage 
for treatment of congenital heart conditions is a preexisting 
condition exclusion because it operates to exclude benefits relating 
to a condition based on the fact that the condition was present 
before the effective date of coverage. The plan provision, 
therefore, is subject to the limitations on preexisting condition 
exclusions in this section.
    Example 7. (i) Facts. A group health plan generally provides 
coverage for medically necessary items and services. However, the 
plan excludes coverage for the treatment of cleft palate.
    (ii) Conclusion. In this Example 7, the exclusion of coverage 
for treatment of cleft palate is not a preexisting condition 
exclusion because the exclusion applies regardless of when the 
condition arose relative to the effective date of coverage. The plan 
provision, therefore, is not subject to the limitations on 
preexisting condition exclusions in this section.
    Example 8. (i) Facts. A group health plan provides coverage for 
treatment of cleft palate, but only if the individual being treated 
has been continuously covered under the plan from the date of birth.
    (ii) Conclusion. In this Example 8, the exclusion of coverage 
for treatment of cleft palate for individuals who have not been 
covered under the plan from the date of birth operates to exclude 
benefits in relation to a condition based on the fact that the 
condition was present before the effective date of coverage. The 
plan provision, therefore, is subject to the limitations on 
preexisting condition exclusions in this section.

    (2) General rules. Subject to paragraph (b) of this section 
(prohibiting the imposition of a preexisting condition exclusion with 
respect to certain individuals and conditions), a group health plan, 
and a health insurance issuer offering group health insurance coverage, 
may impose, with respect to a participant or beneficiary, a preexisting 
condition exclusion only if the requirements of this paragraph (a)(2) 
are satisfied.
    (i) 6-month look-back rule. A preexisting condition exclusion must 
relate to a condition (whether physical or mental), regardless of the 
cause of the condition, for which medical advice, diagnosis, care, or 
treatment was recommended or received within the 6-month period (or 
such shorter period as applies under the plan) ending on the enrollment 
date.
    (A) For purposes of this paragraph (a)(2)(i), medical advice, 
diagnosis, care, or treatment is taken into account only if it is 
recommended by, 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 State law.
    (B) For purposes of this paragraph (a)(2)(i), the 6-month period 
ending on the enrollment date begins on the 6-month anniversary date 
preceding the enrollment date. For example, for an enrollment date of 
August 1, 1998, the 6-month period preceding the enrollment date is the 
period commencing on February 1, 1998 and continuing through July 31, 
1998. As another example, for an enrollment date of August 30, 1998, 
the 6-month period preceding the enrollment date is the period 
commencing on February 28, 1998 and continuing through August 29, 1998.
    (C) The rules of this paragraph (a)(2)(i) are illustrated by the 
following examples:

    Example 1. (i) Facts. Individual A is diagnosed with a medical 
condition 8 months before A's enrollment date in Employer R's group 
health plan. A's doctor recommends that A take a prescription drug 
for 3 months, and A follows the recommendation.
    (ii) Conclusion. In this Example 1, Employer R's plan may impose 
a preexisting condition exclusion with respect to A's condition 
because A received treatment during the 6-month period ending on A's 
enrollment date in Employer R's plan by taking the prescription 
medication during that period. However, if A did not take the 
prescription drug during the 6-month period, Employer R's plan would 
not be able to impose a preexisting condition exclusion with respect 
to that condition.
    Example 2. (i) Facts. Individual B is treated for a medical 
condition 7 months before the enrollment date in Employer S's group 
health plan. As part of such treatment, B's physician recommends 
that a follow-up examination be given 2 months later. Despite this 
recommendation, B does not receive a

[[Page 78766]]

follow-up examination, and no other medical advice, diagnosis, care, 
or treatment for that condition is recommended to B or received by B 
during the 6-month period ending on B's enrollment date in Employer 
S's plan.
    (ii) Conclusion. In this Example 2, Employer S's plan may not 
impose a preexisting condition exclusion with respect to the 
condition for which B received treatment 7 months prior to the 
enrollment date.
    Example 3. (i) Facts. Same facts as Example 2, except that 
Employer S's plan learns of the condition and attaches a rider to 
B's certificate of coverage excluding coverage for the condition. 
Three months after enrollment, B's condition recurs, and Employer 
S's plan denies payment under the rider.
    (ii) Conclusion. In this Example 3, the rider is a preexisting 
condition exclusion and Employer S's plan may not impose a 
preexisting condition exclusion with respect to the condition for 
which B received treatment 7 months prior to the enrollment date. 
(In addition, such a rider would violate the provisions of Sec.  
2590.702, even if B had received treatment for the condition within 
the 6-month period ending on the enrollment date.)
    Example 4. (i) Facts. Individual C has asthma and is treated for 
that condition several times during the 6-month period before C's 
enrollment date in Employer T's plan. Three months after the 
enrollment date, C begins coverage under Employer T's plan. Two 
months later, C is hospitalized for asthma.
    (ii) Conclusion. In this Example 4, Employer T's plan may impose 
a preexisting condition exclusion with respect to C's asthma because 
care relating to C's asthma was received during the 6-month period 
ending on C's enrollment date (which, under the rules of paragraph 
(a)(3)(i) of this section, is the first day of the waiting period).
    Example 5. (i) Facts. Individual D, who is subject to a 
preexisting condition exclusion imposed by Employer U's plan, has 
diabetes, as well as retinal degeneration, a foot condition, and 
poor circulation (all of which are conditions that may be directly 
attributed to diabetes). D receives treatment for these conditions 
during the 6-month period ending on D's enrollment date in Employer 
U's plan. After enrolling in the plan, D stumbles and breaks a leg.
    (ii) Conclusion. In this Example 5, the leg fracture is not a 
condition related to D's diabetes, retinal degeneration, foot 
condition, or poor circulation, even though they may have 
contributed to the accident. Therefore, benefits to treat the leg 
fracture cannot be subject to a preexisting condition exclusion. 
However, any additional medical services that may be needed because 
of D's preexisting diabetes, poor circulation, or retinal 
degeneration that would not be needed by another patient with a 
broken leg who does not have these conditions may be subject to the 
preexisting condition exclusion imposed under Employer U's plan.

    (ii) Maximum length of preexisting condition exclusion. A 
preexisting condition exclusion is not permitted to extend for more 
than 12 months (18 months in the case of a late enrollee) after the 
enrollment date. For example, for an enrollment date of August 1, 1998, 
the 12-month period after the enrollment date is the period commencing 
on August 1, 1998 and continuing through July 31, 1999; the 18-month 
period after the enrollment date is the period commencing on August 1, 
1998 and continuing through January 31, 2000.
    (iii) Reducing a preexisting condition exclusion period by 
creditable coverage--(A) The period of any preexisting condition 
exclusion that would otherwise apply to an individual under a group 
health plan is reduced by the number of days of creditable coverage the 
individual has as of the enrollment date, as counted under Sec.  
2590.701-4. Creditable coverage may be evidenced through a certificate 
of creditable coverage (required under Sec.  2590.701-5(a)), or through 
other means in accordance with the rules of Sec.  2590.701-5(c).
    (B) The rules of this paragraph (a)(2)(iii) are illustrated by the 
following example:

    Example. (i) Facts. Individual D works for Employer X and has 
been covered continuously under X's group health plan. D's spouse 
works for Employer Y. Y maintains a group health plan that imposes a 
12-month preexisting condition exclusion (reduced by creditable 
coverage) on all new enrollees. D enrolls in Y's plan, but also 
stays covered under X's plan. D presents Y's plan with evidence of 
creditable coverage under X's plan.
    (ii) Conclusion. In this Example, Y's plan must reduce the 
preexisting condition exclusion period that applies to D by the 
number of days of coverage that D had under X's plan as of D's 
enrollment date in Y's plan (even though D's coverage under X's plan 
was continuing as of that date).

    (iv) Other standards. See Sec.  2590.702 for other standards in 
this Subpart B that may apply with respect to certain benefit 
limitations or restrictions under a group health plan. Other laws may 
also apply, such as the Uniformed Services Employment and Reemployment 
Rights Act (USERRA), which can affect the application of a preexisting 
condition exclusion to certain individuals who are reinstated in a 
group health plan following active military service.
    (3) Enrollment definitions--(i) Enrollment date means the first day 
of coverage (as described in paragraph (a)(3)(ii) of this section) or, 
if there is a waiting period, the first day of the waiting period. If 
an individual receiving benefits under a group health plan changes 
benefit packages, or if the plan changes group health insurance 
issuers, the individual's enrollment date does not change.
    (ii) First day of coverage means, in the case of an individual 
covered for benefits under a group health plan, the first day of 
coverage under the plan and, in the case of an individual covered by 
health insurance coverage in the individual market, the first day of 
coverage under the policy or contract.
    (iii) Waiting period means the period that must pass before 
coverage for an employee or dependent who is otherwise eligible to 
enroll under the terms of a group health plan can become effective. If 
an employee or dependent enrolls as a late enrollee or special 
enrollee, any period before such late or special enrollment is not a 
waiting period. If an individual seeks coverage in the individual 
market, a waiting period begins on the date the individual submits a 
substantially complete application for coverage and ends on--
    (A) If the application results in coverage, the date coverage 
begins;
    (B) If the application does not result in coverage, the date on 
which the application is denied by the issuer or the date on which the 
offer of coverage lapses.
    (iv) The rules of paragraphs (a)(3)(i), (ii), and (iii) of this 
section are illustrated by the following examples:

    Example 1. (i) Facts. Employer V's group health plan provides 
for coverage to begin on the first day of the first payroll period 
following the date an employee is hired and completes the applicable 
enrollment forms, or on any subsequent January 1 after completion of 
the applicable enrollment forms. Employer V's plan imposes a 
preexisting condition exclusion for 12 months (reduced by the 
individual's creditable coverage) following an individual's 
enrollment date. Employee E is hired by Employer V on October 13, 
1998 and on October 14, 1998 E completes and files all the forms 
necessary to enroll in the plan. E's coverage under the plan becomes 
effective on October 25, 1998 (which is the beginning of the first 
payroll period after E's date of hire).
    (ii) Conclusion. In this Example 1, E's enrollment date is 
October 13, 1998 (which is the first day of the waiting period for 
E's enrollment and is also E's date of hire). Accordingly, with 
respect to E, the permissible 6-month period in paragraph (a)(2)(i) 
is the period from April 13, 1998 through October 12, 1998, the 
maximum permissible period during which Employer V's plan can apply 
a preexisting condition exclusion under paragraph (a)(2)(ii) is the 
period from October 13, 1998 through October 12, 1999, and this 
period must be reduced under paragraph (a)(2)(iii) by E's days of 
creditable coverage as of October 13, 1998.
    Example 2. (i) Facts. A group health plan has two benefit 
package options, Option 1 and Option 2. Under each option a 12-month

[[Page 78767]]

preexisting condition exclusion is imposed. Individual B is enrolled 
in Option 1 on the first day of employment with the employer 
maintaining the plan, remains enrolled in Option 1 for more than one 
year, and then decides to switch to Option 2 at open season.
    (ii) Conclusion. In this Example 2, B cannot be subject to any 
preexisting condition exclusion under Option 2 because any 
preexisting condition exclusion period would have to begin on B's 
enrollment date, which is B's first day of coverage, rather than the 
date that B enrolled in Option 2. Therefore, the preexisting 
condition exclusion period expired before B switched to Option 2.
    Example 3. (i) Facts. On May 13, 1997, Individual E is hired by 
an employer and enrolls in the employer's group health plan. The 
plan provides benefits solely through an insurance policy offered by 
Issuer S. On December 27, 1998, E's leg is injured in an accident 
and the leg is amputated. On January 1, 1999, the plan switches 
coverage to a policy offered by Issuer T. Issuer T's policy excludes 
benefits for any prosthesis if the body part was lost before the 
effective date of coverage under the policy.
    (ii) Conclusion. In this Example 3, E's enrollment date is May 
13, 1997, E's first day of coverage. Therefore, the permissible 6-
month look-back period for the preexisting condition exclusion 
imposed under Issuer T's policy begins on November 13, 1996 and ends 
on May 12, 1997. In addition, the 12-month maximum permissible 
preexisting condition exclusion period begins on May 13, 1997 and 
ends on May 12, 1998. Accordingly, because no medical advice, 
diagnosis, care, or treatment was recommended to or received by E 
for the leg during the 6-month look-back period (even though medical 
care was provided within the 6-month period preceding the effective 
date of E's coverage under Issuer T's policy), Issuer T may not 
impose any preexisting condition exclusion with respect to E. 
Moreover, even if E had received treatment during the 6-month look-
back period, Issuer T still would not be permitted to impose a 
preexisting condition exclusion because the 12-month maximum 
permissible preexisting condition exclusion period expired on May 
12, 1998 (before the effective date of E's coverage under Issuer T's 
policy).
    Example 4. (i) Facts. A group health plan limits eligibility for 
coverage to full-time employees of Employer Y. Coverage becomes 
effective on the first day of the month following the date the 
employee becomes eligible. Employee C begins working full-time for 
Employer Y on April 11. Prior to this date, C worked part-time for 
Y. C enrolls in the plan and coverage is effective May 1.
    (ii) Conclusion. In this Example 4, C's enrollment date is April 
11 and the period from April 11 through April 30 is a waiting 
period. The period while C was working part-time, and therefore not 
in an eligible class of employees, is not part of the waiting 
period.
    Example 5. (i) Facts. To be eligible for coverage under a 
multiemployer group health plan in the current calendar quarter, the 
plan requires an individual to have worked 250 hours in covered 
employment during the previous quarter. If the hours requirement is 
satisfied, coverage becomes effective on the first day of the 
current calendar quarter. Employee D begins work on January 28 and 
does not work 250 hours in covered employment during the first 
quarter (ending March 31). D works at least 250 hours in the second 
quarter (ending June 30) and is enrolled in the plan with coverage 
effective July 1 (the first day of the third quarter).
    (ii) Conclusion. In this Example 5, D's enrollment date is the 
first day of the quarter during which D satisfies the hours 
requirement, which is April 1. The period from April 1 through June 
30 is a waiting period.

    (v) Late enrollee means an individual whose enrollment in a plan is 
a late enrollment.
    (vi) (A) Late enrollment means enrollment of an individual under a 
group health plan other than--
    (1) On the earliest date on which coverage can become effective for 
the individual under the terms of the plan; or
    (2) Through special enrollment. (For rules relating to special 
enrollment, see Sec.  2590.701-6.)
    (B) If an individual ceases to be eligible for coverage under the 
plan, and then subsequently becomes eligible for coverage under the 
plan, only the individual's most recent period of eligibility is taken 
into account in determining whether the individual is a late enrollee 
under the plan with respect to the most recent period of coverage. 
Similar rules apply if an individual again becomes eligible for 
coverage following a suspension of coverage that applied generally 
under the plan.
    (vii) Examples. The rules of paragraphs (a)(3)(v) and (vi) of this 
section are illustrated by the following examples:

    Example 1. (i) Facts. Employee F first becomes eligible to be 
covered by Employer W's group health plan on January 1, 1999 but 
elects not to enroll in the plan until a later annual open 
enrollment period, with coverage effective January 1, 2001. F has no 
special enrollment right at that time.
    (ii) Conclusion. In this Example 1, F is a late enrollee with 
respect to F's coverage that became effective under the plan on 
January 1, 2001.
    Example 2. (i) Facts. Same facts as Example 1, except that F 
terminates employment with Employer W on July 1, 1999 without having 
had any health insurance coverage under the plan. F is rehired by 
Employer W on January 1, 2000 and is eligible for and elects 
coverage under Employer W's plan effective on January 1, 2000.
    (ii) Conclusion. In this Example 2, F would not be a late 
enrollee with respect to F's coverage that became effective on 
January 1, 2000.

    (b) Exceptions pertaining to preexisting condition exclusions--(1) 
Newborns--(i) In general. Subject to paragraph (b)(3) of this section, 
a group health plan, and a health insurance issuer offering group 
health insurance coverage, may not impose any preexisting condition 
exclusion on a child who, within 30 days after birth, is covered under 
any creditable coverage. Accordingly, if a child is enrolled in a group 
health plan (or other creditable coverage) within 30 days after birth 
and subsequently enrolls in another group health plan without a 
significant break in coverage (as described in Sec.  2590.701-
4(b)(2)(iii)), the other plan may not impose any preexisting condition 
exclusion on the child.
    (ii) Examples. The rules of this paragraph (b)(1) are illustrated 
by the following examples:
    Example 1. (i) Facts. Individual E, who has no prior creditable 
coverage, begins working for Employer W and has accumulated 210 days 
of creditable coverage under Employer W's group health plan on the 
date E gives birth to a child. Within 30 days after the birth, the 
child is enrolled in the plan. Ninety days after the birth, both E 
and the child terminate coverage under the plan. Both E and the 
child then experience a break in coverage of 45 days before E is 
hired by Employer X and the two are enrolled in Employer X's group 
health plan.
    (ii) Conclusion. In this Example 1, because E's child is 
enrolled in Employer W's plan within 30 days after birth, no 
preexisting condition exclusion may be imposed with respect to the 
child under Employer W's plan. Likewise, Employer X's plan may not 
impose any preexisting condition exclusion on E's child because the 
child was covered under creditable coverage within 30 days after 
birth and had no significant break in coverage before enrolling in 
Employer X's plan. On the other hand, because E had only 300 days of 
creditable coverage prior to E's enrollment date in Employer X's 
plan, Employer X's plan may impose a preexisting condition exclusion 
on E for up to 65 days (66 days if the 12-month period after E's 
enrollment date in X's plan includes February 29).
    Example 2. (i) Facts. Individual F is enrolled in a group health 
plan in which coverage is provided through a health insurance 
issuer. F gives birth. Under State law applicable to the health 
insurance issuer, health care expenses incurred for the child during 
the 30 days following birth are covered as part of F's coverage. 
Although F may obtain coverage for the child beyond 30 days by 
timely requesting special enrollment and paying an additional 
premium, the issuer is prohibited under State law from recouping the 
cost of any expenses incurred for the child within the 30-day period 
if the child is not later enrolled.
    (ii) Conclusion. In this Example 2, the child is covered under 
creditable coverage within 30 days after birth, regardless of 
whether the child enrolls as a special enrollee under the plan. 
Therefore, no preexisting condition exclusion may be imposed on the 
child unless the child has a significant break in coverage.


[[Page 78768]]


    (2) Adopted children. Subject to paragraph (b)(3) of this section, 
a group health plan, and a health insurance issuer offering group 
health insurance coverage, may not impose any preexisting condition 
exclusion on a child who is adopted or placed for adoption before 
attaining 18 years of age and who, within 30 days after the adoption or 
placement for adoption, is covered under any creditable coverage. 
Accordingly, if a child is enrolled in a group health plan (or other 
creditable coverage) within 30 days after adoption or placement for 
adoption and subsequently enrolls in another group health plan without 
a significant break in coverage (as described in Sec.  2590.701-
4(b)(2)(iii)), the other plan may not impose any preexisting condition 
exclusion on the child. This rule does not apply to coverage before the 
date of such adoption or placement for adoption.
    (3) Significant break in coverage. Paragraphs (b)(1) and (2) of 
this section no longer apply to a child after a significant break in 
coverage. (See Sec.  2590.701-4(b)(2)(iii) for rules relating to the 
determination of a significant break in coverage.)
    (4) Special enrollment. For special enrollment rules relating to 
new dependents, see Sec.  2590.701-6(b).
    (5) Pregnancy. A group health plan, and a health insurance issuer 
offering group health insurance coverage, may not impose a preexisting 
condition exclusion relating to pregnancy.
    (6) Genetic information--(i) A group health plan, and a health 
insurance issuer offering group health insurance coverage, may not 
impose a preexisting condition exclusion relating to a condition based 
solely on genetic information. However, if an individual is diagnosed 
with a condition, even if the condition relates to genetic information, 
the plan may impose a preexisting condition exclusion with respect to 
the condition, subject to the other limitations of this section.
    (ii) The rules of this paragraph (b)(6) are illustrated by the 
following example:

    Example. (i) Facts. Individual A enrolls in a group health plan 
that imposes a 12-month maximum preexisting condition exclusion. 
Three months before A's enrollment, A's doctor told A that, based on 
genetic information, A has a predisposition towards breast cancer. A 
was not diagnosed with breast cancer at any time prior to A's 
enrollment date in the plan. Nine months after A's enrollment date 
in the plan, A is diagnosed with breast cancer.
    (ii) Conclusion. In this Example, the plan may not impose a 
preexisting condition exclusion with respect to A's breast cancer 
because, prior to A's enrollment date, A was not diagnosed with 
breast cancer.

    (c) General notice of preexisting condition exclusion. A group 
health plan imposing a preexisting condition exclusion, and a health 
insurance issuer offering group health insurance coverage subject to a 
preexisting condition exclusion, must provide a written general notice 
of preexisting condition exclusion to participants under the plan and 
cannot impose a preexisting condition exclusion with respect to a 
participant or a dependent of the participant until such a notice is 
provided.
    (1) Manner and timing. A plan or issuer must provide the general 
notice of preexisting condition exclusion as part of any written 
application materials distributed by the plan or issuer for enrollment. 
If the plan or issuer does not distribute such materials, the notice 
must be provided by the earliest date following a request for 
enrollment that the plan or issuer, acting in a reasonable and prompt 
fashion, can provide the notice.
    (2) Content. The general notice of preexisting condition exclusion 
must notify participants of the following:
    (i) The existence and terms of any preexisting condition exclusion 
under the plan. This description includes the length of the plan's 
look-back period (which is not to exceed 6 months under paragraph 
(a)(2)(i) of this section); the maximum preexisting condition exclusion 
period under the plan (which cannot exceed 12 months (or 18-months for 
late enrollees) under paragraph (a)(2)(ii) of this section); and how 
the plan will reduce the maximum preexisting condition exclusion period 
by creditable coverage (described in paragraph (a)(2)(iii) of this 
section).
    (ii) A description of the rights of individuals to demonstrate 
creditable coverage, and any applicable waiting periods, through a 
certificate of creditable coverage (as required by Sec.  2590.701-5(a)) 
or through other means (as described in Sec.  2590.701-5(c)). This must 
include a description of the right of the individual to request a 
certificate from a prior plan or issuer, if necessary, and a statement 
that the current plan or issuer will assist in obtaining a certificate 
from any prior plan or issuer, if necessary.
    (iii) A person to contact (including an address or telephone 
number) for obtaining additional information or assistance regarding 
the preexisting condition exclusion.
    (3) Duplicate notices not required. If a notice satisfying the 
requirements of this paragraph (c) is provided to an individual, the 
obligation to provide a general notice of preexisting condition 
exclusion with respect to that individual is satisfied for both the 
plan and the issuer.
    (4) Example with sample language. The rules of this paragraph (c) 
are illustrated by the following example, which includes sample 
language that plans and issuers can use as a basis for preparing their 
own notices to satisfy the requirements of this paragraph (c):

    Example. (i) Facts. A group health plan makes coverage effective 
on the first day of the first calendar month after hire and on each 
January 1 following an open season. The plan imposes a 12-month 
maximum preexisting condition exclusion (18 months for late 
enrollees) and uses a 6-month look-back period. As part of the 
enrollment application materials, the plan provides the following 
statement:
    This plan imposes a preexisting condition exclusion. This means 
that if you have a medical condition before coming to our plan, you 
might have to wait a certain period of time before the plan will 
provide coverage for that condition. This exclusion applies only to 
conditions for which medical advice, diagnosis, care, or treatment 
was recommended or received within a six-month period. Generally, 
this six-month period ends the day before your coverage becomes 
effective. However, if you were in a waiting period for coverage, 
the six-month period ends on the day before the waiting period 
begins. The preexisting condition exclusion does not apply to 
pregnancy nor to a child who is enrolled in the plan within 30 days 
after birth, adoption, or placement for adoption.
    This exclusion may last up to 12 months (18 months if you are a 
late enrollee) from your first day of coverage, or, if you were in a 
waiting period, from the first day of your waiting period. However, 
you can reduce the length of this exclusion period by the number of 
days of your prior ``creditable coverage.'' Most prior health 
coverage is creditable coverage and can be used to reduce the 
preexisting condition exclusion if you have not experienced a break 
in coverage of at least 63 days. To reduce the 12-month (or 18-
month) exclusion period by your creditable coverage, you should give 
us a copy of any certificates of creditable coverage you have. If 
you do not have a certificate, but you do have prior health 
coverage, we will help you obtain one from your prior plan or 
issuer. There are also other ways that you can show you have 
creditable coverage. Please contact us if you need help 
demonstrating creditable coverage.
    All questions about the preexisting condition exclusion and 
creditable coverage should be directed to Individual B at Address M 
or Telephone Number N.
    (ii) Conclusion. In this Example, the plan satisfies the general 
notice requirement of this paragraph (c), and thus also satisfies 
this requirement for any issuer providing the coverage.

    (d) Determination of creditable coverage--(1) Determination within 
reasonable time. If a group health plan or health insurance issuer 
offering group health insurance coverage receives

[[Page 78769]]

creditable coverage information under Sec.  2590.701-5, the plan or 
issuer is required, within a reasonable time following receipt of the 
information, to make a determination regarding the amount of the 
individual's creditable coverage and the length of any exclusion that 
remains. Whether this determination is made within a reasonable time 
depends on the relevant facts and circumstances. Relevant facts and 
circumstances include whether a plan's application of a preexisting 
condition exclusion would prevent an individual from having access to 
urgent medical care.
    (2) No time limit on presenting evidence of creditable coverage. A 
plan or issuer may not impose any limit on the amount of time that an 
individual has to present a certificate or other evidence of creditable 
coverage.
    (3) Example. The rules of this paragraph (d) are illustrated by the 
following example:

    Example. (i) Facts. A group health plan imposes a preexisting 
condition exclusion period of 12 months. After receiving the general 
notice of preexisting condition exclusion, Individual H develops an 
urgent health condition before receiving a certificate of creditable 
coverage from H's prior group health plan. H attests to the period 
of prior coverage, presents corroborating documentation of the 
coverage period, and authorizes the plan to request a certificate on 
H's behalf in accordance with the rules of Sec.  2590.701-5.
    (ii) Conclusion. In this Example, the plan must review the 
evidence presented by H and make a determination of creditable 
coverage within a reasonable time that is consistent with the 
urgency of H's health condition. (This determination may be modified 
as permitted under paragraph (f) of this section.)

    (e) Individual notice of period of preexisting condition exclusion. 
After an individual has presented evidence of creditable coverage and 
after the plan or issuer has made a determination of creditable 
coverage under paragraph (d) of this section, the plan or issuer must 
provide the individual a written notice of the length of preexisting 
condition exclusion that remains after offsetting for prior creditable 
coverage. This individual notice is not required to identify any 
medical conditions specific to the individual that could be subject to 
the exclusion. A plan or issuer is not required to provide this notice 
if the plan or issuer does not impose any preexisting condition 
exclusion on the individual or if the plan's preexisting condition 
exclusion is completely offset by the individual's prior creditable 
coverage.
    (1) Manner and timing. The individual notice must be provided by 
the earliest date following a determination that the plan or issuer, 
acting in a reasonable and prompt fashion, can provide the notice.
    (2) Content. A plan or issuer must disclose--
    (i) Its determination of any preexisting condition exclusion period 
that applies to the individual (including the last day on which the 
preexisting condition exclusion applies);
    (ii) The basis for such determination, including the source and 
substance of any information on which the plan or issuer relied;
    (iii) An explanation of the individual's right to submit additional 
evidence of creditable coverage; and
    (iv) A description of any applicable appeal procedures established 
by the plan or issuer.
    (3) Duplicate notices not required. If a notice satisfying the 
requirements of this paragraph (e) is provided to an individual, the 
obligation to provide this individual notice of preexisting condition 
exclusion with respect to that individual is satisfied for both the 
plan and the issuer.
    (4) Examples. The rules of this paragraph (e) are illustrated by 
the following examples:

    Example 1. (i) Facts. A group health plan imposes a preexisting 
condition exclusion period of 12 months. After receiving the general 
notice of preexisting condition exclusion, Individual G presents a 
certificate of creditable coverage indicating 240 days of creditable 
coverage. Within seven days of receipt of the certificate, the plan 
determines that G is subject to a preexisting condition exclusion of 
125 days, the last day of which is March 5. Five days later, the 
plan notifies G that, based on the certificate G submitted, G is 
subject to a preexisting condition exclusion period of 125 days, 
ending on March 5. The notice also explains the opportunity to 
submit additional evidence of creditable coverage and the plan's 
appeal procedures. The notice does not identify any of G's medical 
conditions that could be subject to the exclusion.
    (ii) Conclusion. In this Example 1, the plan satisfies the 
requirements of this paragraph (e).
    Example 2. (i) Facts. Same facts as in Example 1, except that 
the plan determines that G has 430 days of creditable coverage based 
on G's certificate indicating 430 days of creditable coverage under 
G's prior plan.
    (ii) Conclusion. In this Example 2, the plan is not required to 
notify G that G will not be subject to a preexisting condition 
exclusion.

    (f) Reconsideration. Nothing in this section prevents a plan or 
issuer from modifying an initial determination of creditable coverage 
if it determines that the individual did not have the claimed 
creditable coverage, provided that--
    (1) A notice of the new determination (consistent with the 
requirements of paragraph (e) of this section) is provided to the 
individual; and
    (2) Until the notice of the new determination is provided, the plan 
or issuer, for purposes of approving access to medical services (such 
as a pre-surgery authorization), acts in a manner consistent with the 
initial determination.


Sec.  2590.701-4  Rules relating to creditable coverage.

    (a) General rules--(1) Creditable coverage. For purposes of this 
section, except as provided in paragraph (a)(2) of this section, the 
term creditable coverage means coverage of an individual under any of 
the following:
    (i) A group health plan as defined in Sec.  2590.732(a).
    (ii) Health insurance coverage as defined in Sec.  2590.701-2 
(whether or not the entity offering the coverage is subject to Part 7 
of Subtitle B of Title I of the Act, and without regard to whether the 
coverage is offered in the group market, the individual market, or 
otherwise).
    (iii) Part A or B of Title XVIII of the Social Security Act 
(Medicare).
    (iv) Title XIX of the Social Security Act (Medicaid), other than 
coverage consisting solely of benefits under section 1928 of the Social 
Security Act (the program for distribution of pediatric vaccines).
    (v) Title 10 U.S.C. Chapter 55 (medical and dental care for members 
and certain former members of the uniformed services, and for their 
dependents; for purposes of Title 10 U.S.C. Chapter 55, uniformed 
services means the armed forces and the Commissioned Corps of the 
National Oceanic and Atmospheric Administration and of the Public 
Health Service).
    (vi) A medical care program of the Indian Health Service or of a 
tribal organization.
    (vii) A State health benefits risk pool. For purposes of this 
section, a State health benefits risk pool means--
    (A) An organization qualifying under section 501(c)(26) of the 
Internal Revenue Code;
    (B) A qualified high risk pool described in section 2744(c)(2) of 
the PHS Act; or
    (C) Any other arrangement sponsored by a State, the membership 
composition of which is specified by the State and which is established 
and maintained primarily to provide health coverage for individuals who 
are residents of such State and who, by reason of the existence or 
history of a medical condition--
    (1) Are unable to acquire medical care coverage for such condition 
through insurance or from an HMO, or

[[Page 78770]]

    (2) Are able to acquire such coverage only at a rate which is 
substantially in excess of the rate for such coverage through the 
membership organization.
    (viii) A health plan offered under Title 5 U.S.C. Chapter 89 (the 
Federal Employees Health Benefits Program).
    (ix) A public health plan. For purposes of this section, a public 
health plan means any plan established or maintained by a State, the 
U.S. government, a foreign country, or any political subdivision of a 
State, the U.S. government, or a foreign country that provides health 
coverage to individuals who are enrolled in the plan.
    (x) A health benefit plan under section 5(e) of the Peace Corps Act 
(22 U.S.C. 2504(e)).
    (xi) Title XXI of the Social Security Act (State Children's Health 
Insurance Program).
    (2) Excluded coverage. Creditable coverage does not include 
coverage of solely excepted benefits (described in Sec.  2590.732).
    (3) Methods of counting creditable coverage. For purposes of 
reducing any preexisting condition exclusion period, as provided under 
Sec.  2590.701-3(a)(2)(iii), the amount of an individual's creditable 
coverage generally is determined by using the standard method described 
in paragraph (b) of this section. A plan or issuer may use the 
alternative method under paragraph (c) of this section with respect to 
any or all of the categories of benefits described under paragraph 
(c)(3) of this section.
    (b) Standard method--(1) Specific benefits not considered. Under 
the standard method, the amount of creditable coverage is determined 
without regard to the specific benefits included in the coverage.
    (2) Counting creditable coverage--(i) Based on days. For purposes 
of reducing the preexisting condition exclusion period that applies to 
an individual, the amount of creditable coverage is determined by 
counting all the days on which the individual has one or more types of 
creditable coverage. Accordingly, if on a particular day an individual 
has creditable coverage from more than one source, all the creditable 
coverage on that day is counted as one day. Any days in a waiting 
period for coverage are not creditable coverage.
    (ii) Days not counted before significant break in coverage. Days of 
creditable coverage that occur before a significant break in coverage 
are not required to be counted.
    (iii) Significant break in coverage defined--A significant break in 
coverage means a period of 63 consecutive days during each of which an 
individual does not have any creditable coverage. (See also Sec.  
2590.731(c)(2)(iii) regarding the applicability to issuers of State 
insurance laws that require a break of more than 63 days before an 
individual has a significant break in coverage for purposes of State 
insurance law.)
    (iv) Periods that toll a significant break. Days in a waiting 
period and days in an affiliation period are not taken into account in 
determining whether a significant break in coverage has occurred. In 
addition, for an individual who elects COBRA continuation coverage 
during the second election period provided under the Trade Act of 2002, 
the days between the date the individual lost group health plan 
coverage and the first day of the second COBRA election period are not 
taken into account in determining whether a significant break in 
coverage has occurred.
    (v) Examples. The rules of this paragraph (b)(2) are illustrated by 
the following examples:

    Example 1. (i) Facts. Individual A has creditable coverage under 
Employer P's plan for 18 months before coverage ceases. A is 
provided a certificate of creditable coverage on A's last day of 
coverage. Sixty-four days after the last date of coverage under P's 
plan, A is hired by Employer Q and enrolls in Q's group health plan. 
Q's plan has a 12-month preexisting condition exclusion.
    (ii) Conclusion. In this Example 1, A has a break in coverage of 
63 days. Because A's break in coverage is a significant break in 
coverage, Q's plan may disregard A's prior coverage and A may be 
subject to a 12-month preexisting condition exclusion.
    Example 2. (i) Facts. Same facts as Example 1, except that A is 
hired by Q and enrolls in Q's plan on the 63rd day after the last 
date of coverage under P's plan.
    (ii) Conclusion. In this Example 2, A has a break in coverage of 
62 days. Because A's break in coverage is not a significant break in 
coverage, Q's plan must count A's prior creditable coverage for 
purposes of reducing the plan's preexisting condition exclusion 
period that applies to A.
    Example 3. (i) Facts. Same facts as Example 1, except that Q's 
plan provides benefits through an insurance policy that, as required 
by applicable State insurance laws, defines a significant break in 
coverage as 90 days.
    (ii) Conclusion. In this Example 3, under State law, the issuer 
that provides group health insurance coverage to Q's plan must count 
A's period of creditable coverage prior to the 63-day break. 
(However, if Q's plan was a self-insured plan, the coverage would 
not be subject to State law. Therefore, the health coverage would 
not be governed by the longer break rules and A's previous health 
coverage could be disregarded.)
    Example 4. --[Reserved]
    Example 5. (i) Facts. Individual C has creditable coverage under 
Employer S's plan for 200 days before coverage ceases. C is provided 
a certificate of creditable coverage on C's last day of coverage. C 
then does not have any creditable coverage for 51 days before being 
hired by Employer T. T's plan has a 3-month waiting period. C works 
for T for 2 months and then terminates employment. Eleven days after 
terminating employment with T, C begins working for Employer U. U's 
plan has no waiting period, but has a 6-month preexisting condition 
exclusion.
    (ii) Conclusion. In this Example 5, C does not have a 
significant break in coverage because, after disregarding the 
waiting period under T's plan, C had only a 62-day break in coverage 
(51 days plus 11 days). Accordingly, C has 200 days of creditable 
coverage, and U's plan may not apply its 6-month preexisting 
condition exclusion with respect to C.
    Example 6. --[Reserved]
    Example 7. (i) Facts. Individual E has creditable coverage under 
Employer X's plan. E is provided a certificate of creditable 
coverage on E's last day of coverage. On the 63rd day without 
coverage, E submits a substantially complete application for a 
health insurance policy in the individual market. E's application is 
accepted and coverage is made effective 10 days later.
    (ii) Conclusion. In this Example 7, because E applied for the 
policy before the end of the 63rd day, the period between the date 
of application and the first day of coverage is a waiting period and 
no significant break in coverage occurred even though the actual 
period without coverage was 73 days.
    Example 8. (i) Facts. Same facts as Example 7, except that E's 
application for a policy in the individual market is denied.
    (ii) Conclusion. In this Example 8, even though E did not obtain 
coverage following application, the period between the date of 
application and the date the coverage was denied is a waiting 
period. However, to avoid a significant break in coverage, no later 
than the day after the application for the policy is denied E would 
need to do one of the following: submit a substantially complete 
application for a different individual market policy; obtain 
coverage in the group market; or be in a waiting period for coverage 
in the group market.

    (vi) Other permissible counting methods--(A) Rule. Notwithstanding 
any other provisions of this paragraph (b)(2), for purposes of reducing 
a preexisting condition exclusion period (but not for purposes of 
issuing a certificate under Sec.  2590.701-5), a group health plan, and 
a health insurance issuer offering group health insurance coverage, may 
determine the amount of creditable coverage in any other manner that is 
at least as favorable to the individual as the method set forth in this 
paragraph (b)(2), subject to the requirements of other applicable law.
    (B) Example. The rule of this paragraph (b)(2)(vi) is illustrated 
by the following example:

    Example.  (i) Facts. Individual F has coverage under Group 
Health Plan Y from January 3, 1997 through March 25, 1997. F

[[Page 78771]]

then becomes covered by Group Health Plan Z. F's enrollment date in 
Plan Z is May 1, 1997. Plan Z has a 12-month preexisting condition 
exclusion.
    (ii) Conclusion. In this Example, Plan Z may determine, in 
accordance with the rules prescribed in paragraphs (b)(2)(i), (ii), 
and (iii) of this section, that F has 82 days of creditable coverage 
(29 days in January, 28 days in February, and 25 days in March). 
Thus, the preexisting condition exclusion will no longer apply to F 
on February 8, 1998 (82 days before the 12-month anniversary of F's 
enrollment (May 1)). For administrative convenience, however, Plan Z 
may consider that the preexisting condition exclusion will no longer 
apply to F on the first day of the month (February 1).

    (c) Alternative method--(1) Specific benefits considered. Under the 
alternative method, a group health plan, or a health insurance issuer 
offering group health insurance coverage, determines the amount of 
creditable coverage based on coverage within any category of benefits 
described in paragraph (c)(3) of this section and not based on coverage 
for any other benefits. The plan or issuer may use the alternative 
method for any or all of the categories. The plan or issuer may apply a 
different preexisting condition exclusion period with respect to each 
category (and may apply a different preexisting condition exclusion 
period for benefits that are not within any 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. An individual's creditable coverage for 
benefits that are not within any category for which the alternative 
method is being used is determined under the standard method of 
paragraph (b) of this section.
    (2) Uniform application. A plan or issuer using the alternative 
method is required to apply it uniformly to all participants and 
beneficiaries under the plan or health insurance coverage. The use of 
the alternative method is required to be set forth in the plan.
    (3) Categories of benefits. The alternative method for counting 
creditable coverage may be used for coverage for the following 
categories of benefits--
    (i) Mental health;
    (ii) Substance abuse treatment;
    (iii) Prescription drugs;
    (iv) Dental care; or
    (v) Vision care.
    (4) Plan notice. If the alternative method is used, the plan is 
required to--
    (i) State prominently that the plan is using the alternative method 
of counting creditable coverage in disclosure statements concerning the 
plan, and State this to each enrollee at the time of enrollment under 
the plan; and
    (ii) Include in these statements a description of the effect of 
using the alternative method, including an identification of the 
categories used.
    (5) Disclosure of information on previous benefits. See Sec.  
2590.701-5(b) for special rules concerning disclosure of coverage to a 
plan, or issuer, using the alternative method of counting creditable 
coverage under this paragraph (c).
    (6) Counting creditable coverage--(i) In general. Under the 
alternative method, the group health plan or issuer counts creditable 
coverage within a category if any level of benefits is provided within 
the category. Coverage under a reimbursement account or arrangement, 
such as a flexible spending arrangement (as defined in section 
106(c)(2) of the Internal Revenue Code), does not constitute coverage 
within any category.
    (ii) Special rules. In counting an individual's creditable coverage 
under the alternative method, the group health plan, or issuer, first 
determines the amount of the individual's creditable coverage that may 
be counted under paragraph (b) of this section, up to a total of 365 
days of the most recent creditable coverage (546 days for a late 
enrollee). The period over which this creditable coverage is determined 
is referred to as the determination period. Then, for the category 
specified under the alternative method, the plan or issuer counts 
within the category all days of coverage that occurred during the 
determination period (whether or not a significant break in coverage 
for that category occurs), and reduces the individual's preexisting 
condition exclusion period for that category by that number of days. 
The plan or issuer may determine the amount of creditable coverage in 
any other reasonable manner, uniformly applied, that is at least as 
favorable to the individual.
    (iii) Example. The rules of this paragraph (c)(6) are illustrated 
by the following example:

    Example.  (i) Facts. Individual D enrolls in Employer V's plan 
on January 1, 2001. Coverage under the plan includes prescription 
drug benefits. On April 1, 2001, the plan ceases providing 
prescription drug benefits. D's employment with Employer V ends on 
January 1, 2002, after D was covered under Employer V's group health 
plan for 365 days. D enrolls in Employer Y's plan on February 1, 
2002 (D's enrollment date). Employer Y's plan uses the alternative 
method of counting creditable coverage and imposes a 12-month 
preexisting condition exclusion on prescription drug benefits.
    (ii) Conclusion. In this Example, Employer Y's plan may impose a 
275-day preexisting condition exclusion with respect to D for 
prescription drug benefits because D had 90 days of creditable 
coverage relating to prescription drug benefits within D's 
determination period.


Sec.  2590.701-5  Evidence of creditable coverage.

    (a) Certificate of creditable coverage--(1) Entities required to 
provide certificate--(i) In general. A group health plan, and each 
health insurance issuer offering group health insurance coverage under 
a group health plan, is required to furnish certificates of creditable 
coverage in accordance with this paragraph (a).
    (ii) Duplicate certificates not required. An entity required to 
provide a certificate under this paragraph (a) with respect to an 
individual satisfies that requirement if another party provides the 
certificate, but only to the extent that the certificate contains the 
information required in paragraph (a)(3) of this section. For example, 
in the case of a group health plan funded through an insurance policy, 
the issuer satisfies the certification requirement with respect to an 
individual if the plan actually provides a certificate that includes 
all the information required under paragraph (a)(3) of this section 
with respect to the individual.
    (iii) Special rule for group health plans. To the extent coverage 
under a plan consists of group health insurance coverage, the plan 
satisfies the certification requirements under this paragraph (a) if 
any issuer offering the coverage is required to provide the 
certificates pursuant to an agreement between the plan and the issuer. 
For example, if there is an agreement between an issuer and a plan 
sponsor under which the issuer agrees to provide certificates for 
individuals covered under the plan, and the issuer fails to provide a 
certificate to an individual when the plan would have been required to 
provide one under this paragraph (a), then the issuer, but not the 
plan, violates the certification requirements of this paragraph (a).
    (iv) Special rules for issuers--(A)(1) Responsibility of issuer for 
coverage period. An issuer is not required to provide information 
regarding coverage provided to an individual by another party.
    (2) Example. The rule of this paragraph (a)(1)(iv)(A) is 
illustrated by the following example:

    Example.  (i) Facts. A plan offers coverage with an HMO option 
from one issuer and an indemnity option from a different issuer. The 
HMO has not entered into an agreement with

[[Page 78772]]

the plan to provide certificates as permitted under paragraph 
(a)(1)(iii) of this section.
    (ii) Conclusion. In this Example, if an employee switches from 
the indemnity option to the HMO option and later ceases to be 
covered under the plan, any certificate provided by the HMO is not 
required to provide information regarding the employee's coverage 
under the indemnity option.

    (B)(1) Cessation of issuer coverage prior to cessation of coverage 
under a plan. If an individual's coverage under an issuer's policy or 
contract ceases before the individual's coverage under the plan ceases, 
the issuer is required to provide sufficient information to the plan 
(or to another party designated by the plan) to enable the plan (or 
other party), after cessation of the individual's coverage under the 
plan, to provide a certificate that reflects the period of coverage 
under the policy or contract. By providing that information to the 
plan, the issuer satisfies its obligation to provide an automatic 
certificate for that period of creditable coverage with respect to the 
individual under paragraph (a)(2)(ii) of this section. The issuer, 
however, must still provide a certificate upon request as required 
under paragraph (a)(2)(iii) of this section. In addition, the issuer is 
required to cooperate with the plan in responding to any request made 
under paragraph (b)(2) of this section (relating to the alternative 
method of counting creditable coverage). Moreover, if the individual's 
coverage under the plan ceases at the time the individual's coverage 
under the issuer's policy or contract ceases, the issuer must still 
provide an automatic certificate under paragraph (a)(2)(ii) of this 
section. If an individual's coverage under an issuer's policy or 
contract ceases on the effective date for changing enrollment options 
under the plan, the issuer may presume (absent information to the 
contrary) that the individual's coverage under the plan continues. 
Therefore, the issuer is required to provide information to the plan in 
accordance with this paragraph (a)(1)(iv)(B)(1) (and is not required to 
provide an automatic certificate under paragraph (a)(2)(ii) of this 
section).
    (2) Example. The rule of this paragraph (a)(1)(iv)(B) is 
illustrated by the following example:

    Example.  (i) Facts. A group health plan provides coverage under 
an HMO option and an indemnity option through different issuers, and 
only allows employees to switch on each January 1. Neither the HMO 
nor the indemnity issuer has entered into an agreement with the plan 
to provide certificates as permitted under paragraph (a)(1)(iii) of 
this section.
    (ii) Conclusion. In this Example, if an employee switches from 
the indemnity option to the HMO option on January 1, the indemnity 
issuer must provide the plan (or a person designated by the plan) 
with appropriate information with respect to the individual's 
coverage with the indemnity issuer. However, if the individual's 
coverage with the indemnity issuer ceases at a date other than 
January 1, the issuer is instead required to provide the individual 
with an automatic certificate.

    (2) Individuals for whom certificate must be provided; timing of 
issuance--(i) Individuals. A certificate must be provided, without 
charge, for participants or dependents who are or were covered under a 
group health plan upon the occurrence of any of the events described in 
paragraph (a)(2)(ii) or (iii) of this section.
    (ii) Issuance of automatic certificates. The certificates described 
in this paragraph (a)(2)(ii) are referred to as automatic certificates.
    (A) Qualified beneficiaries upon a qualifying event. In the case of 
an individual who is a qualified beneficiary (as defined in section 
607(3) of the Act) entitled to elect COBRA continuation coverage, an 
automatic certificate is required to be provided at the time the 
individual would lose coverage under the plan in the absence of COBRA 
continuation coverage or alternative coverage elected instead of COBRA 
continuation coverage. A plan or issuer satisfies this requirement if 
it provides the automatic certificate no later than the time a notice 
is required to be furnished for a qualifying event under section 606 of 
the Act (relating to notices required under COBRA).
    (B) Other individuals when coverage ceases. In the case of an 
individual who is not a qualified beneficiary entitled to elect COBRA 
continuation coverage, an automatic certificate must be provided at the 
time the individual ceases to be covered under the plan. A plan or 
issuer satisfies the requirement to provide an automatic certificate at 
the time the individual ceases to be covered if it provides the 
automatic certificate within a reasonable time after coverage ceases 
(or after the expiration of any grace period for nonpayment of 
premiums).
    (1) The cessation of temporary continuation coverage (TCC) under 
Title 5 U.S.C. Chapter 89 (the Federal Employees Health Benefit 
Program) is a cessation of coverage upon which an automatic certificate 
must be provided.
    (2) In the case of an individual who is entitled to elect to 
continue coverage under a State program similar to COBRA and who 
receives the automatic certificate not later than the time a notice is 
required to be furnished under the State program, the certificate is 
deemed to be provided within a reasonable time after coverage ceases 
under the plan.
    (3) If an individual's coverage ceases due to the operation of a 
lifetime limit on all benefits, coverage is considered to cease for 
purposes of this paragraph (a)(2)(ii)(B) on the earliest date that a 
claim is denied due to the operation of the lifetime limit.
    (C) Qualified beneficiaries when COBRA ceases. In the case of an 
individual who is a qualified beneficiary and has elected COBRA 
continuation coverage (or whose coverage has continued after the 
individual became entitled to elect COBRA continuation coverage), an 
automatic certificate is to be provided at the time the individual' s 
coverage under the plan ceases. A plan, or issuer, satisfies this 
requirement if it provides the automatic certificate within a 
reasonable time after coverage ceases (or after the expiration of any 
grace period for nonpayment of premiums). An automatic certificate is 
required to be provided to such an individual regardless of whether the 
individual has previously received an automatic certificate under 
paragraph (a)(2)(ii)(A) of this section.
    (iii) Any individual upon request. A certificate must be provided 
in response to a request made by, or on behalf of, an individual at any 
time while the individual is covered under a plan and up to 24 months 
after coverage ceases. Thus, for example, a plan in which an individual 
enrolls may, if authorized by the individual, request a certificate of 
the individual's creditable coverage on behalf of the individual from a 
plan in which the individual was formerly enrolled. After the request 
is received, a plan or issuer is required to provide the certificate by 
the earliest date that the plan or issuer, acting in a reasonable and 
prompt fashion, can provide the certificate. A certificate is required 
to be provided under this paragraph (a)(2)(iii) even if the individual 
has previously received a certificate under this paragraph (a)(2)(iii) 
or an automatic certificate under paragraph (a)(2)(ii) of this section.
    (iv) Examples. The rules of this paragraph (a)(2) are illustrated 
by the following examples:

    Example 1. (i) Facts. Individual A terminates employment with 
Employer Q. A is a qualified beneficiary entitled to elect COBRA 
continuation coverage under Employer Q's group health plan. A notice 
of the rights provided under COBRA is typically furnished to 
qualified beneficiaries under the plan within 10 days after a 
covered employee terminates employment.

[[Page 78773]]

    (ii) Conclusion. In this Example 1, the automatic certificate 
may be provided at the same time that A is provided the COBRA 
notice.
    Example 2. (i) Facts. Same facts as Example 1, except that the 
automatic certificate for A is not completed by the time the COBRA 
notice is furnished to A.
    (ii) Conclusion. In this Example 2, the automatic certificate 
may be provided after the COBRA notice but must be provided within 
the period permitted by law for the delivery of notices under COBRA.
    Example 3. (i) Facts. Employer R maintains an insured group 
health plan. R has never had 20 employees and thus R's plan is not 
subject to the COBRA continuation provisions. However, R is in a 
State that has a State program similar to COBRA. B terminates 
employment with R and loses coverage under R's plan.
    (ii) Conclusion. In this Example 3, the automatic certificate 
must be provided not later than the time a notice is required to be 
furnished under the State program.
    Example 4. (i) Facts. Individual C terminates employment with 
Employer S and receives both a notice of C's rights under COBRA and 
an automatic certificate. C elects COBRA continuation coverage under 
Employer S's group health plan. After four months of COBRA 
continuation coverage and the expiration of a 30-day grace period, 
S's group health plan determines that C's COBRA continuation 
coverage has ceased due to a failure to make a timely payment for 
continuation coverage.
    (ii) Conclusion. In this Example 4, the plan must provide an 
updated automatic certificate to C within a reasonable time after 
the end of the grace period.
    Example 5. (i) Facts. Individual D is currently covered under 
the group health plan of Employer T. D requests a certificate, as 
permitted under paragraph (a)(2)(iii) of this section. Under the 
procedure for T's plan, certificates are mailed (by first class 
mail) 7 business days following receipt of the request. This date 
reflects the earliest date that the plan, acting in a reasonable and 
prompt fashion, can provide certificates.
    (ii) Conclusion. In this Example 5, the plan's procedure 
satisfies paragraph (a)(2)(iii) of this section.

    (3) Form and content of certificate--(i) Written certificate--(A) 
In general. Except as provided in paragraph (a)(3)(i)(B) of this 
section, the certificate must be provided in writing (or any other 
medium approved by the Secretary).
    (B) Other permissible forms. No written certificate is required to 
be provided under this paragraph (a) with respect to a particular event 
described in paragraph (a)(2)(ii) or (iii) of this section, if--
    (1) An individual who is entitled to receive the certificate 
requests that the certificate be sent to another plan or issuer instead 
of to the individual;
    (2) The plan or issuer that would otherwise receive the certificate 
agrees to accept the information in this paragraph (a)(3) through means 
other than a written certificate (such as by telephone); and
    (3) The receiving plan or issuer receives the information from the 
sending plan or issuer through such means within the time required 
under paragraph (a)(2) of this section.
    (ii) Required information. The certificate must include the 
following--
    (A) The date the certificate is issued;
    (B) The name of the group health plan that provided the coverage 
described in the certificate;
    (C) The name of the participant or dependent with respect to whom 
the certificate applies, and any other information necessary for the 
plan providing the coverage specified in the certificate to identify 
the individual, such as the individual's identification number under 
the plan and the name of the participant if the certificate is for (or 
includes) a dependent;
    (D) The name, address, and telephone number of the plan 
administrator or issuer required to provide the certificate;
    (E) The telephone number to call for further information regarding 
the certificate (if different from paragraph (a)(3)(ii)(D) of this 
section);
    (F) Either--
    (1) A statement that an individual has at least 18 months (for this 
purpose, 546 days is deemed to be 18 months) of creditable coverage, 
disregarding days of creditable coverage before a significant break in 
coverage, or
    (2) The date any waiting period (and affiliation period, if 
applicable) began and the date creditable coverage began;
    (G) The date creditable coverage ended, unless the certificate 
indicates that creditable coverage is continuing as of the date of the 
certificate; and
    (H) An educational statement regarding HIPAA, which explains:
    (1) The restrictions on the ability of a plan or issuer to impose a 
preexisting condition exclusion (including an individual's ability to 
reduce a preexisting condition exclusion by creditable coverage);
    (2) Special enrollment rights;
    (3) The prohibitions against discrimination based on any health 
factor;
    (4) The right to individual health coverage;
    (5) The fact that state law may require issuers to provide 
additional protections to individuals in that State; and
    (6) Where to get more information.
    (iii) Periods of coverage under the certificate. If an automatic 
certificate is provided pursuant to paragraph (a)(2)(ii) of this 
section, the period that must be included on the certificate is the 
last period of continuous coverage ending on the date coverage ceased. 
If an individual requests a certificate pursuant to paragraph 
(a)(2)(iii) of this section, the certificate provided must include each 
period of continuous coverage ending within the 24-month period ending 
on the date of the request (or continuing on the date of the request). 
A separate certificate may be provided for each such period of 
continuous coverage.
    (iv) Combining information for families. A certificate may provide 
information with respect to both a participant and the participant's 
dependents if the information is identical for each individual. If the 
information is not identical, certificates may be provided on one form 
if the form provides all the required information for each individual 
and separately States the information that is not identical.
    (v) Model certificate. The requirements of paragraph (a)(3)(ii) of 
this section are satisfied if the plan or issuer provides a certificate 
in accordance with a model certificate authorized by the Secretary.
    (vi) Excepted benefits; categories of benefits. No certificate is 
required to be furnished with respect to excepted benefits described in 
Sec.  2590.732(c). In addition, the information in the certificate 
regarding coverage is not required to specify categories of benefits 
described in Sec.  2590.701-4(c) (relating to the alternative method of 
counting creditable coverage). However, if excepted benefits are 
provided concurrently with other creditable coverage (so that the 
coverage does not consist solely of excepted benefits), information 
concerning the benefits may be required to be disclosed under paragraph 
(b) of this section.
    (4) Procedures--(i) Method of delivery. The certificate is required 
to be provided to each individual described in paragraph (a)(2) of this 
section or an entity requesting the certificate on behalf of the 
individual. The certificate may be provided by first-class mail. (See 
also Sec.  2520.104b-1, which permits plans to make disclosures under 
the Act--including the furnishing of certificates--through electronic 
means if certain standards are met.) If the certificate or certificates 
are provided to the participant and the participant's spouse at the 
participant's last known address, then the requirements of this 
paragraph (a)(4) are satisfied with respect to all individuals residing 
at that address. If a dependent's last known address is different than 
the participant's last known address, a separate certificate is 
required to be provided to the dependent at the

[[Page 78774]]

dependent's last known address. If separate certificates are being 
provided by mail to individuals who reside at the same address, 
separate mailings of each certificate are not required.
    (ii) Procedure for requesting certificates. A plan or issuer must 
establish a written procedure for individuals to request and receive 
certificates pursuant to paragraph (a)(2)(iii) of this section. The 
written procedure must include all contact information necessary to 
request a certificate (such as name and phone number or address).
    (iii) Designated recipients. If an automatic certificate is 
required to be provided under paragraph (a)(2)(ii) of this section, and 
the individual entitled to receive the certificate designates another 
individual or entity to receive the certificate, the plan or issuer 
responsible for providing the certificate is permitted to provide the 
certificate to the designated individual or entity. If a certificate is 
required to be provided upon request under paragraph (a)(2)(iii) of 
this section and the individual entitled to receive the certificate 
designates another individual or entity to receive the certificate, the 
plan or issuer responsible for providing the certificate is required to 
provide the certificate to the designated individual or entity.
    (5) Special rules concerning dependent coverage--(i)(A) Reasonable 
efforts. A plan or issuer is required to use reasonable efforts to 
determine any information needed for a certificate relating to 
dependent coverage. In any case in which an automatic certificate is 
required to be furnished with respect to a dependent under paragraph 
(a)(2)(ii) of this section, no individual certificate is required to be 
furnished until the plan or issuer knows (or making reasonable efforts 
should know) of the dependent's cessation of coverage under the plan.
    (B) Example. The rules of this paragraph (a)(5)(i) are illustrated 
by the following example:

    Example. (i) Facts. A group health plan covers employees and 
their dependents. The plan annually requests all employees to 
provide updated information regarding dependents, including the 
specific date on which an employee has a new dependent or on which a 
person ceases to be a dependent of the employee.
    (ii) Conclusion. In this Example, the plan has satisfied the 
standard in this paragraph (a)(5)(i) of this section that it make 
reasonable efforts to determine the cessation of dependents' 
coverage and the related dependent coverage information.

    (ii) Special rules for demonstrating coverage. If a certificate 
furnished by a plan or issuer does not provide the name of any 
dependent covered by the certificate, the procedures described in 
paragraph (c)(5) of this section may be used to demonstrate dependent 
status. In addition, these procedures may be used to demonstrate that a 
child was covered under any creditable coverage within 30 days after 
birth, adoption, or placement for adoption. See also Sec.  2590.701-
3(b), under which such a child cannot be subject to a preexisting 
condition exclusion.
    (6) Special certification rules for entities not subject to Part 7 
of Subtitle B of Title I of the Act--(i) Issuers. For special rules 
requiring that issuers not subject to Part 7 of Subtitle B of Title I 
of the Act provide certificates consistent with the rules in this 
section, including issuers offering coverage with respect to creditable 
coverage described in sections 701(c)(1)(G), (I), and (J) of the Act 
(coverage under a State health benefits risk pool, a public health 
plan, and a health benefit plan under section 5(e) of the Peace Corps 
Act), see sections 2743 and 2721(b)(1)(B) of the PHS Act (requiring 
certificates by issuers in the individual market, and issuers offering 
health insurance coverage in connection with a group health plan, 
including a church plan or a governmental plan (such as the Federal 
Employees Health Benefits Program (FEHBP)). (However, this section does 
not require a certificate to be provided with respect to short-term, 
limited-duration insurance, as described in the definition of 
individual health insurance coverage in Sec.  2590.701-2, that is not 
provided by a group health plan or issuer offering health insurance 
coverage in connection with a group health plan.)
    (ii) Other entities. For special rules requiring that certain other 
entities not subject to Part 7 of Subtitle B of Title I of the Act 
provide certificates consistent with the rules in this section, see 
section 2791(a)(3) of the PHS Act applicable to entities described in 
sections 2701(c)(1)(C), (D), (E), and (F) of the PHS Act (relating to 
Medicare, Medicaid, TRICARE, and Indian Health Service), section 
2721(b)(1)(A) of the PHS Act applicable to nonfederal governmental 
plans generally, section 2721(b)(2)(C)(ii) of the PHS Act applicable to 
nonfederal governmental plans that elect to be excluded from the 
requirements of Subparts 1 through 3 of Part A of Title XXVII of the 
PHS Act, and section 9832(a) of the Internal Revenue Code applicable to 
group health plans, which includes church plans (as defined in section 
414(e) of the Internal Revenue Code).
    (b) Disclosure of coverage to a plan or issuer using the 
alternative method of counting creditable coverage--(1) In general. 
After an individual provides a certificate of creditable coverage to a 
plan or issuer using the alternative method under Sec.  2590.701-4(c), 
that plan or issuer (requesting entity) must request that the entity 
that issued the certificate (prior entity) disclose the information set 
forth in paragraph (b)(2) of this section. The prior entity is required 
to disclose this information promptly.
    (2) Information to be disclosed. The prior entity is required to 
identify to the requesting entity the categories of benefits with 
respect to which the requesting entity is using the alternative method 
of counting creditable coverage, and the requesting entity may identify 
specific information that the requesting entity reasonably needs in 
order to determine the individual's creditable coverage with respect to 
any such category.
    (3) Charge for providing information. The prior entity may charge 
the requesting entity for the reasonable cost of disclosing such 
information.
    (c) Ability of an individual to demonstrate creditable coverage and 
waiting period information--(1) Purpose. The rules in this paragraph 
(c) implement section 701(c)(4) of the Act, which permits individuals 
to demonstrate the duration of creditable coverage through means other 
than certificates, and section 701(e)(3) of the Act, which requires the 
Secretary to establish rules designed to prevent an individual's 
subsequent coverage under a group health plan or health insurance 
coverage from being adversely affected by an entity's failure to 
provide a certificate with respect to that individual.
    (2) In general. If the accuracy of a certificate is contested or a 
certificate is unavailable when needed by an individual, the individual 
has the right to demonstrate creditable coverage (and waiting or 
affiliation periods) through the presentation of documents or other 
means. For example, the individual may make such a demonstration when--
    (i) An entity has failed to provide a certificate within the 
required time;
    (ii) The individual has creditable coverage provided by an entity 
that is not required to provide a certificate of the coverage pursuant 
to paragraph (a) of this section;
    (iii) The individual has an urgent medical condition that 
necessitates a determination before the individual can deliver a 
certificate to the plan; or
    (iv) The individual lost a certificate that the individual had 
previously received and is unable to obtain another certificate.

[[Page 78775]]

    (3) Evidence of creditable coverage--(i) Consideration of 
evidence--(A) A plan or issuer is required to take into account all 
information that it obtains or that is presented on behalf of an 
individual to make a determination, based on the relevant facts and 
circumstances, whether an individual has creditable coverage. A plan or 
issuer shall treat the individual as having furnished a certificate 
under paragraph (a) of this section if--
    (1) The individual attests to the period of creditable coverage;
    (2) The individual also presents relevant corroborating evidence of 
some creditable coverage during the period; and
    (3) The individual cooperates with the plan's or issuer's efforts 
to verify the individual's coverage.
    (B) For purposes of this paragraph (c)(3)(i), cooperation includes 
providing (upon the plan's or issuer's request) a written authorization 
for the plan or issuer to request a certificate on behalf of the 
individual, and cooperating in efforts to determine the validity of the 
corroborating evidence and the dates of creditable coverage. While a 
plan or issuer may refuse to credit coverage where the individual fails 
to cooperate with the plan's or issuer's efforts to verify coverage, 
the plan or issuer may not consider an individual's inability to obtain 
a certificate to be evidence of the absence of creditable coverage.
    (ii) Documents. Documents that corroborate creditable coverage (and 
waiting or affiliation periods) include explanations of benefits (EOBs) 
or other correspondence from a plan or issuer indicating coverage, pay 
stubs showing a payroll deduction for health coverage, a health 
insurance identification card, a certificate of coverage under a group 
health policy, records from medical care providers indicating health 
coverage, third party statements verifying periods of coverage, and any 
other relevant documents that evidence periods of health coverage.
    (iii) Other evidence. Creditable coverage (and waiting or 
affiliation periods) may also be corroborated through means other than 
documentation, such as by a telephone call from the plan or provider to 
a third party verifying creditable coverage.
    (iv) Example. The rules of this paragraph (c)(3) are illustrated by 
the following example:

    Example.  (i) Facts. Individual F terminates employment with 
Employer W and, a month later, is hired by Employer X. X's group 
health plan imposes a preexisting condition exclusion of 12 months 
on new enrollees under the plan and uses the standard method of 
determining creditable coverage. F fails to receive a certificate of 
prior coverage from the self-insured group health plan maintained by 
F's prior employer, W, and requests a certificate. However, F (and 
X's plan, on F's behalf and with F's cooperation) is unable to 
obtain a certificate from W's plan. F attests that, to the best of 
F's knowledge, F had at least 12 months of continuous coverage under 
W's plan, and that the coverage ended no earlier than F's 
termination of employment from W. In addition, F presents evidence 
of coverage, such as an explanation of benefits for a claim that was 
made during the relevant period.
    (ii) Conclusion. In this Example, based solely on these facts, F 
has demonstrated creditable coverage for the 12 months of coverage 
under W's plan in the same manner as if F had presented a written 
certificate of creditable coverage.

    (4) Demonstrating categories of creditable coverage. Procedures 
similar to those described in this paragraph (c) apply in order to 
determine the duration of an individual's creditable coverage with 
respect to any category under paragraph (b) of this section (relating 
to determining creditable coverage under the alternative method).
    (5) Demonstrating dependent status. If, in the course of providing 
evidence (including a certificate) of creditable coverage, an 
individual is required to demonstrate dependent status, the group 
health plan or issuer is required to treat the individual as having 
furnished a certificate showing the dependent status if the individual 
attests to such dependency and the period of such status and the 
individual cooperates with the plan's or issuer's efforts to verify the 
dependent status.


Sec.  2590.701-6  Special enrollment periods.

    (a) Special enrollment for certain individuals who lose coverage--
(1) In general. A group health plan, and a health insurance issuer 
offering health insurance coverage in connection with a group health 
plan, is required to permit current employees and dependents (as 
defined in Sec.  2590.701-2) who are described in paragraph (a)(2) of 
this section to enroll for coverage under the terms of the plan if the 
conditions in paragraph (a)(3) of this section are satisfied. The 
special enrollment rights under this paragraph (a) apply without regard 
to the dates on which an individual would otherwise be able to enroll 
under the plan.
    (2) Individuals eligible for special enrollment--(i) When employee 
loses coverage. A current employee and any dependents (including the 
employee's spouse) each are eligible for special enrollment in any 
benefit package under the plan (subject to plan eligibility rules 
conditioning dependent enrollment on enrollment of the employee) if--
    (A) The employee and the dependents are otherwise eligible to 
enroll in the benefit package;
    (B) When coverage under the plan was previously offered, the 
employee had coverage under any group health plan or health insurance 
coverage; and
    (C) The employee satisfies the conditions of paragraph (a)(3)(i), 
(ii), or (iii) of this section and, if applicable, paragraph (a)(3)(iv) 
of this section.
    (ii) When dependent loses coverage--(A) A dependent of a current 
employee (including the employee's spouse) and the employee each are 
eligible for special enrollment in any benefit package under the plan 
(subject to plan eligibility rules conditioning dependent enrollment on 
enrollment of the employee) if--
    (1) The dependent and the employee are otherwise eligible to enroll 
in the benefit package;
    (2) When coverage under the plan was previously offered, the 
dependent had coverage under any group health plan or health insurance 
coverage; and
    (3) The dependent satisfies the conditions of paragraph (a)(3)(i), 
(ii), or (iii) of this section and, if applicable, paragraph (a)(3)(iv) 
of this section.
    (B) However, the plan or issuer is not required to enroll any other 
dependent unless that dependent satisfies the criteria of this 
paragraph (a)(2)(ii), or the employee satisfies the criteria of 
paragraph (a)(2)(i) of this section.
    (iii) Examples. The rules of this paragraph (a)(2) are illustrated 
by the following examples:

    Example 1.  (i) Facts. Individual A works for Employer X. A, A's 
spouse, and A's dependent children are eligible but not enrolled for 
coverage under X's group health plan. A's spouse works for Employer 
Y and at the time coverage was offered under X's plan, A was 
enrolled in coverage under Y's plan. Then, A loses eligibility for 
coverage under Y's plan.
    (ii) Conclusion. In this Example 1, because A satisfies the 
conditions for special enrollment under paragraph (a)(2)(i) of this 
section, A, A's spouse, and A's dependent children are eligible for 
special enrollment under X's plan.
    Example 2.  (i) Facts. Individual A and A's spouse are eligible 
but not enrolled for coverage under Group Health Plan P maintained 
by A's employer. When A was first presented with an opportunity to 
enroll A and A's spouse, they did not have other coverage. Later, A 
and A's spouse enroll in Group Health Plan Q maintained by the 
employer of A's spouse. During a subsequent open enrollment period 
in P, A and A's spouse did not enroll because of their coverage 
under Q. They then lose eligibility for coverage under Q.
    (ii) Conclusion. In this Example 2, because A and A's spouse 
were covered under Q when they did not enroll in P during open

[[Page 78776]]

enrollment, they satisfy the conditions for special enrollment under 
paragraphs (a)(2)(i) and (ii) of this section. Consequently, A and 
A's spouse are eligible for special enrollment under P.
    Example 3.  (i) Facts. Individual B works for Employer X. B and 
B's spouse are eligible but not enrolled for coverage under X's 
group health plan. B's spouse works for Employer Y and at the time 
coverage was offered under X's plan, B's spouse was enrolled in 
self-only coverage under Y's group health plan. Then, B's spouse 
loses eligibility for coverage under Y's plan.
    (ii) Conclusion. In this Example 3, because B's spouse satisfies 
the conditions for special enrollment under paragraph (a)(2)(ii) of 
this section, both B and B's spouse are eligible for special 
enrollment under X's plan.
    Example 4.  (i) Facts. Individual A works for Employer X. X 
maintains a group health plan with two benefit packages--an HMO 
option and an indemnity option. Self-only and family coverage are 
available under both options. A enrolls for self-only coverage in 
the HMO option. A's spouse works for Employer Y and was enrolled for 
self-only coverage under Y's plan at the time coverage was offered 
under X's plan. Then, A's spouse loses coverage under Y's plan. A 
requests special enrollment for A and A's spouse under the plan's 
indemnity option.
    (ii) Conclusion. In this Example 4, because A's spouse satisfies 
the conditions for special enrollment under paragraph (a)(2)(ii) of 
this section, both A and A's spouse can enroll in either benefit 
package under X's plan. Therefore, if A requests enrollment in 
accordance with the requirements of this section, the plan must 
allow A and A's spouse to enroll in the indemnity option.

    (3) Conditions for special enrollment--(i) Loss of eligibility for 
coverage. In the case of an employee or dependent who has coverage that 
is not COBRA continuation coverage, the conditions of this paragraph 
(a)(3)(i) are satisfied at the time the coverage is terminated as a 
result of loss of eligibility (regardless of whether the individual is 
eligible for or elects COBRA continuation coverage). Loss of 
eligibility under this paragraph (a)(3)(i) does not include a loss due 
to the failure of the employee or dependent to pay premiums on a timely 
basis or termination of coverage for cause (such as making a fraudulent 
claim or an intentional misrepresentation of a material fact in 
connection with the plan). Loss of eligibility for coverage under this 
paragraph (a)(3)(i) includes (but is not limited to)--
    (A) Loss of eligibility for coverage as a result of legal 
separation, divorce, cessation of dependent status (such as attaining 
the maximum age to be eligible as a dependent child under the plan), 
death of an employee, termination of employment, reduction in the 
number of hours of employment, and any loss of eligibility for coverage 
after a period that is measured by reference to any of the foregoing;
    (B) In the case of coverage offered through an HMO, or other 
arrangement, in the individual market that does not provide benefits to 
individuals who no longer reside, live, or work in a service area, loss 
of coverage because an individual no longer resides, lives, or works in 
the service area (whether or not within the choice of the individual);
    (C) In the case of coverage offered through an HMO, or other 
arrangement, in the group market that does not provide benefits to 
individuals who no longer reside, live, or work in a service area, loss 
of coverage because an individual no longer resides, lives, or works in 
the service area (whether or not within the choice of the individual), 
and no other benefit package is available to the individual;
    (D) A situation in which an individual incurs a claim that would 
meet or exceed a lifetime limit on all benefits; and
    (E) A situation in which a plan no longer offers any benefits to 
the class of similarly situated individuals (as described in Sec.  
2590.702(d)) that includes the individual.
    (ii) Termination of employer contributions. In the case of an 
employee or dependent who has coverage that is not COBRA continuation 
coverage, the conditions of this paragraph (a)(3)(ii) are satisfied at 
the time employer contributions towards the employee's or dependent's 
coverage terminate. Employer contributions include contributions by any 
current or former employer that was contributing to coverage for the 
employee or dependent.
    (iii) Exhaustion of COBRA continuation coverage. In the case of an 
employee or dependent who has coverage that is COBRA continuation 
coverage, the conditions of this paragraph (a)(3)(iii) are satisfied at 
the time the COBRA continuation coverage is exhausted. For purposes of 
this paragraph (a)(3)(iii), an individual who satisfies the conditions 
for special enrollment of paragraph (a)(3)(i) of this section, does not 
enroll, and instead elects and exhausts COBRA continuation coverage 
satisfies the conditions of this paragraph (a)(3)(iii). (Exhaustion of 
COBRA continuation coverage is defined in Sec.  2590.701-2.)
    (iv) Written statement. A plan may require an employee declining 
coverage (for the employee or any dependent of the employee) to State 
in writing whether the coverage is being declined due to other health 
coverage only if, at or before the time the employee declines coverage, 
the employee is provided with notice of the requirement to provide the 
statement (and the consequences of the employee's failure to provide 
the statement). If a plan requires such a statement, and an employee 
does not provide it, the plan is not required to provide special 
enrollment to the employee or any dependent of the employee under this 
paragraph (a)(3). A plan must treat an employee as having satisfied the 
plan requirement permitted under this paragraph (a)(3)(iv) if the 
employee provides a written statement that coverage was being declined 
because the employee or dependent had other coverage; a plan cannot 
require anything more for the employee to satisfy the plan's 
requirement to provide a written statement. (For example, the plan 
cannot require that the statement be notarized.)
    (v) The rules of this paragraph (a)(3) are illustrated by the 
following examples:

    Example 1.  (i) Facts. Individual D enrolls in a group health 
plan maintained by Employer Y. At the time D enrolls, Y pays 70 
percent of the cost of employee coverage and D pays the rest. Y 
announces that beginning January 1, Y will no longer make employer 
contributions towards the coverage. Employees may maintain coverage, 
however, if they pay the total cost of the coverage.
    (ii) Conclusion. In this Example 1, employer contributions 
towards D's coverage ceased on January 1 and the conditions of 
paragraph (a)(3)(ii) of this section are satisfied on this date 
(regardless of whether D elects to pay the total cost and continue 
coverage under Y's plan).
    Example 2.  (i) Facts. A group health plan provides coverage 
through two options--Option 1 and Option 2. Employees can enroll in 
either option only within 30 days of hire or on January 1 of each 
year. Employee A is eligible for both options and enrolls in Option 
1. Effective July 1 the plan terminates coverage under Option 1 and 
the plan does not create an immediate open enrollment opportunity 
into Option 2.
    (ii) Conclusion. In this Example 2, A has experienced a loss of 
eligibility for coverage that satisfies paragraph (a)(3)(i) of this 
section, and has satisfied the other conditions for special 
enrollment under paragraph (a)(2)(i) of this section. Therefore, if 
A satisfies the other conditions of this paragraph (a), the plan 
must permit A to enroll in Option 2 as a special enrollee. (A may 
also be eligible to enroll in another group health plan, such as a 
plan maintained by the employer of A's spouse, as a special 
enrollee.) The outcome would be the same if Option 1 was terminated 
by an issuer and the plan made no other coverage available to A.
    Example 3. (i) Facts. Individual C is covered under a group 
health plan maintained by Employer X. While covered under X's plan, 
C was eligible for but did not enroll in a plan maintained by 
Employer Z, the employer of C's spouse. C terminates employment with 
X and loses eligibility for coverage under X's plan. C has a special

[[Page 78777]]

enrollment right to enroll in Z's plan, but C instead elects COBRA 
continuation coverage under X's plan. C exhausts COBRA continuation 
coverage under X's plan and requests special enrollment in Z's plan.
    (ii) Conclusion. In this Example 3, C has satisfied the 
conditions for special enrollment under paragraph (a)(3)(iii) of 
this section, and has satisfied the other conditions for special 
enrollment under paragraph (a)(2)(i) of this section. The special 
enrollment right that C had into Z's plan immediately after the loss 
of eligibility for coverage under X's plan was an offer of coverage 
under Z's plan. When C later exhausts COBRA coverage under X's plan, 
C has a second special enrollment right in Z's plan.

    (4) Applying for special enrollment and effective date of 
coverage--(i) A plan or issuer must allow an employee a period of at 
least 30 days after an event described in paragraph (a)(3) of this 
section (other than an event described in paragraph (a)(3)(i)(D)) to 
request enrollment (for the employee or the employee's dependent). In 
the case of an event described in paragraph (a)(3)(i)(D) of this 
section (relating to loss of eligibility for coverage due to the 
operation of a lifetime limit on all benefits), a plan or issuer must 
allow an employee a period of at least 30 days after a claim is denied 
due to the operation of a lifetime limit on all benefits.
    (ii) Coverage must begin no later than the first day of the first 
calendar month beginning after the date the plan or issuer receives the 
request for special enrollment.
    (b) Special enrollment with respect to certain dependent 
beneficiaries--(1) In general. A group health plan, and a health 
insurance issuer offering health insurance coverage in connection with 
a group health plan, that makes coverage available with respect to 
dependents is required to permit individuals described in paragraph 
(b)(2) of this section to be enrolled for coverage in a benefit package 
under the terms of the plan. Paragraph (b)(3) of this section describes 
the required special enrollment period and the date by which coverage 
must begin. The special enrollment rights under this paragraph (b) 
apply without regard to the dates on which an individual would 
otherwise be able to enroll under the plan.
    (2) Individuals eligible for special enrollment. An individual is 
described in this paragraph (b)(2) if the individual is otherwise 
eligible for coverage in a benefit package under the plan and if the 
individual is described in paragraph (b)(2)(i), (ii), (iii), (iv), (v), 
or (vi) of this section.
    (i) Current employee only. A current employee is described in this 
paragraph (b)(2)(i) if a person becomes a dependent of the individual 
through marriage, birth, adoption, or placement for adoption.
    (ii) Spouse of a participant only. An individual is described in 
this paragraph (b)(2)(ii) if either --
    (A) The individual becomes the spouse of a participant; or
    (B) The individual is a spouse of a participant and a child becomes 
a dependent of the participant through birth, adoption, or placement 
for adoption.
    (iii) Current employee and spouse. A current employee and an 
individual who is or becomes a spouse of such an employee, are 
described in this paragraph (b)(2)(iii) if either--
    (A) The employee and the spouse become married; or
    (B) The employee and spouse are married and a child becomes a 
dependent of the employee through birth, adoption, or placement for 
adoption.
    (iv) Dependent of a participant only. An individual is described in 
this paragraph (b)(2)(iv) if the individual is a dependent (as defined 
in Sec.  2590.701-2) of a participant and the individual has become a 
dependent of the participant through marriage, birth, adoption, or 
placement for adoption.
    (v) Current employee and a new dependent. A current employee and an 
individual who is a dependent of the employee, are described in this 
paragraph (b)(2)(v) if the individual becomes a dependent of the 
employee through marriage, birth, adoption, or placement for adoption.
    (vi) Current employee, spouse, and a new dependent. A current 
employee, the employee's spouse, and the employee's dependent are 
described in this paragraph (b)(2)(vi) if the dependent becomes a 
dependent of the employee through marriage, birth, adoption, or 
placement for adoption.
    (3) Applying for special enrollment and effective date of 
coverage--(i) Request. A plan or issuer must allow an individual a 
period of at least 30 days after the date of the marriage, birth, 
adoption, or placement for adoption (or, if dependent coverage is not 
generally made available at the time of the marriage, birth, adoption, 
or placement for adoption, a period of at least 30 days after the date 
the plan makes dependent coverage generally available) to request 
enrollment (for the individual or the individual's dependent).
    (ii) Reasonable procedures for special enrollment. [Reserved]
    (iii) Date coverage must begin--(A) Marriage. In the case of 
marriage, coverage must begin no later than the first day of the first 
calendar month beginning after the date the plan or issuer receives the 
request for special enrollment.
    (B) Birth, adoption, or placement for adoption. Coverage must begin 
in the case of a dependent's birth on the date of birth and in the case 
of a dependent's adoption or placement for adoption no later than the 
date of such adoption or placement for adoption (or, if dependent 
coverage is not made generally available at the time of the birth, 
adoption, or placement for adoption, the date the plan makes dependent 
coverage available).
    (4) Examples. The rules of this paragraph (b) are illustrated by 
the following examples:

    Example 1. (i) Facts. An employer maintains a group health plan 
that offers all employees employee-only coverage, employee-plus-
spouse coverage, or family coverage. Under the terms of the plan, 
any employee may elect to enroll when first hired (with coverage 
beginning on the date of hire) or during an annual open enrollment 
period held each December (with coverage beginning the following 
January 1). Employee A is hired on September 3. A is married to B, 
and they have no children. On March 15 in the following year a child 
C is born to A and B. Before that date, A and B have not been 
enrolled in the plan.
    (ii) Conclusion. In this Example 1, the conditions for special 
enrollment of an employee with a spouse and new dependent under 
paragraph (b)(2)(vi) of this section are satisfied. If A satisfies 
the conditions of paragraph (b)(3) of this section for requesting 
enrollment timely, the plan will satisfy this paragraph (b) if it 
allows A to enroll either with employee-only coverage, with 
employee-plus-spouse coverage (for A and B), or with family coverage 
(for A, B, and C). The plan must allow whatever coverage is chosen 
to begin on March 15, the date of C's birth.
    Example 2.  (i) Facts. Individual D works for Employer X. X 
maintains a group health plan with two benefit packages--an HMO 
option and an indemnity option. Self-only and family coverage are 
available under both options. D enrolls for self-only coverage in 
the HMO option. Then, a child, E, is placed for adoption with D. 
Within 30 days of the placement of E for adoption, D requests 
enrollment for D and E under the plan's indemnity option.
    (ii) Conclusion. In this Example 2, D and E satisfy the 
conditions for special enrollment under paragraphs (b)(2)(v) and 
(b)(3) of this section. Therefore, the plan must allow D and E to 
enroll in the indemnity coverage, effective as of the date of the 
placement for adoption.

    (c) Notice of special enrollment. At or before the time an employee 
is initially offered the opportunity to enroll in a group health plan, 
the plan must furnish the employee with a notice of special enrollment 
that complies with the requirements of this paragraph (c).

[[Page 78778]]

    (1) Description of special enrollment rights. The notice of special 
enrollment must include a description of special enrollment rights. The 
following model language may be used to satisfy this requirement:

    If you are declining enrollment for yourself or your dependents 
(including your spouse) because of other health insurance or group 
health plan coverage, you may be able to enroll yourself and your 
dependents in this plan if you or your dependents lose eligibility 
for that other coverage (or if the employer stops contributing 
towards your or your dependents' other coverage). However, you must 
request enrollment within [insert ``30 days'' or any longer period 
that applies under the plan] after your or your dependents' other 
coverage ends (or after the employer stops contributing toward the 
other coverage).
    In addition, if you have a new dependent as a result of 
marriage, birth, adoption, or placement for adoption, you may be 
able to enroll yourself and your dependents. However, you must 
request enrollment within [insert ``30 days'' or any longer period 
that applies under the plan] after the marriage, birth, adoption, or 
placement for adoption.
    To request special enrollment or obtain more information, 
contact [insert the name, title, telephone number, and any 
additional contact information of the appropriate plan 
representative].

    (2) Additional information that may be required. The notice of 
special enrollment must also include, if applicable, the notice 
described in paragraph (a)(3)(iv) of this section (the notice required 
to be furnished to an individual declining coverage if the plan 
requires the reason for declining coverage to be in writing).
    (d) Treatment of special enrollees--(1) If an individual requests 
enrollment while the individual is entitled to special enrollment under 
either paragraph (a) or (b) of this section, the individual is a 
special enrollee, even if the request for enrollment coincides with a 
late enrollment opportunity under the plan. Therefore, the individual 
cannot be treated as a late enrollee.
    (2) Special enrollees must be offered all the benefit packages 
available to similarly situated individuals who enroll when first 
eligible. For this purpose, any difference in benefits or cost-sharing 
requirements for different individuals constitutes a different benefit 
package. In addition, a special enrollee cannot be required to pay more 
for coverage than a similarly situated individual who enrolls in the 
same coverage when first eligible. The length of any preexisting 
condition exclusion that may be applied to a special enrollee cannot 
exceed the length of any preexisting condition exclusion that is 
applied to similarly situated individuals who enroll when first 
eligible. For rules prohibiting the application of a preexisting 
condition exclusion to certain newborns, adopted children, and children 
placed for adoption, see Sec.  2590.701-3(b).
    (3) The rules of this section are illustrated by the following 
example:

    Example.  (i) Facts. Employer Y maintains a group health plan 
that has an enrollment period for late enrollees every November 1 
through November 30 with coverage effective the following January 1. 
On October 18, Individual B loses coverage under another group 
health plan and satisfies the requirements of paragraphs (a)(2), 
(3), and (4) of this section. B submits a completed application for 
coverage on November 2.
    (ii) Conclusion. In this Example, B is a special enrollee. 
Therefore, even though B's request for enrollment coincides with an 
open enrollment period, B's coverage is required to be made 
effective no later than December 1 (rather than the plan's January 1 
effective date for late enrollees).


Sec.  2590.701-7  HMO affiliation period as an alternative to a 
preexisting condition exclusion.

    (a) In general. A group health plan offering health insurance 
coverage through an HMO, or an HMO that offers health insurance 
coverage in connection with a group health plan, may impose an 
affiliation period only if each of the following requirements is 
satisfied--
    (1) No preexisting condition exclusion is imposed with respect to 
any coverage offered by the HMO in connection with the particular group 
health plan.
    (2) No premium is charged to a participant or beneficiary for the 
affiliation period.
    (3) The affiliation period for the HMO coverage is imposed 
consistent with the requirements of Sec.  2590.702 (prohibiting 
discrimination based on a health factor).
    (4) The affiliation period does not exceed 2 months (or 3 months in 
the case of a late enrollee).
    (5) The affiliation period begins on the enrollment date, or in the 
case of a late enrollee, the affiliation period begins on the day that 
would be the first day of coverage but for the affiliation period.
    (6) The affiliation period for enrollment in the HMO under a plan 
runs concurrently with any waiting period.
    (b) Examples. The rules of paragraph (a) of this section are 
illustrated by the following examples:

    Example 1.  (i) Facts. An employer sponsors a group health plan. 
Benefits under the plan are provided through an HMO, which imposes a 
two-month affiliation period. In order to be eligible under the 
plan, employees must have worked for the employer for six months. 
Individual A begins working for the employer on February 1.
    (ii) Conclusion. In this Example 1, Individual A's enrollment 
date is February 1 (see Sec.  2590.701-3(a)(2)), and both the 
waiting period and the affiliation period begin on this date and run 
concurrently. Therefore, the affiliation period ends on March 31, 
the waiting period ends on July 31, and A is eligible to have 
coverage begin on August 1.
    Example 2.  (i) Facts. A group health plan has two benefit 
package options, a fee-for-service option and an HMO option. The HMO 
imposes a 1-month affiliation period. Individual B is enrolled in 
the fee-for-service option for more than one month and then decides 
to switch to the HMO option at open season.
    (ii) Conclusion. In this Example 2, the HMO may not impose the 
affiliation period with respect to B because any affiliation period 
would have to begin on B's enrollment date in the plan rather than 
the date that B enrolled in the HMO option. Therefore, the 
affiliation period would have expired before B switched to the HMO 
option.
    Example 3.  (i) Facts. An employer sponsors a group health plan 
that provides benefits through an HMO. The plan imposes a two-month 
affiliation period with respect to salaried employees, but it does 
not impose an affiliation period with respect to hourly employees.
    (ii) Conclusion. In this Example 3, the plan may impose the 
affiliation period with respect to salaried employees without 
imposing any affiliation period with respect to hourly employees 
(unless, under the circumstances, treating salaried and hourly 
employees differently does not comply with the requirements of Sec.  
2590.702).

    (c) Alternatives to affiliation period. An HMO may use alternative 
methods in lieu of an affiliation period to address adverse selection, 
as approved by the State insurance commissioner or other official 
designated to regulate HMOs. However, an arrangement that is in the 
nature of a preexisting condition exclusion cannot be an alternative to 
an affiliation period. Nothing in this part requires a State to receive 
proposals for or approve alternatives to affiliation periods.

0
4. Section 2590.701-8 is added and reserved to read as follows:


Sec.  2590.701-8 Interaction with the Family and Medical Leave 
Act.  [Reserved]

0
5. Revise the heading of subpart D to read as follows:

Subpart D--General Provisions Related to Subparts B and C

0
6. Sections 2590.731, 2590.732 and 2590.736 are revised to read as 
follows:


Sec.  2590.731  Preemption; State flexibility; construction.

    (a) Continued applicability of State law with respect to health 
insurance issuers. Subject to paragraph (b) of this

[[Page 78779]]

section and except as provided in paragraph (c) of this section, part 7 
of subtitle B of Title I of the Act is not to be construed to supersede 
any provision of State law which establishes, implements, or continues 
in effect any standard or requirement solely relating to health 
insurance issuers in connection with group health insurance coverage 
except to the extent that such standard or requirement prevents the 
application of a requirement of this part.
    (b) Continued preemption with respect to group health plans. 
Nothing in part 7 of subtitle B of Title I of the Act affects or 
modifies the provisions of section 514 of the Act with respect to group 
health plans.
    (c) Special rules--(1) In general. Subject to paragraph (c)(2) of 
this section, the provisions of part 7 of subtitle B of Title I of the 
Act relating to health insurance coverage offered by a health insurance 
issuer supersede any provision of State law which establishes, 
implements, or continues in effect a standard or requirement applicable 
to imposition of a preexisting condition exclusion specifically 
governed by section 701 which differs from the standards or 
requirements specified in such section.
    (2) Exceptions. Only in relation to health insurance coverage 
offered by a health insurance issuer, the provisions of this part do 
not supersede any provision of State law to the extent that such 
provision--
    (i) Shortens the period of time from the ``6-month period'' 
described in section 701(a)(1) of the Act and Sec.  2590.701-3(a)(1)(i) 
(for purposes of identifying a preexisting condition);
    (ii) Shortens the period of time from the ``12 months'' and ``18 
months'' described in section 701(a)(2) of the Act and Sec.  2590.701-
3(a)(1)(ii) (for purposes of applying a preexisting condition exclusion 
period);
    (iii) Provides for a greater number of days than the ``63-day 
period'' described in sections 701(c)(2)(A) and (d)(4)(A) of the Act 
and Sec. Sec.  2590.701-3(a)(1)(iii) and 2590.701-4 (for purposes of 
applying the break in coverage rules);
    (iv) Provides for a greater number of days than the ``30-day 
period'' described in sections 701(b)(2) and (d)(1) of the Act and 
Sec.  2590.701-3(b) (for purposes of the enrollment period and 
preexisting condition exclusion periods for certain newborns and 
children that are adopted or placed for adoption);
    (v) Prohibits the imposition of any preexisting condition exclusion 
in cases not described in section 701(d) of the Act or expands the 
exceptions described therein;
    (vi) Requires special enrollment periods in addition to those 
required under section 701(f) of the Act; or
    (vii) Reduces the maximum period permitted in an affiliation period 
under section 701(g)(1)(B) of the Act.
    (d) Definitions--(1) State law. For purposes of this section the 
term State law includes all laws, decisions, rules, regulations, or 
other State action having the effect of law, of any State. A law of the 
United States applicable only to the District of Columbia is treated as 
a State law rather than a law of the United States.
    (2) State. For purposes of this section the term State includes a 
State (as defined in Sec.  2590.701-2), any political subdivisions of a 
State, or any agency or instrumentality of either.


Sec.  2590.732  Special rules relating to group health plans.

    (a) Group health plan--(1) Defined. A group health plan means an 
employee welfare benefit plan to the extent that the plan provides 
medical care (including items and services paid for as medical care) to 
employees (including both current and former employees) or their 
dependents (as defined under the terms of the plan) directly or through 
insurance, reimbursement, or otherwise.
    (2) Determination of number of plans. [Reserved]
    (b) General exception for certain small group health plans. The 
requirements of this part, other than Sec.  2590.711, do not apply to 
any group health plan (and group health insurance coverage) for any 
plan year if, on the first day of the plan year, the plan has fewer 
than two participants who are current employees.
    (c) Excepted benefits--(1) In general. The requirements of this 
Part do not apply to any group health plan (or any group health 
insurance coverage) in relation to its provision of the benefits 
described in paragraph (c)(2), (3), (4), or (5) of this section (or any 
combination of these benefits).
    (2) Benefits excepted in all circumstances. The following benefits 
are excepted in all circumstances--
    (i) Coverage only for accident (including accidental death and 
dismemberment);
    (ii) Disability income coverage;
    (iii) Liability insurance, including general liability insurance 
and automobile liability insurance;
    (iv) Coverage issued as a supplement to liability insurance;
    (v) Workers' compensation or similar coverage;
    (vi) Automobile medical payment insurance;
    (vii) Credit-only insurance (for example, mortgage insurance); and
    (viii) Coverage for on-site medical clinics.
    (3) Limited excepted benefits--(i) In general. Limited-scope dental 
benefits, limited-scope vision benefits, or 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 a group 
health plan as described in paragraph (c)(3)(ii) of this section. In 
addition, benefits provided under a health flexible spending 
arrangement are excepted benefits if they satisfy the requirements of 
paragraph (c)(3)(v) of this section.
    (ii) Not an integral part of a group health plan. For purposes of 
this paragraph (c)(3), benefits are not an integral part of a group 
health plan (whether the benefits are provided through the same plan or 
a separate plan) only if the following two requirements are satisfied--
    (A) Participants must have the right to elect not to receive 
coverage for the benefits; and
    (B) If a participant elects to receive coverage for the benefits, 
the participant must pay an additional premium or contribution for that 
coverage.
    (iii) Limited scope--(A) Dental benefits. Limited scope dental 
benefits are benefits substantially all of which are for treatment of 
the mouth (including any organ or structure within the mouth).
    (B) Vision benefits. Limited scope vision benefits are benefits 
substantially all of which are for treatment of the eye.
    (iv) Long-term care. Long-term care benefits are benefits that are 
either--
    (A) Subject to State long-term care insurance laws;
    (B) For qualified long-term care services, as defined in section 
7702B(c)(1) of the Internal Revenue Code, or provided under a qualified 
long-term care insurance contract, as defined in section 7702B(b) of 
the Internal Revenue Code; or
    (C) Based on cognitive impairment or a loss of functional capacity 
that is expected to be chronic.
    (v) Health flexible spending arrangements. Benefits provided under 
a health flexible spending arrangement (as defined in section 106(c)(2) 
of the Internal Revenue Code) are excepted for a class of participants 
only if they satisfy the following two requirements--
    (A) Other group health plan coverage, not limited to excepted 
benefits, is made available for the year to the class of participants 
by reason of their employment; and
    (B) The arrangement is structured so that the maximum benefit 
payable to any participant in the class for a year

[[Page 78780]]

cannot exceed two times the participant's salary reduction election 
under the arrangement for the year (or, if greater, cannot exceed $500 
plus the amount of the participant's salary reduction election). For 
this purpose, any amount that an employee can elect to receive as 
taxable income but elects to apply to the health flexible spending 
arrangement is considered a salary reduction election (regardless of 
whether the amount is characterized as salary or as a credit under the 
arrangement).
    (4) Noncoordinated benefits--(i) Excepted benefits that are not 
coordinated. Coverage for only a specified disease or illness (for 
example, cancer-only policies) or hospital indemnity or other fixed 
indemnity insurance is excepted only if it meets each of the conditions 
specified in paragraph (c)(4)(ii) of this section. To be hospital 
indemnity or other fixed indemnity insurance, the insurance must pay a 
fixed dollar amount per day (or per other period) of hospitalization or 
illness (for example, $100/day) regardless of the amount of expenses 
incurred.
    (ii) Conditions. Benefits are described in paragraph (c)(4)(i) of 
this section only if--
    (A) The benefits are provided under a separate policy, certificate, 
or contract of insurance;
    (B) There is no coordination between the provision of the benefits 
and an exclusion of benefits under any group health plan maintained by 
the same plan sponsor; and
    (C) The benefits are paid with respect to an event without regard 
to whether benefits are provided with respect to the event under any 
group health plan maintained by the same plan sponsor.
    (iii) Example. The rules of this paragraph (c)(4) are illustrated 
by the following example:

    Example.  (i) Facts. An employer sponsors a group health plan 
that provides coverage through an insurance policy. The policy 
provides benefits only for hospital stays at a fixed percentage of 
hospital expenses up to a maximum of $100 a day.
    (ii) Conclusion. In this Example, even though the benefits under 
the policy satisfy the conditions in paragraph (c)(4)(ii) of this 
section, because the policy pays a percentage of expenses incurred 
rather than a fixed dollar amount, the benefits under the policy are 
not excepted benefits under this paragraph (c)(4). This is the 
result even if, in practice, the policy pays the maximum of $100 for 
every day of hospitalization.

    (5) Supplemental benefits. (i) The following benefits are excepted 
only if they are provided under a separate policy, certificate, or 
contract of insurance--
    (A) Medicare supplemental health insurance (as defined under 
section 1882(g)(1) of the Social Security Act; also known as Medigap or 
MedSupp insurance);
    (B) Coverage supplemental to the coverage provided under Chapter 
55, Title 10 of the United States Code (also known as TRICARE 
supplemental programs); and
    (C) Similar supplemental coverage provided to coverage under a 
group health plan. To be similar supplemental coverage, the coverage 
must be specifically designed to fill gaps in primary coverage, such as 
coinsurance or deductibles. Similar supplemental coverage does not 
include coverage that becomes secondary or supplemental only under a 
coordination-of-benefits provision.
    (ii) The rules of this paragraph (c)(5) are illustrated by the 
following example:

    Example.  (i) Facts. An employer sponsors a group health plan 
that provides coverage for both active employees and retirees. The 
coverage for retirees supplements benefits provided by Medicare, but 
does not meet the requirements for a supplemental policy under 
section 1882(g)(1) of the Social Security Act.
    (ii) Conclusion. In this Example, the coverage provided to 
retirees does not meet the definition of supplemental excepted 
benefits under this paragraph (c)(5) because the coverage is not 
Medicare supplemental insurance as defined under section 1882(g)(1) 
of the Social Security Act, is not a TRICARE supplemental program, 
and is not supplemental to coverage provided under a group health 
plan.

    (d) Treatment of partnerships. For purposes of this part:
    (1) Treatment as a group health plan. Any plan, fund, or program 
that would not be (but for this paragraph (d)) an employee welfare 
benefit plan and that is established or maintained by a partnership, to 
the extent that the plan, fund, or program provides medical care 
(including items and services paid for as medical care) to present or 
former partners in the partnership or to their dependents (as defined 
under the terms of the plan, fund, or program), directly or through 
insurance, reimbursement, or otherwise, is treated (subject to 
paragraph (d)(2)) as an employee welfare benefit plan that is a group 
health plan.
    (2) Employment relationship. In the case of a group health plan, 
the term employer also includes the partnership in relation to any bona 
fide partner. In addition, the term employee also includes any bona 
fide partner. Whether or not an individual is a bona fide partner is 
determined based on all the relevant facts and circumstances, including 
whether the individual performs services on behalf of the partnership.
    (3) Participants of group health plans. In the case of a group 
health plan, the term participant also includes any individual 
described in paragraph (d)(3)(i) or (ii) of this section if the 
individual is, or may become, eligible to receive a benefit under the 
plan or the individual's beneficiaries may be eligible to receive any 
such benefit.
    (i) In connection with a group health plan maintained by a 
partnership, the individual is a partner in relation to the 
partnership.
    (ii) In connection with a group health plan maintained by a self-
employed individual (under which one or more employees are 
participants), the individual is the self-employed individual.
    (e) Determining the average number of employees. [Reserved]


Sec.  2590.736  Applicability dates.

    Sections 2590.701-1 through 2590.701-8 and 2590.731 through 
2590.736 are applicable for plan years beginning on or after July 1, 
2005. Until the applicability date for this regulation, plans and 
issuers are required to continue to comply with the corresponding 
sections of 29 CFR part 2590, contained in the 29 CFR, parts 1927 to 
end, edition revised as of July 1, 2004.

    Signed at Washington, DC, this 1st day of December, 2004.
Ann L. Combs,
Assistant Secretary, Employee Benefits Security Administration, U.S. 
Department of Labor.

Department of Health and Human Services

45 CFR Subtitle A

0
For the reasons set forth in the preamble, the Department of Health and 
Human Services amends 45 CFR Part 144 and Part 146 as follows:

PART 144--REQUIREMENTS RELATING TO HEALTH INSURANCE COVERAGE

0
A. Part 144 is amended as set forth below:
0
1. The authority citation for Part 144 is revised to read as follows:

    Authority: Secs. 2701 through 2763, 2791, and 2792 of the Public 
Health Service Act, 42 U.S.C. 300gg through 300gg-63, 300gg-91, 
30gg-92 as amended by HIPAA (Public Law 104-191, 110 Stat. 1936), 
MHPA (Public Law 104-204, 110 Stat. 2944, as amended by Public Law 
107-116, 115 Stat. 2177), NMHPA (Public Law 104-204, 110 Stat. 
2935), WHCRA (Public Law 105-277, 112 Stat. 2681-436), and section 
103(c)(4) of HIPAA.

[[Page 78781]]


0
2. Section 144.103 is revised to read as follows:


Sec.  144.103  Definitions.

    For purposes of parts 146 (group market), 148 (individual market), 
and 150 (enforcement) of this subchapter, the following definitions 
apply unless otherwise provided:
    Affiliation period means a period of time that must expire before 
health insurance coverage provided by an HMO becomes effective, and 
during which the HMO is not required to provide benefits.
    Applicable State authority means, with respect to a health 
insurance issuer in a State, the State insurance commissioner or 
official or officials designated by the State to enforce the 
requirements of 45 CFR parts 146 and 148 for the State involved with 
respect to the issuer.
    Beneficiary has the meaning given the term under section 3(8) of 
the Employee Retirement Income Security Act of 1974 (ERISA), which 
States, ``a person designated by a participant, or by the terms of an 
employee benefit plan, who is or may become entitled to a benefit'' 
under the plan.
    Bona fide association means, with respect to health insurance 
coverage offered in a State, an association that meets the following 
conditions:
    (1) Has been actively in existence for at least 5 years.
    (2) Has been formed and maintained in good faith for purposes other 
than obtaining insurance.
    (3) Does not condition membership in the association on any health 
status-related factor relating to an individual (including an employee 
of an employer or a dependent of any employee).
    (4) Makes health insurance coverage offered through the association 
available to all members regardless of any health status-related factor 
relating to the members (or individuals eligible for coverage through a 
member).
    (5) Does not make health insurance coverage offered through the 
association available other than in connection with a member of the 
association.
    (6) Meets any additional requirements that may be imposed under 
State law.
    Church plan means a Church plan within the meaning of section 3(33) 
of ERISA.
    COBRA definitions:
    (1) COBRA means Title X of the Consolidated Omnibus Budget 
Reconciliation Act of 1985, as amended.
    (2) COBRA continuation coverage means coverage, under a group 
health plan, that satisfies an applicable COBRA continuation provision.
    (3) COBRA continuation provision means sections 601-608 of the 
Employee Retirement Income Security Act, section 4980B of the Internal 
Revenue Code of 1986 (other than paragraph (f)(1) of such section 4980B 
insofar as it relates to pediatric vaccines), or Title XXII of the PHS 
Act.
    (4) Continuation coverage means coverage under a COBRA continuation 
provision or a similar State program. Coverage provided by a plan that 
is subject to a COBRA continuation provision or similar State program, 
but that does not satisfy all the requirements of that provision or 
program, will be deemed to be continuation coverage if it allows an 
individual to elect to continue coverage for a period of at least 18 
months. Continuation coverage does not include coverage under a 
conversion policy required to be offered to an individual upon 
exhaustion of continuation coverage, nor does it include continuation 
coverage under the Federal Employees Health Benefits Program.
    (5) Exhaustion of COBRA continuation coverage means that an 
individual's COBRA continuation coverage ceases for any reason other 
than either failure of the individual to pay premiums on a timely 
basis, or for cause (such as making a fraudulent claim or an 
intentional misrepresentation of a material fact in connection with the 
plan). An individual is considered to have exhausted COBRA continuation 
coverage if such coverage ceases--
    (i) Due to the failure of the employer or other responsible entity 
to remit premiums on a timely basis;
    (ii) When the individual no longer resides, lives, or works in the 
service area of an HMO or similar program (whether or not within the 
choice of the individual) and there is no other COBRA continuation 
coverage available to the individual; or
    (iii) When the individual incurs a claim that would meet or exceed 
a lifetime limit on all benefits and there is no other COBRA 
continuation coverage available to the individual.
    (6) Exhaustion of continuation coverage means that an individual's 
continuation coverage ceases for any reason other than either failure 
of the individual to pay premiums on a timely basis, or for cause (such 
as making a fraudulent claim or an intentional misrepresentation of a 
material fact in connection with the plan). An individual is considered 
to have exhausted continuation coverage if--
    (i) Coverage ceases due to the failure of the employer or other 
responsible entity to remit premiums on a timely basis;
    (ii) When the individual no longer resides, lives or works in a 
service area of an HMO or similar program (whether or not within the 
choice of the individual) and there is no other continuation coverage 
available to the individual; or
    (iii) When the individual incurs a claim that would meet or exceed 
a lifetime limit on all benefits and there is no other continuation 
coverage available to the individual.
    Condition means a medical condition.
    Creditable coverage has the meaning given the term in 45 CFR 
146.113(a).
    Dependent means any individual who is or may become eligible for 
coverage under the terms of a group health plan because of a 
relationship to a participant.
    Eligible individual, for purposes of--
    (1) The group market provisions in 45 CFR part 146, subpart E, is 
defined in 45 CFR 146.150(b); and
    (2) The individual market provisions in 45 CFR part 148, is defined 
in 45 CFR 148.103.
    Employee has the meaning given the term under section 3(6) of 
ERISA, which States, ``any individual employed by an employer.''
    Employer has the meaning given the term under section 3(5) of 
ERISA, which States, ``any person acting directly as an employer, or 
indirectly in the interest of an employer, in relation to an employee 
benefit plan; and includes a group or association of employers acting 
for an employer in such capacity.''
    Enroll means to become covered for benefits under a group health 
plan (that is, when coverage becomes effective), without regard to when 
the individual may have completed or filed any forms that are required 
in order to become covered under the plan. For this purpose, an 
individual who has health coverage under a group health plan is 
enrolled in the plan regardless of whether the individual elects 
coverage, the individual is a dependent who becomes covered as a result 
of an election by a participant, or the individual becomes covered 
without an election.
    Enrollment date definitions (enrollment date, first day of 
coverage, and waiting period) are set forth in 45 CFR 146.111(a)(3)(i) 
through (iii).
    ERISA stands for the Employee Retirement Income Security Act of 
1974, as amended (29 U.S.C. 1001 et seq.).
    Excepted benefits, consistent for purposes of the--
    (1) Group market provisions in 45 CFR part 146 subpart D, is 
defined in 45 CFR 146.145(c); and

[[Page 78782]]

    (2) Individual market provisions in 45 CFR part 148, is defined in 
45 CFR 148.220.
    Federal governmental plan means a governmental plan established or 
maintained for its employees by the Government of the United States or 
by any agency or instrumentality of such Government.
    Genetic information means information about genes, gene products, 
and inherited characteristics that may derive from the individual or a 
family member. This includes information regarding carrier status and 
information derived from laboratory tests that identify mutations in 
specific genes or chromosomes, physical medical examinations, family 
histories, and direct analysis of genes or chromosomes.
    Governmental plan means a governmental plan within the meaning of 
section 3(32) of ERISA.
    Group health insurance coverage means health insurance coverage 
offered in connection with a group health plan.
    Group health plan or plan means a group health plan within the 
meaning of 45 CFR 146.145(a).
    Group market means the market for health insurance coverage offered 
in connection with a group health plan. (However, certain very small 
plans may be treated as being in the individual market, rather than the 
group market; see the definition of individual market in this section.)
    Health insurance coverage means benefits consisting of medical care 
(provided directly, through insurance or reimbursement, or otherwise) 
under any hospital or medical service policy or certificate, hospital 
or medical service plan contract, or HMO contract offered by a health 
insurance issuer. Health insurance coverage includes group health 
insurance coverage, individual health insurance coverage, and short-
term, limited-duration insurance.
    Health insurance issuer or issuer means an insurance company, 
insurance service, or insurance organization (including an HMO) that is 
required to be licensed to engage in the business of insurance in a 
State and that is subject to State law that regulates insurance (within 
the meaning of section 514(b)(2) of ERISA). This term does not include 
a group health plan.
    Health maintenance organization or HMO means--
    (1) A Federally qualified health maintenance organization (as 
defined in section 1301(a) of the PHS Act);
    (2) An organization recognized under State law as a health 
maintenance organization; or
    (3) A similar organization regulated under State law for solvency 
in the same manner and to the same extent as such a health maintenance 
organization.
    Health status-related factor is any factor identified as a health 
factor in 45 CFR 146.121(a).
    Individual health insurance coverage means health insurance 
coverage offered to individuals in the individual market, but does not 
include short-term, limited-duration insurance. Individual health 
insurance coverage can include dependent coverage.
    Individual market means the market for health insurance coverage 
offered to individuals other than in connection with a group health 
plan. Unless a State elects otherwise in accordance with section 
2791(e)(1)(B)(ii) of the PHS Act, such term also includes coverage 
offered in connection with a group health plan that has fewer than two 
participants who are current employees on the first day of the plan 
year.
    Internal Revenue Code means the Internal Revenue Code of 1986, as 
amended (Title 26, United States Code).
    Issuer means a health insurance issuer.
    Large employer means, in connection with a group health plan with 
respect to a calendar year and a plan year, an employer who employed an 
average of at least 51 employees on business days during the preceding 
calendar year and who employs at least 2 employees on the first day of 
the plan year, unless otherwise provided under State law.
    Large group market means the health insurance market under which 
individuals obtain health insurance coverage (directly or through any 
arrangement) on behalf of themselves (and their dependents) through a 
group health plan maintained by a large employer, unless otherwise 
provided under State law.
    Late enrollment definitions (late enrollee and late enrollment) are 
set forth in 45 CFR 146.111(a)(3)(v) and (vi).
    Medical care means amounts paid for--
    (1) The diagnosis, cure, mitigation, treatment, or prevention of 
disease, or amounts paid for the purpose of affecting any structure or 
function of the body;
    (2) Transportation primarily for and essential to medical care 
referred to in paragraph (1) of this definition; and
    (3) Insurance covering medical care referred to in paragraphs (1) 
and (2) of this definition.
    Medical condition or condition means any condition, whether 
physical or mental, including, but not limited to, any condition 
resulting from illness, injury (whether or not the injury is 
accidental), pregnancy, or congenital malformation. However, genetic 
information is not a condition.
    Network plan means health insurance coverage of a health insurance 
issuer under which the financing and delivery of medical care 
(including items and services paid for as medical care) are provided, 
in whole or in part, through a defined set of providers under contract 
with the issuer.
    Non-Federal governmental plan means a governmental plan that is not 
a Federal governmental plan.
    Participant has the meaning given the term under section 3(7) of 
ERISA, which States, ``any employee or former employee of an employer, 
or any member or former member of an employee organization, who is or 
may become eligible to receive a benefit of any type from an employee 
benefit plan which covers employees of such employer or members of such 
organization, or whose beneficiaries may be eligible to receive any 
such benefit.''
    PHS Act stands for the Public Health Service Act (42 U.S.C. 201 et 
seq.).
    Placement, or being placed, for adoption means the assumption and 
retention of a legal obligation for total or partial support of a child 
by a person with whom the child has been placed in anticipation of the 
child's adoption. The child's placement for adoption with such person 
ends upon the termination of such legal obligation.
    Plan sponsor has the meaning given the term under section 3(16)(B) 
of ERISA, which states, ``(i) the employer in the case of an employee 
benefit plan established or maintained by a single employer, (ii) the 
employee organization in the case of a plan established or maintained 
by an employee organization, or (iii) in the case of a plan established 
or maintained by two or more employers or jointly by one or more 
employers and one or more employee organizations, the association, 
committee, joint board of trustees, or other similar group of 
representatives of the parties who establish or maintain the plan.''
    Plan year means the year that is designated as the plan year in the 
plan document of a group health plan, except that if the plan document 
does not designate a plan year or if there is no plan document, the 
plan year is--
    (1) The deductible or limit year used under the plan;
    (2) If the plan does not impose deductibles or limits on a yearly 
basis, then the plan year is the policy year;
    (3) If the plan does not impose deductibles or limits on a yearly 
basis, and either the plan is not insured or the

[[Page 78783]]

insurance policy is not renewed on an annual basis, then the plan year 
is the employer's taxable year; or
    (4) In any other case, the plan year is the calendar year.
    Preexisting condition exclusion has the meaning given the term in 
45 CFR 146.111(a)(1), with respect to group health plans and group 
health insurance coverage. With respect to individual market health 
insurance issuers or other entities providing coverage to federally 
eligible individuals pursuant to 45 CFR part 148, preexisting condition 
exclusion means a limitation or exclusion of benefits relating to a 
condition based on the fact that 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. A 
preexisting condition exclusion includes any exclusion applicable to an 
individual as a result of information that is obtained relating to an 
individual's health status before the individual's first day of 
coverage, such as a condition identified as a result of a pre-
enrollment questionnaire or physical examination given to the 
individual, or review of medical records relating to the pre-enrollment 
period.
    Public health plan has the meaning given the term in 45 CFR 
146.113(a)(1)(ix).
    Short-term, limited-duration insurance means health insurance 
coverage provided pursuant to a contract with an issuer that has an 
expiration date specified in the contract (taking into account any 
extensions that may be elected by the policyholder without the issuer's 
consent) that is less than 12 months after the original effective date 
of the contract.
    Significant break in coverage has the meaning given the term in 45 
CFR 146.113(b)(2)(iii).
    Small employer means, in connection with a group health plan with 
respect to a calendar year and a plan year, an employer who employed an 
average of at least 2 but not more than 50 employees on business days 
during the preceding calendar year and who employs at least 2 employees 
on the first day of the plan year, unless otherwise provided under 
State law.
    Small group market means the health insurance market under which 
individuals obtain health insurance coverage (directly or through any 
arrangement) on behalf of themselves (and their dependents) through a 
group health plan maintained by a small employer.
    Special enrollment means enrollment in a group health plan or group 
health insurance coverage under the rights described in 45 CFR 146.117.
    State means each of the several States, the District of Columbia, 
Puerto Rico, the Virgin Islands, Guam, American Samoa, and the Northern 
Mariana Islands.
    State health benefits risk pool has the meaning given the term in 
45 CFR Sec.  146.113(a)(1)(vii).
    Waiting period has the meaning given the term in 45 CFR 
146.111(a)(3)(iii).

PART 146--REQUIREMENTS FOR THE GROUP HEALTH INSURANCE MARKET

0
B. Part 146 is amended as set forth below:
0
1. The authority citation for Part 146 is revised to read as follows:

    Authority: Secs. 2701 through 2763, 2791, and 2792 of the Public 
Health Service Act, 42 U.S.C. 300gg through 300gg-63, 300gg-91, 
30gg-92 as amended by HIPAA (Public Law 104-191, 110 Stat. 1936), 
MHPA (Public Law 104-204, 110 Stat. 2944, as amended by Public Law 
107-116, 115 Stat. 2177), NMHPA (Public Law 104-204, 110 Stat. 
2935), WHCRA (Public Law 105-277, 112 Stat. 2681-436), and section 
103(c)(4) of HIPAA.


0
2. Revise Sec.  146.111 to read as follows:


Sec.  146.111  Limitations on preexisting condition exclusion period.

    (a) Preexisting condition exclusion--(1) Defined.--(i) A 
preexisting condition exclusion means a limitation or exclusion of 
benefits relating to a condition based on the fact that the condition 
was present before the effective date of coverage under a group health 
plan or group health insurance coverage, whether or not any medical 
advice, diagnosis, care, or treatment was recommended or received 
before that day. A preexisting condition exclusion includes any 
exclusion applicable to an individual as a result of information 
relating to an individual's health status before the individual's 
effective date of coverage under a group health plan or group health 
insurance coverage, such as a condition identified as a result of a 
pre-enrollment questionnaire or physical examination given to the 
individual, or review of medical records relating to the pre-enrollment 
period.
    (ii) Examples. The rules of this paragraph (a)(1) are illustrated 
by the following examples:

    Example 1. (i) Facts. A group health plan provides benefits 
solely through an insurance policy offered by Issuer S. At the 
expiration of the policy, the plan switches coverage to a policy 
offered by Issuer T. Issuer T's policy excludes benefits for any 
prosthesis if the body part was lost before the effective date of 
coverage under the policy.
    (ii) Conclusion. In this Example 1, the exclusion of benefits 
for any prosthesis if the body part was lost before the effective 
date of coverage is a preexisting condition exclusion because it 
operates to exclude benefits for a condition based on the fact that 
the condition was present before the effective date of coverage 
under the policy. (Therefore, the exclusion of benefits is required 
to comply with the limitations on preexisting condition exclusions 
in this section. For an example illustrating the application of 
these limitations to a succeeding insurance policy, see Example 3 of 
paragraph (a)(3)(iv) of this section.)
    Example 2. (i) Facts. A group health plan provides coverage for 
cosmetic surgery in cases of accidental injury, but only if the 
injury occurred while the individual was covered under the plan.
    (ii) Conclusion. In this Example 2, the plan provision excluding 
cosmetic surgery benefits for individuals injured before enrolling 
in the plan is a preexisting condition exclusion because it operates 
to exclude benefits relating to a condition based on the fact that 
the condition was present before the effective date of coverage. The 
plan provision, therefore, is subject to the limitations on 
preexisting condition exclusions in this section.
    Example 3. (i) Facts. A group health plan provides coverage for 
the treatment of diabetes, generally not subject to any lifetime 
dollar limit. However, if an individual was diagnosed with diabetes 
before the effective date of coverage under the plan, diabetes 
coverage is subject to a lifetime limit of $10,000.
    (ii) Conclusion. In this Example 3, the $10,000 lifetime limit 
is a preexisting condition exclusion because it limits benefits for 
a condition based on the fact that the condition was present before 
the effective date of coverage. The plan provision, therefore, is 
subject to the limitations on preexisting condition exclusions in 
this section.
    Example 4. (i) Facts. A group health plan provides coverage for 
the treatment of acne, subject to a lifetime limit of $2,000. The 
plan counts against this $2,000 lifetime limit acne treatment 
benefits provided under prior health coverage.
    (ii) Conclusion. In this Example 4, counting benefits for a 
specific condition provided under prior health coverage against a 
lifetime limit for that condition is a preexisting condition 
exclusion because it operates to limit benefits for a condition 
based on the fact that the condition was present before the 
effective date of coverage. The plan provision, therefore, is 
subject to the limitations on preexisting condition exclusions in 
this section.
    Example 5. (i) Facts. When an individual's coverage begins under 
a group health plan, the individual generally becomes eligible for 
all benefits. However, benefits for pregnancy are not available 
until the individual has been covered under the plan for 12 months.
    (ii) Conclusion. In this Example 5, the requirement to be 
covered under the plan for 12 months to be eligible for pregnancy 
benefits is a subterfuge for a preexisting condition exclusion 
because it is designed to

[[Page 78784]]

exclude benefits for a condition (pregnancy) that arose before the 
effective date of coverage. Because a plan is prohibited under 
paragraph (b)(5) of this section from imposing any preexisting 
condition exclusion on pregnancy, the plan provision is prohibited. 
However, if the plan provision included an exception for women who 
were pregnant before the effective date of coverage under the plan 
(so that the provision applied only to women who became pregnant on 
or after the effective date of coverage) the plan provision would 
not be a preexisting condition exclusion (and would not be 
prohibited by paragraph (b)(5) of this section).
    Example 6. (i) Facts. A group health plan provides coverage for 
medically necessary items and services, generally including 
treatment of heart conditions. However, the plan does not cover 
those same items and services when used for treatment of congenital 
heart conditions.
    (ii) Conclusion. In this Example 6, the exclusion of coverage 
for treatment of congenital heart conditions is a preexisting 
condition exclusion because it operates to exclude benefits relating 
to a condition based on the fact that the condition was present 
before the effective date of coverage. The plan provision, 
therefore, is subject to the limitations on preexisting condition 
exclusions in this section.
    Example 7. (i) Facts. A group health plan generally provides 
coverage for medically necessary items and services. However, the 
plan excludes coverage for the treatment of cleft palate.
    (ii) Conclusion. In this Example 7, the exclusion of coverage 
for treatment of cleft palate is not a preexisting condition 
exclusion because the exclusion applies regardless of when the 
condition arose relative to the effective date of coverage. The plan 
provision, therefore, is not subject to the limitations on 
preexisting condition exclusions in this section.
    Example 8. (i) Facts. A group health plan provides coverage for 
treatment of cleft palate, but only if the individual being treated 
has been continuously covered under the plan from the date of birth.
    (ii) Conclusion. In this Example 8, the exclusion of coverage 
for treatment of cleft palate for individuals who have not been 
covered under the plan from the date of birth operates to exclude 
benefits in relation to a condition based on the fact that the 
condition was present before the effective date of coverage. The 
plan provision, therefore, is subject to the limitations on 
preexisting condition exclusions in this section.

    (2) General rules. Subject to paragraph (b) of this section 
(prohibiting the imposition of a preexisting condition exclusion with 
respect to certain individuals and conditions), a group health plan, 
and a health insurance issuer offering group health insurance coverage, 
may impose, with respect to a participant or beneficiary, a preexisting 
condition exclusion only if the requirements of this paragraph (a)(2) 
are satisfied.
    (i) 6-month look-back rule. A preexisting condition exclusion must 
relate to a condition (whether physical or mental), regardless of the 
cause of the condition, for which medical advice, diagnosis, care, or 
treatment was recommended or received within the 6-month period (or 
such shorter period as applies under the plan) ending on the enrollment 
date.
    (A) For purposes of this paragraph (a)(2)(i), medical advice, 
diagnosis, care, or treatment is taken into account only if it is 
recommended by, 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 State law.
    (B) For purposes of this paragraph (a)(2)(i), the 6-month period 
ending on the enrollment date begins on the 6-month anniversary date 
preceding the enrollment date. For example, for an enrollment date of 
August 1, 1998, the 6-month period preceding the enrollment date is the 
period commencing on February 1, 1998 and continuing through July 31, 
1998. As another example, for an enrollment date of August 30, 1998, 
the 6-month period preceding the enrollment date is the period 
commencing on February 28, 1998 and continuing through August 29, 1998.
    (C) The rules of this paragraph (a)(2)(i) are illustrated by the 
following examples:
    Example 1. (i) Facts. Individual A is diagnosed with a medical 
condition 8 months before A's enrollment date in Employer R's group 
health plan. A's doctor recommends that A take a prescription drug 
for 3 months, and A follows the recommendation.
    (ii) Conclusion. In this Example 1, Employer R's plan may impose 
a preexisting condition exclusion with respect to A's condition 
because A received treatment during the 6-month period ending on A's 
enrollment date in Employer R's plan by taking the prescription 
medication during that period. However, if A did not take the 
prescription drug during the 6-month period, Employer R's plan would 
not be able to impose a preexisting condition exclusion with respect 
to that condition.
    Example 2. (i) Facts. Individual B is treated for a medical 
condition 7 months before the enrollment date in Employer S's group 
health plan. As part of such treatment, B's physician recommends 
that a follow-up examination be given 2 months later. Despite this 
recommendation, B does not receive a follow-up examination, and no 
other medical advice, diagnosis, care, or treatment for that 
condition is recommended to B or received by B during the 6-month 
period ending on B's enrollment date in Employer S's plan.
    (ii) Conclusion. In this Example 2, Employer S's plan may not 
impose a preexisting condition exclusion with respect to the 
condition for which B received treatment 7 months prior to the 
enrollment date.
    Example 3. (i) Facts. Same facts as Example 2, except that 
Employer S's plan learns of the condition and attaches a rider to 
B's certificate of coverage excluding coverage for the condition. 
Three months after enrollment, B's condition recurs, and Employer 
S's plan denies payment under the rider.
    (ii) Conclusion. In this Example 3, the rider is a preexisting 
condition exclusion and Employer S's plan may not impose a 
preexisting condition exclusion with respect to the condition for 
which B received treatment 7 months prior to the enrollment date. 
(In addition, such a rider would violate the provisions of Sec.  
146.121, even if B had received treatment for the condition within 
the 6-month period ending on the enrollment date.)
    Example 4. (i) Facts. Individual C has asthma and is treated for 
that condition several times during the 6-month period before C's 
enrollment date in Employer T's plan. Three months after the 
enrollment date, C begins coverage under Employer T's plan. Two 
months later, C is hospitalized for asthma.
    (ii) Conclusion. In this Example 4, Employer T's plan may impose 
a preexisting condition exclusion with respect to C's asthma because 
care relating to C's asthma was received during the 6-month period 
ending on C's enrollment date (which, under the rules of paragraph 
(a)(3)(i) of this section, is the first day of the waiting period).
    Example 5. (i) Facts. Individual D, who is subject to a 
preexisting condition exclusion imposed by Employer U's plan, has 
diabetes, as well as retinal degeneration, a foot condition, and 
poor circulation (all of which are conditions that may be directly 
attributed to diabetes). D receives treatment for these conditions 
during the 6-month period ending on D's enrollment date in Employer 
U's plan. After enrolling in the plan, D stumbles and breaks a leg.
    (ii) Conclusion. In this Example 5, the leg fracture is not a 
condition related to D's diabetes, retinal degeneration, foot 
condition, or poor circulation, even though they may have 
contributed to the accident. Therefore, benefits to treat the leg 
fracture cannot be subject to a preexisting condition exclusion. 
However, any additional medical services that may be needed because 
of D's preexisting diabetes, poor circulation, or retinal 
degeneration that would not be needed by another patient with a 
broken leg who does not have these conditions may be subject to the 
preexisting condition exclusion imposed under Employer U's plan.

    (ii) Maximum length of preexisting condition exclusion. A 
preexisting condition exclusion is not permitted to extend for more 
than 12 months (18 months in the case of a late enrollee) after the 
enrollment date. For example, for an enrollment date of August 1, 1998, 
the 12-month period after the enrollment date is the period commencing 
on August 1, 1998 and continuing through July 31, 1999; the

[[Page 78785]]

18-month period after the enrollment date is the period commencing on 
August 1, 1998 and continuing through January 31, 2000.
    (iii) Reducing a preexisting condition exclusion period by 
creditable coverage--(A) The period of any preexisting condition 
exclusion that would otherwise apply to an individual under a group 
health plan is reduced by the number of days of creditable coverage the 
individual has as of the enrollment date, as counted under Sec.  
146.113. Creditable coverage may be evidenced through a certificate of 
creditable coverage (required under Sec.  146.115(a)), or through other 
means in accordance with the rules of Sec.  146.115(c).
    (B) The rules of this paragraph (a)(2)(iii) are illustrated by the 
following example:

    Example. (i) Facts. Individual D works for Employer X and has 
been covered continuously under X's group health plan. D's spouse 
works for Employer Y. Y maintains a group health plan that imposes a 
12-month preexisting condition exclusion (reduced by creditable 
coverage) on all new enrollees. D enrolls in Y's plan, but also 
stays covered under X's plan. D presents Y's plan with evidence of 
creditable coverage under X's plan.
    (ii) Conclusion. In this Example, Y's plan must reduce the 
preexisting condition exclusion period that applies to D by the 
number of days of coverage that D had under X's plan as of D's 
enrollment date in Y's plan (even though D's coverage under X's plan 
was continuing as of that date).

    (iv) Other standards. See Sec.  146.121 for other standards in this 
Subpart A that may apply with respect to certain benefit limitations or 
restrictions under a group health plan. Other laws may also apply, such 
as the Uniformed Services Employment and Reemployment Rights Act 
(USERRA), which can affect the application of a preexisting condition 
exclusion to certain individuals who are reinstated in a group health 
plan following active military service.
    (3) Enrollment definitions--(i) Enrollment date means the first day 
of coverage (as described in paragraph (a)(3)(ii) of this section) or, 
if there is a waiting period, the first day of the waiting period. If 
an individual receiving benefits under a group health plan changes 
benefit packages, or if the plan changes group health insurance 
issuers, the individual's enrollment date does not change.
    (ii) First day of coverage means, in the case of an individual 
covered for benefits under a group health plan, the first day of 
coverage under the plan and, in the case of an individual covered by 
health insurance coverage in the individual market, the first day of 
coverage under the policy or contract.
    (iii) Waiting period means the period that must pass before 
coverage for an employee or dependent who is otherwise eligible to 
enroll under the terms of a group health plan can become effective. If 
an employee or dependent enrolls as a late enrollee or special 
enrollee, any period before such late or special enrollment is not a 
waiting period. If an individual seeks coverage in the individual 
market, a waiting period begins on the date the individual submits a 
substantially complete application for coverage and ends on--
    (A) If the application results in coverage, the date coverage 
begins;
    (B) If the application does not result in coverage, the date on 
which the application is denied by the issuer or the date on which the 
offer of coverage lapses.
    (iv) The rules of paragraphs (a)(3)(i), (ii), and (iii) of this 
section are illustrated by the following examples:

    Example 1. (i) Facts. Employer V's group health plan provides 
for coverage to begin on the first day of the first payroll period 
following the date an employee is hired and completes the applicable 
enrollment forms, or on any subsequent January 1 after completion of 
the applicable enrollment forms. Employer V's plan imposes a 
preexisting condition exclusion for 12 months (reduced by the 
individual's creditable coverage) following an individual's 
enrollment date. Employee E is hired by Employer V on October 13, 
1998 and on October 14, 1998 E completes and files all the forms 
necessary to enroll in the plan. E's coverage under the plan becomes 
effective on October 25, 1998 (which is the beginning of the first 
payroll period after E's date of hire).
    (ii) Conclusion. In this Example 1, E's enrollment date is 
October 13, 1998 (which is the first day of the waiting period for 
E's enrollment and is also E's date of hire). Accordingly, with 
respect to E, the permissible 6-month period in paragraph (a)(2)(i) 
is the period from April 13, 1998 through October 12, 1998, the 
maximum permissible period during which Employer V's plan can apply 
a preexisting condition exclusion under paragraph (a)(2)(ii) is the 
period from October 13, 1998 through October 12, 1999, and this 
period must be reduced under paragraph (a)(2)(iii) by E's days of 
creditable coverage as of October 13, 1998.
    Example 2. (i) Facts. A group health plan has two benefit 
package options, Option 1 and Option 2. Under each option a 12-month 
preexisting condition exclusion is imposed. Individual B is enrolled 
in Option 1 on the first day of employment with the employer 
maintaining the plan, remains enrolled in Option 1 for more than one 
year, and then decides to switch to Option 2 at open season.
    (ii) Conclusion. In this Example 2, B cannot be subject to any 
preexisting condition exclusion under Option 2 because any 
preexisting condition exclusion period would have to begin on B's 
enrollment date, which is B's first day of coverage, rather than the 
date that B enrolled in Option 2. Therefore, the preexisting 
condition exclusion period expired before B switched to Option 2.
    Example 3. (i) Facts. On May 13, 1997, Individual E is hired by 
an employer and enrolls in the employer's group health plan. The 
plan provides benefits solely through an insurance policy offered by 
Issuer S. On December 27, 1998, E's leg is injured in an accident 
and the leg is amputated. On January 1, 1999, the plan switches 
coverage to a policy offered by Issuer T. Issuer T's policy excludes 
benefits for any prosthesis if the body part was lost before the 
effective date of coverage under the policy.
    (ii) Conclusion. In this Example 3, E's enrollment date is May 
13, 1997, E's first day of coverage. Therefore, the permissible 6-
month look-back period for the preexisting condition exclusion 
imposed under Issuer T's policy begins on November 13, 1996 and ends 
on May 12, 1997. In addition, the 12-month maximum permissible 
preexisting condition exclusion period begins on May 13, 1997 and 
ends on May 12, 1998. Accordingly, because no medical advice, 
diagnosis, care, or treatment was recommended to or received by E 
for the leg during the 6-month look-back period (even though medical 
care was provided within the 6-month period preceding the effective 
date of E's coverage under Issuer T's policy), Issuer T may not 
impose any preexisting condition exclusion with respect to E. 
Moreover, even if E had received treatment during the 6-month look-
back period, Issuer T still would not be permitted to impose a 
preexisting condition exclusion because the 12-month maximum 
permissible preexisting condition exclusion period expired on May 
12, 1998 (before the effective date of E's coverage under Issuer T's 
policy).
    Example 4. (i) Facts. A group health plan limits eligibility for 
coverage to full-time employees of Employer Y. Coverage becomes 
effective on the first day of the month following the date the 
employee becomes eligible. Employee C begins working full-time for 
Employer Y on April 11. Prior to this date, C worked part-time for 
Y. C enrolls in the plan and coverage is effective May 1.
    (ii) Conclusion. In this Example 4, C's enrollment date is April 
11 and the period from April 11 through April 30 is a waiting 
period. The period while C was working part-time, and therefore not 
in an eligible class of employees, is not part of the waiting 
period.
    Example 5. (i) Facts. To be eligible for coverage under a 
multiemployer group health plan in the current calendar quarter, the 
plan requires an individual to have worked 250 hours in covered 
employment during the previous quarter. If the hours requirement is 
satisfied, coverage becomes effective on the first day of the 
current calendar quarter. Employee D begins work on January 28 and 
does not work 250 hours in covered employment during the first 
quarter (ending March 31). D works at least 250 hours in the second 
quarter (ending June 30) and is enrolled in the plan with coverage 
effective July 1 (the first day of the third quarter).

[[Page 78786]]

    (ii) Conclusion. In this Example 5, D's enrollment date is the 
first day of the quarter during which D satisfies the hours 
requirement, which is April 1. The period from April 1 through June 30 
is a waiting period.

    (v) Late enrollee means an individual whose enrollment in a plan is 
a late enrollment.
    (vi) (A) Late enrollment means enrollment of an individual under a 
group health plan other than--
    (1) On the earliest date on which coverage can become effective for 
the individual under the terms of the plan; or
    (2) Through special enrollment. (For rules relating to special 
enrollment, see Sec.  146.117.)
    (B) If an individual ceases to be eligible for coverage under the 
plan, and then subsequently becomes eligible for coverage under the 
plan, only the individual's most recent period of eligibility is taken 
into account in determining whether the individual is a late enrollee 
under the plan with respect to the most recent period of coverage. 
Similar rules apply if an individual again becomes eligible for 
coverage following a suspension of coverage that applied generally 
under the plan.
    (vii) Examples. The rules of paragraphs (a)(3)(v) and (vi) of this 
section are illustrated by the following examples:

    Example 1. (i) Facts. Employee F first becomes eligible to be 
covered by Employer W's group health plan on January 1, 1999 but 
elects not to enroll in the plan until a later annual open 
enrollment period, with coverage effective January 1, 2001. F has no 
special enrollment right at that time.
    (ii) Conclusion. In this Example 1, F is a late enrollee with 
respect to F's coverage that became effective under the plan on 
January 1, 2001.
    Example 2. (i) Facts. Same facts as Example 1, except that F 
terminates employment with Employer W on July 1, 1999 without having 
had any health insurance coverage under the plan. F is rehired by 
Employer W on January 1, 2000 and is eligible for and elects 
coverage under Employer W's plan effective on January 1, 2000.
    (ii) Conclusion. In this Example 2, F would not be a late 
enrollee with respect to F's coverage that became effective on 
January 1, 2000.

    (b) Exceptions pertaining to preexisting condition exclusions--(1) 
Newborns--(i) In general. Subject to paragraph (b)(3) of this section, 
a group health plan, and a health insurance issuer offering group 
health insurance coverage, may not impose any preexisting condition 
exclusion on a child who, within 30 days after birth, is covered under 
any creditable coverage. Accordingly, if a child is enrolled in a group 
health plan (or other creditable coverage) within 30 days after birth 
and subsequently enrolls in another group health plan without a 
significant break in coverage (as described in Sec.  
146.113(b)(2)(iii)), the other plan may not impose any preexisting 
condition exclusion on the child.
    (ii) Examples. The rules of this paragraph (b)(1) are illustrated 
by the following examples:

    Example 1. (i) Facts. Individual E, who has no prior creditable 
coverage, begins working for Employer W and has accumulated 210 days 
of creditable coverage under Employer W's group health plan on the 
date E gives birth to a child. Within 30 days after the birth, the 
child is enrolled in the plan. Ninety days after the birth, both E 
and the child terminate coverage under the plan. Both E and the 
child then experience a break in coverage of 45 days before E is 
hired by Employer X and the two are enrolled in Employer X's group 
health plan.
    (ii) Conclusion. In this Example 1, because E's child is 
enrolled in Employer W's plan within 30 days after birth, no 
preexisting condition exclusion may be imposed with respect to the 
child under Employer W's plan. Likewise, Employer X's plan may not 
impose any preexisting condition exclusion on E's child because the 
child was covered under creditable coverage within 30 days after 
birth and had no significant break in coverage before enrolling in 
Employer X's plan. On the other hand, because E had only 300 days of 
creditable coverage prior to E's enrollment date in Employer X's 
plan, Employer X's plan may impose a preexisting condition exclusion 
on E for up to 65 days (66 days if the 12-month period after E's 
enrollment date in X's plan includes February 29).
    Example 2. (i) Facts. Individual F is enrolled in a group health 
plan in which coverage is provided through a health insurance 
issuer. F gives birth. Under State law applicable to the health 
insurance issuer, health care expenses incurred for the child during 
the 30 days following birth are covered as part of F's coverage. 
Although F may obtain coverage for the child beyond 30 days by 
timely requesting special enrollment and paying an additional 
premium, the issuer is prohibited under State law from recouping the 
cost of any expenses incurred for the child within the 30-day period 
if the child is not later enrolled.
    (ii) Conclusion. In this Example 2, the child is covered under 
creditable coverage within 30 days after birth, regardless of 
whether the child enrolls as a special enrollee under the plan. 
Therefore, no preexisting condition exclusion may be imposed on the 
child unless the child has a significant break in coverage.

    (2) Adopted children. Subject to paragraph (b)(3) of this section, 
a group health plan, and a health insurance issuer offering group 
health insurance coverage, may not impose any preexisting condition 
exclusion on a child who is adopted or placed for adoption before 
attaining 18 years of age and who, within 30 days after the adoption or 
placement for adoption, is covered under any creditable coverage. 
Accordingly, if a child is enrolled in a group health plan (or other 
creditable coverage) within 30 days after adoption or placement for 
adoption and subsequently enrolls in another group health plan without 
a significant break in coverage (as described in Sec.  
146.113(b)(2)(iii)), the other plan may not impose any preexisting 
condition exclusion on the child. This rule does not apply to coverage 
before the date of such adoption or placement for adoption.
    (3) Significant break in coverage. Paragraphs (b)(1) and (2) of 
this section no longer apply to a child after a significant break in 
coverage. (See Sec.  146.113(b)(2)(iii) for rules relating to the 
determination of a significant break in coverage.)
    (4) Special enrollment. For special enrollment rules relating to 
new dependents, see Sec.  146.117(b).
    (5) Pregnancy. A group health plan, and a health insurance issuer 
offering group health insurance coverage, may not impose a preexisting 
condition exclusion relating to pregnancy.
    (6) Genetic information--(i) A group health plan, and a health 
insurance issuer offering group health insurance coverage, may not 
impose a preexisting condition exclusion relating to a condition based 
solely on genetic information. However, if an individual is diagnosed 
with a condition, even if the condition relates to genetic information, 
the plan may impose a preexisting condition exclusion with respect to 
the condition, subject to the other limitations of this section.
    (ii) The rules of this paragraph (b)(6) are illustrated by the 
following example:

    Example. (i) Facts. Individual A enrolls in a group health plan 
that imposes a 12-month maximum preexisting condition exclusion. 
Three months before A's enrollment, A's doctor told A that, based on 
genetic information, A has a predisposition towards breast cancer. A 
was not diagnosed with breast cancer at any time prior to A's 
enrollment date in the plan. Nine months after A's enrollment date 
in the plan, A is diagnosed with breast cancer.
    (ii) Conclusion. In this Example, the plan may not impose a 
preexisting condition exclusion with respect to A's breast cancer 
because, prior to A's enrollment date, A was not diagnosed with 
breast cancer.

    (c) General notice of preexisting condition exclusion. A group 
health plan imposing a preexisting condition exclusion, and a health 
insurance issuer offering group health insurance

[[Page 78787]]

coverage subject to a preexisting condition exclusion, must provide a 
written general notice of preexisting condition exclusion to 
participants under the plan and cannot impose a preexisting condition 
exclusion with respect to a participant or a dependent of the 
participant until such a notice is provided.
    (1) Manner and timing. A plan or issuer must provide the general 
notice of preexisting condition exclusion as part of any written 
application materials distributed by the plan or issuer for enrollment. 
If the plan or issuer does not distribute such materials, the notice 
must be provided by the earliest date following a request for 
enrollment that the plan or issuer, acting in a reasonable and prompt 
fashion, can provide the notice.
    (2) Content. The general notice of preexisting condition exclusion 
must notify participants of the following:
    (i) The existence and terms of any preexisting condition exclusion 
under the plan. This description includes the length of the plan's 
look-back period (which is not to exceed 6 months under paragraph 
(a)(2)(i) of this section); the maximum preexisting condition exclusion 
period under the plan (which cannot exceed 12 months (or 18-months for 
late enrollees) under paragraph (a)(2)(ii) of this section); and how 
the plan will reduce the maximum preexisting condition exclusion period 
by creditable coverage (described in paragraph (a)(2)(iii) of this 
section).
    (ii) A description of the rights of individuals to demonstrate 
creditable coverage, and any applicable waiting periods, through a 
certificate of creditable coverage (as required by Sec.  146.115(a)) or 
through other means (as described in Sec.  146.115(c)). This must 
include a description of the right of the individual to request a 
certificate from a prior plan or issuer, if necessary, and a statement 
that the current plan or issuer will assist in obtaining a certificate 
from any prior plan or issuer, if necessary.
    (iii) A person to contact (including an address or telephone 
number) for obtaining additional information or assistance regarding 
the preexisting condition exclusion.
    (3) Duplicate notices not required. If a notice satisfying the 
requirements of this paragraph (c) is provided to an individual, the 
obligation to provide a general notice of preexisting condition 
exclusion with respect to that individual is satisfied for both the 
plan and the issuer.
    (4) Example with sample language. The rules of this paragraph (c) 
are illustrated by the following example, which includes sample 
language that plans and issuers can use as a basis for preparing their 
own notices to satisfy the requirements of this paragraph (c):

    Example. (i) Facts. A group health plan makes coverage effective 
on the first day of the first calendar month after hire and on each 
January 1 following an open season. The plan imposes a 12-month 
maximum preexisting condition exclusion (18 months for late 
enrollees) and uses a 6-month look-back period. As part of the 
enrollment application materials, the plan provides the following 
statement:
    This plan imposes a preexisting condition exclusion. This means 
that if you have a medical condition before coming to our plan, you 
might have to wait a certain period of time before the plan will 
provide coverage for that condition. This exclusion applies only to 
conditions for which medical advice, diagnosis, care, or treatment 
was recommended or received within a six-month period. Generally, 
this six-month period ends the day before your coverage becomes 
effective. However, if you were in a waiting period for coverage, 
the six-month period ends on the day before the waiting period 
begins. The preexisting condition exclusion does not apply to 
pregnancy nor to a child who is enrolled in the plan within 30 days 
after birth, adoption, or placement for adoption.
    This exclusion may last up to 12 months (18 months if you are a 
late enrollee) from your first day of coverage, or, if you were in a 
waiting period, from the first day of your waiting period. However, 
you can reduce the length of this exclusion period by the number of 
days of your prior ``creditable coverage.'' Most prior health 
coverage is creditable coverage and can be used to reduce the 
preexisting condition exclusion if you have not experienced a break 
in coverage of at least 63 days. To reduce the 12-month (or 18-
month) exclusion period by your creditable coverage, you should give 
us a copy of any certificates of creditable coverage you have. If 
you do not have a certificate, but you do have prior health 
coverage, we will help you obtain one from your prior plan or 
issuer. There are also other ways that you can show you have 
creditable coverage. Please contact us if you need help 
demonstrating creditable coverage.
    All questions about the preexisting condition exclusion and 
creditable coverage should be directed to Individual B at Address M 
or Telephone Number N.
    (ii) Conclusion. In this Example, the plan satisfies the general 
notice requirement of this paragraph (c), and thus also satisfies 
this requirement for any issuer providing the coverage.

    (d) Determination of creditable coverage--(1) Determination within 
reasonable time. If a group health plan or health insurance issuer 
offering group health insurance coverage receives creditable coverage 
information under Sec.  146.115, the plan or issuer is required, within 
a reasonable time following receipt of the information, to make a 
determination regarding the amount of the individual's creditable 
coverage and the length of any exclusion that remains. Whether this 
determination is made within a reasonable time depends on the relevant 
facts and circumstances. Relevant facts and circumstances include 
whether a plan's application of a preexisting condition exclusion would 
prevent an individual from having access to urgent medical care.
    (2) No time limit on presenting evidence of creditable coverage. A 
plan or issuer may not impose any limit on the amount of time that an 
individual has to present a certificate or other evidence of creditable 
coverage.
    (3) Example. The rules of this paragraph (d) are illustrated by the 
following example:

    Example. (i) Facts. A group health plan imposes a preexisting 
condition exclusion period of 12 months. After receiving the general 
notice of preexisting condition exclusion, Individual H develops an 
urgent health condition before receiving a certificate of creditable 
coverage from H's prior group health plan. H attests to the period 
of prior coverage, presents corroborating documentation of the 
coverage period, and authorizes the plan to request a certificate on 
H's behalf in accordance with the rules of Sec.  146.115.
    (ii) Conclusion. In this Example, the plan must review the 
evidence presented by H and make a determination of creditable 
coverage within a reasonable time that is consistent with the 
urgency of H's health condition. (This determination may be modified 
as permitted under paragraph (f) of this section.)

    (e) Individual notice of period of preexisting condition exclusion. 
After an individual has presented evidence of creditable coverage and 
after the plan or issuer has made a determination of creditable 
coverage under paragraph (d) of this section, the plan or issuer must 
provide the individual a written notice of the length of preexisting 
condition exclusion that remains after offsetting for prior creditable 
coverage. This individual notice is not required to identify any 
medical conditions specific to the individual that could be subject to 
the exclusion. A plan or issuer is not required to provide this notice 
if the plan or issuer does not impose any preexisting condition 
exclusion on the individual or if the plan's preexisting condition 
exclusion is completely offset by the individual's prior creditable 
coverage.
    (1) Manner and timing. The individual notice must be provided by 
the earliest date following a determination that the plan or issuer, 
acting in a reasonable and prompt fashion, can provide the notice.
    (2) Content. A plan or issuer must disclose--

[[Page 78788]]

    (i) Its determination of any preexisting condition exclusion period 
that applies to the individual (including the last day on which the 
preexisting condition exclusion applies);
    (ii) The basis for such determination, including the source and 
substance of any information on which the plan or issuer relied;
    (iii) An explanation of the individual's right to submit additional 
evidence of creditable coverage; and
    (iv) A description of any applicable appeal procedures established 
by the plan or issuer.
    (3) Duplicate notices not required. If a notice satisfying the 
requirements of this paragraph (e) is provided to an individual, the 
obligation to provide this individual notice of preexisting condition 
exclusion with respect to that individual is satisfied for both the 
plan and the issuer.
    (4) Examples. The rules of this paragraph (e) are illustrated by 
the following examples:

    Example 1. (i) Facts. A group health plan imposes a preexisting 
condition exclusion period of 12 months. After receiving the general 
notice of preexisting condition exclusion, Individual G presents a 
certificate of creditable coverage indicating 240 days of creditable 
coverage. Within seven days of receipt of the certificate, the plan 
determines that G is subject to a preexisting condition exclusion of 
125 days, the last day of which is March 5. Five days later, the 
plan notifies G that, based on the certificate G submitted, G is 
subject to a preexisting condition exclusion period of 125 days, 
ending on March 5. The notice also explains the opportunity to 
submit additional evidence of creditable coverage and the plan's 
appeal procedures. The notice does not identify any of G's medical 
conditions that could be subject to the exclusion.
    (ii) Conclusion. In this Example 1, the plan satisfies the 
requirements of this paragraph (e).
    Example 2. (i) Facts. Same facts as in Example 1, except that 
the plan determines that G has 430 days of creditable coverage based 
on G's certificate indicating 430 days of creditable coverage under 
G's prior plan.
    (ii) Conclusion. In this Example 2, the plan is not required to 
notify G that G will not be subject to a preexisting condition 
exclusion.

    (f) Reconsideration. Nothing in this section prevents a plan or 
issuer from modifying an initial determination of creditable coverage 
if it determines that the individual did not have the claimed 
creditable coverage, provided that --
    (1) A notice of the new determination (consistent with the 
requirements of paragraph (e) of this section) is provided to the 
individual; and
    (2) Until the notice of the new determination is provided, the plan 
or issuer, for purposes of approving access to medical services (such 
as a pre-surgery authorization), acts in a manner consistent with the 
initial determination.

0
3. Revise Sec.  146.113 to read as follows:


Sec.  146.113  Rules relating to creditable coverage.

    (a) General rules--(1) Creditable coverage. For purposes of this 
section, except as provided in paragraph (a)(2) of this section, the 
term creditable coverage means coverage of an individual under any of 
the following:
    (i) A group health plan as defined in Sec.  146.145(a).
    (ii) Health insurance coverage as defined in Sec.  144.103 of this 
chapter (whether or not the entity offering the coverage is subject to 
the requirements of this part and 45 CFR part 148 and without regard to 
whether the coverage is offered in the group market, the individual 
market, or otherwise).
    (iii) Part A or B of Title XVIII of the Social Security Act 
(Medicare).
    (iv) Title XIX of the Social Security Act (Medicaid), other than 
coverage consisting solely of benefits under section 1928 of the Social 
Security Act (the program for distribution of pediatric vaccines).
    (v) Title 10 U.S.C. Chapter 55 (medical and dental care for members 
and certain former members of the uniformed services, and for their 
dependents; for purposes of Title 10 U.S.C. Chapter 55, uniformed 
services means the armed forces and the Commissioned Corps of the 
National Oceanic and Atmospheric Administration and of the Public 
Health Service).
    (vi) A medical care program of the Indian Health Service or of a 
tribal organization.
    (vii) A State health benefits risk pool. For purposes of this 
section, a State health benefits risk pool means--
    (A) An organization qualifying under section 501(c)(26) of the 
Internal Revenue Code;
    (B) A qualified high risk pool described in section 2744(c)(2) of 
the PHS Act; or
    (C) Any other arrangement sponsored by a State, the membership 
composition of which is specified by the State and which is established 
and maintained primarily to provide health coverage for individuals who 
are residents of such State and who, by reason of the existence or 
history of a medical condition--
    (1) Are unable to acquire medical care coverage for such condition 
through insurance or from an HMO, or
    (2) Are able to acquire such coverage only at a rate which is 
substantially in excess of the rate for such coverage through the 
membership organization.
    (viii) A health plan offered under Title 5 U.S.C. Chapter 89 (the 
Federal Employees Health Benefits Program).
    (ix) A public health plan. For purposes of this section, a public 
health plan means any plan established or maintained by a State, the 
U.S. government, a foreign country, or any political subdivision of a 
State, the U.S. government, or a foreign country that provides health 
coverage to individuals who are enrolled in the plan.
    (x) A health benefit plan under section 5(e) of the Peace Corps Act 
(22 U.S.C. 2504(e)).
    (xi) Title XXI of the Social Security Act (State Children's Health 
Insurance Program).
    (2) Excluded coverage. Creditable coverage does not include 
coverage of solely excepted benefits (described in Sec.  146.145).
    (3) Methods of counting creditable coverage. For purposes of 
reducing any preexisting condition exclusion period, as provided under 
Sec.  146.111(a)(2)(iii), the amount of an individual's creditable 
coverage generally is determined by using the standard method described 
in paragraph (b) of this section. A plan or issuer may use the 
alternative method under paragraph (c) of this section with respect to 
any or all of the categories of benefits described under paragraph 
(c)(3) of this section.
    (b) Standard method--(1) Specific benefits not considered. Under 
the standard method, the amount of creditable coverage is determined 
without regard to the specific benefits included in the coverage.
    (2) Counting creditable coverage--(i) Based on days. For purposes 
of reducing the preexisting condition exclusion period that applies to 
an individual, the amount of creditable coverage is determined by 
counting all the days on which the individual has one or more types of 
creditable coverage. Accordingly, if on a particular day an individual 
has creditable coverage from more than one source, all the creditable 
coverage on that day is counted as one day. Any days in a waiting 
period for coverage are not creditable coverage.
    (ii) Days not counted before significant break in coverage. Days of 
creditable coverage that occur before a significant break in coverage 
are not required to be counted.
    (iii) Significant break in coverage defined--A significant break in 
coverage means a period of 63 consecutive days during each of which an 
individual does not have any creditable coverage. (See also Sec.  
146.143(c)(2)(iii) regarding the applicability to issuers of State 
insurance laws that require a break of more than 63 days before an 
individual

[[Page 78789]]

has a significant break in coverage for purposes of State insurance 
law.)
    (iv) Periods that toll a significant break. Days in a waiting 
period and days in an affiliation period are not taken into account in 
determining whether a significant break in coverage has occurred. In 
addition, for an individual who elects COBRA continuation coverage 
during the second election period provided under the Trade Act of 2002, 
the days between the date the individual lost group health plan 
coverage and the first day of the second COBRA election period are not 
taken into account in determining whether a significant break in 
coverage has occurred.
    (v) Examples. The rules of this paragraph (b)(2) are illustrated by 
the following examples:

    Example 1. (i) Facts. Individual A has creditable coverage under 
Employer P's plan for 18 months before coverage ceases. A is 
provided a certificate of creditable coverage on A's last day of 
coverage. Sixty-four days after the last date of coverage under P's 
plan, A is hired by Employer Q and enrolls in Q's group health plan. 
Q's plan has a 12-month preexisting condition exclusion.
    (ii) Conclusion. In this Example 1, A has a break in coverage of 
63 days. Because A's break in coverage is a significant break in 
coverage, Q's plan may disregard A's prior coverage and A may be 
subject to a 12-month preexisting condition exclusion.
    Example 2. (i) Facts. Same facts as Example 1, except that A is 
hired by Q and enrolls in Q's plan on the 63rd day after the last 
date of coverage under P's plan.
    (ii) Conclusion. In this Example 2, A has a break in coverage of 
62 days. Because A's break in coverage is not a significant break in 
coverage, Q's plan must count A's prior creditable coverage for 
purposes of reducing the plan's preexisting condition exclusion 
period that applies to A.
    Example 3. (i) Facts. Same facts as Example 1, except that Q's 
plan provides benefits through an insurance policy that, as required 
by applicable State insurance laws, defines a significant break in 
coverage as 90 days.
    (ii) Conclusion. In this Example 3, under State law, the issuer 
that provides group health insurance coverage to Q's plan must count 
A's period of creditable coverage prior to the 63-day break. 
(However, if Q's plan was a self-insured plan, the coverage would 
not be subject to State law. Therefore, the health coverage would 
not be governed by the longer break rules and A's previous health 
coverage could be disregarded.)
    Example 4. --[Reserved]
    Example 5. (i) Facts. Individual C has creditable coverage under 
Employer S's plan for 200 days before coverage ceases. C is provided 
a certificate of creditable coverage on C's last day of coverage. C 
then does not have any creditable coverage for 51 days before being 
hired by Employer T. T's plan has a 3-month waiting period. C works 
for T for 2 months and then terminates employment. Eleven days after 
terminating employment with T, C begins working for Employer U. U's 
plan has no waiting period, but has a 6-month preexisting condition 
exclusion.
    (ii) Conclusion. In this Example 5, C does not have a 
significant break in coverage because, after disregarding the 
waiting period under T's plan, C had only a 62-day break in coverage 
(51 days plus 11 days). Accordingly, C has 200 days of creditable 
coverage, and U's plan may not apply its 6-month preexisting 
condition exclusion with respect to C.
    Example 6. --[Reserved]
    Example 7. (i) Facts. Individual E has creditable coverage under 
Employer X's plan. E is provided a certificate of creditable 
coverage on E's last day of coverage. On the 63rd day without 
coverage, E submits a substantially complete application for a 
health insurance policy in the individual market. E's application is 
accepted and coverage is made effective 10 days later.
    (ii) Conclusion. In this Example 7, because E applied for the 
policy before the end of the 63rd day, the period between the date 
of application and the first day of coverage is a waiting period and 
no significant break in coverage occurred even though the actual 
period without coverage was 73 days.
    Example 8. (i) Facts. Same facts as Example 7, except that E's 
application for a policy in the individual market is denied.
    (ii) Conclusion. In this Example 8, even though E did not obtain 
coverage following application, the period between the date of 
application and the date the coverage was denied is a waiting 
period. However, to avoid a significant break in coverage, no later 
than the day after the application for the policy is denied E would 
need to do one of the following: submit a substantially complete 
application for a different individual market policy; obtain 
coverage in the group market; or be in a waiting period for coverage 
in the group market.

    (vi) Other permissible counting methods--(A) Rule. Notwithstanding 
any other provisions of this paragraph (b)(2), for purposes of reducing 
a preexisting condition exclusion period (but not for purposes of 
issuing a certificate under Sec.  146.115), a group health plan, and a 
health insurance issuer offering group health insurance coverage, may 
determine the amount of creditable coverage in any other manner that is 
at least as favorable to the individual as the method set forth in this 
paragraph (b)(2), subject to the requirements of other applicable law.
    (B) Example. The rule of this paragraph (b)(2)(vi) is illustrated 
by the following example:

    Example. (i) Facts. Individual F has coverage under Group Health 
Plan Y from January 3, 1997 through March 25, 1997. F then becomes 
covered by Group Health Plan Z. F's enrollment date in Plan Z is May 
1, 1997. Plan Z has a 12-month preexisting condition exclusion.
    (ii) Conclusion. In this Example, Plan Z may determine, in 
accordance with the rules prescribed in paragraphs (b)(2)(i), (ii), 
and (iii) of this section, that F has 82 days of creditable coverage 
(29 days in January, 28 days in February, and 25 days in March). 
Thus, the preexisting condition exclusion will no longer apply to F 
on February 8, 1998 (82 days before the 12-month anniversary of F's 
enrollment (May 1)). For administrative convenience, however, Plan Z 
may consider that the preexisting condition exclusion will no longer 
apply to F on the first day of the month (February 1).

    (c) Alternative method--(1) Specific benefits considered. Under the 
alternative method, a group health plan, or a health insurance issuer 
offering group health insurance coverage, determines the amount of 
creditable coverage based on coverage within any category of benefits 
described in paragraph (c)(3) of this section and not based on coverage 
for any other benefits. The plan or issuer may use the alternative 
method for any or all of the categories. The plan or issuer may apply a 
different preexisting condition exclusion period with respect to each 
category (and may apply a different preexisting condition exclusion 
period for benefits that are not within any 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. An individual's creditable coverage for 
benefits that are not within any category for which the alternative 
method is being used is determined under the standard method of 
paragraph (b) of this section.
    (2) Uniform application. A plan or issuer using the alternative 
method is required to apply it uniformly to all participants and 
beneficiaries under the plan or health insurance coverage. The use of 
the alternative method is required to be set forth in the plan.
    (3) Categories of benefits. The alternative method for counting 
creditable coverage may be used for coverage for the following 
categories of benefits--
    (i) Mental health;
    (ii) Substance abuse treatment;
    (iii) Prescription drugs;
    (iv) Dental care; or
    (v) Vision care.
    (4) Plan notice. If the alternative method is used, the plan is 
required to--
    (i) State prominently that the plan is using the alternative method 
of counting creditable coverage in disclosure statements concerning the 
plan, and state this to each enrollee at the time of enrollment under 
the plan; and
    (ii) Include in these statements a description of the effect of 
using the

[[Page 78790]]

alternative method, including an identification of the categories used.
    (5) Issuer notice. With respect to health insurance coverage 
offered by an issuer in the small or large group market, if the 
insurance coverage uses the alternative method, the issuer states 
prominently in any disclosure statement concerning the coverage, that 
the issuer is using the alternative method, and includes in such 
statements a description of the effect of using the alternative method. 
This applies separately to each type of coverage offered by the health 
insurance issuer.
    (6) Disclosure of information on previous benefits. See Sec.  
146.115(b) for special rules concerning disclosure of coverage to a 
plan, or issuer, using the alternative method of counting creditable 
coverage under this paragraph (c).
    (7) Counting creditable coverage--(i) In general. Under the 
alternative method, the group health plan or issuer counts creditable 
coverage within a category if any level of benefits is provided within 
the category. Coverage under a reimbursement account or arrangement, 
such as a flexible spending arrangement (as defined in section 
106(c)(2) of the Internal Revenue Code), does not constitute coverage 
within any category.
    (ii) Special rules. In counting an individual's creditable coverage 
under the alternative method, the group health plan, or issuer, first 
determines the amount of the individual's creditable coverage that may 
be counted under paragraph (b) of this section, up to a total of 365 
days of the most recent creditable coverage (546 days for a late 
enrollee). The period over which this creditable coverage is determined 
is referred to as the determination period. Then, for the category 
specified under the alternative method, the plan or issuer counts 
within the category all days of coverage that occurred during the 
determination period (whether or not a significant break in coverage 
for that category occurs), and reduces the individual's preexisting 
condition exclusion period for that category by that number of days. 
The plan or issuer may determine the amount of creditable coverage in 
any other reasonable manner, uniformly applied, that is at least as 
favorable to the individual.
    (iii) Example. The rules of this paragraph (c)(7) are illustrated 
by the following example:

    Example. (i) Facts. Individual D enrolls in Employer V's plan on 
January 1, 2001. Coverage under the plan includes prescription drug 
benefits. On April 1, 2001, the plan ceases providing prescription 
drug benefits. D's employment with Employer V ends on January 1, 
2002, after D was covered under Employer V's group health plan for 
365 days. D enrolls in Employer Y's plan on February 1, 2002 (D's 
enrollment date). Employer Y's plan uses the alternative method of 
counting creditable coverage and imposes a 12-month preexisting 
condition exclusion on prescription drug benefits.
    (ii) Conclusion. In this Example, Employer Y's plan may impose a 
275-day preexisting condition exclusion with respect to D for 
prescription drug benefits because D had 90 days of creditable 
coverage relating to prescription drug benefits within D's 
determination period.


0
4. Revise Sec.  146.115 to read as follows:


Sec.  146.115  Certification and disclosure of previous coverage.

    (a) Certificate of creditable coverage--(1) Entities required to 
provide certificate--(i) In General. A group health plan, and each 
health insurance issuer offering group health insurance coverage under 
a group health plan, is required to furnish certificates of creditable 
coverage in accordance with this paragraph (a).
    (ii) Duplicate certificates not required. An entity required to 
provide a certificate under this paragraph (a) with respect to an 
individual satisfies that requirement if another party provides the 
certificate, but only to the extent that the certificate contains the 
information required in paragraph (a)(3) of this section. For example, 
in the case of a group health plan funded through an insurance policy, 
the issuer satisfies the certification requirement with respect to an 
individual if the plan actually provides a certificate that includes 
all the information required under paragraph (a)(3) of this section 
with respect to the individual.
    (iii) Special rule for group health plans. To the extent coverage 
under a plan consists of group health insurance coverage, the plan 
satisfies the certification requirements under this paragraph (a) if 
any issuer offering the coverage is required to provide the 
certificates pursuant to an agreement between the plan and the issuer. 
For example, if there is an agreement between an issuer and a plan 
sponsor under which the issuer agrees to provide certificates for 
individuals covered under the plan, and the issuer fails to provide a 
certificate to an individual when the plan would have been required to 
provide one under this paragraph (a), then the issuer, but not the 
plan, violates the certification requirements of this paragraph (a).
    (iv) Special rules for issuers--(A)(1) Responsibility of issuer for 
coverage period. An issuer is not required to provide information 
regarding coverage provided to an individual by another party.
    (2) Example. The rule of this paragraph (a)(1)(iv)(A) is 
illustrated by the following example:

    Example. (i) Facts. A plan offers coverage with an HMO option 
from one issuer and an indemnity option from a different issuer. The 
HMO has not entered into an agreement with the plan to provide 
certificates as permitted under paragraph (a)(1)(iii) of this 
section.
    (ii) Conclusion. In this Example, if an employee switches from 
the indemnity option to the HMO option and later ceases to be 
covered under the plan, any certificate provided by the HMO is not 
required to provide information regarding the employee's coverage 
under the indemnity option.

    (B)(1) Cessation of issuer coverage prior to cessation of coverage 
under a plan. If an individual's coverage under an issuer's policy or 
contract ceases before the individual's coverage under the plan ceases, 
the issuer is required to provide sufficient information to the plan 
(or to another party designated by the plan) to enable the plan (or 
other party), after cessation of the individual's coverage under the 
plan, to provide a certificate that reflects the period of coverage 
under the policy or contract. By providing that information to the 
plan, the issuer satisfies its obligation to provide an automatic 
certificate for that period of creditable coverage with respect to the 
individual under paragraph (a)(2)(ii) of this section. The issuer, 
however, must still provide a certificate upon request as required 
under paragraph (a)(2)(iii) of this section. In addition, the issuer is 
required to cooperate with the plan in responding to any request made 
under paragraph (b)(2) of this section (relating to the alternative 
method of counting creditable coverage). Moreover, if the individual's 
coverage under the plan ceases at the time the individual's coverage 
under the issuer's policy or contract ceases, the issuer must still 
provide an automatic certificate under paragraph (a)(2)(ii) of this 
section. If an individual's coverage under an issuer's policy or 
contract ceases on the effective date for changing enrollment options 
under the plan, the issuer may presume (absent information to the 
contrary) that the individual's coverage under the plan continues. 
Therefore, the issuer is required to provide information to the plan in 
accordance with this paragraph (a)(1)(iv)(B)(1) (and is not required to 
provide an automatic certificate under paragraph (a)(2)(ii) of this 
section).
    (2) Example. The rule of this paragraph (a)(1)(iv)(B) is 
illustrated by the following example:


[[Page 78791]]


    Example. (i) Facts. A group health plan provides coverage under 
an HMO option and an indemnity option through different issuers, and 
only allows employees to switch on each January 1. Neither the HMO 
nor the indemnity issuer has entered into an agreement with the plan 
to provide certificates as permitted under paragraph (a)(1)(iii) of 
this section.
    (ii) Conclusion. In this Example, if an employee switches from 
the indemnity option to the HMO option on January 1, the indemnity 
issuer must provide the plan (or a person designated by the plan) 
with appropriate information with respect to the individual's 
coverage with the indemnity issuer. However, if the individual's 
coverage with the indemnity issuer ceases at a date other than 
January 1, the issuer is instead required to provide the individual 
with an automatic certificate.

    (2) Individuals for whom certificate must be provided; timing of 
issuance--(i) Individuals. A certificate must be provided, without 
charge, for participants or dependents who are or were covered under a 
group health plan upon the occurrence of any of the events described in 
paragraph (a)(2)(ii) or (iii) of this section.
    (ii) Issuance of automatic certificates. The certificates described 
in this paragraph (a)(2)(ii) are referred to as automatic certificates.
    (A) Qualified beneficiaries upon a qualifying event. In the case of 
an individual who is a qualified beneficiary (as defined in section 
607(3) of ERISA, section 4980(B)(g)(1) of the Internal Revenue Code, or 
section 2208 of the PHS Act) entitled to elect COBRA continuation 
coverage, an automatic certificate is required to be provided at the 
time the individual would lose coverage under the plan in the absence 
of COBRA continuation coverage or alternative coverage elected instead 
of COBRA continuation coverage. A plan or issuer satisfies this 
requirement if it provides the automatic certificate no later than the 
time a notice is required to be furnished for a qualifying event under 
section 606 of ERISA, section 4980(B)(f)(6) of the Internal Revenue 
Code, and section 2206 of the PHS Act (relating to notices required 
under COBRA).
    (B) Other individuals when coverage ceases. In the case of an 
individual who is not a qualified beneficiary entitled to elect COBRA 
continuation coverage, an automatic certificate must be provided at the 
time the individual ceases to be covered under the plan. A plan or 
issuer satisfies the requirement to provide an automatic certificate at 
the time the individual ceases to be covered if it provides the 
automatic certificate within a reasonable time after coverage ceases 
(or after the expiration of any grace period for nonpayment of 
premiums).
    (1) The cessation of temporary continuation coverage (TCC) under 
Title 5 U.S.C. Chapter 89 (the Federal Employees Health Benefit 
Program) is a cessation of coverage upon which an automatic certificate 
must be provided.
    (2) In the case of an individual who is entitled to elect to 
continue coverage under a State program similar to COBRA and who 
receives the automatic certificate not later than the time a notice is 
required to be furnished under the State program, the certificate is 
deemed to be provided within a reasonable time after coverage ceases 
under the plan.
    (3) If an individual's coverage ceases due to the operation of a 
lifetime limit on all benefits, coverage is considered to cease for 
purposes of this paragraph (a)(2)(ii)(B) on the earliest date that a 
claim is denied due to the operation of the lifetime limit.
    (C) Qualified beneficiaries when COBRA ceases. In the case of an 
individual who is a qualified beneficiary and has elected COBRA 
continuation coverage (or whose coverage has continued after the 
individual became entitled to elect COBRA continuation coverage), an 
automatic certificate is to be provided at the time the individual' s 
coverage under the plan ceases. A plan, or issuer, satisfies this 
requirement if it provides the automatic certificate within a 
reasonable time after coverage ceases (or after the expiration of any 
grace period for nonpayment of premiums). An automatic certificate is 
required to be provided to such an individual regardless of whether the 
individual has previously received an automatic certificate under 
paragraph (a)(2)(ii)(A) of this section.
    (iii) Any individual upon request. A certificate must be provided 
in response to a request made by, or on behalf of, an individual at any 
time while the individual is covered under a plan and up to 24 months 
after coverage ceases. Thus, for example, a plan in which an individual 
enrolls may, if authorized by the individual, request a certificate of 
the individual's creditable coverage on behalf of the individual from a 
plan in which the individual was formerly enrolled. After the request 
is received, a plan or issuer is required to provide the certificate by 
the earliest date that the plan or issuer, acting in a reasonable and 
prompt fashion, can provide the certificate. A certificate is required 
to be provided under this paragraph (a)(2)(iii) even if the individual 
has previously received a certificate under this paragraph (a)(2)(iii) 
or an automatic certificate under paragraph (a)(2)(ii) of this section.
    (iv) Examples. The rules of this paragraph (a)(2) are illustrated 
by the following examples:

    Example 1. (i) Facts. Individual A terminates employment with 
Employer Q. A is a qualified beneficiary entitled to elect COBRA 
continuation coverage under Employer Q's group health plan. A notice 
of the rights provided under COBRA is typically furnished to 
qualified beneficiaries under the plan within 10 days after a 
covered employee terminates employment.
    (ii) Conclusion. In this Example 1, the automatic certificate 
may be provided at the same time that A is provided the COBRA 
notice.
    Example 2. (i) Facts. Same facts as Example 1, except that the 
automatic certificate for A is not completed by the time the COBRA 
notice is furnished to A.
    (ii) Conclusion. In this Example 2, the automatic certificate 
may be provided after the COBRA notice but must be provided within 
the period permitted by law for the delivery of notices under COBRA.
    Example 3. (i) Facts. Employer R maintains an insured group 
health plan. R has never had 20 employees and thus R's plan is not 
subject to the COBRA continuation provisions. However, R is in a 
State that has a State program similar to COBRA. B terminates 
employment with R and loses coverage under R's plan.
    (ii) Conclusion. In this Example 3, the automatic certificate 
must be provided not later than the time a notice is required to be 
furnished under the State program.
    Example 4. (i) Facts. Individual C terminates employment with 
Employer S and receives both a notice of C's rights under COBRA and 
an automatic certificate. C elects COBRA continuation coverage under 
Employer S's group health plan. After four months of COBRA 
continuation coverage and the expiration of a 30-day grace period, 
S's group health plan determines that C's COBRA continuation 
coverage has ceased due to a failure to make a timely payment for 
continuation coverage.
    (ii) Conclusion. In this Example 4, the plan must provide an 
updated automatic certificate to C within a reasonable time after 
the end of the grace period.
    Example 5. (i) Facts. Individual D is currently covered under 
the group health plan of Employer T. D requests a certificate, as 
permitted under paragraph (a)(2)(iii) of this section. Under the 
procedure for T's plan, certificates are mailed (by first class 
mail) 7 business days following receipt of the request. This date 
reflects the earliest date that the plan, acting in a reasonable and 
prompt fashion, can provide certificates.
    (ii) Conclusion. In this Example 5, the plan's procedure 
satisfies paragraph (a)(2)(iii) of this section.

    (3) Form and content of certificate--(i) Written certificate--(A) 
In General. Except as provided in paragraph (a)(3)(i)(B) of this 
section, the certificate must be provided in writing (or any

[[Page 78792]]

other medium approved by the Secretary).
    (B) Other permissible forms. No written certificate is required to 
be provided under this paragraph (a) with respect to a particular event 
described in paragraph (a)(2)(ii) or (iii) of this section, if--
    (1) An individual who is entitled to receive the certificate 
requests that the certificate be sent to another plan or issuer instead 
of to the individual;
    (2) The plan or issuer that would otherwise receive the certificate 
agrees to accept the information in this paragraph (a)(3) through means 
other than a written certificate (such as by telephone); and
    (3) The receiving plan or issuer receives the information from the 
sending plan or issuer through such means within the time required 
under paragraph (a)(2) of this section.
    (ii) Required information. The certificate must include the 
following--
    (A) The date the certificate is issued;
    (B) The name of the group health plan that provided the coverage 
described in the certificate;
    (C) The name of the participant or dependent with respect to whom 
the certificate applies, and any other information necessary for the 
plan providing the coverage specified in the certificate to identify 
the individual, such as the individual's identification number under 
the plan and the name of the participant if the certificate is for (or 
includes) a dependent;
    (D) The name, address, and telephone number of the plan 
administrator or issuer required to provide the certificate;
    (E) The telephone number to call for further information regarding 
the certificate (if different from paragraph (a)(3)(ii)(D) of this 
section);
    (F) Either--
    (1) A statement that an individual has at least 18 months (for this 
purpose, 546 days is deemed to be 18 months) of creditable coverage, 
disregarding days of creditable coverage before a significant break in 
coverage, or
    (2) The date any waiting period (and affiliation period, if 
applicable) began and the date creditable coverage began;
    (G) The date creditable coverage ended, unless the certificate 
indicates that creditable coverage is continuing as of the date of the 
certificate; and
    (H) An educational statement regarding HIPAA, which explains:
    (1) The restrictions on the ability of a plan or issuer to impose a 
preexisting condition exclusion (including an individual's ability to 
reduce a preexisting condition exclusion by creditable coverage);
    (2) Special enrollment rights;
    (3) The prohibitions against discrimination based on any health 
factor;
    (4) The right to individual health coverage;
    (5) The fact that State law may require issuers to provide 
additional protections to individuals in that State; and
    (6) Where to get more information.
    (iii) Periods of coverage under the certificate. If an automatic 
certificate is provided pursuant to paragraph (a)(2)(ii) of this 
section, the period that must be included on the certificate is the 
last period of continuous coverage ending on the date coverage ceased. 
If an individual requests a certificate pursuant to paragraph 
(a)(2)(iii) of this section, the certificate provided must include each 
period of continuous coverage ending within the 24-month period ending 
on the date of the request (or continuing on the date of the request). 
A separate certificate may be provided for each such period of 
continuous coverage.
    (iv) Combining information for families. A certificate may provide 
information with respect to both a participant and the participant's 
dependents if the information is identical for each individual. If the 
information is not identical, certificates may be provided on one form 
if the form provides all the required information for each individual 
and separately states the information that is not identical.
    (v) Model certificate. The requirements of paragraph (a)(3)(ii) of 
this section are satisfied if the plan or issuer provides a certificate 
in accordance with a model certificate authorized by the Secretary.
    (vi) Excepted benefits; categories of benefits. No certificate is 
required to be furnished with respect to excepted benefits described in 
Sec.  146.145(c). In addition, the information in the certificate 
regarding coverage is not required to specify categories of benefits 
described in Sec.  146.113(c) (relating to the alternative method of 
counting creditable coverage). However, if excepted benefits are 
provided concurrently with other creditable coverage (so that the 
coverage does not consist solely of excepted benefits), information 
concerning the benefits may be required to be disclosed under paragraph 
(b) of this section.
    (4) Procedures--(i) Method of delivery. The certificate is required 
to be provided to each individual described in paragraph (a)(2) of this 
section or an entity requesting the certificate on behalf of the 
individual. The certificate may be provided by first-class mail. If the 
certificate or certificates are provided to the participant and the 
participant's spouse at the participant's last known address, then the 
requirements of this paragraph (a)(4) are satisfied with respect to all 
individuals residing at that address. If a dependent's last known 
address is different than the participant's last known address, a 
separate certificate is required to be provided to the dependent at the 
dependent's last known address. If separate certificates are being 
provided by mail to individuals who reside at the same address, 
separate mailings of each certificate are not required.
    (ii) Procedure for requesting certificates. A plan or issuer must 
establish a written procedure for individuals to request and receive 
certificates pursuant to paragraph (a)(2)(iii) of this section. The 
written procedure must include all contact information necessary to 
request a certificate (such as name and phone number or address).
    (iii) Designated recipients. If an automatic certificate is 
required to be provided under paragraph (a)(2)(ii) of this section, and 
the individual entitled to receive the certificate designates another 
individual or entity to receive the certificate, the plan or issuer 
responsible for providing the certificate is permitted to provide the 
certificate to the designated individual or entity. If a certificate is 
required to be provided upon request under paragraph (a)(2)(iii) of 
this section and the individual entitled to receive the certificate 
designates another individual or entity to receive the certificate, the 
plan or issuer responsible for providing the certificate is required to 
provide the certificate to the designated individual or entity.
    (5) Special rules concerning dependent coverage--(i)(A) Reasonable 
efforts. A plan or issuer is required to use reasonable efforts to 
determine any information needed for a certificate relating to 
dependent coverage. In any case in which an automatic certificate is 
required to be furnished with respect to a dependent under paragraph 
(a)(2)(ii) of this section, no individual certificate is required to be 
furnished until the plan or issuer knows (or making reasonable efforts 
should know) of the dependent's cessation of coverage under the plan.
    (B) Example. The rules of this paragraph (a)(5)(i) are illustrated 
by the following example:

    Example. (i) Facts. A group health plan covers employees and 
their dependents. The plan annually requests all employees to 
provide updated information regarding dependents, including the 
specific date on which an employee has a new dependent or

[[Page 78793]]

on which a person ceases to be a dependent of the employee.
    (ii) Conclusion. In this Example, the plan has satisfied the 
standard in this paragraph (a)(5)(i) of this section that it make 
reasonable efforts to determine the cessation of dependents' 
coverage and the related dependent coverage information.

    (ii) Special rules for demonstrating coverage. If a certificate 
furnished by a plan or issuer does not provide the name of any 
dependent covered by the certificate, the procedures described in 
paragraph (c)(5) of this section may be used to demonstrate dependent 
status. In addition, these procedures may be used to demonstrate that a 
child was covered under any creditable coverage within 30 days after 
birth, adoption, or placement for adoption. See also Sec.  146.111(b), 
under which such a child cannot be subject to a preexisting condition 
exclusion.
    (6) Special certification rules--(i) Issuers. Issuers of group and 
individual health insurance are required to provide certificates of any 
creditable coverage they provide in the group or individual health 
insurance market, even if the coverage is provided in connection with 
an entity or program that is not itself required to provide a 
certificate because it is not subject to the group market provisions of 
this part, part 7 of subtitle B of title I of ERISA, or chapter 100 of 
subtitle K of the Internal Revenue Code. This would include coverage 
provided in connection with any of the following:
    (A) Creditable coverage described in sections 2701(c)(1)(G), (I) 
and (J) of the PHS Act (coverage under a State health benefits risk 
pool, a public health plan, and a health benefit plan under section 
5(e) of the Peace Corps Act).
    (B) Coverage subject to section 2721(b)(1)(B) of the PHS Act 
(requiring certificates by issuers offering health insurance coverage 
in connection with any group health plan, including a church plan or a 
governmental plan (including the Federal Employees Health Benefits 
Program).
    (C) Coverage subject to section 2743 of the PHS Act applicable to 
health insurance issuers in the individual market. (However, this 
section does not require a certificate to be provided with respect to 
short-term limited duration insurance, which is excluded from the 
definition of ``individual health insurance coverage'' in 45 CFR 
144.103 that is not provided in connection with a group health plan, as 
described in paragraph (a)(6)(i)(B) of this section.)
    (ii) Other entities. For special rules requiring that certain other 
entities, not subject to this part, provide certificates consistent 
with the rules of this section, see section 2791(a)(3) of the PHS Act 
applicable to entities described in sections 2701(c)(1)(C), (D), (E), 
and (F) of the PHS Act (relating to Medicare, Medicaid, TRICARE, and 
Indian Health Service), section 2721(b)(1)(A) of the PHS Act applicable 
to non-Federal governmental plans generally, section 2721(b)(2)(C)(ii) 
of the PHS Act applicable to non-Federal governmental plans that elect 
to be excluded from the requirements of subparts 1 through 3 of part A 
of title XXVII of the PHS Act, and section 9805(a) of the Internal 
Revenue Code applicable to group health plans, which includes church 
plans (as defined in section 414(e) of the Internal Revenue Code).
    (b) Disclosure of coverage to a plan or issuer using the 
alternative method of counting creditable coverage--(1) In general. 
After an individual provides a certificate of creditable coverage to a 
plan or issuer using the alternative method under Sec.  146.113(c), 
that plan or issuer (requesting entity) must request that the entity 
that issued the certificate (prior entity) disclose the information set 
forth in paragraph (b)(2) of this section. The prior entity is required 
to disclose this information promptly.
    (2) Information to be disclosed. The prior entity is required to 
identify to the requesting entity the categories of benefits with 
respect to which the requesting entity is using the alternative method 
of counting creditable coverage, and the requesting entity may identify 
specific information that the requesting entity reasonably needs in 
order to determine the individual's creditable coverage with respect to 
any such category.
    (3) Charge for providing information. The prior entity may charge 
the requesting entity for the reasonable cost of disclosing such 
information.
    (c) Ability of an individual to demonstrate creditable coverage and 
waiting period information--(1) Purpose. The rules in this paragraph 
(c) implement section 2701(c)(4) of the PHS Act, which permits 
individuals to demonstrate the duration of creditable coverage through 
means other than certificates, and section 2701(e)(3) of the PHS Act, 
which requires the Secretary to establish rules designed to prevent an 
individual's subsequent coverage under a group health plan or health 
insurance coverage from being adversely affected by an entity's failure 
to provide a certificate with respect to that individual.
    (2) In general. If the accuracy of a certificate is contested or a 
certificate is unavailable when needed by an individual, the individual 
has the right to demonstrate creditable coverage (and waiting or 
affiliation periods) through the presentation of documents or other 
means. For example, the individual may make such a demonstration when--
    (i) An entity has failed to provide a certificate within the 
required time;
    (ii) The individual has creditable coverage provided by an entity 
that is not required to provide a certificate of the coverage pursuant 
to paragraph (a) of this section;
    (iii) The individual has an urgent medical condition that 
necessitates a determination before the individual can deliver a 
certificate to the plan; or
    (iv) The individual lost a certificate that the individual had 
previously received and is unable to obtain another certificate.
    (3) Evidence of creditable coverage--(i) Consideration of 
evidence--(A) A plan or issuer is required to take into account all 
information that it obtains or that is presented on behalf of an 
individual to make a determination, based on the relevant facts and 
circumstances, whether an individual has creditable coverage. A plan or 
issuer shall treat the individual as having furnished a certificate 
under paragraph (a) of this section if--
    (1) The individual attests to the period of creditable coverage;
    (2) The individual also presents relevant corroborating evidence of 
some creditable coverage during the period; and
    (3) The individual cooperates with the plan's or issuer's efforts 
to verify the individual's coverage.
    (B) For purposes of this paragraph (c)(3)(i), cooperation includes 
providing (upon the plan's or issuer's request) a written authorization 
for the plan or issuer to request a certificate on behalf of the 
individual, and cooperating in efforts to determine the validity of the 
corroborating evidence and the dates of creditable coverage. While a 
plan or issuer may refuse to credit coverage where the individual fails 
to cooperate with the plan's or issuer's efforts to verify coverage, 
the plan or issuer may not consider an individual's inability to obtain 
a certificate to be evidence of the absence of creditable coverage.
    (ii) Documents. Documents that corroborate creditable coverage (and 
waiting or affiliation periods) include explanations of benefits (EOBs) 
or other correspondence from a plan or issuer indicating coverage, pay 
stubs showing a payroll deduction for health coverage, a health 
insurance identification card, a certificate of coverage under a group 
health policy, records from medical care providers indicating health 
coverage, third party statements verifying periods of coverage, and any 
other relevant

[[Page 78794]]

documents that evidence periods of health coverage.
    (iii) Other evidence. Creditable coverage (and waiting or 
affiliation periods) may also be corroborated through means other than 
documentation, such as by a telephone call from the plan or provider to 
a third party verifying creditable coverage.
    (iv) Example. The rules of this paragraph (c)(3) are illustrated by 
the following example:

    Example.  (i) Facts. Individual F terminates employment with 
Employer W and, a month later, is hired by Employer X. X's group 
health plan imposes a preexisting condition exclusion of 12 months 
on new enrollees under the plan and uses the standard method of 
determining creditable coverage. F fails to receive a certificate of 
prior coverage from the self-insured group health plan maintained by 
F's prior employer, W, and requests a certificate. However, F (and 
X's plan, on F's behalf and with F's cooperation) is unable to 
obtain a certificate from W's plan. F attests that, to the best of 
F's knowledge, F had at least 12 months of continuous coverage under 
W's plan, and that the coverage ended no earlier than F's 
termination of employment from W. In addition, F presents evidence 
of coverage, such as an explanation of benefits for a claim that was 
made during the relevant period.
    (ii) Conclusion. In this Example, based solely on these facts, F 
has demonstrated creditable coverage for the 12 months of coverage 
under W's plan in the same manner as if F had presented a written 
certificate of creditable coverage.

    (4) Demonstrating categories of creditable coverage. Procedures 
similar to those described in this paragraph (c) apply in order to 
determine the duration of an individual's creditable coverage with 
respect to any category under paragraph (b) of this section (relating 
to determining creditable coverage under the alternative method).
    (5) Demonstrating dependent status. If, in the course of providing 
evidence (including a certificate) of creditable coverage, an 
individual is required to demonstrate dependent status, the group 
health plan or issuer is required to treat the individual as having 
furnished a certificate showing the dependent status if the individual 
attests to such dependency and the period of such status and the 
individual cooperates with the plan's or issuer's efforts to verify the 
dependent status.

0
5. Revise Sec.  146.117 to read as follows:


Sec.  146.117  Special enrollment periods.

    (a) Special enrollment for certain individuals who lose coverage--
(1) In General. A group health plan, and a health insurance issuer 
offering health insurance coverage in connection with a group health 
plan, is required to permit current employees and dependents (as 
defined in Sec.  144.103 of this chapter) who are described in 
paragraph (a)(2) of this section to enroll for coverage under the terms 
of the plan if the conditions in paragraph (a)(3) of this section are 
satisfied. The special enrollment rights under this paragraph (a) apply 
without regard to the dates on which an individual would otherwise be 
able to enroll under the plan.
    (2) Individuals eligible for special enrollment--(i) When employee 
loses coverage. A current employee and any dependents (including the 
employee's spouse) each are eligible for special enrollment in any 
benefit package under the plan (subject to plan eligibility rules 
conditioning dependent enrollment on enrollment of the employee) if--
    (A) The employee and the dependents are otherwise eligible to 
enroll in the benefit package;
    (B) When coverage under the plan was previously offered, the 
employee had coverage under any group health plan or health insurance 
coverage; and
    (C) The employee satisfies the conditions of paragraph (a)(3)(i), 
(ii), or (iii) of this section and, if applicable, paragraph (a)(3)(iv) 
of this section.
    (ii) When dependent loses coverage--(A) A dependent of a current 
employee (including the employee's spouse) and the employee each are 
eligible for special enrollment in any benefit package under the plan 
(subject to plan eligibility rules conditioning dependent enrollment on 
enrollment of the employee) if--
    (1) The dependent and the employee are otherwise eligible to enroll 
in the benefit package;
    (2) When coverage under the plan was previously offered, the 
dependent had coverage under any group health plan or health insurance 
coverage; and
    (3) The dependent satisfies the conditions of paragraph (a)(3)(i), 
(ii), or (iii) of this section and, if applicable, paragraph (a)(3)(iv) 
of this section.
    (B) However, the plan or issuer is not required to enroll any other 
dependent unless that dependent satisfies the criteria of this 
paragraph (a)(2)(ii), or the employee satisfies the criteria of 
paragraph (a)(2)(i) of this section.
    (iii) Examples. The rules of this paragraph (a)(2) are illustrated 
by the following examples:

    Example 1.  (i) Facts. Individual A works for Employer X. A, A's 
spouse, and A's dependent children are eligible but not enrolled for 
coverage under X's group health plan. A's spouse works for Employer 
Y and at the time coverage was offered under X's plan, A was 
enrolled in coverage under Y's plan. Then, A loses eligibility for 
coverage under Y's plan.
    (ii) Conclusion. In this Example 1, because A satisfies the 
conditions for special enrollment under paragraph (a)(2)(i) of this 
section, A, A's spouse, and A's dependent children are eligible for 
special enrollment under X's plan.
    Example 2.  (i) Facts. Individual A and A's spouse are eligible 
but not enrolled for coverage under Group Health Plan P maintained 
by A's employer. When A was first presented with an opportunity to 
enroll A and A's spouse, they did not have other coverage. Later, A 
and A's spouse enroll in Group Health Plan Q maintained by the 
employer of A's spouse. During a subsequent open enrollment period 
in P, A and A's spouse did not enroll because of their coverage 
under Q. They then lose eligibility for coverage under Q.
    (ii) Conclusion. In this Example 2, because A and A's spouse 
were covered under Q when they did not enroll in P during open 
enrollment, they satisfy the conditions for special enrollment under 
paragraphs (a)(2)(i) and (ii) of this section. Consequently, A and 
A's spouse are eligible for special enrollment under P.
    Example 3.  (i) Facts. Individual B works for Employer X. B and 
B's spouse are eligible but not enrolled for coverage under X's 
group health plan. B's spouse works for Employer Y and at the time 
coverage was offered under X's plan, B's spouse was enrolled in 
self-only coverage under Y's group health plan. Then, B's spouse 
loses eligibility for coverage under Y's plan.
    (ii) Conclusion. In this Example 3, because B's spouse satisfies 
the conditions for special enrollment under paragraph (a)(2)(ii) of 
this section, both B and B's spouse are eligible for special 
enrollment under X's plan.
    Example 4.  (i) Facts. Individual A works for Employer X. X 
maintains a group health plan with two benefit packages--an HMO 
option and an indemnity option. Self-only and family coverage are 
available under both options. A enrolls for self-only coverage in 
the HMO option. A's spouse works for Employer Y and was enrolled for 
self-only coverage under Y's plan at the time coverage was offered 
under X's plan. Then, A's spouse loses coverage under Y's plan. A 
requests special enrollment for A and A's spouse under the plan's 
indemnity option.
    (ii) Conclusion. In this Example 4, because A's spouse satisfies 
the conditions for special enrollment under paragraph (a)(2)(ii) of 
this section, both A and A's spouse can enroll in either benefit 
package under X's plan. Therefore, if A requests enrollment in 
accordance with the requirements of this section, the plan must 
allow A and A's spouse to enroll in the indemnity option.

    (3) Conditions for special enrollment--(i) Loss of eligibility for 
coverage. In the case of an employee or dependent who has coverage that 
is not COBRA continuation coverage, the conditions of this paragraph 
(a)(3)(i) are satisfied at the time the coverage is terminated as a 
result of loss of eligibility (regardless of whether the individual is 
eligible for or elects COBRA continuation coverage). Loss of 
eligibility under this paragraph (a)(3)(i) does not include a loss due 
to the failure

[[Page 78795]]

of the employee or dependent to pay premiums on a timely basis or 
termination of coverage for cause (such as making a fraudulent claim or 
an intentional misrepresentation of a material fact in connection with 
the plan). Loss of eligibility for coverage under this paragraph 
(a)(3)(i) includes (but is not limited to)--
    (A) Loss of eligibility for coverage as a result of legal 
separation, divorce, cessation of dependent status (such as attaining 
the maximum age to be eligible as a dependent child under the plan), 
death of an employee, termination of employment, reduction in the 
number of hours of employment, and any loss of eligibility for coverage 
after a period that is measured by reference to any of the foregoing;
    (B) In the case of coverage offered through an HMO, or other 
arrangement, in the individual market that does not provide benefits to 
individuals who no longer reside, live, or work in a service area, loss 
of coverage because an individual no longer resides, lives, or works in 
the service area (whether or not within the choice of the individual);
    (C) In the case of coverage offered through an HMO, or other 
arrangement, in the group market that does not provide benefits to 
individuals who no longer reside, live, or work in a service area, loss 
of coverage because an individual no longer resides, lives, or works in 
the service area (whether or not within the choice of the individual), 
and no other benefit package is available to the individual;
    (D) A situation in which an individual incurs a claim that would 
meet or exceed a lifetime limit on all benefits; and
    (E) A situation in which a plan no longer offers any benefits to 
the class of similarly situated individuals (as described in Sec.  
146.121(d)) that includes the individual.
    (ii) Termination of employer contributions. In the case of an 
employee or dependent who has coverage that is not COBRA continuation 
coverage, the conditions of this paragraph (a)(3)(ii) are satisfied at 
the time employer contributions towards the employee's or dependent's 
coverage terminate. Employer contributions include contributions by any 
current or former employer that was contributing to coverage for the 
employee or dependent.
    (iii) Exhaustion of COBRA continuation coverage. In the case of an 
employee or dependent who has coverage that is COBRA continuation 
coverage, the conditions of this paragraph (a)(3)(iii) are satisfied at 
the time the COBRA continuation coverage is exhausted. For purposes of 
this paragraph (a)(3)(iii), an individual who satisfies the conditions 
for special enrollment of paragraph (a)(3)(i) of this section, does not 
enroll, and instead elects and exhausts COBRA continuation coverage 
satisfies the conditions of this paragraph (a)(3)(iii). (Exhaustion of 
COBRA continuation coverage is defined in Sec.  144.103 of this 
chapter.)
    (iv) Written statement. A plan may require an employee declining 
coverage (for the employee or any dependent of the employee) to state 
in writing whether the coverage is being declined due to other health 
coverage only if, at or before the time the employee declines coverage, 
the employee is provided with notice of the requirement to provide the 
statement (and the consequences of the employee's failure to provide 
the statement). If a plan requires such a statement, and an employee 
does not provide it, the plan is not required to provide special 
enrollment to the employee or any dependent of the employee under this 
paragraph (a)(3). A plan must treat an employee as having satisfied the 
plan requirement permitted under this paragraph (a)(3)(iv) if the 
employee provides a written statement that coverage was being declined 
because the employee or dependent had other coverage; a plan cannot 
require anything more for the employee to satisfy the plan's 
requirement to provide a written statement. (For example, the plan 
cannot require that the statement be notarized.)
    (v) The rules of this paragraph (a)(3) are illustrated by the 
following examples:

    Example 1.  (i) Facts. Individual D enrolls in a group health 
plan maintained by Employer Y. At the time D enrolls, Y pays 70 
percent of the cost of employee coverage and D pays the rest. Y 
announces that beginning January 1, Y will no longer make employer 
contributions towards the coverage. Employees may maintain coverage, 
however, if they pay the total cost of the coverage.
    (ii) Conclusion. In this Example 1, employer contributions 
towards D's coverage ceased on January 1 and the conditions of 
paragraph (a)(3)(ii) of this section are satisfied on this date 
(regardless of whether D elects to pay the total cost and continue 
coverage under Y's plan).
    Example 2.  (i) Facts. A group health plan provides coverage 
through two options--Option 1 and Option 2. Employees can enroll in 
either option only within 30 days of hire or on January 1 of each 
year. Employee A is eligible for both options and enrolls in Option 
1. Effective July 1 the plan terminates coverage under Option 1 and 
the plan does not create an immediate open enrollment opportunity 
into Option 2.
    (ii) Conclusion. In this Example 2, A has experienced a loss of 
eligibility for coverage that satisfies paragraph (a)(3)(i) of this 
section, and has satisfied the other conditions for special 
enrollment under paragraph (a)(2)(i) of this section. Therefore, if 
A satisfies the other conditions of this paragraph (a), the plan 
must permit A to enroll in Option 2 as a special enrollee. (A may 
also be eligible to enroll in another group health plan, such as a 
plan maintained by the employer of A's spouse, as a special 
enrollee.) The outcome would be the same if Option 1 was terminated 
by an issuer and the plan made no other coverage available to A.
    Example 3.  (i) Facts. Individual C is covered under a group 
health plan maintained by Employer X. While covered under X's plan, 
C was eligible for but did not enroll in a plan maintained by 
Employer Z, the employer of C's spouse. C terminates employment with 
X and loses eligibility for coverage under X's plan. C has a special 
enrollment right to enroll in Z's plan, but C instead elects COBRA 
continuation coverage under X's plan. C exhausts COBRA continuation 
coverage under X's plan and requests special enrollment in Z's plan.
    (ii) Conclusion. In this Example 3, C has satisfied the 
conditions for special enrollment under paragraph (a)(3)(iii) of 
this section, and has satisfied the other conditions for special 
enrollment under paragraph (a)(2)(i) of this section. The special 
enrollment right that C had into Z's plan immediately after the loss 
of eligibility for coverage under X's plan was an offer of coverage 
under Z's plan. When C later exhausts COBRA coverage under X's plan, 
C has a second special enrollment right in Z's plan.

    (4) Applying for special enrollment and effective date of 
coverage--(i) A plan or issuer must allow an employee a period of at 
least 30 days after an event described in paragraph (a)(3) of this 
section (other than an event described in paragraph (a)(3)(i)(D)) to 
request enrollment (for the employee or the employee's dependent). In 
the case of an event described in paragraph (a)(3)(i)(D) of this 
section (relating to loss of eligibility for coverage due to the 
operation of a lifetime limit on all benefits), a plan or issuer must 
allow an employee a period of at least 30 days after a claim is denied 
due to the operation of a lifetime limit on all benefits.
    (ii) Coverage must begin no later than the first day of the first 
calendar month beginning after the date the plan or issuer receives the 
request for special enrollment.
    (b) Special enrollment with respect to certain dependent 
beneficiaries--(1) General. A group health plan, and a health insurance 
issuer offering health insurance coverage in connection with a group 
health plan, that makes coverage available with respect to dependents 
is required to permit individuals described in paragraph (b)(2) of this 
section to be enrolled for coverage in a benefit

[[Page 78796]]

package under the terms of the plan. Paragraph (b)(3) of this section 
describes the required special enrollment period and the date by which 
coverage must begin. The special enrollment rights under this paragraph 
(b) apply without regard to the dates on which an individual would 
otherwise be able to enroll under the plan.
    (2) Individuals eligible for special enrollment. An individual is 
described in this paragraph (b)(2) if the individual is otherwise 
eligible for coverage in a benefit package under the plan and if the 
individual is described in paragraph (b)(2)(i), (ii), (iii), (iv), (v), 
or (vi) of this section.
    (i) Current employee only. A current employee is described in this 
paragraph (b)(2)(i) if a person becomes a dependent of the individual 
through marriage, birth, adoption, or placement for adoption.
    (ii) Spouse of a participant only. An individual is described in 
this paragraph (b)(2)(ii) if either--
    (A) The individual becomes the spouse of a participant; or
    (B) The individual is a spouse of a participant and a child becomes 
a dependent of the participant through birth, adoption, or placement 
for adoption.
    (iii) Current employee and spouse. A current employee and an 
individual who is or becomes a spouse of such an employee, are 
described in this paragraph (b)(2)(iii) if either--
    (A) The employee and the spouse become married; or
    (B) The employee and spouse are married and a child becomes a 
dependent of the employee through birth, adoption, or placement for 
adoption.
    (iv) Dependent of a participant only. An individual is described in 
this paragraph (b)(2)(iv) if the individual is a dependent (as defined 
in Sec.  144.103 of this chapter) of a participant and the individual 
has become a dependent of the participant through marriage, birth, 
adoption, or placement for adoption.
    (v) Current employee and a new dependent. A current employee and an 
individual who is a dependent of the employee, are described in this 
paragraph (b)(2)(v) if the individual becomes a dependent of the 
employee through marriage, birth, adoption, or placement for adoption.
    (vi) Current employee, spouse, and a new dependent. A current 
employee, the employee's spouse, and the employee's dependent are 
described in this paragraph (b)(2)(vi) if the dependent becomes a 
dependent of the employee through marriage, birth, adoption, or 
placement for adoption.
    (3) Applying for special enrollment and effective date of 
coverage--(i) Request. A plan or issuer must allow an individual a 
period of at least 30 days after the date of the marriage, birth, 
adoption, or placement for adoption (or, if dependent coverage is not 
generally made available at the time of the marriage, birth, adoption, 
or placement for adoption, a period of at least 30 days after the date 
the plan makes dependent coverage generally available) to request 
enrollment (for the individual or the individual's dependent).
    (ii) Reasonable procedures for special enrollment. [Reserved]
    (iii) Date coverage must begin--(A) Marriage. In the case of 
marriage, coverage must begin no later than the first day of the first 
calendar month beginning after the date the plan or issuer receives the 
request for special enrollment.
    (B) Birth, adoption, or placement for adoption. Coverage must begin 
in the case of a dependent's birth on the date of birth and in the case 
of a dependent's adoption or placement for adoption no later than the 
date of such adoption or placement for adoption (or, if dependent 
coverage is not made generally available at the time of the birth, 
adoption, or placement for adoption, the date the plan makes dependent 
coverage available).
    (4) Examples. The rules of this paragraph (b) are illustrated by 
the following examples:

    Example 1.  (i) Facts. An employer maintains a group health plan 
that offers all employees employee-only coverage, employee-plus-
spouse coverage, or family coverage. Under the terms of the plan, 
any employee may elect to enroll when first hired (with coverage 
beginning on the date of hire) or during an annual open enrollment 
period held each December (with coverage beginning the following 
January 1). Employee A is hired on September 3. A is married to B, 
and they have no children. On March 15 in the following year a child 
C is born to A and B. Before that date, A and B have not been 
enrolled in the plan.
    (ii) Conclusion. In this Example 1, the conditions for special 
enrollment of an employee with a spouse and new dependent under 
paragraph (b)(2)(vi) of this section are satisfied. If A satisfies 
the conditions of paragraph (b)(3) of this section for requesting 
enrollment timely, the plan will satisfy this paragraph (b) if it 
allows A to enroll either with employee-only coverage, with 
employee-plus-spouse coverage (for A and B), or with family coverage 
(for A, B, and C). The plan must allow whatever coverage is chosen 
to begin on March 15, the date of C's birth.
    Example 2.  (i) Facts. Individual D works for Employer X. X 
maintains a group health plan with two benefit packages--an HMO 
option and an indemnity option. Self-only and family coverage are 
available under both options. D enrolls for self-only coverage in 
the HMO option. Then, a child, E, is placed for adoption with D. 
Within 30 days of the placement of E for adoption, D requests 
enrollment for D and E under the plan's indemnity option.
    (ii) Conclusion. In this Example 2, D and E satisfy the 
conditions for special enrollment under paragraphs (b)(2)(v) and 
(b)(3) of this section. Therefore, the plan must allow D and E to 
enroll in the indemnity coverage, effective as of the date of the 
placement for adoption.

    (c) Notice of special enrollment. At or before the time an employee 
is initially offered the opportunity to enroll in a group health plan, 
the plan must furnish the employee with a notice of special enrollment 
that complies with the requirements of this paragraph (c).
    (1) Description of special enrollment rights. The notice of special 
enrollment must include a description of special enrollment rights. The 
following model language may be used to satisfy this requirement:

    If you are declining enrollment for yourself or your dependents 
(including your spouse) because of other health insurance or group 
health plan coverage, you may be able to enroll yourself and your 
dependents in this plan if you or your dependents lose eligibility 
for that other coverage (or if the employer stops contributing 
towards your or your dependents' other coverage). However, you must 
request enrollment within [insert ``30 days'' or any longer period 
that applies under the plan] after your or your dependents' other 
coverage ends (or after the employer stops contributing toward the 
other coverage).
    In addition, if you have a new dependent as a result of 
marriage, birth, adoption, or placement for adoption, you may be 
able to enroll yourself and your dependents. However, you must 
request enrollment within [insert ``30 days'' or any longer period 
that applies under the plan] after the marriage, birth, adoption, or 
placement for adoption.
    To request special enrollment or obtain more information, 
contact [insert the name, title, telephone number, and any 
additional contact information of the appropriate plan 
representative].

    (2) Additional information that may be required. The notice of 
special enrollment must also include, if applicable, the notice 
described in paragraph (a)(3)(iv) of this section (the notice required 
to be furnished to an individual declining coverage if the plan 
requires the reason for declining coverage to be in writing).
    (d) Treatment of special enrollees--(1) If an individual requests 
enrollment while the individual is entitled to special enrollment under 
either paragraph (a) or (b) of this section, the individual is a 
special enrollee, even if the request for enrollment coincides with a 
late enrollment opportunity under the plan. Therefore, the

[[Page 78797]]

individual cannot be treated as a late enrollee.
    (2) Special enrollees must be offered all the benefit packages 
available to similarly situated individuals who enroll when first 
eligible. For this purpose, any difference in benefits or cost-sharing 
requirements for different individuals constitutes a different benefit 
package. In addition, a special enrollee cannot be required to pay more 
for coverage than a similarly situated individual who enrolls in the 
same coverage when first eligible. The length of any preexisting 
condition exclusion that may be applied to a special enrollee cannot 
exceed the length of any preexisting condition exclusion that is 
applied to similarly situated individuals who enroll when first 
eligible. For rules prohibiting the application of a preexisting 
condition exclusion to certain newborns, adopted children, and children 
placed for adoption, see Sec.  146.111(b).
    (3) The rules of this section are illustrated by the following 
example:

    Example.  (i) Facts. Employer Y maintains a group health plan 
that has an enrollment period for late enrollees every November 1 
through November 30 with coverage effective the following January 1. 
On October 18, Individual B loses coverage under another group 
health plan and satisfies the requirements of paragraphs (a)(2), 
(3), and (4) of this section. B submits a completed application for 
coverage on November 2.
    (ii) Conclusion. In this Example, B is a special enrollee. 
Therefore, even though B's request for enrollment coincides with an 
open enrollment period, B's coverage is required to be made 
effective no later than December 1 (rather than the plan's January 1 
effective date for late enrollees).

0
6. Revise Sec.  146.119 to read as follows:


Sec.  146.119  HMO affiliation period as an alternative to a 
preexisting condition exclusion.

    (a) In general. A group health plan offering health insurance 
coverage through an HMO, or an HMO that offers health insurance 
coverage in connection with a group health plan, may impose an 
affiliation period only if each of the following requirements is 
satisfied--
    (1) No preexisting condition exclusion is imposed with respect to 
any coverage offered by the HMO in connection with the particular group 
health plan.
    (2) No premium is charged to a participant or beneficiary for the 
affiliation period.
    (3) The affiliation period for the HMO coverage is imposed 
consistent with the requirements of Sec.  146.121 (prohibiting 
discrimination based on a health factor).
    (4) The affiliation period does not exceed 2 months (or 3 months in 
the case of a late enrollee).
    (5) The affiliation period begins on the enrollment date, or in the 
case of a late enrollee, the affiliation period begins on the day that 
would be the first day of coverage but for the affiliation period.
    (6) The affiliation period for enrollment in the HMO under a plan 
runs concurrently with any waiting period.
    (b) Examples. The rules of paragraph (a) of this section are 
illustrated by the following examples:

    Example 1.  (i) Facts. An employer sponsors a group health plan. 
Benefits under the plan are provided through an HMO, which imposes a 
two-month affiliation period. In order to be eligible under the 
plan, employees must have worked for the employer for six months. 
Individual A begins working for the employer on February 1.
    (ii) Conclusion. In this Example 1, Individual A's enrollment 
date is February 1 (see Sec.  146.111(a)(2)), and both the waiting 
period and the affiliation period begin on this date and run 
concurrently. Therefore, the affiliation period ends on March 31, 
the waiting period ends on July 31, and A is eligible to have 
coverage begin on August 1.
    Example 2. (i) Facts. A group health plan has two benefit 
package options, a fee-for-service option and an HMO option. The HMO 
imposes a 1-month affiliation period. Individual B is enrolled in 
the fee-for-service option for more than one month and then decides 
to switch to the HMO option at open season.
    (ii) Conclusion. In this Example 2, the HMO may not impose the 
affiliation period with respect to B because any affiliation period 
would have to begin on B's enrollment date in the plan rather than 
the date that B enrolled in the HMO option. Therefore, the 
affiliation period would have expired before B switched to the HMO 
option.
    Example 3. (i) Facts. An employer sponsors a group health plan 
that provides benefits through an HMO. The plan imposes a two-month 
affiliation period with respect to salaried employees, but it does 
not impose an affiliation period with respect to hourly employees.
    (ii) Conclusion. In this Example 3, the plan may impose the 
affiliation period with respect to salaried employees without 
imposing any affiliation period with respect to hourly employees 
(unless, under the circumstances, treating salaried and hourly 
employees differently does not comply with the requirements of Sec.  
146.121).

    (c) Alternatives to affiliation period. An HMO may use alternative 
methods in lieu of an affiliation period to address adverse selection, 
as approved by the State insurance commissioner or other official 
designated to regulate HMOs. However, an arrangement that is in the 
nature of a preexisting condition exclusion cannot be an alternative to 
an affiliation period. Nothing in this part requires a State to receive 
proposals for or approve alternatives to affiliation periods.

0
7. Add and reserve Sec.  146.120 to read as follows:


Sec.  146.120  Interaction with the Family and Medical Leave Act 
[Reserved]

0
8. Revise Sec.  146.125 to read as follows:


Sec.  146.125  Applicability dates.

    Sections 146.111 through 146.119, Sec.  146.143, and Sec.  146.145 
are applicable for plan years beginning on or after July 1, 2005. Until 
the applicability date for this regulation, plans and issuers are 
required to continue to comply with the corresponding sections of 45 
CFR parts 144 and 146, contained in the 45 CFR, parts 1 to 199, edition 
revised as of October 1, 2004.

0
9. Revise Sec.  146.143 to read as follows:


Sec.  146.143  Preemption; State flexibility; construction.

    (a) Continued applicability of State law with respect to health 
insurance issuers. Subject to paragraph (b) of this section and except 
as provided in paragraph (c) of this section, part A of title XXVII of 
the PHS Act is not to be construed to supersede any provision of State 
law which establishes, implements, or continues in effect any standard 
or requirement solely relating to health insurance issuers in 
connection with group health insurance coverage except to the extent 
that such standard or requirement prevents the application of a 
requirement of this part.
    (b) Continued preemption with respect to group health plans. 
Nothing in part A of title XXVII of the PHS Act affects or modifies the 
provisions of section 514 of the Act with respect to group health 
plans.
    (c) Special rules--(1) In general. Subject to paragraph (c)(2) of 
this section, the provisions of part A of title XXVII of the PHS Act 
relating to health insurance coverage offered by a health insurance 
issuer supersede any provision of State law which establishes, 
implements, or continues in effect a standard or requirement applicable 
to imposition of a preexisting condition exclusion specifically 
governed by section 2701 of the PHS Act which differs from the 
standards or requirements specified in section 2701 of the PHS Act.
    (2) Exceptions. Only in relation to health insurance coverage 
offered by a health insurance issuer, the provisions of this part do 
not supersede any provision of State law to the extent that such 
provision--
    (i) Shortens the period of time from the ``6-month period'' 
described in section 2701(a)(1) of the PHS Act and

[[Page 78798]]

Sec.  146.111(a)(1)(i) (for purposes of identifying a preexisting 
condition);
    (ii) Shortens the period of time from the ``12 months'' and ``18 
months'' described in section 2701(a)(2) of the PHS Act and Sec.  
146.111(a)(1)(ii) (for purposes of applying a preexisting condition 
exclusion period);
    (iii) Provides for a greater number of days than the ``63-day 
period'' described in sections 2701(c)(2)(A) and (d)(4)(A) of the PHS 
Act and Sec. Sec.  146.111(a)(1)(iii) and 146.113 (for purposes of 
applying the break in coverage rules);
    (iv) Provides for a greater number of days than the ``30-day 
period'' described in sections 2701(b)(2) and (d)(1) of the PHS Act and 
Sec.  146.111(b) (for purposes of the enrollment period and preexisting 
condition exclusion periods for certain newborns and children that are 
adopted or placed for adoption);
    (v) Prohibits the imposition of any preexisting condition exclusion 
in cases not described in section 2701(d) of the PHS Act or expands the 
exceptions described therein;
    (vi) Requires special enrollment periods in addition to those 
required under section 2701(f) of the PHS Act; or
    (vii) Reduces the maximum period permitted in an affiliation period 
under section 2701(g)(1)(B) of the PHS Act.
    (d) Definitions--(1) State law. For purposes of this section the 
term State law includes all laws, decisions, rules, regulations, or 
other State action having the effect of law, of any State. A law of the 
United States applicable only to the District of Columbia is treated as 
a State law rather than a law of the United States.
    (2) State. For purposes of this section the term State includes a 
State (as defined in Sec.  144.103), any political subdivisions of a 
State, or any agency or instrumentality of either.

0
10. Revise Sec.  146.145 to read as follows:


Sec.  146.145  Special rules relating to group health plans.

    (a) Group health plan--(1) Definition. A group health plan means an 
employee welfare benefit plan to the extent that the plan provides 
medical care (including items and services paid for as medical care) to 
employees (including both current and former employees) or their 
dependents (as defined under the terms of the plan) directly or through 
insurance, reimbursement, or otherwise.
    (2) Determination of number of plans. [Reserved]
    (b) General exception for certain small group health plans. The 
requirements of this part, other than Sec.  146.130, do not apply to 
any group health plan (and group health insurance coverage) for any 
plan year if, on the first day of the plan year, the plan has fewer 
than two participants who are current employees.
    (c) Excepted benefits--(1) In general. The requirements of subparts 
B and C of this part do not apply to any group health plan (or any 
group health insurance coverage) in relation to its provision of the 
benefits described in paragraph (c)(2), (3), (4), or (5) of this 
section (or any combination of these benefits).
    (2) Benefits excepted in all circumstances. The following benefits 
are excepted in all circumstances--
    (i) Coverage only for accident (including accidental death and 
dismemberment);
    (ii) Disability income coverage;
    (iii) Liability insurance, including general liability insurance 
and automobile liability insurance;
    (iv) Coverage issued as a supplement to liability insurance;
    (v) Workers' compensation or similar coverage;
    (vi) Automobile medical payment insurance;
    (vii) Credit-only insurance (for example, mortgage insurance); and
    (viii) Coverage for on-site medical clinics.
    (3) Limited excepted benefits--(i) In general. Limited-scope dental 
benefits, limited-scope vision benefits, or 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 a group 
health plan as described in paragraph (c)(3)(ii) of this section. In 
addition, benefits provided under a health flexible spending 
arrangement are excepted benefits if they satisfy the requirements of 
paragraph (c)(3)(v) of this section.
    (ii) Not an integral part of a group health plan. For purposes of 
this paragraph (c)(3), benefits are not an integral part of a group 
health plan (whether the benefits are provided through the same plan or 
a separate plan) only if the following two requirements are satisfied--
    (A) Participants must have the right to elect not to receive 
coverage for the benefits; and
    (B) If a participant elects to receive coverage for the benefits, 
the participant must pay an additional premium or contribution for that 
coverage.
    (iii) Limited scope--(A) Dental benefits. Limited scope dental 
benefits are benefits substantially all of which are for treatment of 
the mouth (including any organ or structure within the mouth).
    (B) Vision benefits. Limited scope vision benefits are benefits 
substantially all of which are for treatment of the eye.
    (iv) Long-term care. Long-term care benefits are benefits that are 
either--
    (A) Subject to State long-term care insurance laws;
    (B) For qualified long-term care services, as defined in section 
7702B(c)(1) of the Internal Revenue Code, or provided under a qualified 
long-term care insurance contract, as defined in section 7702B(b) of 
the Internal Revenue Code; or
    (C) Based on cognitive impairment or a loss of functional capacity 
that is expected to be chronic.
    (v) Health flexible spending arrangements. Benefits provided under 
a health flexible spending arrangement (as defined in section 106(c)(2) 
of the Internal Revenue Code) are excepted for a class of participants 
only if they satisfy the following two requirements--
    (A) Other group health plan coverage, not limited to excepted 
benefits, is made available for the year to the class of participants 
by reason of their employment; and
    (B) The arrangement is structured so that the maximum benefit 
payable to any participant in the class for a year cannot exceed two 
times the participant's salary reduction election under the arrangement 
for the year (or, if greater, cannot exceed $500 plus the amount of the 
participant's salary reduction election). For this purpose, any amount 
that an employee can elect to receive as taxable income but elects to 
apply to the health flexible spending arrangement is considered a 
salary reduction election (regardless of whether the amount is 
characterized as salary or as a credit under the arrangement).
    (4) Noncoordinated benefits--(i) Excepted benefits that are not 
coordinated. Coverage for only a specified disease or illness (for 
example, cancer-only policies) or hospital indemnity or other fixed 
indemnity insurance is excepted only if it meets each of the conditions 
specified in paragraph (c)(4)(ii) of this section. To be hospital 
indemnity or other fixed indemnity insurance, the insurance must pay a 
fixed dollar amount per day (or per other period) of hospitalization or 
illness (for example, $100/day) regardless of the amount of expenses 
incurred.
    (ii) Conditions. Benefits are described in paragraph (c)(4)(i) of 
this section only if--
    (A) The benefits are provided under a separate policy, certificate, 
or contract of insurance;
    (B) There is no coordination between the provision of the benefits 
and an exclusion of benefits under any group

[[Page 78799]]

health plan maintained by the same plan sponsor; and
    (C) The benefits are paid with respect to an event without regard 
to whether benefits are provided with respect to the event under any 
group health plan maintained by the same plan sponsor.
    (iii) Example. The rules of this paragraph (c)(4) are illustrated 
by the following example:

    Example. (i) Facts. An employer sponsors a group health plan 
that provides coverage through an insurance policy. The policy 
provides benefits only for hospital stays at a fixed percentage of 
hospital expenses up to a maximum of $100 a day.
    (ii) Conclusion. In this Example, even though the benefits under 
the policy satisfy the conditions in paragraph (c)(4)(ii) of this 
section, because the policy pays a percentage of expenses incurred 
rather than a fixed dollar amount, the benefits under the policy are 
not excepted benefits under this paragraph (c)(4). This is the 
result even if, in practice, the policy pays the maximum of $100 for 
every day of hospitalization.

    (5) Supplemental benefits. (i) The following benefits are excepted 
only if they are provided under a separate policy, certificate, or 
contract of insurance--
    (A) Medicare supplemental health insurance (as defined under 
section 1882(g)(1) of the Social Security Act; also known as Medigap or 
MedSupp insurance);
    (B) Coverage supplemental to the coverage provided under Chapter 
55, Title 10 of the United States Code (also known as TRICARE 
supplemental programs); and
    (C) Similar supplemental coverage provided to coverage under a 
group health plan. To be similar supplemental coverage, the coverage 
must be specifically designed to fill gaps in primary coverage, such as 
coinsurance or deductibles. Similar supplemental coverage does not 
include coverage that becomes secondary or supplemental only under a 
coordination-of-benefits provision.
    (ii) The rules of this paragraph (c)(5) are illustrated by the 
following example:

    Example. (i) Facts. An employer sponsors a group health plan 
that provides coverage for both active employees and retirees. The 
coverage for retirees supplements benefits provided by Medicare, but 
does not meet the requirements for a supplemental policy under 
section 1882(g)(1) of the Social Security Act.
    (ii) Conclusion. In this Example, the coverage provided to 
retirees does not meet the definition of supplemental excepted 
benefits under this paragraph (c)(5) because the coverage is not 
Medicare supplemental insurance as defined under section 1882(g)(1) 
of the Social Security Act, is not a TRICARE supplemental program, 
and is not supplemental to coverage provided under a group health 
plan.

    (d) Treatment of partnerships. For purposes of this part:
    (1) Treatment as a group health plan. Any plan, fund, or program 
that would not be (but for this paragraph (d)) an employee welfare 
benefit plan and that is established or maintained by a partnership, to 
the extent that the plan, fund, or program provides medical care 
(including items and services paid for as medical care) to present or 
former partners in the partnership or to their dependents (as defined 
under the terms of the plan, fund, or program), directly or through 
insurance, reimbursement, or otherwise, is treated (subject to 
paragraph (d)(2) of this section) as an employee welfare benefit plan 
that is a group health plan.
    (2) Employment relationship. In the case of a group health plan, 
the term employer also includes the partnership in relation to any bona 
fide partner. In addition, the term employee also includes any bona 
fide partner. Whether or not an individual is a bona fide partner is 
determined based on all the relevant facts and circumstances, including 
whether the individual performs services on behalf of the partnership.
    (3) Participants of group health plans. In the case of a group 
health plan, the term participant also includes any individual 
described in paragraph (d)(3)(i) or (ii) of this section if the 
individual is, or may become, eligible to receive a benefit under the 
plan or the individual's beneficiaries may be eligible to receive any 
such benefit.
    (i) In connection with a group health plan maintained by a 
partnership, the individual is a partner in relation to the 
partnership.
    (ii) In connection with a group health plan maintained by a self-
employed individual (under which one or more employees are 
participants), the individual is the self-employed individual.
    (e) Determining the average number of employees. [Reserved]

    Dated: November 24, 2004.
Mark B. McClellan,
Administrator, Centers for Medicare & Medicaid Services.
    Dated: December 2, 2004.
Tommy G. Thompson,
Secretary, Department of Health and Human Services.
[FR Doc. 04-28112 Filed 12-29-04; 8:45 am]
BILLING CODE 4830-01-P; 4510-29-P; 4120-01-P