May 10, 2024

The Departments of Labor (DOL), Health and Human Services (HHS), and the Treasury/IRS – collectively known as the Tri-Agencies – released anticipated final rules at the end of March on short-term limited duration insurance (STLDI) and fixed indemnity excepted benefits coverage, which includes a new requirement for all groups who offer fixed and/or hospital indemnity plans.

For large employers, the use of STLDI insurance is generally less common, but some employers offer fixed indemnity and/or hospital indemnity coverage, often on a voluntary basis. Fixed indemnity coverage is an insurance policy that pays covered individuals a specified amount of money for the occurrence of certain health-related events, such as physician office visits or days in the hospital. Fixed indemnity plans, like STLDI, do not meet the ACA minimum essential coverage requirements, as they are generally designed to provide a source of income replacement rather than comprehensive medical coverage. A commonly utilized form of indemnity coverage is critical illness insurance, which pays the beneficiary a flat fee following the diagnosis of certain conditions such as life-threatening cancer or renal failure.

Fixed Indemnity and/or Hospital Indemnity – New Notice Requirements

The Departments considered a number of proposals for fixed indemnity plans but only finalized notice requirements in this rulemaking.

The Departments will now require a consumer notice to be provided in the group market (the same way consumer notices are required in the individual market) that highlights the differences between fixed indemnity excepted benefits coverage and “comprehensive coverage.” Among other terms and requirements, the notice expressly must state: “This policy isn’t a substitute for comprehensive health insurance,” and “Since this policy isn’t health insurance, it doesn’t have to include most Federal consumer protections that apply to health insurance.”

Group and individual coverage providers/issuers are required to prominently display this notice in marketing, application, enrollment, and reenrollment materials, effective for plan years beginning on or after January 1, 2025.

The rule did not finalize other proposed changes to these coverages or certain other accident and health plans, including changes to their taxability. The Departments, however, will continue to review the tax treatment of these coverages and expressed concerns about deceptive marketing and the sale of hospital indemnity and other fixed indemnity insurance that blurs the lines between indemnity benefits and comprehensive coverage. We anticipate future rulemaking in this area and will provide additional information as the Departments take next steps.

Background Information and Rule Changes for STLDI

STLDI policies have been an attractive option for certain consumers who do not qualify for, or prefer not to enroll in, employer plans or government programs like Medicaid. While the STLDI policies generally only offer limited benefits, the ability to purchase a plan for 30 days, six months, or even 360 days has had an appeal for people who needed to bridge a gap in coverage. STLDI policies have also grown to be one of the more controversial forms of health coverage as they do not meet ACA standards to count as minimum essential coverage.

Regulatory action on STLDI has been expected since 2021, when President Biden signed an Executive Order that formally revoked Executive Order 13813 (signed by President Trump during his first year in office). Under the Obama administration, short-term plans were available to consumers for three months, with the option to extend just one more month for a maximum coverage period of four months. President Trump’s Order 13813 directed agencies to increase this period; in 2018, the Trump administration finalized a rule to extend their availability from 90 days to 12 months (with the option for three full renewals for a maximum coverage period of 36 months).

The latest final rule amends the federal definition of STLDI to limit the length of the initial contract term to no more than three months and the maximum coverage period to no more than four months, reverting to Obama-era standards. Additionally, the rule aims to curtail extensions and renewals that would try to circumvent term limits by issuing a successive “new” policy that is under a different insurance company brand/name but related to the original issuing insurance company (i.e., in the controlled group). The final rule does this by defining STLDI to provide that a renewal or extension includes STLDI sold by the same insurance issuer – or any issuer that is a member of the same controlled group – to the same policyholder within a 12-month period.

These regulations apply to coverages sold on or after September 1, 2024.

We provide this material for informational purposes only; it is not a substitute for legal advice.

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