Treasury issued final regulations that update the definition of short-term, limited-duration insurance (STLDI) and require prominent notices contrasting it with comprehensive health coverage, but reserved guidance on the tax treatment of some fixed indemnity payments.
The final regs (T.D. 9990), released March 28 by Treasury, the Department of Labor, and the Department of Health and Human Services, shorten the permitted duration of temporary health insurance alternatives that are exempted from reporting requirements and other market reforms enacted under the Affordable Care Act. Healthcare groups and critics have characterized the plans as “junk” insurance because they provide only bare-bones coverage and often leave patients with significant medical bills.
The reg package adopts most of the proposed rules (REG-120730-21) that were published by the three agencies in July 2023.
STLDI policies are defined in the regs as those that expire no more than three months after the policy’s original effective date and have a total duration — with renewals or extensions — of no longer than four months. Many of the public comments submitted to HHS on the proposed regs protested the three-to-four-month maximum duration as too short, but the final regs retain that limitation.
A prior version of the regs (T.D. 9837), issued in 2018, allowed STLDI plans with an initial term of 364 days and a maximum policy duration of three years. Healthcare groups, U.S. states, and several major cities filed suit challenging those regs, claiming that a term of one to three years wasn’t “short-term” or temporary, so shouldn’t be exempted from ACA rules.
The updated definition of STLDI applies for purposes of the code, ERISA, and the Public Health Service Act. Insurance products qualifying as STLDI are excluded from the definition of “individual health insurance coverage” under the code.
The final regs also amend the requirements for hospital indemnity and other fixed indemnity insurance to be treated as an excepted benefit in the health insurance markets for groups and individuals.
Not included in the final reg package were proposed amendments to reg. section 1.105-2 that would clarify the tax treatment of fixed-amount benefit payments a taxpayer receives under fixed indemnity coverage purchased with pretax dollars. The proposal would apply when the fixed amounts are paid without reference to the amount of medical expenses the taxpayer incurred.
Under the proposed rule, taxpayers who can’t substantiate their qualified medical expenses for reimbursement under the plans wouldn’t be able to exclude the fixed-amount payments from gross income under section 105(b).
Treasury and the IRS intend to issue separate guidance on those fixed-amount payments and the scope of section 105(b) after further study.
The final regs will be effective June 17.
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