[Federal Register Volume 71, Number 239 (Wednesday, December 13, 2006)]
[Rules and Regulations]
[Pages 75014-75055]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-9557]



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Part III





Department of the Treasury





Internal Revenue Service



26 CFR Part 54



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Department of Labor





Employee Benefits Security Administration

29 CFR Part 2590



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Department of Health and Human Services





Centers for Medicare & Medicaid Services

45 CFR Part 146



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Nondiscrimination and Wellness Programs in Health Coverage in the Group 
Market; Final Rules

Federal Register / Vol. 71, No. 239 / Wednesday, December 13, 2006 / 
Rules and Regulations

[[Page 75014]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 54

[TD 9298]
RIN 1545-AY32

DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2590

RIN 1210-AA77

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

45 CFR Part 146

RIN 0938-AI08


Nondiscrimination and Wellness Programs in Health Coverage in the 
Group Market

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 rules.

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SUMMARY: This document contains final rules governing the provisions 
prohibiting discrimination based on a health factor 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 of 1986 (Code), the 
Employee Retirement Income Security Act of 1974 (ERISA), and the Public 
Health Service Act (PHS Act) enacted as part of the Health Insurance 
Portability and Accountability Act of 1996 (HIPAA).

DATES: Effective date. These final regulations are effective February 
12, 2007.
    Applicability dates. These final regulations apply for plan years 
beginning on or after July 1, 2007.

FOR FURTHER INFORMATION CONTACT: Russ Weinheimer, Internal Revenue 
Service, Department of the Treasury, at (202) 622-6080; Amy Turner or 
Elena Lynett, Employee Benefits Security Administration, Department of 
Labor, at (202) 693-8335; or Karen Levin or Adam Shaw, Centers for 
Medicare & Medicaid Services, Department of Health and Human Services, 
at (877) 267-2323 extension 65445 and 61091, respectively.
    Customer Service Information: Individuals interested in obtaining 
copies of Department of Labor publications concerning health care laws 
may request copies by calling the Department of Labor (DOL), Employee 
Benefits Security Administration (EBSA) Toll-Free Hotline at 1-866-444-
EBSA (3272) or may request a copy of the Department of Health and Human 
Services (HHS), Centers for Medicare & Medicaid Services (CMS) 
publication entitled ``Protecting Your Health Insurance Coverage'' by 
calling 1-800-633-4227. These regulations as well as other information 
on HIPAA's nondiscrimination rules and other health care laws are also 
available on the Department of Labor's Web site (http://www.dol.gov/ebsa), including the interactive web pages Health Elaws.

SUPPLEMENTARY INFORMATION:

I. Background

    The Health Insurance Portability and Accountability Act of 1996 
(HIPAA), Public Law 104-191 (110 Stat. 1936), 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. HIPAA added 
section 9802 of the Code, section 702 of ERISA, and section 2702 of the 
PHS Act, which prohibit discrimination in health coverage based on a 
health factor. Interim final rules implementing the HIPAA provisions 
were published in the Federal Register on April 8, 1997 (62 FR 16894) 
(1997 interim rules). On December 29, 1997, the Department of Labor, 
the Department of Health and Human Services, and the Department of the 
Treasury (the Departments) published a clarification of the April 1997 
interim rules as they relate to individuals who were denied coverage 
before the effective date of HIPAA on the basis of any health factor 
(62 FR 67689).
    On January 8, 2001, the Departments published interim final 
regulations (2001 interim rules) on many issues under the HIPAA 
nondiscrimination provisions (66 FR 1378) and proposed regulations on 
wellness programs under those nondiscrimination provisions (66 FR 
1421). These regulations being published today in the Federal Register 
finalize both the 2001 interim rules and the proposed rules.

II. Overview of the Regulations

    Section 9802 of the Code, section 702 of ERISA, and section 2702 of 
the PHS Act (the HIPAA nondiscrimination provisions) establish rules 
generally prohibiting group health plans and group health insurance 
issuers from discriminating against individual participants or 
beneficiaries based on any health factor of such participants or 
beneficiaries. The 2001 interim rules --
    <bullet> Explained the application of these provisions to benefits;
    <bullet> Clarified the relationship between the HIPAA 
nondiscrimination provisions and the HIPAA preexisting condition 
exclusion limitations;
    <bullet> Explained the application of these provisions to premiums;
    <bullet> Described similarly situated individuals;
    <bullet> Explained the application of these provisions to actively-
at-work and nonconfinement clauses; and
    <bullet> Clarified that more favorable treatment of individuals 
with medical needs generally is permitted.
    In general, these final regulations do not change the 2001 interim 
rules or the proposed rules on wellness programs. However, these 
regulations do not republish the expired transitional rules regarding 
individuals who were denied coverage based on a health factor prior to 
the applicability date of the 2001 interim rules. (These regulations do 
republish, and slightly modify, the special transitional rule for self-
funded nonfederal governmental plans that had denied any individual 
coverage due to the plan's election to opt out of the nondiscrimination 
requirements under 45 CFR 146.180, in cases where the plan sponsor 
subsequently chooses to bring the plan into compliance with those 
requirements). These regulations clarify how the source-of-injury rules 
apply to the timing of a diagnosis of a medical condition and add an 
example to illustrate how the benefits rules apply to the carryover 
feature of health 0reimbursement arrangements (HRAs). For wellness 
programs, the final regulations clarify some ambiguities in the 
proposed rules, make some changes in terminology and organization, and 
add a description of wellness programs not required to satisfy 
additional standards.

Application to Benefits

    Under the 2001 interim rules and these regulations, a plan or 
issuer is not required to provide coverage for any particular benefit 
to any group of similarly situated individuals. However, benefits 
provided must be uniformly available to all similarly situated

[[Page 75015]]

individuals. Likewise, any restriction on a benefit or benefits must 
apply uniformly to all similarly situated individuals and must not be 
directed at individual participants or beneficiaries based on any 
health factor of the participants or beneficiaries (determined based on 
all the relevant facts and circumstances).
    With respect to these benefit rules, the Departments received many 
inquiries about HRAs and one comment about nondiscrimination 
requirements under other laws. Under HRAs, employees are reimbursed for 
medical expenses up to a maximum amount for a period, based on the 
employer's contribution to the plan. These plans may or may not be 
funded. Another common feature is that the plans typically allow 
amounts remaining available at the end of the period to be used to 
reimburse medical expenses in later periods. Because the maximum 
reimbursement available under a plan to an employee in any single 
period may vary based on the claims experience of the employee, 
concerns have arisen about the application of the HIPAA 
nondiscrimination rules to these plans.
    To address these concerns, these final regulations include an 
example under which the carryforward of unused employer-provided 
medical care reimbursement amounts to later years does not violate the 
HIPAA nondiscrimination requirements, even though the maximum 
reimbursement amount for a year varies among employees within the same 
group of similarly situated individuals based on prior claims 
experience. In the example, an employer sponsors a group health plan 
under which medical care expenses are reimbursed up to an annual 
maximum amount. The maximum reimbursement amount with respect to an 
employee for a year is a uniform amount multiplied by the number of 
years the employee has participated in the plan, reduced by the total 
reimbursements for prior years. Because employees who have participated 
in the plan for the same length of time are eligible for the same total 
benefit over that length of time, the example concludes that the 
arrangement does not violate the HIPAA nondiscrimination requirements.
    The Equal Employment Opportunity Commission (EEOC) asked the 
Departments to clarify that certain plan practices or provisions 
permitted under the benefits paragraphs of the 2001 interim rules may 
violate the Americans with Disabilities Act of 1990 (ADA) or Title VII 
of the Civil Rights Act of 1964 (Title VII). Specifically, the 2001 
interim rules allow plans to exclude or limit benefits for certain 
types of conditions or treatments. The EEOC commented that, if such a 
benefit limit were applied to AIDS, it would be a disability-based 
distinction that violates the ADA (unless it is permitted under section 
501(c) of the ADA). In addition, the EEOC commented that an exclusion 
from coverage of prescription contraceptives, but not of other 
preventive treatments, would violate Title VII because prescription 
contraceptives are used exclusively by women.
    Paragraph (h) of the 2001 interim rules and these final regulations 
is entitled ``No effect on other laws.'' This section clarifies that 
compliance with the nondiscrimination rules is not determinative of 
compliance with any other provision of ERISA, or any other State or 
Federal law, including the ADA. Moreover, in paragraph (b) of the 2001 
interim rules and these final regulations, the general rule governing 
the application of the nondiscrimination rules to benefits clarifies 
that whether any plan provision or practice with respect to benefits 
complies with these rules does not affect whether the provision or 
practice is permitted under any other provision of the Code, ERISA, or 
the PHS Act, the Americans with Disabilities Act, or any other law, 
whether State or Federal.
    Many other laws may regulate plans and issuers in their provision 
of benefits to participants and beneficiaries. These laws include the 
ADA, Title VII, the Family and Medical Leave Act, ERISA's fiduciary 
provisions, and State law. The Departments have not attempted to 
summarize the requirements of those laws in the HIPAA nondiscrimination 
rules. Instead, these rules clarify the application of the HIPAA 
nondiscrimination rules to group health plans, which may permit certain 
practices that other laws prohibit. Nonetheless, to avoid misleading 
plans and issuers as to the permissibility of any plan provision under 
other laws, the Departments included, in both paragraph (h) and 
paragraph (b) of the regulations, references to the potential 
applicability of other laws. Employers, plans, issuers, and other 
service providers should consider the applicability of these laws to 
their coverage and contact legal counsel or other government agencies 
such as the EEOC and State insurance departments if they have questions 
under those laws.

Source-of-Injury Exclusions

    Some plans and issuers, while generally providing coverage for the 
treatment of an injury, deny benefits if the injury arose from a 
specified cause or activity. These kinds of exclusions are known as 
source-of-injury exclusions. Under the 2001 interim rules, if a plan or 
issuer provides benefits for a particular injury, it may not deny 
benefits otherwise provided for treatment of the injury due to the fact 
that the injury results from a medical condition or an act of domestic 
violence. Two examples in the 2001 interim rules illustrate the 
application of this rule, to injuries resulting from an attempted 
suicide due to depression and to injuries resulting from bungee 
jumping.
    These final regulations retain the provisions in the 2001 interim 
rules and add a clarification. Some people have inquired if a suicide 
exclusion can apply if an individual had not been diagnosed with a 
medical condition such as depression before the suicide attempt. These 
final regulations clarify that benefits may not be denied for injuries 
resulting from a medical condition even if the medical condition was 
not diagnosed before the injury.
    Some comments expressed concern that the discussion of the source-
of-injury rule in the 2001 interim rules might be used to support the 
use of vague language to identify plan benefit exclusions, especially 
to identify source-of-injury exclusions. Requirements for plan benefit 
descriptions are generally outside of the scope of these regulations. 
Nonetheless, Department of Labor regulations at 29 CFR 2520.102-2(b) 
provide, ``The format of the summary plan description must not have the 
effect of misleading, misinforming or failing to inform participants 
and beneficiaries. Any description of exception, limitations, 
reductions, and other restrictions of plan benefits shall not be 
minimized, rendered obscure or otherwise made to appear unimportant * * 
* The advantages and disadvantages of the plan shall be presented 
without either exaggerating the benefits or minimizing the 
limitations.'' State laws governing group insurance or nonfederal 
governmental plans may provide additional protections.
    The Departments received thousands of comments protesting that the 
source-of-injury provisions in the 2001 interim rules would generally 
permit plans or issuers to exclude benefits for the treatment of 
injuries sustained in the activities listed in the conference report to 
HIPAA (motorcycling, snowmobiling, all-terrain vehicle riding, 
horseback riding, skiing, and other similar activities). Many comments 
requested that the source-of-injury rule be amended to provide that a 
source-of-injury exclusion could not apply if the

[[Page 75016]]

injury resulted from (in addition to an act of domestic violence or a 
medical condition) participation in legal recreational activities such 
as those listed in the conference report. Some comments expressed the 
concern that the rule in the 2001 interim rules would cause plans and 
issuers to begin excluding benefits for treatment of injuries sustained 
in these kinds of activities.
    One comment generally supported the position in the 2001 interim 
rules. That comment expressed the belief that Congress intended with 
this issue, as with many other issues, to continue its longstanding 
deference to the States on the regulation of benefit design under 
health insurance. The comment also noted that the source-of-injury rule 
in the 2001 interim rules would not change the practice of plans or 
issuers with regard to the activities listed in the conference report 
and that the practice of plans and issuers in this regard would 
continue to be governed, as they had been before HIPAA, by market 
conditions and the States.
    The Departments have not added the list of activities from the 
conference report to the source-of-injury rule in the final 
regulations. The statute itself is unclear about how benefits in 
general are affected by the nondiscrimination requirements and is 
silent with respect to source-of-injury exclusions in particular. The 
legislative history provides that the inclusion of evidence of 
insurability in the list of health factors is intended to ensure, among 
other things, that individuals are not excluded from health care 
coverage due to their participation in the activities listed in the 
conference report. This language is unclear because the term ``health 
care coverage'' could mean only eligibility to enroll for coverage 
under the plan, so that people who participate in the activities listed 
in the conference report could not be kept out of the plan but could be 
denied benefits for injuries sustained in those activities. 
Alternatively, it could mean eligibility both to enroll for coverage 
and for benefits, so that people who participate in those activities 
could not be kept out of the plan or denied benefits for injuries 
sustained in those activities. Without any indication in the statute 
and without a clear indication in the legislative history about this 
issue, and in light of the overall scheme of the statute, the 
Departments have made no changes to the regulations.
    Moreover, to the extent not prohibited by State law, plans and 
issuers have been free to impose source-of-injury exclusions since 
before HIPAA. There is no reason to believe that plans and issuers will 
begin to impose source-of-injury exclusions with respect to the 
conference report activities merely because such exclusions are not 
prohibited under the 2001 interim rules and these final regulations.

Relationship of Prohibition on Nonconfinement Clauses to State 
Extension-of-Benefits Laws

    Questions have arisen about the relationship of the prohibition on 
nonconfinement clauses in the 2001 interim rules to State extension-of-
benefits laws. Plan provisions that deny an individual benefits based 
on the individual's confinement to a hospital or other health care 
institution at the time coverage would otherwise become effective are 
often called nonconfinement clauses. The 2001 interim rules prohibit 
such nonconfinement clauses. At the same time, many States require 
issuers to provide benefits beyond the date on which coverage under the 
policy would otherwise have ended to individuals who continue to be 
hospitalized beyond that date. Example 2 in the 2001 interim rules 
illustrated that a current issuer cannot impose a nonconfinement clause 
that restricts benefits for an individual based on whether that 
individual is entitled to continued benefits from a prior issuer 
pursuant to a State law requirement. The final sentence in Example 2 
provided that HIPAA does not affect the prior issuer's obligation under 
State law and does not affect any State law governing coordination of 
benefits.
    Under the laws of some States, a prior issuer has the obligation to 
provide health benefits to an individual confined to a hospital beyond 
the nominal end of the policy only if the hospitalization is not 
covered by a succeeding issuer. Because HIPAA requires a succeeding 
issuer to provide benefits that it would otherwise provide if not for 
the nonconfinement clause, in such a case State law would not require 
the prior issuer to provide benefits for a confinement beyond the 
nominal end of the policy. In this context, the statement in the final 
sentence of Example 2--that HIPAA does not affect the prior issuer's 
obligation under State law--could be read to conflict with the text of 
the rule and the main point of Example 2 that the succeeding issuer 
must cover the confinement.
    There has been some dispute about how this potential ambiguity 
should be resolved. One interpretation is that the succeeding issuer 
can never impose a nonconfinement clause, and if this has the effect 
under State law of not requiring the prior issuer to provide benefits 
beyond the nominal end of the policy, then the prior issuer is not 
obligated to provide the extended benefits. This interpretation is 
consistent with the text of the nonconfinement rule and the main point 
of Example 2, though it could be read to conflict with the last 
sentence in Example 2.
    Another interpretation proposed by some is that, consistent with 
the last sentence of Example 2, the obligation of a prior issuer is 
never affected by the HIPAA prohibition against nonconfinement clauses. 
Under this interpretation, if a State law conditions a prior issuer's 
obligation on there being no succeeding issuer with the obligation, 
then in order to leave the prior issuer's obligation unaffected under 
State law, the succeeding issuer could apply a nonconfinement clause 
and the HIPAA prohibition would not apply. This interpretation elevates 
a minor clarification at the end of an example to supersede not only 
the main point of the example but also the express text of the rule the 
example illustrates. This proposed interpretation is clearly contrary 
to the intent of the 2001 interim rules.
    To avoid other interpretations, these final rules have replaced the 
final sentence of Example 2 in the 2001 interim rules with three 
sentences. The new language clarifies that: State law cannot change the 
succeeding issuer's obligation under HIPAA; a prior issuer may also 
have an obligation; and in a case in which a succeeding issuer has an 
obligation under HIPAA and a prior issuer has an obligation under State 
law to provide benefits for a confinement, any State laws designed to 
prevent more than 100 percent reimbursement, such as State 
coordination-of-benefits laws, continue to apply. Thus, under HIPAA a 
succeeding issuer cannot deny benefits to an individual on the basis of 
a nonconfinement clause. If this requirement under HIPAA has the effect 
under State law of removing a prior issuer's obligation to provide 
benefits, then the prior issuer is not obligated to provide benefits 
for the confinement. If under State law this requirement under HIPAA 
has the effect of obligating both the prior issuer and the succeeding 
issuer to provide benefits, then any State coordination-of-benefits law 
that is used to determine the order of payment and to prevent more than 
100 percent reimbursement continues to apply.

Actively-at-Work Rules and Employer Leave Policies

    The final regulations make no changes to the 2001 interim rules 
relating to actively-at-work provisions. Actively-at-

[[Page 75017]]

work clauses are generally prohibited, unless individuals who are 
absent from work due to any health factor are treated, for purposes of 
health coverage, as if they are actively at work. Nonetheless, a plan 
or issuer may distinguish between groups of similarly situated 
individuals (provided the distinction is not directed at individual 
participants or beneficiaries based on a health factor). Examples in 
the regulations illustrate that a plan or issuer may condition coverage 
on an individual's meeting the plan's requirement of working full-time 
(such as a minimum of 250 hours in a three-month period or 30 hours per 
week).
    Several members of the regulated community have asked the 
Departments to clarify the applicability of the actively-at-work rules 
to various plan provisions that require an individual to perform a 
minimum amount of service per week in order to be eligible for 
coverage. It is the Departments' experience that much of the complexity 
in applying these rules derives from the myriad variations in the 
operation of employers' leave policies. The Departments believe that 
the 2001 interim rules provide adequate principles for applying the 
actively-at-work provisions to different types of eligibility 
provisions. In order to comply with these rules, a plan or issuer 
should apply the plan's service requirements consistently to all 
similarly situated employees eligible for coverage under the plan 
without regard to whether an employee is seeking eligibility to enroll 
in the plan or continued eligibility to remain in the plan. 
Accordingly, if a plan imposes a 30-hour-per-week requirement and 
treats employees on paid leave (including sick leave and vacation 
leave) who are already in the plan as if they are actively-at-work, the 
plan generally is required to credit time on paid leave towards 
satisfying the 30-hour-per-week requirement for employees seeking 
enrollment in the plan. Similarly, if a plan allowed employees to 
continue eligibility under the plan while on paid leave and for an 
additional period of 30 days while on unpaid leave, the plan is 
generally required to credit these same periods for employees seeking 
enrollment in the plan.\1\ To help ensure consistency in application, 
plans and issuers may wish to clarify, in writing, how employees on 
various types of leave are treated for purposes of interpreting a 
service requirement. Without clear plan rules, plans and issuers might 
slip into inconsistent applications of their rules, which could lead to 
violations of the actively-at-work provisions.
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    \1\ These nondiscrimination rules do not address the 
applicability of the Family and Medical Leave Act to employers or 
group health coverage.
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Wellness Programs

    The HIPAA nondiscrimination provisions do not prevent a plan or 
issuer from establishing discounts or rebates or modifying otherwise 
applicable copayments or deductibles in return for adherence to 
programs of health promotion and disease prevention. The 1997 interim 
rules refer to these programs as ``bona fide wellness programs.'' In 
the preamble to the 1997 interim rules, the Departments invited 
comments on whether additional guidance was needed concerning, among 
other things, the permissible standards for determining bona fide 
wellness programs. The Departments also stated their intent to issue 
further regulations on the nondiscrimination requirements and that in 
no event would the Departments take any enforcement action against a 
plan or issuer that had sought to comply in good faith with section 
9802 of the Code, section 702 of ERISA, and section 2702 of the PHS Act 
before the publication of additional guidance. The preambles to the 
2001 interim final and proposed rules noted that the period for 
nonenforcement in cases of good faith compliance with the HIPAA 
nondiscrimination provisions generally ended on the applicability date 
of those regulations but continued with respect to wellness programs 
until the issuance of further guidance. Accordingly, the nonenforcement 
policy of the Departments ends upon the applicability date of these 
final regulations for cases in which a plan or issuer fails to comply 
with the regulations but complies in good faith with an otherwise 
reasonable interpretation of the statute.
    The HIPAA nondiscrimination provisions generally prohibit a plan or 
issuer from charging similarly situated individuals different premiums 
or contributions based on a health factor. These final regulations also 
generally prohibit a plan or issuer from requiring similarly situated 
individuals to satisfy differing deductible, copayment, or other cost-
sharing requirements. However, the HIPAA nondiscrimination provisions 
do not prevent a plan or issuer from establishing premium discounts or 
rebates or modifying otherwise applicable copayments or deductibles in 
return for adherence to programs of health promotion and disease 
prevention. Thus, there is an exception to the general rule prohibiting 
discrimination based on a health factor if the reward, such as a 
premium discount or waiver of a cost-sharing requirement, is based on 
participation in a program of health promotion or disease prevention.
    Both the 1997 interim rules and the 2001 proposed regulations refer 
to programs of health promotion and disease prevention allowed under 
this exception as ``bona fide wellness programs.'' These regulations 
generally adopt the provisions in the 2001 proposed rules. However, as 
more fully explained below, the final regulations no longer use the 
term ``bona fide'' in connection with wellness programs, add a 
description of wellness programs that do not have to satisfy additional 
requirements in order to comply with the nondiscrimination 
requirements, reorganize the four requirements from the proposed rules 
into five requirements, provide that the reward for a wellness 
program--coupled with the reward for other wellness programs with 
respect to the plan that require satisfaction of a standard related to 
a health factor--must not exceed 20% of the total cost of coverage 
under the plan, and add examples and make other changes to more 
accurately describe how the requirements apply.
    The term ``wellness program''. Comments suggested that the use of 
the term ``bona fide'' with respect to wellness programs was confusing 
because, under the proposed rules, some wellness programs that are not 
``bona fide'' within the narrow meaning of that term in the proposed 
rules nonetheless satisfy the HIPAA nondiscrimination requirements. To 
address this concern, these final regulations do not use the term 
``bona fide wellness program.'' Instead the final regulations treat all 
programs of health promotion or disease prevention as wellness programs 
and specify which of those wellness programs must satisfy additional 
standards to comply with the nondiscrimination requirements.
    Programs not subject to additional standards. The preamble to the 
2001 proposed rules described a number of wellness programs that comply 
with the HIPAA nondiscrimination requirements without having to satisfy 
any additional standards. However, the text of the regulation did not 
make such a distinction. The Departments have received many comments 
and inquiries about whether programs like those described in the 2001 
preamble would have to satisfy the additional standards in the proposed 
rules. As a result, a paragraph has been added to the final regulations 
defining and illustrating programs that comply with the 
nondiscrimination requirements without having to satisfy any additional

[[Page 75018]]

standards (assuming participation in the program is made available to 
all similarly situated individuals). Such programs are those under 
which none of the conditions for obtaining a reward is based on an 
individual satisfying a standard related to a health factor or under 
which no reward is offered. The final regulations include the following 
list to illustrate the wide range of programs that would not have to 
satisfy any additional standards to comply with the nondiscrimination 
requirements:
    <bullet> A program that reimburses all or part of the cost for 
memberships in a fitness center.
    <bullet> A diagnostic testing program that provides a reward for 
participation and does not base any part of the reward on outcomes.
    <bullet> A program that encourages preventive care through the 
waiver of the copayment or deductible requirement under a group health 
plan for the costs of, for example, prenatal care or well-baby visits.
    <bullet> A program that reimburses employees for the costs of 
smoking cessation programs without regard to whether the employee quits 
smoking.
    <bullet> A program that provides a reward to employees for 
attending a monthly health education seminar.
    Only programs under which any of the conditions for obtaining a 
reward is based on an individual satisfying a standard related to a 
health factor must meet the five additional requirements described in 
paragraph (f)(2) of these regulations in order to comply with the 
nondiscrimination requirements.
    Limit on the reward. As under the proposed rules, the total reward 
that may be given to an individual under the plan for all wellness 
programs is limited. A reward can be in the form of a discount or 
rebate of a premium or contribution, a waiver of all or part of a cost-
sharing mechanism (such as deductibles, copayments, or coinsurance), 
the absence of a surcharge, or the value of a benefit that would 
otherwise not be provided under the plan. Under the proposed rule, the 
reward for the wellness program, coupled with the reward for other 
wellness programs with respect to the plan that require satisfaction of 
a standard related to a health factor, must not exceed a specified 
percentage of the cost of employee-only coverage under the plan. The 
cost of employee-only coverage is determined based on the total amount 
of employer and employee contributions for the benefit package under 
which the employee is receiving coverage.
    Comments indicated that in some circumstances dependents are 
permitted to participate in the wellness program in addition to the 
employee and that in those circumstances the reward should be higher to 
reflect dependent participation in the program. These final regulations 
provide that if, in addition to employees, any class of dependents 
(such as spouses or spouses and dependent children) may participate in 
the wellness program, the limit on the reward is based on the cost of 
the coverage category in which the employee and any dependents are 
enrolled.
    The proposed regulations specified three alternative percentages: 
10, 15, and 20. The final regulations provide that the amount of the 
reward may not exceed 20 percent of the cost of coverage. The proposed 
regulations solicited comments on the appropriate percentage. The 
percentage limit is designed to avoid a reward or penalty being so 
large as to have the effect of denying coverage or creating too heavy a 
financial penalty on individuals who do not satisfy an initial wellness 
program standard that is related to a health factor. Comments from one 
employer and two national insurance industry associations requested 
that the level of the percentage for rewards should provide plans and 
issuers maximum flexibility for designing wellness programs. Comments 
suggested that plans and issuers have a greater opportunity to 
encourage healthy behaviors through programs of health promotion and 
disease prevention if they are allowed flexibility in designing such 
programs. The 20 percent limit on the size of the reward in the final 
regulations allows plans and issuers to maintain flexibility in their 
ability to design wellness programs, while avoiding rewards or 
penalties so large as to deny coverage or create too heavy a financial 
penalty on individuals who do not satisfy an initial wellness program 
standard that is related to a health factor.
    Reasonably-designed and at-least-once-per-year requirements. In the 
2001 proposed rules, the second of four requirements was that the 
program must be reasonably designed to promote good health or prevent 
disease. The regulations also provided that a program did not meet this 
standard unless it gave individuals eligible for the program the 
opportunity to qualify for the reward at least once per year.
    One comment suggested a safe harbor under which a wellness program 
that allows individuals to qualify at least once a year for the reward 
under the program would satisfy the ``reasonably designed'' standard 
without regard to other attributes of the program. The Departments have 
not adopted this suggestion. The ``reasonably designed'' standard is a 
broad standard. A wide range of factors could affect the reasonableness 
of the design of a wellness program, not just the frequency with which 
a participant could qualify for the reward. For example, a program 
might not be reasonably designed to promote good health or prevent 
disease if it imposed, as a condition to obtaining the reward, an 
overly burdensome time commitment or a requirement to engage in illegal 
behavior. The once-per-year requirement was included in the proposed 
rules merely as a bright-line standard for determining the minimum 
frequency that is consistent with a reasonable design for promoting 
good health or preventing disease. Thus, this second requirement of the 
proposed rules has been divided into two requirements in the final 
rules (the second and the third requirements). This division was made 
to emphasize that a program that must satisfy the additional standards 
in order to comply with the nondiscrimination requirements must allow 
eligible individuals to qualify for the reward at least once per year 
and must also be otherwise reasonably designed to promote health or 
prevent disease.
    Comments also expressed other concerns about the ``reasonably 
designed'' requirement. While acknowledging that this standard provides 
significant flexibility, these comments were concerned that this 
flexible approach might also require substantial resources in 
evaluating all the facts and circumstances of a proposed program to 
determine whether it was reasonable in its design.
    The ``reasonably designed'' requirement is intended to be an easy 
standard to satisfy. To make this clear, the final regulations have 
added language providing that if a program has a reasonable chance of 
improving the health of participants and it is not overly burdensome, 
is not a subterfuge for discriminating based on a health factor, and is 
not highly suspect in the method chosen to promote health or prevent 
disease, it satisfies this standard. There does not need to be a 
scientific record that the method promotes wellness to satisfy this 
standard. The standard is intended to allow experimentation in diverse 
ways of promoting wellness. For example, a plan or issuer could satisfy 
this standard by providing rewards to individuals who participated in a 
course of aromatherapy. The requirement of reasonableness in this 
standard prohibits bizarre, extreme, or illegal requirements in a 
wellness program.

[[Page 75019]]

    One comment requested that the final regulations set forth one or 
more safe harbors that would demonstrate compliance with the 
``reasonably designed'' standard. The examples in the proposed and 
final regulations present a range of wellness programs that are well 
within the borders of what is considered reasonably designed to promote 
health or prevent disease. The examples serve as safe harbors, so that 
a plan or issuer could adopt a program identical to one described as 
satisfying the wellness program requirements in the examples and be 
assured of satisfying the requirements in the regulations. Wellness 
programs similar to the examples also would satisfy the ``reasonably 
designed'' requirement. The Departments, though, do not want plans or 
issuers to feel constrained by the relatively narrow range of programs 
described by the examples but want plans and issuers to feel free to 
consider innovative programs for motivating individuals to make efforts 
to improve their health.
    Reasonable alternative standard. Under the 2001 proposed rules and 
these final regulations, a wellness program that provides a reward 
requiring satisfaction of a standard related to a health factor must 
provide a reasonable alternative standard for obtaining the reward for 
certain individuals. This alternative standard must be available for 
individuals for whom, for that period, it is unreasonably difficult due 
to a medical condition to satisfy the otherwise applicable standard, or 
for whom, for that period, it is medically inadvisable to attempt to 
satisfy the otherwise applicable standard. A program does not need to 
establish the specific reasonable alternative standard before the 
program commences. It is sufficient to determine a reasonable 
alternative standard once a participant informs the plan that it is 
unreasonably difficult for the participant due to a medical condition 
to satisfy the general standard (or that it is medically inadvisable 
for the participant to attempt to achieve the general standard) under 
the program.
    Some comments suggested that the requirement to devise and offer 
such a reasonable alternative standard potentially creates a 
significant burden on plans and issuers. Comments also suggested that 
the Departments should define a ``safe harbor'' for what constitutes a 
reasonable alternative standard, and that plans and issuers should be 
permitted to establish a single alternative standard, rather than 
having to tailor a standard for each individual for whom a reasonable 
alternative standard must be offered.
    The Departments understand that, in devising wellness programs, 
plans and issuers strive to improve the health of participating 
individuals in a way that is not administratively burdensome or 
expensive. Under the proposed and final rules, it is permissible for a 
plan or issuer to devise a reasonable alternative standard by lowering 
the threshold of the existing health-factor-related standard, 
substituting a different standard, or waiving the standard. (For the 
alternative standard to be reasonable, the individual must be able to 
satisfy it without regard to any health factor.) To address the concern 
regarding the potential burden of this requirement, the final 
regulations explicitly provide that a plan or issuer can waive the 
health-factor-related standard for all individuals for whom a 
reasonable alternative standard must be offered. Additionally, the 
final regulations include an example demonstrating that a reasonable 
alternative standard could include following the recommendations of an 
individual's physician regarding the health factor at issue. Thus, a 
plan or issuer need not assume the burden of designing a discrete 
alternative standard for each individual for whom an alternative 
standard must be offered. An example also illustrates that if an 
alternative standard is health-factor-related (i.e., walking three days 
a week for 20 minutes a day), the wellness program must provide an 
additional alternative standard (i.e., following the individual's 
physician's recommendations regarding the health factor at issue) to 
the appropriate individuals.
    The 2001 proposed rules included an example illustrating a smoking 
cessation program. Comments expressed concern that, under the proposed 
regulations, individuals addicted to nicotine who comply with a 
reasonable alternative standard year after year would always be 
entitled to the reward even if they did not quit using tobacco. 
Comments questioned whether this result is consistent with the goal of 
promoting wellness. The final regulations retain the example from the 
proposed rules. Comments noted that overcoming an addiction sometimes 
requires a cycle of failure and renewed effort. For those individuals 
for whom it remains unreasonably difficult due to an addiction, a 
reasonable alternative standard must continue to be offered. Plans and 
issuers can accommodate this health factor by continuing to offer the 
same or a new reasonable alternative standard. For example, a plan or 
issuer using a smoking cessation class might use different classes from 
year to year or might change from using a class to providing nicotine 
replacement therapy. These final regulations provide an additional 
example of a reasonable alternative standard of viewing, over a period 
of 12 months, a 12-hour video series on health problems associated with 
tobacco use.
    Concern has been expressed that individuals might claim that it 
would be unreasonably difficult or medically inadvisable to meet the 
wellness program standard, when in fact the individual could meet the 
standard. The final rules clarify that plans may seek verification, 
such as a statement from a physician, that a health factor makes it 
unreasonably difficult or medically inadvisable for an individual to 
meet a standard.
    Disclosure requirements. The fifth requirement for a wellness 
program that provides a reward requiring satisfaction of a standard 
related to a health factor is that all plan materials describing the 
terms of the program must disclose the availability of a reasonable 
alternative standard. This requirement is unchanged from the proposed 
rules. The 2001 proposed rules and these final regulations include the 
same model language that can be used to satisfy this requirement; 
examples also illustrate substantially similar language that would 
satisfy the requirement.
    The final regulations retain the two clarifications of this 
requirement. First, plan materials are not required to describe 
specific reasonable alternative standards. It is sufficient to disclose 
that some reasonable alternative standard will be made available. 
Second, any plan materials that describe the general standard would 
also have to disclose the availability of a reasonable alternative 
standard. However, if the program is merely mentioned (and does not 
describe the general standard), disclosure of the availability of a 
reasonable alternative standard is not required.

Special Rule for Self-Funded Nonfederal Governmental Plans Exempted 
Under 45 CFR 146.180

    The sponsor of a self-funded nonfederal governmental plan may elect 
under section 2721(b)(2) of the PHS Act and 45 CFR 146.180 to exempt 
its group health plan from the nondiscrimination requirements of 
section 2702 of the PHS Act and 45 CFR 146.121. Under the interim final 
nondiscrimination rules, if the plan sponsor subsequently chooses to 
bring the plan into compliance with the nondiscrimination requirements, 
the plan must provide notice to that effect to individuals who were 
denied

[[Page 75020]]

enrollment based on one or more health factors, and afford those 
individuals an opportunity, that continues for at least 30 days, to 
enroll in the plan. (An individual is considered to have been denied 
coverage if he or she failed to apply for coverage because, given an 
exemption election under 45 CFR 146.180, it was reasonable to believe 
that an application for coverage would have been denied based on a 
health factor). The notice must specify the effective date of 
compliance, and inform the individual regarding any enrollment 
restrictions that may apply under the terms of the plan once the plan 
comes into compliance. The plan may not treat the individual as a late 
enrollee or a special enrollee. These final regulations retain this 
transitional rule, and state that the plan must permit coverage to be 
effective as of the first day of plan coverage for which an exemption 
election under 45 CFR 146.180 (with regard to the nondiscrimination 
requirements) is no longer in effect. (These final regulations delete 
the reference giving the plan the option of having the coverage start 
July 1, 2001, because that option implicated the expired transitional 
rules regarding individuals who were denied coverage based on a health 
factor prior to the applicability of the 2001 interim rules. As 
previously stated, those transitional rules have not been republished 
in these final regulations.) Additionally, the examples illustrating 
how the special rule for nonfederal governmental plans operates have 
been revised slightly.

Applicability Date

    These regulations apply for plan years beginning on or after July 
1, 2007. Until the applicability date for this regulation, plans and 
issuers are required to comply with the corresponding sections of the 
regulations previously published in the Federal Register (66 FR 1378) 
and other applicable regulations.

III. Economic Impact and Paperwork Burden

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

    HIPAA's nondiscrimination provisions generally prohibit group 
health plans and group health insurance issuers from discriminating 
against individuals in eligibility or premiums on the basis of health 
factors. The Departments have crafted these regulations to secure the 
protections from discrimination as intended by Congress in as 
economically efficient a manner as possible, and believe that the 
economic benefits of the regulations justify their costs.
    The primary economic benefits associated with securing HIPAA's 
nondiscrimination provisions derive from increased access to affordable 
group health plan coverage for individuals with health problems. 
Increased access benefits both newly-covered individuals and society at 
large. It fosters expanded health coverage, timelier and more complete 
medical care, better health outcomes, and improved productivity and 
quality of life. This is especially true for the individuals most 
affected by HIPAA's nondiscrimination provisions--those with adverse 
health conditions. Denied health coverage, individuals in poorer health 
are more likely to suffer economic hardship, to forego badly needed 
care for financial reasons, and to suffer adverse health outcomes as a 
result. For them, gaining health coverage is more likely to mean 
gaining economic security, receiving timely, quality care, and living 
healthier, more productive lives. Similarly, participation by these 
individuals in wellness programs fosters better health outcomes, 
increases productivity and quality of life, and has the same outcome in 
terms of overall gains in economic security. The wellness provisions of 
these regulations will result in fewer instances in which wellness 
programs shift costs to high-risk individuals, and more instances in 
which these individuals succeed at improving health habits and health.
    Additional economic benefits derive directly from the improved 
clarity provided by the regulations. The regulations will reduce 
uncertainty and costly disputes and promote confidence in health 
benefits' value, thereby improving labor market efficiency and 
fostering the establishment and continuation of group health plans and 
their wellness program provisions.
    The Departments estimate that the dollar value of the expanded 
coverage attributable to HIPAA's nondiscrimination provisions is 
approximately $850 million annually. The Departments believe that the 
cost of HIPAA's nondiscrimination provisions is borne by covered 
workers. Costs can be shifted to workers through increases in employee 
premium shares or reductions (or smaller increases) in pay or other 
components of compensation, by increases in deductibles or other cost 
sharing, or by reducing the richness of health benefits. Whereas the 
benefits of the nondiscrimination provisions are concentrated in a 
relatively small population, the costs are distributed broadly across 
plans and enrollees.
    The proposed rules on wellness programs impose certain requirements 
on wellness programs providing rewards that would otherwise 
discriminate based on a health factor in order to ensure that the 
exception for wellness programs does not eviscerate the general rule 
contained in HIPAA's nondiscrimination provisions. Costs associated 
with the wellness program provisions are justified by the benefits 
received by those individuals now able, through alternative standards, 
to participate in such programs. Because the new provisions limit 
rewards for wellness programs that require an individual to satisfy a 
standard related to a health factor to 20 percent of the cost of single 
coverage (with additional provisions related to rewards that apply also 
to classes of dependents), some rewards will be reduced and this 
reduction might compel some individuals to decline coverage. The number 
of individuals affected, however, is thought to be small. Moreover, the 
Departments estimate that the cost of the reduction in rewards that 
would exceed the limit will amount to only $6 million. Establishing 
reasonable alternative standards, which should increase coverage for 
those now eligible for discounts as well as their participation in 
programs designed to promote health or prevent disease, is expected to 
cost between $2 million to $9 million. The total costs should therefore 
fall within a range between $8 million and $15 million annually.
    New economic costs may be also incurred in connection with the 
wellness provisions if reductions in rewards result in the reduction of 
wellness programs' effectiveness, but this effect is expected to be 
very small. Other new economic costs may be incurred by plan sponsors 
to make available reasonable alternative standards where required. The 
Departments are unable to estimate these costs due to the variety of 
options available to plan sponsors for bringing wellness programs into 
compliance with these rules.

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

    Under Executive Order 12866, 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

[[Page 75021]]

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 regulatory 
action. The Departments performed a comprehensive, unified analysis to 
estimate the costs and benefits attributable to the final regulations 
for purposes of compliance with the Executive Order 12866, the 
Regulatory Flexibility Act, and the Paperwork Reduction Act. The 
Departments' analyses and underlying assumptions are detailed below. 
The Departments believe that the benefits of the final regulations 
justify their costs.

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.) and likely to have 
a significant economic impact on a substantial number of small 
entities. Unless an agency certifies that a final rule will not have a 
significant economic impact on a substantial number of small entities, 
section 604 of the RFA requires that the agency present a final 
regulatory flexibility analysis (FRFA) 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 the 2001 interim rules were issued as final rules and not 
as a notice of proposed rulemaking, the RFA did not apply and the 
Departments were not required to either certify that the rule would not 
have a significant impact on a substantial number of small entities or 
conduct a regulatory flexibility analysis. The Departments nonetheless 
crafted those regulations in careful consideration of effects on small 
entities, and conducted an analysis of the likely impact of the rules 
on small entities. This analysis was detailed in the preamble to the 
interim final rule.
    The Departments also conducted an initial regulatory flexibility 
analysis in connection with the proposed regulations on wellness 
programs and present here a FRFA with respect to the final regulations 
on wellness programs pursuant to section 604 of the RFA. For purposes 
of their unified FRFA, the Departments adhered to EBSA's proposed 
definition of small entities. The Departments consider a small entity 
to be an employee benefit plan with fewer than 100 participants. The 
basis of 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 that cover fewer than 100 participants. The 
Departments believe that assessing the impact of this final rule on 
small plans is an appropriate substitute for evaluating the effect on 
small entities as that term is defined in the RFA. This definition of 
small entity differs, however, from the definition of small business 
based on standards promulgated by the Small Business Administration (13 
CFR 121.201) pursuant to the Small Business Act (15 U.S.C. 631 et 
seq.). Because of this difference, the Departments requested comments 
on the appropriateness of this size standard for evaluating the impact 
of the proposed regulations on small entities. No comments were 
received.
    The Departments estimate that 35,000 plans with fewer than 100 
participants vary employee premium contributions or cost-sharing across 
similarly situated individuals based on health factors.\2\ While this 
represents just one percent of all small plans, the Departments believe 
that because of the large number of plans, this may constitute a 
substantial number of small entities. The Departments also note that at 
least some premium rewards may be large. Premium discounts associated 
with wellness programs are believed to range as high as $920 per 
affected participant per year. Therefore, the Departments believe that 
the impact of this regulation on at least some small entities may be 
significant.
---------------------------------------------------------------------------

    \2\ Based on tabulations of the 2003 Medical Expenditure Panel 
Survey Insurance Component (MEPS-IC) and 1997 Survey of Government 
Finances (SGF), the Departments estimate that roughly 2.4 million 
small health plans exist. Of these, 1.2 percent of these plans are 
believed to vary premiums (as suggested in a 1993 study by the 
Robert Woods Johnson Foundation) while .5 percent are thought to 
vary benefits (as suggested in, Spec Summary. United States Salaried 
Managed Health/Health Promotion Initiatives, 2003-2004, Hewitt 
Associates, July, 2003.). Assuming that half of those that vary 
premiums also vary benefits, the Departments conclude that 1.5 
percent of all small plans are potentially affected by the statute.
---------------------------------------------------------------------------

    Under these final regulations on wellness programs, such programs 
are not subject to additional requirements if none of the conditions 
for obtaining a reward is based on an individual satisfying a standard 
that is related to a health factor (or if a wellness program does not 
provide a reward).
    Where a condition for obtaining a reward is based on an individual 
satisfying a standard related to a health factor, the wellness program 
will not violate the nondiscrimination provisions if additional 
requirements are met. The first requirement limits the maximum 
allowable reward or total of rewards to a maximum of 20 percent of the 
cost of employee-only coverage under the plan (with additional 
provisions related to rewards that apply also to classes of 
dependents). The magnitude of the limit is intended to offer plans 
maximum flexibility while avoiding the effect of denying coverage or 
creating an excessive financial penalty for individuals who cannot 
satisfy the initial standard based on a health factor.
    The Departments estimate that 4,000 small plans and 22,000 small 
plan participants will be affected by this limit.\3\ These plans can 
comply with this requirement by reducing the discount to the regulated 
maximum. This will result in an increase in premiums (or decrease in 
cost-sharing) by about $1.3 million on aggregate for those participants 
receiving qualified premium discounts \4\ This constitutes an ongoing, 
annual cost of $338 on average per affected plan. The regulation does 
not limit small plans' flexibility to shift this cost to all 
participants in the form

[[Page 75022]]

of small premium increases or benefit cuts.
---------------------------------------------------------------------------

    \3\ Simulations run by the Departments suggest that 10.7 percent 
of all plans exceed the capped premium discount. For the purposes of 
this analysis, it was assumed that the affected plans were 
proportionally distributed between large and small plans. However, 
it is likely that larger plans would have more generous welfare 
programs and therefore, this estimate is likely an upper bound.
    \4\ Estimate is based on the 2003-04 Hewitt Study and various 
measures of the general health of the labor force suggest that 
roughly 30 percent of health plan participants will not qualify for 
the discount. While plans exceeding the capped discount could meet 
the statutes requirements by transferring the excess amount, on 
average $57, to the non-qualifying participants, given current 
trends in the health insurance industry, it is considered more 
likely that plans would instead lower the amount of the discount 
given to the 70 percent of participants that qualify. This transfer 
would roughly total $1.3 million dollars.
---------------------------------------------------------------------------

    The second requirement provides that wellness programs must be 
reasonably designed to promote health or prevent disease. Comments 
received by the Departments and available literature on employee 
wellness programs suggest that existing wellness programs generally 
satisfy this requirement. The requirement therefore is not expected to 
compel small plans to modify existing wellness programs.
    The third requirement is that the program give individuals eligible 
for the program the opportunity to qualify for the reward at least once 
per year. This provision was included within the terms of the 
requirements for reasonable design in the proposed regulations. The 
Departments did not anticipate that a cost would arise from the 
requirements related to reasonable design when taken together, but 
requested comments on their assumptions. Because no comments were 
received, the Departments have not attributed a cost to this provision 
of the final rule.
    The fourth requirement provides that rewards under wellness 
programs must be available to all similarly situated individuals. 
Rewards are not available to similarly situated individuals unless a 
program allows a reasonable alternative standard or waiver of the 
applicable standard, if it is unreasonably difficult due to a medical 
condition or medically inadvisable to attempt to satisfy the otherwise 
applicable standard. The Departments believe that some small plans' 
wellness programs do not currently satisfy this requirement and will 
have to be modified.
    The Departments estimate that 3,000 small plans' wellness programs 
include initial standards that may be unreasonably difficult due to a 
medical condition or medically inadvisable for some participants to 
meet.\5\ These plans are estimated to include 4,000 participants for 
whom the standard is in fact unreasonably difficult due to a medical 
condition or medically inadvisable to meet.\6\ Satisfaction of 
alternative standards by these participants will result in cost 
increases for plans as these individuals qualify for discounts or avoid 
surcharges. If all of these participants request and then satisfy an 
alternative standard, the cost would amount to about $2 million 
annually. If one-half request alternative standards and one-half of 
those meet them, the cost would be $0.5 million.\7\
---------------------------------------------------------------------------

    \5\ The 2003-04 Hewitt Survey finds that 9 percent of its 
respondents require participants to achieve a certain health 
standard to be eligible for discounts. Based on assumptions about 
the general health of the labor force, approximately 2.3 percent of 
health plan participants may and 1.5 percent will find these 
standards difficult to achieve.
    \6\ Many small plans are very small, having fewer than 10 
participants. Hence, many small plans will include no participant 
for whom either of these standards apply.
    \7\ Simulations run by the Departments find that the average 
premium discount for all health plans after the cap is enforced will 
be approximately $450 dollars. This average is then applied to the 
upper and lower bounds of those able to pass the alternative 
standards in small health plans in order to determine the upper and 
lower bound of the transfer cost.
---------------------------------------------------------------------------

    In addition to the costs associated with new participants 
qualifying for discounts through alternative standards, small plans may 
also incur new economic costs by simply providing alternative 
standards. However, plans can satisfy this requirement by providing 
inexpensive alternative standards and have the flexibility to select 
whatever reasonable alternative standard is most desirable or cost 
effective. Plans not wishing to provide alternative standards also have 
the option of eliminating health status-based variation in employee 
premiums or waiving standards for individuals for whom the program 
standard is unreasonably difficult due to a medical condition or 
medically inadvisable to meet. The Departments expect that the economic 
cost to provide alternatives combined with the associated cost of 
granting discounts or waiving surcharges will not exceed the cost 
associated with granting discounts or waiving surcharges for all 
participants who qualify for an alternative. Those costs are estimated 
here at $0.5 million to $2 million, or about $160 to $650 per affected 
plan. Plans have the flexibility to pass back some or all of this cost 
to all participants in the form of small premium increases or benefit 
cuts.
    The fifth requirement provides that plan materials describing 
wellness program standards disclose the availability of reasonable 
alternative standards. This requirement will affect the approximately 
4,000 small plans that condition rewards on satisfaction of a standard. 
These plans will incur economic costs to revise affected plan 
materials. The estimated 1,000 to 4,000 small plan participants who 
will succeed at satisfying these alternative standards will benefit 
from these disclosures. The disclosures need not specify what 
alternatives are available unless the plan describes the initial 
standard in writing and the regulation provides sample language that 
can be used to satisfy this requirement. Legal requirements other than 
this regulation generally require plans and issuers to maintain 
accurate materials describing plans. Plans and issuers generally update 
such materials on a regular basis as part of their normal business 
practices. This requirement is expected to represent a negligible 
fraction of the ongoing, normal cost of updating plans' materials. This 
analysis therefore attributes no cost to this requirement.

Paperwork Reduction Act--Department of Labor and Department of the 
Treasury

    The 2001 interim rules included an information collection request 
(ICR) related to the notice of the opportunity to enroll in a plan 
where coverage had been denied based on a health factor before the 
effective date of HIPAA. That ICR was approved under OMB control 
numbers 1210-0120 and 1545-1728, and was subsequently withdrawn from 
OMB inventory because the notice, if applicable, was to have been 
provided only once.
    The proposed regulations on wellness programs did not include an 
information collection request. Like the proposed regulations, the 
final regulations include a requirement that, if a plan's wellness 
program requires individuals to meet a standard related to a health 
factor in order to qualify for a reward and if the plan materials 
describe this standard, the materials must also disclose the 
availability of a reasonable alternative standard. If plan materials 
merely mention that a program is available, the disclosure relating to 
alternatives is not required. The regulations include samples of 
disclosures that could be used to satisfy the requirements of the final 
regulations.
    In concluding that the proposed rules did not include an 
information collection request, the Departments reasoned that much of 
the information required was likely already provided as a result of 
state and local mandates or the usual business practices of group 
health plans and group health insurance issuers in connection with the 
offer and promotion of health care coverage. In addition, the sample 
disclosures would enable group health plans to make any modifications 
necessary with minimal effort.
    Finally, although neither the proposed or final regulations include 
a new information collection request, the regulations might have been 
interpreted to require a revision to an existing collection of 
information. Administrators of group health plans covered under Title I 
of ERISA are generally required to make certain disclosures about the 
terms of a plan and material changes in terms through a Summary Plan 
Description (SPD) or

[[Page 75023]]

Summary of Material Modifications (SMM) pursuant to sections 101(a) and 
102(a) of ERISA and related regulations. The ICR related to the SPD and 
SMM is currently approved under OMB control number 1210-0039. While 
these materials may in some cases require revisions to comply with the 
final regulations, the associated burden is expected to be negligible, 
and is in fact already accounted for in connection with the SPD and SMM 
ICR by a burden estimation methodology that anticipates ongoing 
revisions. Therefore, any change to the existing information collection 
request arising from these final regulations is not substantive or 
material. Accordingly, no application for approval of a revision to the 
existing ICR has been made to OMB in connection with these final 
regulations.

Paperwork Reduction Act--Department of Health and Human Services

Collection of Information Requirements
    Under the Paperwork Reduction Act of 1995, we are required to 
provide notice in the Federal Register and solicit public comment 
before a collection of information requirement is submitted to the 
Office of Management and Budget (OMB) for review and approval. In order 
to fairly evaluate whether an information collection should be approved 
by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act of 1995 
requires that we solicit comment on the following issues:
    <bullet> The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
    <bullet> The accuracy of our estimate of the information collection 
burden.
    <bullet> The quality, utility, and clarity of the information to be 
collected.
    <bullet> Recommendations to minimize the information collection 
burden on the affected public, including automated techniques.
    Department regulations in 45 CFR 146.121(i)(4) require that if 
coverage has been denied to any individual because the sponsor of a 
self-funded nonfederal governmental plan has elected under 45 CFR Part 
146 to exempt the plan from the requirements of this section, and the 
plan sponsor subsequently chooses to bring the plan into compliance, 
the plan must: notify the individual that the plan will be coming into 
compliance; afford the individual an opportunity to enroll that 
continues for at least 30 days, specify the effective date of 
compliance; and inform the individual regarding any enrollment 
restrictions that may apply once the plan is in compliance.
    The burden associated with this requirement was approved by The 
Office of Management and Budget (OMB) under OMB control number 0938-
0827, with a current expiration date of April 30, 2009.
    In addition, CMS-2078-P, published in the Federal Register on 
January 8, 2001 (66 FR 1421) describes the bona fide wellness programs 
and specifies their criteria. Section 146.121(f)(1)(iv) further 
stipulates that the plan or issuer disclose in all plan materials 
describing the terms of the program the availability of a reasonable 
alternative standard to qualify for the reward under a wellness 
program. However, in plan materials that merely mention that a program 
is available, without describing its terms, the disclosure is not 
required.
    The burden associated with this requirement was approved by OMB 
control number 0938-0819, with a current expiration date of April 30, 
2009.

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. Therefore, a regulatory assessment is 
not required. It has also been determined that section 553(b) of the 
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to 
these regulations, and, because these regulations do not impose a 
collection of information on 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.

Congressional Review Act

    These final regulations are subject to the Congressional Review Act 
provisions of the Small Business Regulatory Enforcement Fairness Act of 
1996 (5 U.S.C. 801 et seq.) and have been transmitted to Congress and 
the Comptroller General for review. These regulations, however, 
constitute a ``major rule,'' as that term is defined in 5 U.S.C. 804, 
because they are likely to 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

    For purposes of the Unfunded Mandates Reform Act of 1995 (Pub. L. 
104-4), as well as Executive Order 12875, these final regulations do 
not include any federal mandate that may result in expenditures by 
state, local, or tribal governments, nor does it include mandates which 
may impose an annual burden of $100 million or more on the private 
sector.

Federalism Statement--Department of Labor and Department of Health and 
Human Services

    Executive Order 13132 outlines fundamental principles of 
federalism, and requires the adherence to specific criteria by federal 
agencies in the process of their formulation and implementation of 
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 have substantial direct effects on the 
States, the relationship between the national government and States, or 
on the distribution of power and responsibilities among 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 
standards prohibiting discrimination based on health factors.
    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 preemption provision to 
ERISA (as well as to the PHS Act) narrowly preempting State 
requirements for group health insurance coverage. With respect to the

[[Page 75024]]

HIPAA nondiscrimination provisions, States may continue to apply State 
law requirements except to the extent that such requirements prevent 
the application of the portability, access, and renewability 
requirements of HIPAA, which include HIPAA's nondiscrimination 
requirements provisions that are the subject of this rulemaking.
    In enacting these new preemption provisions, Congress intended to 
preempt State insurance requirements only to the extent that those 
requirements 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 
nondiscrimination provisions, and be preempted. Accordingly, States 
have significant latitude to impose requirements on health insurance 
issuers that are more restrictive than the federal law.
    Guidance conveying this interpretation was published in the Federal 
Register on April 8, 1997. (62 FR 16904) and on December 30, 2004 (62 
FR 78720). 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 nondiscrimination 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. To date, HHS has had occasion to enforce the 
HIPAA nondiscrimination provisions in only two States and currently 
enforces the nondiscrimination provisions in only one State in 
accordance with that State's specific request to do so. When exercising 
its responsibility to enforce 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.\8\ 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 enforcing 
HIPAA's requirements, and the mechanism for allocating enforcement 
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 policy making 
discretion of the States, DOL and HHS have engaged in numerous efforts 
to consult with and work cooperatively with affected State and local 
officials.
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    \8\ This authority applies to insurance issued with respect to 
group health plans generally, including plans covering employees of 
church organizations. Thus, this discussion of federalism applies to 
all group health insurance coverage that is subject to the PHS Act, 
including those church plans that provide coverage through a health 
insurance issuer (but not to church plans that do not provide 
coverage through a health insurance issuer).
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    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 Department of Labor staff have attended the 
quarterly meetings consistently to listen to the concerns of the State 
Insurance Departments regarding HIPAA issues, including the 
nondiscrimination provisions. 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.
    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 rating practices and late 
enrollment issues. The Departments employed the States' insights on 
insurance rating practices in developing the provisions prohibiting 
``list-billing,'' and their experience with late enrollment in crafting 
the regulatory provision clarifying the relationship between the 
nondiscrimination provisions and late enrollment. Specifically, the 
regulations clarify that while late enrollment, if offered by a plan, 
must be available to all similarly situated individuals regardless of 
any health factor, an individual's status as a late enrollee is not 
itself within the scope of any health factor.
    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, the 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 Congress's 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 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 Rules for Nondiscrimination in Health Coverage in the 
Group Market (RIN 1210-AA77 and RIN 0938-AI08), in a meaningful and 
timely manner.

[[Page 75025]]

Unified Analysis of Costs and Benefits

1. Introduction
    HIPAA's nondiscrimination provisions generally prohibit group 
health plans and group health insurance issuers from discriminating 
against individuals on the basis of health factors. The primary effect 
and intent of the provision is to increase access to affordable group 
health coverage for individuals with health problems. This effect, and 
the economic costs and benefits attendant to it, primarily flows from 
the statutory provisions of HIPAA that this regulation implements. 
However, the statute alone leaves room for varying interpretations of 
exactly which practices are prohibited or permitted at the margin. 
These regulations draw on the Departments' authority to clarify and 
interpret HIPAA's statutory nondiscrimination provisions in order to 
secure the protections intended by Congress for plan participants and 
beneficiaries. The Departments crafted them to satisfy this mandate in 
as economically efficient a manner as possible, and believe that the 
economic benefits of the regulations justify their costs. The analysis 
underlying this conclusion takes into account both the effect of the 
statute and the impact of the discretion exercised in the regulations.
    The nondiscrimination provisions of the HIPAA statute and of these 
regulations generally apply to both group health plans and group health 
insurance issuers. Economic theory predicts that issuers will pass 
their costs of compliance back to plans, and that plans may pass some 
or all of issuers' and their own costs of compliance to participants. 
This analysis is carried out in light of this prediction.
    These final regulations are needed to clarify and interpret the 
HIPAA nondiscrimination provisions under section 702 of ERISA, section 
2702 of the PHS Act, and section 9802 of the Code, and to ensure that 
group health plans and group health insurance issuers do not 
discriminate against individual participants or beneficiaries based on 
any health factors with respect to health care coverage and premiums. 
The 2001 interim rules provided additional guidance to explain the 
application of the statute to benefits, to clarify the relationship 
between the HIPAA nondiscrimination provisions and the HIPAA 
preexisting condition exclusion limitations, to explain the 
applications of these provisions to premiums, to describe similarly 
situated individuals, to explain the application of the provisions to 
actively-at-work and nonconfinement clauses, to clarify that more 
favorable treatment of individuals with medical needs generally is 
permitted, and to describe plans' and issuers' obligations with respect 
to plan amendments.\9\ These final regulations clarify the relationship 
between the source-of-injury rules and the timing of a diagnosis of a 
medical condition and add an example to illustrate how the benefits 
rules apply to the carryover feature of HRAs.
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    \9\ The Departments' estimate of the economic impact of the 2001 
interim final regulations was published at 66 FR 1393 (January 8, 
2001). These one-time costs were already absorbed by plans and 
issuers and are not discussed in this analysis. In fact, the only 
notice requirement in the 2001 interim final regulations was deleted 
from the final regulations because the time period for compliance 
has passed, with one small exception. Certain self-insured, 
nonfederal governmental plans that had opted out of the HIPAA 
nondiscrimination provisions under Section 2721(b)(2) of the PHS Act 
and that have since decided to opt back in may be required to send a 
notice to individuals previously denied coverage due to a health 
factor. However, to date, only approximately 550 such plans have 
notified CMS that they are opting-out of the HIPAA nondiscrimination 
provisions and CMS does not receive information regarding a plan's 
decision to opt back in. The Departments estimate that the number of 
plans having done this is very small and, therefore, estimate that 
the impact of the notice provision on such plans is too small to 
calculate.
---------------------------------------------------------------------------

    The proposed rules on wellness programs were issued in order to 
ensure that the exception for wellness programs would not contravene 
HIPAA's nondiscrimination provisions. With respect to wellness 
programs, these final regulations clarify some ambiguities in the 
proposed rules, make some changes in terminology and organization, and 
add a description of wellness programs not required to satisfy 
additional standards. The final rules also set the maximum reward for 
wellness programs that require satisfaction of a standard at 20 percent 
of the cost of single coverage (with additional provisions related to 
rewards that apply also to classes of dependents), where the proposed 
rules had stated the limit in terms of a range of percentages.
    Because the 2001 interim rules and proposed regulations on wellness 
programs were originally issued as separate rulemaking actions, the 
Departments estimated their economic impacts separately. The costs and 
benefits of the statutory nondiscrimination provisions and the 2001 
interim rules are again described separately from the wellness program 
provisions here, due to both differing baselines for the measurement of 
impact, and to reliance on different types of information and 
assumptions in the analyses.
2. Costs and Benefits of HIPAA's Nondiscrimination Provisions
    The Departments have evaluated the impacts of HIPAA's 
nondiscrimination provisions. The nondiscrimination provisions of the 
2001 interim final rules were estimated to result in costs of about $20 
million to amend plans, revise plan informational materials, and notify 
employees previously denied coverage on the basis of a health factor of 
enrollment opportunities. Because these costs were associated with one-
time activities that were required to be completed by the applicability 
date of the 2001 interim rules, these costs have been fully defrayed.
    The primary statutory economic benefits associated with the HIPAA 
nondiscrimination provisions derive from increased access to affordable 
group health plan coverage for individuals whose health factors had 
previously restricted their participation in such plans. Expanding 
access entails both benefits and costs. Newly-covered individuals, who 
previously had to purchase similar services out-of-pocket, reap a 
simple and direct financial gain. In addition, these individuals may be 
induced 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.\10\

[[Page 75026]]

    Inclusion of these newly-covered individuals, though, will increase 
both premiums and claims costs incurred by group health plans. Economic 
theory predicts that these costs will ultimately be shifted to all plan 
participants or employees, either through an increased share of 
insurance costs, or lowered compensation.\11\ If the number of newly-
covered individuals is small relative to the total number of plan 
participants and costs are distributed evenly, then the increased 
burden for each individual should be minimal. However, it is unclear 
how previously-covered individuals will respond to subsequent changes 
in their benefits package and if their response will have unforeseen 
economic costs.\12\ The HIPAA nondiscrimination cost is estimated to be 
substantial. Annual group health plan costs average approximately 
$7,100 per-participant,\13\ and it is likely that average costs would 
be higher for individuals who had been denied coverage due to health 
factors. Prior to HIPAA's enactment, less than one-tenth of one percent 
of employees, or roughly 120,000 in today's labor market, were denied 
employment-based coverage annually because of health factors.\14\ A 
simple assessment suggests that the total cost of coverage for such 
employees could be $850 million. However, this estimated statutory 
transfer is small relative to the overall cost of employment-based 
health coverage. Group health plans will spend over $620 billion this 
year to cover approximately 174 million employees and their 
dependents.\15\ Estimated costs under HIPAA's nondiscrimination 
provisions represent a very small fraction of one percent of total 
group health plan expenditures.
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    \10\ Individuals without health insurance are less likely to get 
preventive care and less likely to have a regular source of care. A 
lack of health insurance generally increases the likelihood that 
needed medical treatment will be forgone or delayed. Forgoing or 
delaying care increases the risk of adverse health outcomes. These 
adverse outcomes in turn generate higher medical costs, which are 
often shifted to public funding sources (and therefore to taxpayers) 
or to other payers. They also erode productivity and the quality of 
life. Improved access to affordable group health coverage for 
individuals with health problems under HIPAA's nondiscrimination 
provisions will lead to more insurance coverage, timelier and fuller 
medical care, better health outcomes, and improved productivity and 
quality of life. This is especially true for the individuals most 
affected by HIPAA's nondiscrimination provisions--those with adverse 
health conditions. Denied insurance, individuals in poorer health 
are more likely to suffer economic hardship, to forgo badly needed 
care for financial reasons, and to suffer adverse health outcomes as 
a result. For them, gaining insurance is more likely to mean gaining 
economic security, receiving timely, quality care, and living 
healthier, more productive lives. For an extensive discussion of the 
consequences of uninsurance, see: ``The Uninsured and their Access 
to Health Care'' (2004). The Kaiser Commission on Medicaid and the 
Uninsured, November; ``Insuring America's Health'', (2004). 
Institute of Medicine; ``Health Policy and the Uninsured'' (2004) 
edited by Catherine G. McLaughlin. Washington, DC: Urban Institute 
Press; Miller, Wilhelmine et al (2004) ``Covering the Uninsured: 
What is it Worth,'' Health Affairs, March: w157-w167.
    \11\ 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. The extent to 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 top accept wage offsets is 
minimized.
    \12\ 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.
    \13\ Departments' tabulations using the 2005 Kaiser Family 
Foundation's Employer Health Benefits Annual Survey. Average 
employee premium is a weighted average of premiums for single, 
family, and employee-plus-one health plans. The estimate for 
Employee-Plus-One health premiums was derived using the 2003 MEPS-
IC, as was the share of employees in each type of plans. 
Participants are defined as the workers or primary policy holders.
    \14\ Departments' tabulations off the February 1997 Current 
Population Survey (CPS), Contingent Worker Supplement. The estimate 
was projected to reflect current labor market conditions by assuming 
the same share of the employed, civilian force would be affected and 
using the 2004 CPS table, ``Employment status of the civilian 
noninstitutional population, 1940 to date.''
    \15\ The Departments' estimate is based on the Office of the 
Actuary at the Centers for Medicare and Medicaid Services (CMS) 
projected measure of total personal health expenditures by private 
health insurance in 2005. This total ($707.0 billion) is then 
multiplied by the share of privately insured individuals covered by 
employer-sponsored health insurance in 2004 as estimated by the 2005 
March CPS (88 percent).
---------------------------------------------------------------------------

3. Costs and Benefits of Finalizing the 2001 Interim Rules
Prohibiting Discrimination
    Many of the provisions of these regulations serve to specify more 
precisely than the statute alone exactly what practices are prohibited 
by HIPAA as unlawful discrimination in eligibility or employee premiums 
among similarly situated employees. For example, under the regulations, 
eligibility generally may not be restricted based on an individual's 
participation in risky activities, confinement to an institution, or 
absence from work on an individual's enrollment date due to illness. 
The regulations provide that various plan features including waiting 
periods and eligibility for certain benefits constitute rules for 
eligibility which may not vary across similarly situated individuals 
based on health factors. They also provide that plans may not 
reclassify employees based on health factors in order to create 
separate groups of similarly situated individuals among which 
discrimination would be permitted.
    All of these provisions have the effect of clarifying and ensuring 
certain participants' right to freedom from discrimination in 
eligibility and premium amounts, thereby securing their access to 
affordable group health plan coverage. The costs and benefits 
attributable to these provisions resemble those attendant to HIPAA's 
statutory nondiscrimination provisions. Securing participants' access 
to affordable group coverage provides economic benefits by reducing the 
numbers of uninsured and thereby improving health outcomes. The 
regulations entail a shifting of costs from the employees whose rights 
are secured (and/or from other parties who would otherwise pay for 
their health care) to plan sponsors (or to other plan participants if 
sponsors pass those costs back to them).
    The Departments lack any basis on which to distinguish these 
benefits and costs from those of the statute itself. It is unclear how 
many plans were engaging in the discriminatory practices targeted for 
prohibition by these regulatory provisions. Because these provisions 
operate largely at the margin of the statutory requirements, it is 
likely that the effects of these provisions were far smaller than the 
similar statutory effects. The Departments are confident, however, that 
by securing employees' access to affordable coverage at the margin, the 
regulations, like the statute, have yielded benefits that justify 
costs.
Clarifying Requirements
    Additional economic benefits derive directly from the improved 
clarity provided by the regulations. The regulation provides clarity 
through both its provisions and its examples of how those provisions 
apply in various circumstances. By clarifying employees' rights and 
plan sponsors' obligations under HIPAA's nondiscrimination provisions, 
the regulations reduce uncertainty and costly disputes over these 
rights and obligations. Greater clarity promotes 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

[[Page 75027]]

continuation of group health plans by employers.
Impact of the Final Rules
    As noted earlier in this preamble, the Departments have not 
modified the 2001 interim rules in any way that would impact the 
original cost estimates or the magnitude of the statutory transfers. 
Accordingly, no impact is attributable to these final regulations when 
measured against the baseline of the interim final rules. The 
provisions of the 2001 interim rules offer the appropriate baseline for 
this measurement because these rules were generally applicable for plan 
years beginning on or after July 1, 2001.
4. Costs and Benefits of the Rules Applicable to Wellness Programs
    By contrast with the nondiscrimination regulatory provisions issued 
as interim final rules, the provisions relating to wellness programs 
were issued as proposed rules. This final regulation will not become 
effective until its applicability date.
    Under the final regulation, health plans generally may vary 
employee premium contributions or benefit levels across similarly 
situated individuals based on a health factor only in connection with 
wellness programs. The final regulation establishes five requirements 
for wellness programs that vary premiums or benefits based on 
participation in the program and condition a reward involving premiums 
or benefits on satisfaction of a standard related to a health factor. 
These requirements will, therefore, apply to only a subset of all 
wellness programs.
    Available literature, together with comments received by the 
Departments, demonstrate that well-designed wellness programs can 
deliver benefits well in excess of their costs. For example, the U.S. 
Centers for Disease Control and Prevention estimate that implementing 
proven clinical smoking cessation interventions can save one year of 
life for each $2,587 invested.\16\ In addition to reduced mortality, 
benefits of effective wellness programs can include reduced 
absenteeism, improved productivity, and reduced medical costs.\17\ The 
requirements of the final regulation were crafted to accommodate and 
not impair such beneficial programs, while combating discrimination in 
eligibility and premiums for similarly situated individuals as intended 
by Congress.
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    \16\ Cromwell, J., W. J. Bartosch, M. C. Fiore, V. Hasselblad 
and T. Baker. ``Cost-Effectiveness of the Clinical Practice 
Recommendations in the AHCPR Guideline for Smoking Cessation.'' 
Journal of the American Medical Association, vol. 278 (December 3, 
1997): 1759-66.
    \17\ The benefits of employer wellness programs are well 
documented. One study found the annual per participant savings to be 
$613 while private companies have reported returns of as much as 
$4.50 in lowered medical expenses for every dollar spent on health 
programs. (See for example, Gregg M. State et al, ``Quantifiable 
Impact of the Contract for Health Wellness: Health Behaviors, Health 
Care Costs, Disability and Workers' Compensation,'' Journal of 
Occupational and Environmental Medicine (2003), vol. 45 (2):109-117; 
Morgan O'Rourke & Laura Sullivan, ``A Health Return on Employee 
Investment'' Risk Management (2003), vol. 50 (11): 34-38; American 
Association of Health Plans and Health Insurance Association of 
America ``The Cost Savings of Disease Management Programs: Report on 
a Study of Health Plans,'' November, 2003; Rachel Christensen, 
``Employment-Based Health Promotion and Wellness Programs'' EBRI 
Notes (2001), vol. 22 (7): 1-6; and Steven G. Aldana ``Financial 
Impact of Wellness Programs: A Comprehensive Review of the 
Literature,'' American Journal of Health Promotions (2001), vol. 15 
(5): 296-320.)
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    Estimation of the economic impacts of the requirements is difficult 
because data on affected plans' current practices are incomplete, and 
because plans' approaches to compliance with the requirements and the 
effects of those approaches will vary and cannot be predicted. 
Nonetheless, the Departments endeavored to consider the impacts fully 
and to develop estimates based on reasonable assumptions.
    The Departments estimate that 1.6 percent of large plans and 1.2 
percent of small plans currently vary employee premium contributions 
across similarly situated individuals due to participation in a 
wellness program that provides rewards based on satisfaction of a 
standard related to a health factor.\18\ This amounts to 30,000 plans 
covering 1.1 million participants. According to survey data reported by 
Hewitt Associates,\19\ just less than one-half as many plans vary 
benefit levels across similarly situated individuals as vary premiums. 
This amounts to 13,000 plans covering 460,000 participants. The 
Departments considered the effect of each of the five requirements on 
these plans. For purposes of its estimates, the Departments assumed 
that one-half of the plans in the latter group are also included in the 
former, thereby estimating that 37,000 plans covering 1.3 million 
participants will be subject to the five requirements for wellness 
programs.
---------------------------------------------------------------------------

    \18\ Estimates are based on a 1993 survey of employers by the 
Robert Wood Johnson Foundation. More recent estimates are 
unavailable.
    \19\ Hewitt Associates, July 2003.
---------------------------------------------------------------------------

Limit on Reward
    Under the first requirement, any reward, whether applicable to 
employee premiums or benefit levels, must not exceed 20 percent of the 
total premium for employee-only coverage under the plan (with 
additional provisions related to rewards that apply also to classes of 
dependents). This percentage is the highest of the three alternative 
percentages suggested in the proposed rule, and the award limit used 
for purposes of the analysis of the proposed rule, which was 15 
percent--the midpoint of the three alternative percentages suggested in 
the proposal. The estimates here also reflect increases in average 
annual premiums and the numbers of plans and participants since 
publication of the proposed rules.
    The Departments lack representative data on the magnitude of the 
rewards applied by affected plans today. One consultant practicing in 
this area suggested that wellness incentive premium discounts ranged 
from about 3 percent to 23 percent, with an average of about 11 
percent.\20\ This suggests that most affected plans, including some 
whose discounts are somewhat larger than average, already comply with 
the first requirement and will not need to reduce the size of the 
rewards they apply. It appears likely, however, that perhaps a few 
thousand plans covering approximately one hundred thousand participants 
will need to reduce the size of their rewards in order to comply with 
the first requirement.
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    \20\ This estimate was made in 1998, shortly after the 1997 
interim final rule was published. Since then, it appears that 
wellness programs advocates have been advising health plans to offer 
premium discounts in the range of 5 to 11 percent, well below the 
proposed ceiling. For a full discussion, see Larry Chapman's, 
``Increasing Participation in Wellness Programs,'' National Wellness 
Institute Members ``Ask the Expert,'' July/August 2004.
---------------------------------------------------------------------------

    The Departments considered the potential economic effects of 
requiring these plans to reduce the size of their rewards. These 
effects are likely to include a shifting of costs between plan sponsors 
and participants, as well as new economic costs and benefits. Shifts in 
costs will arise as plans reduce rewards where necessary. Plan sponsors 
can exercise substantial control over the size and direction of these 
shifts. Limiting the size of rewards restricts only the differential 
treatment between participants who satisfy wellness program standards 
and those who do not. It does not, for example, restrict plans 
sponsors' flexibility to determine the overall respective employer and 
employee shares of base premiums. Possible outcomes include a shifting 
of costs to plan sponsors from participants who satisfy wellness 
program standards, from plan sponsors to participants who do not 
satisfy the standards, from participants who satisfy the standards to 
those who do not, or some combination of these.

[[Page 75028]]

    The Departments developed a very rough estimate of the total amount 
of costs that might derive from this requirement. The Departments' 
estimate assumes that (1) all rewards take the form of employee premium 
discounts; (2) discounts are distributed evenly within both the low-to-
average range and the average-to-high range, and are distributed across 
these ranges such that their mean equals the assumed average; and (3) 
70 percent of participants qualify for the discount. The 4,000 affected 
plans could satisfy this requirement by reducing the premium discount 
for the 100,000 participants who successfully complete a certified 
wellness program. When applied to the 2005 average annual employee-only 
premium of $4,024,\21\ discounts range from $115 to $920, with an 
average of $460. The maximum allowable discount based on 20 percent of 
current premium is $805. Reducing all discounts greater than $805 to 
that amount will result in an average annual reduction of about $57. 
Applying this reduction to the 100,000 participants assumed to be 
covered by 4,000 plans affected by the limit results in an estimate of 
the aggregate cost at $6 million.
---------------------------------------------------------------------------

    \21\ Average based on the Kaiser Family Foundation/Health 
Research and Education Trust Survey of Employer-Sponsored Health 
Benefits, 2005.
---------------------------------------------------------------------------

    New economic costs and benefits may arise if changes in the size of 
rewards result in changes in participant behavior. Net economic welfare 
might be lost if some wellness programs' effectiveness is eroded, but 
the magnitude and incidence of such effects is expected to be 
negligible. Consider a wellness program that discounts premiums for 
participants who take part in an exercise program. It is plausible 
that, at the margin, a few participants who would take part in order to 
obtain an existing discount will not take part to obtain a somewhat 
lower discount. This effect is expected to be negligible, however. 
Reductions in discounts are likely to average about $57 annually, which 
is very small when spread over biweekly pay periods. Moreover, the 
final regulation limits only rewards applied to similarly situated 
individuals in the context of a group health plan. It does not restrict 
plan sponsors from encouraging healthy lifestyles in other ways, such 
as by varying life insurance premiums.
    On the other hand, net economic welfare likely will be gained in 
instances where large premium differentials would otherwise have served 
to discourage enrollment in health plans by employees who did not 
satisfy wellness program requirements.
    The Departments believe that the net economic gains from 
prohibiting rewards so large that they could discourage enrollment 
based on health factors justify any net losses that might derive from 
the negligible reduction of some employees' incentive to participate in 
wellness programs.
Reasonable Design
    Under the second requirement, the program must be reasonably 
designed to promote health or prevent disease. The Departments believe 
that a program that is not so designed would not provide economic 
benefits, but would serve merely to shift costs from plan sponsors to 
targeted individuals based on health factors. Comments received by the 
Departments and available literature on employee wellness programs, 
however, suggest that existing wellness programs generally satisfy this 
requirement. As was stated in the analysis of the proposed rule, this 
requirement therefore is not expected to compel plans to modify 
existing wellness programs or entail additional economic costs.
Annual Opportunity To Qualify
    Although this requirement was included in the proposal within the 
requirement for reasonable design, it has been reorganized as a 
separate provision in these final regulations. At the time of the 
proposal, the Departments assumed that most plans satisfied the 
requirements for reasonable design, such that they would not be 
required to modify existing programs. Accordingly, no cost was 
attributed to the reasonable design requirements when taken together. 
The Departments did request comments on this assumption, but received 
no additional information in response. Accordingly, the Departments 
have not attributed a cost to this provision of the final regulations.
Uniform Availability
    The fourth requirement provides that where rewards are conditioned 
on satisfaction of a standard related to a health factor, rewards must 
be available to all similarly situated individuals. A reward is not 
available to all similarly situated individuals unless the program 
allows for a reasonable alternative standard if the otherwise 
applicable initial standard is unreasonably difficult to achieve due to 
a medical condition or medically inadvisable for the individual to 
meet. In particular, the program must offer any such individual the 
opportunity to satisfy a reasonable alternative standard. Comments 
received by the Departments and available literature on employee 
wellness programs suggest that some wellness programs do not currently 
satisfy this requirement and will have to be modified. The Departments 
estimate that among employers that provide incentives for employees to 
participate in wellness programs, nine percent require employees to 
achieve a low risk behavior to qualify for the incentive, 53 percent 
require a pledge of compliance, and 55 percent require participation in 
a program.\22\ Depending on the nature of the wellness program, it 
might be unreasonably difficult due to a medical condition or medically 
inadvisable for at least some plan participants to achieve the behavior 
or to comply with or participate in the program.
---------------------------------------------------------------------------

    \22\ Hewitt Associates, July, 2003. The sum of these shares 
exceeds 100 percent due to some employers using multiple criteria to 
determine compliance.
---------------------------------------------------------------------------

    The Departments identified three broad types of economic impact 
that might arise from this requirement. First, affected plans will 
incur some economic cost to make available reasonable alternative 
standards. Second, additional economic costs and benefits may arise 
depending on the nature of alternatives provided, individuals' use of 
these alternatives, and any changes in the affected individuals' 
behavioral and health outcomes. Third, some costs may be shifted from 
individuals who would fail to satisfy programs' initial standards, but 
who will satisfy reasonable alternative standards once available (and 
thereby qualify for associated rewards), to plan sponsors (or to other 
participants in their plans if plan sponsors elect to pass these costs 
back to all participants).
    The Departments note that some plans that offer rewards to 
similarly situated individuals based on their ability to meet a 
standard related to a health factor (and are therefore subject to the 
requirement) may not need to provide alternative standards. The 
requirement provides that alternative standards need not be specified 
or provided until a participant for whom it is unreasonably difficult 
due to a medical condition or medically inadvisable to satisfy the 
initial standard seeks such an alternative. Some wellness programs' 
initial standards may be such that no participant would ever find them 
unreasonably difficult to satisfy due to a medical condition or 
medically inadvisable to attempt. The Departments estimate that 3,000 
potentially affected plans have initial wellness program standards that 
might be unreasonably difficult for some participants to satisfy due to 
a medical condition or medically

[[Page 75029]]

inadvisable to attempt.\23\ Moreover, because alternatives need not be 
made available until they are sought by qualified plan participants, it 
might be possible for some plans to go for years without needing to 
make available an alternative standard. This could be particularly 
likely for small plans.\24\
---------------------------------------------------------------------------

    \23\ Estimate is based on both the share of plans in the 2003-04 
Hewitt survey stating that certain health factors or lifestyle 
choices affect employees' benefit coverage and the share of 
employers requiring employees to achieve a lower-risk behavior to 
earn incentives. These measures are then combined with the number of 
workers in the civilian labor force (from 2003 estimates of the 
Bureau of Labor Statistics (BLS) suffering from these maladies (as 
provided by the Centers for Disease Control (CDC) 2004 Health and 
the National Center for Statistics and Analysis (NCSA) 2004 
estimates of seatbelt use), by demographic group.
    \24\ The most common standards that would be implemented by this 
provision of the wellness program rules pertain to smoking, blood 
pressure, and cholesterol levels, according to the Hewitt survey. 
Based on data from the CDC, NCSA and BLS, the Departments estimate 
that among plans with five participants, about one-fourth will not 
contain any smokers, one-third will not contain participants with 
high blood pressure and two-fifths will not contain any with high 
cholesterol. Approximately 97 percent of all plans with potentially 
difficult initial wellness program standards have fewer than 100 
participants.
---------------------------------------------------------------------------

    The Departments estimate that as many as 27 percent of participants 
in plans with rewards that are based on meeting a standard related to a 
health factor, or 344,000 individuals, might fail to satisfy wellness 
programs' initial standards because they are unreasonably difficult due 
to a medical condition or medically inadvisable to meet.\25\ Of these, 
only about 30,000 are in the 3,000 plans assumed to apply standards 
that might be unreasonably difficult due to a medical condition or 
medically inadvisable for some plan participants to satisfy. The 
standards would in fact be unreasonably difficult or medically 
inadvisable to satisfy for some subset of these individuals--roughly 
two-thirds, or 19,000 by the Departments' estimate.\26\ Of these, it is 
assumed that between 5,000 and 19,000 of those individuals that seek 
alternative standards are able to satisfy them.\27\
---------------------------------------------------------------------------

    \25\ This estimate is considerably lower than that offered in 
the proposal due to a difference in the format of the data reported 
in the 2001 and 2003 Hewitt surveys, and the Departments' original 
adjustment for data reported in the 2001 survey as, ``not 
provided.'' The Departments believe in light of the 2003 data that 
the adjustments thought to be appropriate at the time overestimated 
the number of plans with standards that might be unreasonably 
difficult or medically inadvisable to meet, resulting in more 
instances in which alternative standards might be established and 
met, and greater magnitudes of transfers for individuals who would 
newly attain rewards. The Departments have revised their assumptions 
to account for a smaller number of plans with standards unreasonably 
difficult or medically inadvisable to meet, and a correspondingly 
larger number of participants who will already have been satisfying 
these standards. Accordingly, this results in a reduction of the 
estimates of transfers in connection with establishing reasonable 
alternative standards.
    \26\ Having previously determined the share of the working class 
population suffering from various maladies using CDC, NCSA and BLS 
estimates and how, according to the Hewitt survey, these conditions 
are factored into wellness programs, the Departments were able to 
estimate that 26.8 percent of plan participants may initially fail 
to satisfy program standards. Since the Hewitt study went on to 
state that 9 percent of employers surveyed required participants to 
meet the standard in order to receive premium discounts, it was then 
concluded that 2.3 percent may have difficulty meeting the standards 
and 1.5 percent will have difficulty meeting the standards.
    \27\ No independent estimates of the those satisfying 
alternative standards were available, so the Departments created an 
upper bound which assumes all individuals for whom the standards are 
unreasonably difficult seek and satisfy an alternative standard, and 
a lower bound which assumes half of those for whom the standards are 
unreasonably difficult seek an alternative, and half of those are 
able to satisfy it.
---------------------------------------------------------------------------

    The cost associated with establishing alternative standards is 
unknown. However, the regulation does not prescribe a particular type 
of alternative standard that must be provided. Instead, it permits plan 
sponsors flexibility to provide any reasonable alternative, or to waive 
the standard, for individuals for whom the initial standard is 
unreasonably difficult due to a medical condition or medically 
inadvisable to meet. The Departments expect that plan sponsors will 
select alternatives that entail the minimum net costs possible. Plan 
sponsors may select low-cost alternatives, such as requiring an 
individual for whom it would be unreasonably difficult to quit smoking 
(and thereby qualify for a non-smoker discount) to attend a smoking 
cessation program that is available at little or no cost in the 
community, or to watch educational videos or review educational 
literature. Plan sponsors presumably will select higher-cost 
alternatives only if they thereby derive offsetting benefits, such as a 
higher smoking cessation success rate.
    Although there is considerable uncertainty in these estimates, it 
seems reasonable to assume that the net cost sponsors will incur in the 
provision of alternatives, including new economic costs and benefits, 
will not exceed the cost of providing discounts (or waiving surcharges) 
for all plan participants who qualify for alternatives, which is 
estimated at between $2 million and $9 million.\28\ Other economic 
costs and benefits might arise where alternative standards are made 
available. For example, some individuals might receive a discount for 
satisfying alternative standards that turn out to be less beneficial to 
overall health than the initial standard might have been, resulting in 
a net loss of economic welfare. In other cases, the satisfaction of an 
alternative standard might produce the desired health improvement, 
which would represent a net gain in economic welfare.
---------------------------------------------------------------------------

    \28\ These estimates are the product of the range of numbers of 
individuals who might newly attain rewards and the average premium 
reward. It is likely that many plan sponsors will find more cost-
effective ways to satisfy this requirement, and that the true net 
cost to them will therefore be smaller than this.
---------------------------------------------------------------------------

    Although outcomes are uncertain, the Departments note that plan 
sponsors have strong motivation to identify and provide alternative 
standards that have positive net economic effects. They will be 
disinclined to provide alternatives that worsen behavioral and health 
outcomes, or that make financial rewards available absent meaningful 
efforts by participants to improve their health habits and health. 
Instead they will be inclined to provide alternatives that sustain or 
reinforce plan participants' incentive to improve their health habits 
and health, and/or that help participants make such improvements. It 
therefore seems likely that gains in economic welfare from this 
requirement will equal or justify losses. The Departments anticipate 
that the requirement to provide reasonable alternative standards will 
reduce instances where wellness programs serve only to shift costs to 
higher risk individuals and increase instances where programs succeed 
at helping individuals with higher health risks improve their health 
habits and health.
Disclosure Regarding Reasonable Alternative Standards
    The fifth requirement provides that plan materials describing 
wellness program standards that are related to a health factor must 
disclose the availability of reasonable alternative standards. Under 
some wellness programs, an individual must satisfy a standard related 
to a health factor in order to qualify for the reward.
    Plans offering wellness programs under which an individual must 
satisfy a standard related to a health factor in order to qualify for 
the reward must disclose in all plan materials describing the terms of 
the program the availability of a reasonable alternative standard. The 
regulations provide sample language for this disclosure. An actual 
description of the alternative standard is not required in such 
materials. In plan materials that merely mention that a wellness 
program is available but do not describe its terms, this disclosure of 
the availability of an alternative standard is not required. The 
Departments generally account elsewhere for plans' cost of updating 
such materials to reflect changes in plan provisions as required

[[Page 75030]]

under various disclosure requirements and as is part of usual business 
practice. This particular requirement is expected to represent a 
negligible fraction of the ongoing cost of updating plans' materials, 
and is not separately accounted for here.

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 sections 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, 110 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 Health and Human Services 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 (Pub. L. 104-191, 110 Stat. 1936), 
and amended by the Mental Health Parity Act (MHPA) and the Newborns' 
and Mothers' Health Protection Act (NMHPA) (Pub. L. 104-204, 110 Stat. 
2935), and the Women's Health and Cancer Rights Act (WHCRA) (Pub. L. 
105-277, 112 Stat. 2681-436).

List of Subjects

26 CFR Part 54

    Excise taxes, Health care, Health insurance, Pensions, 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 Part 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 Part 54 is amended as follows:

PART 54--PENSION EXCISE TAXES

0
Paragraph 1. The authority citation for part 54 is amended by removing 
the citation for Sec.  54.9802-1T to read, in part, as follows:

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


Sec.  54.9802-1T  [Removed]

0
Par. 2. Section 54.9802-1T is removed.

0
Par. 3. Section 54.9802-1 is revised to read as follows:


Sec.  54.9802-1  Prohibiting discrimination against participants and 
beneficiaries based on a health factor.

    (a) Health factors. (1) The term health factor means, in relation 
to an individual, any of the following health status-related factors:
    (i) Health status;
    (ii) Medical condition (including both physical and mental 
illnesses), as defined in Sec.  54.9801-2;
    (iii) Claims experience;
    (iv) Receipt of health care;
    (v) Medical history;
    (vi) Genetic information, as defined in Sec.  54.9801-2;
    (vii) Evidence of insurability; or
    (viii) Disability.
    (2) Evidence of insurability includes--
    (i) Conditions arising out of acts of domestic violence; and
    (ii) Participation in activities such as motorcycling, 
snowmobiling, all-terrain vehicle riding, horseback riding, skiing, and 
other similar activities.
    (3) The decision whether health coverage is elected for an 
individual (including the time chosen to enroll, such as under special 
enrollment or late enrollment) is not, itself, within the scope of any 
health factor. (However, under Sec.  54.9801-6, a plan must treat 
special enrollees the same as similarly situated individuals who are 
enrolled when first eligible.)
    (b) Prohibited discrimination in rules for eligibility--(1) In 
general--(i) A group health plan may not establish any rule for 
eligibility (including continued eligibility) of any individual to 
enroll for benefits under the terms of the plan that discriminates 
based on any health factor that relates to that individual or a 
dependent of that individual. This rule is subject to the provisions of 
paragraph (b)(2) of this section (explaining how this rule applies to 
benefits), paragraph (b)(3) of this section (allowing plans to impose 
certain preexisting condition exclusions), paragraph (d) of this 
section (containing rules for establishing groups of similarly situated 
individuals), paragraph (e) of this section (relating to 
nonconfinement, actively-at-work, and other service requirements), 
paragraph (f) of this section (relating to wellness programs), and 
paragraph (g) of this section (permitting favorable treatment of 
individuals with adverse health factors).
    (ii) For purposes of this section, rules for eligibility include, 
but are not limited to, rules relating to--
    (A) Enrollment;
    (B) The effective date of coverage;
    (C) Waiting (or affiliation) periods;
    (D) Late and special enrollment;
    (E) Eligibility for benefit packages (including rules for 
individuals to change their selection among benefit packages);
    (F) Benefits (including rules relating to covered benefits, benefit 
restrictions, and cost-sharing mechanisms such as coinsurance, 
copayments, and deductibles), as described in paragraphs (b)(2) and (3) 
of this section;
    (G) Continued eligibility; and
    (H) Terminating coverage (including disenrollment) of any 
individual under the plan.
    (iii) The rules of this paragraph (b)(1) are illustrated by the 
following examples:

    Example 1. (i) Facts. An employer sponsors a group health plan 
that is available to all employees who enroll within the first 30 
days of their employment. However, employees who do not enroll 
within the first 30 days cannot enroll later unless they pass a 
physical examination.
    (ii) Conclusion. In this Example 1, the requirement to pass a 
physical examination in order to enroll in the plan is a rule for 
eligibility that discriminates based on one or more health factors and 
thus violates this paragraph (b)(1).
    Example 2. (i) Facts. Under an employer's group health plan, 
employees who enroll during the first 30 days of employment (and 
during special enrollment periods) may choose between two benefit 
packages: An indemnity option and an HMO option. However, employees 
who enroll during late enrollment are permitted to enroll only in 
the HMO option and only if they provide evidence of good health.
    (ii) Conclusion. In this Example 2, the requirement to provide 
evidence of good health in order to be eligible for late enrollment in 
the HMO option is a rule for eligibility that discriminates based on 
one or more health factors and thus violates this paragraph (b)(1). 
However, if the plan did not require evidence of good health but 
limited late enrollees to the HMO option, the plan's rules for 
eligibility would not discriminate based on any health factor, and thus 
would not violate this paragraph (b)(1), because the time an individual 
chooses to enroll is not, itself, within the scope of any health 
factor.
    Example 3. (i) Facts. Under an employer's group health plan, all 
employees generally may enroll within the first 30 days of 
employment. However, individuals who participate in certain 
recreational activities, including motorcycling, are excluded from 
coverage.
    (ii) Conclusion. In this Example 3, excluding from the plan 
individuals who participate in recreational activities, such as

[[Page 75031]]

motorcycling, is a rule for eligibility that discriminates based on one 
or more health factors and thus violates this paragraph (b)(1).
    Example 4. (i) Facts. A group health plan applies for a group 
health policy offered by an issuer. As part of the application, the 
issuer receives health information about individuals to be covered 
under the plan. Individual A is an employee of the employer 
maintaining the plan. A and A's dependents have a history of high 
health claims. Based on the information about A and A's dependents, 
the issuer excludes A and A's dependents from the group policy it 
offers to the employer.
    (ii) Conclusion. See Example 4 in 29 CFR 2590.702(b)(1) and 45 CFR 
146.121(b)(1) for a conclusion that the exclusion by the issuer of A 
and A's dependents from coverage is a rule for eligibility that 
discriminates based on one or more health factors and violates rules 
under 29 CFR 2590.702(b)(1) and 45 CFR 146.121(b)(1) similar to the 
rules under this paragraph (b)(1). (If the employer is a small employer 
under 45 CFR 144.103 (generally, an employer with 50 or fewer 
employees), the issuer also may violate 45 CFR 146.150, which requires 
issuers to offer all the policies they sell in the small group market 
on a guaranteed available basis to all small employers and to accept 
every eligible individual in every small employer group.) If the plan 
provides coverage through this policy and does not provide equivalent 
coverage for A and A's dependents through other means, the plan 
violates this paragraph (b)(1).

    (2) Application to benefits--(i) General rule--(A) Under this 
section, a group health plan is not required to provide coverage for 
any particular benefit to any group of similarly situated individuals.
    (B) However, benefits provided under a plan must be uniformly 
available to all similarly situated individuals (as described in 
paragraph (d) of this section). Likewise, any restriction on a benefit 
or benefits must apply uniformly to all similarly situated individuals 
and must not be directed at individual participants or beneficiaries 
based on any health factor of the participants or beneficiaries 
(determined based on all the relevant facts and circumstances). Thus, 
for example, a plan may limit or exclude benefits in relation to a 
specific disease or condition, limit or exclude benefits for certain 
types of treatments or drugs, or limit or exclude benefits based on a 
determination of whether the benefits are experimental or not medically 
necessary, but only if the benefit limitation or exclusion applies 
uniformly to all similarly situated individuals and is not directed at 
individual participants or beneficiaries based on any health factor of 
the participants or beneficiaries. In addition, a plan may impose 
annual, lifetime, or other limits on benefits and may require the 
satisfaction of a deductible, copayment, coinsurance, or other cost-
sharing requirement in order to obtain a benefit if the limit or cost-
sharing requirement applies uniformly to all similarly situated 
individuals and is not directed at individual participants or 
beneficiaries based on any health factor of the participants or 
beneficiaries. In the case of a cost-sharing requirement, see also 
paragraph (b)(2)(ii) of this section, which permits variances in the 
application of a cost-sharing mechanism made available under a wellness 
program. (Whether any plan provision or practice with respect to 
benefits complies with this paragraph (b)(2)(i) does not affect whether 
the provision or practice is permitted under ERISA, the Americans with 
Disabilities Act, or any other law, whether State or Federal.)
    (C) For purposes of this paragraph (b)(2)(i), a plan amendment 
applicable to all individuals in one or more groups of similarly 
situated individuals under the plan and made effective no earlier than 
the first day of the first plan year after the amendment is adopted is 
not considered to be directed at any individual participants or 
beneficiaries.
    (D) The rules of this paragraph (b)(2)(i) are illustrated by the 
following examples:

    Example 1. (i) Facts. A group health plan applies a $500,000 
lifetime limit on all benefits to each participant or beneficiary 
covered under the plan. The limit is not directed at individual 
participants or beneficiaries.
    (ii) Conclusion. In this Example 1, the limit does not violate this 
paragraph (b)(2)(i) because $500,000 of benefits are available 
uniformly to each participant and beneficiary under the plan and 
because the limit is applied uniformly to all participants and 
beneficiaries and is not directed at individual participants or 
beneficiaries.
    Example 2. (i) Facts. A group health plan has a $2 million 
lifetime limit on all benefits (and no other lifetime limits) for 
participants covered under the plan. Participant B files a claim for 
the treatment of AIDS. At the next corporate board meeting of the 
plan sponsor, the claim is discussed. Shortly thereafter, the plan 
is modified to impose a $10,000 lifetime limit on benefits for the 
treatment of AIDS, effective before the beginning of the next plan 
year.
    (ii) Conclusion. The facts of this Example 2 strongly suggest that 
the plan modification is directed at B based on B's claim. Absent 
outweighing evidence to the contrary, the plan violates this paragraph 
(b)(2)(i).
    Example 3. (i) A group health plan applies for a group health 
policy offered by an issuer. Individual C is covered under the plan 
and has an adverse health condition. As part of the application, the 
issuer receives health information about the individuals to be 
covered, including information about C's adverse health condition. 
The policy form offered by the issuer generally provides benefits 
for the adverse health condition that C has, but in this case the 
issuer offers the plan a policy modified by a rider that excludes 
benefits for C for that condition. The exclusionary rider is made 
effective the first day of the next plan year.
    (ii) Conclusion. See Example 3 in 29 CFR 2590.702(b)(2)(i) and 45 
CFR 146.121(b)(2)(i) for a conclusion that the issuer violates rules 
under 29 CFR 2590.702(b)(2)(i) and 45 CFR 146.121(b)(2)(i) similar to 
the rules under this paragraph (b)(2)(i) because benefits for C's 
condition are available to other individuals in the group of similarly 
situated individuals that includes C but are not available to C. Thus, 
the benefits are not uniformly available to all similarly situated 
individuals. Even though the exclusionary rider is made effective the 
first day of the next plan year, because the rider does not apply to 
all similarly situated individuals, the issuer violates the rules under 
29 CFR 2590.702(b)(2)(i) and 45 CFR 146.121(b)(2)(i). If the plan 
provides coverage through this policy and does not provide equivalent 
coverage for C through other means, the plan violates this paragraph 
(b)(2)(i).
    Example 4. (i) Facts. A group health plan has a $2,000 lifetime 
limit for the treatment of temporomandibular joint syndrome (TMJ). 
The limit is applied uniformly to all similarly situated individuals 
and is not directed at individual participants or beneficiaries.
    (ii) Conclusion. In this Example 4, the limit does not violate this 
paragraph (b)(2)(i) because $2,000 of benefits for the treatment of TMJ 
are available uniformly to all similarly situated individuals and a 
plan may limit benefits covered in relation to a specific disease or 
condition if the limit applies uniformly to all similarly situated 
individuals and is not directed at individual participants or 
beneficiaries. * * * (This example does not address whether the plan 
provision is permissible under the Americans with Disabilities Act or 
any other applicable law.)
    Example 5. (i) Facts. A group health plan applies a $2 million 
lifetime limit on all benefits. However, the $2 million lifetime 
limit is reduced to $10,000 for any participant or beneficiary 
covered under the plan who has a congenital heart defect.
    (ii) Conclusion. In this Example 5, the lower lifetime limit for 
participants and beneficiaries with a congenital heart defect violates 
this paragraph (b)(2)(i) because benefits under the plan are not 
uniformly available to all similarly situated individuals and the 
plan's lifetime limit on benefits does not apply uniformly to all 
similarly situated individuals.
    Example 6. (i) Facts. A group health plan limits benefits for 
prescription drugs to those listed on a drug formulary. The limit is 
applied uniformly to all similarly situated individuals and is not 
directed at individual participants or beneficiaries.
    (ii) Conclusion. In this Example 6, the exclusion from coverage of 
drugs not listed on the drug formulary does not violate this paragraph 
(b)(2)(i) because benefits for prescription drugs listed on the 
formulary are uniformly available to all similarly situated individuals 
and because the exclusion of

[[Page 75032]]

drugs not listed on the formulary applies uniformly to all similarly 
situated individuals and is not directed at individual participants or 
beneficiaries.
    Example 7. (i) Facts. Under a group health plan, doctor visits 
are generally subject to a $250 annual deductible and 20 percent 
coinsurance requirement. However, prenatal doctor visits are not 
subject to any deductible or coinsurance requirement. These rules 
are applied uniformly to all similarly situated individuals and are 
not directed at individual participants or beneficiaries.
    (ii) Conclusion. In this Example 7, imposing different deductible 
and coinsurance requirements for prenatal doctor visits and other 
visits does not violate this paragraph (b)(2)(i) because a plan may 
establish different deductibles or coinsurance requirements for 
different services if the deductible or coinsurance requirement is 
applied uniformly to all similarly situated individuals and is not 
directed at individual participants or beneficiaries.
    Example 8. (i) Facts. An employer sponsors a group health plan 
that is available to all current employees. Under the plan, the 
medical care expenses of each employee (and the employee's 
dependents) are reimbursed up to an annual maximum amount. The 
maximum reimbursement amount with respect to an employee for a year 
is $1500 multiplied by the number of years the employee has 
participated in the plan, reduced by the total reimbursements for 
prior years.
    (ii) Conclusion. In this Example 8, the variable annual limit does 
not violate this paragraph (b)(2)(i). Although the maximum 
reimbursement amount for a year varies among employees within the same 
group of similarly situated individuals based on prior claims 
experience, employees who have participated in the plan for the same 
length of time are eligible for the same total benefit over that length 
of time (and the restriction on the maximum reimbursement amount is not 
directed at any individual participants or beneficiaries based on any 
health factor).

    (ii) Exception for wellness programs. A group health plan may vary 
benefits, including cost-sharing mechanisms (such as a deductible, 
copayment, or coinsurance), based on whether an individual has met the 
standards of a wellness program that satisfies the requirements of 
paragraph (f) of this section.
    (iii) Specific rule relating to source-of-injury exclusions--(A) If 
a group health plan generally provides benefits for a type of injury, 
the plan may not deny benefits otherwise provided for treatment of the 
injury if the injury results from an act of domestic violence or a 
medical condition (including both physical and mental health 
conditions). This rule applies in the case of an injury resulting from 
a medical condition even if the condition is not diagnosed before the 
injury.
    (B) The rules of this paragraph (b)(2)(iii) are illustrated by the 
following examples:

    Example 1. (i) Facts. A group health plan generally provides 
medical/surgical benefits, including benefits for hospital stays, 
that are medically necessary. However, the plan excludes benefits 
for self-inflicted injuries or injuries sustained in connection with 
attempted suicide. Because of depression, Individual D attempts 
suicide. As a result, D sustains injuries and is hospitalized for 
treatment of the injuries. Under the exclusion, the plan denies D 
benefits for treatment of the injuries.
    (ii) Conclusion. In this Example 1, the suicide attempt is the 
result of a medical condition (depression). Accordingly, the denial of 
benefits for the treatments of D's injuries violates the requirements 
of this paragraph (b)(2)(iii) because the plan provision excludes 
benefits for treatment of an injury resulting from a medical condition.
    Example 2. (i) Facts. A group health plan provides benefits for 
head injuries generally. The plan also has a general exclusion for 
any injury sustained while participating in any of a number of 
recreational activities, including bungee jumping. However, this 
exclusion does not apply to any injury that results from a medical 
condition (nor from domestic violence). Participant E sustains a 
head injury while bungee jumping. The injury did not result from a 
medical condition (nor from domestic violence). Accordingly, the 
plan denies benefits for E's head injury.
    (ii) Conclusion. In this Example 2, the plan provision that denies 
benefits based on the source of an injury does not restrict benefits 
based on an act of domestic violence or any medical condition. 
Therefore, the provision is permissible under this paragraph 
(b)(2)(iii) and does not violate this section. (However, if the plan 
did not allow E to enroll in the plan (or applied different rules for 
eligibility to E) because E frequently participates in bungee jumping, 
the plan would violate paragraph (b)(1) of this section.)

    (3) Relationship to Sec.  54.9801-3. (i) A preexisting condition 
exclusion is permitted under this section if it--
    (A) Complies with Sec.  54.9801-3;
    (B) Applies uniformly to all similarly situated individuals (as 
described in paragraph (d) of this section); and
    (C) Is not directed at individual participants or beneficiaries 
based on any health factor of the participants or beneficiaries. For 
purposes of this paragraph (b)(3)(i)(C), a plan amendment relating to a 
preexisting condition exclusion applicable to all individuals in one or 
more groups of similarly situated individuals under the plan and made 
effective no earlier than the first day of the first plan year after 
the amendment is adopted is not considered to be directed at any 
individual participants or beneficiaries.
    (ii) The rules of this paragraph (b)(3) are illustrated by the 
following examples:

    Example 1. (i) Facts. A group health plan imposes a preexisting 
condition exclusion on all individuals enrolled in the plan. The 
exclusion applies to conditions for which medical advice, diagnosis, 
care, or treatment was recommended or received within the six-month 
period ending on an individual's enrollment date. In addition, the 
exclusion generally extends for 12 months after an individual's 
enrollment date, but this 12-month period is offset by the number of 
days of an individual's creditable coverage in accordance with Sec.  
54.9801-3. There is nothing to indicate that the exclusion is 
directed at individual participants or beneficiaries.
    (ii) Conclusion. In this Example 1, even though the plan's 
preexisting condition exclusion discriminates against individuals based 
on one or more health factors, the preexisting condition exclusion does 
not violate this section because it applies uniformly to all similarly 
situated individuals, is not directed at individual participants or 
beneficiaries, and complies with Sec.  54.9801-3 (that is, the 
requirements relating to the six-month look-back period, the 12-month 
(or 18-month) maximum exclusion period, and the creditable coverage 
offset).
    Example 2. (i) Facts. A group health plan excludes coverage for 
conditions with respect to which medical advice, diagnosis, care, or 
treatment was recommended or received within the six-month period 
ending on an individual's enrollment date. Under the plan, the 
preexisting condition exclusion generally extends for 12 months, 
offset by creditable coverage. However, if an individual has no 
claims in the first six months following enrollment, the remainder 
of the exclusion period is waived.
    (ii) Conclusion. In this Example 2, the plan's preexisting 
condition exclusions violate this section because they do not meet the 
requirements of this paragraph (b)(3); specifically, they do not apply 
uniformly to all similarly situated individuals. The plan provisions do 
not apply uniformly to all similarly situated individuals because 
individuals who have medical claims during the first six months 
following enrollment are not treated the same as similarly situated 
individuals with no claims during that period. (Under paragraph (d) of 
this section, the groups cannot be treated as two separate groups of 
similarly situated individuals because the distinction is based on a 
health factor.)

    (c) Prohibited discrimination in premiums or contributions--(1) In 
general--(i) A group health plan may not require an individual, as a 
condition of enrollment or continued enrollment under the plan, to pay 
a premium or contribution that is greater than the premium or 
contribution for a similarly situated individual (described in 
paragraph (d) of this section) enrolled in the plan based on any health 
factor that relates to the individual or a dependent of the individual.
    (ii) Discounts, rebates, payments in kind, and any other premium 
differential mechanisms are taken into account in determining an 
individual's premium or contribution rate. (For rules relating to cost-
sharing mechanisms, see

[[Page 75033]]

paragraph (b)(2) of this section (addressing benefits).)
    (2) Rules relating to premium rates--(i) Group rating based on 
health factors not restricted under this section. Nothing in this 
section restricts the aggregate amount that an employer may be charged 
for coverage under a group health plan.
    (ii) List billing based on a health factor prohibited. However, a 
group health plan may not quote or charge an employer (or an 
individual) a different premium for an individual in a group of 
similarly situated individuals based on a health factor. (But see 
paragraph (g) of this section permitting favorable treatment of 
individuals with adverse health factors.)
    (iii) Examples. The rules of this paragraph (c)(2) are illustrated 
by the following examples:

    Example 1. (i) Facts. An employer sponsors a group health plan 
and purchases coverage from a health insurance issuer. In order to 
determine the premium rate for the upcoming plan year, the issuer 
reviews the claims experience of individuals covered under the plan. 
The issuer finds that Individual F had significantly higher claims 
experience than similarly situated individuals in the plan. The 
issuer quotes the plan a higher per-participant rate because of F's 
claims experience.
    (ii) Conclusion. See Example 1 in 29 CFR 2590.702(c)(2) and 45 CFR 
146.121(c)(2) for a conclusion that the issuer does not violate the 
provisions of 29 CFR 2590.702(c)(2) and 45 CFR 146.121(c)(2) similar to 
the provisions of this paragraph (c)(2) because the issuer blends the 
rate so that the employer is not quoted a higher rate for F than for a 
similarly situated individual based on F's claims experience.
    Example 2. (i) Facts. Same facts as Example 1, except that the 
issuer quotes the employer a higher premium rate for F, because of 
F's claims experience, than for a similarly situated individual.
    (ii) Conclusion. See Example 2 in 29 CFR 2590.702(c)(2) and 45 CFR 
146.121(c)(2) for a conclusion that the issuer violates provisions of 
29 CFR 2590.702(c)(2) and 45 CFR 146.121(c)(2) similar to the 
provisions of this paragraph (c)(2). Moreover, even if the plan 
purchased the policy based on the quote but did not require a higher 
participant contribution for F than for a similarly situated 
individual, see Example 2 in 29 CFR 2590.702(c)(2) and 45 CFR 
146.121(c)(2) for a conclusion that the issuer would still violate 29 
CFR 2590.702(c)(2) and 45 CFR 146.121(c)(2) (but in such a case the 
plan would not violate this paragraph (c)(2)).

    (3) Exception for wellness programs. Notwithstanding paragraphs 
(c)(1) and (2) of this section, a plan may vary the amount of premium 
or contribution it requires similarly situated individuals to pay based 
on whether an individual has met the standards of a wellness program 
that satisfies the requirements of paragraph (f) of this section.
    (d) Similarly situated individuals. The requirements of this 
section apply only within a group of individuals who are treated as 
similarly situated individuals. A plan may treat participants as a 
group of similarly situated individuals separate from beneficiaries. In 
addition, participants may be treated as two or more distinct groups of 
similarly situated individuals and beneficiaries may be treated as two 
or more distinct groups of similarly situated individuals in accordance 
with the rules of this paragraph (d). Moreover, if individuals have a 
choice of two or more benefit packages, individuals choosing one 
benefit package may be treated as one or more groups of similarly 
situated individuals distinct from individuals choosing another benefit 
package.
    (1) Participants. Subject to paragraph (d)(3) of this section, a 
plan may treat participants as two or more distinct groups of similarly 
situated individuals if the distinction between or among the groups of 
participants is based on a bona fide employment-based classification 
consistent with the employer's usual business practice. Whether an 
employment-based classification is bona fide is determined on the basis 
of all the relevant facts and circumstances. Relevant facts and 
circumstances include whether the employer uses the classification for 
purposes independent of qualification for health coverage (for example, 
determining eligibility for other employee benefits or determining 
other terms of employment). Subject to paragraph (d)(3) of this 
section, examples of classifications that, based on all the relevant 
facts and circumstances, may be bona fide include full-time versus 
part-time status, different geographic location, membership in a 
collective bargaining unit, date of hire, length of service, current 
employee versus former employee status, and different occupations. 
However, a classification based on any health factor is not a bona fide 
employment-based classification, unless the requirements of paragraph 
(g) of this section are satisfied (permitting favorable treatment of 
individuals with adverse health factors).
    (2) Beneficiaries--(i) Subject to paragraph (d)(3) of this section, 
a plan may treat beneficiaries as two or more distinct groups of 
similarly situated individuals if the distinction between or among the 
groups of beneficiaries is based on any of the following factors:
    (A) A bona fide employment-based classification of the participant 
through whom the beneficiary is receiving coverage;
    (B) Relationship to the participant (for example, as a spouse or as 
a dependent child);
    (C) Marital status;
    (D) With respect to children of a participant, age or student 
status; or
    (E) Any other factor if the factor is not a health factor.
    (ii) Paragraph (d)(2)(i) of this section does not prevent more 
favorable treatment of individuals with adverse health factors in 
accordance with paragraph (g) of this section.
    (3) Discrimination directed at individuals. Notwithstanding 
paragraphs (d)(1) and (2) of this section, if the creation or 
modification of an employment or coverage classification is directed at 
individual participants or beneficiaries based on any health factor of 
the participants or beneficiaries, the classification is not permitted 
under this paragraph (d), unless it is permitted under paragraph (g) of 
this section (permitting favorable treatment of individuals with 
adverse health factors). Thus, if an employer modified an employment-
based classification to single out, based on a health factor, 
individual participants and beneficiaries and deny them health 
coverage, the new classification would not be permitted under this 
section.
    (4) Examples. The rules of this paragraph (d) are illustrated by 
the following examples:

    Example 1. (i) Facts. An employer sponsors a group health plan 
for full-time employees only. Under the plan (consistent with the 
employer's usual business practice), employees who normally work at 
least 30 hours per week are considered to be working full-time. 
Other employees are considered to be working part-time. There is no 
evidence to suggest that the classification is directed at 
individual participants or beneficiaries.
    (ii) Conclusion. In this Example 1, treating the full-time and 
part-time employees as two separate groups of similarly situated 
individuals is permitted under this paragraph (d) because the 
classification is bona fide and is not directed at individual 
participants or beneficiaries.
    Example 2. (i) Facts. Under a group health plan, coverage is 
made available to employees, their spouses, and their dependent 
children. However, coverage is made available to a dependent child 
only if the dependent child is under age 19 (or under age 25 if the 
child is continuously enrolled full-time in an institution of higher 
learning (full-time students)). There is no evidence to suggest that 
these classifications are directed at individual participants or 
beneficiaries.
    (ii) Conclusion. In this Example 2, treating spouses and dependent 
children differently by imposing an age limitation on dependent 
children, but not on spouses, is permitted under this paragraph (d). 
Specifically, the distinction between spouses and dependent children is 
permitted under paragraph (d)(2)

[[Page 75034]]

of this section and is not prohibited under paragraph (d)(3) of this 
section because it is not directed at individual participants or 
beneficiaries. It is also permissible to treat dependent children who 
are under age 19 (or full-time students under age 25) as a group of 
similarly situated individuals separate from those who are age 25 or 
older (or age 19 or older if they are not full-time students) because 
the classification is permitted under paragraph (d)(2) of this section 
and is not directed at individual participants or beneficiaries.
    Example 3. (i) Facts. A university sponsors a group health plan 
that provides one health benefit package to faculty and another 
health benefit package to other staff. Faculty and staff are treated 
differently with respect to other employee benefits such as 
retirement benefits and leaves of absence. There is no evidence to 
suggest that the distinction is directed at individual participants 
or beneficiaries.
    (ii) Conclusion. In this Example 3, the classification is permitted 
under this paragraph (d) because there is a distinction based on a bona 
fide employment-based classification consistent with the employer's 
usual business practice and the distinction is not directed at 
individual participants and beneficiaries.
    Example 4. (i) Facts. An employer sponsors a group health plan 
that is available to all current employees. Former employees may 
also be eligible, but only if they complete a specified number of 
years of service, are enrolled under the plan at the time of 
termination of employment, and are continuously enrolled from that 
date. There is no evidence to suggest that these distinctions are 
directed at individual participants or beneficiaries.
    (ii) Conclusion. In this Example 4, imposing additional eligibility 
requirements on former employees is permitted because a classification 
that distinguishes between current and former employees is a bona fide 
employment-based classification that is permitted under this paragraph 
(d), provided that it is not directed at individual participants or 
beneficiaries. In addition, it is permissible to distinguish between 
former employees who satisfy the service requirement and those who do 
not, provided that the distinction is not directed at individual 
participants or beneficiaries. (However, former employees who do not 
satisfy the eligibility criteria may, nonetheless, be eligible for 
continued coverage pursuant to a COBRA continuation provision or 
similar State law.)
    Example 5. (i) Facts. An employer sponsors a group health plan 
that provides the same benefit package to all seven employees of the 
employer. Six of the seven employees have the same job title and 
responsibilities, but Employee G has a different job title and 
different responsibilities. After G files an expensive claim for 
benefits under the plan, coverage under the plan is modified so that 
employees with G's job title receive a different benefit package 
that includes a lower lifetime dollar limit than in the benefit 
package made available to the other six employees.
    (ii) Conclusion. Under the facts of this Example 5, changing the 
coverage classification for G based on the existing employment 
classification for G is not permitted under this paragraph (d) because 
the creation of the new coverage classification for G is directed at G 
based on one or more health factors.

    (e) Nonconfinement and actively-at-work provisions--(1) 
Nonconfinement provisions--(i) General rule. Under the rules of 
paragraphs (b) and (c) of this section, a plan may not establish a rule 
for eligibility (as described in paragraph (b)(1)(ii) of this section) 
or set any individual's premium or contribution rate based on whether 
an individual is confined to a hospital or other health care 
institution. In addition, under the rules of paragraphs (b) and (c) of 
this section, a plan may not establish a rule for eligibility or set 
any individual's premium or contribution rate based on an individual's 
ability to engage in normal life activities, except to the extent 
permitted under paragraphs (e)(2)(ii) and (3) of this section 
(permitting plans, under certain circumstances, to distinguish among 
employees based on the performance of services).
    (ii) Examples. The rules of this paragraph (e)(1) are illustrated 
by the following examples:

    Example 1. (i) Facts. Under a group health plan, coverage for 
employees and their dependents generally becomes effective on the 
first day of employment. However, coverage for a dependent who is 
confined to a hospital or other health care institution does not 
become effective until the confinement ends.
    (ii) Conclusion. In this Example 1, the plan violates this 
paragraph (e)(1) because the plan delays the effective date of coverage 
for dependents based on confinement to a hospital or other health care 
institution.
    Example 2. (i) Facts. In previous years, a group health plan has 
provided coverage through a group health insurance policy offered by 
Issuer M. However, for the current year, the plan provides coverage 
through a group health insurance policy offered by Issuer N. Under 
Issuer N's policy, items and services provided in connection with 
the confinement of a dependent to a hospital or other health care 
institution are not covered if the confinement is covered under an 
extension of benefits clause from a previous health insurance 
issuer.
    (ii) Conclusion. See Example 2 in 29 CFR 2590.702(e)(1) and 45 CFR 
146.121(e)(1) for a conclusion that Issuer N violates provisions of 29 
CFR 2590.702(e)(1) and 45 CFR 146.121(e)(1) similar to the provisions 
of this paragraph (e)(1) because the group health insurance coverage 
restricts benefits based on whether a dependent is confined to a 
hospital or other health care institution that is covered under an 
extension of benefits from a previous issuer. See Example 2 in 29 CFR 
2590.702(e)(1) and 45 CFR 146.121(e)(1) for the additional conclusions 
that under State law Issuer M may also be responsible for providing 
benefits to such a dependent; and that in a case in which Issuer N has 
an obligation under 29 CFR 2590.702(e)(1) or 45 CFR 146.121(e)(1) to 
provide benefits and Issuer M has an obligation under State law to 
provide benefits, any State laws designed to prevent more than 100% 
reimbursement, such as State coordination-of-benefits laws, continue to 
apply.

    (2) Actively-at-work and continuous service provisions--(i) General 
rule--(A) Under the rules of paragraphs (b) and (c) of this section and 
subject to the exception for the first day of work described in 
paragraph (e)(2)(ii) of this section, a plan may not establish a rule 
for eligibility (as described in paragraph (b)(1)(ii) of this section) 
or set any individual's premium or contribution rate based on whether 
an individual is actively at work (including whether an individual is 
continuously employed), unless absence from work due to any health 
factor (such as being absent from work on sick leave) is treated, for 
purposes of the plan, as being actively at work.
    (B) The rules of this paragraph (e)(2)(i) are illustrated by the 
following examples:

    Example 1. (i) Facts. Under a group health plan, an employee 
generally becomes eligible to enroll 30 days after the first day of 
employment. However, if the employee is not actively at work on the 
first day after the end of the 30-day period, then eligibility for 
enrollment is delayed until the first day the employee is actively 
at work.
    (ii) Conclusion. In this Example 1, the plan violates this 
paragraph (e)(2) (and thus also violates paragraph (b) of this 
section). However, the plan would not violate paragraph (e)(2) or (b) 
of this section if, under the plan, an absence due to any health factor 
is considered being actively at work.
    Example 2. (i) Facts. Under a group health plan, coverage for an 
employee becomes effective after 90 days of continuous service; that 
is, if an employee is absent from work (for any reason) before 
completing 90 days of service, the beginning of the 90-day period is 
measured from the day the employee returns to work (without any 
credit for service before the absence).
    (ii) Conclusion. In this Example 2, the plan violates this 
paragraph (e)(2) (and thus also paragraph (b) of this section) because 
the 90-day continuous service requirement is a rule for eligibility 
based on whether an individual is actively at work. However, the plan 
would not violate this paragraph (e)(2) or paragraph (b) of this 
section if, under the plan, an absence due to any health factor is not 
considered an absence for purposes of measuring 90 days of continuous 
service.

    (ii) Exception for the first day of work--(A) Notwithstanding the 
general rule in paragraph (e)(2)(i) of this section, a plan may 
establish a rule for eligibility that requires an individual to begin 
work for the employer sponsoring the plan (or, in the case of a 
multiemployer

[[Page 75035]]

plan, to begin a job in covered employment) before coverage becomes 
effective, provided that such a rule for eligibility applies regardless 
of the reason for the absence.
    (B) The rules of this paragraph (e)(2)(ii) are illustrated by the 
following examples:

    Example 1. (i) Facts. Under the eligibility provision of a group 
health plan, coverage for new employees becomes effective on the 
first day that the employee reports to work. Individual H is 
scheduled to begin work on August 3. However, H is unable to begin 
work on that day because of illness. H begins working on August 4, 
and H's coverage is effective on August 4.
    (ii) Conclusion. In this Example 1, the plan provision does not 
violate this section. However, if coverage for individuals who do not 
report to work on the first day they were scheduled to work for a 
reason unrelated to a health factor (such as vacation or bereavement) 
becomes effective on the first day they were scheduled to work, then 
the plan would violate this section.
    Example 2. (i) Facts. Under a group health plan, coverage for 
new employees becomes effective on the first day of the month 
following the employee's first day of work, regardless of whether 
the employee is actively at work on the first day of the month. 
Individual J is scheduled to begin work on March 24. However, J is 
unable to begin work on March 24 because of illness. J begins 
working on April 7 and J's coverage is effective May 1.
    (ii) Conclusion. In this Example 2, the plan provision does not 
violate this section. However, as in Example 1, if coverage for 
individuals absent from work for reasons unrelated to a health factor 
became effective despite their absence, then the plan would violate 
this section.

    (3) Relationship to plan provisions defining similarly situated 
individuals--(i) Notwithstanding the rules of paragraphs (e)(1) and (2) 
of this section, a plan may establish rules for eligibility or set any 
individual's premium or contribution rate in accordance with the rules 
relating to similarly situated individuals in paragraph (d) of this 
section. Accordingly, a plan may distinguish in rules for eligibility 
under the plan between full-time and part-time employees, between 
permanent and temporary or seasonal employees, between current and 
former employees, and between employees currently performing services 
and employees no longer performing services for the employer, subject 
to paragraph (d) of this section. However, other Federal or State laws 
(including the COBRA continuation provisions and the Family and Medical 
Leave Act of 1993) may require an employee or the employee's dependents 
to be offered coverage and set limits on the premium or contribution 
rate even though the employee is not performing services.
    (ii) The rules of this paragraph (e)(3) are illustrated by the 
following examples:

    Example 1. (i) Facts. Under a group health plan, employees are 
eligible for coverage if they perform services for the employer for 
30 or more hours per week or if they are on paid leave (such as 
vacation, sick, or bereavement leave). Employees on unpaid leave are 
treated as a separate group of similarly situated individuals in 
accordance with the rules of paragraph (d) of this section.
    (ii) Conclusion. In this Example 1, the plan provisions do not 
violate this section. However, if the plan treated individuals 
performing services for the employer for 30 or more hours per week, 
individuals on vacation leave, and individuals on bereavement leave as 
a group of similarly situated individuals separate from individuals on 
sick leave, the plan would violate this paragraph (e) (and thus also 
would violate paragraph (b) of this section) because groups of 
similarly situated individuals cannot be established based on a health 
factor (including the taking of sick leave) under paragraph (d) of this 
section.
    Example 2. (i) Facts. To be eligible for coverage under a bona 
fide collectively bargained group health plan in the current 
calendar quarter, the plan requires an individual to have worked 250 
hours in covered employment during the three-month period that ends 
one month before the beginning of the current calendar quarter. The 
distinction between employees working at least 250 hours and those 
working less than 250 hours in the earlier three-month period is not 
directed at individual participants or beneficiaries based on any 
health factor of the participants or beneficiaries.
    (ii) Conclusion. In this Example 2, the plan provision does not 
violate this section because, under the rules for similarly situated 
individuals allowing full-time employees to be treated differently than 
part-time employees, employees who work at least 250 hours in a three-
month period can be treated differently than employees who fail to work 
250 hours in that period. The result would be the same if the plan 
permitted individuals to apply excess hours from previous periods to 
satisfy the requirement for the current quarter.
    Example 3. (i) Facts. Under a group health plan, coverage of an 
employee is terminated when the individual's employment is 
terminated, in accordance with the rules of paragraph (d) of this 
section. Employee B has been covered under the plan. B experiences a 
disabling illness that prevents B from working. B takes a leave of 
absence under the Family and Medical Leave Act of 1993. At the end 
of such leave, B terminates employment and consequently loses 
coverage under the plan. (This termination of coverage is without 
regard to whatever rights the employee (or members of the employee's 
family) may have for COBRA continuation.)
    (ii) Conclusion. In this Example 3, the plan provision terminating 
B's coverage upon B's termination of employment does not violate this 
section.
    Example 4. (i) Facts. Under a group health plan, coverage of an 
employee is terminated when the employee ceases to perform services 
for the employer sponsoring the plan, in accordance with the rules 
of paragraph (d) of this section. Employee C is laid off for three 
months. When the layoff begins, C's coverage under the plan is 
terminated. (This termination of coverage is without regard to 
whatever rights the employee (or members of the employee's family) 
may have for COBRA continuation coverage.)
    (ii) Conclusion. In this Example 4, the plan provision terminating 
C's coverage upon the cessation of C's performance of services does not 
violate this section.

    (f) Wellness programs. A wellness program is any program designed 
to promote health or prevent disease. Paragraphs (b)(2)(ii) and (c)(3) 
of this section provide exceptions to the general prohibitions against 
discrimination based on a health factor for plan provisions that vary 
benefits (including cost-sharing mechanisms) or the premium or 
contribution for similarly situated individuals in connection with a 
wellness program that satisfies the requirements of this paragraph (f). 
If none of the conditions for obtaining a reward under a wellness 
program is based on an individual satisfying a standard that is related 
to a health factor, paragraph (f)(1) of this section clarifies that the 
wellness program does not violate this section if participation in the 
program is made available to all similarly situated individuals. If any 
of the conditions for obtaining a reward under a wellness program is 
based on an individual satisfying a standard that is related to a 
health factor, the wellness program does not violate this section if 
the requirements of paragraph (f)(2) of this section are met.
    (1) Wellness programs not subject to requirements. If none of the 
conditions for obtaining a reward under a wellness program is based on 
an individual satisfying a standard that are related to a health factor 
(or if a wellness program does not provide a reward), the wellness 
program does not violate this section, if participation in the program 
is made available to all similarly situated individuals. Thus, for 
example, the following programs need not satisfy the requirements of 
paragraph (f)(2) of this section, if participation in the program is 
made available to all similarly situated individuals:
    (i) A program that reimburses all or part of the cost for 
memberships in a fitness center.
    (ii) A diagnostic testing program that provides a reward for 
participation and does not base any part of the reward on outcomes.

[[Page 75036]]

    (iii) A program that encourages preventive care through the waiver 
of the copayment or deductible requirement under a group health plan 
for the costs of, for example, prenatal care or well-baby visits.
    (iv) A program that reimburses employees for the costs of smoking 
cessation programs without regard to whether the employee quits 
smoking.
    (v) A program that provides a reward to employees for attending a 
monthly health education seminar.
    (2) Wellness programs subject to requirements. If any of the 
conditions for obtaining a reward under a wellness program is based on 
an individual satisfying a standard that is related to a health factor, 
the wellness program does not violate this section if the requirements 
of this paragraph (f)(2) are met.
    (i) The reward for the wellness program, coupled with the reward 
for other wellness programs with respect to the plan that require 
satisfaction of a standard related to a health factor, must not exceed 
20 percent of the cost of employee-only coverage under the plan. 
However, if, in addition to employees, any class of dependents (such as 
spouses or spouses and dependent children) may participate in the 
wellness program, the reward must not exceed 20 percent of the cost of 
the coverage in which an employee and any dependents are enrolled. For 
purposes of this paragraph (f)(2), the cost of coverage is determined 
based on the total amount of employer and employee contributions for 
the benefit package under which the employee is (or the employee and 
any dependents are) receiving coverage. A reward can be in the form of 
a discount or rebate of a premium or contribution, a waiver of all or 
part of a cost-sharing mechanism (such as deductibles, copayments, or 
coinsurance), the absence of a surcharge, or the value of a benefit 
that would otherwise not be provided under the plan.
    (ii) The program must be reasonably designed to promote health or 
prevent disease. A program satisfies this standard if it has a 
reasonable chance of improving the health of or preventing disease in 
participating individuals and it is not overly burdensome, is not a 
subterfuge for discriminating based on a health factor, and is not 
highly suspect in the method chosen to promote health or prevent 
disease.
    (iii) The program must give individuals eligible for the program 
the opportunity to qualify for the reward under the program at least 
once per year.
    (iv) The reward under the program must be available to all 
similarly situated individuals.
    (A) A reward is not available to all similarly situated individuals 
for a period unless the program allows--
    (1) A reasonable alternative standard (or waiver of the otherwise 
applicable standard) for obtaining the reward for any individual for 
whom, for that period, it is unreasonably difficult due to a medical 
condition to satisfy the otherwise applicable standard; and
    (2) A reasonable alternative standard (or waiver of the otherwise 
applicable standard) for obtaining the reward for any individual for 
whom, for that period, it is medically inadvisable to attempt to 
satisfy the otherwise applicable standard.
    (B) A plan or issuer may seek verification, such as a statement 
from an individual's physician, that a health factor makes it 
unreasonably difficult or medically inadvisable for the individual to 
satisfy or attempt to satisfy the otherwise applicable standard.
    (v)(A) The plan must disclose in all plan materials describing the 
terms of the program the availability of a reasonable alternative 
standard (or the possibility of waiver of the otherwise applicable 
standard) required under paragraph (f)(2)(iv) of this section. However, 
if plan materials merely mention that a program is available, without 
describing its terms, this disclosure is not required.
    (B) The following language, or substantially similar language, can 
be used to satisfy the requirement of this paragraph (f)(2)(v): ``If it 
is unreasonably difficult due to a medical condition for you to achieve 
the standards for the reward under this program, or if it is medically 
inadvisable for you to attempt to achieve the standards for the reward 
under this program, call us at [insert telephone number] and we will 
work with you to develop another way to qualify for the reward.'' In 
addition, other examples of language that would satisfy this 
requirement are set forth in Examples 3, 4, and 5 of paragraph (f)(3) 
of this section.
    (3) Examples. The rules of paragraph (f)(2) of this section are 
illustrated by the following examples:

    Example 1. (i) Facts. An employer sponsors a group health plan. 
The annual premium for employee-only coverage is $3,600 (of which 
the employer pays $2,700 per year and the employee pays $900 per 
year). The annual premium for family coverage is $9,000 (of which 
the employer pays $4,500 per year and the employee pays $4,500 per 
year). The plan offers a wellness program with an annual premium 
rebate of $360. The program is available only to employees.
    (ii) Conclusion. In this Example 1, the program satisfies the 
requirements of paragraph (f)(2)(i) of this section because the reward 
for the wellness program, $360, does not exceed 20 percent of the total 
annual cost of employee-only coverage, $720. ($3,600 x 20% = $720.) If 
any class of dependents is allowed to participate in the program and 
the employee is enrolled in family coverage, the plan could offer the 
employee a reward of up to 20 percent of the cost of family coverage, 
$1,800. ($9,000 x 20% = $1,800.)
    Example 2. (i) Facts. A group health plan gives an annual 
premium discount of 20 percent of the cost of employee-only coverage 
to participants who adhere to a wellness program. The wellness 
program consists solely of giving an annual cholesterol test to 
participants. Those participants who achieve a count under 200 
receive the premium discount for the year.
    (ii) Conclusion. In this Example 2, the program fails to satisfy 
the requirement of being available to all similarly situated 
individuals because some participants may be unable to achieve a 
cholesterol count of under 200 and the plan does not make available a 
reasonable alternative standard or waive the cholesterol standard. (In 
addition, plan materials describing the program are required to 
disclose the availability of a reasonable alternative standard (or the 
possibility of waiver of the otherwise applicable standard) for 
obtaining the premium discount. Thus, the premium discount violates 
paragraph (c) of this section because it may require an individual to 
pay a higher premium based on a health factor of the individual than is 
required of a similarly situated individual under the plan.
    Example 3. (i) Facts. Same facts as Example 2, except that the 
plan provides that if it is unreasonably difficult due to a medical 
condition for a participant to achieve the targeted cholesterol 
count (or if it is medically inadvisable for a participant to 
attempt to achieve the targeted cholesterol count) within a 60-day 
period, the plan will make available a reasonable alternative 
standard that takes the relevant medical condition into account. In 
addition, all plan materials describing the terms of the program 
include the following statement: ``If it is unreasonably difficult 
due to a medical condition for you to achieve a cholesterol count 
under 200, or if it is medically inadvisable for you to attempt to 
achieve a count under 200, call us at the number below and we will 
work with you to develop another way to get the discount.'' 
Individual D begins a diet and exercise program but is unable to 
achieve a cholesterol count under 200 within the prescribed period. 
D's doctor determines D requires prescription medication to achieve 
a medically advisable cholesterol count. In addition, the doctor 
determines that D must be monitored through periodic blood tests to 
continually reevaluate D's health status. The plan accommodates D by 
making the discount available to D, but only if D follows the advice 
of D's doctor's regarding medication and blood tests.
    (ii) Conclusion. In this Example 3, the program is a wellness 
program because it satisfies the five requirements of paragraph (f)(2) 
of this section. First, the program

[[Page 75037]]

complies with the limits on rewards under a program. Second, it is 
reasonably designed to promote health or prevent disease. Third, 
individuals eligible for the program are given the opportunity to 
qualify for the reward at least once per year. Fourth, the reward under 
the program is available to all similarly situated individuals because 
it accommodates individuals for whom it is unreasonably difficult due 
to a medical condition to achieve the targeted count (or for whom it is 
medically inadvisable to attempt to achieve the targeted count) in the 
prescribed period by providing a reasonable alternative standard. 
Fifth, the plan discloses in all materials describing the terms of the 
program the availability of a reasonable alternative standard. Thus, 
the premium discount does not violate this section.
    Example 4. (i) Facts. A group health plan will waive the $250 
annual deductible (which is less than 20 percent of the annual cost 
of employee-only coverage under the plan) for the following year for 
participants who have a body mass index between 19 and 26, 
determined shortly before the beginning of the year. However, any 
participant for whom it is unreasonably difficult due to a medical 
condition to attain this standard (and any participant for whom it 
is medically inadvisable to attempt to achieve this standard) during 
the plan year is given the same discount if the participant walks 
for 20 minutes three days a week. Any participant for whom it is 
unreasonably difficult due to a medical condition to attain either 
standard (and any participant for whom it is medically inadvisable 
to attempt to achieve either standard) during the year is given the 
same discount if the individual satisfies an alternative standard 
that is reasonable in the burden it imposes and is reasonable taking 
into consideration the individual's medical situation. All plan 
materials describing the terms of the wellness program include the 
following statement: ``If it is unreasonably difficult due to a 
medical condition for you to achieve a body mass index between 19 
and 26 (or if it is medically inadvisable for you to attempt to 
achieve this body mass index) this year, your deductible will be 
waived if you walk for 20 minutes three days a week. If you cannot 
follow the walking program, call us at the number above and we will 
work with you to develop another way to have your deductible 
waived.'' Due to a medical condition, Individual E is unable to 
achieve a BMI of between 19 and 26 and is also unable to follow the 
walking program. E proposes a program based on the recommendations 
of E's physician. The plan agrees to make the discount available to 
E if E follows the physician's recommendations.
    (ii) Conclusion. In this Example 4, the program satisfies the five 
requirements of paragraph (f)(2) of this section. First, the program 
complies with the limits on rewards under a program. Second, it is 
reasonably designed to promote health or prevent disease. Third, 
individuals eligible for the program are given the opportunity to 
qualify for the reward at least once per year. Fourth, the reward under 
the program is available to all similarly situated individuals because 
it generally accommodates individuals for whom it is unreasonably 
difficult due to a medical condition to achieve (or for whom it is 
medically inadvisable to attempt to achieve) the targeted body mass 
index by providing a reasonable alternative standard (walking) and it 
accommodates individuals for whom it is unreasonably difficult due to a 
medical condition (or for whom it is medically inadvisable to attempt) 
to walk by providing an alternative standard that is reasonable for the 
individual. Fifth, the plan discloses in all materials describing the 
terms of the program the availability of a reasonable alternative 
standard for every individual. Thus, the waiver of the deductible does 
not violate this section.
    Example 5. (i) Facts. In conjunction with an annual open 
enrollment period, a group health plan provides a form for 
participants to certify that they have not used tobacco products in 
the preceding twelve months. Participants who do not provide the 
certification are assessed a surcharge that is 20 percent of the 
cost of employee-only coverage. However, all plan materials 
describing the terms of the wellness program include the following 
statement: ``If it is unreasonably difficult due to a health factor 
for you to meet the requirements under this program (or if it is 
medically inadvisable for you to attempt to meet the requirements of 
this program), we will make available a reasonable alternative 
standard for you to avoid this surcharge.'' It is unreasonably 
difficult for Individual F to stop smoking cigarettes due to an 
addiction to nicotine (a medical condition). The plan accommodates F 
by requiring F to participate in a smoking cessation program to 
avoid the surcharge. F can avoid the surcharge for as long as F 
participates in the program, regardless of whether F stops smoking 
(as long as F continues to be addicted to nicotine).
    (ii) Conclusion. In this Example 5, the premium surcharge is 
permissible as a wellness program because it satisfies the five 
requirements of paragraph (f)(2) of this section. First, the program 
complies with the limits on rewards under a program. Second, it is 
reasonably designed to promote health or prevent disease. Third, 
individuals eligible for the program are given the opportunity to 
qualify for the reward at least once per year. Fourth, the reward under 
the program is available to all similarly situated individuals because 
it accommodates individuals for whom it is unreasonably difficult due 
to a medical condition (or for whom it is medically inadvisable to 
attempt) to quit using tobacco products by providing a reasonable 
alternative standard. Fifth, the plan discloses in all materials 
describing the terms of the program the availability of a reasonable 
alternative standard. Thus, the premium surcharge does not violate this 
section.
    Example 6. (i) Facts. Same facts as Example 5, except the plan 
accommodates F by requiring F to view, over a period of 12 months, a 
12-hour video series on health problems associated with tobacco use. 
F can avoid the surcharge by complying with this requirement.
    (ii) Conclusion. In this Example 6, the requirement to watch the 
series of video tapes is a reasonable alternative method for avoiding 
the surcharge.
    (g) More favorable treatment of individuals with adverse health 
factors permitted--(1) In rules for eligibility--(i) Nothing in this 
section prevents a group health plan from establishing more favorable 
rules for eligibility (described in paragraph (b)(1) of this section) 
for individuals with an adverse health factor, such as disability, than 
for individuals without the adverse health factor. Moreover, nothing in 
this section prevents a plan from charging a higher premium or 
contribution with respect to individuals with an adverse health factor 
if they would not be eligible for the coverage were it not for the 
adverse health factor. (However, other laws, including State insurance 
laws, may set or limit premium rates; these laws are not affected by 
this section.)

    (ii) The rules of this paragraph (g)(1) are illustrated by the 
following examples:

    Example 1. (i) Facts. An employer sponsors a group health plan 
that generally is available to employees, spouses of employees, and 
dependent children until age 23. However, dependent children who are 
disabled are eligible for coverage beyond age 23.
    (ii) Conclusion. In this Example 1, the plan provision allowing 
coverage for disabled dependent children beyond age 23 satisfies this 
paragraph (g)(1) (and thus does not violate this section).
    Example 2. (i) Facts. An employer sponsors a group health plan, 
which is generally available to employees (and members of the 
employee's family) until the last day of the month in which the 
employee ceases to perform services for the employer. The plan 
generally charges employees $50 per month for employee-only coverage 
and $125 per month for family coverage. However, an employee who 
ceases to perform services for the employer by reason of disability 
may remain covered under the plan until the last day of the month 
that is 12 months after the month in which the employee ceased to 
perform services for the employer. During this extended period of 
coverage, the plan charges the employee $100 per month for employee-
only coverage and $250 per month for family coverage. (This extended 
period of coverage is without regard to whatever rights the employee 
(or members of the employee's family) may have for COBRA 
continuation coverage.)
    (ii) Conclusion. In this Example 2, the plan provision allowing 
extended coverage for disabled employees and their families satisfies 
this paragraph (g)(1) (and thus does not violate this section). In 
addition, the plan is permitted, under this paragraph (g)(1), to charge 
the disabled employees a higher premium during the extended period of 
coverage.
    Example 3. (i) Facts. To comply with the requirements of a COBRA 
continuation provision, a group health plan generally makes COBRA 
continuation coverage available for a maximum period of 18 months in 
connection with a termination of employment but makes the coverage

[[Page 75038]]

available for a maximum period of 29 months to certain disabled 
individuals and certain members of the disabled individual's family. 
Although the plan generally requires payment of 102 percent of the 
applicable premium for the first 18 months of COBRA continuation 
coverage, the plan requires payment of 150 percent of the applicable 
premium for the disabled individual's COBRA continuation coverage 
during the disability extension if the disabled individual would not 
be entitled to COBRA continuation coverage but for the disability.
    (ii) Conclusion. In this Example 3, the plan provision allowing 
extended COBRA continuation coverage for disabled individuals satisfies 
this paragraph (g)(1) (and thus does not violate this section). In 
addition, the plan is permitted, under this paragraph (g)(1), to charge 
the disabled individuals a higher premium for the extended coverage if 
the individuals would not be eligible for COBRA continuation coverage 
were it not for the disability. (Similarly, if the plan provided an 
extended period of coverage for disabled individuals pursuant to State 
law or plan provision rather than pursuant to a COBRA continuation 
coverage provision, the plan could likewise charge the disabled 
individuals a higher premium for the extended coverage.)

    (2) In premiums or contributions--(i) Nothing in this section 
prevents a group health plan from charging individuals a premium or 
contribution that is less than the premium (or contribution) for 
similarly situated individuals if the lower charge is based on an 
adverse health factor, such as disability.
    (ii) The rules of this paragraph (g)(2) are illustrated by the 
following example:

    Example. (i) Facts. Under a group health plan, employees are 
generally required to pay $50 per month for employee-only coverage 
and $125 per month for family coverage under the plan. However, 
employees who are disabled receive coverage (whether employee-only 
or family coverage) under the plan free of charge.
    (ii) Conclusion. In this Example, the plan provision waiving 
premium payment for disabled employees is permitted under this 
paragraph (g)(2) (and thus does not violate this section).

    (h) No effect on other laws. Compliance with this section is not 
determinative of compliance with any provision of ERISA (including the 
COBRA continuation provisions) or any other State or Federal law, such 
as the Americans with Disabilities Act. Therefore, although the rules 
of this section would not prohibit a plan from treating one group of 
similarly situated individuals differently from another (such as 
providing different benefit packages to current and former employees), 
other Federal or State laws may require that two separate groups of 
similarly situated individuals be treated the same for certain purposes 
(such as making the same benefit package available to COBRA qualified 
beneficiaries as is made available to active employees). In addition, 
although this section generally does not impose new disclosure 
obligations on plans, this section does not affect any other laws, 
including those that require accurate disclosures and prohibit 
intentional misrepresentation.
    (i) Applicability dates. This section applies for plan years 
beginning on or after July 1, 2007.

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement, Internal Revenue 
Service.

    Approved: June 22, 2006.
Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury (Tax Policy).

Employee Benefits Security Administration

29 CFR Chapter XXV

0
For the reasons set forth above, 29 CFR Part 2590 is amended as 
follows:

PART 2590--RULES AND REGULATIONS FOR GROUP HEALTH PLANS

0
1. The authority citation for Part 2590 continues 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, 110 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. Section 2590.702 is revised to read as follows:


Sec.  2590.702  Prohibiting discrimination against participants and 
beneficiaries based on a health factor.

    (a) Health factors. (1) The term health factor means, in relation 
to an individual, any of the following health status-related factors:
    (i) Health status;
    (ii) Medical condition (including both physical and mental 
illnesses), as defined in Sec.  2590.701-2;
    (iii) Claims experience;
    (iv) Receipt of health care;
    (v) Medical history;
    (vi) Genetic information, as defined in Sec.  2590.701-2;
    (vii) Evidence of insurability; or
    (viii) Disability.
    (2) Evidence of insurability includes--
    (i) Conditions arising out of acts of domestic violence; and
    (ii) Participation in activities such as motorcycling, 
snowmobiling, all-terrain vehicle riding, horseback riding, skiing, and 
other similar activities.
    (3) The decision whether health coverage is elected for an 
individual (including the time chosen to enroll, such as under special 
enrollment or late enrollment) is not, itself, within the scope of any 
health factor. (However, under Sec.  2590.701-6, a plan or issuer must 
treat special enrollees the same as similarly situated individuals who 
are enrolled when first eligible.)
    (b) Prohibited discrimination in rules for eligibility--(1) In 
general--(i) A group health plan, and a health insurance issuer 
offering health insurance coverage in connection with a group health 
plan, may not establish any rule for eligibility (including continued 
eligibility) of any individual to enroll for benefits under the terms 
of the plan or group health insurance coverage that discriminates based 
on any health factor that relates to that individual or a dependent of 
that individual. This rule is subject to the provisions of paragraph 
(b)(2) of this section (explaining how this rule applies to benefits), 
paragraph (b)(3) of this section (allowing plans to impose certain 
preexisting condition exclusions), paragraph (d) of this section 
(containing rules for establishing groups of similarly situated 
individuals), paragraph (e) of this section (relating to 
nonconfinement, actively-at-work, and other service requirements), 
paragraph (f) of this section (relating to wellness programs), and 
paragraph (g) of this section (permitting favorable treatment of 
individuals with adverse health factors).
    (ii) For purposes of this section, rules for eligibility include, 
but are not limited to, rules relating to--
    (A) Enrollment;
    (B) The effective date of coverage;
    (C) Waiting (or affiliation) periods;
    (D) Late and special enrollment;
    (E) Eligibility for benefit packages (including rules for 
individuals to change their selection among benefit packages);
    (F) Benefits (including rules relating to covered benefits, benefit 
restrictions, and cost-sharing mechanisms such as coinsurance, 
copayments, and deductibles), as described in paragraphs (b)(2) and (3) 
of this section;
    (G) Continued eligibility; and
    (H) Terminating coverage (including disenrollment) of any 
individual under the plan.
    (iii) The rules of this paragraph (b)(1) are illustrated by the 
following examples:

    Example 1. (i) Facts. An employer sponsors a group health plan 
that is available to all employees who enroll within the first 30 
days of their employment. However, employees who do not enroll 
within the first

[[Page 75039]]

30 days cannot enroll later unless they pass a physical examination.
    (ii) Conclusion. In this Example 1, the requirement to pass a 
physical examination in order to enroll in the plan is a rule for 
eligibility that discriminates based on one or more health factors and 
thus violates this paragraph (b)(1).

    Example 2. (i) Facts. Under an employer's group health plan, 
employees who enroll during the first 30 days of employment (and 
during special enrollment periods) may choose between two benefit 
packages: an indemnity option and an HMO option. However, employees 
who enroll during late enrollment are permitted to enroll only in 
the HMO option and only if they provide evidence of good health.
    (ii) Conclusion. In this Example 2, the requirement to provide 
evidence of good health in order to be eligible for late enrollment in 
the HMO option is a rule for eligibility that discriminates based on 
one or more health factors and thus violates this paragraph (b)(1). 
However, if the plan did not require evidence of good health but 
limited late enrollees to the HMO option, the plan's rules for 
eligibility would not discriminate based on any health factor, and thus 
would not violate this paragraph (b)(1), because the time an individual 
chooses to enroll is not, itself, within the scope of any health 
factor.
    Example 3. (i) Facts. Under an employer's group health plan, all 
employees generally may enroll within the first 30 days of 
employment. However, individuals who participate in certain 
recreational activities, including motorcycling, are excluded from 
coverage.
    (ii) Conclusion. In this Example 3, excluding from the plan 
individuals who participate in recreational activities, such as 
motorcycling, is a rule for eligibility that discriminates based on one 
more health factors and thus violates this paragraph (b)(1).
    Example 4.  (i) Facts. A group health plan applies for a group 
health policy offered by an issuer. As part of the application, the 
issuer receives health information about individuals to be covered 
under the plan. Individual A is an employee of the employer 
maintaining the plan. A and A's dependents have a history of high 
health claims. Based on the information about A and A's dependents, 
the issuer excludes A and A's dependents from the group policy it 
offers to the employer.
    (ii) Conclusion. In this Example 4, the issuer's exclusion of A and 
A's dependents from coverage is a rule for eligibility that 
discriminates based on one or more health factors, and thus violates 
this paragraph (b)(1). (If the employer is a small employer under 45 
CFR 144.103 (generally, an employer with 50 or fewer employees), the 
issuer also may violate 45 CFR 146.150, which requires issuers to offer 
all the policies they sell in the small group market on a guaranteed 
available basis to all small employers and to accept every eligible 
individual in every small employer group.) If the plan provides 
coverage through this policy and does not provide equivalent coverage 
for A and A's dependents through other means, the plan will also 
violate this paragraph (b)(1).

    (2) Application to benefits--(i) General rule--(A) Under this 
section, a group health plan or group health insurance issuer is not 
required to provide coverage for any particular benefit to any group of 
similarly situated individuals.
    (B) However, benefits provided under a plan or through group health 
insurance coverage must be uniformly available to all similarly 
situated individuals (as described in paragraph (d) of this section). 
Likewise, any restriction on a benefit or benefits must apply uniformly 
to all similarly situated individuals and must not be directed at 
individual participants or beneficiaries based on any health factor of 
the participants or beneficiaries (determined based on all the relevant 
facts and circumstances). Thus, for example, a plan or issuer may limit 
or exclude benefits in relation to a specific disease or condition, 
limit or exclude benefits for certain types of treatments or drugs, or 
limit or exclude benefits based on a determination of whether the 
benefits are experimental or not medically necessary, but only if the 
benefit limitation or exclusion applies uniformly to all similarly 
situated individuals and is not directed at individual participants or 
beneficiaries based on any health factor of the participants or 
beneficiaries. In addition, a plan or issuer may impose annual, 
lifetime, or other limits on benefits and may require the satisfaction 
of a deductible, copayment, coinsurance, or other cost-sharing 
requirement in order to obtain a benefit if the limit or cost-sharing 
requirement applies uniformly to all similarly situated individuals and 
is not directed at individual participants or beneficiaries based on 
any health factor of the participants or beneficiaries. In the case of 
a cost-sharing requirement, see also paragraph (b)(2)(ii) of this 
section, which permits variances in the application of a cost-sharing 
mechanism made available under a wellness program. (Whether any plan 
provision or practice with respect to benefits complies with this 
paragraph (b)(2)(i) does not affect whether the provision or practice 
is permitted under any other provision of the Act, the Americans with 
Disabilities Act, or any other law, whether State or Federal.)
    (C) For purposes of this paragraph (b)(2)(i), a plan amendment 
applicable to all individuals in one or more groups of similarly 
situated individuals under the plan and made effective no earlier than 
the first day of the first plan year after the amendment is adopted is 
not considered to be directed at any individual participants or 
beneficiaries.
    (D) The rules of this paragraph (b)(2)(i) are illustrated by the 
following examples:

    Example 1. (i) Facts. A group health plan applies a $500,000 
lifetime limit on all benefits to each participant or beneficiary 
covered under the plan. The limit is not directed at individual 
participants or beneficiaries.
    (ii) Conclusion. In this Example 1, the limit does not violate this 
paragraph (b)(2)(i) because $500,000 of benefits are available 
uniformly to each participant and beneficiary under the plan and 
because the limit is applied uniformly to all participants and 
beneficiaries and is not directed at individual participants or 
beneficiaries.
    Example 2.  (i) Facts. A group health plan has a $2 million 
lifetime limit on all benefits (and no other lifetime limits) for 
participants covered under the plan. Participant B files a claim for 
the treatment of AIDS. At the next corporate board meeting of the 
plan sponsor, the claim is discussed. Shortly thereafter, the plan 
is modified to impose a $10,000 lifetime limit on benefits for the 
treatment of AIDS, effective before the beginning of the next plan 
year.
    (ii) Conclusion. The facts of this Example 2 strongly suggest that 
the plan modification is directed at B based on B's claim. Absent 
outweighing evidence to the contrary, the plan violates this paragraph 
(b)(2)(i).
    Example 3. (i) Facts. A group health plan applies for a group 
health policy offered by an issuer. Individual C is covered under 
the plan and has an adverse health condition. As part of the 
application, the issuer receives health information about the 
individuals to be covered, including information about C's adverse 
health condition. The policy form offered by the issuer generally 
provides benefits for the adverse health condition that C has, but 
in this case the issuer offers the plan a policy modified by a rider 
that excludes benefits for C for that condition. The exclusionary 
rider is made effective the first day of the next plan year.
    (ii) Conclusion. In this Example 3, the issuer violates this 
paragraph (b)(2)(i) because benefits for C's condition are available to 
other individuals in the group of similarly situated individuals that 
includes C but are not available to C. Thus, the benefits are not 
uniformly available to all similarly situated individuals. Even though 
the exclusionary rider is made effective the first day of the next plan 
year, because the rider does not apply to all similarly situated 
individuals, the issuer violates this paragraph (b)(2)(i).
    Example 4. (i) Facts. A group health plan has a $2,000 lifetime 
limit for the treatment of temporomandibular joint syndrome (TMJ). 
The limit is applied uniformly to all similarly situated individuals 
and is not directed at individual participants or beneficiaries.
    (ii) Conclusion. In this Example 4, the limit does not violate 
this paragraph (b)(2)(i) because $2,000 of benefits for the 
treatment of TMJ are available uniformly to all similarly situated 
individuals and a plan may limit benefits covered in relation to a 
specific disease or condition if the limit applies uniformly to all 
similarly situated

[[Page 75040]]

individuals and is not directed at individual participants or 
beneficiaries. (This example does not address whether the plan 
provision is permissible under the Americans with Disabilities Act 
or any other applicable law.)
    Example 5. (i) Facts. A group health plan applies a $2 million 
lifetime limit on all benefits. However, the $2 million lifetime 
limit is reduced to $10,000 for any participant or beneficiary 
covered under the plan who has a congenital heart defect.
    (ii) Conclusion. In this Example 5, the lower lifetime limit for 
participants and beneficiaries with a congenital heart defect violates 
this paragraph (b)(2)(i) because benefits under the plan are not 
uniformly available to all similarly situated individuals and the 
plan's lifetime limit on benefits does not apply uniformly to all 
similarly situated individuals.
    Example 6. (i) Facts. A group health plan limits benefits for 
prescription drugs to those listed on a drug formulary. The limit is 
applied uniformly to all similarly situated individuals and is not 
directed at individual participants or beneficiaries.
    (ii) Conclusion. In this Example 6, the exclusion from coverage of 
drugs not listed on the drug formulary does not violate this paragraph 
(b)(2)(i) because benefits for prescription drugs listed on the 
formulary are uniformly available to all similarly situated individuals 
and because the exclusion of drugs not listed on the formulary applies 
uniformly to all similarly situated individuals and is not directed at 
individual participants or beneficiaries.
    Example 7. (i) Facts. Under a group health plan, doctor visits 
are generally subject to a $250 annual deductible and 20 percent 
coinsurance requirement. However, prenatal doctor visits are not 
subject to any deductible or coinsurance requirement. These rules 
are applied uniformly to all similarly situated individuals and are 
not directed at individual participants or beneficiaries.
    (ii) Conclusion. In this Example 7, imposing different deductible 
and coinsurance requirements for prenatal doctor visits and other 
visits does not violate this paragraph (b)(2)(i) because a plan may 
establish different deductibles or coinsurance requirements for 
different services if the deductible or coinsurance requirement is 
applied uniformly to all similarly situated individuals and is not 
directed at individual participants or beneficiaries.
    Example 8. (i) Facts. An employer sponsors a group health plan 
that is available to all current employees. Under the plan, the 
medical care expenses of each employee (and the employee's 
dependents) are reimbursed up to an annual maximum amount. The 
maximum reimbursement amount with respect to an employee for a year 
is $1500 multiplied by the number of years the employee has 
participated in the plan, reduced by the total reimbursements for 
prior years.
    (ii) Conclusion. In this Example 8, the variable annual limit does 
not violate this paragraph (b)(2)(i). Although the maximum 
reimbursement amount for a year varies among employees within the same 
group of similarly situated individuals based on prior claims 
experience, employees who have participated in the plan for the same 
length of time are eligible for the same total benefit over that length 
of time (and the restriction on the maximum reimbursement amount is not 
directed at any individual participants or beneficiaries based on any 
health factor).

    (ii) Exception for wellness programs. A group health plan or group 
health insurance issuer may vary benefits, including cost-sharing 
mechanisms (such as a deductible, copayment, or coinsurance), based on 
whether an individual has met the standards of a wellness program that 
satisfies the requirements of paragraph (f) of this section.
    (iii) Specific rule relating to source-of-injury exclusions--(A) If 
a group health plan or group health insurance coverage generally 
provides benefits for a type of injury, the plan or issuer may not deny 
benefits otherwise provided for treatment of the injury if the injury 
results from an act of domestic violence or a medical condition 
(including both physical and mental health conditions). This rule 
applies in the case of an injury resulting from a medical condition 
even if the condition is not diagnosed before the injury.
    (B) The rules of this paragraph (b)(2)(iii) are illustrated by the 
following examples:

    Example 1. (i) Facts. A group health plan generally provides 
medical/surgical benefits, including benefits for hospital stays, 
that are medically necessary. However, the plan excludes benefits 
for self-inflicted injuries or injuries sustained in connection with 
attempted suicide. Because of depression, Individual D attempts 
suicide. As a result, D sustains injuries and is hospitalized for 
treatment of the injuries. Under the exclusion, the plan denies D 
benefits for treatment of the injuries.
    (ii) Conclusion. In this Example 1, the suicide attempt is the 
result of a medical condition (depression). Accordingly, the denial of 
benefits for the treatments of D's injuries violates the requirements 
of this paragraph (b)(2)(iii) because the plan provision excludes 
benefits for treatment of an injury resulting from a medical condition.
    Example 2. (i) Facts. A group health plan provides benefits for 
head injuries generally. The plan also has a general exclusion for 
any injury sustained while participating in any of a number of 
recreational activities, including bungee jumping. However, this 
exclusion does not apply to any injury that results from a medical 
condition (nor from domestic violence). Participant E sustains a 
head injury while bungee jumping. The injury did not result from a 
medical condition (nor from domestic violence). Accordingly, the 
plan denies benefits for E's head injury.
    (ii) Conclusion. In this Example 2, the plan provision that denies 
benefits based on the source of an injury does not restrict benefits 
based on an act of domestic violence or any medical condition. 
Therefore, the provision is permissible under this paragraph 
(b)(2)(iii) and does not violate this section. (However, if the plan 
did not allow E to enroll in the plan (or applied different rules for 
eligibility to E) because E frequently participates in bungee jumping, 
the plan would violate paragraph (b)(1) of this section.)

    (3) Relationship to Sec.  2590.701-3. (i) A preexisting condition 
exclusion is permitted under this section if it --
    (A) Complies with Sec.  2590.701-3;
    (B) Applies uniformly to all similarly situated individuals (as 
described in paragraph (d) of this section); and
    (C) Is not directed at individual participants or beneficiaries 
based on any health factor of the participants or beneficiaries. For 
purposes of this paragraph (b)(3)(i)(C), a plan amendment relating to a 
preexisting condition exclusion applicable to all individuals in one or 
more groups of similarly situated individuals under the plan and made 
effective no earlier than the first day of the first plan year after 
the amendment is adopted is not considered to be directed at any 
individual participants or beneficiaries.
    (ii) The rules of this paragraph (b)(3) are illustrated by the 
following examples:

    Example 1. (i) Facts. A group health plan imposes a preexisting 
condition exclusion on all individuals enrolled in the plan. The 
exclusion applies to conditions for which medical advice, diagnosis, 
care, or treatment was recommended or received within the six-month 
period ending on an individual's enrollment date. In addition, the 
exclusion generally extends for 12 months after an individual's 
enrollment date, but this 12-month period is offset by the number of 
days of an individual's creditable coverage in accordance with Sec.  
2590.701-3. There is nothing to indicate that the exclusion is 
directed at individual participants or beneficiaries.
    (ii) Conclusion. In this Example 1, even though the plan's 
preexisting condition exclusion discriminates against individuals based 
on one or more health factors, the preexisting condition exclusion does 
not violate this section because it applies uniformly to all similarly 
situated individuals, is not directed at individual participants or 
beneficiaries, and complies with Sec.  2590.701-3 (that is, the 
requirements relating to the six-month look-back period, the 12-month 
(or 18-month) maximum exclusion period, and the creditable coverage 
offset).
    Example 2.  (i) Facts. A group health plan excludes coverage for 
conditions with respect to which medical advice, diagnosis, care, or 
treatment was recommended or received within the six-month period 
ending on an individual's enrollment date. Under the plan, the 
preexisting condition exclusion generally extends for 12 months, 
offset by creditable coverage. However, if an individual has no 
claims in the first six months following enrollment, the remainder 
of the exclusion period is waived.

[[Page 75041]]

    (ii) Conclusion. In this Example 2, the plan's preexisting 
condition exclusions violate this section because they do not meet 
the requirements of this paragraph (b)(3); specifically, they do not 
apply uniformly to all similarly situated individuals. The plan 
provisions do not apply uniformly to all similarly situated 
individuals because individuals who have medical claims during the 
first six months following enrollment are not treated the same as 
similarly situated individuals with no claims during that period. 
(Under paragraph (d) of this section, the groups cannot be treated 
as two separate groups of similarly situated individuals because the 
distinction is based on a health factor.)

    (c) Prohibited discrimination in premiums or contributions--(1) In 
general--(i) A group health plan, and a health insurance issuer 
offering health insurance coverage in connection with a group health 
plan, may not require an individual, as a condition of enrollment or 
continued enrollment under the plan or group health insurance coverage, 
to pay a premium or contribution that is greater than the premium or 
contribution for a similarly situated individual (described in 
paragraph (d) of this section) enrolled in the plan or group health 
insurance coverage based on any health factor that relates to the 
individual or a dependent of the individual.
    (ii) Discounts, rebates, payments in kind, and any other premium 
differential mechanisms are taken into account in determining an 
individual's premium or contribution rate. (For rules relating to cost-
sharing mechanisms, see paragraph (b)(2) of this section (addressing 
benefits).)
    (2) Rules relating to premium rates--(i) Group rating based on 
health factors not restricted under this section. Nothing in this 
section restricts the aggregate amount that an employer may be charged 
for coverage under a group health plan.
    (ii) List billing based on a health factor prohibited. However, a 
group health insurance issuer, or a group health plan, may not quote or 
charge an employer (or an individual) a different premium for an 
individual in a group of similarly situated individuals based on a 
health factor. (But see paragraph (g) of this section permitting 
favorable treatment of individuals with adverse health factors.)
    (iii) Examples. The rules of this paragraph (c)(2) are illustrated 
by the following examples:

    Example 1.  (i) Facts. An employer sponsors a group health plan 
and purchases coverage from a health insurance issuer. In order to 
determine the premium rate for the upcoming plan year, the issuer 
reviews the claims experience of individuals covered under the plan. 
The issuer finds that Individual F had significantly higher claims 
experience than similarly situated individuals in the plan. The 
issuer quotes the plan a higher per-participant rate because of F's 
claims experience.
    (ii) Conclusion. In this Example 1, the issuer does not violate the 
provisions of this paragraph (c)(2) because the issuer blends the rate 
so that the employer is not quoted a higher rate for F than for a 
similarly situated individual based on F's claims experience.
    Example 2.  (i) Facts. Same facts as Example 1, except that the 
issuer quotes the employer a higher premium rate for F, because of 
F's claims experience, than for a similarly situated individual.
    (ii) Conclusion. In this Example 2, the issuer violates this 
paragraph (c)(2). Moreover, even if the plan purchased the policy based 
on the quote but did not require a higher participant contribution for 
F than for a similarly situated individual, the issuer would still 
violate this paragraph (c)(2) (but in such a case the plan would not 
violate this paragraph (c)(2)).

    (3) Exception for wellness programs. Notwithstanding paragraphs 
(c)(1) and (2) of this section, a plan or issuer may vary the amount of 
premium or contribution it requires similarly situated individuals to 
pay based on whether an individual has met the standards of a wellness 
program that satisfies the requirements of paragraph (f) of this 
section.
    (d) Similarly situated individuals. The requirements of this 
section apply only within a group of individuals who are treated as 
similarly situated individuals. A plan or issuer may treat participants 
as a group of similarly situated individuals separate from 
beneficiaries. In addition, participants may be treated as two or more 
distinct groups of similarly situated individuals and beneficiaries may 
be treated as two or more distinct groups of similarly situated 
individuals in accordance with the rules of this paragraph (d). 
Moreover, if individuals have a choice of two or more benefit packages, 
individuals choosing one benefit package may be treated as one or more 
groups of similarly situated individuals distinct from individuals 
choosing another benefit package.
    (1) Participants. Subject to paragraph (d)(3) of this section, a 
plan or issuer may treat participants as two or more distinct groups of 
similarly situated individuals if the distinction between or among the 
groups of participants is based on a bona fide employment-based 
classification consistent with the employer's usual business practice. 
Whether an employment-based classification is bona fide is determined 
on the basis of all the relevant facts and circumstances. Relevant 
facts and circumstances include whether the employer uses the 
classification for purposes independent of qualification for health 
coverage (for example, determining eligibility for other employee 
benefits or determining other terms of employment). Subject to 
paragraph (d)(3) of this section, examples of classifications that, 
based on all the relevant facts and circumstances, may be bona fide 
include full-time versus part-time status, different geographic 
location, membership in a collective bargaining unit, date of hire, 
length of service, current employee versus former employee status, and 
different occupations. However, a classification based on any health 
factor is not a bona fide employment-based classification, unless the 
requirements of paragraph (g) of this section are satisfied (permitting 
favorable treatment of individuals with adverse health factors).
    (2) Beneficiaries--(i) Subject to paragraph (d)(3) of this section, 
a plan or issuer may treat beneficiaries as two or more distinct groups 
of similarly situated individuals if the distinction between or among 
the groups of beneficiaries is based on any of the following factors:
    (A) A bona fide employment-based classification of the participant 
through whom the beneficiary is receiving coverage;
    (B) Relationship to the participant (for example, as a spouse or as 
a dependent child);
    (C) Marital status;
    (D) With respect to children of a participant, age or student 
status; or
    (E) Any other factor if the factor is not a health factor.
    (ii) Paragraph (d)(2)(i) of this section does not prevent more 
favorable treatment of individuals with adverse health factors in 
accordance with paragraph (g) of this section.
    (3) Discrimination directed at individuals. Notwithstanding 
paragraphs (d)(1) and (2) of this section, if the creation or 
modification of an employment or coverage classification is directed at 
individual participants or beneficiaries based on any health factor of 
the participants or beneficiaries, the classification is not permitted 
under this paragraph (d), unless it is permitted under paragraph (g) of 
this section (permitting favorable treatment of individuals with 
adverse health factors). Thus, if an employer modified an employment-
based classification to single out, based on a health factor, 
individual participants and beneficiaries and deny them health 
coverage, the new classification would not be permitted under this 
section.

[[Page 75042]]

    (4) Examples. The rules of this paragraph (d) are illustrated by 
the following examples:

    Example 1.  (i) Facts. An employer sponsors a group health plan 
for full-time employees only. Under the plan (consistent with the 
employer's usual business practice), employees who normally work at 
least 30 hours per week are considered to be working full-time. 
Other employees are considered to be working part-time. There is no 
evidence to suggest that the classification is directed at 
individual participants or beneficiaries.
    (ii) Conclusion. In this Example 1, treating the full-time and 
part-time employees as two separate groups of similarly situated 
individuals is permitted under this paragraph (d) because the 
classification is bona fide and is not directed at individual 
participants or beneficiaries.
    Example 2.  (i) Facts. Under a group health plan, coverage is 
made available to employees, their spouses, and their dependent 
children. However, coverage is made available to a dependent child 
only if the dependent child is under age 19 (or under age 25 if the 
child is continuously enrolled full-time in an institution of higher 
learning (full-time students)). There is no evidence to suggest that 
these classifications are directed at individual participants or 
beneficiaries.
    (ii) Conclusion. In this Example 2, treating spouses and dependent 
children differently by imposing an age limitation on dependent 
children, but not on spouses, is permitted under this paragraph (d). 
Specifically, the distinction between spouses and dependent children is 
permitted under paragraph (d)(2) of this section and is not prohibited 
under paragraph (d)(3) of this section because it is not directed at 
individual participants or beneficiaries. It is also permissible to 
treat dependent children who are under age 19 (or full-time students 
under age 25) as a group of similarly situated individuals separate 
from those who are age 25 or older (or age 19 or older if they are not 
full-time students) because the classification is permitted under 
paragraph (d)(2) of this section and is not directed at individual 
participants or beneficiaries.
    Example 3.  (i) Facts. A university sponsors a group health plan 
that provides one health benefit package to faculty and another 
health benefit package to other staff. Faculty and staff are treated 
differently with respect to other employee benefits such as 
retirement benefits and leaves of absence. There is no evidence to 
suggest that the distinction is directed at individual participants 
or beneficiaries.
    (ii) Conclusion. In this Example 3, the classification is permitted 
under this paragraph (d) because there is a distinction based on a bona 
fide employment-based classification consistent with the employer's 
usual business practice and the distinction is not directed at 
individual participants and beneficiaries.
    Example 4.  (i) Facts. An employer sponsors a group health plan 
that is available to all current employees. Former employees may 
also be eligible, but only if they complete a specified number of 
years of service, are enrolled under the plan at the time of 
termination of employment, and are continuously enrolled from that 
date. There is no evidence to suggest that these distinctions are 
directed at individual participants or beneficiaries.
    (ii) Conclusion. In this Example 4, imposing additional eligibility 
requirements on former employees is permitted because a classification 
that distinguishes between current and former employees is a bona fide 
employment-based classification that is permitted under this paragraph 
(d), provided that it is not directed at individual participants or 
beneficiaries. In addition, it is permissible to distinguish between 
former employees who satisfy the service requirement and those who do 
not, provided that the distinction is not directed at individual 
participants or beneficiaries. (However, former employees who do not 
satisfy the eligibility criteria may, nonetheless, be eligible for 
continued coverage pursuant to a COBRA continuation provision or 
similar State law.)
    Example 5.  (i) Facts. An employer sponsors a group health plan 
that provides the same benefit package to all seven employees of the 
employer. Six of the seven employees have the same job title and 
responsibilities, but Employee G has a different job title and 
different responsibilities. After G files an expensive claim for 
benefits under the plan, coverage under the plan is modified so that 
employees with Gs job title receive a different benefit package that 
includes a lower lifetime dollar limit than in the benefit package 
made available to the other six employees.
    (ii) Conclusion. Under the facts of this Example 5, changing the 
coverage classification for G based on the existing employment 
classification for G is not permitted under this paragraph (d) because 
the creation of the new coverage classification for G is directed at G 
based on one or more health factors.

    (e) Nonconfinement and actively-at-work provisions--(1) 
Nonconfinement provisions--(i) General rule. Under the rules of 
paragraphs (b) and (c) of this section, a plan or issuer may not 
establish a rule for eligibility (as described in paragraph (b)(1)(ii) 
of this section) or set any individual's premium or contribution rate 
based on whether an individual is confined to a hospital or other 
health care institution. In addition, under the rules of paragraphs (b) 
and (c) of this section, a plan or issuer may not establish a rule for 
eligibility or set any individual's premium or contribution rate based 
on an individual's ability to engage in normal life activities, except 
to the extent permitted under paragraphs (e)(2)(ii) and (3) of this 
section (permitting plans and issuers, under certain circumstances, to 
distinguish among employees based on the performance of services).
    (ii) Examples. The rules of this paragraph (e)(1) are 
illustrated by the following examples: P='04'>
    Example 1.  (i) Facts. Under a group health plan, coverage for 
employees and their dependents generally becomes effective on the 
first day of employment. However, coverage for a dependent who is 
confined to a hospital or other health care institution does not 
become effective until the confinement ends.
    (ii) Conclusion. In this Example 1, the plan violates this 
paragraph (e)(1) because the plan delays the effective date of coverage 
for dependents based on confinement to a hospital or other health care 
institution.
    Example 2.  (i) Facts. In previous years, a group health plan 
has provided coverage through a group health insurance policy 
offered by Issuer M. However, for the current year, the plan 
provides coverage through a group health insurance policy offered by 
Issuer N. Under Issuer N's policy, items and services provided in 
connection with the confinement of a dependent to a hospital or 
other health care institution are not covered if the confinement is 
covered under an extension of benefits clause from a previous health 
insurance issuer.
    (ii) Conclusion. In this Example 2, Issuer N violates this 
paragraph (e)(1) because the group health insurance coverage restricts 
benefits (a rule for eligibility under paragraph (b)(1)) based on 
whether a dependent is confined to a hospital or other health care 
institution that is covered under an extension of benefits clause from 
a previous issuer. State law cannot change the obligation of Issuer N 
under this section. However, under State law Issuer M may also be 
responsible for providing benefits to such a dependent. In a case in 
which Issuer N has an obligation under this section to provide benefits 
and Issuer M has an obligation under State law to provide benefits, any 
State laws designed to prevent more than 100% reimbursement, such as 
State coordination-of-benefits laws, continue to apply.

    (2) Actively-at-work and continuous service provisions--(i) General 
rule--(A) Under the rules of paragraphs (b) and (c) of this section and 
subject to the exception for the first day of work described in 
paragraph (e)(2)(ii) of this section, a plan or issuer may not 
establish a rule for eligibility (as described in paragraph (b)(1)(ii) 
of this section) or set any individual's premium or contribution rate 
based on whether an individual is actively at work (including whether 
an individual is continuously employed), unless absence from work due 
to any health factor (such as being absent from work on sick leave) is 
treated, for purposes of the plan or health insurance coverage, as 
being actively at work.
    (B) The rules of this paragraph (e)(2)(i) are illustrated by the 
following examples:

    Example 1.  (i) Facts. Under a group health plan, an employee 
generally becomes eligible to enroll 30 days after the first day of 
employment. However, if the employee is not actively at work on the 
first day after the end of the 30-day period, then eligibility for

[[Page 75043]]

enrollment is delayed until the first day the employee is actively 
at work.
    (ii) Conclusion. In this Example 1, the plan violates this 
paragraph (e)(2) (and thus also violates paragraph (b) of this 
section). However, the plan would not violate paragraph (e)(2) or (b) 
of this section if, under the plan, an absence due to any health factor 
is considered being actively at work.
    Example 2. (i) Facts. Under a group health plan, coverage for an 
employee becomes effective after 90 days of continuous service; that 
is, if an employee is absent from work (for any reason) before 
completing 90 days of service, the beginning of the 90-day period is 
measured from the day the employee returns to work (without any 
credit for service before the absence).
    (ii) Conclusion. In this Example 2, the plan violates this 
paragraph (e)(2) (and thus also paragraph (b) of this section) because 
the 90-day continuous service requirement is a rule for eligibility 
based on whether an individual is actively at work. However, the plan 
would not violate this paragraph (e)(2) or paragraph (b) of this 
section if, under the plan, an absence due to any health factor is not 
considered an absence for purposes of measuring 90 days of continuous 
service.

    (ii) Exception for the first day of work--(A) Notwithstanding the 
general rule in paragraph (e)(2)(i) of this section, a plan or issuer 
may establish a rule for eligibility that requires an individual to 
begin work for the employer sponsoring the plan (or, in the case of a 
multiemployer plan, to begin a job in covered employment) before 
coverage becomes effective, provided that such a rule for eligibility 
applies regardless of the reason for the absence.
    (B) The rules of this paragraph (e)(2)(ii) are illustrated by the 
following examples:

    Example 1. (i) Facts. Under the eligibility provision of a group 
health plan, coverage for new employees becomes effective on the 
first day that the employee reports to work. Individual H is 
scheduled to begin work on August 3. However, H is unable to begin 
work on that day because of illness. H begins working on August 4, 
and H's coverage is effective on August 4.
    (ii) Conclusion. In this Example 1, the plan provision does not 
violate this section. However, if coverage for individuals who do not 
report to work on the first day they were scheduled to work for a 
reason unrelated to a health factor (such as vacation or bereavement) 
becomes effective on the first day they were scheduled to work, then 
the plan would violate this section.
    Example 2.  (i) Facts. Under a group health plan, coverage for 
new employees becomes effective on the first day of the month 
following the employee's first day of work, regardless of whether 
the employee is actively at work on the first day of the month. 
Individual J is scheduled to begin work on March 24. However, J is 
unable to begin work on March 24 because of illness. J begins 
working on April 7 and J's coverage is effective May 1.
    (ii) Conclusion. In this Example 2, the plan provision does not 
violate this section. However, as in Example 1, if coverage for 
individuals absent from work for reasons unrelated to a health factor 
became effective despite their absence, then the plan would violate 
this section.

    (3) Relationship to plan provisions defining similarly situated 
individuals--(i) Notwithstanding the rules of paragraphs (e)(1) and (2) 
of this section, a plan or issuer may establish rules for eligibility 
or set any individual's premium or contribution rate in accordance with 
the rules relating to similarly situated individuals in paragraph (d) 
of this section. Accordingly, a plan or issuer may distinguish in rules 
for eligibility under the plan between full-time and part-time 
employees, between permanent and temporary or seasonal employees, 
between current and former employees, and between employees currently 
performing services and employees no longer performing services for the 
employer, subject to paragraph (d) of this section. However, other 
Federal or State laws (including the COBRA continuation provisions and 
the Family and Medical Leave Act of 1993) may require an employee or 
the employee's dependents to be offered coverage and set limits on the 
premium or contribution rate even though the employee is not performing 
services.
    (ii) The rules of this paragraph (e)(3) are illustrated by the 
following examples:

    Example 1.  (i) Facts. Under a group health plan, employees are 
eligible for coverage if they perform services for the employer for 
30 or more hours per week or if they are on paid leave (such as 
vacation, sick, or bereavement leave). Employees on unpaid leave are 
treated as a separate group of similarly situated individuals in 
accordance with the rules of paragraph (d) of this section.
    (ii) Conclusion. In this Example 1, the plan provisions do not 
violate this section. However, if the plan treated individuals 
performing services for the employer for 30 or more hours per week, 
individuals on vacation leave, and individuals on bereavement leave as 
a group of similarly situated individuals separate from individuals on 
sick leave, the plan would violate this paragraph (e) (and thus also 
would violate paragraph (b) of this section) because groups of 
similarly situated individuals cannot be established based on a health 
factor (including the taking of sick leave) under paragraph (d) of this 
section.
    Example 2. (i) Facts. To be eligible for coverage under a bona fide 
collectively bargained group health plan in the current calendar 
quarter, the plan requires an individual to have worked 250 hours in 
covered employment during the three-month period that ends one month 
before the beginning of the current calendar quarter. The distinction 
between employees working at least 250 hours and those working less 
than 250 hours in the earlier three-month period is not directed at 
individual participants or beneficiaries based on any health factor of 
the participants or beneficiaries.
    (ii) Conclusion. In this Example 2, the plan provision does not 
violate this section because, under the rules for similarly situated 
individuals allowing full-time employees to be treated differently than 
part-time employees, employees who work at least 250 hours in a three-
month period can be treated differently than employees who fail to work 
250 hours in that period. The result would be the same if the plan 
permitted individuals to apply excess hours from previous periods to 
satisfy the requirement for the current quarter.
    Example 3. (i) Facts. Under a group health plan, coverage of an 
employee is terminated when the individual's employment is terminated, 
in accordance with the rules of paragraph (d) of this section. Employee 
B has been covered under the plan. B experiences a disabling illness 
that prevents B from working. B takes a leave of absence under the 
Family and Medical Leave Act of 1993. At the end of such leave, B 
terminates employment and consequently loses coverage under the plan. 
(This termination of coverage is without regard to whatever rights the 
employee (or members of the employee's family) may have for COBRA 
continuation coverage.)
    (ii) Conclusion. In this Example 3, the plan provision terminating 
B's coverage upon B's termination of employment does not violate this 
section.
    Example 4. (i) Facts. Under a group health plan, coverage of an 
employee is terminated when the employee ceases to perform services for 
the employer sponsoring the plan, in accordance with the rules of 
paragraph (d) of this section. Employee C is laid off for three months. 
When the layoff begins, C's coverage under the plan is terminated. 
(This termination of coverage is without regard to whatever rights the 
employee (or members of the employee's family) may have for COBRA 
continuation coverage.)
    (ii) Conclusion. In this Example 4, the plan provision terminating 
C's coverage upon the cessation of C's performance of services does not 
violate this section.

    (f) Wellness programs. A wellness program is any program designed 
to promote health or prevent disease. Paragraphs (b)(2)(ii) and (c)(3) 
of this section provide exceptions to the general prohibitions against 
discrimination based on a health factor for plan provisions that vary 
benefits (including cost-sharing mechanisms) or the premium or 
contribution for similarly situated individuals in connection with a 
wellness program that satisfies the requirements of this paragraph (f). 
If none of the conditions for obtaining a reward under a wellness 
program is based on an individual satisfying a standard that is related 
to a health factor, paragraph (f)(1) of this

[[Page 75044]]

section clarifies that the wellness program does not violate this 
section if participation in the program is made available to all 
similarly situated individuals. If any of the conditions for obtaining 
a reward under a wellness program is based on an individual satisfying 
a standard that is related to a health factor, the wellness program 
does not violate this section if the requirements of paragraph (f)(2) 
of this section are met.
    (1) Wellness programs not subject to requirements. If none of the 
conditions for obtaining a reward under a wellness program are based on 
an individual satisfying a standard that is related to a health factor 
(or if a wellness program does not provide a reward), the wellness 
program does not violate this section, if participation in the program 
is made available to all similarly situated individuals. Thus, for 
example, the following programs need not satisfy the requirements of 
paragraph (f)(2) of this section, if participation in the program is 
made available to all similarly situated individuals:
    (i) A program that reimburses all or part of the cost for 
memberships in a fitness center.
    (ii) A diagnostic testing program that provides a reward for 
participation and does not base any part of the reward on outcomes.
    (iii) A program that encourages preventive care through the waiver 
of the copayment or deductible requirement under a group health plan 
for the costs of, for example, prenatal care or well-baby visits.
    (iv) A program that reimburses employees for the costs of smoking 
cessation programs without regard to whether the employee quits 
smoking.
    (v) A program that provides a reward to employees for attending a 
monthly health education seminar.
    (2) Wellness programs subject to requirements. If any of the 
conditions for obtaining a reward under a wellness program is based on 
an individual satisfying a standard that is related to a health factor, 
the wellness program does not violate this section if the requirements 
of this paragraph (f)(2) are met.
    (i) The reward for the wellness program, coupled with the reward 
for other wellness programs with respect to the plan that require 
satisfaction of a standard related to a health factor, must not exceed 
20 percent of the cost of employee-only coverage under the plan. 
However, if, in addition to employees, any class of dependents (such as 
spouses or spouses and dependent children) may participate in the 
wellness program, the reward must not exceed 20 percent of the cost of 
the coverage in which an employee and any dependents are enrolled. For 
purposes of this paragraph (f)(2), the cost of coverage is determined 
based on the total amount of employer and employee contributions for 
the benefit package under which the employee is (or the employee and 
any dependents are) receiving coverage. A reward can be in the form of 
a discount or rebate of a premium or contribution, a waiver of all or 
part of a cost-sharing mechanism (such as deductibles, copayments, or 
coinsurance), the absence of a surcharge, or the value of a benefit 
that would otherwise not be provided under the plan.
    (ii) The program must be reasonably designed to promote health or 
prevent disease. A program satisfies this standard if it has a 
reasonable chance of improving the health of or preventing disease in 
participating individuals and it is not overly burdensome, is not a 
subterfuge for discriminating based on a health factor, and is not 
highly suspect in the method chosen to promote health or prevent 
disease.
    (iii) The program must give individuals eligible for the program 
the opportunity to qualify for the reward under the program at least 
once per year.
    (iv) The reward under the program must be available to all 
similarly situated individuals.
    (A) A reward is not available to all similarly situated individuals 
for a period unless the program allows--
    (1) A reasonable alternative standard (or waiver of the otherwise 
applicable standard) for obtaining the reward for any individual for 
whom, for that period, it is unreasonably difficult due to a medical 
condition to satisfy the otherwise applicable standard; and
    (2) A reasonable alternative standard (or waiver of the otherwise 
applicable standard) for obtaining the reward for any individual for 
whom, for that period, it is medically inadvisable to attempt to 
satisfy the otherwise applicable standard.
    (B) A plan or issuer may seek verification, such as a statement 
from an individual's physician, that a health factor makes it 
unreasonably difficult or medically inadvisable for the individual to 
satisfy or attempt to satisfy the otherwise applicable standard.
    (v)(A) The plan or issuer must disclose in all plan materials 
describing the terms of the program the availability of a reasonable 
alternative standard (or the possibility of waiver of the otherwise 
applicable standard) required under paragraph (f)(2)(iv) of this 
section. However, if plan materials merely mention that a program is 
available, without describing its terms, this disclosure is not 
required.
    (B) The following language, or substantially similar language, can 
be used to satisfy the requirement of this paragraph (f)(2)(v): ``If it 
is unreasonably difficult due to a medical condition for you to achieve 
the standards for the reward under this program, or if it is medically 
inadvisable for you to attempt to achieve the standards for the reward 
under this program, call us at [insert telephone number] and we will 
work with you to develop another way to qualify for the reward.'' In 
addition, other examples of language that would satisfy this 
requirement are set forth in Examples 3, 4, and 5 of paragraph (f)(3) 
of this section.
    (3) Examples. The rules of paragraph (f)(2) of this section are 
illustrated by the following examples:

    Example 1. (i) Facts. An employer sponsors a group health plan. 
The annual premium for employee-only coverage is $3,600 (of which 
the employer pays $2,700 per year and the employee pays $900 per 
year). The annual premium for family coverage is $9,000 (of which 
the employer pays $4,500 per year and the employee pays $4,500 per 
year). The plan offers a wellness program with an annual premium 
rebate of $360. The program is available only to employees.
    (ii) Conclusion. In this Example 1, the program satisfies the 
requirements of paragraph (f)(2)(i) of this section because the reward 
for the wellness program, $360, does not exceed 20 percent of the total 
annual cost of employee-only coverage, $720. ($3,600 x 20% = $720.) If 
any class of dependents is allowed to participate in the program and 
the employee is enrolled in family coverage, the plan could offer the 
employee a reward of up to 20 percent of the cost of family coverage, 
$1,800. ($9,000 x 20% = $1,800.)
    Example 2. (i) Facts. A group health plan gives an annual 
premium discount of 20 percent of the cost of employee-only coverage 
to participants who adhere to a wellness program. The wellness 
program consists solely of giving an annual cholesterol test to 
participants. Those participants who achieve a count under 200 
receive the premium discount for the year.
    (ii) Conclusion. In this Example 2, the program fails to satisfy 
the requirement of being available to all similarly situated 
individuals because some participants may be unable to achieve a 
cholesterol count of under 200 and the plan does not make available a 
reasonable alternative standard or waive the cholesterol standard. (In 
addition, plan materials describing the program are required to 
disclose the availability of a reasonable alternative standard (or the 
possibility of waiver of the otherwise applicable standard) for 
obtaining the premium discount. Thus, the premium discount violates 
paragraph (c) of this section because it may require an individual to 
pay a higher premium based on a health factor of the individual than is 
required of a similarly situated individual under the plan.

[[Page 75045]]

    Example 3. (i) Facts. Same facts as Example 2, except that the 
plan provides that if it is unreasonably difficult due to a medical 
condition for a participant to achieve the targeted cholesterol 
count (or if it is medically inadvisable for a participant to 
attempt to achieve the targeted cholesterol count) within a 60-day 
period, the plan will make available a reasonable alternative 
standard that takes the relevant medical condition into account. In 
addition, all plan materials describing the terms of the program 
include the following statement: ``If it is unreasonably difficult 
due to a medical condition for you to achieve a cholesterol count 
under 200, or if it is medically inadvisable for you to attempt to 
achieve a count under 200, call us at the number below and we will 
work with you to develop another way to get the discount.'' 
Individual D begins a diet and exercise program but is unable to 
achieve a cholesterol count under 200 within the prescribed period. 
D's doctor determines D requires prescription medication to achieve 
a medically advisable cholesterol count. In addition, the doctor 
determines that D must be monitored through periodic blood tests to 
continually reevaluate D's health status. The plan accommodates D by 
making the discount available to D, but only if D follows the advice 
of D's doctor's regarding medication and blood tests.
    (ii) Conclusion. In this Example 3, the program is a wellness 
program because it satisfies the five requirements of paragraph (f)(2) 
of this section. First, the program complies with the limits on rewards 
under a program. Second, it is reasonably designed to promote health or 
prevent disease. Third, individuals eligible for the program are given 
the opportunity to qualify for the reward at least once per year. 
Fourth, the reward under the program is available to all similarly 
situated individuals because it accommodates individuals for whom it is 
unreasonably difficult due to a medical condition to achieve the 
targeted count (or for whom it is medically inadvisable to attempt to 
achieve the targeted count) in the prescribed period by providing a 
reasonable alternative standard. Fifth, the plan discloses in all 
materials describing the terms of the program the availability of a 
reasonable alternative standard. Thus, the premium discount does not 
violate this section.
    Example 4. (i) Facts. A group health plan will waive the $250 
annual deductible (which is less than 20 percent of the annual cost 
of employee-only coverage under the plan) for the following year for 
participants who have a body mass index between 19 and 26, 
determined shortly before the beginning of the year. However, any 
participant for whom it is unreasonably difficult due to a medical 
condition to attain this standard (and any participant for whom it 
is medically inadvisable to attempt to achieve this standard) during 
the plan year is given the same discount if the participant walks 
for 20 minutes three days a week. Any participant for whom it is 
unreasonably difficult due to a medical condition to attain either 
standard (and any participant for whom it is medically inadvisable 
to attempt to achieve either standard) during the year is given the 
same discount if the individual satisfies an alternative standard 
that is reasonable in the burden it imposes and is reasonable taking 
into consideration the individual's medical situation. All plan 
materials describing the terms of the wellness program include the 
following statement: ``If it is unreasonably difficult due to a 
medical condition for you to achieve a body mass index between 19 
and 26 (or if it is medically inadvisable for you to attempt to 
achieve this body mass index) this year, your deductible will be 
waived if you walk for 20 minutes three days a week. If you cannot 
follow the walking program, call us at the number above and we will 
work with you to develop another way to have your deductible 
waived.'' Due to a medical condition, Individual E is unable to 
achieve a BMI of between 19 and 26 and is also unable to follow the 
walking program. E proposes a program based on the recommendations 
of E's physician. The plan agrees to make the discount available to 
E if E follows the physician's recommendations.
    (ii) Conclusion. In this Example 4, the program satisfies the five 
requirements of paragraph (f)(2) of this section. First, the program 
complies with the limits on rewards under a program. Second, it is 
reasonably designed to promote health or prevent disease. Third, 
individuals eligible for the program are given the opportunity to 
qualify for the reward at least once per year. Fourth, the reward under 
the program is available to all similarly situated individuals because 
it generally accommodates individuals for whom it is unreasonably 
difficult due to a medical condition to achieve (or for whom it is 
medically inadvisable to attempt to achieve) the targeted body mass 
index by providing a reasonable alternative standard (walking) and it 
accommodates individuals for whom it is unreasonably difficult due to a 
medical condition (or for whom it is medically inadvisable to attempt) 
to walk by providing an alternative standard that is reasonable for the 
individual. Fifth, the plan discloses in all materials describing the 
terms of the program the availability of a reasonable alternative 
standard for every individual. Thus, the waiver of the deductible does 
not violate this section.
    Example 5. (i) Facts. In conjunction with an annual open 
enrollment period, a group health plan provides a form for 
participants to certify that they have not used tobacco products in 
the preceding twelve months. Participants who do not provide the 
certification are assessed a surcharge that is 20 percent of the 
cost of employee-only coverage. However, all plan materials 
describing the terms of the wellness program include the following 
statement: ``If it is unreasonably difficult due to a health factor 
for you to meet the requirements under this program (or if it is 
medically inadvisable for you to attempt to meet the requirements of 
this program), we will make available a reasonable alternative 
standard for you to avoid this surcharge.'' It is unreasonably 
difficult for Individual F to stop smoking cigarettes due to an 
addiction to nicotine (a medical condition). The plan accommodates F 
by requiring F to participate in a smoking cessation program to 
avoid the surcharge. F can avoid the surcharge for as long as F 
participates in the program, regardless of whether F stops smoking 
(as long as F continues to be addicted to nicotine).
    (ii) Conclusion. In this Example 5, the premium surcharge is 
permissible as a wellness program because it satisfies the five 
requirements of paragraph (f)(2) of this section. First, the program 
complies with the limits on rewards under a program. Second, it is 
reasonably designed to promote health or prevent disease. Third, 
individuals eligible for the program are given the opportunity to 
qualify for the reward at least once per year. Fourth, the reward under 
the program is available to all similarly situated individuals because 
it accommodates individuals for whom it is unreasonably difficult due 
to a medical condition (or for whom it is medically inadvisable to 
attempt) to quit using tobacco products by providing a reasonable 
alternative standard. Fifth, the plan discloses in all materials 
describing the terms of the program the availability of a reasonable 
alternative standard. Thus, the premium surcharge does not violate this 
section.
    Example 6. (i) Facts. Same facts as Example 5, except the plan 
accommodates F by requiring F to view, over a period of 12 months, a 
12-hour video series on health problems associated with tobacco use. 
F can avoid the surcharge by complying with this requirement.
    (ii) Conclusion. In this Example 6, the requirement to watch the 
series of video tapes is a reasonable alternative method for avoiding 
the surcharge.

    (g) More favorable treatment of individuals with adverse health 
factors permitted--(1) In rules for eligibility--(i) Nothing in this 
section prevents a group health plan or group health insurance issuer 
from establishing more favorable rules for eligibility (described in 
paragraph (b)(1) of this section) for individuals with an adverse 
health factor, such as disability, than for individuals without the 
adverse health factor. Moreover, nothing in this section prevents a 
plan or issuer from charging a higher premium or contribution with 
respect to individuals with an adverse health factor if they would not 
be eligible for the coverage were it not for the adverse health factor. 
(However, other laws, including State insurance laws, may set or limit 
premium rates; these laws are not affected by this section.)
    (ii) The rules of this paragraph (g)(1) are illustrated by the 
following examples:

    Example 1. (i) Facts. An employer sponsors a group health plan 
that generally is available to employees, spouses of employees, and 
dependent children until age 23. However, dependent children who are 
disabled are eligible for coverage beyond age 23.
    (ii) Conclusion. In this Example 1, the plan provision allowing 
coverage for disabled dependent children beyond age 23 satisfies this 
paragraph (g)(1) (and thus does not violate this section).

[[Page 75046]]

    Example 2. (i) Facts. An employer sponsors a group health plan, 
which is generally available to employees (and members of the 
employee's family) until the last day of the month in which the 
employee ceases to perform services for the employer. The plan 
generally charges employees $50 per month for employee-only coverage 
and $125 per month for family coverage. However, an employee who 
ceases to perform services for the employer by reason of disability 
may remain covered under the plan until the last day of the month 
that is 12 months after the month in which the employee ceased to 
perform services for the employer. During this extended period of 
coverage, the plan charges the employee $100 per month for employee-
only coverage and $250 per month for family coverage. (This extended 
period of coverage is without regard to whatever rights the employee 
(or members of the employee's family) may have for COBRA 
continuation coverage.)
    (ii) Conclusion. In this Example 2, the plan provision allowing 
extended coverage for disabled employees and their families satisfies 
this paragraph (g)(1) (and thus does not violate this section). In 
addition, the plan is permitted, under this paragraph (g)(1), to charge 
the disabled employees a higher premium during the extended period of 
coverage.
    Example 3. (i) Facts. To comply with the requirements of a COBRA 
continuation provision, a group health plan generally makes COBRA 
continuation coverage available for a maximum period of 18 months in 
connection with a termination of employment but makes the coverage 
available for a maximum period of 29 months to certain disabled 
individuals and certain members of the disabled individual's family. 
Although the plan generally requires payment of 102 percent of the 
applicable premium for the first 18 months of COBRA continuation 
coverage, the plan requires payment of 150 percent of the applicable 
premium for the disabled individual's COBRA continuation coverage 
during the disability extension if the disabled individual would not 
be entitled to COBRA continuation coverage but for the disability.
    (ii) Conclusion. In this Example 3, the plan provision allowing 
extended COBRA continuation coverage for disabled individuals satisfies 
this paragraph (g)(1) (and thus does not violate this section). In 
addition, the plan is permitted, under this paragraph (g)(1), to charge 
the disabled individuals a higher premium for the extended coverage if 
the individuals would not be eligible for COBRA continuation coverage 
were it not for the disability. (Similarly, if the plan provided an 
extended period of coverage for disabled individuals pursuant to State 
law or plan provision rather than pursuant to a COBRA continuation 
coverage provision, the plan could likewise charge the disabled 
individuals a higher premium for the extended coverage.)

    (2) In premiums or contributions--(i) Nothing in this section 
prevents a group health plan or group health insurance issuer from 
charging individuals a premium or contribution that is less than the 
premium (or contribution) for similarly situated individuals if the 
lower charge is based on an adverse health factor, such as disability.
    (ii) The rules of this paragraph (g)(2) are illustrated by the 
following example:

    Example. (i) Facts. Under a group health plan, employees are 
generally required to pay $50 per month for employee-only coverage 
and $125 per month for family coverage under the plan. However, 
employees who are disabled receive coverage (whether employee-only 
or family coverage) under the plan free of charge.
    (ii) Conclusion. In this Example, the plan provision waiving 
premium payment for disabled employees is permitted under this 
paragraph (g)(2) (and thus does not violate this section).

    (h) No effect on other laws. Compliance with this section is not 
determinative of compliance with any other provision of the Act 
(including the COBRA continuation provisions) or any other State or 
Federal law, such as the Americans with Disabilities Act. Therefore, 
although the rules of this section would not prohibit a plan or issuer 
from treating one group of similarly situated individuals differently 
from another (such as providing different benefit packages to current 
and former employees), other Federal or State laws may require that two 
separate groups of similarly situated individuals be treated the same 
for certain purposes (such as making the same benefit package available 
to COBRA qualified beneficiaries as is made available to active 
employees). In addition, although this section generally does not 
impose new disclosure obligations on plans and issuers, this section 
does not affect any other laws, including those that require accurate 
disclosures and prohibit intentional misrepresentation.
    (i) Applicability dates. This section applies for plan years 
beginning on or after July 1, 2007.

    Signed at Washington, DC this 1st day of December, 2006.
Bradford P. Campbell,
Acting Assistant Secretary,Employee Benefits Security 
Administration,U.S. Department of Labor.

0
For the reasons set forth above, 45 CFR part 146 is amended as follows:

PART 146--REQUIREMENTS FOR THE GROUP HEALTH INSURANCE MARKET

0
1. Paragraph (b)(1)(vi) is added to Sec.  146.101 as follows:


Sec.  146.101  Basis and scope

* * * * *
    (b) * * *
    (1) * * *
    (vi) Prohibiting discrimination against participants and 
beneficiaries based on a health factor.
* * * * *

0
2. Section 146.121 is revised to read as follows:


Sec.  146.121  Prohibiting discrimination against participants and 
beneficiaries based on a health factor.

    (a) Health factors. (1) The term health factor means, in relation 
to an individual, any of the following health status-related factors:
    (i) Health status;
    (ii) Medical condition (including both physical and mental 
illnesses), as defined in Sec.  144.103 of this chapter;
    (iii) Claims experience;
    (iv) Receipt of health care;
    (v) Medical history;
    (vi) Genetic information, as defined in Sec.  144.103 of this 
chapter;
    (vii) Evidence of insurability; or
    (viii) Disability.
    (2) Evidence of insurability includes--
    (i) Conditions arising out of acts of domestic violence; and
    (ii) Participation in activities such as motorcycling, 
snowmobiling, all-terrain vehicle riding, horseback riding, skiing, and 
other similar activities.
    (3) The decision whether health coverage is elected for an 
individual (including the time chosen to enroll, such as under special 
enrollment or late enrollment) is not, itself, within the scope of any 
health factor. (However, under Sec.  146.117, a plan or issuer must 
treat special enrollees the same as similarly situated individuals who 
are enrolled when first eligible.)
    (b) Prohibited discrimination in rules for eligibility--(1) In 
general--(i) A group health plan, and a health insurance issuer 
offering health insurance coverage in connection with a group health 
plan, may not establish any rule for eligibility (including continued 
eligibility) of any individual to enroll for benefits under the terms 
of the plan or group health insurance coverage that discriminates based 
on any health factor that relates to that individual or a dependent of 
that individual. This rule is subject to the provisions of paragraph 
(b)(2) of this section (explaining how this rule applies to benefits), 
paragraph (b)(3) of this section (allowing plans to impose certain 
preexisting condition exclusions), paragraph (d) of this section 
(containing rules for establishing groups of similarly situated 
individuals), paragraph (e) of this section (relating to 
nonconfinement, actively-at-work, and other service requirements), 
paragraph

[[Page 75047]]

(f) of this section (relating to wellness programs), and paragraph (g) 
of this section (permitting favorable treatment of individuals with 
adverse health factors).
    (ii) For purposes of this section, rules for eligibility include, 
but are not limited to, rules relating to--
    (A) Enrollment;
    (B) The effective date of coverage;
    (C) Waiting (or affiliation) periods;
    (D) Late and special enrollment;
    (E) Eligibility for benefit packages (including rules for 
individuals to change their selection among benefit packages);
    (F) Benefits (including rules relating to covered benefits, benefit 
restrictions, and cost-sharing mechanisms such as coinsurance, 
copayments, and deductibles), as described in paragraphs (b)(2) and 
(b)(3) of this section;
    (G) Continued eligibility; and
    (H) Terminating coverage (including disenrollment) of any 
individual under the plan.
    (iii) The rules of this paragraph (b)(1) are illustrated by the 
following examples:

    Example 1. (i) Facts. An employer sponsors a group health plan 
that is available to all employees who enroll within the first 30 
days of their employment. However, employees who do not enroll 
within the first 30 days cannot enroll later unless they pass a 
physical examination.
    (ii) Conclusion. In this Example 1, the requirement to pass a 
physical examination in order to enroll in the plan is a rule for 
eligibility that discriminates based on one or more health factors 
and thus violates this paragraph (b)(1).
    Example 2. (i) Facts. Under an employer's group health plan, 
employees who enroll during the first 30 days of employment (and 
during special enrollment periods) may choose between two benefit 
packages: an indemnity option and an HMO option. However, employees 
who enroll during late enrollment are permitted to enroll only in 
the HMO option and only if they provide evidence of good health.
    (ii) Conclusion. In this Example 2, the requirement to provide 
evidence of good health in order to be eligible for late enrollment in 
the HMO option is a rule for eligibility that discriminates based on 
one or more health factors and thus violates this paragraph (b)(1). 
However, if the plan did not require evidence of good health but 
limited late enrollees to the HMO option, the plan's rules for 
eligibility would not discriminate based on any health factor, and thus 
would not violate this paragraph (b)(1), because the time an individual 
chooses to enroll is not, itself, within the scope of any health 
factor.
    Example 3. (i) Facts. Under an employer's group health plan, all 
employees generally may enroll within the first 30 days of 
employment. However, individuals who participate in certain 
recreational activities, including motorcycling, are excluded from 
coverage.
    (ii) Conclusion. In this Example 3, excluding from the plan 
individuals who participate in recreational activities, such as 
motorcycling, is a rule for eligibility that discriminates based on 
one or more health factors and thus violates this paragraph (b)(1).
    Example 4. (i) Facts. A group health plan applies for a group 
health policy offered by an issuer. As part of the application, the 
issuer receives health information about individuals to be covered 
under the plan. Individual A is an employee of the employer 
maintaining the plan. A and A's dependents have a history of high 
health claims. Based on the information about A and A's dependents, 
the issuer excludes A and A's dependents from the group policy it 
offers to the employer.
    (ii) Conclusion. In this Example 4, the issuer's exclusion of A and 
A's dependents from coverage is a rule for eligibility that 
discriminates based on one or more health factors, and thus violates 
this paragraph (b)(1). (If the employer is a small employer under 45 
CFR 144.103 (generally, an employer with 50 or fewer employees), the 
issuer also may violate 45 CFR 146.150, which requires issuers to offer 
all the policies they sell in the small group market on a guaranteed 
available basis to all small employers and to accept every eligible 
individual in every small employer group.) If the plan provides 
coverage through this policy and does not provide equivalent coverage 
for A and A's dependents through other means, the plan will also 
violate this paragraph (b)(1).

    (2) Application to benefits--(i) General rule--(A) Under this 
section, a group health plan or group health insurance issuer is not 
required to provide coverage for any particular benefit to any group of 
similarly situated individuals.
    (B) However, benefits provided under a plan or through group health 
insurance coverage must be uniformly available to all similarly 
situated individuals (as described in paragraph (d) of this section). 
Likewise, any restriction on a benefit or benefits must apply uniformly 
to all similarly situated individuals and must not be directed at 
individual participants or beneficiaries based on any health factor of 
the participants or beneficiaries (determined based on all the relevant 
facts and circumstances). Thus, for example, a plan or issuer may limit 
or exclude benefits in relation to a specific disease or condition, 
limit or exclude benefits for certain types of treatments or drugs, or 
limit or exclude benefits based on a determination of whether the 
benefits are experimental or not medically necessary, but only if the 
benefit limitation or exclusion applies uniformly to all similarly 
situated individuals and is not directed at individual participants or 
beneficiaries based on any health factor of the participants or 
beneficiaries. In addition, a plan or issuer may impose annual, 
lifetime, or other limits on benefits and may require the satisfaction 
of a deductible, copayment, coinsurance, or other cost-sharing 
requirement in order to obtain a benefit if the limit or cost-sharing 
requirement applies uniformly to all similarly situated individuals and 
is not directed at individual participants or beneficiaries based on 
any health factor of the participants or beneficiaries. In the case of 
a cost-sharing requirement, see also paragraph (b)(2)(ii) of this 
section, which permits variances in the application of a cost-sharing 
mechanism made available under a wellness program. (Whether any plan 
provision or practice with respect to benefits complies with this 
paragraph (b)(2)(i) does not affect whether the provision or practice 
is permitted under any other provision of ERISA, the Americans with 
Disabilities Act, or any other law, whether State or Federal.)
    (C) For purposes of this paragraph (b)(2)(i), a plan amendment 
applicable to all individuals in one or more groups of similarly 
situated individuals under the plan and made effective no earlier than 
the first day of the first plan year after the amendment is adopted is 
not considered to be directed at any individual participants or 
beneficiaries.
    (D) The rules of this paragraph (b)(2)(i) are illustrated by the 
following examples:

    Example 1. (i) Facts. A group health plan applies a $500,000 
lifetime limit on all benefits to each participant or beneficiary 
covered under the plan. The limit is not directed at individual 
participants or beneficiaries.
    (ii) Conclusion. In this Example 1, the limit does not violate this 
paragraph (b)(2)(i) because $500,000 of benefits are available 
uniformly to each participant and beneficiary under the plan and 
because the limit is applied uniformly to all participants and 
beneficiaries and is not directed at individual participants or 
beneficiaries.
    Example 2. (i) Facts. A group health plan has a $2 million 
lifetime limit on all benefits (and no other lifetime limits) for 
participants covered under the plan. Participant B files a claim for 
the treatment of AIDS. At the next corporate board meeting of the 
plan sponsor, the claim is discussed. Shortly thereafter, the plan 
is modified to impose a $10,000 lifetime limit on benefits for the 
treatment of AIDS, effective before the beginning of the next plan 
year.
    (ii) Conclusion. The facts of this Example 2 strongly suggest that 
the plan modification is directed at B based on B's claim. Absent 
outweighing evidence to the contrary, the plan violates this paragraph 
(b)(2)(i).
    Example 3. (i) A group health plan applies for a group health 
policy offered by an issuer. Individual C is covered under the plan 
and has an adverse health condition. As part of

[[Page 75048]]

the application, the issuer receives health information about the 
individuals to be covered, including information about C's adverse 
health condition. The policy form offered by the issuer generally 
provides benefits for the adverse health condition that C has, but 
in this case the issuer offers the plan a policy modified by a rider 
that excludes benefits for C for that condition. The exclusionary 
rider is made effective the first day of the next plan year.
    (ii) Conclusion. In this Example 3, the issuer violates this 
paragraph (b)(2)(i) because benefits for C's condition are available to 
other individuals in the group of similarly situated individuals that 
includes C but are not available to C. Thus, the benefits are not 
uniformly available to all similarly situated individuals. Even though 
the exclusionary rider is made effective the first day of the next plan 
year, because the rider does not apply to all similarly situated 
individuals, the issuer violates this paragraph (b)(2)(i).
    Example 4. (i) Facts. A group health plan has a $2,000 lifetime 
limit for the treatment of temporomandibular joint syndrome (TMJ). 
The limit is applied uniformly to all similarly situated individuals 
and is not directed at individual participants or beneficiaries.
    (ii) Conclusion. In this Example 4, the limit does not violate this 
paragraph (b)(2)(i) because $2,000 of benefits for the treatment of TMJ 
are available uniformly to all similarly situated individuals and a 
plan may limit benefits covered in relation to a specific disease or 
condition if the limit applies uniformly to all similarly situated 
individuals and is not directed at individual participants or 
beneficiaries. (This example does not address whether the plan 
provision is permissible under the Americans with Disabilities Act or 
any other applicable law.)
    Example 5. (i) Facts. A group health plan applies a $2 million 
lifetime limit on all benefits. However, the $2 million lifetime 
limit is reduced to $10,000 for any participant or beneficiary 
covered under the plan who has a congenital heart defect.
    (ii) Conclusion. In this Example 5, the lower lifetime limit for 
participants and beneficiaries with a congenital heart defect violates 
this paragraph (b)(2)(i) because benefits under the plan are not 
uniformly available to all similarly situated individuals and the 
plan's lifetime limit on benefits does not apply uniformly to all 
similarly situated individuals.
    Example 6. (i) Facts. A group health plan limits benefits for 
prescription drugs to those listed on a drug formulary. The limit is 
applied uniformly to all similarly situated individuals and is not 
directed at individual participants or beneficiaries.
    (ii) Conclusion. In this Example 6, the exclusion from coverage of 
drugs not listed on the drug formulary does not violate this paragraph 
(b)(2)(i) because benefits for prescription drugs listed on the 
formulary are uniformly available to all similarly situated individuals 
and because the exclusion of drugs not listed on the formulary applies 
uniformly to all similarly situated individuals and is not directed at 
individual participants or beneficiaries.
    Example 7. (i) Facts. Under a group health plan, doctor visits 
are generally subject to a $250 annual deductible and 20 percent 
coinsurance requirement. However, prenatal doctor visits are not 
subject to any deductible or coinsurance requirement. These rules 
are applied uniformly to all similarly situated individuals and are 
not directed at individual participants or beneficiaries.
    (ii) Conclusion. In this Example 7, imposing different deductible 
and coinsurance requirements for prenatal doctor visits and other 
visits does not violate this paragraph (b)(2)(i) because a plan may 
establish different deductibles or coinsurance requirements for 
different services if the deductible or coinsurance requirement is 
applied uniformly to all similarly situated individuals and is not 
directed at individual participants or beneficiaries.
    Example 8. (i) Facts. An employer sponsors a group health plan 
that is available to all current employees. Under the plan, the 
medical care expenses of each employee (and the employee's 
dependents) are reimbursed up to an annual maximum amount. The 
maximum reimbursement amount with respect to an employee for a year 
is $1500 multiplied by the number of years the employee has 
participated in the plan, reduced by the total reimbursements for 
prior years.
    (ii) Conclusion. In this Example 8, the variable annual limit does 
not violate this paragraph (b)(2)(i). Although the maximum 
reimbursement amount for a year varies among employees within the same 
group of similarly situated individuals based on prior claims 
experience, employees who have participated in the plan for the same 
length of time are eligible for the same total benefit over that length 
of time (and the restriction on the maximum reimbursement amount is not 
directed at any individual participants or beneficiaries based on any 
health factor).

    (ii) Exception for wellness programs. A group health plan or group 
health insurance issuer may vary benefits, including cost-sharing 
mechanisms (such as a deductible, copayment, or coinsurance), based on 
whether an individual has met the standards of a wellness program that 
satisfies the requirements of paragraph (f) of this section.
    (iii) Specific rule relating to source-of-injury exclusions--(A) If 
a group health plan or group health insurance coverage generally 
provides benefits for a type of injury, the plan or issuer may not deny 
benefits otherwise provided for treatment of the injury if the injury 
results from an act of domestic violence or a medical condition 
(including both physical and mental health conditions). This rule 
applies in the case of an injury resulting from a medical condition 
even if the condition is not diagnosed before the injury.
    (B) The rules of this paragraph (b)(2)(iii) are illustrated by the 
following examples:

    Example 1. (i) Facts. A group health plan generally provides 
medical/surgical benefits, including benefits for hospital stays, 
that are medically necessary. However, the plan excludes benefits 
for self-inflicted injuries or injuries sustained in connection with 
attempted suicide. Because of depression, Individual D attempts 
suicide. As a result, D sustains injuries and is hospitalized for 
treatment of the injuries. Under the exclusion, the plan denies D 
benefits for treatment of the injuries.
    (ii) Conclusion. In this Example 1, the suicide attempt is the 
result of a medical condition (depression). Accordingly, the denial of 
benefits for the treatments of D's injuries violates the requirements 
of this paragraph (b)(2)(iii) because the plan provision excludes 
benefits for treatment of an injury resulting from a medical condition.
    Example 2. (i) Facts. A group health plan provides benefits for 
head injuries generally. The plan also has a general exclusion for 
any injury sustained while participating in any of a number of 
recreational activities, including bungee jumping. However, this 
exclusion does not apply to any injury that results from a medical 
condition (nor from domestic violence). Participant E sustains a 
head injury while bungee jumping. The injury did not result from a 
medical condition (nor from domestic violence). Accordingly, the 
plan denies benefits for E's head injury.
    (ii) Conclusion. In this Example 2, the plan provision that denies 
benefits based on the source of an injury does not restrict benefits 
based on an act of domestic violence or any medical condition. 
Therefore, the provision is permissible under this paragraph 
(b)(2)(iii) and does not violate this section. (However, if the plan 
did not allow E to enroll in the plan (or applied different rules for 
eligibility to E) because E frequently participates in bungee jumping, 
the plan would violate paragraph (b)(1) of this section.)

    (3) Relationship to Sec.  146.111. (i) A preexisting condition 
exclusion is permitted under this section if it --
    (A) Complies with Sec.  146.111;
    (B) Applies uniformly to all similarly situated individuals (as 
described in paragraph (d) of this section); and
    (C) Is not directed at individual participants or beneficiaries 
based on any health factor of the participants or beneficiaries. For 
purposes of this paragraph (b)(3)(i)(C), a plan amendment relating to a 
preexisting condition exclusion applicable to all individuals in one or 
more groups of similarly situated individuals under the plan and made 
effective no earlier than the first day of the first plan year after 
the amendment is adopted is not considered to be directed at any 
individual participants or beneficiaries.
    (ii) The rules of this paragraph (b)(3) are illustrated by the 
following examples:

    Example 1. (i) Facts. A group health plan imposes a preexisting 
condition exclusion on all individuals enrolled in the plan. The 
exclusion applies to conditions for which medical advice, diagnosis, 
care, or treatment was recommended or received within the six-

[[Page 75049]]

month period ending on an individual's enrollment date. In addition, 
the exclusion generally extends for 12 months after an individual's 
enrollment date, but this 12-month period is offset by the number of 
days of an individual's creditable coverage in accordance with Sec.  
146.111. There is nothing to indicate that the exclusion is directed 
at individual participants or beneficiaries.
    (ii) Conclusion. In this Example 1, even though the plan's 
preexisting condition exclusion discriminates against individuals 
based on one or more health factors, the preexisting condition 
exclusion does not violate this section because it applies uniformly 
to all similarly situated individuals, is not directed at individual 
participants or beneficiaries, and complies with Sec.  146.111 (that 
is, the requirements relating to the six-month look-back period, the 
12-month (or 18-month) maximum exclusion period, and the creditable 
coverage offset).
    Example 2. (i) Facts. A group health plan excludes coverage for 
conditions with respect to which medical advice, diagnosis, care, or 
treatment was recommended or received within the six-month period 
ending on an individual's enrollment date. Under the plan, the 
preexisting condition exclusion generally extends for 12 months, 
offset by creditable coverage. However, if an individual has no 
claims in the first six months following enrollment, the remainder 
of the exclusion period is waived.
    (ii) Conclusion. In this Example 2, the plan's preexisting 
condition exclusions violate this section because they do not meet 
the requirements of this paragraph (b)(3); specifically, they do not 
apply uniformly to all similarly situated individuals. The plan 
provisions do not apply uniformly to all similarly situated 
individuals because individuals who have medical claims during the 
first six months following enrollment are not treated the same as 
similarly situated individuals with no claims during that period. 
(Under paragraph (d) of this section, the groups cannot be treated 
as two separate groups of similarly situated individuals because the 
distinction is based on a health factor.)

    (c) Prohibited discrimination in premiums or contributions--(1) In 
general--(i) A group health plan, and a health insurance issuer 
offering health insurance coverage in connection with a group health 
plan, may not require an individual, as a condition of enrollment or 
continued enrollment under the plan or group health insurance coverage, 
to pay a premium or contribution that is greater than the premium or 
contribution for a similarly situated individual (described in 
paragraph (d) of this section) enrolled in the plan or group health 
insurance coverage based on any health factor that relates to the 
individual or a dependent of the individual.
    (ii) Discounts, rebates, payments in kind, and any other premium 
differential mechanisms are taken into account in determining an 
individual's premium or contribution rate. (For rules relating to cost-
sharing mechanisms, see paragraph (b)(2) of this section (addressing 
benefits).)
    (2) Rules relating to premium rates--(i) Group rating based on 
health factors not restricted under this section. Nothing in this 
section restricts the aggregate amount that an employer may be charged 
for coverage under a group health plan.
    (ii) List billing based on a health factor prohibited. However, a 
group health insurance issuer, or a group health plan, may not quote or 
charge an employer (or an individual) a different premium for an 
individual in a group of similarly situated individuals based on a 
health factor. (But see paragraph (g) of this section permitting 
favorable treatment of individuals with adverse health factors.)
    (iii) Examples. The rules of this paragraph (c)(2) are illustrated 
by the following examples:

    Example 1. (i) Facts. An employer sponsors a group health plan 
and purchases coverage from a health insurance issuer. In order to 
determine the premium rate for the upcoming plan year, the issuer 
reviews the claims experience of individuals covered under the plan. 
The issuer finds that Individual F had significantly higher claims 
experience than similarly situated individuals in the plan. The 
issuer quotes the plan a higher per-participant rate because of F's 
claims experience.
    (ii) Conclusion. In this Example 1, the issuer does not violate 
the provisions of this paragraph (c)(2) because the issuer blends 
the rate so that the employer is not quoted a higher rate for F than 
for a similarly situated individual based on F's claims experience.
    Example 2. (i) Facts. Same facts as Example 1, except that the 
issuer quotes the employer a higher premium rate for F, because of 
F's claims experience, than for a similarly situated individual.
    (ii) Conclusion. In this Example 2, the issuer violates this 
paragraph (c)(2). Moreover, even if the plan purchased the policy 
based on the quote but did not require a higher participant 
contribution for F than for a similarly situated individual, the 
issuer would still violate this paragraph (c)(2) (but in such a case 
the plan would not violate this paragraph (c)(2)).

    (3) Exception for wellness programs. Notwithstanding paragraphs 
(c)(1) and (c)(2) of this section, a plan or issuer may vary the amount 
of premium or contribution it requires similarly situated individuals 
to pay based on whether an individual has met the standards of a 
wellness program that satisfies the requirements of paragraph (f) of 
this section.
    (d) Similarly situated individuals. The requirements of this 
section apply only within a group of individuals who are treated as 
similarly situated individuals. A plan or issuer may treat participants 
as a group of similarly situated individuals separate from 
beneficiaries. In addition, participants may be treated as two or more 
distinct groups of similarly situated individuals and beneficiaries may 
be treated as two or more distinct groups of similarly situated 
individuals in accordance with the rules of this paragraph (d). 
Moreover, if individuals have a choice of two or more benefit packages, 
individuals choosing one benefit package may be treated as one or more 
groups of similarly situated individuals distinct from individuals 
choosing another benefit package.
    (1) Participants. Subject to paragraph (d)(3) of this section, a 
plan or issuer may treat participants as two or more distinct groups of 
similarly situated individuals if the distinction between or among the 
groups of participants is based on a bona fide employment-based 
classification consistent with the employer's usual business practice. 
Whether an employment-based classification is bona fide is determined 
on the basis of all the relevant facts and circumstances. Relevant 
facts and circumstances include whether the employer uses the 
classification for purposes independent of qualification for health 
coverage (for example, determining eligibility for other employee 
benefits or determining other terms of employment). Subject to 
paragraph (d)(3) of this section, examples of classifications that, 
based on all the relevant facts and circumstances, may be bona fide 
include full-time versus part-time status, different geographic 
location, membership in a collective bargaining unit, date of hire, 
length of service, current employee versus former employee status, and 
different occupations. However, a classification based on any health 
factor is not a bona fide employment-based classification, unless the 
requirements of paragraph (g) of this section are satisfied (permitting 
favorable treatment of individuals with adverse health factors).
    (2) Beneficiaries--(i) Subject to paragraph (d)(3) of this section, 
a plan or issuer may treat beneficiaries as two or more distinct groups 
of similarly situated individuals if the distinction between or among 
the groups of beneficiaries is based on any of the following factors:
    (A) A bona fide employment-based classification of the participant 
through whom the beneficiary is receiving coverage;

[[Page 75050]]

    (B) Relationship to the participant (for example, as a spouse or as 
a dependent child);
    (C) Marital status;
    (D) With respect to children of a participant, age or student 
status; or
    (E) Any other factor if the factor is not a health factor.
    (ii) Paragraph (d)(2)(i) of this section does not prevent more 
favorable treatment of individuals with adverse health factors in 
accordance with paragraph (g) of this section.
    (3) Discrimination directed at individuals. Notwithstanding 
paragraphs (d)(1) and (d)(2) of this section, if the creation or 
modification of an employment or coverage classification is directed at 
individual participants or beneficiaries based on any health factor of 
the participants or beneficiaries, the classification is not permitted 
under this paragraph (d), unless it is permitted under paragraph (g) of 
this section (permitting favorable treatment of individuals with 
adverse health factors). Thus, if an employer modified an employment-
based classification to single out, based on a health factor, 
individual participants and beneficiaries and deny them health 
coverage, the new classification would not be permitted under this 
section.
    (4) Examples. The rules of this paragraph (d) are illustrated by 
the following examples:

    Example 1. (i) Facts. An employer sponsors a group health plan 
for full-time employees only. Under the plan (consistent with the 
employer's usual business practice), employees who normally work at 
least 30 hours per week are considered to be working full-time. 
Other employees are considered to be working part-time. There is no 
evidence to suggest that the classification is directed at 
individual participants or beneficiaries.
    (ii) Conclusion. In this Example 1, treating the full-time and 
part-time employees as two separate groups of similarly situated 
individuals is permitted under this paragraph (d) because the 
classification is bona fide and is not directed at individual 
participants or beneficiaries.
    Example 2. (i) Facts. Under a group health plan, coverage is 
made available to employees, their spouses, and their dependent 
children. However, coverage is made available to a dependent child 
only if the dependent child is under age 19 (or under age 25 if the 
child is continuously enrolled full-time in an institution of higher 
learning (full-time students)). There is no evidence to suggest that 
these classifications are directed at individual participants or 
beneficiaries.
    (ii) Conclusion. In this Example 2, treating spouses and 
dependent children differently by imposing an age limitation on 
dependent children, but not on spouses, is permitted under this 
paragraph (d). Specifically, the distinction between spouses and 
dependent children is permitted under paragraph (d)(2) of this 
section and is not prohibited under paragraph (d)(3) of this section 
because it is not directed at individual participants or 
beneficiaries. It is also permissible to treat dependent children 
who are under age 19 (or full-time students under age 25) as a group 
of similarly situated individuals separate from those who are age 25 
or older (or age 19 or older if they are not full-time students) 
because the classification is permitted under paragraph (d)(2) of 
this section and is not directed at individual participants or 
beneficiaries.
    Example 3. (i) Facts. A university sponsors a group health plan 
that provides one health benefit package to faculty and another 
health benefit package to other staff. Faculty and staff are treated 
differently with respect to other employee benefits such as 
retirement benefits and leaves of absence. There is no evidence to 
suggest that the distinction is directed at individual participants 
or beneficiaries.
    (ii) Conclusion. In this Example 3, the classification is 
permitted under this paragraph (d) because there is a distinction 
based on a bona fide employment-based classification consistent with 
the employer's usual business practice and the distinction is not 
directed at individual participants and beneficiaries.
    Example 4. (i) Facts. An employer sponsors a group health plan 
that is available to all current employees. Former employees may 
also be eligible, but only if they complete a specified number of 
years of service, are enrolled under the plan at the time of 
termination of employment, and are continuously enrolled from that 
date. There is no evidence to suggest that these distinctions are 
directed at individual participants or beneficiaries.
    (ii) Conclusion. In this Example 4, imposing additional 
eligibility requirements on former employees is permitted because a 
classification that distinguishes between current and former 
employees is a bona fide employment-based classification that is 
permitted under this paragraph (d), provided that it is not directed 
at individual participants or beneficiaries. In addition, it is 
permissible to distinguish between former employees who satisfy the 
service requirement and those who do not, provided that the 
distinction is not directed at individual participants or 
beneficiaries. (However, former employees who do not satisfy the 
eligibility criteria may, nonetheless, be eligible for continued 
coverage pursuant to a COBRA continuation provision or similar State 
law.)
    Example 5. (i) Facts. An employer sponsors a group health plan 
that provides the same benefit package to all seven employees of the 
employer. Six of the seven employees have the same job title and 
responsibilities, but Employee G has a different job title and 
different responsibilities. After G files an expensive claim for 
benefits under the plan, coverage under the plan is modified so that 
employees with G's job title receive a different benefit package 
that includes a lower lifetime dollar limit than in the benefit 
package made available to the other six employees.
    (ii) Conclusion. Under the facts of this Example 5, changing the 
coverage classification for G based on the existing employment 
classification for G is not permitted under this paragraph (d) 
because the creation of the new coverage classification for G is 
directed at G based on one or more health factors.

    (e) Nonconfinement and actively-at-work provisions--(1) 
Nonconfinement provisions--(i) General rule. Under the rules of 
paragraphs (b) and (c) of this section, a plan or issuer may not 
establish a rule for eligibility (as described in paragraph (b)(1)(ii) 
of this section) or set any individual's premium or contribution rate 
based on whether an individual is confined to a hospital or other 
health care institution. In addition, under the rules of paragraphs (b) 
and (c) of this section, a plan or issuer may not establish a rule for 
eligibility or set any individual's premium or contribution rate based 
on an individual's ability to engage in normal life activities, except 
to the extent permitted under paragraphs (e)(2)(ii) and (e)(3) of this 
section (permitting plans and issuers, under certain circumstances, to 
distinguish among employees based on the performance of services).
    (ii) Examples. The rules of this paragraph (e)(1) are illustrated 
by the following examples:

    Example 1. (i) Facts. Under a group health plan, coverage for 
employees and their dependents generally becomes effective on the 
first day of employment. However, coverage for a dependent who is 
confined to a hospital or other health care institution does not 
become effective until the confinement ends.
    (ii) Conclusion. In this Example 1, the plan violates this 
paragraph (e)(1) because the plan delays the effective date of 
coverage for dependents based on confinement to a hospital or other 
health care institution.
    Example 2. (i) Facts. In previous years, a group health plan has 
provided coverage through a group health insurance policy offered by 
Issuer M. However, for the current year, the plan provides coverage 
through a group health insurance policy offered by Issuer N. Under 
Issuer N's policy, items and services provided in connection with 
the confinement of a dependent to a hospital or other health care 
institution are not covered if the confinement is covered under an 
extension of benefits clause from a previous health insurance 
issuer.
    (ii) Conclusion. In this Example 2, Issuer N violates this 
paragraph (e)(1) because the group health insurance coverage 
restricts benefits (a rule for eligibility under paragraph (b)(1)) 
based on whether a dependent is confined to a hospital or other 
health care institution that is covered under an extension of 
benefits clause from a previous issuer. State law cannot change the 
obligation of Issuer N under this section. However, under State law 
Issuer M may also be responsible for providing benefits to such a 
dependent. In a case in which Issuer N has an obligation

[[Page 75051]]

under this section to provide benefits and Issuer M has an 
obligation under State law to provide benefits, any State laws 
designed to prevent more than 100% reimbursement, such as State 
coordination-of-benefits laws, continue to apply.

    (2) Actively-at-work and continuous service provisions--(i) General 
rule--(A) Under the rules of paragraphs (b) and (c) of this section and 
subject to the exception for the first day of work described in 
paragraph (e)(2)(ii) of this section, a plan or issuer may not 
establish a rule for eligibility (as described in paragraph (b)(1)(ii) 
of this section) or set any individual's premium or contribution rate 
based on whether an individual is actively at work (including whether 
an individual is continuously employed), unless absence from work due 
to any health factor (such as being absent from work on sick leave) is 
treated, for purposes of the plan or health insurance coverage, as 
being actively at work.
    (B) The rules of this paragraph (e)(2)(i) are illustrated by the 
following examples:

    Example 1. (i) Facts. Under a group health plan, an employee 
generally becomes eligible to enroll 30 days after the first day of 
employment. However, if the employee is not actively at work on the 
first day after the end of the 30-day period, then eligibility for 
enrollment is delayed until the first day the employee is actively 
at work.
    (ii) Conclusion. In this Example 1, the plan violates this 
paragraph (e)(2) (and thus also violates paragraph (b) of this 
section). However, the plan would not violate paragraph (e)(2) or 
(b) of this section if, under the plan, an absence due to any health 
factor is considered being actively at work.
    Example 2. (i) Facts. Under a group health plan, coverage for an 
employee becomes effective after 90 days of continuous service; that 
is, if an employee is absent from work (for any reason) before 
completing 90 days of service, the beginning of the 90-day period is 
measured from the day the employee returns to work (without any 
credit for service before the absence).

    (ii) Conclusion. In this Example 2, the plan violates this 
paragraph (e)(2) (and thus also paragraph (b) of this section) because 
the 90-day continuous service requirement is a rule for eligibility 
based on whether an individual is actively at work. However, the plan 
would not violate this paragraph (e)(2) or paragraph (b) of this 
section if, under the plan, an absence due to any health factor is not 
considered an absence for purposes of measuring 90 days of continuous 
service.
    (ii) Exception for the first day of work--(A) Notwithstanding the 
general rule in paragraph (e)(2)(i) of this section, a plan or issuer 
may establish a rule for eligibility that requires an individual to 
begin work for the employer sponsoring the plan (or, in the case of a 
multiemployer plan, to begin a job in covered employment) before 
coverage becomes effective, provided that such a rule for eligibility 
applies regardless of the reason for the absence.
    (B) The rules of this paragraph (e)(2)(ii) are illustrated by the 
following examples:

    Example 1. (i) Facts. Under the eligibility provision of a group 
health plan, coverage for new employees becomes effective on the 
first day that the employee reports to work. Individual H is 
scheduled to begin work on August 3. However, H is unable to begin 
work on that day because of illness. H begins working on August 4, 
and H's coverage is effective on August 4.
    (ii) Conclusion. In this Example 1, the plan provision does not 
violate this section. However, if coverage for individuals who do 
not report to work on the first day they were scheduled to work for 
a reason unrelated to a health factor (such as vacation or 
bereavement) becomes effective on the first day they were scheduled 
to work, then the plan would violate this section.
    Example 2. (i) Facts. Under a group health plan, coverage for 
new employees becomes effective on the first day of the month 
following the employee's first day of work, regardless of whether 
the employee is actively at work on the first day of the month. 
Individual J is scheduled to begin work on March 24. However, J is 
unable to begin work on March 24 because of illness. J begins 
working on April 7 and J's coverage is effective May 1.
    (ii) Conclusion. In this Example 2, the plan provision does not 
violate this section. However, as in Example 1, if coverage for 
individuals absent from work for reasons unrelated to a health 
factor became effective despite their absence, then the plan would 
violate this section.

    (3) Relationship to plan provisions defining similarly situated 
individuals--(i) Notwithstanding the rules of paragraphs (e)(1) and 
(e)(2) of this section, a plan or issuer may establish rules for 
eligibility or set any individual's premium or contribution rate in 
accordance with the rules relating to similarly situated individuals in 
paragraph (d) of this section. Accordingly, a plan or issuer may 
distinguish in rules for eligibility under the plan between full-time 
and part-time employees, between permanent and temporary or seasonal 
employees, between current and former employees, and between employees 
currently performing services and employees no longer performing 
services for the employer, subject to paragraph (d) of this section. 
However, other Federal or State laws (including the COBRA continuation 
provisions and the Family and Medical Leave Act of 1993) may require an 
employee or the employee's dependents to be offered coverage and set 
limits on the premium or contribution rate even though the employee is 
not performing services.
    (ii) The rules of this paragraph (e)(3) are illustrated by the 
following examples:

    Example 1. (i) Facts. Under a group health plan, employees are 
eligible for coverage if they perform services for the employer for 
30 or more hours per week or if they are on paid leave (such as 
vacation, sick, or bereavement leave). Employees on unpaid leave are 
treated as a separate group of similarly situated individuals in 
accordance with the rules of paragraph (d) of this section.
    (ii) Conclusion. In this Example 1, the plan provisions do not 
violate this section. However, if the plan treated individuals 
performing services for the employer for 30 or more hours per week, 
individuals on vacation leave, and individuals on bereavement leave 
as a group of similarly situated individuals separate from 
individuals on sick leave, the plan would violate this paragraph (e) 
(and thus also would violate paragraph (b) of this section) because 
groups of similarly situated individuals cannot be established based 
on a health factor (including the taking of sick leave) under 
paragraph (d) of this section.
    Example 2. (i) Facts. To be eligible for coverage under a bona 
fide collectively bargained group health plan in the current 
calendar quarter, the plan requires an individual to have worked 250 
hours in covered employment during the three-month period that ends 
one month before the beginning of the current calendar quarter. The 
distinction between employees working at least 250 hours and those 
working less than 250 hours in the earlier three-month period is not 
directed at individual participants or beneficiaries based on any 
health factor of the participants or beneficiaries.
    (ii) Conclusion. In this Example 2, the plan provision does not 
violate this section because, under the rules for similarly situated 
individuals allowing full-time employees to be treated differently 
than part-time employees, employees who work at least 250 hours in a 
three-month period can be treated differently than employees who 
fail to work 250 hours in that period. The result would be the same 
if the plan permitted individuals to apply excess hours from 
previous periods to satisfy the requirement for the current quarter.
    Example 3.  (i) Facts. Under a group health plan, coverage of an 
employee is terminated when the individual's employment is 
terminated, in accordance with the rules of paragraph (d) of this 
section. Employee B has been covered under the plan. B experiences a 
disabling illness that prevents B from working. B takes a leave of 
absence under the Family and Medical Leave Act of 1993. At the end 
of such leave, B terminates employment and consequently loses 
coverage under the plan. (This termination of coverage is without 
regard to whatever rights the employee (or members of the employee's 
family) may have for COBRA continuation coverage.)

[[Page 75052]]

    (ii) Conclusion. In this Example 3, the plan provision 
terminating B's coverage upon B's termination of employment does not 
violate this section.
    Example 4.  (i) Facts. Under a group health plan, coverage of an 
employee is terminated when the employee ceases to perform services 
for the employer sponsoring the plan, in accordance with the rules 
of paragraph (d) of this section. Employee C is laid off for three 
months. When the layoff begins, C's coverage under the plan is 
terminated. (This termination of coverage is without regard to 
whatever rights the employee (or members of the employee's family) 
may have for COBRA continuation coverage.)
    (ii) Conclusion. In this Example 4, the plan provision 
terminating C's coverage upon the cessation of C's performance of 
services does not violate this section.

    (f) Wellness programs. A wellness program is any program designed 
to promote health or prevent disease. Paragraphs (b)(2)(ii) and (c)(3) 
of this section provide exceptions to the general prohibitions against 
discrimination based on a health factor for plan provisions that vary 
benefits (including cost-sharing mechanisms) or the premium or 
contribution for similarly situated individuals in connection with a 
wellness program that satisfies the requirements of this paragraph (f). 
If none of the conditions for obtaining a reward under a wellness 
program is based on an individual satisfying a standard that is related 
to a health factor, paragraph (f)(1) of this section clarifies that the 
wellness program does not violate this section if participation in the 
program is made available to all similarly situated individuals. If any 
of the conditions for obtaining a reward under a wellness program is 
based on an individual satisfying a standard that is related to a 
health factor, the wellness program does not violate this section if 
the requirements of paragraph (f)(2) of this section are met.
    (1) Wellness programs not subject to requirements. If none of the 
conditions for obtaining a reward under a wellness program are based on 
an individual satisfying a standard that is related to a health factor 
(or if a wellness program does not provide a reward), the wellness 
program does not violate this section, if participation in the program 
is made available to all similarly situated individuals. Thus, for 
example, the following programs need not satisfy the requirements of 
paragraph (f)(2) of this section, if participation in the program is 
made available to all similarly situated individuals:
    (i) A program that reimburses all or part of the cost for 
memberships in a fitness center.
    (ii) A diagnostic testing program that provides a reward for 
participation and does not base any part of the reward on outcomes.
    (iii) A program that encourages preventive care through the waiver 
of the copayment or deductible requirement under a group health plan 
for the costs of, for example, prenatal care or well-baby visits.
    (iv) A program that reimburses employees for the costs of smoking 
cessation programs without regard to whether the employee quits 
smoking.
    (v) A program that provides a reward to employees for attending a 
monthly health education seminar.
    (2) Wellness programs subject to requirements. If any of the 
conditions for obtaining a reward under a wellness program is based on 
an individual satisfying a standard that is related to a health factor, 
the wellness program does not violate this section if the requirements 
of this paragraph (f)(2) are met.
    (i) The reward for the wellness program, coupled with the reward 
for other wellness programs with respect to the plan that require 
satisfaction of a standard related to a health factor, must not exceed 
20 percent of the cost of employee-only coverage under the plan. 
However, if, in addition to employees, any class of dependents (such as 
spouses or spouses and dependent children) may participate in the 
wellness program, the reward must not exceed 20 percent of the cost of 
the coverage in which an employee and any dependents are enrolled. For 
purposes of this paragraph (f)(2), the cost of coverage is determined 
based on the total amount of employer and employee contributions for 
the benefit package under which the employee is (or the employee and 
any dependents are) receiving coverage. A reward can be in the form of 
a discount or rebate of a premium or contribution, a waiver of all or 
part of a cost-sharing mechanism (such as deductibles, copayments, or 
coinsurance), the absence of a surcharge, or the value of a benefit 
that would otherwise not be provided under the plan.
    (ii) The program must be reasonably designed to promote health or 
prevent disease. A program satisfies this standard if it has a 
reasonable chance of improving the health of or preventing disease in 
participating individuals and it is not overly burdensome, is not a 
subterfuge for discriminating based on a health factor, and is not 
highly suspect in the method chosen to promote health or prevent 
disease.
    (iii) The program must give individuals eligible for the program 
the opportunity to qualify for the reward under the program at least 
once per year.
    (iv) The reward under the program must be available to all 
similarly situated individuals. (A) A reward is not available to all 
similarly situated individuals for a period unless the program allows 
--
    (1) A reasonable alternative standard (or waiver of the otherwise 
applicable standard) for obtaining the reward for any individual for 
whom, for that period, it is unreasonably difficult due to a medical 
condition to satisfy the otherwise applicable standard; and
    (2) A reasonable alternative standard (or waiver of the otherwise 
applicable standard) for obtaining the reward for any individual for 
whom, for that period, it is medically inadvisable to attempt to 
satisfy the otherwise applicable standard.
    (B) A plan or issuer may seek verification, such as a statement 
from an individual's physician, that a health factor makes it 
unreasonably difficult or medically inadvisable for the individual to 
satisfy or attempt to satisfy the otherwise applicable standard.
    (v)(A) The plan or issuer must disclose in all plan materials 
describing the terms of the program the availability of a reasonable 
alternative standard (or the possibility of waiver of the otherwise 
applicable standard) required under paragraph (f)(2)(iv) of this 
section. However, if plan materials merely mention that a program is 
available, without describing its terms, this disclosure is not 
required.
    (B) The following language, or substantially similar language, can 
be used to satisfy the requirement of this paragraph (f)(2)(v): ``If it 
is unreasonably difficult due to a medical condition for you to achieve 
the standards for the reward under this program, or if it is medically 
inadvisable for you to attempt to achieve the standards for the reward 
under this program, call us at [insert telephone number] and we will 
work with you to develop another way to qualify for the reward.'' In 
addition, other examples of language that would satisfy this 
requirement are set forth in Examples 3, 4, and 5 of paragraph (f)(3) 
of this section.
    (3) Examples. The rules of paragraph (f)(2) of this section are 
illustrated by the following examples:

    Example 1. (i) Facts. An employer sponsors a group health plan. 
The annual premium for employee-only coverage is $3,600 (of which 
the employer pays $2,700 per year and the employee pays $900 per 
year). The annual premium for family coverage is $9,000 (of which 
the employer pays $4,500 per year and the employee pays $4,500 per 
year). The plan

[[Page 75053]]

offers a wellness program with an annual premium rebate of $360. The 
program is available only to employees.
    (ii) Conclusion. In this Example 1, the program satisfies the 
requirements of paragraph (f)(2)(i) of this section because the 
reward for the wellness program, $360, does not exceed 20 percent of 
the total annual cost of employee-only coverage, $720. ($3,600 x 20% 
= $720.) If any class of dependents is allowed to participate in the 
program and the employee is enrolled in family coverage, the plan 
could offer the employee a reward of up to 20 percent of the cost of 
family coverage, $1,800. ($9,000 x 20% = $1,800.)
    Example 2. (i) Facts. A group health plan gives an annual 
premium discount of 20 percent of the cost of employee-only coverage 
to participants who adhere to a wellness program. The wellness 
program consists solely of giving an annual cholesterol test to 
participants. Those participants who achieve a count under 200 
receive the premium discount for the year.
    (ii) Conclusion. In this Example 2,the program fails to satisfy 
the requirement of being available to all similarly situated 
individuals because some participants may be unable to achieve a 
cholesterol count of under 200 and the plan does not make available 
a reasonable alternative standard or waive the cholesterol standard. 
(In addition, plan materials describing the program are required to 
disclose the availability of a reasonable alternative standard (or 
the possibility of waiver of the otherwise applicable standard) for 
obtaining the premium discount. Thus, the premium discount violates 
paragraph (c) of this section because it may require an individual 
to pay a higher premium based on a health factor of the individual 
than is required of a similarly situated individual under the plan.
    Example 3. (i) Facts. Same facts as Example 2, except that the 
plan provides that if it is unreasonably difficult due to a medical 
condition for a participant to achieve the targeted cholesterol 
count (or if it is medically inadvisable for a participant to 
attempt to achieve the targeted cholesterol count) within a 60-day 
period, the plan will make available a reasonable alternative 
standard that takes the relevant medical condition into account. In 
addition, all plan materials describing the terms of the program 
include the following statement: ``If it is unreasonably difficult 
due to a medical condition for you to achieve a cholesterol count 
under 200, or if it is medically inadvisable for you to attempt to 
achieve a count under 200, call us at the number below and we will 
work with you to develop another way to get the discount.'' 
Individual D begins a diet and exercise program but is unable to 
achieve a cholesterol count under 200 within the prescribed period. 
D's doctor determines D requires prescription medication to achieve 
a medically advisable cholesterol count. In addition, the doctor 
determines that D must be monitored through periodic blood tests to 
continually reevaluate D's health status. The plan accommodates D by 
making the discount available to D, but only if D follows the advice 
of D's doctor regarding medication and blood tests.
    (ii) Conclusion. In this Example 3, the program is a wellness 
program because it satisfies the five requirements of paragraph 
(f)(2) of this section. First, the program complies with the limits 
on rewards under a program. Second, it is reasonably designed to 
promote health or prevent disease. Third, individuals eligible for 
the program are given the opportunity to qualify for the reward at 
least once per year. Fourth, the reward under the program is 
available to all similarly situated individuals because it 
accommodates individuals for whom it is unreasonably difficult due 
to a medical condition to achieve the targeted count (or for whom it 
is medically inadvisable to attempt to achieve the targeted count) 
in the prescribed period by providing a reasonable alternative 
standard. Fifth, the plan discloses in all materials describing the 
terms of the program the availability of a reasonable alternative 
standard. Thus, the premium discount does not violate this section.
    Example 4. (i) Facts. A group health plan will waive the $250 
annual deductible (which is less than 20 percent of the annual cost 
of employee-only coverage under the plan) for the following year for 
participants who have a body mass index between 19 and 26, 
determined shortly before the beginning of the year. However, any 
participant for whom it is unreasonably difficult due to a medical 
condition to attain this standard (and any participant for whom it 
is medically inadvisable to attempt to achieve this standard) during 
the plan year is given the same discount if the participant walks 
for 20 minutes three days a week. Any participant for whom it is 
unreasonably difficult due to a medical condition to attain either 
standard (and any participant for whom it is medically inadvisable 
to attempt to achieve either standard) during the year is given the 
same discount if the individual satisfies an alternative standard 
that is reasonable in the burden it imposes and is reasonable taking 
into consideration the individual's medical situation. All plan 
materials describing the terms of the wellness program include the 
following statement: ``If it is unreasonably difficult due to a 
medical condition for you to achieve a body mass index between 19 
and 26 (or if it is medically inadvisable for you to attempt to 
achieve this body mass index) this year, your deductible will be 
waived if you walk for 20 minutes three days a week. If you cannot 
follow the walking program, call us at the number above and we will 
work with you to develop another way to have your deductible 
waived.'' Due to a medical condition, Individual E is unable to 
achieve a BMI of between 19 and 26 and is also unable to follow the 
walking program. E proposes a program based on the recommendations 
of E's physician. The plan agrees to make the discount available to 
E if E follows the physician's recommendations.
    (ii) Conclusion. In this Example 4, the program satisfies the 
five requirements of paragraph (f)(2) of this section. First, the 
program complies with the limits on rewards under a program. Second, 
it is reasonably designed to promote health or prevent disease. 
Third, individuals eligible for the program are given the 
opportunity to qualify for the reward at least once per year. 
Fourth, the reward under the program is available to all similarly 
situated individuals because it generally accommodates individuals 
for whom it is unreasonably difficult due to a medical condition to 
achieve (or for whom it is medically inadvisable to attempt to 
achieve) the targeted body mass index by providing a reasonable 
alternative standard (walking) and it accommodates individuals for 
whom it is unreasonably difficult due to a medical condition (or for 
whom it is medically inadvisable to attempt) to walk by providing an 
alternative standard that is reasonable for the individual. Fifth, 
the plan discloses in all materials describing the terms of the 
program the availability of a reasonable alternative standard for 
every individual. Thus, the waiver of the deductible does not 
violate this section.
    Example 5. (i) Facts. In conjunction with an annual open 
enrollment period, a group health plan provides a form for 
participants to certify that they have not used tobacco products in 
the preceding twelve months. Participants who do not provide the 
certification are assessed a surcharge that is 20 percent of the 
cost of employee-only coverage. However, all plan materials 
describing the terms of the wellness program include the following 
statement: ``If it is unreasonably difficult due to a health factor 
for you to meet the requirements under this program (or if it is 
medically inadvisable for you to attempt to meet the requirements of 
this program), we will make available a reasonable alternative 
standard for you to avoid this surcharge.'' It is unreasonably 
difficult for Individual F to stop smoking cigarettes due to an 
addiction to nicotine (a medical condition). The plan accommodates F 
by requiring F to participate in a smoking cessation program to 
avoid the surcharge. F can avoid the surcharge for as long as F 
participates in the program, regardless of whether F stops smoking 
(as long as F continues to be addicted to nicotine).
    (ii) Conclusion. In this Example 5, the premium surcharge is 
permissible as a wellness program because it satisfies the five 
requirements of paragraph (f)(2) of this section. First, the program 
complies with the limits on rewards under a program. Second, it is 
reasonably designed to promote health or prevent disease. Third, 
individuals eligible for the program are given the opportunity to 
qualify for the reward at least once per year. Fourth, the reward 
under the program is available to all similarly situated individuals 
because it accommodates individuals for whom it is unreasonably 
difficult due to a medical condition (or for whom it is medically 
inadvisable to attempt) to quit using tobacco products by providing 
a reasonable alternative standard. Fifth, the plan discloses in all 
materials describing the terms of the program the availability of a 
reasonable alternative standard. Thus, the premium surcharge does 
not violate this section.
    Example 6. (i) Facts. Same facts as Example 5, except the plan 
accommodates F by requiring F to view, over a period of 12 months, a 
12-hour video series on health problems associated with tobacco use. 
F can avoid the surcharge by complying with this requirement.
    (ii) Conclusion. In this Example 6, the requirement to watch the 
series of video

[[Page 75054]]

tapes is a reasonable alternative method for avoiding the surcharge.
    (g) More favorable treatment of individuals with adverse health 
factors permitted--(1) In rules for eligibility--(i) Nothing in this 
section prevents a group health plan or group health insurance issuer 
from establishing more favorable rules for eligibility (described in 
paragraph (b)(1) of this section) for individuals with an adverse 
health factor, such as disability, than for individuals without the 
adverse health factor. Moreover, nothing in this section prevents a 
plan or issuer from charging a higher premium or contribution with 
respect to individuals with an adverse health factor if they would not 
be eligible for the coverage were it not for the adverse health factor. 
(However, other laws, including State insurance laws, may set or limit 
premium rates; these laws are not affected by this section.)
    (ii) The rules of this paragraph (g)(1) are illustrated by the 
following examples:

    Example 1. (i) Facts. An employer sponsors a group health plan 
that generally is available to employees, spouses of employees, and 
dependent children until age 23. However, dependent children who are 
disabled are eligible for coverage beyond age 23.
    (ii) Conclusion. In this Example 1, the plan provision allowing 
coverage for disabled dependent children beyond age 23 satisfies 
this paragraph (g)(1) (and thus does not violate this section).
    Example 2. (i) Facts. An employer sponsors a group health plan, 
which is generally available to employees (and members of the 
employee's family) until the last day of the month in which the 
employee ceases to perform services for the employer. The plan 
generally charges employees $50 per month for employee-only coverage 
and $125 per month for family coverage. However, an employee who 
ceases to perform services for the employer by reason of disability 
may remain covered under the plan until the last day of the month 
that is 12 months after the month in which the employee ceased to 
perform services for the employer. During this extended period of 
coverage, the plan charges the employee $100 per month for employee-
only coverage and $250 per month for family coverage. (This extended 
period of coverage is without regard to whatever rights the employee 
(or members of the employee's family) may have for COBRA 
continuation coverage.)
    (ii) Conclusion. In this Example 2, the plan provision allowing 
extended coverage for disabled employees and their families 
satisfies this paragraph (g)(1) (and thus does not violate this 
section). In addition, the plan is permitted, under this paragraph 
(g)(1), to charge the disabled employees a higher premium during the 
extended period of coverage.
    Example 3. (i) Facts. To comply with the requirements of a COBRA 
continuation provision, a group health plan generally makes COBRA 
continuation coverage available for a maximum period of 18 months in 
connection with a termination of employment but makes the coverage 
available for a maximum period of 29 months to certain disabled 
individuals and certain members of the disabled individual's family. 
Although the plan generally requires payment of 102 percent of the 
applicable premium for the first 18 months of COBRA continuation 
coverage, the plan requires payment of 150 percent of the applicable 
premium for the disabled individual's COBRA continuation coverage 
during the disability extension if the disabled individual would not 
be entitled to COBRA continuation coverage but for the disability.
    (ii) Conclusion. In this Example 3, the plan provision allowing 
extended COBRA continuation coverage for disabled individuals 
satisfies this paragraph (g)(1) (and thus does not violate this 
section). In addition, the plan is permitted, under this paragraph 
(g)(1), to charge the disabled individuals a higher premium for the 
extended coverage if the individuals would not be eligible for COBRA 
continuation coverage were it not for the disability. (Similarly, if 
the plan provided an extended period of coverage for disabled 
individuals pursuant to State law or plan provision rather than 
pursuant to a COBRA continuation coverage provision, the plan could 
likewise charge the disabled individuals a higher premium for the 
extended coverage.)

    (2) In premiums or contributions--(i) Nothing in this section 
prevents a group health plan or group health insurance issuer from 
charging individuals a premium or contribution that is less than the 
premium (or contribution) for similarly situated individuals if the 
lower charge is based on an adverse health factor, such as disability.
    (ii) The rules of this paragraph (g)(2) are illustrated by the 
following example:

    Example. (i) Facts. Under a group health plan, employees are 
generally required to pay $50 per month for employee-only coverage 
and $125 per month for family coverage under the plan. However, 
employees who are disabled receive coverage (whether employee-only 
or family coverage) under the plan free of charge.
    (ii) Conclusion. In this Example, the plan provision waiving 
premium payment for disabled employees is permitted under this 
paragraph (g)(2) (and thus does not violate this section).

    (h) No effect on other laws. Compliance with this section is not 
determinative of compliance with any other provision of the PHS Act 
(including the COBRA continuation provisions) or any other State or 
Federal law, such as the Americans with Disabilities Act. Therefore, 
although the rules of this section would not prohibit a plan or issuer 
from treating one group of similarly situated individuals differently 
from another (such as providing different benefit packages to current 
and former employees), other Federal or State laws may require that two 
separate groups of similarly situated individuals be treated the same 
for certain purposes (such as making the same benefit package available 
to COBRA qualified beneficiaries as is made available to active 
employees). In addition, although this section generally does not 
impose new disclosure obligations on plans and issuers, this section 
does not affect any other laws, including those that require accurate 
disclosures and prohibit intentional misrepresentation.
    (i) Applicability dates. (1) Generally. This section applies for 
plan years beginning on or after July 1, 2007.
    (2) Special rule for self-funded nonfederal governmental plans 
exempted under 45 CFR 146.180--(i) If coverage has been denied to any 
individual because the sponsor of a self-funded nonfederal governmental 
plan has elected under Sec.  146.180 to exempt the plan from the 
requirements of this section, and the plan sponsor subsequently chooses 
to bring the plan into compliance with the requirements of this 
section, the plan--
    (A) Must notify the individual that the plan will be coming into 
compliance with the requirements of this section, specify the effective 
date of compliance, and inform the individual regarding any enrollment 
restrictions that may apply under the terms of the plan once the plan 
is in compliance with this section (as a matter of administrative 
convenience, the notice may be disseminated to all employees);
    (B) Must give the individual an opportunity to enroll that 
continues for at least 30 days;
    (C) Must permit coverage to be effective as of the first day of 
plan coverage for which an exemption election under Sec.  146.180 of 
this part (with regard to this section) is no longer in effect; and
    (D) May not treat the individual as a late enrollee or a special 
enrollee.
    (ii) For purposes of this paragraph (i)(2), an individual is 
considered to have been denied coverage if the individual failed to 
apply for coverage because, given an exemption election under Sec.  
146.180 of this part, it was reasonable to believe that an application 
for coverage would have been denied based on a health factor.
    (iii) The rules of this paragraph (i)(2) are illustrated by the 
following examples:

    Example 1. (i) Facts. Individual D was hired by a nonfederal 
governmental employer in June 1999. The employer maintains a self-
funded group health plan with a plan year beginning on October 1. 
The plan sponsor

[[Page 75055]]

elected under Sec.  146.180 of this part to exempt the plan from the 
requirements of this section for the plan year beginning October 1, 
2005, and renewed the exemption election for the plan year beginning 
October 1, 2006. Under the terms of the plan while the exemption was 
in effect, employees and their dependents were allowed to enroll 
when the employee was first hired without regard to any health 
factor. If an individual declines to enroll when first eligible, the 
individual could enroll effective October 1 of any plan year if the 
individual could pass a physical examination. The evidence-of-good-
health requirement for late enrollees, absent an exemption election 
under Sec.  146.180 of this part, would have been in violation of 
this section. D chose not to enroll for coverage when first hired. 
In February of 2006, D was treated for skin cancer but did not apply 
for coverage under the plan for the plan year beginning October 1, 
2006, because D assumed D could not meet the evidence-of-good-health 
requirement. With the plan year beginning October 1, 2007 the plan 
sponsor chose not to renew its exemption election and brought the 
plan into compliance with this section. The plan notifies individual 
D (and all other employees) that it will be coming into compliance 
with the requirements of this section. The notice specifies that the 
effective date of compliance will be October 1, 2007, explains the 
applicable enrollment restrictions that will apply under the plan, 
states that individuals will have at least 30 days to enroll, and 
explains that coverage for those who choose to enroll will be 
effective as of October 1, 2007. Individual D timely requests 
enrollment in the plan, and coverage commences under the plan on 
October 1, 2007.
    (ii) Conclusion. In this Example 1, the plan complies with this 
paragraph (i)(2).
    Example 2. (i) Facts. Individual E was hired by a nonfederal 
governmental employer in February 1999. The employer maintains a 
self-funded group health plan with a plan year beginning on 
September 1. The plan sponsor elected under Sec.  146.180 of this 
part to exempt the plan from the requirements of this section and 
``Sec.  146.111 (limitations on preexisting condition exclusion 
periods) for the plan year beginning September 1, 2002, and renews 
the exemption election for the plan years beginning September 1, 
2003, September 1, 2004, September 1, 2005, and September 1, 2006. 
Under the terms of the plan while the exemption was in effect, 
employees and their dependents were allowed to enroll when the 
employee was first hired without regard to any health factor. If an 
individual declined to enroll when first eligible, the individual 
could enroll effective September 1 of any plan year if the 
individual could pass a physical examination. Also under the terms 
of the plan, all enrollees were subject to a 12-month preexisting 
condition exclusion period, regardless of whether they had 
creditable coverage. E chose not to enroll for coverage when first 
hired. In June of 2006, E is diagnosed as having multiple sclerosis 
(MS). With the plan year beginning September 1, 2007, the plan 
sponsor chooses to bring the plan into compliance with this section, 
but renews its exemption election with regard to limitations on 
preexisting condition exclusion periods. The plan notifies E of her 
opportunity to enroll, without a physical examination, effective 
September 1, 2007. The plan gives E 30 days to enroll. E is subject 
to a 12-month preexisting condition exclusion period with respect to 
any treatment E receives that is related to E's MS, without regard 
to any prior creditable coverage E may have. Beginning September 1, 
2008, the plan will cover treatment of E's MS.
    (ii) Conclusion. In this Example 2, the plan complies with the 
requirements of this section. (The plan is not required to comply 
with the requirements of Sec.  146.111 because the plan continues to 
be exempted from those requirements in accordance with the plan 
sponsor's election under Sec.  146.180.)

    Editorial Note: This document was received at the Office of the 
Federal Register on December 1, 2006.

    Dated: July 16, 2004.
Mark B. McClellan,
Administrator, Centers for Medicare & Medicaid Services.
    Dated: November 28, 2005.
Michael O. Leavitt,
Secretary, Department of Health and Human Services.
[FR Doc. 06-9557 Filed 12-12-06; 8:45 am]
BILLING CODE 4830-01-P; 4510-29-P; 4120-01-P