Section 2711 of the Public Health Service Act (the “Act”), as added by the Affordable Care Act (“ACA”), generally prohibits group health plans and health insurance issuers offering group insurance coverage from imposing lifetime or annual limits on the dollar value of essential health benefits offered under the plan or coverage.
For plan years beginning after September 23, 2010, group health plans are prohibited from imposing lifetime limits on the dollar value of essential health benefits offered under the plan or coverage.
For plan years beginning on or after January 1, 2014, group health plans and health insurance issuers are prohibited from imposing annual limits on the dollar value of essential health benefits.
Under the ACA, essential health benefits are defined to include the following general categories: ambulatory patient services, emergency services, hospitalization, maternity and newborn care, mental health and substance use disorder services (including behavioral health treatment), prescription drugs, rehabilitative and habilitative services and devices, laboratory services, preventive and wellness services, chronic disease management, and pediatric services (including oral and vision care).
See the Essential Health Benefits section below for more information.
A group health plan must offer any individual who has lost coverage solely because he or she reached a lifetime limit on benefits a special enrollment opportunity of at least 30 days in which to enroll in the plan, as long as that individual is otherwise still eligible for coverage. This enrollment period is treated as a HIPAA special enrollment period, which permits the employee as well as the individual who previously exceeded the limit to choose from among any of the benefit options offered under the plan.
The enrollment opportunity must be provided no later than the first day of the first plan year beginning on or after September 23, 2010. Therefore, many plans can use the existing annual or open enrollment periods to satisfy the enrollment opportunity requirement, as long as the enrollment period is a minimum of 30 days in length. Once the individual is enrolled, coverage must begin no later than the first day of the first plan year beginning on or after September 23, 2010. This is true even if the request for special enrollment is made after the first day of the plan year, as long as the request is made during the required special enrollment period.
Plans and issuers must provide one-time written notice of this special enrollment right to any individual who has lost coverage because he or she reached a lifetime limit on benefits. The notice must state that the lifetime limit no longer applies and that the individual (if still otherwise eligible) has a 30 day special enrollment period by which to enroll in any benefit option under the plan available to similarly-situated employees. The notice may be provided to an employee on behalf of the employee’s dependent. In addition, the notice may be included with other enrollment materials that a plan distributes to employees, provided the statement is prominent.
Although the regulations do not specify a means of delivery for this notice, presumably the plan could follow ERISA safe harbor distribution methods.
Please Note: This special enrollment and notice requirement is a one-time event and does not need to be repeated in subsequent plan years; however, plans that issued this notice should maintain a copy of it with their plan records.
Essential health benefits (EHB) include at least the following general categories and the items and services covered within these categories:
A plan or issuer must apply the definition of essential health benefits consistently. For example, a plan could not both apply a lifetime limit to a particular benefit—thus taking the position that it was not an essential health benefit—and at the same time treat that particular benefit as an essential health benefit for purposes of applying the restricted annual limit.
Each State is required to determine an “EHB-benchmark plan” in accordance with criteria specified in the rules and which are generally a function of the largest of various types of plans operating within the state. There are default rules for States that fail to select a benchmark plans.
Details regarding each State’s benchmark plan can be found here.
Issuers of plans for small employers that will be available through the Exchanges must provide coverage for EHB. Large insured plans and self-insured plans are not required to provide EHB but, of course, most will provide some benefits that are EHB and to that extent they will be subject to the limitations on lifetime and annual limits applicable to EHB. A self-insured plan, large group plan and grandfathered group health plan will be considered to have used a permissible definition of EHB if it is one authorized by the Secretary of HHS, including any available benchmark options. Furthermore, the Departments intend to work with those plans that make a good faith effort to apply an authorized definition of EHB to ensure there are no annual or lifetime dollar limits on EHB.
In addition, EHB are used to measure whether a self-insured health plan provides minimum value. The final rule provides that a self-insured plan may take into account all benefits provided by the plan that are in any of the EHB benchmark plans.
The restriction on annual limits applies differently to certain account-based plans, especially where other rules apply to limit the benefits available.
The annual limit rules do not apply to health flexible spending accounts (health FSAs).
Other market reform provisions will apply to health FSAs unless they are considered excepted benefits. A health FSA will be considered an excepted benefit if:
Health Reimbursement Arrangements (HRAs) are another type of account-based health plan and typically consist of a promise by an employer to reimburse qualified medical expenses incurred and paid by a participant up to a certain amount during the plan year. HRAs can be designed so that unused amounts are available to reimburse a participant’s qualified medical expenses in future years, or can be designed such that any unused amounts are forfeited. HRAs must be funded solely with employer contributions.
An HRA is not considered a health plan for purposes of the ACA if it only provides excepted benefits (for example limited scope dental and vision benefits). If an HRA is available to reimburse medical expenses that are not excepted benefits, it is considered a health plan for purposes of the ACA’s market reform rules. As a result, it would need to comply with the rules prohibiting annual limits on essential health benefits as well as those requiring payment for preventive care.
However, when HRA coverage is “integrated” with coverage under a primary group health plan that complies with the ACA’s annual dollar limit requirement, the fact that the HRA features provide an annual reimbursement limit on essential health benefits will not cause it to be in violation of the ACA.
There are two methods by which an HRA may be considered integrated. The first is called the “Minimum Value Not Required Method”. Under this method, an HRA is integrated with an employer’s group health plan for purposes of the annual dollar limit prohibition and the preventive services requirements if:
The second method is called the “Minimum Value Required Method”. It applies to HRAs whose reimbursements are not limited as described under item (4) above. These HRAs will be considered integrated if:
An HRA is not considered “integrated” if it is available to employees who are not covered by a primary group health plan. This includes employees who are eligible for the employer’s primary coverage but elect not to take it. As noted above, however, an employer’s HRA can be integrated with the health coverage offered by another employer. However, see comments under the heading The Effect of Arrangements that Reduce Cost-Sharing on Minimum Value and Affordability of Employer-Sponsored Plans for the treatment of HRA contributions for purposes of determining an employee’s required contribution as it relates to the individual mandate.
In addition, an HRA that is used to purchase coverage on the individual market is not considered integrated.
Unused amounts that were credited to an HRA while the HRA was integrated with other group health plan coverage may be used to reimburse medical expenses in accordance with the terms of the HRA after an employee ceases to be covered by other integrated group health plan coverage without causing the HRA to fail to comply with the market reforms.
Example: Employee X is covered under his employer’s group health plan. The employer also sponsors an HRA for its covered employees. The employer credits $500 per year to the HRA account of each employee. X becomes ineligible for his employer’s group health plan due to a change in job classification. However, at the time his coverage ends, he still has $300 available in his HRA. The HRA may permit the X to use the $300 for medical expenses incurred after termination of his health plan coverage.
An HRA integrated with a group health plan that does not provide minimum value is deemed to impose an annual limit in violation of the annual dollar limit prohibition if the group health plan with which the HRA is integrated does not cover a category of essential health benefits and the HRA is available to cover that category of essential health benefits but limits the coverage to the HRA’s maximum benefit.
Example: Employer M sponsors a self-insured group health plan which does not provide minimum value. The group health plan does not cover preventive care. The employer also sponsors an HRA for its covered employees. The employer credits $500 per year to the HRA account of each employee. The employees may use the HRA to pay for medical expenses including preventive care up to the available balance in their account. The HRA is in violation of the ACA’s annual dollar limit prohibition.
However, under the integration method available for plans that provide minimum value, if a group health plan provides minimum value, an HRA integrated with that group health plan will not be treated as imposing an annual limit in violation of the annual dollar limit prohibition, even if that group health plan does not cover a category of essential health benefits and the HRA is available to cover that category of essential health benefits and limits the coverage to the HRA’s maximum benefit.
Example: Employer M sponsors a self-insured group health plan that provides minimum value. However, the group health plan does not cover preventive care. The employer also sponsors an HRA for its covered employees. The employer credits $500 per year to the HRA account of each employee. The employees may use the HRA to pay for medical expenses including preventive care up to the available balance in their account. The HRA is not in violation of the ACA’s annual dollar limit prohibition.
In previous guidance unrelated to the ACA, the IRS has stated that an HRA may be considered an FSA under certain specified circumstances. However, the IRS has declined to extend that ruling to HRAs for purposes of whether the annual limit rules apply, saying only that the matter is under consideration.
If the HRA terms in effect on January 1, 2013 did not prescribe a set amount or amounts to be credited during 2013 or the timing for crediting such amounts, then the amounts credited may not exceed those credited for 2012 and may not be credited at a faster rate than the rate that applied during 2012.
Retiree Plans: HRAs providing benefits solely to retirees are exempt from the rules relating to annual and lifetime limits, because retiree-only plans are exempt from the ACA.
Effective for plan years beginning after December 31, 2016, there is an exception to HRA integration rules that applies to Qualified Small Employer HRAs. This exception would allow Qualified Small Employers to reimburse the cost of individual health insurance coverage purchased by employees through an HRA without causing the HRA to become a group health plan subject to the ACA.
Please note that cost-sharing limits only apply to essential health benefits (EHB) and do not include premiums, balance billing amounts for non-network providers, or spending for non-covered services such as cosmetic surgery. In the case of a plan using a network of providers, cost-sharing for benefits provided outside of the network will not count towards the annual limitation on cost-sharing.
The limitation on cost sharing applies to deductibles, coinsurance, copayments, or similar charges, and any other required expenditure that is a qualified medical expense with respect to essential health benefits covered under the plan. When originally passed, the ACA included a separate limit on deductibles; that was subsequently repealed. However, the amount of the deductible is still included in the overall cost-sharing limit.
If a plan includes a network of providers, the plan may, but is not required to, count out-of-pocket spending for out-of-network items and services towards the plan’s annual out-of-pocket maximum.
Cost Sharing Scenario
To illustrate, let’s walk through a claim scenario and how these limits would come into play.
Each year the cost-sharing limits are updated based on the percent increase in average premiums. For our illustration, let’s use the limits for 2017 which state:
Let’s assume that a calendar year plan covers an employee, the employee’s spouse and one child. The plan adopts the maximum limit on cost sharing. Using 2017 numbers, suppose that the child incurs $8,000 in expenses for essential health benefits in January.
The plan must pay $850 in benefits and cannot impose any additional cost sharing for the rest of the year with respect to the child’s expenses for essential health benefits, even though the family cost-sharing limit has not been met.
Next, suppose that in February, the spouse incurs $3,000 in expenses for essential health benefits.
Since these expenses do not exceed either the individual or family cost sharing limits, the plan pays no benefits.
Finally, suppose that in March, the employee incurs $6,000 in expenses for essential health benefits.
Although the employee has not exceeded the individual cost sharing limit, the remaining family limit is $14,300 – $7,150 (child) – $3,000 (spouse) or $4,150. The plan can charge that amount against the family cost sharing limit but must pay benefits of $1,850 on the remainder. The plan cannot impose any additional cost sharing for essential health benefits for either the employee or the spouse for the rest of the year, even though neither has met the individual cost sharing maximum.
Coordination with High Deductible Health Plans
High Deductible Health Plans (for purposes of HSA eligibility) must include an annual out-of-pocket limit that is not more than a specific dollar limit that is set for that year. For example, for 2017, $6,550 is the limit for self-only coverage or $13,100 for family coverage. These maximums are lower than those that apply to plans under the ACA. To further complicate matters, HDHPs are not required to impose the self-only out-of-pocket limit to individuals with family coverage. While the ACA uses the term “cost sharing” and the HDHP rules use the term “out-of-pocket” they both refer to the same types of things; i.e. both include deductibles, coinsurance, copayments, or similar charges. Fundamentally, the HDHP needs to comply with both the HDHP rules and the ACA rules.
This is of little consequence for persons with self-only coverage as the HDHP self-only limit will always be less than the ACA self-only limit. In the case of family coverage, the HDHP is not required to also have an individual limit. This presents no problem when the HDHP family limit is less than the ACA individual limit since in practice, no individual will exceed the applicable ACA individual limit. However, if the HDHP family limit does exceed the ACA individual limit, the HDHP will need to incorporate an ACA-compliant self-only cost sharing limit.
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