75014 Federal Register / Vol. 71, No. 239 / Wednesday, December 13, 2006 / Rules and Regulations 

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. 

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 — 

• Explained the application of these 

provisions to benefits; 

• Clarified the relationship between 

the HIPAA nondiscrimination 

provisions and the HIPAA preexisting 

condition exclusion limitations; 

• Explained the application of these 

provisions to premiums; 

• Described similarly situated 

individuals; 

• Explained the application of these 

provisions to actively-at-work and 

nonconfinement clauses; and 

• 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 


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Federal Register / Vol. 71, No. 239 / Wednesday, December 13, 2006 / Rules and Regulations 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-ofinjury 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 sourceof-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-ofinjury exclusion could not apply if the 


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75016 Federal Register / Vol. 71, No. 239 / Wednesday, December 13, 2006 / Rules and Regulations 

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-ofinjury 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-ofbenefits 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 

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Federal Register / Vol. 71, No. 239 / Wednesday, December 13, 2006 / Rules and Regulations 75017 

1These nondiscrimination rules do not address 

the applicability of the Family and Medical Leave 

Act to employers or group health coverage. 

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 threemonth 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-atwork 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. 

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 


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75018 Federal Register / Vol. 71, No. 239 / Wednesday, December 13, 2006 / Rules and Regulations 

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: 

• A program that reimburses all or 

part of the cost for memberships in a 

fitness center. 

• A diagnostic testing program that 

provides a reward for participation and 

does not base any part of the reward on 

outcomes. 

• 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. 

• A program that reimburses 

employees for the costs of smoking 

cessation programs without regard to 

whether the employee quits smoking. 

• 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-leastonce-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. 


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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-factorrelated 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-factorrelated (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 


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75020 Federal Register / Vol. 71, No. 239 / Wednesday, December 13, 2006 / Rules and Regulations 

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 newlycovered 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 highrisk 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 


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2Based 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. 

3Simulations 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. 

4Estimate 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 nonqualifying 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. 

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. 

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 


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5The 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. 

6Many 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. 

7Simulations 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. 

of small premium increases or benefit 

cuts. 

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

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 statusbased 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 


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

• The need for the information 

collection and its usefulness in carrying 

out the proper functions of our agency. 

• The accuracy of our estimate of the 

information collection burden. 

• The quality, utility, and clarity of 

the information to be collected. 

• 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 foreignbased 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 


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75024 Federal Register / Vol. 71, No. 239 / Wednesday, December 13, 2006 / Rules and Regulations 

8This 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). 

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. 

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 Statefederal 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. 


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9The 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 selfinsured, 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. 

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. 

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. 

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 onetime 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


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11The 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. 

12Research 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 #9036. July 2002; Gruber, Jonathon 

and Ebonya Washington. ‘‘Subsidies to Employee 

Health Insurance Premiums and the Health 

Insurance Market’’ NBER Working Paper #9567. 

March 2003; and Cooper, PF and J. Vistnes. 

‘‘Workers’ Decisions to Take-up Offered Insurance 

Coverage: Assessing the Importance of Out-ofPocket 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.’’

15The 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). 

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 newlycovered 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 previouslycovered 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. 

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 


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16Cromwell, 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. 

17The 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.) 

18Estimates are based on a 1993 survey of 

employers by the Robert Wood Johnson 

Foundation. More recent estimates are unavailable. 

19Hewitt Associates, July 2003. 

20This 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. 

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. 

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. 

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. 

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. 


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21Average based on the Kaiser Family 

Foundation/Health Research and Education Trust 

Survey of Employer-Sponsored Health Benefits, 

2005. 

22Hewitt Associates, July, 2003. The sum of these 

shares exceeds 100 percent due to some employers 

using multiple criteria to determine compliance. 

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. 

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. 

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 


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Federal Register / Vol. 71, No. 239 / Wednesday, December 13, 2006 / Rules and Regulations 75029 

23Estimate 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. 24The 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. 25This 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. 

26Having 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. 

27No 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. 

28These 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 costeffective ways to satisfy this requirement, and that 

the true net cost to them will therefore be smaller 

than this. 

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

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

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. 

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 


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75030 Federal Register / Vol. 71, No. 239 / Wednesday, December 13, 2006 / Rules and Regulations 

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 

■ Accordingly, 26 CFR Part 54 is 

amended as follows: 

PART 54—PENSION EXCISE TAXES 

■ Paragraph 1. The authority citation 

for part 54 is amended by removing the 

citation for § 54.9802–1T to read, in 

part, as follows: 

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

§ 54.9802–1T [Removed] 

■ Par. 2. Section 54.9802–1T is 

removed. 

■ Par. 3. Section 54.9802–1 is revised to 

read as follows: 

§ 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 § 54.9801–2; 

(iii) Claims experience; 

(iv) Receipt of health care; 

(v) Medical history; 

(vi) Genetic information, as defined in 

§ 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 § 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 


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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 costsharing 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 costsharing requirement, see also paragraph 

(b)(2)(ii) of this section, which permits 

variances in the application of a costsharing 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 


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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-ofinjury 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 § 54.9801–3. (i) A 

preexisting condition exclusion is 

permitted under this section if it—

(A) Complies with § 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 sixmonth 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 § 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 § 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 


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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) 


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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-atwork 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 


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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 parttime 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 

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. 


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(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 × 

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 × 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 


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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 


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75038 Federal Register / Vol. 71, No. 239 / Wednesday, December 13, 2006 / Rules and Regulations 

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 

■ For the reasons set forth above, 29 

CFR Part 2590 is amended as follows: 

PART 2590—RULES AND 

REGULATIONS FOR GROUP HEALTH 

PLANS 

■ 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). 

■ 2. Section 2590.702 is revised to read 

as follows: 

§ 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 § 2590.701–2; 

(iii) Claims experience; 

(iv) Receipt of health care; 

(v) Medical history; 

(vi) Genetic information, as defined in 

§ 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 § 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 


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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 


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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-ofinjury 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 § 2590.701–3. (i) A 

preexisting condition exclusion is 

permitted under this section if it —

(A) Complies with § 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 sixmonth 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 § 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 § 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. 


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(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. 


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75042 Federal Register / Vol. 71, No. 239 / Wednesday, December 13, 2006 / Rules and Regulations 

(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-atwork 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: 

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 


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


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75044 Federal Register / Vol. 71, No. 239 / Wednesday, December 13, 2006 / Rules and Regulations 

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 × 

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 × 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. 


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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). 


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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. 

■ For the reasons set forth above, 45 

CFR part 146 is amended as follows: 

PART 146—REQUIREMENTS FOR THE 

GROUP HEALTH INSURANCE 

MARKET 

■ 1. Paragraph (b)(1)(vi) is added to 

§ 146.101 as follows: 

§ 146.101 Basis and scope 

* * * * * 

(b) * * * 

(1) * * * 

(vi) Prohibiting discrimination against 

participants and beneficiaries based on 

a health factor. 

* * * * * 

■ 2. Section 146.121 is revised to read 

as follows: 

§ 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 § 144.103 of this chapter; 

(iii) Claims experience; 

(iv) Receipt of health care; 

(v) Medical history; 

(vi) Genetic information, as defined in 

§ 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 § 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 


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(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 


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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-ofinjury 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 § 146.111. (i) A 

preexisting condition exclusion is 

permitted under this section if it —

(A) Complies with § 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 sixVerDate Aug<31>2005 20:15 Dec 12, 2006 Jkt 211001 PO 00000 Frm 00036 Fmt 4701 Sfmt 4700 E:\FR\FM\13DER2.SGM 13DER2

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


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(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-atwork 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 


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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 parttime 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.) 


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(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 


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

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 × 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 


rwilkins on PROD1PC63 with RULES_2
75054 Federal Register / Vol. 71, No. 239 / Wednesday, December 13, 2006 / Rules and Regulations 

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 selffunded nonfederal governmental plan 

has elected under § 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 § 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 § 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 selffunded group health plan with a plan year 

beginning on October 1. The plan sponsor 


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Federal Register / Vol. 71, No. 239 / Wednesday, December 13, 2006 / Rules and Regulations 75055 

elected under § 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 § 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-ofgood-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 § 146.180 of this part 

to exempt the plan from the requirements of 

this section and ‘‘§ 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 § 146.111 because 

the plan continues to be exempted from those 

requirements in accordance with the plan 

sponsor’s election under § 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 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 54 

[TD 9299] 

RIN 1545–AY33 

Exception to the HIPAA 

Nondiscrimination Requirements for 

Certain Grandfathered Church Plans 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final regulations. 

SUMMARY: This document contains final 

regulations that provide guidance under 

section 9802(c) of the Internal Revenue 

Code relating to the exception for 

certain grandfathered church plans from 

the nondiscrimination requirements 

applicable to group health plans under 

section 9802(a) and (b). Final 

regulations relating to the 

nondiscrimination requirements under 

section 9802(a) and (b) are being 

published elsewhere in this issue of the 

Federal Register. The regulations will 

generally affect sponsors of and 

participants in certain self-funded 

church plans that are group health 

plans, and the regulations provide plan 

sponsors and plan administrators with 

guidance necessary to comply with the 

law. 

DATES: Effective Date: These regulations 

are effective February 12, 2007. 

Applicability Date: These regulations 

apply for plan years beginning on or 

after July 1, 2007. 

FOR FURTHER INFORMATION CONTACT: Russ 

Weinheimer at 202–622–6080 (not a 

toll-free number). 

SUPPLEMENTARY INFORMATION: 

Background 

This document contains amendments 

to the Miscellaneous Excise Tax 

Regulations (26 CFR part 54) relating to 

the exception for certain grandfathered 

church plans from the 

nondiscrimination requirements 

applicable to group health plans. The 

nondiscrimination requirements 

applicable to group health plans were 

added to the Internal Revenue Code 

(Code), in section 9802, by the Health 

Insurance Portability and 

Accountability Act of 1996 (HIPAA), 

Public Law 104–191 (110 Stat. 1936). 

HIPAA also added similar 

nondiscrimination provisions 

applicable to group health plans and 

health insurance issuers (such as health 

insurance companies and health 

maintenance organizations) under the 

Employee Retirement Income Security 

Act of 1974 (ERISA), administered by 

the U.S. Department of Labor, and the 

Public Health Service Act (PHS Act), 

administered by the U.S. Department of 

Health and Human Services. 

Final regulations relating to the 

HIPAA nondiscrimination requirements 

in paragraphs (a) and (b) of section 9802 

of the Code are being published 

elsewhere in this issue of the Federal 

Register. Those regulations are similar 

to, and have been developed in 

coordination with, final regulations also 

being published today by the 

Departments of Labor and of Health and 

Human Services. Guidance under the 

HIPAA nondiscrimination requirements 

is summarized in a joint preamble to the 

final regulations. 

The exception for certain 

grandfathered church plans was added 

to section 9802, in subsection (c), by 

section 1532 of the Taxpayer Relief Act 

of 1997, Public Law 105–34 (111 Stat. 

788). A notice of proposed rulemaking 

on the exception for certain 

grandfathered church plans and a 

request for comments (REG–114083–00) 

was published in the Federal Register of 

January 8, 2001. Two written comments 

were received. After consideration of 

the comments, the proposed regulations 

are adopted as amended by this 

Treasury decision. 


rwilkins on PROD1PC63 with RULES_2