Final Short-Term, Limited-Duration Insurance (STLDI) Rules Permit 36-Month Coverage

Practical Law Legal Update w-016-1429 (Approx. 8 pages)

Final Short-Term, Limited-Duration Insurance (STLDI) Rules Permit 36-Month Coverage

by Practical Law Employee Benefits & Executive Compensation

Short-Term, Limited-Duration Insurance

STLDI is health insurance coverage available in the individual insurance market that is intended to fill temporary coverage gaps when an individual transitions from one plan (or form of coverage) to another (for example, for individuals who are in-between jobs). Under the Public Health Service Act (PHSA), STLDI is exempt from federal requirements that govern health insurance sold in the individual market (which is subject to individual market requirements under the Affordable Care Act (ACA)). This is because the PHSA's definition of individual health insurance coverage expressly excludes STLDI.

As a result, STLDI is not subject to the ACA's insurance market reforms in the individual market, including:

The ACA's prohibition on preexisting condition exclusions (see Practice Note, Preexisting Condition Exclusions and Coverage Rescissions Under the ACA).
The requirement to provide coverage of essential health benefits without annual or lifetime dollar limits (see Practice Note, Lifetime Limits, Annual Limits, and Essential Health Benefits Under the ACA).
Requirements involving guaranteed availability and renewability.
The requirement to provide summaries of benefits and coverage (SBCs) (because STLDI is not individual health insurance coverage under the PHSA) (see Practice Note, Summaries of Benefits and Coverage Under the ACA).

(See Practice Note, Affordable Care Act (ACA) Overview and Affordable Care Act (ACA) Toolkit.)

STLDI Versus Individual Health Insurance Coverage

The STLDI final regulations are intended to distinguish STLDI from individual health insurance coverage. For example, the coverage types differ in terms of:

Their initial contract terms.
The maximum duration of each coverage type.
The notice requirements applicable to each coverage type.
Whether they are considered minimum essential coverage (MEC) for ACA purposes.

STLDI is not MEC, and so individuals who have STLDI coverage during 2018 could be subject to individual mandate liability for not having MEC (26 C.F.R. § 1.5000A-2(d); 78 Fed. Reg. 53646 (Aug. 30, 2013); see Practice Note, Employer Mandate Under the ACA: Overview: Minimum Essential Coverage). However, the ACA individual mandate is reduced to $0 beginning in 2019, under tax reform legislation enacted in 2017 (Tax Cuts and Jobs Act (TCJA), Pub. L. No. 115-97 (2017); see Legal Update, Tax Reform Is Enacted, With Significant Implications for Executive Compensation and Employee Benefits).

According to the Departments, the STLDI final regulations are designed to:

Offer individuals additional, affordable coverage options.
Remove federal barriers that prevent individuals from accessing coverage.
Support state efforts to develop innovative options in the health insurance market.

The Departments have acknowledged, however, that STLDI may not provide coverage that is as comprehensive as individual health insurance coverage.

Recent Guidance Involving STLDI

Obama-Era Regulations (2016) Imposed Three-Month Cap

The STLDI final regulations (August 2018) revise final regulations issued by the Obama Administration in October 2016 (81 Fed. Reg. 75316 (Oct. 31, 2016)). At the time, the Departments were concerned that STLDI was being sold as primary coverage and for periods longer than the then-applicable 12-month coverage limit. As a result, the October 2016 final regulations defined STLDI as health insurance:

Provided under a contract with an insurer.
That had an expiration date specified in the contract (and reflecting any extensions that could be elected with or without the insurer's consent) of less than three months after the contract's original effective date.

(29 C.F.R. § 2590.701-2; see Legal Update, Tri-Agencies Draw the Line on Short-Term, Limited-Duration Insurance.)

The October 2016 final regulations applied to group health plans and health insurers for plan years beginning on or after January 1, 2017 (see Group Health Plans Toolkit).

2017 Trump Administration Executive Order and 2018 Proposed Regulations

Following a change in administration, President Trump instructed the Departments to consider proposing regulations to expand the availability of STLDI (Executive Order 13813 (Oct. 12, 2017); see Legal Update, Trump Administration Calls for Expanded Use of Health Reimbursement Arrangements). In particular, the president's order directed the Departments to consider allowing STLDI to cover longer periods and to be renewable by individuals.

In proposed regulations issued in February 2018, the Departments proposed to amend the STLDI definition to mean insurance having a maximum coverage period of less than 12 months after a contract's original effective date, considering extensions that might be elected by an insured without the insurer's consent (83 Fed. Reg. 7437 (Feb. 21, 2018); see Legal Update, Proposed Rules Would Turn Back the Clock on Short-Term, Limited-Duration Insurance Coverage Periods). The Departments received roughly 12,000 comments concerning the proposed regulations.

Meaning of STLDI Under the Final Regulations

The Departments' STLDI final regulations establish a uniform federal standard for what constitutes STLDI. Under the final regulations, STLDI is health insurance coverage provided under a contract with an insurer that:

Has an initial contract term of less than 12 months (that is, the contract's initial expiration date is less than 12 months (a maximum of 364 days) after its original effective date).
Taking into account renewals or extensions, does not have a duration of longer than 36 months in total (referred to as the maximum duration rule; see Renewability of STLDI (Up to 36 Months)).

(29 C.F.R. § 2590.701-2.)

STLDI must also satisfy a notice requirement addressed in the final regulations (see Notice Requirement (Two Versions)).

COBRA Coverage Is a Guidepost for STLDI Definition

The Departments based their interpretation of STLDI in part on standards for health continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), under which the maximum coverage period is 36 months (see COBRA Toolkit). The Departments reasoned that like COBRA, STLDI is a temporary form of coverage for individuals who are transitioning between other forms of coverage. (However, whereas COBRA coverage sets out minimum periods for which group health plans must offer continuation coverage, the STLDI final regulations describe the maximum period for which STLDI coverage is available.)

Renewability of STLDI (Up to 36 Months)

The STLDI final regulations permit (but do not require) insurers to renew or extend an STLDI policy up to a maximum of 36 months. As a result, the maximum duration of an STLDI policy is 36 months, including the initial contract term and renewals or extensions of the same contract. The duration of coverage is measured using the total number of consecutive days of coverage under a single (that is, the same) insurance contract.

Coverage under a separate contract is not counted for this purpose, and an individual may purchase separate insurance contracts that run consecutively. The STLDI final regulations therefore permit individuals to "string together" coverage under separate policies offered by the same or different insurers (with the effect that a total coverage period could be more than 36 months).

State Flexibility to Define STLDI Coverage

Acknowledging a history of deceptive marketing practices regarding STLDI, the Departments observed that the states may regulate STLDI in aspects other than those addressed in the final regulations. For example, a state may define STLDI to include a shorter maximum initial contract term or maximum duration (including renewals and extensions) for policies issued in the state. States may also require insurers to provide additional information as part of an STLDI-related notice (see Notice Requirement (Two Versions)).

Notice Requirement (Two Versions)

The final regulations include a notice requirement that:

Consists of two versions of STLDI model language.
Reflects certain changes from the proposed regulations regarding content and style.

Among other issues, the notice informs individuals that STLDI is not individual health insurance coverage and, as a result, is not required to meet federal standards governing individual health insurance coverage. The versions both consist of a short, standard description of STLDI, though they vary depending on whether a policy's start date is either before – or on or after – January 1, 2019. This reflects that the TCJA reduced the individual mandate penalty to $0 beginning in 2019 (see Legal Update, Tax Reform Is Enacted, With Significant Implications for Executive Compensation and Employee Benefits).

For both versions of the notices, the language must be prominently displayed in:

The governing insurance contract and any enrollment materials provided in connection with the coverage.
At least 14-point type.

The notice must also include any additional information required under applicable state law.

In a change from the proposed regulations, the notice language is provided in sentence case, rather than all capital letters. The two versions contain additional specificity, including a list of health benefits that might not be covered under STLDI.

The notices under the STLDI final regulations were also expanded to inform individuals:

Of possible exclusions or limits concerning coverage of preexisting conditions or benefits (for example, hospitalization or emergency services).
That an STLDI policy might have lifetime or annual dollar limits (or both) on health benefits.

A provision in the notices involving compliance with federal requirements was narrowed from the proposed version, so as not to imply that STLDI coverage is exempt from all federal requirements applicable to such coverage.

Notice for Coverage Start Dates Before January 1, 2019

For policies with a coverage start date before January 1, 2019, during which time ACA individual mandate penalties may apply, the following language must be included:

This coverage is not required to comply with certain federal market requirements for health insurance, principally those contained in the Affordable Care Act. Be sure to check your policy carefully to make sure you are aware of any exclusions or limitations regarding coverage of preexisting conditions or health benefits (such as hospitalization, emergency services, maternity care, preventive care, prescription drugs, and mental health and substance use disorder services). Your policy might also have lifetime and/or annual dollar limits on health benefits. If this coverage expires or you lose eligibility for this coverage, you might have to wait until an open enrollment period to get other health insurance coverage. Also, this coverage is not "minimum essential coverage." If you don't have minimum essential coverage for any month in 2018, you may have to make a payment when you file your tax return unless you qualify for an exemption from the requirement that you have health coverage for that month.

This language reflects that individuals may be liable for individual mandate penalties for STLDI covering any months before January 2019.
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Notice for Coverage Start Dates on or After January 1, 2019

For policies with a coverage start date on or after January 1, 2019, the following language (which does not include a reference to MEC) must be included:

This coverage is not required to comply with certain federal market requirements for health insurance, principally those contained in the Affordable Care Act. Be sure to check your policy carefully to make sure you are aware of any exclusions or limitations regarding coverage of preexisting conditions or health benefits (such as hospitalization, emergency services, maternity care, preventive care, prescription drugs, and mental health and substance use disorder services). Your policy might also have lifetime and/or annual dollar limits on health benefits. If this coverage expires or you lose eligibility for this coverage, you might have to wait until an open enrollment period to get other health insurance coverage.

Severability Clause

The final regulations include a severability clause that applies if a court either:

Invalidates the rule's 36-month maximum duration provision (see Renewability of STLDI (Up to 36 Months)).
Concludes that the 36-month maximum duration provision is inapplicable as to any person or circumstances.

In this case, the remaining provisions of the STLDI rule, and their applicability to other people or circumstances, will continue in effect.

The Departments added the severability clause in recognition of the possibility that the 36-month maximum duration provision may be challenged in court.

Effective Date of STLDI Final Regulations

The STLDI final regulations are effective on October 2, 2018. Insurance policies sold on or after October 2, 2018 must meet the final regulations' definition of STLDI in order to be considered STLDI.

Practical Impact

The provision under the final regulations permitting STLDI coverage to be renewed or extended for up to 36 months is a notable change from the Departments' February 2018 proposed regulations, and the Departments anticipate – as evidenced by the addition of a severability provision – that this change may be challenged through litigation. The Departments acknowledge that individuals who switch to STLDI (as defined under the August 2018 final regulations) may experience an increase in out-of-pocket expenses regarding benefits and coverage that is excluded under STLDI. Moreover, because individuals who are young and healthy may be more likely to purchase STLDI, the extended permissible duration of such coverage may – as the Departments recognize – weaken state individual market risk pools. However, the Departments believe that these potential consequences can be offset by the final regulations' notice requirements and states' ability to regulate other aspects of STLDI.

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