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August 12, 2010
Healthcare Reform Update: Ban on Annual and Lifetime Limits
The Patient Protection and Affordable Care Act (PPACA), as amended by the Health Care and Education Reconciliation Act of 2010 (HCERA), collectively referred to as the Affordable Care Act (ACA), provides for a ban on lifetime limits and restriction on annual limits in both existing (grandfathered) and new and amended plans effective for the first plan year beginning on or after September 23, 2010. The Internal Revenue Service (IRS), Department of Labor (DOL), and Department of Health and Human Service (HHS) have issued interim final regulations detailing these provisions.

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Plans and insurers may not place lifetime dollar limits on coverage of participants and beneficiaries. This provision applies to all plans effective for the first plan year beginning on or after September 23, 2010. In addition, for plan years beginning on or after September 21, 2010, but before January 1, 2014, a group health plan and a health insurance issuer offering group or individual health insurance coverage may establish only a restricted annual limit on essential health benefits.

For plan years beginning on or after January 1, 2014, annual limits on the dollar value of coverage of participants and beneficiaries are banned. The ban on annual limits does not apply to health flexible spending accounts (29 CFR 2590.715–2711).

The interim final regulations define the term “restricted annual limit” with the aim of ensuring that access to needed services is made available with a minimal impact on premiums by phasing in the annual limit restriction. Under the interim final regulations, annual limits on the dollar value of benefits that are essential health benefits may not be less than the following amounts:

  • For plan years beginning on or after September 23, 2010, but before September 23, 2011, $750,000;
  • For plan years beginning on or after September 23, 2011, but before September 23, 2012, $1.25 million; and
  • For plan years beginning on or after September 23, 2012, but before January 1, 2014, $2 million.

Effective for plan years beginning on or after January 1, 2014, plans and insurers may no longer impose annual dollar limits on coverage.

Annual or lifetime per-beneficiary limits on specific covered benefits that are not essential health benefits are allowed to the extent that such limits are otherwise permitted under federal or state law. Essential health benefits include at least the following general categories and the items and services covered within these 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 and chronic disease management
  • Pediatric services, including oral and vision care

Regulations will be issued defining other items that are essential benefits so that an essential benefits package equals in scope the benefits provided under a typical employer plan. For plan years beginning before the issuance of regulations defining "essential health benefits", for purposes of enforcement, IRS, DOL, and HHS will take into account good faith efforts to comply with a reasonable interpretation of the term "essential health benefits." For this purpose, a plan or issuer must apply the definition of essential health benefits consistently.

A group health plan or group health insurer may exclude all benefits for a particular condition unless barred by federal or state law. However, if any benefits are provided for the condition, then the ban on annual and lifetime limits will apply.

Account-based plans. The restriction on annual limits applies differently to certain account-based plans, especially where other rules apply to limit the benefits available. For example, under Sec. 9005 of the Affordable Care Act, salary reduction contributions for health flexible spending arrangements (health FSAs) are specifically limited to $2,500 (indexed for inflation) per year, beginning with taxable years in 2013.

The interim final regulations provide that the annual limit rules do not apply to health FSAs. The restrictions on annual limits also do not apply to medical savings accounts (MSAs) and health savings accounts (HSAs). Both MSAs and HSAs generally are not treated as group health plans because the amounts available under the plans are available for both medical and nonmedical expenses. Moreover, annual contributions to MSAs and HSAs are subject to specific statutory provisions that require that the contributions be limited.

Health reimbursement arrangements (HRAs) are another type of account-based health plan and typically consist of a promise by an employer to reimburse medical expenses for the year up to a certain amount, with unused amounts available to reimburse medical expenses in future years. When HRAs are integrated with other coverage as part of a group health plan and the other coverage alone would comply with the restrictions on annual limits, the fact that benefits under the HRA by itself are limited is not a violation because the combined benefit satisfies the requirements.

A retiree-only HRA is generally not subject to the restrictions on annual limits. The DOL, IRS, and HHS have requested comments on the restrictions on annual limits to stand-alone HRAs that are not retiree-only plans.

Notice to individuals who previously reached a lifetime limit. For individuals who had reached a lifetime limit prior to the issuance of regulations on June 27, 2010, the regulations require the plan to provide such individuals with a notice and an opportunity to enroll in any of the benefit packages available to similarly situated individuals, if they are otherwise eligible for the plan. The notices are required no later than the first day of the first plan year beginning on or after September 23, 2010 with coverage to take effect by that date, also.

Any individual enrolling in a group health plan who previously reached a lifetime limit must be treated like a special enrollee. Accordingly, the individual (and, if the individual would not be a participant once enrolled in the plan, the participant through whom the individual is otherwise eligible for coverage under the plan) must be offered all the benefit packages available to similarly situated individuals who did not lose coverage by reason of reaching a lifetime limit. For this purpose, any difference in benefits or cost sharing requirements constitutes a different benefit package. The individual also cannot be required to pay more for coverage than similarly situated individuals who did not lose coverage by reason of reaching a lifetime limit.

Related articles:

Healthcare Reform: What Happens When
Healthcare Reform: 10 Changes for Employers
Healthcare Reform Update: Dependent Coverage to Age 26

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