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Employer Health Reform Issues Brief: Limits on Rescissions of Group Health Plan Coverage

Smart first steps for employers


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The Provision

Group health plans, including grandfathered health plans, will not be permitted to rescind coverage except in cases of fraud or intentional misrepresentation of a material fact. This applies only to retroactive cancellations of coverage; prospective cancellations are still permissible. For purposes of this rule the term “rescission” does not include any retroactive cancellation based on the participant’s failure to timely pay premiums.

When permitted, 30-day advance notice must be given to the participant before a rescission can occur. This advance notice will be required regardless of whether the rescission applies to an entire group or a single individual within the group.

These limitations will not affect a plan sponsor’s ability to terminate coverage prospectively.

Example

An employer sponsors a group health plan that covers employees who work at least 30 hours per week. Employee B is covered under the plan as a full-time employee. Employee B is reassigned to a part-time position, making him ineligible for coverage under the plan’s terms. The plan mistakenly continues to provide coverage, collecting premiums from Employee B and paying his claims. After a routine audit the plan discovers Employee B is no longer eligible for coverage due to his part-time status. The plan cannot rescind Employee B’s coverage retroactive to the date he changed from full-time to part-time status because there was no fraud or misrepresentation of material fact. However, the plan may cancel Employee B’s coverage prospectively to the extent consistent with any other applicable federal and State laws.

Effective Date: Plan years beginning on or after September 23, 2010. Applies to grandfathered health plans.

Key Implication: Administration

Group health plan administrators occasionally initiate audits to identify and drop coverage of individuals who are no longer eligible but still enrolled. These individuals may include employees’ dependents who have aged-out under the plan’s terms, employees’ ex-spouses, and employees who have recently terminated employment. In many cases these individuals have continued paying premiums because they still need coverage and do not have access to other affordable options. Sometimes it is in the plan’s best interests to refund these premiums and terminate coverage retroactively, especially when the individual in question has incurred large post-eligibility claims. When these new limits on rescissions take effect that option may not be available.

Key Implication: Plan Design

Plans should be amended to update existing provisions relating to rescissions in accordance with the new rules. Sponsors of fully-insured plans must be careful to consider any applicable State laws when determining what, if any, changes need to be made. The State laws will continue to apply to the extent they afford greater rights to participants.

Smart First Steps

Administration: Consider initiating an audit before the new limitations on rescissions take effect. This will give the plan an opportunity to retroactively cancel coverage in appropriate circumstances before the new rules take effect. However, administrators of fully insured plans must be careful not to take any actions that would violate any applicable State-law limits on rescissions.

Plan Design: Prepare and adopt necessary plan amendments. Consider taking this opportunity to update the plan’s provisions to clarify how and when the plan can cancel coverage, either retroactively or prospectively. Insured plans should be sure to consider any applicable State laws before making changes.

As used in this document, “Deloitte” means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.

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