Dec 3, 2008

ELIGIBILITY | Plan Provisions and Taxation

The eligibility requirements for medical expense coverage are essentially the same as those discussed earlier for group term insurance—an employee must usually be in a covered classification, must satisfy any probationary period, and must be a full-time employee. Coverage is rarely made available to part-time employees. In addition, medical expense contracts often contain an actively-at-work provision. This provision may be waived, particularly for larger employers for whom adverse selection tends to be less of a problem than for smaller groups because any adverse selection for a large group is reflected in future premiums through the experience-rating process.

Eligibility requirements may vary somewhat if an employer changes providers for a plan's benefits. Note that the following discussion refers to the employer's plan with benefits paid by the previous provider as the "old plan" and the employer's plan with benefits paid by the new provider as the "new plan." In actuality, the employer still has the same medical expense plan. It has only been modified with the use of a new provider and, possibly, a different level of benefits. This is a material modification to a group health plan, and ERISA requires that participants be notified of this change by a summary of material modification.

Even though it has been adopted by only a few states, most providers follow the procedures established by the National Association of Insurance Commissioners (NAIC) Group Coverage Discontinuance and Replacement Model Regulation for medical expense coverage (and possibly other group coverages). This regulation stipulates that coverage be provided (but possibly limited) under a new plan to anyone who (1) was covered under the old plan at the date it was discontinued and (2) is in an eligible classification of the new plan. Employees actively at work on the date coverage is transferred are automatically covered under the new plan and are exempt from any probationary periods. If the new plan contains a preexisting-conditions provision, benefits applicable to an individual's preexisting conditions are limited to the lesser of (1) the maximum benefits of the new plan (ignoring the preexisting conditions) or (2) the maximum benefits of the old plan.

Employers often negotiate with the provider of benefits to ensure that for employees who are covered under the old plan but who are not actively at work on the date coverage is discontinued (such as an employee disabled by illness or injury or employees suffering temporary interruptions of employment) are included in the new plan. However, their benefits are frequently limited to the old plan's level until they meet the new plan's actively-at-work requirement.

Two final points should be made concerning the transfer of coverage. First, the new plan will not pay benefits for expenses covered by the old plan under an extension-of-benefits provision (discussed later); second, when applying any deductibles or probationary periods under the new plan, credit is often given for the satisfaction (or partial satisfaction) of the same or similar provisions during the last three months of the old plan. For example, assume that coverage is transferred in the middle of a calendar year and the new plan contains the same $200-a-year calendar deductible as the old plan. If an employee has already satisfied the deductible under the old plan, no new deductible is required for the remainder of the calendar year, provided that (1) the expenses used to satisfy the deductible under the old plan satisfy the deductible under the new plan and (2) the expenses were incurred during the last three months of the old plan. If only $140 of the $200 was incurred during those last three months, an additional $60 deductible is required under the new plan for the remainder of the calendar year.

Dependent Eligibility
Typically, the same medical expense benefits that are provided for an eligible employee are also available for that employee's dependents. Conversely, however, dependent coverage is rarely available unless the employee also has coverage. As long as any necessary payroll deductions have been authorized, dependent coverage is typically effective on the same date as the employee's coverage. If coverage under a contributory plan is not elected within 31 days after dependents are eligible, future coverage is available only during an open enrollment period or when satisfactory evidence of insurability is provided. However, if an employee was previously without dependents (and therefore had no dependent coverage), any newly acquired dependents (by birth, marriage, or adoption) are eligible for coverage as of the date they gain dependent status.

The term dependents most commonly refers to an employee's spouse who is not legally separated from the employee and any unmarried dependent children (including stepchildren and adopted children) under the age of 19. However, coverage is usually provided for children to age 23 if they are full-time students. In addition, coverage may also continue (and is required to be continued in some states) for children who are incapable of earning their own living because of a physical or mental infirmity. Such children are considered dependents as long as this condition exists, but periodic proof of the condition may be required. If an employee has dependent coverage, all newly acquired dependents (by birth, marriage, or adoption) are automatically covered.

Some persons that meet the definition of a dependent may be ineligible for coverage because they are in the armed forces or they are eligible for coverage under the same plan as the employees themselves. This latter restriction, however, may not apply to a spouse unless the spouse is actually covered under the plan. Some plans also exclude coverage for any dependents residing outside the United States or Canada.

Medical expense plans may contain a "nonconfinement" provision for dependents, which is similar to the actively-at-work provision for employees. Under this provision, a dependent is not covered if he or she is confined for medical care or treatment in a hospital or at home at the time of eligibility. Coverage, however, becomes effective when the dependent is released from such confinement. Until the passage of HIPAA, a nonconfinement provision was commonly found in medical expense plans. However, many legal and benefit experts feel that such a provision violates HIPAA, because it involves the use of health status as a basis for eligibility. In addition, some states do not allow the provision in insured contracts. As a result, many providers no longer include a nonconfinement provision, and an employee's dependents are eligible for coverage at the same time the employee is eligible.

When coverage is transferred, dependents are treated the same as employees, except that any actively-at-work provision may be replaced by a nonconfinement provision.


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