[Federal Register Volume 66, Number 5 (Monday, January 8, 2001)]
[Rules and Regulations]
[Pages 1378-1420]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-106]



[[Page 1377]]

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Part II





Department of the Treasury





Internal Revenue Service



26 CFR Part 54



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Department of Labor





Pension and Welfare Benefits Administration

29 CFR Part 2590



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Department of Health and Human Services





Health Care Financing Administration

45 CFR Part 146



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Nondiscrimination in Health Coverage in the Group Market; Interim Final 
Rules and Proposed Rules

Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Rules 
and Regulations

[[Page 1378]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 54

[TD 8931]
RIN 1545-AW02

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

29 CFR Part 2590

RIN 1210-AA77

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

45 CFR Part 146

RIN 0938-AI08


Interim Final Rules for Nondiscrimination in Health Coverage in 
the Group Market

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: Interim final rules with request for comments.

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SUMMARY: This document contains interim 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. The interim final rules are effective March 9, 
2001.
    Applicability dates. For rules describing when this section applies 
to group health plans and group health insurance issuers, see paragraph 
(i) of these interim regulations.\1\
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    \1\ References in this preamble to a specific paragraph in the 
interim regulations are to paragraphs in each of the three sets of 
regulations being published as part of this document. Specifically, 
references are to paragraphs in 26 CFR 54.9802-1 and 26 CFR 54.9802-
1T (see discussion and table in ``C. Format of Regulations'' below), 
29 CFR 2590.702, and 45 CFR 146.121.
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    Comment date. Written comments on these interim regulations are 
invited and must be received by the Departments on or before April 9, 
2001.

ADDRESSES: Written comments should be submitted with a signed original 
and three copies (except for electronic submissions to the Internal 
Revenue Service (IRS) or Department of Labor) to any of the addresses 
specified below. Any comment that is submitted to any Department will 
be shared with the other Departments.
    Comments to the IRS can be addressed to: CC:M&SP:RU (REG-109707-
97), Room 5226, Internal Revenue Service, POB 7604, Ben Franklin 
Station, Washington, DC 20044.
    In the alternative, comments may be hand-delivered between the 
hours of 8 a.m. and 5 p.m. to: CC:M&SP:RU (REG-109707-97), Courier's 
Desk, Internal Revenue Service, 1111 Constitution Avenue, NW., 
Washington, DC 20224.
    Alternatively, comments may be transmitted electronically via the 
IRS Internet site at: http://www.irs.gov/tax regs/regslist.html.
    Comments to the Department of Labor can be addressed to: U.S. 
Department of Labor, Pension and Welfare Benefits Administration, 200 
Constitution Avenue NW., Room C-5331, Washington, DC 20210, Attention: 
Nondiscrimination Comments.
    Alternatively, comments may be hand-delivered between the hours of 
9 a.m. and 5 p.m. to the same address. Comments may also be transmitted 
by e-mail to: <a href="/cdn-cgi/l/email-protection#c48c8d948585f3f4f684b4b3a6a5eaa0aba8eaa3abb2"><span class="__cf_email__" data-cfemail="1b53524b5a5a2c2b295b6b6c797a357f7477357c746d">[email protected]</span></a>.
    Comments to HHS can be addressed to: Health Care Financing 
Administration, Department of Health and Human Services, Attention: 
HCFA-2022-IFC, P.O. Box 26688, Baltimore, MD 21207.
    In the alternative, comments may be hand-delivered between the 
hours of 8:30 a.m. and 5 p.m. to either: Room 443-G, Hubert Humphrey 
Building, 200 Independence Avenue, SW., Washington, DC 20201 or Room 
C5-14-03, 7500 Security Boulevard, Baltimore, MD 21244-1850.
    All submissions to the IRS will be open to public inspection and 
copying in room 1621, 1111 Constitution Avenue, NW., Washington, DC 
from 9 a.m. to 4 p.m.
    All submissions to the Department of Labor will be open to public 
inspection and copying in the Public Documents Room, Pension and 
Welfare Benefits Administration, U.S. Department of Labor, Room N-1513, 
200 Constitution Avenue, NW., Washington, DC from 8:30 a.m. to 5:30 
p.m.
    All submissions to HHS will be open to public inspection and 
copying in room 309-G of the Department of Health and Human Services, 
200 Independence Avenue, SW., Washington, DC from 8:30 a.m. to 5 p.m.

FOR FURTHER INFORMATION CONTACT: Russ Weinheimer, Internal Revenue 
Service, Department of the Treasury, at (202) 622-6080; Amy J. Turner, 
Pension and Welfare Benefits Administration, Department of Labor, at 
(202) 219-7006; or Ruth A. Bradford, Health Care Financing 
Administration, Department of Health and Human Services, at (410) 786-
1565.

SUPPLEMENTARY INFORMATION:

Customer Service Information:

    Individuals interested in obtaining additional information on 
HIPAA's nondiscrimination rules may request a copy of the Department of 
Labor's booklet entitled ``Questions and Answers: Recent Changes in 
Health Care Law'' by calling the PWBA Toll-Free Publication Hotline at 
1-800-998-7542 or may request a copy of the Health Care Financing 
Administration's new publication entitled ``Protecting Your Health 
Insurance Coverage'' by calling (410) 786-1565. Information on HIPAA's 
nondiscrimination rules and other recent health care laws is also 
available on the Department of Labor's website (http://www.dol.gov/dol/pwba) and the Department of Health and Human Services' website (http://hipaa.hcfa.gov).

I. Background

    The Health Insurance Portability and Accountability Act of 1996 
(HIPAA), Public Law 104-191, was enacted on August 21, 1996. HIPAA 
amended the Internal Revenue Code of 1986 (Code), the Employee 
Retirement Income Security Act of 1974 (ERISA), and the Public Health 
Service Act (PHS Act) to provide for, among other things, improved 
portability and continuity of health coverage. HIPAA added section 9802 
of the Code, section 702 of ERISA, and section 2702 of the PHS Act, 
which prohibit discrimination in health coverage. Interim final rules 
implementing the HIPAA provisions were first made available to the 
public on April 1, 1997 (published in the Federal Register on April 8, 
1997, 62 FR 16894) (April 1997 interim rules). On December 29, 1997, 
the Departments published 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).
    In the preamble to the April 1997 interim rules, the Departments 
invited

[[Page 1379]]

comments on whether additional guidance was needed concerning--
    <bullet> The extent to which the statute prohibits discrimination 
against individuals in eligibility for particular benefits;
    <bullet> The extent to which the statute may permit benefit 
limitations based on the source of an injury;
    <bullet> The permissible standards for defining groups of similarly 
situated individuals;
    <bullet> Application of the prohibitions on discrimination between 
groups of similarly situated individuals; and
    <bullet> The permissible standards for determining bona fide 
wellness programs.
    In the preamble to the April 1997 interim rules, the Departments 
stated that they intend to issue further regulations on the 
nondiscrimination rules 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 additional guidance 
is provided. Accordingly, with the issuance of these interim 
regulations, the Departments have determined that the period for 
nonenforcement in cases of good faith compliance ends in accordance 
with the rules described in paragraph (i) of these interim 
regulations.\2\ However, because the interim regulations do not include 
a discussion of bona fide wellness programs (see proposed rules 
relating to bona fide wellness programs published elsewhere in this 
issue of the Federal Register), the period for good faith compliance 
continues with respect to those provisions until further guidance is 
issued.
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    \2\ See footnote 1.
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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. These interim regulations interpret the HIPAA 
nondiscrimination provisions. Among other things, the interim 
regulations--
    <bullet> Explain the application of these provisions to benefits;
    <bullet> Clarify the relationship between the HIPAA 
nondiscrimination provisions and the HIPAA preexisting condition 
exclusion limitations;
    <bullet> Explain the application of these provisions to premiums;
    <bullet> Describe similarly situated individuals;
    <bullet> Explain the application of these provisions to actively-
at-work and nonconfinement clauses; and
    <bullet> Clarify that more favorable treatment of individuals with 
medical needs generally is permitted.
    Described elsewhere in this issue of the Federal Register are 
proposed standards for defining bona fide wellness programs.
    Of course, plans and benefits that are not subject to the HIPAA 
portability provisions (set forth in Chapter 100 of the Code, part 7 of 
subtitle B of title I of ERISA, and title XXVII of the PHS Act) are not 
subject to the HIPAA nondiscrimination requirements. Accordingly, the 
following plans and benefits are not subject to the HIPAA 
nondiscrimination requirements: benefits that qualify under the HIPAA 
portability provisions as excepted benefits; plans with fewer than two 
participants who are current employees on the first day of the plan 
year;\3\ and self-funded non-Federal governmental plans that elect, 
under 45 CFR 146.180, to be exempt from these nondiscrimination 
requirements. In addition, under a proposed regulation published by the 
Department of the Treasury and described elsewhere in this issue of the 
Federal Register, certain church plans are treated as not violating the 
general HIPAA nondiscrimination provisions if the plan requires 
evidence of good health for the coverage of certain individuals.
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    \3\ However, a State may impose the requirements of the HIPAA 
portability provisions, in whole or in part, on health insurance 
coverage sold to groups that contain fewer than 2 current employees 
on the first day of the plan year. See sections 2723 and 2791(e) of 
the PHS Act.
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Health Factors

    The HIPAA nondiscrimination provisions set forth eight health 
status-related factors. The interim regulations refer to these as 
``health factors.'' The eight health factors are health status, medical 
condition (including both physical and mental illnesses), claims 
experience, receipt of health care, medical history, genetic 
information, evidence of insurability, and disability. These terms are 
largely overlapping and, in combination, include any factor related to 
an individual's health.
    Evidence of insurability. Several commenters urged that the health 
factor ``evidence of insurability'' be interpreted to prohibit plans 
and issuers from denying coverage to individuals who engage in certain 
types of activities. Commenters cited language in the conference report 
that states, ``The inclusion of evidence of insurability in the 
definition of health status is intended to ensure, among other things, 
that individuals are not excluded from health care coverage due to 
their participation in activities such as motorcycling, snowmobiling, 
all-terrain vehicle riding, horseback riding, skiing and other similar 
activities.'' H.R. Conf. Rep. No. 736, 104th Cong., 2d Sess. 186 
(1996). The interim regulations clarify that evidence of insurability 
includes participation in activities listed in the conference report. 
In addition, the interim regulations incorporate the statutory 
clarification that evidence of insurability includes conditions arising 
out of acts of domestic violence. See also the discussion below 
concerning source-of-injury restrictions under the heading 
``Application to Benefits.''
    Late enrollees and special enrollees. Some commenters asked whether 
treating late enrollees differently from other enrollees is 
discrimination based on one or more health factors. HIPAA was designed 
to encourage individuals to enroll in health coverage when first 
eligible and to maintain coverage for as long as they continue to be 
eligible. Permitting plans and issuers to treat late enrollees less 
favorably than other enrollees is consistent with this objective. The 
interim regulations clarify that the decision whether to elect health 
coverage, including the time an individual chooses to enroll, such as 
late enrollment, is not itself within the scope of any health factor. 
Thus, the interim regulations permit plans and issuers to treat late 
enrollees differently from similarly situated individuals who enroll 
when first eligible.
    Although the HIPAA nondiscrimination requirements do not prohibit 
different treatment of special enrollees, any differential treatment 
would violate the HIPAA special enrollment requirements. These interim 
regulations provide a cross-reference to the HIPAA regulations 
requiring special enrollees to be treated the same as individuals who 
enroll when first eligible.

Prohibited Discrimination in Rules for Eligibility

    These interim regulations provide that group health plans and group 
health insurance issuers generally may not establish any rule for 
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. Under these interim

[[Page 1380]]

regulations, rules for eligibility include, but are not limited to, 
rules relating to enrollment, the effective date of coverage, waiting 
(or affiliation) periods, late and special enrollment, eligibility for 
benefit packages (including rules for individuals to change their 
selection among benefit packages), benefits (as described below under 
the heading ``Application to Benefits''), continued eligibility, and 
terminating coverage of any individual under the plan.
    The rules for eligibility apply in tandem with the rules describing 
similarly situated individuals (described below under the heading 
``Similarly Situated Individuals'') to prevent discrimination in 
eligibility based on any health factor. Thus, while it is permissible 
for a plan or issuer to impose waiting periods of different lengths on 
different groups of similarly situated individuals, a plan or issuer 
would violate the interim regulations if it imposed a longer waiting 
period for individuals within the same group of similarly situated 
individuals based on the higher claims of those individuals (or based 
on any other adverse health factor of those individuals).
    While the interim regulations clarify that late enrollment itself 
is not within the scope of any health factor, eligibility for late 
enrollment comes within the scope of rules for eligibility under which 
discrimination based on one or more health factors is prohibited. The 
effect of these rules is to permit plans or issuers to treat late 
enrollees differently from individuals who enroll when first eligible 
but to prohibit plans and issuers from distinguishing among applicants 
for late enrollment based on any health factor of the applicant. Thus, 
a plan could impose an 18-month preexisting condition exclusion on late 
enrollees while imposing no preexisting condition exclusion on 
individuals who enroll in the plan when first eligible, but a plan 
would violate the interim regulations if it conditioned the ability to 
enroll as a late enrollee on the passing of a physical examination (or 
on any other health factor of the individual, such as having incurred 
health claims during a past period below a certain dollar amount).

Application to Benefits

    General rules. The extent to which the statutory language prohibits 
discrimination against individuals in eligibility for particular 
benefits is subject to a wide range of interpretations. At one extreme, 
the language could be interpreted as applying only to enrollment and to 
premiums. Under this interpretation, for example, it would be possible 
for a plan or issuer to impose a $100 lifetime limit on a particular 
individual with a history of high health claims (provided that the 
individual is permitted to enroll in the plan and is charged the same 
premium as similarly situated individuals), while imposing a $1 million 
lifetime limit on all other participants in the plan.
    At the other extreme, the statutory language could be interpreted 
to mandate parity in health benefits. This interpretation would prevent 
plans and issuers from designing benefit packages that control costs 
and are responsive to employees' preferences for balancing additional 
benefits with additional costs.
    In the preamble to the April 1997 interim rules, the Departments 
specifically invited comments on whether guidance was needed concerning 
this issue. The comments received ranged between these two extremes. 
The approach in these interim regulations takes into account the 
concerns expressed by commenters, as well as the conference report. 
Specifically, the conference report states that:

    It is the intent of the conferees that a plan cannot knowingly 
be designed to exclude individuals and their dependents on the basis 
of health status. However, generally applicable terms of the plan 
may have a disparate impact on individual enrollees. For example, a 
plan may exclude all coverage of a specific condition, or may 
include a lifetime cap on all benefits, or a lifetime cap on 
specific benefits. Although individuals with the specific condition 
would be adversely affected by an exclusion of coverage for that 
condition * * * such plan characteristics would be permitted as long 
as they are not directed at individual sick employees or dependents.

H.R. Conf. Rep. No. 736, 104th Cong., 2d Sess. 186-187 (1996).

    The interim regulations clarify that they do not require a plan or 
issuer to provide coverage for any particular benefit to any group of 
similarly situated individuals. However, benefits provided under a plan 
or group health insurance coverage must be uniformly available to all 
similarly situated 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). 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.\4\ These interim regulations clarify 
that whether any plan provision with respect to benefits complies with 
the interim regulations does not affect whether the provision is 
permitted under the Americans with Disabilities Act (ADA), or any other 
law, whether State or federal.\5\
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    \4\ For special rules that apply to cost-sharing mechanisms that 
are part of a bona fide wellness program, see the proposed 
regulations relating to bona fide wellness programs published 
elsewhere in this issue of the Federal Register.
    \5\ In this regard, the Equal Employment Opportunity Commission 
has commented, by letter of July 7, 1997, ``Title I of the ADA 
prohibits disability-based employment discrimination, including 
discrimination in fringe benefits such as health insurance plans.''
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    Accordingly, for example, a group health plan may apply a lifetime 
limit on all benefits provided to each participant covered under the 
plan. While this limitation on all benefits may adversely impact 
individuals with serious medical conditions, the limitation is 
permitted provided that it applies to all similarly situated 
individuals and is not directed at individual participants or 
beneficiaries. Similarly, a plan or issuer may establish a specific 
lifetime limit on the treatment of a particular condition (such as the 
treatment of temporomandibular joint syndrome (TMJ)) for all similarly 
situated individuals in the plan. Although individuals with TMJ may be 
adversely affected by this limitation, because benefits for the 
treatment of TMJ are available uniformly to all similarly situated 
individuals and because the limit on benefits for TMJ applies to all 
similarly situated individuals, the limit is permissible.
    Under these interim regulations, plans and issuers therefore have 
significant flexibility in designing benefits. However, to prevent 
plans and issuers from restricting benefits based on a

[[Page 1381]]

specific health factor of an individual under the plan, the interim 
regulations prohibit benefit restrictions, even if applied uniformly to 
all similarly situated individuals, from being directed at individual 
participants or beneficiaries based on any health factor of the 
participants or beneficiaries. The interim regulations clarify that 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 individual participants 
and beneficiaries. This exception to the general facts and 
circumstances determination that a change is directed at an individual 
is necessary to preserve the flexibility of small employers that might 
otherwise be disproportionately affected and prevented from adopting 
changes in benefit design. If small employers are unable to modify 
future benefits to keep health coverage affordable, their alternative 
may be to eliminate health coverage entirely. At the same time, the 
exception reflects the common practice of modifying the terms of a plan 
on an annual basis. Finally, changes in benefit design that are 
effective earlier than the first day of the next plan year remain 
subject to a facts and circumstances determination regarding whether 
the change is directed at individual participants and beneficiaries.
    An example illustrates that if an individual files a claim for the 
treatment of a condition, and shortly thereafter the plan is modified 
to restrict benefits for the treatment of the condition, effective 
before the beginning of the next plan year, the restriction would be 
directed at the individual based on a health factor (absent additional 
facts to indicate that the change was made independent of the claim) 
and the plan would violate these interim regulations.
    Source-of-injury restrictions. While a person cannot be excluded 
from a plan for engaging in certain recreational activities (see 
previous discussion on evidence of insurability under the heading 
``Health Factors''), benefits for a particular injury can, in some 
cases, be excluded based on the source of an injury. These plan 
restrictions are known as source-of-injury restrictions.\6\ Under these 
interim regulations, if a plan or group health insurance coverage 
generally provides benefits for a type of injury, the plan or issuer 
may not use a source-of-injury restriction to deny benefits otherwise 
provided for treatment of the injury if it results from an act of 
domestic violence or a medical condition (including both physical and 
mental health conditions). An example in the interim regulations 
clarifies that benefits for injuries generally covered under the plan 
cannot be excluded merely because they were self-inflicted or were 
sustained in connection with a suicide or attempted suicide if the 
injuries resulted from a medical condition such as depression. Another 
example illustrates that a plan can nonetheless exclude benefits for 
injuries because they were sustained in connection with various 
recreational activities if the accident did not result from any medical 
condition (or from domestic violence).
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    \6\ A commenter pointed out that this type of restriction is 
distinct from two other restrictions sometimes referred to as 
``source-of-injury restrictions''--(1) those based on the geographic 
location where the injury occurred, and (2) those based on when the 
injury occurred and whether other coverage was in effect.
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The Relationship Between the HIPAA Nondiscrimination Provisions and the 
HIPAA Preexisting Condition Exclusion Provisions

    Restrictions on benefits based on the fact that a medical condition 
was present before the first day of coverage discriminate against 
individuals based on one or more health factors. The statute 
nonetheless provides that the nondiscrimination provisions are intended 
to be construed in a manner consistent with the HIPAA provisions 
specifically allowing the application of preexisting condition 
exclusions. These latter provisions restrict the ability of a group 
health plan or group health insurance issuer to apply preexisting 
condition exclusions, both by restricting the circumstances under which 
an individual's condition is considered preexisting and by limiting the 
length of the exclusion period. The interim regulations clarify that a 
preexisting condition exclusion that satisfies the requirements of the 
HIPAA preexisting condition exclusion provisions is permitted under the 
HIPAA nondiscrimination requirements if the exclusion applies uniformly 
to individuals within the same group of similarly situated individuals 
and is not directed at individual participants or beneficiaries based 
on any health factor of the participants or beneficiaries. 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 individual participants or beneficiaries.
    The examples illustrate that a typical preexisting condition 
exclusion permitted under the HIPAA preexisting condition exclusion 
requirements does not violate the HIPAA nondiscrimination requirements 
even though the exclusion inherently discriminates based on one or more 
health factors. The examples also illustrate that a plan nonetheless 
must apply the preexisting condition exclusion to similarly situated 
individuals in a uniform manner and cannot apply a longer preexisting 
condition exclusion period based on the submission of claims during the 
first part of the exclusion period.

Prohibited Discrimination in Premiums or Contributions

    Under the interim regulations, 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 
enrolled in the plan or group health insurance coverage, based on any 
health factor that relates to that individual or a dependent of that 
individual. Under the interim regulations, when determining an 
individual's premium or contribution rate, discounts, rebates, payments 
in kind, or other premium differential mechanisms are taken into 
account.\7\
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    \7\ However, a group health plan or a health insurance issuer 
offering group health insurance coverage may establish premium or 
contribution differentials through a bona fide wellness program. 
(See proposed regulations relating to bona fide wellness programs 
published elsewhere in this issue of the Federal Register).
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    In general, the interim regulations do not restrict the amount that 
an employer may be quoted or charged by an issuer (or, in the case of a 
multiemployer plan, by the plan) for coverage of a group of similarly 
situated individuals. However, the interim regulations prohibit certain 
billing practices because in many instances they could directly or 
indirectly result in an individual's being charged more than a 
similarly situated individual based on a health factor.
    Some health insurance issuers that offer health insurance coverage 
in connection with a group health plan use billing practices with 
separate individual rates that vary based, in part, on the health 
factors of the individuals who are eligible to participate in the plan. 
This practice is generally known as list billing. List billing based on 
a

[[Page 1382]]

health factor is prohibited under the interim regulations.
    The HIPAA nondiscrimination requirements do not prohibit an issuer 
from considering all relevant health factors of individuals in order to 
establish aggregate rates for coverage provided under the group health 
plan. However, an individual may not be required to pay a higher 
premium based on any health factor of the individual. Under the interim 
regulations, an issuer (or a multiemployer plan) may not quote or 
charge an employer different premium rates on an individual-by-
individual basis in a group of similarly situated individuals based on 
any health factor of the individuals, even if the employer does not 
pass the different rates through to the individuals. If an issuer 
wishes to increase rates to cover the additional exposure to expenses 
that may result from an individual's health factor, the issuer must 
blend the increase into an overall group rate and then quote or charge 
a higher per-participant rate. Nonetheless, the prohibition on the 
practice of list billing based on a health factor does not restrict 
communications between issuers and plans regarding rate calculations.

Similarly Situated Individuals

    The statutory HIPAA nondiscrimination requirements clarify that the 
general rule prohibiting discrimination in eligibility does not prevent 
a group health plan or group health insurance coverage from 
establishing limitations or restrictions on the amount, level, extent, 
or nature of benefits for ``similarly situated individuals'' enrolled 
in the plan or coverage. The statutory rule prohibiting discrimination 
in charging individuals premiums or contributions prohibits a plan or 
issuer from requiring any individual, based on any health factor of 
that individual or a dependent of that individual, to pay a premium or 
contribution that is greater than the premium or contribution required 
of a ``similarly situated individual.'' In the preamble to the April 
1997 interim rules, the Departments requested comments both on the 
permissible standards for defining groups of similarly situated 
individuals and on the application of the prohibitions on 
discrimination between groups of similarly situated individuals.
    Many commenters suggested that discrimination between groups of 
similarly situated individuals should be permitted, with the caveat 
that it should not be permissible to define a group based on a health 
factor. These interim regulations provide that the nondiscrimination 
rules apply only within a group of similarly situated individuals. 
Thus, these interim regulations do not prohibit discrimination between 
or among groups of similarly situated individuals. However, these 
interim regulations also provide that 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. 
This is intended to be a broad anti-abuse standard that applies based 
on the relevant facts and circumstances of each case.
    The permissibility of discrimination between or among groups of 
similarly situated individuals increases the possibility of abuse in 
establishing groups of similarly situated individuals. Most commenters 
addressing this issue focused on the classification of participants and 
suggested that classifications should be based on work activities and 
not on a health factor or on activities unrelated to employment. The 
interim regulations provide generally that participants may be treated 
as two or more groups of similarly situated individuals if the 
distinction between or among the groups is based on a bona fide 
employment-based classification consistent with the employer's usual 
business practice. The validity of a category as a bona fide 
employment-based classification is determined based on 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 the anti-abuse standard (described in the 
preceding paragraph), the interim regulations allow distinctions to be 
made based on 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.
    Some commenters expressed concern that allowing similarly situated 
individuals to be determined based on occupation or geographic location 
would allow plans and issuers to create artificial classifications, 
ostensibly based on occupation or geographic location, that are 
actually designed to discriminate based on a health factor of an 
individual or individuals. These interim regulations permit bona fide 
classifications based on occupation or geographic location. In this 
connection, commenters had two principal concerns. First, there was a 
concern about reclassifications targeting unhealthy individuals. For 
example, a participant receiving expensive medical treatment might be 
reclassified to a separate employment category either with reduced 
health benefits or none at all. The broad anti-abuse standard of these 
interim regulations is intended, among other things, to prohibit 
reclassifications directed at individuals such as this.
    A second concern that commenters had was that plans and issuers 
might design health benefits differently for employees in different 
occupations or geographic locations based, at least in part, on the 
health factors of these groups of individuals. One example is a plan 
that offers fewer benefits to employees in one occupation than to 
employees in another occupation at least in part because of the higher 
average historical claims of the employees in the first occupation. A 
second example is a plan that charges employees in one area more than 
employees in another area at least in part because the cost of medical 
care is generally higher in the first area. The statute and legislative 
history appear to allow this practice, and thus these interim 
regulations do not prohibit the provision of different health benefits 
for employees in different occupations or geographic locations, based 
at least in part on the health factors of the group as a whole, if the 
classifications are not directed at individual participants or 
beneficiaries based on a health factor of the participants or 
beneficiaries.
    These interim regulations also permit plans and issuers, in certain 
circumstances, to treat beneficiaries as different groups of similarly 
situated individuals. Beneficiaries may be treated as a group of 
similarly situated individuals separate from participants, and 
different treatment is permitted among beneficiaries based on bona fide 
employment-based classifications of the participants through whom the 
beneficiaries are receiving coverage. Thus, if the plan provides 
different benefits to full-time employees than to part-time employees, 
then it may also provide different benefits to dependents of full-time 
employees than to dependents of part-time employees. Similarly, 
different treatment is permitted based on the beneficiary's 
relationship to the participant (for example, as a spouse or as a 
dependent child). Different treatment is also permitted based on the 
beneficiary's marital status, based on a dependent

[[Page 1383]]

child's age or student status, or based on any other factor if the 
factor is not a health factor.
    The rules in these interim regulations allowing the different 
treatment of individuals in different groups of similarly situated 
individuals are distinct from rules requiring that qualified 
beneficiaries under a COBRA continuation provision \8\ have available 
the same coverage as similarly situated non-COBRA beneficiaries. 
Although these interim regulations would not prohibit making benefit 
packages available to non-COBRA beneficiaries (such as current 
employees) that are not made available to COBRA qualified beneficiaries 
(such as former employees), the COBRA continuation provisions prohibit 
such a difference.
---------------------------------------------------------------------------

    \8\ The term COBRA continuation provision is defined in 26 CFR 
54.9801-2T, 29 CFR 2590.701-2, and 45 CFR 144.103.
---------------------------------------------------------------------------

    Finally, all of the requirements relating to determining groups of 
similarly situated individuals are subject to other rules in these 
interim regulations permitting favorable treatment of individuals with 
certain adverse health factors (discussed below under the heading 
``More Favorable Treatment of Individuals with Adverse Health Factors 
Permitted'').

Nonconfinement Provisions

    Some group health plans and health insurance issuers refuse to 
provide benefits to an individual based on the individual's confinement 
to a hospital or other health care institution at the time coverage 
otherwise would become effective. Plan provisions like these are often 
called ``nonconfinement clauses.'' Any reasonable interpretation or 
application of the statutory HIPAA nondiscrimination provisions 
prohibits a plan or issuer from imposing a nonconfinement clause.\9\ 
Thus, a plan or issuer may not deny the eligibility of any individual 
to enroll for benefits or charge any individual a higher premium (or 
contribution) because the individual, or a dependent of the individual, 
is confined to a hospital or other health care institution. In 
addition, some plans and issuers refuse to provide benefits to an 
individual based on an individual's inability to engage in normal life 
activities. A plan or issuer generally may not deny the eligibility of 
any individual to enroll for benefits or charge any individual a higher 
premium (or contribution) based on any individual's ability to engage 
in normal life activities. However, these interim regulations provide 
an exception that permits plans and issuers to distinguish among 
employees based on the performance of services. Although in practice 
nonconfinement clauses generally apply only to dependents, in some 
cases they apply also to employees. Thus, the interim regulations 
clarify that a nonconfinement clause would also be impermissible if 
applied to an employee.
---------------------------------------------------------------------------

    \9\ For an example illustrating that the imposition of a 
nonconfinement clause is not a good faith interpretation of the 
HIPAA nondiscrimination provisions, and the rule requiring that 
individuals denied enrollment without a good faith interpretation of 
the law be provided an opportunity to enroll, see the discussion 
below under the heading ``Transitional Rule for Individuals 
Previously Denied Coverage Based on a Health Factor.''
---------------------------------------------------------------------------

    These rules are of particular interest in the case of a group 
health plan switching coverage from one health insurance issuer to a 
succeeding health insurance issuer. In such a case, the HIPAA 
nondiscrimination provisions prohibit the succeeding issuer from 
denying eligibility to any individual due to confinement to a hospital 
or other health care institution because such a denial would 
discriminate in eligibility based on one or more health factors. The 
obligation of the succeeding issuer to provide coverage to such an 
individual does not preempt any obligation that the prior issuer may 
have under other applicable law, including State extension of benefits 
laws.

Actively-at-Work and Other Service Requirements

    Some group health plans and health insurance issuers refuse to 
provide benefits to an individual if the individual is not actively at 
work on the day the individual would otherwise become eligible for 
benefits. Plan provisions like these are often called ``actively-at-
work clauses.'' These interim regulations provide that a plan or issuer 
generally may not impose an ``actively-at-work clause.'' That is, these 
interim regulations prohibit a plan or issuer from denying the 
eligibility of any individual to enroll for benefits or charging any 
individual a higher premium or contribution based on whether an 
individual is actively at work (including whether an individual is 
continuously employed). However, an actively-at-work clause is 
permitted if individuals who are absent from work due to any health 
factor (for example, individuals taking sick leave) are treated, for 
purposes of health coverage, as if they are actively at work. 
Accordingly, plan provisions that delay enrollment until an individual 
is actively at work on a day following a waiting period (or for a 
continuous period) are prohibited unless absence from work due to any 
health factor is considered being actively at work.
    These interim regulations also provide an exception for the first 
day of work to the general prohibition against actively-at-work 
clauses. Under the exception, a plan or issuer may require an 
individual to begin work before coverage may become effective.
    The interim regulations explain the relationship between the rules 
governing actively-at-work clauses and the rules describing similarly 
situated individuals. Under the interim regulations, a plan or issuer 
is generally permitted to distinguish between groups of similarly 
situated individuals (provided the distinction is not directed at 
individual participants or beneficiaries based on a health factor). 
Examples illustrate that a plan or issuer may condition coverage on an 
individual's meeting the plan's requirement of working full-time (such 
as a minimum of 250 hours in a three-month period or 30 hours per 
week). In addition, a plan or issuer may terminate coverage for former 
employees while providing coverage to current employees without 
violating the HIPAA nondiscrimination provisions if the rules 
describing similarly situated individuals are satisfied, even if the 
former employee is unable to work due to a health factor. Similarly, a 
plan or issuer may charge a higher premium to employees no longer 
performing services than to employees currently performing services 
without violating the HIPAA nondiscrimination provisions if the rules 
describing similarly situated individuals are met. An example 
illustrates that the interim regulations would not, however, permit a 
plan or issuer to treat individuals on annual or bereavement leave 
better than individuals on sick leave because groups of similarly 
situated individuals cannot be established based on any health factor 
(including the taking of sick leave).
    In any case, other federal or State laws, including the COBRA 
continuation provisions and the Family and Medical Leave Act of 1993 
(FMLA), may require individuals to be offered coverage and set limits 
on the premium or contribution rate.

Bona Fide Wellness Programs

    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

[[Page 1384]]

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. 
The April 1997 interim rules, these interim regulations, and proposed 
regulations published elsewhere in this issue of the Federal Register 
refer to programs of health promotion and disease prevention allowed 
under this exception as ``bona fide wellness programs.'' For a 
discussion of bona fide wellness programs, see the preamble to proposed 
regulations published elsewhere in this issue of the Federal Register.

More Favorable Treatment of Individuals With Adverse Health Factors 
Permitted

    Many group health plans make certain periods of extended coverage 
available to employees no longer performing services only if the 
employee is unable to work due to disability, and many plans make 
coverage available to dependent children past a certain age only if the 
child is disabled. Some plans waive or reduce the required employee 
contribution for coverage if the employee or a member of the employee's 
immediate family is in a critical medical condition for a prolonged 
period. Disability and medical condition are listed in the statute as 
health factors, and several commenters recognized that, under one 
possible interpretation of the HIPAA nondiscrimination requirements, 
plan provisions or practices such as these would be impermissible. 
These commenters asked for guidance clarifying that plan provisions and 
practices like these would be permissible. Other commenters cited the 
rule under the COBRA continuation provisions permitting plans to 
require payment of a higher amount during the disability extension than 
during other periods of COBRA coverage and asked whether following this 
COBRA rule is permissible under the HIPAA nondiscrimination 
requirements.
    Eligibility. These interim regulations permit plans and issuers to 
establish rules for eligibility favoring individuals based on an 
adverse health factor, such as disability. Thus, a plan or issuer does 
not violate the HIPAA nondiscrimination requirements by making extended 
coverage available to employees no longer providing services only if 
the employee is unable to work due to disability nor by making coverage 
available to dependent children past a certain age only if the child is 
disabled. Examples clarify this rule.
    Premiums. These interim regulations also address the circumstances 
under which differential premiums (or contributions) may be charged to 
an individual based on an adverse health factor. These interim 
regulations permit plans and issuers to charge a higher rate in some 
situations and also a lower rate to individuals based on an adverse 
health factor, such as disability. A higher rate may be charged only in 
situations where the individual with the adverse health factor would 
not have coverage were it not for the adverse health factor. Thus, in a 
case where a plan or issuer makes extended coverage available to 
employees no longer performing services only if the employee is unable 
to work due to disability, the plan could require a higher payment from 
the employee only while the employee is receiving coverage under that 
special eligibility provision. However, the plan could not charge a 
disabled employee a higher rate than nondisabled employees while the 
disabled employee was still eligible under a generally-applicable 
eligibility provision, rather than the special extended coverage 
provision. Accordingly, under the interim regulations, a plan or issuer 
could charge a higher rate for COBRA coverage during the disability 
extension than for COBRA coverage outside the disability extension (and 
the result is the same if the extended coverage for disability is 
provided pursuant to State law or plan provision rather than pursuant 
to a COBRA continuation provision).\10\
---------------------------------------------------------------------------

    \10\ This result is consistent with the result under the COBRA 
continuation provisions. Under those provisions, plans are generally 
permitted to require payment of up to 102 percent of the applicable 
premium but are permitted to require payment for coverage of a 
disabled qualified beneficiary of up to 150 percent of the 
applicable premium during the disability extension period.
---------------------------------------------------------------------------

    Although charging a higher rate based on an adverse health factor 
is limited to the situation in which coverage would not be available 
but for the adverse health factor, under these interim regulations a 
plan or issuer is always permitted to charge an individual a lower rate 
based on an adverse health factor. Thus, even though an employee is 
receiving coverage under the same eligibility provision as other 
employees who are required to pay the full employee share of the 
premium, under the interim regulations it is permissible to waive or 
reduce the employee share of the premium if the employee or a family 
member is in critical medical condition for a prolonged period.

No Effect on Other Laws

    Compliance with these interim regulations is not determinative of 
compliance with any other provision of ERISA, or any other State or 
federal law, including the Americans with Disabilities Act. Therefore, 
while these interim regulations generally do not impose any new 
disclosure requirements on plans or issuers, other applicable law 
continues to apply. For example, under Title I of ERISA, administrators 
of ERISA-covered group health plans are required to provide 
participants and beneficiaries with a summary plan description that is 
sufficiently accurate and comprehensive to reasonably apprise such 
participants and beneficiaries of their rights and obligations under 
the plan.\11\ In addition, some courts have held that fiduciaries of 
ERISA-covered group health plans are obligated to ensure that plan 
documents and disclosures are consistent with applicable disclosure 
requirements and do not serve to mislead or misinform participants and 
beneficiaries concerning their rights and obligations under the plans 
in which they participate.\12\ Fiduciaries are advised to take steps to 
ensure that plan disclosures are accurate and are not misleading.
---------------------------------------------------------------------------

    \11\ See ERISA section 102, and the Department of Labaor's 
regulations issued thereunder.
    \12\ See Varity Corp v. Howe, 516 U.S. 489, 506 (1996).
---------------------------------------------------------------------------

    These interim regulations are also not determinative of compliance 
with the COBRA continuation provisions, or any other State or federal 
law, such as the Americans with Disabilities Act.

Applicability Date

    These interim regulations generally apply for plan years beginning 
on or after July 1, 2001 (although some provisions apply earlier, as 
discussed below under the heading ``III. Format of Regulations''). As 
noted above, in the preamble to the April 1997 interim rules the 
Departments stated that they intended to issue further regulations on 
the statutory nondiscrimination rules. That preamble also stated 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 the 
statutory nondiscrimination provisions before the additional guidance 
was issued. The Departments will not take any enforcement action 
against a plan or issuer with respect to efforts to comply in good 
faith with the statutory nondiscrimination provisions before the first 
plan year beginning on or after July 1, 2001. (See the description of

[[Page 1385]]

transitional rules immediately below regarding certain interpretations 
that are not good faith interpretations of the statutory 
nondiscrimination requirements.) Upon the applicability of these 
regulations, however, good faith efforts to comply with the statutory 
provisions addressed by these interim regulations may not be sufficient 
to avoid adverse enforcement actions by the Departments. Therefore, for 
plan years beginning on or after July 1, 2001, plans and issuers must 
comply with the requirements of these regulations in order to avoid 
adverse enforcement actions. As discussed earlier, under the heading 
``Background,'' the period for good faith compliance continues with 
respect to bona fide wellness programs until further guidance is 
issued.

Transitional Rules for Individuals Previously Denied Coverage Based on 
a Health Factor

    The April 1997 interim rules clarified that a plan or issuer 
violates the HIPAA nondiscrimination requirements if it requires an 
individual to pass a physical examination as a condition for 
enrollment, even if the condition is imposed only on late enrollees. 
The HIPAA nondiscrimination requirements apply both to eligibility and 
continued eligibility of any individual to enroll under a plan. 
Consequently, once HIPAA became effective with respect to a plan or 
health insurance issuer, it was a violation of the nondiscrimination 
requirements to continue to deny an individual eligibility to enroll if 
the reason the individual was denied enrollment previously was due to 
one or more health factors (such as requiring the individual to pass a 
physical examination).
    On December 29, 1997, the Departments issued in the Federal 
Register a clarification of the April 1997 interim rules relating to 
individuals who were denied coverage due to a health factor before the 
effective date of HIPAA (62 FR 67689). The clarification restates the 
requirement of the April 1997 interim rules that an individual cannot 
be denied coverage based on a health factor on or after the effective 
date of HIPAA. The clarification then states that individuals to whom 
coverage had not been made available before the effective date of HIPAA 
based on a health factor and who enrolled when first eligible on or 
after the effective date of the HIPAA nondiscrimination provisions 
could not be treated as a late enrollee for purposes of the HIPAA 
preexisting condition exclusion provisions. Under the clarification, 
individuals to whom coverage had not been made available include any 
individual who did not apply for coverage because it was reasonable to 
believe that the application would have been futile. The rules in the 
clarification apply whether or not the plan offered late enrollment.
    Neither the April 1997 interim rules nor the December 1997 guidance 
clearly addressed the situation where an individual was denied only 
late enrollment based on a health factor prior to the effective date of 
HIPAA and, by the effective date of HIPAA, the plan eliminated late 
enrollment. For example, prior to HIPAA many plans and issuers allowed 
individuals to enroll when first eligible without regard to health 
status, but allowed late enrollees to enroll only if they could pass a 
physical examination (or present evidence of good health). Upon the 
effective date of HIPAA, some of these plans and issuers eliminated 
late enrollment.
    Any plan or issuer that permitted these individuals to enroll once 
the HIPAA nondiscrimination provisions took effect, of course, is in 
compliance with this provision of the nondiscrimination rules. In 
contrast, a plan or issuer that continued to deny coverage to these 
individuals may have done so based on a good faith interpretation of 
the statute and the Departments' published guidance. For example, a 
plan or issuer might reasonably have thought that HIPAA did not require 
it to remedy pre-HIPAA denials of late enrollment based on a health 
factor for individuals who could have enrolled initially without regard 
to their health if the plan or issuer eliminated late enrollment by the 
effective date of HIPAA.
    The interim regulations provide transitional rules for situations 
where coverage was denied to individuals based on one or more health 
factors, both where the denial was based on a good faith interpretation 
of the statute or the Departments' published guidance and where it was 
not. In either event, a safe harbor provides that the Departments will 
not take any enforcement action with respect to such a denial of 
coverage if the plan or issuer complies with the transitional rules.
    Where the denial was not based on a good faith interpretation, the 
interim regulations provide that the plan or issuer is required to give 
the individual an opportunity to enroll (including notice of an 
opportunity to enroll) that continues for at least 30 days. This 
opportunity must be presented not later than March 9, 2001. If the 
opportunity is presented within the first plan year beginning on or 
after the effective date of the statutory HIPAA nondiscrimination 
rules, the enrollment must be effective within that plan year. If this 
enrollment opportunity is presented after such plan year, the 
individual must be given an option to have coverage effective either 
(1) prospectively from the date the plan receives a request for 
enrollment in connection with the enrollment opportunity or (2) 
retroactively to the first day of the first plan year beginning on 
HIPAA's effective date for the plan (or, if the individual otherwise 
first became eligible to enroll for coverage after that date, on the 
date the individual was otherwise eligible to enroll in the plan).
    The reason for giving the individual the opportunity to elect 
retroactive coverage is to make the individual whole; that is, to put 
the individual in the same financial condition that the individual 
would have been in had the individual not been denied enrollment. Thus, 
if the individual elects retroactive coverage, the plan or issuer may 
require the individual to pay premiums or contributions for the 
retroactive period (but the plan or issuer cannot charge interest on 
that amount).
    The rule differs for situations where coverage was denied to 
individuals based on one or more health factors but where the denial 
was based on a good faith interpretation of the statute or the 
Departments' prior published guidance. In those situations, these 
interim regulations require plans and issuers to give the individuals 
an opportunity to enroll that continues for at least 30 days and with 
coverage effective not later than July 1, 2001.
    In both situations (whether the denial of coverage was or was not 
based on a good faith interpretation), the interim regulations also 
clarify that, once enrolled, these individuals cannot be treated as 
late enrollees. The individual's enrollment date under the plan is the 
effective date of HIPAA (or, if later, the date the individual would 
have otherwise been eligible to enroll). In addition, any period 
between an individual's enrollment date and the effective date of 
coverage is treated as a waiting period. Thus, for example, with 
respect to a calendar year plan that is not collectively bargained, an 
individual who was previously denied late enrollment due to a health 
factor before the effective date of HIPAA has an enrollment date of 
January 1, 1998 (HIPAA's effective date for that plan) and a waiting 
period that begins on that date. Moreover, because any waiting period 
must begin on the individual's enrollment date, January 1, 1998, and 
the maximum preexisting exclusion period that can be applied is 12 
months,

[[Page 1386]]

individuals who enroll in the plan on July 1, 2001 cannot be subject to 
any preexisting condition exclusion period.

Special Transitional Rule for Self-Funded Non-Federal Governmental 
Plans Exempted Under 45 CFR 146.180

    The sponsor of a self-funded non-Federal 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. If the plan sponsor 
subsequently chooses to bring the plan into compliance with these 
nondiscrimination requirements, the plan must provide notice to that 
effect to individuals who were denied 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. Coverage must be effective no 
later than the date the exemption election under 45 CFR 146.180 (with 
regard to these nondiscrimination requirements) no longer applies, or 
July 1, 2001 (if later) and the plan was acting in accordance with a 
good faith interpretation of the statutory HIPAA nondiscrimination 
provisions and guidance published by the Health Care Financing 
Administration.

III. Format of Regulations

Final and Temporary Treasury Regulations

    The Department of the Treasury is issuing a portion of these 
regulations as final regulations and a portion as temporary and cross-
referencing proposed regulations. The April 1997 interim rules were 
originally issued by Treasury in the form of temporary and cross-
referencing proposed regulations. Under section 7805(e)(2) of the Code, 
however, any temporary regulation issued under the Code expires within 
three years after the date issued. Treasury is issuing final 
regulations that restate the rules relating to the HIPAA 
nondiscrimination requirements from the April 1997 regulations without 
significant modification. The final regulations apply March 9, 2001. 
Table 1 identifies which paragraphs of the final regulation issued 
today correspond to which paragraphs of the April 1997 regulation. New 
guidance being published today by Treasury is being issued as temporary 
and cross-referencing proposed regulations. This guidance will apply to 
group health plans beginning with the first plan year on or after July 
1, 2001. (These new temporary regulations will also expire after three 
years pursuant to section 7805(e) of the Code.)

     Table 1.--Comparison of Treasury's April 1997 Regulations With
                      Treasury's Final Regulations
------------------------------------------------------------------------
                                           Final regulation under Sec.
         April 1997 regulations                        9802
------------------------------------------------------------------------
Sec.  54.9802-1T(a)(1).................  Sec.  54.9802-1(a)(1),(2);
                                          (b)(1)
Sec.  54.9802-1T(a)(2)(i)..............  Sec.  54.9802-1(b)(2)(i)(A)
Sec.  54.9802-1T(a)(3).................  [The corresponding provision is
                                          in the new temporary
                                          regulations.]
Sec.  54.9802-1T(a)(4).................  Sec.  54.9802-1(b)(1)(iii)
Sec.  54.9802-1T(b)(1).................  Sec.  54.9802-1(c)(1)(i)
Sec.  54.9802-1T(b)(2)(i)..............  Sec.  54.9802-1(c)(2)(i)
Sec.  54.9802-1T(b)(2)(ii).............  Sec.  54.9802-1(b)(2)(i);
                                          (c)(3)
Sec.  54.9802-1T(b)(3).................  [The corresponding provision is
                                          in the new proposed
                                          regulations for wellness
                                          programs.]
------------------------------------------------------------------------

Interim Final Labor and HHS Regulations

    The guidance issued by the Departments of Labor (Labor) and Health 
and Human Services (HHS) in April 1997 is not subject to a statutory 
expiration date. Accordingly, the Labor and HHS guidance is being 
published as interim final regulations. These regulations contain two 
applicability dates that parallel the two separate applicability dates 
in the Treasury guidance. Table 2 identifies which paragraphs of the 
interim final regulation issued today are applicable on March 9, 2001 
and which paragraphs apply on or after July 1, 2001.

                         Table 2.--Applicability Dates for the Interim Final Regulations
----------------------------------------------------------------------------------------------------------------
                                                                                                   Applies plan
                                                Paragraph of the interim final                   years beginning
                   Subject                               regulations             Applies 3/9/01  on or after 7/1/
                                                                                                       2001
----------------------------------------------------------------------------------------------------------------
Health factors...............................  (a)(1).........................         <check>   ...............
Health factors--Evidence of insurability--     (a)(2)(i)......................         <check>   ...............
 Conditions arising out of an act of domestic
 violence.
Health factors--Evidence of insurability--     (a)(2)(ii).....................  ...............         <check>
 Participation in certain activities.
Health factors--The decision whether health    (a)(3).........................  ...............         <check>
 coverage is elected.
Prohibited discrimination in rules for         (b)(1)(i)......................         <check>   ...............
 eligibility--General rule.
Prohibited discrimination in rules for         (b)(1)(ii).....................  ...............         <check>
 eligibility--Rules for eligibility described.
Prohibited discrimination in eligibility--     (b)(1)(iii) Example 1..........         <check>   ...............
 General rule--Example 1.
Prohibited discrimination in eligibility--     (b)(1)(iii) Examples 2 through   ...............         <check>
 General rule--Examples 2 through 4.            4.
Prohibited discrimination in eligibility--     (b)(2)(i)(A)...................         <check>   ...............
 Application to benefits--No benefits
 mandated.

[[Page 1387]]

 
Prohibited discrimination in eligibility--     (b)(2)(i)(B), (C), & (D).......  ...............         <check>
 Application to benefits--Nondiscriminatory
 benefit restrictions permitted.
Prohibited discrimination in eligibility--     (b)(2)(ii).....................         <check>   ...............
 Application to benefits--Certain cost-
 sharing mechanisms.
Prohibited discrimination in eligibility--     (b)(2)(iii)....................  ...............         <check>
 Application to benefits--Source-of-injury
 exclusions.
Prohibited discrimination in eligibility--     (b)(3).........................  ...............         <check>
 Application to benefits--Relationship to
 HIPAA preexisting condition exclusion rules.
Prohibited discrimination in premiums or       (c)(1)(i)......................         <check>   ...............
 contributions--General rule.
Prohibited discrimination in premiums or       (c)(1)(ii).....................  ...............         <check>
 contributions--Determining an individual's
 premium rate.
Prohibited discrimination in premiums or       (c)(2)(i)......................         <check>   ...............
 contributions--Group rating on health
 factors not restricted.
Prohibited discrimination in premiums or       (c)(2)(ii) & (iii).............  ...............         <check>
 contributions--List billing based on a
 health factor prohibited.
Prohibited discrimination in premiums or       (c)(3).........................         <check>   ...............
 contributions--Exception for bona fide
 wellness programs.
Similarly situated individuals...............  (d)............................  ...............         <check>
Nonconfinement and actively-at-work            (e)............................  ...............         <check>
 provisions.
                                                                               ---------------------------------
Bona fide wellness programs..................  (f) [Reserved.]................      See proposed regulations
                                                                                   published elsewhere in this
                                                                                        Federal Register.
                                                                               ---------------------------------
More favorable treatment of individuals with   (g)............................  ...............         <check>
 adverse health factors permitted.
No effect on other laws......................  (h)............................  ...............         <check>
----------------------------------------------------------------------------------------------------------------

IV. Interim Final Regulations With Request for Comments

    The principal purpose of these interim final regulations is to 
provide additional guidance on how to comply with the HIPAA 
nondiscrimination provisions contained in section 9802 of the Code, 
section 702 of ERISA, and section 2702 of the PHS Act. Code section 
9833, ERISA section 734, and PHS Act section 2792 authorize the 
Secretaries of the Treasury, Labor, and HHS to issue any interim final 
rules as the Secretaries deem are appropriate to carry out certain 
provisions of HIPAA, including the nondiscrimination provisions. As 
explained below, the Secretaries have determined that these regulations 
should be issued as interim final rules with requests for comments.
    HIPAA was enacted in August of 1996. The Secretaries first issued 
interim final rules providing guidance on HIPAA's nondiscrimination 
provisions in April of 1997. In publishing this guidance, the 
Secretaries relied on the authority granted in section 9833 of the 
Code, section 734 of ERISA, and section 2792 of the PHS Act, as well as 
other authority including section 101(g)(4) of HIPAA and section 505 of 
ERISA. As part of the April 1997 rulemaking, the Secretaries requested 
comments on whether additional guidance was needed concerning the 
extent to which the statutory HIPAA nondiscrimination provisions 
prohibit discrimination against individuals in eligibility for 
particular benefits; the extent to which the statute may permit benefit 
limitations based on the source of an injury; the permissible standards 
for defining groups of similarly situated individuals; the application 
of the prohibitions on discrimination between groups of similarly 
situated individuals; and the permissible standards for determining 
bona fide wellness programs. Numerous comments were received in 
response to this request.
    After evaluating all of the comments, and after speaking with 
various interested parties in the course of an extensive educational 
outreach campaign, the Departments have developed these comprehensive 
regulations. Among other things, the comments reflected the need for 
more comprehensive guidance on the application of the nondiscrimination 
provisions. In the period since HIPAA was enacted and the April 1997 
regulations were issued, numerous issues have arisen concerning how 
plans and issuers should apply the nondiscrimination provisions. In 
addition, the number of comments and the breadth of issues raised 
demonstrates that these regulations should go into effect on an interim 
basis pending receipt of further comments. This need to act on an 
interim basis is also supported by the General Accounting Office's 
request that the Departments ``promptly complete regulations related to 
HIPAA's non-discrimination provisions'' (GAO/HEHS 00-85). Therefore, 
the Departments have determined that it is appropriate to issue the 
guidance on an interim final basis, with the exception of the bona fide 
wellness program provisions.\13\ With respect to these last provisions, 
the Departments would like to better develop the administrative record 
before any provisions regarding such programs go into effect.
---------------------------------------------------------------------------

    \13\ See proposed rules relating to bona fide wellness programs 
published elsewhere in this issue of the Federal Register.
---------------------------------------------------------------------------

    The Secretaries believe that this period of interim effectiveness 
will provide ample opportunity for the regulated community to comment 
specifically on this comprehensive guidance, providing a sound basis 
for developing final rules. The Departments are seeking comments from 
all those affected by these regulations, and the Departments will 
consider such comments and will reevaluate these regulations following 
the comment period in the same way that it would if the regulations had 
been published in proposed form. Based on such comments and other 
information obtained through the administration of the 
nondiscrimination requirements, the Departments will make any necessary 
modifications to the regulations when they are issued in final form.

[[Page 1388]]

V. 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 plan issuers from discriminating against 
individuals in eligibility or premium on the basis of health status 
factors. The Departments crafted this regulation to secure these 
protections as intended by Congress in as economically efficient a 
manner as possible, and believe that the economic benefits of the 
regulation outweigh its costs.
    The primary economic benefits associated with securing HIPAA's 
nondiscrimination provisions derive from increased access to affordable 
group health plan coverage for individuals with health problems. 
Increased access benefits both newly covered individuals and society at 
large. It fosters expanded 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.
    Additional economic benefits derive directly from the improved 
clarity provided by the regulation. The regulation 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.
    The Departments estimate that the cost of plans to implement 
amendments in order to comply with this regulation, revise materials 
accordingly, and provide notices of opportunities to enroll as required 
by the regulation will amount to less than $19 million. This is a one-
time cost distinguishable from the transfer that will result from the 
self-implementing requirements of HIPAA's nondiscrimination provisions 
and the discretion exercised by the Departments in this regulation.
    Such a transfer occurs when resources are redistributed without any 
direct change in aggregate social welfare. In this instance, the 
premium and claims cost incurred by group health plans to provide 
coverage under HIPAA's statutory nondiscrimination provisions to 
individuals previously denied coverage or offered restricted coverage 
based on health factors are offset by the commensurate or greater 
benefits realized by the newly eligible participants on whose behalf 
the premiums or claims are paid. Although the Departments are not aware 
of any published estimates of transfers attributable to HIPAA's 
statutory nondiscrimination provisions, a rough attempt to gauge the 
order of magnitude of this transfer suggests that it may amount to more 
than $400 million annually, which is a small fraction of 1 percent of 
total expenditures by group plans. The regulation clarifies at the 
margin exactly what practices are permitted or prohibited by these 
provisions, and may have the effect of slightly increasing the amount 
of this transfer.

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 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, it has been 
determined that this action raises novel policy issues arising out of 
legal mandates. In addition, the magnitude of the transfer that arises 
from the implementation of HIPAA's statutory nondiscrimination 
provisions is estimated to exceed $100 million. Therefore, this notice 
is ``significant'' and subject to OMB review under Sections 3(f)(1) and 
3(f)(4) of the Executive Order. Consistent with the Executive Order, 
the Departments have assessed the costs and benefits of this regulatory 
action. The Departments' assessment, and the analysis underlying that 
assessment, is detailed below. The Departments performed a 
comprehensive, unified analysis to estimate the costs and benefits 
attributable to the interim regulation for purposes of compliance with 
the Executive Order 12866, the Regulatory Flexibility Act, and the 
Paperwork Reduction Act.

1. Statement of Need for Proposed Action

    These interim regulations are needed to clarify and interpret the 
HIPAA nondiscrimination provisions (prohibiting discrimination against 
individual participants and beneficiaries based on health status) under 
section 702 of the Employee Retirement Income Security Act of 1974 
(ERISA), section 2702 of the Public Health Service Act, and section 
9802 of the Internal Revenue Code of 1986. The provisions are needed to 
ensure that group health plans and group health insurers and issuers do 
not discriminate against individuals, participants, and beneficiaries 
based on any health factors with respect to health care coverage and 
premiums. Additional guidance was required to explain the application 
of the statute to benefits, clarify the relationship between the HIPAA 
nondiscrimination provisions and the HIPAA preexisting condition 
exclusion limitations, explain the applications of these provisions to 
premiums, describe similarly situated individuals, explain the 
application of the provisions to actively-at-work and nonconfinement 
clauses, clarify that more favorable treatment of individuals with 
medical needs generally is permitted, and describe plans' and issuers' 
obligations with respect to plan amendments.

2. Costs and Benefits

    The primary economic benefits associated with the HIPAA 
nondiscrimination provisions derive from increased access to affordable 
group health plan coverage for individuals with health problems. 
Expanding access benefits both newly covered individuals and society at 
large by fostering expanded insurance coverage, timelier and fuller 
medical care, better health outcomes, and improved productivity and 
quality of life. Additional economic benefits derive directly from the 
improved clarity provided by the regulation. By clarifying employees' 
rights and plan sponsors' obligations under HIPAA's

[[Page 1389]]

nondiscrimination provisions, the regulation 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.
    The Departments estimate that the cost to plans to implement 
amendments in order to comply with this regulation, revise materials 
accordingly, and provide notices of opportunities to enroll as required 
by the regulation will amount to less than $19 million. This is a one-
time cost distinguishable from the transfer that will result from the 
self-implementing requirements of HIPAA's nondiscrimination provisions 
and the discretion exercised by the Departments in this regulation.
    Such a transfer occurs when resources are redistributed without any 
direct change in aggregate social welfare. In this instance, the 
premium and claims cost incurred by group health plans to provide 
coverage under HIPAA's statutory nondiscrimination provisions to 
individuals previously denied coverage or offered restricted coverage 
based on health factors are offset by the commensurate or greater 
benefits realized by the newly eligible participants on whose behalf 
the premiums or claims are paid. Although the Departments are not aware 
of any published estimates of transfers attributable to HIPAA's 
statutory nondiscrimination provisions, a rough attempt to gauge the 
order of magnitude of this transfer suggests that it may amount to more 
than $400 million annually. The regulation clarifies at the margin 
exactly what practices are permitted or prohibited by these provisions, 
and may have the effect of slightly increasing the amount of this 
transfer. The Departments note that this transfer is the direct 
reflection of the intent and beneficial effect of HIPAA's 
nondiscrimination provisions: increasing access to affordable group 
health plan coverage for individuals with health problems. They also 
note that even the full transfer to plans attributable to HIPAA's 
statutory nondiscrimination provisions probably amounts to a small 
fraction of 1 percent of total expenditures by these plans.
    The Departments believe that the benefits of the regulation 
outweigh its costs.
    A fuller discussion of the Departments assessment of the costs and 
benefits of this regulation is provided below.

Regulatory Flexibility Act

    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 proposed rule will not have 
a significant economic impact on a substantial number of small 
entities, section 603 of the RFA requires that the agency present an 
initial regulatory flexibility analysis at the time of the publication 
of the notice of proposed rule making describing the impact of the rule 
on small entities and seeking public comment on such impact. Small 
entities include small businesses, organizations, and governmental 
jurisdictions.
    Because these rules are being issued as interim final rules and not 
as a notice of proposed rule making, the RFA does not apply and the 
Departments are not required to either certify that the rule will not 
have a significant impact on a substantial number of small businesses 
or conduct a regulatory flexibility analysis. The Departments 
nonetheless crafted this regulation in careful consideration of its 
effects on small entities, and have conducted an analysis of the likely 
impact of the rules on small entities.
    For purposes of this discussion, the Departments consider a small 
entity to be an employee benefit plan with fewer than 100 participants. 
The basis 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 which cover fewer than 100 participants. The 
Departments believe that assessing the impact of this interim final 
rule on small plans is an appropriate substitute for evaluating the 
effect on small entities as that term is defined in the RFA.
    Small plans in particular will benefit from the regulations' 
provisions that affirm and clarify the flexibility available to plans 
under HIPAA's nondiscrimination requirements. Consideration of small 
plans' needs and circumstances played an important part in the 
development of these provisions. These provisions are discussed in more 
detail below.
    The Departments estimate that plans with 100 or fewer participants 
will incur costs of $4 million on aggregate to amend their provisions 
to comply with the regulation and revise their materials accordingly. 
These costs generally will fall directly to issuers who supply small 
group insurance products and stop-loss insurers who provide services to 
small self-insured plans, who will spread those costs across the much 
larger number of small plans that buy them. These same small plans will 
incur costs of $10 million to prepare and distribute notices of 
enrollment opportunities as required by the regulation, the Departments 
estimate. The total economic cost to small plans to comply with this 
regulation is estimated to be $14 million. This is a one-time cost 
distinguishable from the transfer that will result from the self-
implementing requirements of HIPAA's nondiscrimination provisions and 
the discretion exercised by the Departments in this regulation.
    Such a transfer occurs when resources are redistributed without any 
direct change in aggregate social welfare. In this instance, the 
premium and claims cost incurred by group health plans to provide 
coverage under HIPAA's statutory nondiscrimination provisions to 
individuals previously denied coverage or offered restricted coverage 
based on health factors are offset by the commensurate or greater 
benefits realized by the newly eligible participants on whose behalf 
the premiums or claims are paid. The Departments note that transfers to 
small plans attributable to HIPAA's statutory nondiscrimination 
provisions may amount to approximately $110 million. The regulation 
clarifies at the margin exactly what practices are permitted or 
prohibited by these provisions, and may have the effect of slightly 
increasing the amount of this transfer. The Departments note that this 
transfer is the direct reflection of the intent and beneficial effect 
of HIPAA's nondiscrimination provisions: increasing access to 
affordable group health plan coverage for individuals with health 
problems. They also note that even the full transfer to small plans 
attributable to HIPAA's statutory nondiscrimination provisions amounts 
to a small fraction of total expenditures by these plans.

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

1. Department of Labor

    The Department of Labor, as part of its continuing effort to reduce 
paperwork and respondent burden, conducts a preclearance consultation 
program to provide the general public and federal agencies with an 
opportunity to comment on proposed and continuing collections of 
information in accordance with the Paperwork Reduction Act of 1995 (PRA 
95), 44 U.S.C. 3506(c)(2)(A). This helps to ensure that requested data 
can be provided in the desired format,

[[Page 1390]]

reporting burden (time and financial resources) is minimized, 
collection instruments are clearly understood, and the impact of 
collection requirements on respondents can be properly assessed.
    Currently, the Pension and Welfare Benefits Administration (PWBA) 
is soliciting comments concerning the proposed information collection 
request (ICR) included in the Interim Final Rules for Nondiscrimination 
in Health Coverage in the Group Market.
    The Department has submitted this ICR using emergency review 
procedures to the Office of Management and Budget (OMB) for its review 
and clearance in accordance with PRA 95. OMB approval has been 
requested by March 9, 2001. The Department and OMB are particularly 
interested in comments that:
    <bullet> Evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of the agency, 
including whether the information will have practical utility;
    <bullet> Evaluate the accuracy of the agency's estimate of the 
burden of the proposed collection of information, including the 
validity of the methodology and assumptions used;
    <bullet> Enhance the quality, utility, and clarity of the 
information to be collected; and
    <bullet> Minimize the burden of the collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology, e.g., permitting 
electronic submission of the responses.
    Comments on the collection of information should be sent to the 
Office of Information and Regulatory Affairs, Office of Management and 
Budget, Room 10235, New Executive Office Building, Washington DC 20503; 
Attention: Desk Officer for the Pension and Welfare Benefits 
Administration. Although comments may be submitted through March 9, 
2001, OMB requests that comments be received within February 7, 2001 of 
the publication of the Interim Final Rule to ensure their consideration 
in OMB's review of the request for emergency approval. All comments 
will be shared among the Departments.
    Requests for copies of the ICR may be addressed to: Gerald B. 
Lindrew, Office of Policy and Research, U.S. Department of Labor, 
Pension and Welfare Benefits Administration, 200 Constitution Avenue, 
NW, Room N-5647, Washington, DC, 20210. Telephone: (202) 219-4782; Fax: 
(202) 219-4745 (these are not toll-free numbers).

2. Department of the Treasury

    The collection of information is in 26 CFR 54.9802-1T(i)(3)(ii) and 
(iii). This information is required to be provided so that participants 
who have been denied group health plan coverage based on a health 
status factor may be made aware of the opportunity to enroll in the 
plan. The likely respondents are business or other for-profit 
institutions, non-profit institutions, small businesses or 
organizations, and Taft-Hartley trusts. Responses to this collection of 
information are mandatory for affected group health plans.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.
    Comments on the collection of information should be sent to the 
Office of Management and Budget, Attn: Desk Officer for the Department 
of the Treasury, Office of Information and Regulatory Affairs, 
Washington, DC, 20503, with copies to the Internal Revenue Service, 
Attn: IRS Reports Clearance Officer, T:FP, Washington, DC 20224. 
Comments on the collection of information should be received by 
February 7, 2001. In light of the request for OMB clearance by March 9, 
2001, the early submission of comments is encouraged to ensure their 
consideration. Comments are specifically requested concerning:
    <bullet> Whether the proposed collection of information is 
necessary for the proper performance of the functions of the Internal 
Revenue Service, including whether the information will have practical 
utility;
    <bullet> How to enhance the quality, utility, and clarity of the 
information to be collected;
    <bullet> How to minimize the burden of complying with the proposed 
collection of information, including the application of automated 
collection techniques or other forms of information technology; and
    <bullet> Estimates of capital or start up costs and costs of 
operation, maintenance, and purchase of services to provide 
information.

3. Description of Collection of Information

    29 CFR 2590.702(i)(3)(ii) and (iii) and 26 CFR 54.9802-1T(i)(3)(ii) 
and (iii) of these interim rules include information collection 
requests. Paragraphs (i)(3)(ii) and (iii) describe the requirement that 
individuals previously denied coverage under a group health plan be 
provided with an opportunity to enroll in the plan, and a notice 
concerning this opportunity. Pursuant to paragraph (i)(3)(ii), where 
coverage denials were not based on a good faith interpretation of 
section 702 of the ERISA and section 9802 of the Code, notices of the 
opportunity for individuals previously denied coverage to enroll are 
required to be provided within 60 days of publication of this interim 
final rule. Where coverage was denied based on a good faith 
interpretation of section 702 of ERISA and section 9802 of the Code, 
the plan or issuer must provide notice of the opportunity to enroll 
that continues for at least 30 days, with coverage effective no later 
than July 1, 2001.
    The method of estimating the hour and cost burdens of the 
information collection request is described in the section of this 
preamble appearing below entitled Costs and Benefits of the Regulation. 
Generally, the Departments have conservatively estimated that all group 
health plans that excluded individuals on the basis of health status 
factors prior to HIPAA's enactment will provide a notice of the 
opportunity to enroll to all participants. The total burden of 
providing notices to participants of private employers is divided 
equally between the Departments of Labor and Treasury.
    Paragraph (h), No effect on other laws, is not considered to 
include an information collection request because the provision makes 
no substantive or material change to the Department of Labor's existing 
information collection request for the Summary Plan Description and 
Summary of Material Modifications currently approved under OMB control 
number 1210-0039.
    Type of Review: New.
    Agency: Pension and Welfare Benefits Administration, Department of 
Labor; U.S. Department of the Treasury, Internal Revenue Service.
    Title: Notice of Opportunity To Enroll.
    OMB Number: 1210-0NEW; 1545-0NEW.
    Affected Public: Individuals or households; Business or other for-
profit institutions; Not-for-profit institutions.
    Total Respondents: 120,000.
    Frequency of Response: One time.
    Total Responses: 2.0 million.
    Estimated Burden Hours: 5,950 (Pension and Welfare Benefits 
Administration); 5,950 (Internal Revenue Service).
    Estimated Annual Costs (Operating and Maintenance): $5.1 million

[[Page 1391]]

(Pension and Welfare Benefits Administration); $5.1 million (Internal 
Revenue Service).
    Estimated Total Annual Costs: $5.1 million (Pension and Welfare 
Benefits Administration); $5.1 million (Internal Revenue Service).
    Comments submitted in response to the information collection 
provisions of these Interim Final, final, and temporary rules will be 
shared among the Departments and summarized and/or included in the 
request for continuing OMB approval of the information collection 
request; they will also become a matter of public record.

Paperwork Reduction Act--Department of Health and Human Services

    Under the Paperwork Reduction Act of 1995 (PRA), agencies are 
required to provide a 60-day notice in the Federal Register and solicit 
public comment before a collection of information requirement is 
submitted to the 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 PRA requires that we solicit comment on 
the following issues:
    <bullet> Whether the information collection is necessary and useful 
to carry out the proper functions of the agency;
    <bullet> The accuracy of the agency's estimate of the information 
collection burden;
    <bullet> The quality, utility, and clarity of the information to be 
collected; and
    <bullet> Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    We are, however, requesting an emergency review of this interim 
final rule with comment period. In compliance with section 
3506(c)(2)(A) of the PRA, we are submitting to OMB the following 
requirements for emergency review. We are requesting an emergency 
review because the collection of this information is needed before the 
expiration of the normal time limits under OMB's regulations at 5 CFR 
Part 1320, to ensure compliance with section 2702 of the PHS Act. This 
section generally prohibits 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. We cannot reasonably comply with normal clearance 
procedures because public harm is likely to result if the agency cannot 
enforce the requirements of this section 2702 of the PHS Act in order 
to ensure that individual participants or beneficiaries are not subject 
to unfair discrimination.
    HCFA is requesting OMB review and approval of this collection 60 
working days after the publication of this rule, with a 180-day 
approval period. Written comments and recommendations will be accepted 
from the public if received by the individuals designated below within 
30 working days after the publication of this rule.
    During this 180-day period, we will publish a separate Federal 
Register notice announcing the initiation of an extensive 60-day agency 
review and public comment period on these requirements. We will submit 
the requirements for OMB review and an extension of this emergency 
approval.
    We are soliciting public comment on each of the issues for the 
provisions summarized below that contain information collection 
requirements:

Section 146.121  Prohibiting Discrimination Against Participants and 
Beneficiaries Based on a Health Factor. 

    (h) No effect on other laws. Although this section generally does 
not impose new disclosure obligations on plans and issuers, this 
paragraph (h) states that this section does not affect any other laws, 
including those that require accurate disclosures and prohibit 
intentional misrepresentation. Therefore, plan documents (including, 
for example, group health insurance policies and certificates of 
insurance) must be amended if they do not accurately reflect the 
requirements set forth in this section, by the applicability date of 
this section.
    The revisions to the plan documents are intended to eliminate 
provisions that do not comply with the HIPAA nondiscrimination statute 
and regulations. In particular, it is anticipated that changes will be 
required to the majority of actively-at-work provisions and 
nonconfinement clauses found in plan documents. The modifications are 
to be made by the applicability date of the regulation and the 
requirements do not impose any on-going burden. The revisions are 
anticipated to take 100 hours for state governmental plans and 4,900 
hours for local governmental plans. The changes are expected to involve 
one hour of an attorney's time at a $72 hourly rate. The corresponding 
plan amendment cost to be performed by service providers who are acting 
on behalf of the plans, is $32,000 for State governmental plans and 
$1,311,000 for local governmental plans.
    (i) Special transitional rule for self-funded non-Federal 
governmental plans exempted under 45 CFR 146.180. Paragraph (4)(i) 
requires that if coverage has been denied to any individual because the 
sponsor of a self-funded non-Federal governmental plan has elected 
under Sec. 146.180 of this part 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 must: notify the individual that the plan will be 
coming into compliance with the requirements of this section; afford 
the individual an opportunity that continues for at least 30 days, 
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).
    The regulation clarifies that self-funded non-Federal governmental 
plans are required to give individuals who were previously 
discriminated against an opportunity to enroll, including notice of an 
opportunity to enroll. The development of the number of plans that are 
required to notify individuals were conservatively arrived at by 
assuming that all plans which have excluded individuals must notify all 
individuals who are eligible to participate in the plan. Development of 
the transitional notices are estimated to take 0 hours for State 
governmental plans and 200 hours for local governmental plans. The 
corresponding burden for work performed by service providers is 
anticipated to be $1,000 for State governmental plans and $535,000 for 
local governmental plans. The Department estimates that the burden to 
distribute transitional notices will require State governmental plans 
800 hours and 1,400 hours for local governmental plans. The 
corresponding distribution burden performed by service providers is 
$72,000 for State governmental plans and $158,000 for local 
governmental plans.
    The above costs will be reduced to the extent that State and local 
governmental plans have elected to opt out of the HIPAA requirements. 
As of the date of publishing, approximately 600 plans have opted out of 
the HIPAA statutory and regulatory requirements.
    We have submitted a copy of this rule to OMB for its review of the 
information collection requirements. These requirements are not 
effective until they have been approved by OMB. A notice will be 
published in the Federal Register when approval is obtained.
    If you comment on any of these information collection and record

[[Page 1392]]

keeping requirements, please mail copies directly to the following:

Health Care Financing Administration, Office of Information Services, 
Information Technology Investment Management Group, Division of HCFA 
Enterprise Standards, Room C2-26-17, 7500 Security Boulevard, 
Baltimore, MD 21244-1850, Attn: John Burke HCFA-2022,

and

Office of Information and Regulatory Affairs, Office of Management and 
Budget, Room 10235, New Executive Office Building, Washington, DC 
20503, Attn.: Allison Herron Eydt, HCFA-2022.

Small Business Regulatory Enforcement Fairness Act

    This interim final rule is subject to the provisions of the Small 
Business Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 801 et 
seq.) and is being transmitted to Congress and the Comptroller General 
for review. The interim final rule, is a ``major rule,'' as that term 
is defined in 5 U.S.C. 804, because it is likely to result in an annual 
effect on the economy of $100 million or more. As such, this interim 
final rule is being transmitted to Congress and the Comptroller General 
for review.

Unfunded Mandates Reform Act

    For purposes of the Unfunded Mandates Reform Act of 1995 (Pub. L. 
104-4), as well as Executive Order 12875, this interim final rule does 
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 (August 4, 1999) 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. 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 interim final regulations do not 
have federalism implications, because they do not 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. This is largely 
because, with respect to health insurance issuers, the vast majority of 
States have enacted laws which meet or exceed the federal standards in 
HIPAA prohibiting discrimination based on health factors. Therefore, 
the regulations are not likely to require substantial additional 
oversight of States by the Department of Health and Human Services.
    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) preserving the applicability of State 
laws establishing requirements for issuers of group health insurance 
coverage, except to the extent that these requirements prevent the 
application of the portability, access, and renewability requirements 
of HIPAA. The nondiscrimination provisions that are the subject of this 
rulemaking are included among those requirements.
    In enacting these new preemption provisions, Congress indicated its 
intent to establish a preemption of 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). Consequently, under the statute and the 
Conference Report, State insurance laws that are more stringent than 
the federal requirements are unlikely to ``prevent the application of'' 
the HIPAA nondiscrimination provisions.
    Accordingly, States are given significant latitude to impose 
requirements on health insurance issuers that are more restrictive than 
the federal law. In many cases, the federal law imposes minimum 
requirements which States are free to exceed. Guidance conveying this 
interpretation was published in the Federal Register on April 8, 1997 
and these regulations do not reduce the discretion given to the States 
by the statute. It is the Departments' understanding that the vast 
majority of States have in fact implemented provisions which meet or 
exceed the minimum requirements of the HIPAA non-discrimination 
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. When exercising its responsibility to enforce 
the provisions of HIPAA, HCFA works cooperatively with the States for 
the purpose of addressing State concerns and avoiding conflicts with 
the exercise of State authority.\14\ HCFA 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. HCFA'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 HCFA. To 
date, HCFA has had occasion to enforce the HIPAA non-discrimination 
provisions in only two States.
---------------------------------------------------------------------------

    \14\ This authority applies to insurance issued with respect to 
group health plans generally, including plans covering employees of 
church organizations. Thus, this discussion of federalism applies to 
all group health insurance coverage that is subject to the PHS Act, 
including those church plans that provide coverage through a health 
insurance issuer (but not to church plans that do not provide 
coverage through a health insurance issuer). For additional 
information relating to the application of these nondiscrimination 
rules to church plans, see the preamble to regulations being 
proposed elsewhere in this issue of the Federal Register regarding 
section 9802(c) of the Code relating to church plans.
---------------------------------------------------------------------------

    Although the Departments conclude that these interim final rules do 
not have federalism implications, in keeping with the spirit of the 
Executive Order that agencies closely examine any policies that may 
have federalism implications or limit the policy making discretion of 
the States, the Department of Labor and HCFA have engaged in numerous 
efforts to consult with and work cooperatively with affected State and 
local officials.
    For example, the Departments were aware that some States commented 
on the way the federal provisions should be interpreted. Therefore, the 
Departments have 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, that among other

[[Page 1393]]

things 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. HCFA 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 following two 
standing HIPAA meetings for members during the quarterly conferences:
    <bullet> HCFA/DOL Meeting on HIPAA Issues (This meeting provides 
HCFA and Labor the opportunity to provide updates on regulations, 
bulletins, enforcement actions and outreach efforts regarding HIPAA.)
    <bullet> The NAIC/HCFA Liaison Meeting (This meeting provides HCFA 
and the NAIC the opportunity to discuss HIPAA and other health care 
programs.)
    In addition, in developing these interim final regulations, the 
Departments consulted with the NAIC and requested their assistance to 
obtain information from the State Insurance Departments. Specifically, 
we sought and received their input on 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 also cooperate 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 HCFA, NAIC and many business and consumer groups. HCFA has 
sponsored four conferences with the States--the Consumer Outreach and 
Advocacy conferences in March 1999 and June 2000, the Implementation 
and Enforcement of HIPAA National State-Federal Conferences in August 
1999 and 2000. Furthermore, both the Department of Labor and HCFA 
websites offer links to important State websites and other resources, 
facilitating coordination between the State and federal regulators and 
the regulated community.
    In conclusion, 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.

Unified Analysis of Costs and Benefits

1. Introduction

    HIPAA's nondiscrimination provisions generally prohibit group 
health plans and group health plan issuers from discriminating against 
individuals on the basis of health status 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, benefits, and transfers attendant to it, generally 
flow directly from the HIPAA's statutory provisions, which are largely 
self-implementing. However, the statute alone leaves room for varying 
interpretations of exactly which practices are prohibited or permitted 
at the margin. This regulation draws 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 it to satisfy 
this mandate in as economically efficient a manner as possible, and 
believe that the economic benefits of the regulation outweigh its 
costs. The analysis underlying this conclusion takes into account both 
the effect of the statute and the impact of the discretion exercised in 
the regulation.
    The nondiscrimination provisions of the HIPAA statute and of this 
regulation generally apply to both group health plans and to issuers of 
group health plan policies. 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.

2. Costs and Benefits of HIPAA's Statutory Nondiscrimination Provisions

    As noted above, HIPAA's statutory nondiscrimination provisions are 
largely self-implementing even in the absence of interpretive guidance. 
It is the Departments' policy where practicable to evaluate such 
impacts separately from the impact of discretion exercised in 
regulation. The Departments provide qualitative assessments of the 
nature of the costs, benefits, and transfers that are expected to 
derive from statutory provisions, and provide summaries of any 
credible, empirical estimates of these effects that are available.
    To the Departments' knowledge, there is no publicly available work 
that quantifies the magnitude or presents the nature of these benefits, 
costs, and transfers. In its initial scoring of the statute, the 
Congressional Budget Office did not separately quantify the costs of 
the nondiscrimination provisions. Therefore, this analysis considers 
the nature of anticipated costs, benefits, and transfers, and offers a 
basis for estimating separately the impacts of the statute and 
regulatory discretion, but does not present a detailed description of 
any other quantitative analysis of the statute's impact.
    HIPAA's statutory nondiscrimination provisions entail new economic 
costs and benefits, as well as transfers of health care costs among 
plan sponsors and participants.
    The primary statutory economic benefits associated with the HIPAA 
nondiscrimination provisions derive from increased access to affordable 
group health plan coverage for individuals with certain health status-
related factors. Expanding access benefits both newly covered 
individuals and society at large. Individuals without health insurance 
are less likely to get preventive care and less likely to have a 
regular source of care.\15\ 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 spawn 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

[[Page 1394]]

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.
---------------------------------------------------------------------------

    \15\ Kaiser Family Foundation and the NewsHour, ``Newshour/
Kaiser Spotlights Misconceptions About the Medically Uninsured: 
Survey Examines Difficulties Faced by Those Without Health 
Coverage,'' News Release, May 16, 2000.
---------------------------------------------------------------------------

    Plans and issuers will incur economic costs as a result of the law. 
These are generally limited to administrative costs, such as those 
incurred to change plan design and pricing structures and update plan 
materials.
    The premiums and claims costs incurred by group health plans to 
provide coverage to individuals who were previously denied coverage or 
offered restricted coverage based on health factors are offset by the 
commensurate or greater benefits realized by the newly eligible 
participants on whose behalf the premiums or claims are paid. As such, 
these premiums and claims costs are properly characterized as transfers 
rather than as new economic costs. These transfers shift the burden of 
health care costs from one party to another without any direct change 
in aggregate social welfare. For example, as individuals' insurance 
status changes from insured through an individual policy to insured 
through an employment based group health plan, health care costs are 
transferred from these individuals to their employers. Similarly, as 
individuals' insurance status changes from uninsured to insured through 
a group health plan, health care costs are transferred from the 
individuals and public funding sources to employers.
    The HIPAA nondiscrimination statutory transfer is likely to be 
substantial. Annual per-participant group health plan costs average 
more than $4,000,\16\ and it is likely that average costs would be 
higher for individuals who had faced discrimination due to health 
status factors. Prior to HIPAA's enactment approximately 106,000 
employees were denied employment based coverage because of health 
factors.\17\ A simple assessment suggests that the total cost of 
coverage for such employees could exceed $400 million. However, this 
potential statutory transfer is small relative to the overall cost of 
employment-based health coverage. Group health plans will spend about 
$431 billion this year to cover approximately 77 million participants 
and their dependents. Transfers under HIPAA's nondiscrimination 
provision will represent a very small fraction of one percent of total 
group health plan expenditures.
---------------------------------------------------------------------------

    \16\ Gabel, Jon R. Job-based Health Insurance, 1977-1998: The 
Accidental System Under Scrutiny. Health Affairs. November/December 
1999. Volume 18, Number 6.
    \17\ February 1997 Current Population Survey, Contingent Worker 
Supplement.
---------------------------------------------------------------------------

3. Costs and Benefits of the Regulation

    Prohibiting Discrimination--Many of the provisions of this 
regulation serve to specify more precisely than the statute alone 
exactly what practices are prohibited by HIPAA as unlawful 
discrimination in eligibility or employee premium among similarly 
situated employees. For example, under the regulation eligibility 
generally may not be restricted based on an individuals' participation 
in risky activities, confinement to an institution or absence from work 
on enrollment day due to illness, or status as a late enrollee. The 
regulation provides that various plan features including waiting 
periods and eligibility for certain benefits constitute rules for 
eligibility which may not vary across similarly situated employees 
based on health status factors. It provides that individuals who were 
previously denied eligibility based on health status factors (or who 
failed to enroll in anticipation of such denial) must be given an 
opportunity to enroll. It provides that plans may not reclassify 
employees based on health status factors in order to create separate 
groups of similarly situated employees 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 
uninsurance and thereby improving health outcomes. It entails transfers 
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 evenly 
to them). And it imposes economic costs in the form of administrative 
burdens to design and implement necessary plan amendments.
    The Departments lack any basis on which to distinguish these 
benefits, costs, and transfers from those of the statute itself. It is 
unclear how many plans might be 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 will be 
far smaller than the similar statutory effects. The Departments are 
confident, however, that by securing employees' access to affordable 
coverage at the margin, the regulation, like the statute, will yield 
benefits in excess of costs.
    Clarifying Requirements--Additional economic benefits derive 
directly from the improved clarity provided by the regulation. 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 regulation will reduce 
uncertainty and costly disputes over these rights and obligations. It 
will promote employers' and employees' common understanding of the 
value of group health plan benefits and confidence in the security and 
predictability of those benefits, thereby improving labor market 
efficiency and fostering the establishment and continuation of group 
health plans by employers.\18\
---------------------------------------------------------------------------

    \18\ The voluntary nature of the employment-based health benefit 
system in conjunction with the open and dynamic character of labor 
markets make explicit as well as implicit negotiations on 
compensation a key determinant of the prevalence of employee 
benefits coverage. It is likely that 80% to 100% of the cost of 
employee benefits is borne by workers through reduced wages (see for 
example Jonathan Gruber and Alan B. Krueger, ``The Incidence of 
Mandated Employer-Provided Insurance: Lessons from Workers 
Compensation Insurance,'' Tax Policy and Economy (1991); Jonathan 
Gruber, ``The Incidence of Mandated Maternity Benefits,'' American 
Economic Review, Vol. 84 (June 1994), pp. 622-641; Lawrence H. 
Summers, ``Some Simple Economics of Mandated Benefits,'' American 
Economic Review, Vol. 79, No. 2 (May 1989); Louise Sheiner, ``Health 
Care Costs, Wages, and Aging,'' Federal Reserve Board of Governors 
working paper, April 1999; and Edward Montgomery, Kathryn Shaw, and 
Mary Ellen Benedict, ``Pensions and Wages: An Hedonic Price Theory 
Approach,'' International Economic Review, Vol. 33 No. 1, Feb. 
1992.) The prevalence of benefits is therefore largely dependent on 
the efficacy of this exchange. If workers perceive that there is the 
potential for inappropriate denial of benefits they will discount 
their value to adjust for this risk. This discount drives a wedge in 
the compensation negotiation, limiting its efficiency. With workers 
unwilling to bear the full cost of the benefit, fewer benefits will 
be provided. The extent to which workers perceive a federal 
regulation supported by enforcement authority to improve the 
security and quality of benefits, the differential between the 
employers costs and workers willingness to accept wage offsets is 
minimized.

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

[[Page 1395]]

    Amending Plans--The regulation is expected to entail some new 
economic costs, in the form of two new administrative burdens, which 
are distinguishable from those attributable to the statute. First, it 
is likely that some of the regulation's nondiscrimination provisions 
will effectively require some plans to amend their terms and revise 
plan materials. Second, as noted above, the regulation requires that 
individuals who were previously denied eligibility based on health 
status factors (or who failed to enroll in anticipation of such denial) 
must be given an opportunity to enroll. It also requires that plans 
notify such individuals of their right enroll. Providing notices under 
these requirements will entail new administrative costs.
    Plans that, prior to HIPAA's effective date, included provisions 
since prohibited by HIPAA's nondiscrimination requirements, were 
effectively required by HIPAA to implement conforming amendments and to 
revise plan materials accordingly. The costs associated with these 
actions generally are attributable to the HIPAA statute and not to this 
regulation. However, it is likely that some of the regulation's 
nondiscrimination provisions will effectively require some plans to 
amend their terms and revise their materials. For example, the 
Departments understand that plans commonly require employees to be 
actively at work on a designated enrollment day in order to qualify for 
enrollment. It is possible that some plans failed to interpret HIPAA's 
statutory provisions to prohibit this practice. Such plans will need to 
amend their terms and materials to provide that employees will not be 
denied enrollment solely because they were absent due to a health 
status factor. Such plans will incur administrative costs.
    The Departments have no basis for estimating how many plans might 
need to implement amendments beyond those implemented in response to 
the HIPAA's statutory nondiscrimination provisions in order to comply 
with the regulation's corresponding provisions. They adopted 
conservative assumptions in order to develop an upper bound estimate of 
the cost to amend plans and materials to conform with the regulation. 
They assumed that all plans will require at least some amendment to 
conform with this regulation.
    A large majority of fully insured plans do not have unique 
eligibility and employee premium provisions but instead choose from a 
relatively small menu of standardized products offered by issuers. The 
Departments accordingly assumed that issuers will amend their 
standardized group insurance products, passing the associated cost back 
to the plans that buy them. They estimate that a total of approximately 
33,000 group insurance products will be so amended, and that the cost 
of these amendments will be spread across a universe of approximately 
2.6 million fully insured plans. The Departments assumed that small 
self-insured plans (which generally fall outside state regulation of 
insurance products) choose from a much larger menu of products and that 
large self-insured plans each have unique eligibility rules will need 
to be amended independently. This implies a total of approximately 
76,000 self-insured plan configurations requiring amendment.
    Assuming that each affected group insurance product and self-
insured plan configuration would require 1 hour of professional time 
billed at $72 per hour to design and implement amendments, the 
aggregate cost to amend plans would be $8 million.
    Separate from the cost to design and implement plan amendments is 
the cost to revise plan materials to reflect the amendments. The 
Departments note that the cost to revise plan materials can generally 
be attributed to legal requirements other than the HIPAA statute or 
this regulation. It is the policy of the Department of Labor to 
attribute the cost of revising private-sector group health plan 
materials to its regulation implementing ERISA's Summary Plan 
Description requirements. Various state laws compel issuers to provide 
accurate materials, and the Departments believe that State and local 
governmental plan sponsors and private plan sponsors routinely update 
plan materials as a matter of either law or compensation and employment 
policy.
    Notifying Employees of Enrollment Opportunities--In estimating the 
costs associated with the notification requirements, the Departments 
separately considered the cost of preparing notices and the cost of 
distributing them.
    Based on a 1993 Robert Wood Johnson Foundation survey of employers, 
the Departments estimate that 128,000 group health plans excluded 
individuals on the basis of health status factors prior to HIPAA's 
enactment and will therefore be required by the regulation to prepare 
and distribute notices. The Departments assumed that preparing the 
notice will require one hour of time billed at a $72 hourly rate. The 
cost to develop notices is therefore estimated to be $9 million.
    The Departments assumed that plans will distribute notices to all 
individuals who are eligible for coverage under the plan. It might be 
necessary to notify individuals who are currently enrolled because such 
individuals may have dependents for whom eligibility was denied based 
on a health status factor or may have failed to enroll dependents 
because they expected that eligibility would be so denied for them. 
This assumption probably results in an overestimate of the true cost. 
Some affected plans may already have notified affected individuals of 
their right to enroll under HIPAA. Others may have historical records 
of plan enrollment that are sufficiently detailed to allow for the 
notification of only specific individuals. Based on the 1997 Robert 
Wood Johnson Foundation survey, the Departments estimate that a total 
of 2.3 million employees are eligible for coverage under the 128,000 
plans that are required to provide notices. The Departments assumed 
that distributing each notice costs $0.37 for mailing and materials 
plus 2 minutes of photocopying and mailing billed at a $15 per hour 
clerical rate for a total per-notice distribution cost of $0.87. The 
cost to distribute notices is therefore estimated to be $2 million.
    The estimated combined cost to prepare and distribute notices 
therefore amounts to $11 million. The Departments note that this is a 
one-time cost which will be incurred concurrent with the regulation's 
applicability date.
    The Department's note that the provision of notices will benefit 
employees who newly learn of opportunities to enroll themselves or 
their dependents. The result will be fuller realization of HIPAA's 
intent and employees' associated rights, as well as improved access to 
affordable group coverage and reduced rates of uninsurance for affected 
employees.

4. Summary of Cost Estimates

    The cost estimates presented here are compiled in the table below. 
Upper bound cost estimates attributable to the regulation include $8 
million to amend plans and revise documents and $11 million to prepare 
and distribute notices of enrollment opportunities, or a total of $19 
million.

[[Page 1396]]



------------------------------------------------------------------------
        Source of cost                 $MM           Explanatory notes
------------------------------------------------------------------------
Amending plans and revising     $8...............  Upper bound of new
 materials.                                         economic cost
                                                    incurred as plans
                                                    are amended to
                                                    comply with the
                                                    regulation. One-time
                                                    cost.
Notifying employees of          $11..............  Upper bound of new
 enrollment opportunities.                          economic cost to
                                                    prepare and
                                                    distribute notices.
                                                    One-time cost.
Prohibiting discrimination....  >$400............  Transfer attributable
                                                    to HIPAA's statutory
                                                    nondiscriminatory
                                                    provisions.
                                                    Transfers
                                                    attributable to the
                                                    regulation were not
                                                    estimated but are
                                                    expected to be a
                                                    very small fraction
                                                    of this amount.
                                                    Ongoing annual
                                                    level.
------------------------------------------------------------------------

5. Assessment of Likelihood of Adverse Secondary Effects

    The Departments considered whether employers might reduce or 
eliminate health insurance benefits for all employees as a result of 
this regulation. They believe that this is highly unlikely because the 
regulation affirms and clarifies plan sponsors' flexibility and because 
its costs will be very small relative to group health plan 
expenditures.
    The regulation affirms plan sponsors' flexibility to design plans 
and control plan costs in many ways. It affirms and clarifies plans' 
flexibility under HIPAA to exclude from coverage or limit coverage for 
certain conditions or services, to require employees to perform 
services before coverage becomes effective, and to provide different 
benefits or charge different premiums for employees in different bona 
fide employment classes. It also clarifies that more favorable 
treatment of individuals with adverse health factors is permitted, 
thereby allowing employers to assist employees and their families 
dealing with disabilities, medical conditions, or other health factors 
by extending coverage or lowering premiums.
    Both the transfer of health insurance costs and the administrative 
costs generated by this regulation will be very small relative to total 
group health plan expenditures. The $19 million economic cost estimate 
attributed to this regulation amounts to a tiny fraction of one percent 
of the $431 billion that group health plans will spend this year. Even 
the more than $400 million transfer of cost attributed to HIPAA's 
statutory nondiscrimination provisions amount to a very small fraction 
of one percent of that spending. Plan sponsors wishing to do so 
generally can pass these costs back to participants with small, across 
the board changes to employee premiums or benefits.

Statutory Authority

    The Department of the Treasury final and temporary rules are 
adopted pursuant to the authority contained in sections 7805 and 9833 
of the Code (26 U.S.C. 7805, 9833).
    The Department of Labor interim final rule is adopted pursuant to 
the authority contained in sections 107, 209, 505, 701-703, 711-713, 
and 731-734 of ERISA (29 U.S.C. 1027, 1059, 1135, 1171-1173, 1181, 
1182, and 1191-1194), as amended by HIPAA (Public Law 104-191, 110 
Stat. 1936), MHPA and NMHPA (Public Law 104-204, 110 Stat. 2935), and 
WHCRA (Public Law 105-277, 112 Stat. 2681-436), section 101(g)(4) of 
HIPAA, and Secretary of Labor's Order No. 1-87, 52 FR 13139, April 21, 
1987.
    The Department of HHS interim 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 amended by HIPAA (Public Law 104-191, 110 Stat. 1936), MHPA and 
NMHPA (Public Law 104-204, 110 Stat. 2935), and WHCRA (Public Law 105-
277, 112 Stat. 2681-436).

List of Subjects

26 CFR Part 54

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

29 CFR Part 2590

    Employee benefit plans, Employee Retirement Income Security Act, 
Health care, Health insurance, Reporting and recordkeeping 
requirements.

45 CFR Part 146

    Health care, Health insurance, Reporting and recordkeeping 
requirements, 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 continues to read 
in part as follows:


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


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

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


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

    (a) Health factors. (1) The term health factor means, in relation 
to an individual, any of the following health status-related factors:
    (i) Health status;
    (ii) Medical condition (including both physical and mental 
illnesses);
    (iii) Claims experience;
    (iv) Receipt of health care;
    (v) Medical history;
    (vi) Genetic information;
    (vii) Evidence of insurability; or
    (viii) Disability.
    (2) Evidence of insurability includes--
    (i) Conditions arising out of acts of domestic violence; and
    (ii) [Reserved] For further guidance, see Sec. 54.9802-
1T(a)(2)(ii).
    (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 bona fide wellness 
programs), and paragraph (g) of this section (permitting favorable 
treatment of individuals with adverse health factors).
    (ii) [Reserved] For further guidance, see Sec. 54.9802-
1T(b)(1)(ii).

[[Page 1397]]

    (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. [Reserved]

    (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) [Reserved] For further guidance, see Sec. 54.9802-
1T(b)(2)(i)(B).
    (C) [Reserved] For further guidance, see Sec. 54.9802-
1T(b)(2)(i)(C).
    (D) [Reserved] For further guidance, see Sec. 54.9802-
1T(b)(2)(i)(D).
    (ii) Cost-sharing mechanisms and wellness programs. A group health 
plan with a cost-sharing mechanism (such as a deductible, copayment, or 
coinsurance) that requires a higher payment from an individual, based 
on a health factor of that individual or a dependent of that 
individual, than for a similarly situated individual under the plan 
(and thus does not apply uniformly to all similarly situated 
individuals) does not violate the requirements of this paragraph (b)(2) 
if the payment differential is based on whether an individual has 
complied with the requirements of a bona fide wellness program.
    (iii) Specific rule relating to source-of-injury exclusions. 
[Reserved] For further guidance, see Sec. 54.9802-1T(b)(2)(iii).
    (3) Relationship to section 9801(a), (b), and (d). [Reserved] For 
further guidance, see Sec. 54.9802-1T(b)(3).
    (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) [Reserved] For further guidance, see Sec. 54.9802-
1T(c)(1)(ii).
    (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. [Reserved] 
For further guidance, see Sec. 54.9802-1T(c)(2)(ii).
    (3) Exception for bona fide wellness programs. Notwithstanding 
paragraphs (c)(1) and (2) of this section, a plan may establish a 
premium or contribution differential based on whether an individual has 
complied with the requirements of a bona fide wellness program.
    (d) Similarly situated individuals. [Reserved] For further 
guidance, see Sec. 54.9802-1T(d).
    (e) Nonconfinement and actively-at-work provisions. [Reserved] For 
further guidance, see Sec. 54.9802-1T(e).
    (f) Bona fide wellness programs. [Reserved]
    (g) Benign discrimination permitted. [Reserved] For further 
guidance, see Sec. 54.9802-1T(g).
    (h) No effect on other laws. [Reserved] For further guidance, see 
Sec. 54.9802-1T(h).
    (i) Effective dates--(1) Final rules apply March 9, 2001. This 
section applies March 9, 2001.
    (2) Cross-reference to temporary rules applicable for plan years 
beginning on or after July 1, 2001. See Sec. 54.9802-1T(i)(2), which 
makes the rules of that section applicable for plan years beginning on 
or after July 1, 2001.
    (3) Cross-reference to temporary transitional rules for individuals 
previously denied coverage based on a health factor. See Sec. 54.9802-
1T(i)(3) for transitional rules that apply with respect to individuals 
previously denied coverage under a group health plan based on a health 
factor.

    Par. 4. Section 54.9802-1T is added to read as follows:


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

    (a) Health factors. (1) [Reserved] For further guidance, see 
Sec. 54.9802-1(a).
    (2) Evidence of insurability includes--
    (i) [Reserved] For further guidance, see Sec. 54.9802-1(a)(2)(i).
    (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 section 9801(f) 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) [Reserved] For further guidance, see Sec. 54.9802-
1(b)(1)(i).
    (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. [Reserved] For further guidance, see Sec. 54.9802-
1(b)(iii). Example 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

[[Page 1398]]

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 will also violate this paragraph (b)(1).

    (2) Application to benefits--(i) General rule--(A) [Reserved] For 
further guidance, see Sec. 54.9802-1(b)(2)(i)(A).
    (B) However, benefits provided under a plan must be uniformly 
available to all similarly situated individuals (as described in 
paragraph (d) of this section). Likewise, any restriction on a benefit 
or benefits must apply uniformly to all similarly situated individuals 
and must not be directed at individual participants or beneficiaries 
based on any health factor of the participants or beneficiaries 
(determined based on all the relevant facts and circumstances). Thus, 
for example, a plan may limit or exclude benefits in relation to a 
specific disease or condition, limit or exclude benefits for certain 
types of treatments or drugs, or limit or exclude benefits based on a 
determination of whether the benefits are experimental or not medically 
necessary, but only if the benefit limitation or exclusion applies 
uniformly to all similarly situated individuals and is not directed at 
individual participants or beneficiaries based on any health factor of 
the participants or beneficiaries. In addition, a plan may impose 
annual, lifetime, or other limits on benefits and may require the 
satisfaction of a deductible, copayment, coinsurance, or other cost-
sharing requirement in order to obtain a benefit if the limit or cost-
sharing requirement applies uniformly to all similarly situated 
individuals and is not directed at individual participants or 
beneficiaries based on any health factor of the participants or 
beneficiaries. In the case of a cost-sharing requirement, see also 
paragraph (b)(2)(ii) of this section, which permits variances in the 
application of a cost-sharing mechanism made available under a bona 
fide 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 Code, 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. Under the facts of this Example 2, the plan 
violates this paragraph (b)(2)(i) because the plan modification is 
directed at B based on B's claim.
    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 the 
rider excluding benefits for the condition that C has is directed at 
C even though it applies by its terms to all participants and 
beneficiaries under the plan.
    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 $2000 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.
    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.


[[Page 1399]]


    (ii) Cost-sharing mechanisms and wellness programs. [Reserved] For 
further guidance, see Sec. 54.9802-1(b)(2)(ii).
    (iii) Specific rule relating to source-of-injury exclusions--(A) If 
a group health plan generally provides benefits for a type of injury, 
the plan may not deny benefits otherwise provided for treatment of the 
injury if the injury results from an act of domestic violence or a 
medical condition (including both physical and mental health 
conditions).
    (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. Individual D suffers from depression and attempts 
suicide. As a result, D sustains injuries and is hospitalized for 
treatment of the injuries. Pursuant to 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 section 9801(a), (b), and (d). (i) A 
preexisting condition exclusion is permitted under this section if it--
    (A) Complies with section 9801(a), (b), and (d);
    (B) Applies uniformly to all similarly situated individuals (as 
described in paragraph (d) of this section); and
    (C) Is not directed at individual participants or beneficiaries 
based on any health factor of the participants or beneficiaries. For 
purposes of this paragraph (b)(3)(i)(C), a plan amendment relating to a 
preexisting condition exclusion applicable to all individuals in one or 
more groups of similarly situated individuals under the plan and made 
effective no earlier than the first day of the first plan year after 
the amendment is adopted is not considered to be directed at any 
individual participants or beneficiaries.
    (ii) The rules of this paragraph (b)(3) are illustrated by the 
following examples:

    Example 1. (i) Facts. A group health plan imposes a preexisting 
condition exclusion on all individuals enrolled in the plan. The 
exclusion applies to conditions for which medical advice, diagnosis, 
care, or treatment was recommended or received within the six-month 
period ending on an individual's enrollment date. In addition, the 
exclusion generally extends for 12 months after an individual's 
enrollment date, but this 12-month period is offset by the number of 
days of an individual's creditable coverage in accordance with 
section 9801(a). 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 section 9801(a), 
(b), and (d) (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) [Reserved] For further guidance, see Sec. 54.9802-
1(c)(1)(i).
    (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. [Reserved] For 
further guidance, see Sec. 54.9802-1(c)(1)(i).
    (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)).


[[Page 1400]]


    (3) Exception for bona fide wellness programs. [Reserved] For 
further guidance, see Sec. 54.9802-1(c)(3).
    (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 (e.g., 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 beneficiaries 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 ususal 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.

[[Page 1401]]

    (ii) Conclusion. Under the facts of this Example 5, changing the 
coverage classification for G based on the existing employment 
classification for G is not permitted under this paragraph (d) 
because the creation of the new coverage classification for G is 
directed at G based on one or more health factors.

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

    Example 1. (i) Facts. Under a group health plan, coverage for 
employees and their dependents generally becomes effective on the 
first day of employment. However, coverage for a dependent who is 
confined to a hospital or other health care institution does not 
become effective until the confinement ends.
    (ii) Conclusion. In this Example 1, the plan violates this 
paragraph (e)(1) because the plan delays the effective date of 
coverage for dependents based on confinement to a hospital or other 
health care institution.
    Example 2. (i) Facts. In previous years, a group health plan has 
provided coverage through a group health insurance policy offered by 
Issuer M. However, for the current year, the plan provides coverage 
through a group health insurance policy offered by Issuer N. Under 
Issuer N 's policy, items and services provided in connection with 
the confinement of a dependent to a hospital or other health care 
institution are not covered if the confinement is covered under an 
extension of benefits clause from a previous health insurance 
issuer.
    (ii) Conclusion. See Example 2 in 29 CFR 2590.702(e)(1) and 45 
CFR 146.121(e)(1) for a conclusion that Issuer N violates provisions 
of 29 CFR 2590.702(e)(1) and 45 CFR 146.121(e)(1) similar to the 
provisions of this paragraph (e)(1) because Issuer N 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.

    (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 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 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 
annual, 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.

[[Page 1402]]

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

    (f) Bona fide wellness programs. [Reserved]
    (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 
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 other provision of the Code 
(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

[[Page 1403]]

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) Effective dates--(1) Final rules apply March 9, 2001. 
[Reserved] For further guidance, see Sec. 54.9802-1(i)(1).
    (2) This section applies for plan years beginning on or after July 
1, 2001. Except as provided in paragraph (i)(3) of this section, this 
section applies for plan years beginning on or after July 1, 2001. 
Except as provided in paragraph (i)(3) of this section, with respect to 
efforts to comply with section 9802 before the first plan year 
beginning on or after July 1, 2001, the Secretary will not take any 
enforcement action against a plan that has sought to comply in good 
faith with section 9802.
    (3) Transitional rules for individuals previously denied coverage 
based on a health factor. This paragraph (i)(3) provides rules relating 
to individuals previously denied coverage under a group health plan 
based on a health factor of the individual. Paragraph (i)(3)(i) 
clarifies what constitutes a denial of coverage under this paragraph 
(i)(3). Paragraph (i)(3)(ii) of this section applies with respect to 
any individual who was denied coverage if the denial was not based on a 
good faith interpretation of section 9802 or the Secretary's published 
guidance. Under that paragraph, such an individual must be allowed to 
enroll retroactively to the effective date of section 9802, or, if 
later, the date the individual meets eligibility criteria under the 
plan that do not discriminate based on any health factor. Paragraph 
(i)(3)(iii) of this section applies with respect to any individual who 
was denied coverage based on a good faith interpretation of section 
9802 or the Secretary's published guidance. Under that paragraph, such 
an individual must be given an opportunity to enroll effective July 1, 
2001. In either event, whether under paragraph (i)(3)(ii) or (iii) of 
this section, the Secretary will not take any enforcement action with 
respect to denials of coverage addressed in this paragraph (i)(3) if 
the plan has complied with the transitional rules of this paragraph 
(i)(3).
    (i) Denial of coverage clarified. For purposes of this paragraph 
(i)(3), an individual is considered to have been denied coverage if the 
individual--
    (A) Failed to apply for coverage because it was reasonable to 
believe that an application for coverage would have been futile due to 
a plan provision that discriminated based on a health factor; or
    (B) Was not offered an opportunity to enroll in the plan and the 
failure to give such an opportunity violates this section.
    (ii) Individuals denied coverage without a good faith 
interpretation of the law--(A) Opportunity to enroll required. If a 
plan has denied coverage to any individual based on a health factor and 
that denial was not based on a good faith interpretation of section 
9802 or any guidance published by the Secretary, the plan is required 
to give the individual an opportunity to enroll (including notice of an 
opportunity to enroll) that continues for at least 30 days. This 
opportunity must be presented not later than March 9, 2001.
    (1) If this enrollment opportunity was presented before or within 
the first plan year beginning on or after July 1, 1997 (or in the case 
of a collectively bargained plan, before or within the first plan year 
beginning on the effective date for the plan described in section 
401(c)(3) of the Health Insurance Portability and Accountability Act of 
1996), the coverage must be effective within that first plan year.
    (2) If this enrollment opportunity is presented after such plan 
year, the individual must be given the choice of having the coverage 
effective on either of the following two dates--
    (i) The date the plan receives a request for enrollment in 
connection with the enrollment opportunity; or
    (ii) Retroactively to the first day of the first plan year 
beginning on the effective date for the plan described in section 
401(c)(1) or (3) of the Health Insurance Portability and Accountability 
Act of 1996 (or, if the individual otherwise first became eligible to 
enroll for coverage after that date, on the date the individual was 
otherwise eligible to enroll in the plan). If an individual elects 
retroactive coverage, the plan is required to provide the benefits it 
would have provided if the individual had been enrolled for coverage 
during that period (irrespective of any otherwise applicable plan 
provisions governing timing for the submission of claims). The plan may 
require the individual to pay whatever additional amount the individual 
would have been required to pay for the coverage (but the plan cannot 
charge interest on that amount).
    (B) Relation to preexisting condition rules. For purposes of 
Chapter 100 of Subtitle K, the individual may not be treated as a late 
enrollee or as a special enrollee. Moreover, the individual's 
enrollment date is the effective date for the plan described in section 
401(c)(1) or (3) of the Health Insurance Portability and Accountability 
Act of 1996 (or, if the individual otherwise first became eligible to 
enroll for coverage after that date, on the date the individual was 
otherwise eligible to enroll in the plan), even if the individual 
chooses under paragraph (i)(3)(ii)(A) of this section to have coverage 
effective only prospectively. In addition, any period between the 
individual's enrollment date and the effective date of coverage is 
treated as a waiting period.
    (C) Examples. The rules of this paragraph (i)(3)(ii) are 
illustrated by the following examples:

    Example 1. (i) Facts. Employer X maintains a group health plan 
with a plan year beginning October 1 and ending September 30. 
Individual F was hired by Employer X before the effective date of 
section 9802. Before the effective date of section 9802 for this 
plan (October 1, 1997), the terms of the plan allowed employees and 
their dependents to enroll when the employee was first hired, and on 
each January 1 thereafter, but in either case, only if the 
individual could pass a physical examination. F 's application to 
enroll when first hired was denied because F could not pass a 
physical examination. Upon the effective date of section 9802 for 
this plan (October 1, 1997), the plan is amended to delete the 
requirement to pass a physical examination. In November of 1997, the 
plan gives F an opportunity to enroll in the plan (including notice 
of the opportunity to enroll) without passing a physical 
examination, with coverage effective January 1, 1998.
    (ii) Conclusion. In this Example 1, the plan complies with the 
requirements of this paragraph (i)(3)(ii).
    Example 2. (i) Facts. The plan year of a group health plan 
begins January 1 and ends December 31. Under the plan, a dependent 
who is unable to engage in normal life activities on the date 
coverage would otherwise become effective is not enrolled until the 
dependent is able to engage in normal life activities. Individual G 
is a dependent who is otherwise eligible for coverage, but is unable 
to engage in normal life activities. The plan has not allowed G to 
enroll for coverage.
    (ii) Conclusion. In this Example 2, beginning on the effective 
date of section 9802 for the plan (January 1, 1998), the plan 
provision is not permitted under any good faith interpretation of 
section 9802 or any guidance published by the Secretary. Therefore, 
the plan is required, not later than March 9, 2001, to give G an 
opportunity to enroll (including notice of the opportunity to 
enroll), with coverage effective, at G's option, either 
retroactively from January 1, 1998 or prospectively from the date 
G's request for enrollment is received by the plan. If G elects 
coverage to be effective beginning January 1,

[[Page 1404]]

1998, the plan can require G to pay employee premiums for the 
retroactive coverage.

    (iii) Individuals denied coverage based on a good faith 
interpretation of the law--(A) Opportunity to enroll required. If a 
plan has denied coverage to any individual before the first day of the 
first plan year beginning on or after July 1, 2001 based in part on a 
health factor and that denial was based on a good faith interpretation 
of section 9802 or guidance published by the Secretary, the plan is 
required to give the individual an opportunity to enroll (including 
notice of an opportunity to enroll) that continues for at least 30 
days, with coverage effective no later than July 1, 2001. Individuals 
required to be offered an opportunity to enroll include individuals 
previously offered enrollment without regard to a health factor but 
subsequently denied enrollment due to a health factor.
    (B) Relation to preexisting condition rules. For purposes of 
Chapter 100 of Subtitle K, the individual may not be treated as a late 
enrollee or as a special enrollee. Moreover, the individual's 
enrollment date under the plan is the effective date for the plan 
described in section 401(c)(1) or (3) of the Health Insurance 
Portability and Accountability Act of 1996 (or, if the individual 
otherwise first became eligible to enroll for coverage after that date, 
on the date the individual was otherwise eligible to enroll in the 
plan). In addition, any period between the individual's enrollment date 
and the effective date of coverage is treated as a waiting period.
    (C) Example. The rules of this paragraph (i)(3)(iii) are 
illustrated by the following example:

    Example. (i) Facts. Individual H was hired by Employer Y on May 
3, 1995. Y maintains a group health plan with a plan year beginning 
on February 1. Under the terms of the plan, employees and their 
dependents are allowed to enroll when the employee is first hired 
(without a requirement to pass a physical examination), and on each 
February 1 thereafter if the individual can pass a physical 
examination. H chose not to enroll for coverage when hired in May of 
1995. On February 1, 1997, H tried to enroll for coverage under the 
plan. However, H was denied coverage for failure to pass a physical 
examination. Shortly thereafter, Y's plan eliminated late 
enrollment, and H was not given another opportunity to enroll in the 
plan. There is no evidence to suggest that Y's plan was acting in 
bad faith in denying coverage under the plan beginning on the 
effective date of section 9802 (February 1, 1998).
    (ii) Conclusion. In this Example, because coverage previously 
had been made available with respect to H without regard to any 
health factor of H and because Y's plan was acting in accordance 
with a good faith interpretation of section 9802 (and guidance 
published by the Secretary), the failure of Y's plan to allow H to 
enroll effective February 1, 1998 was permissible on that date. 
However, under the transitional rules of this paragraph (i)(3)(iii), 
Y's plan must give H an opportunity to enroll that continues for at 
least 30 days, with coverage effective no later than July 1, 2001. 
(In addition, February 1, 1998 is H's enrollment date under the plan 
and the period between February 1, 1998 and July 1, 2001 is treated 
as a waiting period. Accordingly, any preexisting condition 
exclusion period permitted under section 9801 will have expired 
before July 1, 2001.)

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
    Approved:

    Dated: August 8, 2000.
Jonathan Talisman,
Acting Assistant Secretary of the Treasury.

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

PART 2590 [AMENDED]--RULES AND REGULATIONS FOR HEALTH INSURANCE 
PORTABILITY AND RENEWABILITY FOR GROUP HEALTH PLANS

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


    Authority: Secs. 107, 209, 505, 701-703, 711-713, and 731-734 of 
ERISA (29 U.S.C. 1027, 1059, 1135, 1171-1173, 1181-1183, and 1191-
1194), as amended by HIPAA (Public Law 104-191, 110 Stat. 1936), 
MHPA and NMHPA (Public Law 104-204, 110 Stat. 2935), and WHCRA 
(Public Law 105-277, 112 Stat. 2681-436), section 101(g)(4) of 
HIPAA, and Secretary of Labor's Order No. 1-87, 52 FR 13139, April 
21, 1987.

    2. Section Sec. 2590.702 is revised to read as follows:


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

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

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

[[Page 1405]]

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 bona fide 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. Under the facts of this Example 2, the plan 
violates this paragraph (b)(2)(i) because the plan modification is 
directed at B based on B's claim.
    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. 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 $2000 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.

[[Page 1406]]

    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.

    (ii) Cost-sharing mechanisms and wellness programs. A group health 
plan or group health insurance coverage with a cost-sharing mechanism 
(such as a deductible, copayment, or coinsurance) that requires a 
higher payment from an individual, based on a health factor of that 
individual or a dependent of that individual, than for a similarly 
situated individual under the plan (and thus does not apply uniformly 
to all similarly situated individuals) does not violate the 
requirements of this paragraph (b)(2) if the payment differential is 
based on whether an individual has complied with the requirements of a 
bona fide wellness program.
    (iii) Specific rule relating to source-of-injury exclusions--(A) If 
a group health plan or group health insurance coverage generally 
provides benefits for a type of injury, the plan or issuer may not deny 
benefits otherwise provided for treatment of the injury if the injury 
results from an act of domestic violence or a medical condition 
(including both physical and mental health conditions).
    (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. Individual D suffers from depression and attempts 
suicide. As a result, D sustains injuries and is hospitalized for 
treatment of the injuries. Pursuant to the exclusion, the plan 
denies D benefits for treatment of the injuries.
    (ii) Conclusion. In this Example 1, the suicide attempt is the 
result of a medical condition (depression). Accordingly, the denial 
of benefits for the treatments of D's injuries violates the 
requirements of this paragraph (b)(2)(iii) because the plan 
provision excludes benefits for treatment of an injury resulting 
from a medical condition.
    Example 2. (i) Facts. A group health plan provides benefits for 
head injuries generally. The plan also has a general exclusion for 
any injury sustained while participating in any of a number of 
recreational activities, including bungee jumping. However, this 
exclusion does not apply to any injury that results from a medical 
condition (nor from domestic violence). Participant E sustains a 
head injury while bungee jumping. The injury did not result from a 
medical condition (nor from domestic violence). Accordingly, the 
plan denies benefits for E's head injury.
    (ii) Conclusion. In this Example 2, the plan provision that 
denies benefits based on the source of an injury does not restrict 
benefits based on an act of domestic violence or any medical 
condition. Therefore, the provision is permissible under this 
paragraph (b)(2)(iii) and does not violate this section. (However, 
if the plan did not allow E to enroll in the plan (or applied 
different rules for eligibility to E) because E frequently 
participates in bungee jumping, the plan would violate paragraph 
(b)(1) of this section.)

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

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

[[Page 1407]]

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 bona fide wellness programs. Notwithstanding 
paragraphs (c)(1) and (2) of this section, a plan may establish a 
premium or contribution differential based on whether an individual has 
complied with the requirements of a bona fide wellness program.
    (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 (e.g., 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 ususal 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.

[[Page 1408]]

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

    (e) Nonconfinement and actively-at-work provisions--(1) 
Nonconfinement provisions--(i) General rule. Under the rules of 
paragraphs (b) and (c) of this section, a plan or issuer may not 
establish a rule for eligibility (as described in paragraph (b)(1)(ii) 
of this section) or set any individual's premium or contribution rate 
based on whether an individual is confined to a hospital or other 
health care institution. In addition, under the rules of paragraphs (b) 
and (c) of this section, a plan or issuer may not establish a rule for 
eligibility or set any individual's premium or contribution rate based 
on an individual's ability to engage in normal life activities, except 
to the extent permitted under paragraphs (e)(2)(ii) and (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. This section does not affect 
any obligation Issuer M may have under applicable State law to 
provide any extension of benefits and does not affect any State law 
governing coordination of benefits.

    (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

[[Page 1409]]

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

    Example 1. (i) Facts. Under the eligibility provision of a group 
health plan, coverage for new employees becomes effective on the 
first day that the employee reports to work. Individual H is 
scheduled to begin work on August 3. However, H is unable to begin 
work on that day because of illness. H begins working on August 4, 
and H's coverage is effective on August 4.
    (ii) Conclusion. In this Example 1, the plan provision does not 
violate this section. However, if coverage for individuals who do 
not report to work on the first day they were scheduled to work for 
a reason unrelated to a health factor (such as vacation or 
bereavement) becomes effective on the first day they were scheduled 
to work, then the plan would violate this section.
    Example 2. (i) Facts. Under a group health plan, coverage for 
new employees becomes effective on the first day of the month 
following the employee's first day of work, regardless of whether 
the employee is actively at work on the first day of the month. 
Individual J is scheduled to begin work on March 24. However, J is 
unable to begin work on March 24 because of illness. J begins 
working on April 7 and J's coverage is effective May 1.
    (ii) Conclusion. In this Example 2, the plan provision does not 
violate this section. However, as in Example 1, if coverage for 
individuals absent from work for reasons unrelated to a health 
factor became effective despite their absence, then the plan would 
violate this section.
    (3) Relationship to plan provisions defining similarly situated 
individuals--(i) Notwithstanding the rules of paragraphs (e)(1) and (2) 
of this section, a plan or issuer may establish rules for eligibility 
or set any individual's premium or contribution rate in accordance with 
the rules relating to similarly situated individuals in paragraph (d) 
of this section. Accordingly, a plan or issuer may distinguish in rules 
for eligibility under the plan between full-time and part-time 
employees, between permanent and temporary or seasonal employees, 
between current and former employees, and between employees currently 
performing services and employees no longer performing services for the 
employer, subject to paragraph (d) of this section. However, other 
federal or State laws (including the COBRA continuation provisions and 
the Family and Medical Leave Act of 1993) may require an employee or 
the employee's dependents to be offered coverage and set limits on the 
premium or contribution rate even though the employee is not performing 
services.
    (ii) The rules of this paragraph (e)(3) are illustrated by the 
following examples:

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

    (f) Bona fide wellness programs. [Reserved.]
    (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

[[Page 1410]]

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--(1) Paragraphs applicable March 9, 2001. 
Paragraphs (a)(1), (a)(2)(i), (b)(1)(i), (b)(1)(iii) Example 1, 
(b)(2)(i)(A), (b)(2)(ii), (c)(1)(i), (c)(2)(i), and (c)(3) of this 
section and this paragraph (i)(1) apply to group health plans and 
health insurance issuers offering group health insurance coverage March 
9, 2001.
    (2) Paragraphs applicable for plan years beginning on or after July 
1, 2001. Except as provided in paragraph (i)(3) of this section, the 
provisions of this section not listed in paragraph (i)(1) of this 
section apply to group health plans and health insurance issuers 
offering group health insurance coverage for plan years beginning on or 
after July 1, 2001. Except as provided in paragraph (i)(3) of this 
section, with respect to efforts to comply with section 702 of the Act 
before the first plan year beginning on or after July 1, 2001, the 
Secretary will not take any enforcement action against a plan that has 
sought to comply in good faith with section 702 of the Act.
    (3) Transitional rules for individuals previously denied coverage 
based on a health factor. This paragraph (i)(3) provides rules relating 
to individuals previously denied coverage under a group health plan or 
group health insurance coverage based on a health factor of the 
individual. Paragraph (i)(3)(i) clarifies what constitutes a denial of 
coverage under this paragraph (i)(3). Paragraph (i)(3)(ii) of this 
section applies with respect to any individual who was denied coverage 
if the denial was not based on a good faith interpretation of section 
702 of the Act or the Secretary's published guidance. Under that 
paragraph, such an individual must be allowed to enroll retroactively 
to the effective date of section 702 of the Act, or, if later, the date 
the individual meets eligibility criteria under the plan that do not 
discriminate based on any health factor. Paragraph (i)(3)(iii) of this 
section applies with respect to any individual who was denied coverage 
based on a good faith interpretation of section 702 of the Act or the 
Secretary's published guidance. Under that paragraph, such an 
individual must be given an opportunity to enroll effective July 1, 
2001. In either event, whether under paragraph (i)(3)(ii) or (iii) of 
this section, the Secretary will not take any enforcement action with 
respect to denials of coverage addressed in this paragraph (i)(3) if 
the plan has complied with the transitional rules of this paragraph 
(i)(3).
    (i) Denial of coverage clarified. For purposes of this paragraph 
(i)(3), an individual is considered to have been denied coverage if the 
individual--
    (A) Failed to apply for coverage because it was reasonable to 
believe that an application for coverage would have been futile due to 
a plan provision that discriminated based on a health factor; or
    (B) Was not offered an opportunity to enroll in the plan and the 
failure to give such an opportunity violates this section.
    (ii) Individuals denied coverage without a good faith 
interpretation of the law--(A) Opportunity to enroll required. If a 
plan or issuer has denied coverage to any individual based on a health 
factor and that denial was not based on a good faith interpretation of 
section 702 of the Act or any guidance published by the Secretary, the 
plan or issuer is required to give the individual an opportunity to 
enroll (including notice of an opportunity to enroll) that continues 
for at least 30 days. This opportunity must be presented not later than 
March 9, 2001.
    (1) If this enrollment opportunity was presented before or within 
the first plan year beginning on or after July 1, 1997 (or in the case 
of a collectively bargained plan, before or within the first plan year 
beginning on the effective date for the plan described in section 
101(g)(3) of the Health Insurance Portability and Accountability Act of 
1996), the coverage must be effective within that first plan year.
    (2) If this enrollment opportunity is presented after such plan 
year, the individual must be given the choice of

[[Page 1411]]

having the coverage effective on either of the following two dates--
    (i) The date the plan receives a request for enrollment in 
connection with the enrollment opportunity; or
    (ii) Retroactively to the first day of the first plan year 
beginning on the effective date for the plan described in sections 
101(g)(1) and (3) of the Health Insurance Portability and 
Accountability Act of 1996 (or, if the individual otherwise first 
became eligible to enroll for coverage after that date, on the date the 
individual was otherwise eligible to enroll in the plan). If an 
individual elects retroactive coverage, the plan or issuer is required 
to provide the benefits it would have provided if the individual had 
been enrolled for coverage during that period (irrespective of any 
otherwise applicable plan provisions governing timing for the 
submission of claims). The plan or issuer may require the individual to 
pay whatever additional amount the individual would have been required 
to pay for the coverage (but the plan or issuer cannot charge interest 
on that amount).
    (B) Relation to preexisting condition rules. For purposes of part 7 
of subtitle B of title I of the Act, the individual may not be treated 
as a late enrollee or as a special enrollee. Moreover, the individual's 
enrollment date is the effective date for the plan described in 
sections 101(g)(1) and (3) of the Health Insurance Portability and 
Accountability Act (or, if the individual otherwise first became 
eligible to enroll for coverage after that date, on the date the 
individual was otherwise eligible to enroll in the plan), even if the 
individual chooses under paragraph (i)(3)(ii)(A) of this section to 
have coverage effective only prospectively. In addition, any period 
between the individual's enrollment date and the effective date of 
coverage is treated as a waiting period.
    (C) Examples. The rules of this paragraph (i)(3)(ii) are 
illustrated by the following examples:

    Example 1. (i) Facts. Employer X maintains a group health plan 
with a plan year beginning October 1 and ending September 30. 
Individual F was hired by Employer X before the effective date of 
section 702 of the Act. Before the effective date of section 702 of 
the Act for this plan (October 1, 1997), the terms of the plan 
allowed employees and their dependents to enroll when the employee 
was first hired, and on each January 1 thereafter, but in either 
case, only if the individual could pass a physical examination. F 's 
application to enroll when first hired was denied because F had 
diabetes and could not pass a physical examination. Upon the 
effective date of section 702 of the Act for this plan (October 1, 
1997), the plan is amended to delete the requirement to pass a 
physical examination. In November of 1997, the plan gives F an 
opportunity to enroll in the plan (including notice of the 
opportunity to enroll) without passing a physical examination, with 
coverage effective January 1, 1998.
    (ii) Conclusion. In this Example 1, the plan complies with the 
requirements of this paragraph (i)(3)(ii).
    Example 2. (i) Facts. The plan year of a group health plan 
begins January 1 and ends December 31. Under the plan, a dependent 
who is unable to engage in normal life activities on the date 
coverage would otherwise become effective is not enrolled until the 
dependent is able to engage in normal life activities. Individual G 
is a dependent who is otherwise eligible for coverage, but is unable 
to engage in normal life activities. The plan has not allowed G to 
enroll for coverage.
    (ii) Conclusion. In this Example 2, beginning on the effective 
date of section 702 of the Act for the plan (January 1, 1998), the 
plan provision is not permitted under any good faith interpretation 
of section 702 of the Act or any guidance published by the 
Secretary. Therefore, the plan is required, not later than March 9, 
2001, to give G an opportunity to enroll (including notice of the 
opportunity to enroll), with coverage effective, at G's option, 
either retroactively from January 1, 1998 or prospectively from the 
date G's request for enrollment is received by the plan. If G elects 
coverage to be effective beginning January 1, 1998, the plan can 
require G to pay any required employee premiums for the retroactive 
coverage.

    (iii) Individuals denied coverage based on a good faith 
interpretation of the law--(A) Opportunity to enroll required. If a 
plan or issuer has denied coverage to any individual before the first 
day of the first plan year beginning on or after July 1, 2001 based in 
part on a health factor and that denial was based on a good faith 
interpretation of section 702 of the Act or guidance published by the 
Secretary, the plan or issuer is required to give the individual an 
opportunity to enroll (including notice of an opportunity to enroll) 
that continues for at least 30 days, with coverage effective no later 
than July 1, 2001. Individuals required to be offered an opportunity to 
enroll include individuals previously offered enrollment without regard 
to a health factor but subsequently denied enrollment due to a health 
factor.
    (B) Relation to preexisting condition rules. For purposes of Part 7 
of Subtitle B of Title I of the Act, the individual may not be treated 
as a late enrollee or as a special enrollee. Moreover, the individual's 
enrollment date is the effective date for the plan described in 
sections 101(g)(1) and (3) of the Health Insurance Portability and 
Accountability Act (or, if the individual otherwise first became 
eligible to enroll for coverage after that date, on the date the 
individual was otherwise eligible to enroll in the plan). In addition, 
any period between the individual's enrollment date and the effective 
date of coverage is treated as a waiting period.
    (C) Example. The rules of this paragraph (i)(3)(iii) are 
illustrated by the following example:

    Example. (i) Facts. Individual H was hired by Employer Y on May 
3, 1995. Y maintains a group health plan with a plan year beginning 
on February 1. Under the terms of the plan, employees and their 
dependents are allowed to enroll when the employee is first hired 
(without a requirement to pass a physical examination), and on each 
February 1 thereafter if the individual can pass a physical 
examination. H chose not to enroll for coverage when hired in May of 
1995. On February 1, 1997, H tried to enroll for coverage under the 
plan. However, H was denied coverage for failure to pass a physical 
examination. Shortly thereafter, Y's plan eliminated late 
enrollment, and H was not given another opportunity to enroll in the 
plan. There is no evidence to suggest that Y's plan was acting in 
bad faith in denying coverage under the plan beginning on the 
effective date of section 702 of the Act (February 1, 1998).
    (ii) Conclusion. In this Example, because coverage previously 
had been made available with respect to H without regard to any 
health factor of H and because Y's plan was acting in accordance 
with a good faith interpretation of section 702 (and guidance 
published by the Secretary), the failure of Y's plan to allow H to 
enroll effective February 1, 1998 was permissible on that date. 
However, under the transitional rules of this paragraph (i)(3)(iii), 
Y's plan must give H an opportunity to enroll that continues for at 
least 30 days, with coverage effective no later than July 1, 2001. 
(In addition, February 1, 1998 is H's enrollment date under the plan 
and the period between February 1, 1998 and July 1, 2001 is treated 
as a waiting period. Accordingly, any preexisting condition 
exclusion period permitted under Sec. 2590.701-3 will have expired 
before July 1, 2001.)


    3. The heading, paragraph (a)(1), and the first sentence of 
paragraph (a)(2) of Sec. 2590.736 are revised to read as follows:


Sec. 2590.736  Applicability dates.

    (a) General applicability dates--(1) Non-collectively bargained 
plans. Part 7 of Subtitle B of Title I of the Act and Secs. 2590.701-1 
through 2590.701-7, 2590.703, 2590.731 through 2590.734, and this 
section apply with respect to group health plans, and health insurance 
coverage offered in connection with group health plans, for plan years 
beginning after June 30, 1997, except as otherwise provided in this 
section.
    (2) Collectively-bargained plans. Except as otherwise provided in 
this section (other than in paragraph (a)(1) of

[[Page 1412]]

this section), in the case of a group health plan maintained pursuant 
to one or more collective bargaining agreements between employee 
representatives and one or more employers ratified before August 21, 
1996, Part 7 of Subtitle B of Title I of the Act and Secs. 2590.701-1 
through 2590.701-7, 2590.703, 2590.731 through 2590.734, and this 
section do not apply to plan years beginning before the later of July 
1, 1997, or the date on which the last of the collective bargaining 
agreements relating to the plan terminates (determined without regard 
to any extension thereof agreed to after August 21, 1996). * * *
* * * * *

    Signed at Washington, DC this 28th day of December, 2000.
Leslie B. Kramerich,
Assistant Secretary, Pension and Welfare Benefits Administration, U.S. 
Department of Labor.

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

PART 146 [AMENDED]--RULES AND REGULATIONS FOR HEALTH INSURANCE 
PORTABILITY AND RENEWABILITY FOR GROUP HEALTH PLANS

    1. The authority citation for Part 146 is revised to read as 
follows:


    Authority: Secs. 2701 through 2763, 2791 and 2792 of the Public 
Health Service Act, 42 U.S.C. 300gg through 300gg-63, 300gg-91, 
300gg-92 as amended by HIPAA (Public Law 104-191, 110 Stat. 1936), 
MHPA and NMHPA (Public Law 104-204, 110 Stat. 2935), and WHCRA 
(Public Law 105-277, 112 Stat. 2681-436), and section 102(c)(4) of 
HIPAA.


    2. Section 146.121 is revised to read as follows:


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

    (a) Health factors. (1) The term health factor means, in relation 
to an individual, any of the following health status-related factors:
    (i) Health status;
    (ii) Medical condition (including both physical and mental 
illnesses), as defined in Sec. 144.103;
    (iii) Claims experience;
    (iv) Receipt of health care;
    (v) Medical history;
    (vi) Genetic information, as defined in 45 CFR 144.103;
    (vii) Evidence of insurability; or
    (viii) Disability.
    (2) Evidence of insurability includes--
    (i) Conditions arising out of acts of domestic violence; and
    (ii) Participation in activities such as motorcycling, 
snowmobiling, all-terrain vehicle riding, horseback riding, skiing, and 
other similar activities.
    (3) The decision whether health coverage is elected for an 
individual (including the time chosen to enroll, such as under special 
enrollment or late enrollment) is not, itself, within the scope of any 
health factor. (However, under Sec. 146.117, a plan or issuer must 
treat special enrollees the same as similarly situated individuals who 
are enrolled when first eligible.)
    (b) Prohibited discrimination in rules for eligibility--(1) In 
general--(i) A group health plan, and a health insurance issuer 
offering health insurance coverage in connection with a group health 
plan, may not establish any rule for eligibility (including continued 
eligibility) of any individual to enroll for benefits under the terms 
of the plan or group health insurance coverage that discriminates based 
on any health factor that relates to that individual or a dependent of 
that individual. This rule is subject to the provisions of paragraph 
(b)(2) of this section (explaining how this rule applies to benefits), 
paragraph (b)(3) of this section (allowing plans to impose certain 
preexisting condition exclusions), paragraph (d) of this section 
(containing rules for establishing groups of similarly situated 
individuals), paragraph (e) of this section (relating to 
nonconfinement, actively-at-work, and other service requirements), 
paragraph (f) of this section (relating to bona fide 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 
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

[[Page 1413]]

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 bona fide 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. Under the facts of this Example 2, the plan 
violates this paragraph (b)(2)(i) because the plan modification is 
directed at B based on B's claim.
    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. 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.
    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.

    (ii) Cost-sharing mechanisms and wellness programs. A group health 
plan or group health insurance coverage with a cost-sharing mechanism 
(such as a deductible, copayment, or coinsurance) that requires a 
higher payment from an individual, based on a health factor of that 
individual or a dependent of that individual, than for a similarly 
situated individual under the plan (and thus does not apply uniformly 
to all similarly situated individuals) does not violate the 
requirements of this paragraph (b)(2) if the payment differential is 
based on whether an individual has complied

[[Page 1414]]

with the requirements of a bona fide wellness program.
    (iii) Specific rule relating to source-of-injury exclusions--(A) If 
a group health plan or group health insurance coverage generally 
provides benefits for a type of injury, the plan or issuer may not deny 
benefits otherwise provided for treatment of the injury if the injury 
results from an act of domestic violence or a medical condition 
(including both physical and mental health conditions).
    (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. Individual D suffers from depression and attempts 
suicide. As a result, D sustains injuries and is hospitalized for 
treatment of the injuries. Pursuant to the exclusion, the plan 
denies D benefits for treatment of the injuries.
    (ii) Conclusion. In this Example 1, the suicide attempt is the 
result of a medical condition (depression). Accordingly, the denial 
of benefits for the treatments of D's injuries violates the 
requirements of this paragraph (b)(2)(iii) because the plan 
provision excludes benefits for treatment of an injury resulting 
from a medical condition.
    Example 2. (i) Facts. A group health plan provides benefits for 
head injuries generally. The plan also has a general exclusion for 
any injury sustained while participating in any of a number of 
recreational activities, including bungee jumping. However, this 
exclusion does not apply to any injury that results from a medical 
condition (nor from domestic violence). Participant E sustains a 
head injury while bungee jumping. The injury did not result from a 
medical condition (nor from domestic violence). Accordingly, the 
plan denies benefits for E 's head injury.
    (ii) Conclusion. In this Example 2, the plan provision that 
denies benefits based on the source of an injury does not restrict 
benefits based on an act of domestic violence or any medical 
condition. Therefore, the provision is permissible under this 
paragraph (b)(2)(iii) and does not violate this section. (However, 
if the plan did not allow E to enroll in the plan (or applied 
different rules for eligibility to E) because E frequently 
participates in bungee jumping, the plan would violate paragraph 
(b)(1) of this section.)

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

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

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

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

[[Page 1415]]

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 bona fide wellness programs. Notwithstanding 
paragraphs (c)(1) and (2) of this section, a plan may establish a 
premium or contribution differential based on whether an individual has 
complied with the requirements of a bona fide wellness program.
    (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 (e.g., 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 ususal 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.)

[[Page 1416]]

    Example 5. (i) Facts. An employer sponsors a group health plan 
that provides the same benefit package to all seven employees of the 
employer. Six of the seven employees have the same job title and 
responsibilities, but Employee G has a different job title and 
different responsibilities. After G files an expensive claim for 
benefits under the plan, coverage under the plan is modified so that 
employees with G's job title receive a different benefit package 
that includes a lower lifetime dollar limit than in the benefit 
package made available to the other six employees.
    (ii) Conclusion. Under the facts of this Example 5, changing the 
coverage classification for G based on the existing employment 
classification for G is not permitted under this paragraph (d) 
because the creation of the new coverage classification for G is 
directed at G based on one or more health factors.

    (e) Nonconfinement and actively-at-work provisions--(1) 
Nonconfinement provisions--(i) General rule. Under the rules of 
paragraphs (b) and (c) of this section, a plan or issuer may not 
establish a rule for eligibility (as described in paragraph (b)(1)(ii) 
of this section) or set any individual's premium or contribution rate 
based on whether an individual is confined to a hospital or other 
health care institution. In addition, under the rules of paragraphs (b) 
and (c) of this section, a plan or issuer may not establish a rule for 
eligibility or set any individual's premium or contribution rate based 
on an individual's ability to engage in normal life activities, except 
to the extent permitted under paragraphs (e)(2)(ii) and (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. This section does not affect 
any obligation Issuer M may have under applicable State law to 
provide any extension of benefits and does not affect any State law 
governing coordination of benefits.

    (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 (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

[[Page 1417]]

State laws (including the COBRA continuation provisions and the Family 
and Medical Leave Act of 1993) may require an employee or the 
employee's dependents to be offered coverage and set limits on the 
premium or contribution rate even though the employee is not performing 
services.
    (ii) The rules of this paragraph (e)(3) are illustrated by the 
following examples:

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

    (f) Bona fide wellness programs. [Reserved.]
    (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

[[Page 1418]]

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) Paragraphs applicable March 9, 2001. 
Paragraphs (a)(1), (a)(2)(i), (b)(1)(i), (b)(1)(iii) Example 1, 
(b)(2)(i)(A), (b)(2)(ii), (c)(1)(i), (c)(2)(i), and (c)(3) of this 
section and this paragraph (i)(1) apply to group health plans and 
health insurance issuers offering group health insurance coverage March 
9, 2001.
    (2) Paragraphs applicable for plan years beginning on or after July 
1, 2001. Except as provided in paragraph (i)(3) or (i)(4) of this 
section, the provisions of this section not listed in paragraph (i)(1) 
of this section apply to group health plans and health insurance 
issuers offering group health insurance coverage for plan years 
beginning on or after July 1, 2001. Except as provided in paragraph 
(i)(3) or (i)(4) of this section, with respect to efforts to comply 
with section 2702 of the PHS Act before the first plan year beginning 
on or after July 1, 2001, the Secretary will not take any enforcement 
action against an issuer or plan that has sought to comply in good 
faith with section 2702 of the PHS Act.
    (3) Transitional rules for individuals previously denied coverage 
based on a health factor. This paragraph (i)(3) provides rules relating 
to individuals previously denied coverage under a group health plan or 
group health insurance coverage based on a health factor of the 
individual. Paragraph (i)(3)(i) clarifies what constitutes a denial of 
coverage under this paragraph (i)(3). Paragraph (i)(3)(ii) of this 
section applies with respect to any individual who was denied coverage 
if the denial was not based on a good faith interpretation of section 
2702 of the PHS Act or the Secretary's published guidance. Under that 
paragraph, such an individual must be allowed to enroll retroactively 
to the effective date of section 2702 of the PHS Act, or, if later, the 
date the individual meets eligibility criteria under the plan that do 
not discriminate based on any health factor. Paragraph (i)(3)(iii) of 
this section applies with respect to any individual who was denied 
coverage based on a good faith interpretation of section 2702 of the 
PHS Act or the Secretary's published guidance. Under that paragraph, 
such an individual must be given an opportunity to enroll effective 
July 1, 2001. In either event, whether under paragraph (i)(3)(ii) or 
(iii) of this section, the Secretary will not take any enforcement 
action with respect to denials of coverage addressed in this paragraph 
(i)(3) if the issuer or plan has complied with the transitional rules 
of this paragraph (i)(3).
    (i) Denial of coverage clarified. For purposes of this paragraph 
(i)(3), an individual is considered to have been denied coverage if the 
individual--
    (A) Failed to apply for coverage because it was reasonable to 
believe that an application for coverage would have been futile due to 
a plan provision that discriminated based on a health factor; or
    (B) Was not offered an opportunity to enroll in the plan and the 
failure to give such an opportunity violates this section.
    (ii) Individuals denied coverage without a good faith 
interpretation of the law--(A) Opportunity to enroll required. If a 
plan or issuer has denied coverage to any individual based on a health 
factor and that denial was not based on a good faith interpretation of 
section 2702 of the PHS Act or any guidance published by the Secretary, 
the plan or issuer is required to give the individual an opportunity to 
enroll (including notice of an opportunity to enroll) that continues 
for at least 30 days. This opportunity must be presented not later than 
March 9, 2001.
    (1) If this enrollment opportunity was presented before or within 
the first plan year beginning on or after July 1, 1997 (or in the case 
of a collectively bargained plan, before or within the first plan year 
beginning on the effective date for the plan described in section 
102(c) (3) of the Health Insurance Portability and Accountability Act 
of 1996), the coverage must be effective within that first plan year.
    (2) If this enrollment opportunity is presented after such plan 
year, the individual must be given the choice of having the coverage 
effective on either of the following two dates--
    (i) The date the plan receives a request for enrollment in 
connection with the enrollment opportunity; or
    (ii) Retroactively to the first day of the first plan year 
beginning on the effective date for the plan described in sections 
102(c)(1) and (3) of the Health Insurance Portability and 
Accountability Act of 1996 (or, if the individual otherwise first 
became eligible to enroll for coverage after that date, on the date the 
individual was otherwise eligible to enroll in the plan). If an 
individual elects retroactive coverage, the plan or issuer is required 
to provide the benefits it would have provided if the individual had 
been enrolled for coverage during that period (irrespective of any 
otherwise applicable plan provisions governing timing for the 
submission of claims). The plan or issuer may require the individual to 
pay whatever additional amount the individual would have been required 
to pay for the coverage (but the plan or issuer cannot charge interest 
on that amount).
    (B) Relation to preexisting condition rules. For purposes of 
section 2701 of the PHS Act, the individual may not be treated as a 
late enrollee or as a special enrollee. Moreover, the individual's 
enrollment date is the effective date for the plan described in 
sections 102(c)(1) and (3) of the Health Insurance Portability and 
Accountability Act (or, if the individual otherwise first became 
eligible to enroll for coverage after that date, on the date the 
individual was otherwise eligible to enroll in the plan), even if the 
individual chooses under paragraph (i)(3)(ii)(A) of this section to 
have coverage effective only prospectively. In addition, any period 
between the individual's enrollment date and the effective date of 
coverage is treated as a waiting period.
    (C) Examples. The rules of this paragraph (i)(3)(ii) are 
illustrated by the following examples:

    Example 1. (i) Facts. Employer X maintains a group health plan 
with a plan year beginning October 1 and ending September 30. 
Individual F was hired by Employer X before the effective date of 
section 2702 of the PHS Act. Before the effective date of section 
2702 of the PHS Act for this plan (October 1, 1997), the terms of 
the plan allowed employees and their dependents to enroll when the 
employee was first hired,

[[Page 1419]]

and on each January 1 thereafter, but in either case, only if the 
individual could pass a physical examination. F's application to 
enroll when first hired was denied because F had diabetes and could 
not pass a physical examination. Upon the effective date of section 
2702 of the PHS Act for this plan (October 1, 1997), the plan is 
amended to delete the requirement to pass a physical examination. In 
November of 1997, the plan gives F an opportunity to enroll in the 
plan (including notice of the opportunity to enroll) without passing 
a physical examination, with coverage effective January 1, 1998.
    (ii) Conclusion. In this Example 1, the plan complies with the 
requirements of this paragraph (i)(3)(ii).
    Example 2. (i) Facts. The plan year of a group health plan 
begins January 1 and ends December 31. Under the plan, a dependent 
who is unable to engage in normal life activities on the date 
coverage would otherwise become effective is not enrolled until the 
dependent is able to engage in normal life activities. Individual G 
is a dependent who is otherwise eligible for coverage, but is unable 
to engage in normal life activities. The plan has not allowed G to 
enroll for coverage.
    (ii) Conclusion. In this Example 2, beginning on the effective 
date of section 2702 of the PHS Act for the plan (January 1, 1998), 
the plan provision is not permitted under any good faith 
interpretation of section 2702 of the PHS Act or any guidance 
published by the Secretary. Therefore, the plan is required, not 
later than March 9, 2001, to give G an opportunity to enroll 
(including notice of the opportunity to enroll), with coverage 
effective, at G's option, either retroactively from January 1, 1998 
or prospectively from the date G's request for enrollment is 
received by the plan. If G elects coverage to be effective beginning 
January 1, 1998, the plan can require G to pay any required employee 
premiums for the retroactive coverage.

    (iii) Individuals denied coverage based on a good faith 
interpretation of the law--(A) Opportunity to enroll required. If a 
plan or issuer has denied coverage to any individual before the first 
day of the first plan year beginning on or after July 1, 2001 based in 
part on a health factor and that denial was based on a good faith 
interpretation of section 2702 of the PHS Act or guidance published by 
the Secretary, the plan or issuer is required to give the individual an 
opportunity to enroll (including notice of an opportunity to enroll) 
that continues for at least 30 days, with coverage effective no later 
than July 1, 2001. Individuals required to be offered an opportunity to 
enroll include individuals previously offered enrollment without regard 
to a health factor but subsequently denied enrollment due to a health 
factor.
    (B) Relation to preexisting condition rules. For purposes of 
section 2701 of the PHS Act, the individual may not be treated as a 
late enrollee or as a special enrollee. Moreover, the individual's 
enrollment date is the effective date for the plan described in 
sections 102(c)(1) and (3) of the Health Insurance Portability and 
Accountability Act (or, if the individual otherwise first became 
eligible to enroll for coverage after that date, on the date the 
individual was otherwise eligible to enroll in the plan). In addition, 
any period between the individual's enrollment date and the effective 
date of coverage is treated as a waiting period.
    (C) Example. The rules of this paragraph (i)(3)(iii) are 
illustrated by the following example:

    Example. (i) Facts. Individual H was hired by Employer Y on May 
3, 1995. Y maintains a group health plan with a plan year beginning 
on February 1. Under the terms of the plan, employees and their 
dependents are allowed to enroll when the employee is first hired 
(without a requirement to pass a physical examination), and on each 
February 1 thereafter if the individual can pass a physical 
examination. H chose not to enroll for coverage when hired in May of 
1995. On February 1, 1997, H tried to enroll for coverage under the 
plan. However, H was denied coverage for failure to pass a physical 
examination. Shortly thereafter, Y's plan eliminated late 
enrollment, and H was not given another opportunity to enroll in the 
plan. There is no evidence to suggest that Y's plan was acting in 
bad faith in denying coverage under the plan beginning on the 
effective date of section 2702 of the PHS Act (February 1, 1998).
    (ii) Conclusion. In this Example, because coverage previously 
had been made available with respect to H without regard to any 
health factor of H and because Y's plan was acting in accordance 
with a good faith interpretation of section 2702 of the PHS Act (and 
guidance published by the Secretary), the failure of Y's plan to 
allow H to enroll effective February 1, 1998 was permissible on that 
date. However, under the transitional rules of this paragraph 
(i)(3)(iii), Y's plan must give H an opportunity to enroll that 
continues for at least 30 days, with coverage effective no later 
than July 1, 2001. (In addition, February 1, 1998 is H's enrollment 
date under the plan and the period between February 1, 1998 and July 
1, 2001 is treated as a waiting period. Accordingly, any preexisting 
condition exclusion period permitted under Sec. 146.111 will have 
expired before July 1, 2001.)

    (4) Special transitional rule for self-funded non-Federal 
governmental plans exempted under 45 CFR 146.180--(i) If coverage has 
been denied to any individual because the sponsor of a self-funded non-
Federal governmental plan has elected under Sec. 146.180 to exempt the 
plan from the requirements of this section, and the plan sponsor 
subsequently chooses to bring the plan into compliance with the 
requirements of this section, the plan--
    (A) Must notify the individual that the plan will be coming into 
compliance with the requirements of this section, specify the effective 
date of compliance, and inform the individual regarding any enrollment 
restrictions that may apply under the terms of the plan once the plan 
is in compliance with this section (as a matter of administrative 
convenience, the notice may be disseminated to all employees);
    (B) Must give the individual an opportunity to enroll that 
continues for at least 30 days;
    (C) Must permit coverage to be effective as of the first day of 
plan coverage for which an exemption election under Sec. 146.180 (with 
regard to this section) is no longer in effect (or July 1, 2001, if 
later, and the plan was acting in accordance with a good faith 
interpretation of section 2702 of the PHS Act and guidance published by 
HCFA); and
    (D) May not treat the individual as a late enrollee or a special 
enrollee.
    (ii) For purposes of this paragraph (i)(4), an individual is 
considered to have been denied coverage if the individual failed to 
apply for coverage because, given an exemption election under 
Sec. 146.180, 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)(4) are illustrated by the 
following examples:

    Example 1. (i) Facts. Individual D was hired by a non-Federal 
governmental employer in June 1996. The employer maintains a self-
funded group health plan with a plan year beginning on October 1. 
Under the terms of the plan, employees and their dependents are 
allowed to enroll when the employee is first hired without regard to 
any health factor. If an individual declines to enroll when first 
eligible, the individual may enroll effective October 1 of any plan 
year if the individual can pass a physical examination. The plan 
sponsor elected under Sec. 146.180 of this part to exempt the plan 
from the requirements of this section for the plan year beginning 
October 1, 1997, and renewed the exemption election for the plan 
year beginning October 1, 1998. That is, the plan sponsor elected to 
retain the evidence of good health requirement for late enrollees 
which, absent an exemption election under Sec. 146.180 of this part, 
would have been in violation of this section as of October 1, 1997. 
D chose not to enroll for coverage when first hired. In February of 
1998, D was treated for skin cancer but did not apply for coverage 
under the plan for the plan year beginning October 1, 1998, because 
D assumed D could not meet the evidence of good health requirement. 
With the plan year beginning October 1, 1999, the plan sponsor chose 
not to renew its exemption election and brought the plan into 
compliance with this section. However, the terms of the plan, 
effective

[[Page 1420]]

October 1, 1999, were amended to permit enrollment only during the 
initial 30-day period of employment. The plan no longer permits late 
enrollment under any circumstances, including with respect to 
current employees not enrolled in the plan. Therefore, D was not 
given another opportunity to enroll in the plan. There is no 
evidence to suggest that the plan was acting in bad faith in denying 
D coverage under the plan beginning on the effective date of 
Sec. 146.121 for the plan (October 1, 1999).
    (ii) Conclusion. In this Example 1, because the plan under 
Sec. 146.180 was previously excluded from the requirements of 
Sec. 146.121 and thereafter was acting in accordance with a good 
faith interpretation of Sec. 146.121 and guidance published by HCFA, 
the failure of the plan to give D an opportunity to enroll effective 
October 1, 1999 was permissible on that date. However, under the 
transitional rules of this paragraph (i)(4), the plan must give D an 
opportunity to enroll that continues for at least 30 days, with 
coverage effective no later than July 1, 2001. (Additionally, 
October 1, 1999 is D's enrollment date under the plan and the period 
between October 1, 1999 and July 1, 2001 is treated as a waiting 
period. Furthermore, if the plan sponsor has not elected to exempt 
the plan from limitations on preexisting condition exclusion 
periods, any preexisting condition exclusion period must be 
administered in accordance with Sec. 146.111. Accordingly, any 
preexisting condition exclusion period permitted under Sec. 146.111 
will have expired before July 1, 2001.)
    Example 2. (i) Facts. Individual E was hired by a non-Federal 
governmental employer in February 1995. The employer maintains a 
self-funded group health plan with a plan year beginning on 
September 1. Under the terms of the plan, employees and their 
dependents are allowed to enroll when the employee is first hired 
without regard to any health factor. If an individual declines to 
enroll when first eligible, the individual may enroll effective 
September 1 of any plan year if the individual can pass a physical 
examination. All enrollees are subject to a 12-month preexisting 
condition exclusion period. The plan sponsor elected under 
Sec. 146.180 of this part to exempt the plan from the requirements 
of this section and Sec. 146.111 (limitations on preexisting 
condition exclusion periods) for the plan year beginning September 
1, 1997, and renews the exemption election for the plan years 
beginning September 1, 1998, September 1, 1999, and September 1, 
2000. E chose not to enroll for coverage when first hired. In June 
of 2001, E is diagnosed as having multiple sclerosis (MS). With the 
plan year beginning September 1, 2001, 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 affords E an opportunity to 
enroll, without a physical examination, effective September 1, 2001. 
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, 2002, the plan will cover treatment of E's 
MS.
    (ii) Conclusion. In this Example 2, the plan complies with the 
requirements of this section. (The plan is not required to comply 
with the requirements of Sec. 146.111 because the plan continues to 
be exempted from those requirements in accordance with the plan 
sponsor's election under Sec. 146.180.)


    3. The heading, paragraph (a)(1), and the first sentence of 
paragraph (a)(2) of Sec. 146.125 are revised to read as follows:


Sec. 146.125  Applicability dates.

    (a) General applicability dates--(1) Non-collectively bargained 
plans. Part A of title XXVII of the PHS Act and Secs. 146.101 through 
146.119, Sec. 146.143, Sec. 146.145, 45 CFR part 150, and this section 
apply with respect to group health plans, and health insurance coverage 
offered in connection with group health plans, for plan years beginning 
after June 30, 1997, except as otherwise provided in this section.
    (2) Collectively-bargained plans. Except as otherwise provided in 
this section (other than paragraph (a)(1) of this section), in the case 
of a group health plan maintained pursuant to one or more collective 
bargaining agreements between employee representatives and one or more 
employers ratified before August 21, 1996, Part A of Title XXVII of the 
PHS Act and Secs. 146.101 through 146.119, Sec. 146.143, Sec. 146.145, 
45 CFR part 150, and this section do not apply to plan years beginning 
before the later of July 1, 1997, or the date on which the last of the 
collective bargaining agreements relating to the plan terminates 
(determined without regard to any extension thereof agreed to after 
August 21, 1996). * * *
* * * * *

    Dated: June 22, 2000.
Nancy-Ann Min DeParle,
Administrator, Health Care Financing Administration.
    Approved: August 29, 2000.
Donna E. Shalala,
Secretary.
[FR Doc. 01-106 Filed 1-5-01; 8:45 am]
BILLING CODE 4120-01-P; 4830-01-P; 4510-29-P


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