[Federal Register Volume 62, Number 248 (Monday, December 29, 1997)]
[Rules and Regulations]
[Pages 67688-67689]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-33602]



[[Page 67687]]

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Part II

Department of the Treasury
Internal Revenue Service



26 CFR Part 54

Department of Labor
Pension 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



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Application of HIPAA Group Market Portability Rules to Health Flexible 
Spending Arrangements; Final Rule

Application of HIPAA Group Market Rules to Individuals Who Were Denied 
Coverage Due to a Health Status-Related Factor; Final Rule

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

[[Page 67688]]



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.

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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 employee-paid and employer-
paid portions of the premium) for the participant's coverage. Coverage 
and reimbursements provided to an individual under a group health plan 
that is a health FSA and that conforms to the generally applicable 
rules for accident or health plans qualify for the same tax-favored 
treatment that generally is extended to coverage and reimbursements 
under employer-provided accident or health plans.<SUP>1</SUP> Health 
FSA reimbursements typically provide coverage for medical care expenses 
not otherwise covered by the employer's primary group health plan.
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    \1\ See Q&A-7, prop. Treas. Reg., proposed 26 CFR 1.125-2 (54 FR 
9460, 9502, March 7, 1989).
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    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

[[Page 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