67688 Federal Register / Vol. 62, No. 248 / Monday, December 29, 1997 / Rules and Regulations

1See Q&A–7, prop. Treas. Reg., proposed 26 CFR

1.125–2 (54 FR 9460, 9502, March 7, 1989).

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 54

DEPARTMENT OF LABOR

Pension and Welfare Benefits

Administration

29 CFR Part 2590

DEPARTMENT OF HEALTH AND

HUMAN SERVICES

Health Care Financing Administration

45 CFR Subtitle A, Parts 144 and 146

Application of HIPAA Group Market

Portability Rules to Health Flexible

Spending Arrangements

AGENCIES: Internal Revenue Service,

Department of the Treasury; Pension

and Welfare Benefits Administration,

Department of Labor; Health Care

Financing Administration, Department

of Health and Human Services.

ACTION: Clarification of regulations.

SUMMARY: This document clarifies that it

is appropriate to treat benefits under

certain health flexible spending

arrangements as excepted benefits for

purposes of the group market portability

provisions added by the Health

Insurance Portability and

Accountability Act of 1996 (HIPAA).

FOR FURTHER INFORMATION CONTACT: Russ

Weinheimer, Internal Revenue Service,

Department of the Treasury, at (202)

622–4695; Amy Scheingold, Pension

and Welfare Benefits Administration,

Department of Labor, at (202) 219–4377;

or Joan Kral, Health Care Financing

Administration, Department of Health

and Human Services, at (410) 786–9539.

Customer service information.

Individuals interested in obtaining a

copy of the Department of Labor’s

booklet entitled ‘‘Questions and

Answers: Recent Changes in Health Care

Law,’’ may call the following toll-free

number: 1–800–998–7542. This

information is also available on the

Department’s website at: http://

www.dol.gov/dol/pwba

SUPPLEMENTARY INFORMATION:

I. Purpose

This document addresses the

application of certain portability

provisions added by the Health

Insurance Portability and

Accountability Act of 1996, Pub. L. 104–

191 (HIPAA), to flexible spending

arrangements (FSAs). The Departments

of the Treasury, Labor, and Health and

Human Services (the Departments) have

concluded that it is appropriate to treat

benefits under certain health FSAs as

excepted benefits under sections 9831

and 9832(c) of the Internal Revenue

Code of 1986 (Code), sections 732 and

733(c) of the Employee Retirement

Income Security Act of 1974 (ERISA),

and sections 2721 and 2791(c) of the

Public Health Service Act (PHS Act).

II. Background

HIPAA Group Market Portability

Provisions

HIPAA provides measures to improve

portability and continuity with respect

to group health plan coverage provided

in connection with employment. These

provisions include limitations on

preexisting condition exclusions, rules

prohibiting discrimination on the basis

of any health status-related factor, and

rules requiring special enrollment.

These provisions are generally effective

for group health plans and group health

insurance coverage for plan years

beginning on or after July 1, 1997. The

Departments of the Treasury, Labor, and

Health and Human Services (the

Departments) issued regulations

implementing these group market

provisions at 26 CFR 54.9801–1T

through 54.9801–6T, 54.9802–1T,

54.9831–1T (formerly 54.9804–1T),

54.9833–1T (formerly 54.9806–1T); 29

CFR part 2590; and 45 CFR parts 144

and 146 (made available to the public

on April 1, 1997 and published in the

Federal Register on April 8, 1997, 62 FR

16893).

The HIPAA portability provisions in

section 9801 of the Internal Revenue

Code of 1986 (Code), section 701 of the

Employee Retirement Income Security

Act of 1974 (ERISA), and section 2701

of the Public Health Service Act (PHS

Act), and the implementing regulations

impose limits on the maximum

preexisting condition exclusion period

that may be imposed by a group health

plan or a group health insurance issuer.

In general, neither a group health plan

nor a group health insurance issuer may

impose more than a 12-month

preexisting condition exclusion for

individuals enrolling in the plan or

coverage, although a plan or issuer can

impose an 18-month preexisting

condition exclusion for late enrollees. In

either case, the exclusion period must

be reduced by the amount of an

individual’s prior ‘‘creditable coverage.’’

Plans and issuers subject to the HIPAA

requirements generally must also issue

certificates of creditable coverage for an

individual to use as proof of creditable

coverage for subsequent coverage.

In general, these group market

portability provisions apply to group

health plans (generally plans sponsored

by employers or employee

organizations, or both) and health

insurance issuers providing coverage

under a group health plan, effective for

plan years beginning after June 30, 1997,

except that the obligation to provide

certain information relating to creditable

coverage became effective as early as

June 1, 1997. However, the group

market portability provisions do not

apply to certain excepted benefits. For

example, the group market portability

provisions do not apply to certain types

of supplemental coverage provided

under a separate policy, certificate, or

contract of insurance. In general, if

benefits under a plan or coverage are

excepted benefits, then plans and

issuers do not have to provide

certificates for the coverage, and the

coverage may not qualify as creditable

coverage.

Health Flexible Spending Arrangements

Under proposed Treasury

Regulations, a health FSA generally is a

benefit program that provides

employees with coverage under which

specified, incurred expenses may be

reimbursed (subject to reimbursement

maximums and any other reasonable

conditions) and under which the

maximum amount of reimbursement

that is reasonably available to a

participant for a period of coverage is

not substantially in excess of the total

premium (including both employeepaid and employer-paid portions of the

premium) for the participant’s coverage.

Coverage and reimbursements provided

to an individual under a group health

plan that is a health FSA and that

conforms to the generally applicable

rules for accident or health plans qualify

for the same tax-favored treatment that

generally is extended to coverage and

reimbursements under employerprovided accident or health plans.1

Health FSA reimbursements typically

provide coverage for medical care

expenses not otherwise covered by the

employer’s primary group health plan.

A health FSA is permitted to operate

under a cafeteria plan described in

section 125 of the Code. Pursuant to the

rules of section 125, an employee can

elect to reduce the employee’s salary in

order to pay for health FSA coverage

without the employee having to include

that portion of the salary in gross

income. Commonly, the maximum

benefit payable under a health FSA for

any year is equal to the amount of the
Federal Register / Vol. 62, No. 248 / Monday, December 29, 1997 / Rules and Regulations 67689

employee’s salary reduction election for

the year, plus any additional employer

contribution for the year.

III. Clarification

This document clarifies the

conditions under which it is appropriate

to treat benefits under a health FSA as

excepted benefits. Specifically, benefits

under a health FSA are excepted

benefits if the maximum benefit payable

for the employee under the health FSA

for the year does not exceed two times

the employee’s salary reduction election

under the health FSA for the year (or,

if greater, the amount of the employee’s

salary reduction election under the

health FSA for the year, plus $500), the

employee has other coverage available

under a group health plan of the

employer for the year, and the other

coverage is not limited to benefits that

are excepted benefits.

The effect of treating benefits under a

health FSA as excepted benefits is that

the health FSA is not subject to the

group market portability provisions.

Accordingly, there would be no

requirement under section 9801 of the

Code, section 701 of ERISA, or section

2701 of the PHS Act and the

implementing regulations to issue a

certificate of creditable coverage for

such a health FSA. In addition, coverage

that consists solely of coverage under

such a health FSA does not constitute

creditable coverage.

Group health plans, issuers, and other

entities subject to the group market

portability provisions of HIPAA may

rely on this document in treating

benefits under health FSAs described in

the first paragraph of this section III as

excepted benefits.

Dated: December 18, 1997.

Michael P. Dolan,

Deputy Commissioner of Internal Revenue.

Signed at Washington, DC, this 19th day of

December, 1997.

Olena Berg,

Assistant Secretary, Pension and Welfare

Benefits Administration, U.S. Department of

Labor.

Dated: December 18, 1997.

Nancy-Ann Min DeParle,

Administrator, Health Care Financing

Administration.

[FR Doc. 97–33602 Filed 12–24–97; 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

DEPARTMENT OF LABOR

Pension and Welfare Benefits

Administration

29 CFR Part 2590

DEPARTMENT OF HEALTH AND

HUMAN SERVICES

Health Care Financing Administration

45 CFR Subtitle A, Parts 144 and 146

Application of HIPAA Group Market

Rules to Individuals Who Were Denied

Coverage Due to a Health StatusRelated Factor

AGENCIES: Internal Revenue Service,

Department of the Treasury; Pension

and Welfare Benefits Administration,

Department of Labor; Health Care

Financing Administration, Department

of Health and Human Services.

ACTION: Clarification of regulations.

SUMMARY: This document addresses

certain issues arising under the group

market portability provisions added by

the Health Insurance Portability and

Accountability Act of 1996 (HIPAA)

with respect to employees (or their

dependents) who, until the effective

date of the HIPAA nondiscrimination

provisions, were denied coverage under

a group health plan, including group

health insurance coverage, because of a

health status-related factor.

FOR FURTHER INFORMATION CONTACT: Russ

Weinheimer, Internal Revenue Service,

Department of the Treasury, at (202)

622–4695; Amy Scheingold, Pension

and Welfare Benefits Administration,

Department of Labor, at (202) 219–4377;

or Joan Kral, Health Care Financing

Administration, Department of Health

and Human Services, at (410) 786–9539.

Customer service information.

Individuals interested in obtaining a

copy of the Department of Labor’s

booklet entitled ‘‘Questions and

Answers: Recent Changes in Health Care

Law,’’ which includes information on

the nondiscrimination provisions of

HIPAA, may call the following toll-free

number: 1–800–998–7542. This

information is also available on the

Department’s website at: http://

www.dol.gov/dol/pwba.

SUPPLEMENTARY INFORMATION:

I. Purpose

This document addresses certain

issues arising under the group market

portability provisions added by the

Health Insurance Portability and

Accountability Act of 1996, Public Law

104–191 (HIPAA), with respect to

employees (or their dependents) who,

until the effective date of the HIPAA

nondiscrimination provisions, were

denied coverage under a group health

plan, including health insurance

coverage offered in connection with a

group health plan, because of a health

status-related factor. Under those

provisions and the implementing

regulations, neither a group health plan

nor group health insurance coverage can

continue to exclude such individuals

from enrolling in the plan or coverage.

This document clarifies certain rights of

these individuals.

II. Background

HIPAA contains provisions designed

to improve portability and continuity

with respect to group health plan

coverage provided in connection with

employment. These provisions include

limitations on preexisting condition

exclusions, rules prohibiting

discrimination on the basis of any

health status-related factor, and rules

requiring special enrollment. These

provisions are generally effective for

group health plans and group health

insurance coverage for plan years

beginning on or after July 1, 1997. The

Departments of the Treasury, Labor, and

Health and Human Services (the

Departments) issued interim final

regulations implementing these group

market provisions at 26 CFR 54.9801–1T

through 54.9801–6T, 54.9802–1T,

54.9831–1T (formerly 54.9804–1T),

54.9833–1T (formerly 54.9806–1T); 29

CFR part 2590; and 45 CFR parts 144

and 146 (made available to the public

on April 1, 1997 and published in the

Federal Register on April 8, 1997, 62 FR

16893).

The HIPAA portability provisions in

section 9801 of the Internal Revenue

Code of 1986 (Code), section 701 of the

Employee Retirement Income Security

Act of 1974 (ERISA), and section 2701

of the Public Health Service Act (PHS

Act), and the implementing regulations

impose limits on the maximum

preexisting condition exclusion period

that may be imposed by a group health

plan or group health insurance issuer. In

general, neither a group health plan nor

a group health insurance issuer may

impose more than a 12-month

preexisting condition exclusion for

individuals enrolling in the plan or