1378 Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Rules and Regulations

1References 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.

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.

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

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 email to: HIPAA702@pwba.dol.gov.

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

Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Rules and Regulations 1379

2See footnote 1.

3However, 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.

comments on whether additional

guidance was needed concerning—

• The extent to which the statute

prohibits 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;

• Application of the prohibitions on

discrimination between groups of

similarly situated individuals; and

• 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.

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—

• Explain the application of these

provisions to benefits;

• Clarify the relationship between the

HIPAA nondiscrimination provisions

and the HIPAA preexisting condition

exclusion limitations;

• Explain the application of these

provisions to premiums;

• Describe similarly situated

individuals;

• Explain the application of these

provisions to actively-at-work and

nonconfinement clauses; and

• 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.

Health Factors

The HIPAA nondiscrimination

provisions set forth eight health statusrelated 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

1380 Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Rules and Regulations

4For 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.’’

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

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

Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Rules and Regulations 1381

6A 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.

7However, 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).

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).

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

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

1382 Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Rules and Regulations

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-byindividual 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 perparticipant 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 employmentbased 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 parttime 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

Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Rules and Regulations 1383

8The term COBRA continuation provision is

defined in 26 CFR 54.9801–2T, 29 CFR 2590.701–

2, and 45 CFR 144.103.

9For 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.’’

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.

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.

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 threemonth 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

1384 Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Rules and Regulations

10This 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.

11See ERISA section 102, and the Department of

Labaor’s regulations issued thereunder.

12See Varity Corp v. Howe, 516 U.S. 489, 506

(1996).

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

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.

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

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

1386 Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Rules and Regulations

individuals who enroll in the plan on

July 1, 2001 cannot be subject to any

preexisting condition exclusion period.

Special Transitional Rule for SelfFunded Non-Federal Governmental

Plans Exempted Under 45 CFR 146.180

The sponsor of a self-funded nonFederal governmental plan may elect

under section 2721(b)(2) of the PHS Act

and 45 CFR 146.180 to exempt its group

health plan from the nondiscrimination

requirements of section 2702 of the PHS

Act and 45 CFR 146.121. 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 crossreferencing 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

April 1997 regulations Final regulation under § 9802

§ 54.9802–1T(a)(1) ................................................................................... § 54.9802–1(a)(1),(2); (b)(1)

§ 54.9802–1T(a)(2)(i) ................................................................................ § 54.9802–1(b)(2)(i)(A)

§ 54.9802–1T(a)(3) ................................................................................... [The corresponding provision is in the new temporary regulations.]

§ 54.9802–1T(a)(4) ................................................................................... § 54.9802–1(b)(1)(iii)

§ 54.9802–1T(b)(1) ................................................................................... § 54.9802–1(c)(1)(i)

§ 54.9802–1T(b)(2)(i) ................................................................................ § 54.9802–1(c)(2)(i)

§ 54.9802–1T(b)(2)(ii) ............................................................................... § 54.9802–1(b)(2)(i); (c)(3)

§ 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

Subject Paragraph of the interim final

regulations Applies 3/9/01

Applies plan

years beginning on or

after 7/1/2001

Health factors ............................................................................................. (a)(1) ................................................ ✔ ........................

Health factors—Evidence of insurability—Conditions arising out of an

act of domestic violence.

(a)(2)(i) ............................................. ✔ ........................

Health factors—Evidence of insurability—Participation in certain activities.(a)(2)(ii) ............................................ ........................ ✔

Health factors—The decision whether health coverage is elected ........... (a)(3) ................................................ ........................ ✔

Prohibited discrimination in rules for eligibility—General rule ................... (b)(1)(i) ............................................. ✔ ........................

Prohibited discrimination in rules for eligibility—Rules for eligibility described.(b)(1)(ii) ............................................ ........................ ✔

Prohibited discrimination in eligibility—General rule—Example 1 ............ (b)(1)(iii) Example 1 ......................... ✔ ........................

Prohibited discrimination in eligibility—General rule—Examples 2

through 4.

(b)(1)(iii) Examples 2 through 4 ...... ........................ ✔

Prohibited discrimination in eligibility—Application to benefits—No benefits mandated.(b)(2)(i)(A) ........................................ ✔ ........................

Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Rules and Regulations 1387

13See proposed rules relating to bona fide

wellness programs published elsewhere in this

issue of the Federal Register.

TABLE 2.—APPLICABILITY DATES FOR THE INTERIM FINAL REGULATIONS—Continued

Subject Paragraph of the interim final

regulations Applies 3/9/01

Applies plan

years beginning on or

after 7/1/2001

Prohibited discrimination in eligibility—Application to benefits—Nondiscriminatory benefit restrictions permitted.(b)(2)(i)(B), (C), & (D) ...................... ........................ ✔

Prohibited discrimination in eligibility—Application to benefits—Certain

cost-sharing mechanisms.

(b)(2)(ii) ............................................ ✔ ........................

Prohibited discrimination in eligibility—Application to benefits—Sourceof-injury exclusions.(b)(2)(iii) ........................................... ........................ ✔

Prohibited discrimination in eligibility—Application to benefits—Relationship to HIPAA preexisting condition exclusion rules.(b)(3) ................................................ ........................ ✔

Prohibited discrimination in premiums or contributions—General rule ..... (c)(1)(i) ............................................. ✔ ........................

Prohibited discrimination in premiums or contributions—Determining an

individual’s premium rate.

(c)(1)(ii) ............................................ ........................ ✔

Prohibited discrimination in premiums or contributions—Group rating on

health factors not restricted.

(c)(2)(i) ............................................. ✔ ........................

Prohibited discrimination in premiums or contributions—List billing

based on a health factor prohibited.

(c)(2)(ii) & (iii) .................................. ........................ ✔

Prohibited discrimination in premiums or contributions—Exception for

bona fide wellness programs.

(c)(3) ................................................ ✔ ........................

Similarly situated individuals ...................................................................... (d) .................................................... ........................ ✔

Nonconfinement and actively-at-work provisions ...................................... (e) .................................................... ........................ ✔

Bona fide wellness programs .................................................................... (f) [Reserved.] .................................. See proposed regulations

published elsewhere in this

Federal Register.

More favorable treatment of individuals with adverse health factors permitted.(g) .................................................... ........................ ✔

No effect on other laws ............................................................................. (h) .................................................... ........................ ✔

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 nondiscrimination 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.

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.

1388 Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Rules and Regulations

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 selfimplementing 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

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

1390 Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Rules and Regulations

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:

• 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;

• 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;

• Enhance the quality, utility, and

clarity of the information to be

collected; and

• 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:

• 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;

• How to enhance the quality, utility,

and clarity of the information to be

collected;

• 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

• 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

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

• Whether the information collection

is necessary and useful to carry out the

proper functions of the agency;

• The accuracy of the agency’s

estimate of the information collection

burden;

• The quality, utility, and clarity of

the information to be collected; and

• 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-atwork 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 ongoing 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 selffunded 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 § 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 selffunded 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

1392 Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Rules and Regulations

14This 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.

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 nondiscrimination provisions in only two

States.

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

Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Rules and Regulations 1393

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.

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:

• 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.)

• 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 StateFederal 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 selfimplementing. 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 statusrelated 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

1394 Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Rules and Regulations

16 Gabel, Jon R. Job-based Health Insurance,

1977–1998: The Accidental System Under Scrutiny.

Health Affairs. November/December 1999. Volume

18, Number 6.

17February 1997 Current Population Survey,

Contingent Worker Supplement.

18The 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

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.

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.

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

Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Rules and Regulations 1395

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.

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 selfinsured 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 pernotice 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.

1396 Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Rules and Regulations

Source of cost $MM Explanatory notes

Amending plans and revising materials ....................................... $8 ................ Upper bound of new economic cost incurred as plans are

amended to comply with the regulation. One-time cost.

Notifying employees of enrollment opportunities ......................... $11 .............. Upper bound of new 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:

§ 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 § 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 § 54.9802–1T(b)(1)(ii).

Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Rules and Regulations 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 § 54.9802–1T(b)(2)(i)(B).

(C) [Reserved] For further guidance,

see § 54.9802–1T(b)(2)(i)(C).

(D) [Reserved] For further guidance,

see § 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-ofinjury exclusions. [Reserved] For further

guidance, see § 54.9802–1T(b)(2)(iii).

(3) Relationship to section 9801(a),

(b), and (d). [Reserved] For further

guidance, see § 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 § 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 § 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

§ 54.9802–1T(d).

(e) Nonconfinement and actively-atwork provisions. [Reserved] For further

guidance, see § 54.9802–1T(e).

(f) Bona fide wellness programs.

[Reserved]

(g) Benign discrimination permitted.

[Reserved] For further guidance, see

§ 54.9802–1T(g).

(h) No effect on other laws. [Reserved]

For further guidance, see § 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 § 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 § 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:

§ 54.9802–1T Prohibiting discrimination

against participants and beneficiaries

based on a health factor (temporary).

(a) Health factors. (1) [Reserved] For

further guidance, see § 54.9802–1(a).

(2) Evidence of insurability

includes—

(i) [Reserved] For further guidance,

see § 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

§ 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 § 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

1398 Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Rules and Regulations

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 § 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 costsharing requirement applies uniformly

to all similarly situated individuals and

is not directed at individual participants

or beneficiaries based on any health

factor of the participants or

beneficiaries. In the case of a costsharing requirement, see also paragraph

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

variances in the application of a costsharing mechanism made available

under a 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.

Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Rules and Regulations 1399

(ii) Cost-sharing mechanisms and

wellness programs. [Reserved] For

further guidance, see § 54.9802–

1(b)(2)(ii).

(iii) Specific rule relating to source-ofinjury exclusions—(A) If a group health

plan generally provides benefits for a

type of injury, the plan may not deny

benefits otherwise provided for

treatment of the injury if the injury

results from an act of domestic violence

or a medical condition (including both

physical and mental health conditions).

(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 sixmonth period ending on an individual’s

enrollment date. In addition, the exclusion

generally extends for 12 months after an

individual’s enrollment date, but this 12-

month period is offset by the number of days

of an individual’s creditable coverage in

accordance with 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 lookback 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 § 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

§ 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)).

1400 Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Rules and Regulations

(3) Exception for bona fide wellness

programs. [Reserved] For further

guidance, see § 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.

Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Rules and Regulations 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-atwork provisions—(1) Nonconfinement

provisions—(i) General rule. Under the

rules of paragraphs (b) and (c) of this

section, a plan may not establish a rule

for eligibility (as described in paragraph

(b)(1)(ii) of this section) or set any

individual’s premium or contribution

rate based on whether an individual is

confined to a hospital or other health

care institution. In addition, under the

rules of paragraphs (b) and (c) of this

section, a plan may not establish a rule

for eligibility or set any individual’s

premium or contribution rate based on

an individual’s ability to engage in

normal life activities, except to the

extent permitted under paragraphs

(e)(2)(ii) and (3) of this section

(permitting plans, under certain

circumstances, to distinguish among

employees based on the performance of

services).

(ii) Examples. The rules of this

paragraph (e)(1) are illustrated by the

following examples:

Example 1. (i) Facts. Under a group health

plan, coverage for employees and their

dependents generally becomes effective on

the first day of employment. However,

coverage for a dependent who is confined to

a hospital or other health care institution

does not become effective until the

confinement ends.

(ii) Conclusion. In this Example 1, the plan

violates this paragraph (e)(1) because the

plan delays the effective date of coverage for

dependents based on confinement to a

hospital or other health care institution.

Example 2. (i) Facts. In previous years, a

group health plan has provided coverage

through a group health insurance policy

offered by Issuer M. However, for the current

year, the plan provides coverage through a

group health insurance policy offered by

Issuer N. Under Issuer N ’s policy, items and

services provided in connection with the

confinement of a dependent to a hospital or

other health care institution are not covered

if the confinement is covered under an

extension of benefits clause from a previous

health insurance issuer.

(ii) Conclusion. See Example 2 in 29 CFR

2590.702(e)(1) and 45 CFR 146.121(e)(1) for

a conclusion that Issuer N violates provisions

of 29 CFR 2590.702(e)(1) and 45 CFR

146.121(e)(1) similar to the provisions of this

paragraph (e)(1) because 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.

1402 Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Rules and Regulations

(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 parttime employees, employees who work at

least 250 hours in a three-month period can

be treated differently than employees who

fail to work 250 hours in that period. The

result would be the same if the plan

permitted individuals to apply excess hours

from previous periods to satisfy the

requirement for the current quarter.

Example 3. (i) Facts. Under a group health

plan, coverage of an employee is terminated

when the individual’s employment is

terminated, in accordance with the rules of

paragraph (d) of this section. Employee B has

been covered under the plan. B experiences

a disabling illness that prevents B from

working. B takes a leave of absence under the

Family and Medical Leave Act of 1993. At

the end of such leave, B terminates

employment and consequently loses coverage

under the plan. (This termination of coverage

is without regard to whatever rights the

employee (or members of the employee’s

family) may have for COBRA continuation

coverage.)

(ii) Conclusion. In this Example 3, the plan

provision terminating B’s coverage upon B’s

termination of employment does not violate

this section.

Example 4. (i) Facts. Under a group health

plan, coverage of an employee is terminated

when the employee ceases to perform

services for the employer sponsoring the

plan, in accordance with the rules of

paragraph (d) of this section. Employee C is

laid off for three months. When the layoff

begins, C’s coverage under the plan is

terminated. (This termination of coverage is

without regard to whatever rights the

employee (or members of the employee’s

family) may have for COBRA continuation

coverage.)

(ii) Conclusion. In this Example 4, the plan

provision terminating C’s coverage upon the

cessation of C’s performance of services does

not violate this section.

(f) 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

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

1404 Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Rules and Regulations

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 § 2590.702 is revised to

read as follows:

§ 2590.702 Prohibiting discrimination

against participants and beneficiaries

based on a health factor.

(a) Health factors. (1) The term health

factor means, in relation to an

individual, any of the following health

status-related factors:

(i) Health status;

(ii) Medical condition (including both

physical and mental illnesses), as

defined in § 2590.701–2;

(iii) Claims experience;

(iv) Receipt of health care;

(v) Medical history;

(vi) Genetic information, as defined in

§ 2590.701–2;

(vii) Evidence of insurability; or

(viii) Disability.

(2) Evidence of insurability

includes—

(i) Conditions arising out of acts of

domestic violence; and

(ii) Participation in activities such as

motorcycling, snowmobiling, all-terrain

vehicle riding, horseback riding, skiing,

and other similar activities.

(3) The decision whether health

coverage is elected for an individual

(including the time chosen to enroll,

such as under special enrollment or late

enrollment) is not, itself, within the

scope of any health factor. (However,

under § 2590.701–6, a plan or issuer

must treat special enrollees the same as

similarly situated individuals who are

enrolled when first eligible.)

(b) Prohibited discrimination in rules

for eligibility—(1) In general—(i) A

group health plan, and a health

insurance issuer offering health

insurance coverage in connection with a

group health plan, may not establish

any rule for eligibility (including

continued eligibility) of any individual

to enroll for benefits under the terms of

the plan or group health insurance

coverage that discriminates based on

any health factor that relates to that

individual or a dependent of that

individual. This rule is subject to the

provisions of paragraph (b)(2) of this

section (explaining how this rule

applies to benefits), paragraph (b)(3) of

this section (allowing plans to impose

certain preexisting condition

exclusions), paragraph (d) of this section

(containing rules for establishing groups

of similarly situated individuals),

paragraph (e) of this section (relating to

nonconfinement, actively-at-work, and

other service requirements), paragraph

(f) of this section (relating to 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

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

1406 Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Rules and Regulations

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-ofinjury exclusions—(A) If a group health

plan or group health insurance coverage

generally provides benefits for a type of

injury, the plan or issuer may not deny

benefits otherwise provided for

treatment of the injury if the injury

results from an act of domestic violence

or a medical condition (including both

physical and mental health conditions).

(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 § 2590.701–3. (i) A

preexisting condition exclusion is

permitted under this section if it —

(A) Complies with § 2590.701–3;

(B) Applies uniformly to all similarly

situated individuals (as described in

paragraph (d) of this section); and

(C) Is not directed at individual

participants or beneficiaries based on

any health factor of the participants or

beneficiaries. For purposes of this

paragraph (b)(3)(i)(C), a plan

amendment relating to a preexisting

condition exclusion applicable to all

individuals in one or more groups of

similarly situated individuals under the

plan and made effective no earlier than

the first day of the first plan year after

the amendment is adopted is not

considered to be directed at any

individual participants or beneficiaries.

(ii) The rules of this paragraph (b)(3)

are illustrated by the following

examples:

Example 1. (i) Facts. A group health plan

imposes a preexisting condition exclusion on

all individuals enrolled in the plan. The

exclusion applies to conditions for which

medical advice, diagnosis, care, or treatment

was recommended or received within the sixmonth period ending on an individual’s

enrollment date. In addition, the exclusion

generally extends for 12 months after an

individual’s enrollment date, but this 12-

month period is offset by the number of days

of an individual’s creditable coverage in

accordance with § 2590.701–3. There is

nothing to indicate that the exclusion is

directed at individual participants or

beneficiaries.

(ii) Conclusion. In this Example 1, even

though the plan’s preexisting condition

exclusion discriminates against individuals

based on one or more health factors, the

preexisting condition exclusion does not

violate this section because it applies

uniformly to all similarly situated

individuals, is not directed at individual

participants or beneficiaries, and complies

with § 2590.701–3 (that is, the requirements

relating to the six-month look-back period,

the 12-month (or 18-month) maximum

exclusion period, and the creditable coverage

offset).

Example 2. (i) Facts. A group health plan

excludes coverage for conditions with respect

to which medical advice, diagnosis, care, or

treatment was recommended or received

within the six-month period ending on an

individual’s enrollment date. Under the plan,

the preexisting condition exclusion generally

extends for 12 months, offset by creditable

coverage. However, if an individual has no

claims in the first six months following

enrollment, the remainder of the exclusion

period is waived.

(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

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

1408 Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Rules and Regulations

(ii) Conclusion. In this Example 2, treating

spouses and dependent children differently

by imposing an age limitation on dependent

children, but not on spouses, is permitted

under this paragraph (d). Specifically, the

distinction between spouses and dependent

children is permitted under paragraph (d)(2)

of this section and is not prohibited under

paragraph (d)(3) of this section because it is

not directed at individual participants or

beneficiaries. It is also permissible to treat

dependent children who are under age 19 (or

full-time students under age 25) as a group

of similarly situated individuals separate

from those who are age 25 or older (or age

19 or older if they are not full-time students)

because the classification is permitted under

paragraph (d)(2) of this section and is not

directed at individual participants or

beneficiaries.

Example 3. (i) Facts. A university sponsors

a group health plan that provides one health

benefit package to faculty and another health

benefit package to other staff. Faculty and

staff are treated differently with respect to

other employee benefits such as retirement

benefits and leaves of absence. There is no

evidence to suggest that the distinction is

directed at individual participants or

beneficiaries.

(ii) Conclusion. In this Example 3, the

classification is permitted under this

paragraph (d) because there is a distinction

based on a bona fide employment-based

classification consistent with the employer’s

usual business practice and the distinction is

not directed at individual participants and

beneficiaries.

Example 4. (i) Facts. An employer sponsors

a group health plan that is available to all

current employees. Former employees may

also be eligible, but only if they complete a

specified number of years of service, are

enrolled under the plan at the time of

termination of employment, and are

continuously enrolled from that date. There

is no evidence to suggest that these

distinctions are directed at individual

participants or beneficiaries.

(ii) Conclusion. In this Example 4,

imposing additional eligibility requirements

on former employees is permitted because a

classification that distinguishes between

current and former employees is a bona fide

employment-based classification that is

permitted under this paragraph (d), provided

that it is not directed at individual

participants or beneficiaries. In addition, it is

permissible to distinguish between former

employees who satisfy the service

requirement and those who do not, provided

that the distinction is not directed at

individual participants or beneficiaries.

(However, former employees who do not

satisfy the eligibility criteria may,

nonetheless, be eligible for continued

coverage pursuant to a COBRA continuation

provision or similar State law.)

Example 5. (i) Facts. An employer sponsors

a group health plan that provides the same

benefit package to all seven employees of the

employer. Six of the seven employees have

the same job title and responsibilities, but

Employee G has a different job title and

different responsibilities. After G files an

expensive claim for benefits under the plan,

coverage under the plan is modified so that

employees with G’s job title receive a

different benefit package that includes a

lower lifetime dollar limit than in the benefit

package made available to the other six

employees.

(ii) Conclusion. Under the facts of this

Example 5, changing the coverage

classification for G based on the existing

employment classification for G is not

permitted under this paragraph (d) because

the creation of the new coverage

classification for G is directed at G based on

one or more health factors.

(e) Nonconfinement and actively-atwork provisions—(1) Nonconfinement

provisions—(i) General rule. Under the

rules of paragraphs (b) and (c) of this

section, a plan or issuer may not

establish a rule for eligibility (as

described in paragraph (b)(1)(ii) of this

section) or set any individual’s premium

or contribution rate based on whether

an individual is confined to a hospital

or other health care institution. In

addition, under the rules of paragraphs

(b) and (c) of this section, a plan or

issuer may not establish a rule for

eligibility or set any individual’s

premium or contribution rate based on

an individual’s ability to engage in

normal life activities, except to the

extent permitted under paragraphs

(e)(2)(ii) and (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

Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Rules and Regulations 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 parttime employees, employees who work at

least 250 hours in a three-month period can

be treated differently than employees who

fail to work 250 hours in that period. The

result would be the same if the plan

permitted individuals to apply excess hours

from previous periods to satisfy the

requirement for the current quarter.

Example 3. (i) Facts. Under a group health

plan, coverage of an employee is terminated

when the individual’s employment is

terminated, in accordance with the rules of

paragraph (d) of this section. Employee B has

been covered under the plan. B experiences

a disabling illness that prevents B from

working. B takes a leave of absence under the

Family and Medical Leave Act of 1993. At

the end of such leave, B terminates

employment and consequently loses coverage

under the plan. (This termination of coverage

is without regard to whatever rights the

employee (or members of the employee’s

family) may have for COBRA continuation

coverage.)

(ii) Conclusion. In this Example 3, the plan

provision terminating B’s coverage upon B’s

termination of employment does not violate

this section.

Example 4. (i) Facts. Under a group health

plan, coverage of an employee is terminated

when the employee ceases to perform

services for the employer sponsoring the

plan, in accordance with the rules of

paragraph (d) of this section. Employee C is

laid off for three months. When the layoff

begins, C’s coverage under the plan is

terminated. (This termination of coverage is

without regard to whatever rights the

employee (or members of the employee’s

family) may have for COBRA continuation

coverage.)

(ii) Conclusion. In this Example 4, the plan

provision terminating C’s coverage upon the

cessation of C’s performance of services does

not violate this section.

(f) 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

1410 Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Rules and Regulations

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

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

§ 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

§ 2590.736 are revised to read as

follows:

§ 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

§§ 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

1412 Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Rules and Regulations

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 §§ 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:

§ 146.121 Prohibiting discrimination

against participants and beneficiaries

based on a health factor.

(a) Health factors. (1) The term health

factor means, in relation to an

individual, any of the following health

status-related factors:

(i) Health status;

(ii) Medical condition (including both

physical and mental illnesses), as

defined in § 144.103;

(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 § 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

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

1414 Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Rules and Regulations

with the requirements of a bona fide

wellness program.

(iii) Specific rule relating to source-ofinjury exclusions—(A) If a group health

plan or group health insurance coverage

generally provides benefits for a type of

injury, the plan or issuer may not deny

benefits otherwise provided for

treatment of the injury if the injury

results from an act of domestic violence

or a medical condition (including both

physical and mental health conditions).

(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 § 146.111. (i) A

preexisting condition exclusion is

permitted under this section if it—

(A) Complies with § 146.111;

(B) Applies uniformly to all similarly

situated individuals (as described in

paragraph (d) of this section); and

(C) Is not directed at individual

participants or beneficiaries based on

any health factor of the participants or

beneficiaries. For purposes of this

paragraph (b)(3)(i)(C), a plan

amendment relating to a preexisting

condition exclusion applicable to all

individuals in one or more groups of

similarly situated individuals under the

plan and made effective no earlier than

the first day of the first plan year after

the amendment is adopted is not

considered to be directed at any

individual participants or beneficiaries.

(ii) The rules of this paragraph (b)(3)

are illustrated by the following

examples:

Example 1. (i) Facts. A group health plan

imposes a preexisting condition exclusion on

all individuals enrolled in the plan. The

exclusion applies to conditions for which

medical advice, diagnosis, care, or treatment

was recommended or received within the sixmonth period ending on an individual’s

enrollment date. In addition, the exclusion

generally extends for 12 months after an

individual’s enrollment date, but this 12-

month period is offset by the number of days

of an individual’s creditable coverage in

accordance with § 146.111. There is nothing

to indicate that the exclusion is directed at

individual participants or beneficiaries.

(ii) Conclusion. In this Example 1, even

though the plan’s preexisting condition

exclusion discriminates against individuals

based on one or more health factors, the

preexisting condition exclusion does not

violate this section because it applies

uniformly to all similarly situated

individuals, is not directed at individual

participants or beneficiaries, and complies

with § 146.111 (that is, the requirements

relating to the six-month look-back period,

the 12-month (or 18-month) maximum

exclusion period, and the creditable coverage

offset).

Example 2. (i) Facts. A group health plan

excludes coverage for conditions with respect

to which medical advice, diagnosis, care, or

treatment was recommended or received

within the six-month period ending on an

individual’s enrollment date. Under the plan,

the preexisting condition exclusion generally

extends for 12 months, offset by creditable

coverage. However, if an individual has no

claims in the first six months following

enrollment, the remainder of the exclusion

period is waived.

(ii) Conclusion. In this Example 2, the

plan’s preexisting condition exclusions

violate this section because they do not meet

the requirements of this paragraph (b)(3);

specifically, they do not apply uniformly to

all similarly situated individuals. The plan

provisions do not apply uniformly to all

similarly situated individuals because

individuals who have medical claims during

the first six months following enrollment are

not treated the same as similarly situated

individuals with no claims during that

period. (Under paragraph (d) of this section,

the groups cannot be treated as two separate

groups of similarly situated individuals

because the distinction is based on a health

factor.)

(c) Prohibited discrimination in

premiums or contributions—(1) In

general—(i) A group health plan, and a

health insurance issuer offering health

insurance coverage in connection with a

group health plan, may not require an

individual, as a condition of enrollment

or continued enrollment under the plan

or group health insurance coverage, to

pay a premium or contribution that is

greater than the premium or

contribution for a similarly situated

individual (described in paragraph (d)

of this section) enrolled in the plan or

group health insurance coverage based

on any health factor that relates to the

individual or a dependent of the

individual.

(ii) Discounts, rebates, payments in

kind, and any other premium

differential mechanisms are taken into

account in determining an individual’s

premium or contribution rate. (For rules

relating to cost-sharing mechanisms, see

paragraph (b)(2) of this section

(addressing benefits).)

(2) Rules relating to premium rates—

(i) Group rating based on health factors

not restricted under this section.

Nothing in this section restricts the

aggregate amount that an employer may

be charged for coverage under a group

health plan.

(ii) List billing based on a health

factor prohibited. However, a group

health insurance issuer, or a group

health plan, may not quote or charge an

employer (or an individual) a different

premium for an individual in a group of

similarly situated individuals based on

a health factor. (But see paragraph (g) of

this section permitting favorable

treatment of individuals with adverse

health factors.)

(iii) Examples. The rules of this

paragraph (c)(2) are illustrated by the

following examples:

Example 1. (i) Facts. An employer sponsors

a group health plan and purchases coverage

from a health insurance issuer. In order to

determine the premium rate for the

upcoming plan year, the issuer reviews the

claims experience of individuals covered

under the plan. The issuer finds that

Individual F had significantly higher claims

experience than similarly situated

individuals in the plan. The issuer quotes the

plan a higher per-participant rate because of

F ’s claims experience.

(ii) Conclusion. In this Example 1, the

issuer does not violate the provisions of this

paragraph (c)(2) because the issuer blends the

rate so that the employer is not quoted a

higher rate for F than for a similarly situated

individual based on F ’s claims experience.

Example 2. (i) Facts. Same facts as

Example 1, except that the issuer quotes the

employer a higher premium rate for F,

because of F ’s claims experience, than for a

similarly situated individual.

(ii) Conclusion. In this Example 2, the

issuer violates this paragraph (c)(2).

Moreover, even if the plan purchased the

policy based on the quote but did not require

a higher participant contribution for F than

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

1416 Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Rules and Regulations

Example 5. (i) Facts. An employer sponsors

a group health plan that provides the same

benefit package to all seven employees of the

employer. Six of the seven employees have

the same job title and responsibilities, but

Employee G has a different job title and

different responsibilities. After G files an

expensive claim for benefits under the plan,

coverage under the plan is modified so that

employees with G’s job title receive a

different benefit package that includes a

lower lifetime dollar limit than in the benefit

package made available to the other six

employees.

(ii) Conclusion. Under the facts of this

Example 5, changing the coverage

classification for G based on the existing

employment classification for G is not

permitted under this paragraph (d) because

the creation of the new coverage

classification for G is directed at G based on

one or more health factors.

(e) Nonconfinement and actively-atwork provisions—(1) Nonconfinement

provisions—(i) General rule. Under the

rules of paragraphs (b) and (c) of this

section, a plan or issuer may not

establish a rule for eligibility (as

described in paragraph (b)(1)(ii) of this

section) or set any individual’s premium

or contribution rate based on whether

an individual is confined to a hospital

or other health care institution. In

addition, under the rules of paragraphs

(b) and (c) of this section, a plan or

issuer may not establish a rule for

eligibility or set any individual’s

premium or contribution rate based on

an individual’s ability to engage in

normal life activities, except to the

extent permitted under paragraphs

(e)(2)(ii) and (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

Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Rules and Regulations 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 parttime employees, employees who work at

least 250 hours in a three-month period can

be treated differently than employees who

fail to work 250 hours in that period. The

result would be the same if the plan

permitted individuals to apply excess hours

from previous periods to satisfy the

requirement for the current quarter.

Example 3. (i) Facts. Under a group health

plan, coverage of an employee is terminated

when the individual’s employment is

terminated, in accordance with the rules of

paragraph (d) of this section. Employee B has

been covered under the plan. B experiences

a disabling illness that prevents B from

working. B takes a leave of absence under the

Family and Medical Leave Act of 1993. At

the end of such leave, B terminates

employment and consequently loses coverage

under the plan. (This termination of coverage

is without regard to whatever rights the

employee (or members of the employee’s

family) may have for COBRA continuation

coverage.)

(ii) Conclusion. In this Example 3, the plan

provision terminating B’s coverage upon B’s

termination of employment does not violate

this section.

Example 4. (i) Facts. Under a group health

plan, coverage of an employee is terminated

when the employee ceases to perform

services for the employer sponsoring the

plan, in accordance with the rules of

paragraph (d) of this section. Employee C is

laid off for three months. When the layoff

begins, C’s coverage under the plan is

terminated. (This termination of coverage is

without regard to whatever rights the

employee (or members of the employee’s

family) may have for COBRA continuation

coverage.)

(ii) Conclusion. In this Example 4, the plan

provision terminating C’s coverage upon the

cessation of C’s performance of services does

not violate this section.

(f) 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

1418 Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Rules and Regulations

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,

Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Rules and Regulations 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 § 146.111 will have expired

before July 1, 2001.)

(4) Special transitional rule for selffunded non-Federal governmental plans

exempted under 45 CFR 146.180—(i) If

coverage has been denied to any

individual because the sponsor of a selffunded non-Federal governmental plan

has elected under § 146.180 to exempt

the plan from the requirements of this

section, and the plan sponsor

subsequently chooses to bring the plan

into compliance with the requirements

of this section, the plan—

(A) Must notify the individual that the

plan will be coming into compliance

with the requirements of this section,

specify the effective date of compliance,

and inform the individual regarding any

enrollment restrictions that may apply

under the terms of the plan once the

plan is in compliance with this section

(as a matter of administrative

convenience, the notice may be

disseminated to all employees);

(B) Must give the individual an

opportunity to enroll that continues for

at least 30 days;

(C) Must permit coverage to be

effective as of the first day of plan

coverage for which an exemption

election under § 146.180 (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 § 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

§ 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

§ 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

1420 Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Rules and Regulations

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

§ 146.121 for the plan (October 1, 1999).

(ii) Conclusion. In this Example 1, because

the plan under § 146.180 was previously

excluded from the requirements of § 146.121

and thereafter was acting in accordance with

a good faith interpretation of § 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

§ 146.111. Accordingly, any preexisting

condition exclusion period permitted under

§ 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

§ 146.180 of this part to exempt the plan from

the requirements of this section and

§ 146.111 (limitations on preexisting

condition exclusion periods) for the plan

year beginning September 1, 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 § 146.111 because

the plan continues to be exempted from those

requirements in accordance with the plan

sponsor’s election under § 146.180.)

3. The heading, paragraph (a)(1), and

the first sentence of paragraph (a)(2) of

§ 146.125 are revised to read as follows:

§ 146.125 Applicability dates.

(a) General applicability dates—(1)

Non-collectively bargained plans. Part A

of title XXVII of the PHS Act and

§§ 146.101 through 146.119, § 146.143,

§ 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 §§ 146.101 through 146.119,

§ 146.143, § 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