[Federal Register Volume 69, Number 250 (Thursday, December 30, 2004)]
[Proposed Rules]
[Pages 78800-78825]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-28113]



  Federal Register / Vol. 69, No. 250 / Thursday, December 30, 2004 / 
Proposed Rules  

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 54

[REG-130370-04]
RIN 1545-BD51

DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2590

RIN 1210-AA54

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

45 CFR Part 146

RIN 0938-AL88


Notice of Proposed Rulemaking for Health Coverage Portability: 
Tolling Certain Time Periods and Interaction With the Family and 
Medical Leave Act Under HIPAA Titles I and IV

AGENCIES: Internal Revenue Service, Department of the Treasury; 
Employee Benefits Security Administration, Department of Labor; Centers 
for Medicare & Medicaid Services, Department of Health and Human 
Services.

ACTION: Notice of proposed rulemaking and request for comments.

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SUMMARY: These proposed rules would clarify certain portability 
requirements for group health plans and issuers of health insurance 
coverage offered in connection with a group health plan. These rules 
propose to implement changes made to the Internal Revenue Code, the 
Employee Retirement Income Security Act, and the Public Health Service 
Act enacted as part of the Health Insurance Portability and 
Accountability Act of 1996.

DATES: Written comments on this notice of proposed rulemaking are 
invited and must be received by the Departments on or before March 30, 
2005.

ADDRESSES: Written comments should be submitted with a signed original 
and three copies (except for electronic submissions) to any of the 
addresses specified below. Any comment that is submitted to any 
Department will be shared with the other Departments.
    Comments to the IRS can be addressed to: CC:PA:LPD:PR (REG-130370-
04), Room 5203, Internal Revenue Service, POB 7604, Ben Franklin 
Station, Washington, DC 20044.
    In the alternative, comments may be hand-delivered between the 
hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-130370-04), Courier's 
Desk, Internal Revenue Service, 1111 Constitution Avenue, NW., 
Washington, DC 20224.
    Alternatively, comments may be transmitted electronically via the 
IRS Internet site at: www.irs.gov/regs or via the Federal eRulemaking 
Portal at www.regulations.gov (IRS-REG-130370-04).
    Comments to the Department of Labor can be addressed to: U.S. 
Department of Labor, Employee Benefits Security Administration, 200 
Constitution Avenue NW., Room C-5331, Washington, DC 20210, Attention: 
Proposed Portability Requirements.
    Alternatively, comments may be hand-delivered between the hours of 
9 a.m. and 5 p.m. to the same address. Comments may also be transmitted 
by e-mail to: [email protected].
    Comments to HHS can be submitted as described below: In commenting, 
please refer to file code CMS-2158-P. Because of staff and resource 
limitations, we cannot accept comments by facsimile (FAX) transmission.
    You may submit comments in one of three ways (no duplicates, 
please):
    1. Electronically. You may submit electronic comments on specific 
issues in this regulation to http://www.cms.hhs.gov/regulations/ecomments. (Attachments should be in Microsoft Word, WordPerfect, or 
Excel; however, we prefer Microsoft Word.)
    2. By mail. You may mail written comments (one original and two 
copies) to the following address ONLY:
    Centers for Medicare & Medicaid Services, Department of Health and 
Human Services, Attention: CMS-2158-P, P.O. Box 8017, Baltimore, MD 
21244-8010.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments (one original and two copies) before the 
close of the comment period to one of the following addresses. If you 
intend to deliver your comments to the Baltimore address, please call 
telephone number (410) 786-7195 in advance to schedule your arrival 
with one of our staff members. Room 445-G, Hubert H. Humphrey Building, 
200 Independence Avenue, SW., Washington, DC 20201; or 7500 Security 
Boulevard, Baltimore, MD 21244-1850.

(Because access to the interior of the HHH Building is not readily 
available to persons without Federal Government identification, 
commenters are encouraged to leave their comments in the CMS drop 
slots located in the main lobby of the building. A stamp-in clock is 
available for persons wishing to retain a proof of filing by 
stamping in and retaining an extra copy of the comments being 
filed.)

    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and received after the comment 
period.
    Submission of comments on paperwork requirements. You may submit 
comments on this document's paperwork requirements by mailing your 
comments to the addresses provided at the end of the ``Collection of 
Information Requirements'' section in this document.
    All submissions to the IRS will be open to public inspection and 
copying in room 1621, 1111 Constitution Avenue, NW., Washington, DC 
from 9 a.m. to 4 p.m.
    All submissions to the Department of Labor will be open to public 
inspection and copying in the Public Disclosure Room, Employee Benefits 
Security Administration, U.S. Department of Labor, Room N-1513, 200 
Constitution Avenue, NW., Washington, DC from 8:30 a.m. to 4:30 p.m.
    All submissions timely submitted to HHS will be available for 
public inspection as they are received, generally beginning 
approximately three weeks after publication of a document, at the 
headquarters for the Centers for Medicare & Medicaid Services, 7500 
Security Boulevard, Baltimore, MD 21244, Monday through Friday of each 
week from 8:30 a.m. to 4:00 p.m. To schedule an appointment to view 
public comments, phone 410-786-7195.

FOR FURTHER INFORMATION CONTACT: Dave Mlawsky, Centers for Medicare & 
Medicaid Services (CMS), Department of Health and Human Services, at 1-
877-267-2323 ext. 61565; Amy Turner, Employee Benefits Security 
Administration, Department of Labor, at (202) 693-8335; or Russ 
Weinheimer, Internal Revenue Service, Department of the Treasury, at 
(202) 622-6080.

SUPPLEMENTARY INFORMATION:

Customer Service Information

    To assist consumers and the regulated community, the Departments 
have issued questions and answers concerning HIPAA. Individuals 
interested in obtaining copies of Department of Labor publications 
concerning changes in health care law may call a toll free number, 1-
866-444-EBSA (3272), or access the publications

[[Page 78801]]

on-line at www.dol.gov/ebsa, the Department of Labor's Web site. These 
regulations as well as other information on the new health care laws 
are also available on the Department of Labor's interactive web pages, 
Health Elaws. In addition, CMS's publication entitled ``Protecting Your 
Health Insurance Coverage'' is available by calling 1-800-633-4227 or 
on the Department of Health and Human Services' Web site 
(www.cms.hhs.gov/hipaa1), which includes the interactive webpages, 
HIPAA Online. Copies of the HIPAA regulations, as well as notices and 
press releases related to HIPAA and other health care laws, are also 
available at the above-referenced Web sites.

A. Background

    The Health Insurance Portability and Accountability Act of 1996 
(HIPAA), Public Law 104-191, was enacted on August 21, 1996. HIPAA 
amended the Internal Revenue Code of 1986 (Code), the Employee 
Retirement Income Security Act of 1974 (ERISA), and the Public Health 
Service Act (PHS Act) to provide for, among other things, improved 
portability and continuity of health coverage. Interim final 
regulations implementing the HIPAA provisions were first made available 
to the public on April 1, 1997 (published in the Federal Register on 
April 8, 1997, 62 FR 16894) (April 1997 interim rules). On December 29, 
1997, the Departments published a clarification of the April 1997 
interim rules as they relate to excepted benefits. On October 25, 1999, 
the Departments published a notice in the Federal Register (64 FR 
57520) soliciting additional comments on the portability requirements 
based on the experience of plans and issuers operating under the April 
1997 interim rules.
    After consideration of all the comments received on the portability 
provisions, the Departments are publishing final regulations elsewhere 
in this issue of the Federal Register. These proposed rules address 
additional and discrete issues for which the Departments are soliciting 
further comment before promulgating final regulations.

B. Overview of the Proposed Regulations

1. Rules Relating to Creditable Coverage--26 CFR 54.9801-4, 29 CFR 
2590.701-4, 45 CFR 146.113

Tolling of the 63-Day Break-in-Coverage Rule
    These proposed rules would modify the 63-day break-in-coverage 
rules with one significant substantive change. Under the proposed 
rules, the beginning of the period that is used for determining whether 
a significant break in coverage has occurred (generally 63 days) is 
tolled in cases in which a certificate of creditable coverage is not 
provided on or before the day coverage ceases. In those cases, the 
significant-break-in-coverage period is tolled until a certificate is 
provided but not beyond 44 days after the coverage ceases.
    The Departments have fashioned this tolling rule (and a similar 
tolling rule for the 30-day period for requesting special enrollment) 
in an effort to address the inequity of individuals' losing coverage 
without being aware that the coverage has ended while minimizing the 
burdens on subsequent plans and issuers that are not responsible for 
providing the missing or untimely certificates. Numerous situations 
have come to the attention of the Departments in which an individual's 
health coverage is terminated but in which the individual does not 
learn of the termination of coverage until well after it occurs. The 
statute generally requires that a certificate of creditable coverage be 
provided at the time an individual ceases to be covered under a plan. 
The statute, the April 1997 interim rules, and the final regulations 
(published elsewhere in this issue of the Federal Register) all permit 
a plan or issuer to provide the certificate at a later date if it is 
provided at a time consistent with notices required under a COBRA 
continuation provision. The statute also directs the Secretaries to 
establish rules to prevent a plan or issuer's failure to provide a 
certificate timely from adversely affecting the individual's subsequent 
coverage. If a plan or issuer chooses to provide a certificate later 
than the date an individual loses coverage, as the regulations permit 
in certain circumstances, these proposed rules provide that an 
individual should not suffer from this rule of convenience for the plan 
or issuer. However, to prevent the abuse that might result from an 
open-ended tolling rule, an outside limit of 44 days is placed on this 
relief. This reflects the fact that, in most cases, plans and issuers 
are required to provide certificates within 44 days (although some 
plans and issuers may be required to provide certificates sooner than 
44 days after coverage ceases and some entities are not required to 
provide certificates at all). The Departments have adopted this uniform 
limit on the tolling rule for purposes of consistency. New examples 
have been added to illustrate the tolling rule.

2. Evidence of Creditable Coverage--26 CFR 54.9801-5, 29 CFR 2590.701-
5, 45 CFR 146.115

Information in Certificate and Model Certificate
    These proposed rules would modify the required elements for the 
educational statement in certificates of creditable coverage to require 
a disclosure about the Family and Medical Leave Act. Use of the first 
model certificate below by group health plans and group health 
insurance issuers, or use of the appropriate model certificate that 
appears in the preamble to the related final regulations published 
elsewhere in this issue of the Federal Register, will satisfy the 
requirements of paragraph (a)(3)(ii) in this section of the final 
regulations. Similarly, for purposes of complying with those final 
regulations, State Medicaid programs may use the second version below, 
or may use the appropriate model certificate that appears in the 
preamble to those final regulations. Thus, until this proposed 
regulation is published as a final regulation, entities may use either 
the model certificates published below, or those published elsewhere in 
this issue of the Federal Register. For entities that choose not to use 
the model certificates below until this proposed regulation is 
published as a final regulation, we welcome comments as to the 
applicability date for using them.

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BILLING CODE 4830-01-C

3. Special Enrollment Periods--26 CFR 54.9801-6, 29 CFR 2590.701-6, 45 
CFR 146.117

Tolling of the Special Enrollment Period
    Under HIPAA, the April 1997 interim rules, and the final 
regulations, an individual wishing to special enroll following a loss 
of coverage is generally required to request enrollment not later than 
30 days after the loss of eligibility, termination of employer 
contributions, or exhaustion of COBRA continuation

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coverage. For individuals whose coverage ceases and a certificate of 
creditable coverage is not provided on or before the date coverage 
ceases, this regulation provides for proposed tolling rules similar to 
those described above for determining a significant break. That is, the 
special enrollment period terminates at the end of the 30-day period 
that begins on the first day after the earlier of the date that a 
certificate of creditable coverage is provided or the date 44 days 
after coverage ceases.
Modification of Special Enrollment Procedures and When Coverage Begins 
Under Special Enrollment
    The April 1997 interim rules did not establish procedures for 
processing requests for special enrollment beyond affirming the 
statutory requirement that requests be made not later than 30 days 
after the event giving rise to the special enrollment right and 
providing that the same requirements could be imposed on special 
enrollees that were imposed on other enrollees (e.g., that the request 
be made in writing). Some examples in the April 1997 interim rules 
could be read to suggest that plans and issuers could require 
individuals requesting special enrollment to file completed 
applications for health coverage by the end of the special enrollment 
period.
    It has been brought to the Departments' attention that some plans 
and issuers were imposing application requirements that could not 
reasonably be completed within the special enrollment period (for 
example, requiring the social security number of a newborn within 30 
days of the birth), effectively denying individuals their right to 
special enroll their dependents. In this regard, the statute merely 
requires an employee to request special enrollment, or an individual to 
seek to enroll, during the special enrollment period. These proposed 
regulations preserve individuals' access to special enrollment by 
clarifying that during the special enrollment period individuals are 
only required to make an oral or written request for special 
enrollment.
    The proposed regulations provide further that after a timely 
request, the plan or issuer may require the individual to complete all 
enrollment materials within a reasonable time after the end of the 
special enrollment period. However, the enrollment procedure may only 
require information required from individuals who enroll when first 
eligible and information about the event giving rise to the special 
enrollment right. While a plan can impose a deadline for submitting the 
completed enrollment materials, the deadline must be extended for 
information that an individual making reasonable efforts cannot obtain 
within that deadline.
    Thus, even where a plan requires social security numbers from 
individuals who enroll when first eligible, the plan must provide an 
extended deadline for receiving the social security number in the case 
of a newborn. In no event could a plan deny special enrollment for 
newborns because an employee could not provide a social security number 
for the newborn within the special enrollment period.
    As regards the effective date of coverage for special enrollments, 
the proposed rules generally follow the statute, the April 1997 interim 
final rules, and the final regulations being published elsewhere in 
this issue of the Federal Register. However clarifications of the 
effective date of coverage are added to conform to the clarification of 
the special enrollment procedures. Where the special enrollment right 
results from a loss of eligibility for coverage or marriage, coverage 
generally must begin no later than the first day of the first calendar 
month after the date the plan or issuer receives the request for 
special enrollment. However, if the plan or issuer requires completion 
of additional enrollment materials, coverage must begin no later than 
the first day of the first calendar month after the plan or issuer 
receives enrollment materials that are substantially complete.
    Where the special enrollment right results from a birth, coverage 
must begin on the date of birth. In the case of adoption or placement 
for adoption, coverage must begin no later than the date of such 
adoption or placement for adoption. If a plan or issuer requires 
completion of additional enrollment materials, the plan or issuer must 
provide benefits once the plan or issuer receives substantially 
complete enrollment materials. However, the benefits provided at that 
time must be retroactive to the date of birth, adoption, or placement 
for adoption.
    The Departments welcome comments on these aspects of the proposed 
rule.

4. Interaction With the Family and Medical Leave Act--26 CFR 54.9801-7, 
29 CFR 701-8, 45 CFR 146.120

    The proposed rules address how the HIPAA portability requirements 
apply in situations where a person is on leave under the Family and 
Medical Leave Act of 1993 (FMLA). A general principle of FMLA is that 
an employee returning from leave under FMLA should generally be in the 
same position the employee was in before taking leave. At issue is how 
to reconcile that principle of FMLA with the HIPAA rights and 
requirements that are triggered by an individual ending coverage under 
a group health plan. These proposed regulations provide specific rules 
that clarify how HIPAA and FMLA interact when the coverage of an 
employee or an employee's dependent ends in connection with an employee 
taking leave under FMLA.
    With respect to the rules concerning a significant break in 
coverage, if an employee takes FMLA leave and does not continue group 
health coverage for any part of the leave, the period of FMLA leave 
without coverage is not taken into account in determining whether a 
significant break in coverage has occurred for the employee or any 
dependents. To the extent an individual needs to demonstrate that 
coverage ceased in connection with FMLA leave (which would toll any 
significant break with respect to another plan or issuer), these 
regulations provide that a plan or issuer must take into account all 
information that it obtains about an employee's FMLA leave. Further, if 
an individual attests to the period of FMLA leave and the individual 
cooperates with a plan's or issuer's efforts to verify the individual's 
FMLA leave, the plan or issuer must treat the individual as having been 
on FMLA leave for the period attested to for purposes of determining if 
the individual had a significant break in coverage. Nonetheless, a plan 
or issuer is not prevented from modifying its initial determination of 
FMLA leave if it determines that the individual did not have the 
claimed FMLA leave, provided that the plan or issuer follows procedures 
for reconsideration similar to those set forth in the final rules 
governing determinations of creditable coverage.
    The question has arisen whether it would be appropriate to waive 
the general requirement to provide automatic certificates of creditable 
coverage in the case of an individual who declines coverage when 
electing FMLA leave if the individual will be reinstated at the end of 
FMLA leave. At the time an employee elects FMLA leave, the employer (as 
well as the employee) may not know if the employee will later return 
from FMLA leave and elect to be reinstated. Requiring plans and issuers 
to provide certificates when individuals cease health coverage in 
connection with FMLA leave may result in some certificates being issued 
when individuals ceasing coverage will not need the certificates as 
evidence of coverage (because of later

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reinstatement). However, automatic issuance likely imposes less burden 
because the plan or issuer does not need to determine whether a 
certificate is required. Moreover, automatic issuance eliminates the 
need for remedial measures if an individual expected to be reinstated 
in fact is not later reinstated. Thus, these proposed regulations 
clarify there is no exception to the general rule requiring automatic 
certificates when coverage ends and provide that if an individual 
covered under a group health plan takes FMLA leave and ceases coverage 
under the plan, an automatic certificate must be provided.
    With respect to the special enrollment rules, an individual (or a 
dependent of the individual) who is covered under a group health plan 
and who takes FMLA leave has a loss of eligibility that results in a 
special enrollment period if the individual's group health coverage is 
terminated at any time during FMLA leave and the individual does not 
return to work for the employer at the end of FMLA leave. This special 
enrollment period begins when the period of FMLA leave ends. Moreover, 
the rules that delay the start of the special enrollment period until 
the receipt of a certificate of creditable coverage continue to 
operate.

5. Special Rules--Excepted Plans and Excepted Benefits--26 CFR 54.9831-
1, 29 CFR 2590.732, 45 CFR 146.145

Determination of Number of Plans
    Various provisions in Chapter 100 of the Code, Part 7 of Subtitle B 
of Title I of ERISA, and Title XXVII of the PHS Act apply when an 
individual commences coverage or terminates coverage under a group 
health plan. For example, a certificate of creditable coverage must be 
provided when an individual ceases to be covered under a group health 
plan. Under the April 1997 interim rules, it was not always clear 
whether an individual changing benefit elections among those offered by 
an employer or employee organization was merely switching between 
benefit packages under a single plan or was switching from one plan to 
another. These proposed regulations add rules to remove this 
uncertainty.
    Under these proposed regulations, all medical care benefits made 
available by an employer or employee organization (including a board of 
trustees of a multiemployer trust) are generally considered to 
constitute one group health plan (the default rule). However, the 
employer or employee organization can establish more than one group 
health plan if it is clear from the instruments governing the 
arrangements to provide medical care benefits that the benefits are 
being provided under separate plans and if the arrangements are 
operated pursuant to the instruments as separate plans. A multiemployer 
plan and a nonmultiemployer plan are always separate plans. Under an 
anti-abuse rule, separate plans are aggregated to the extent necessary 
to prevent the evasion of any legal requirement.
    These rules provide plan sponsors great flexibility while 
minimizing the burden of making decisions about how many plans to 
maintain. For example, many employers may wish to minimize the number 
of certificates of creditable coverage required to be furnished to 
continuing employees. Under the default rule, because all health 
benefits provided by an employer are considered a single group health 
plan, there is no need to furnish a certificate of creditable coverage 
when an employee merely switches coverage among the options made 
available by the employer. This need would arise only if the employer 
designated separate benefit packages as separate plans in the plan 
documents and only if the benefit packages were also operated pursuant 
to the plan documents as separate plans.
    The anti-abuse rule limits the flexibility of these rules to 
prevent evasions. For example, a plan sponsor might design an 
arrangement under which the participation of each of many employees in 
the arrangement would be considered a separate plan. On the face of it, 
such an arrangement might appear to satisfy the requirement for a plan 
being exempt from the requirements of Chapter 100 of the Code, Part 7 
of ERISA, and Title XXVII of the PHS Act because on the first day of 
the plan year each plan would have fewer than two participants who are 
current employees. This would give the impression that the plans would 
not have to comply with the prohibitions against discriminating based 
on one or more health factors, with the restrictions on preexisting 
condition exclusions, nor with any of the other requirements of Chapter 
100 of the Code, Part 7 of ERISA, and Title XXVII of the PHS Act. The 
anti-abuse rule would require the aggregation of plans under such an 
arrangement to the extent necessary to make the plans subject to the 
requirements of Chapter 100 of the Code, Part 7 of ERISA, and Title 
XXVII of the PHS Act. The anti-abuse rule would apply in similar 
fashion to prevent the evasion of any other law that applies to group 
health plans or to the parties administering them or providing benefits 
under them.
Counting the Average Number of Employees
    These proposed regulations add rules for counting the average 
number of employees employed by an employer during a year.\1\ Various 
rules in Chapter 100 of the Code, Part 7 of ERISA, and Title XXVII of 
the PHS Act require the determination of such an average number, 
including the Mental Health Parity Act provisions, the guaranteed 
access provisions under the PHS Act for small employers, and the 
exemption from the excise tax under the Code for certain small 
employers.
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    \1\ The rules for determining the average number of employees 
employed by an employer during a year are not used for counting the 
number employed by the employer on a given day, such as the first 
day of a plan year.
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    Under these proposed regulations, the average number of employees 
employed by an employer is determined by using a full-time equivalents 
method. Each full-time employee employed for the entire previous 
calendar year counts as one employee. Full-time employees employed less 
than the entire previous calendar year and part-time employees are 
counted by totaling their employment hours in the previous calendar 
year (but not to exceed 40 hours for any week) and dividing that number 
by the annual full-time hours under the employer's general employment 
practices (but not exceeding 40 hours per week). Any resulting fraction 
is disregarded. For example, if these calculations produce a result of 
50.9, the average number of employees is considered to be 50. If an 
employer existed for less than the entire previous calendar year 
(including not being in existence at all), then the determination of 
the average number of employees is made by estimating the average 
number of employees that it is reasonably expected that the employer 
will employ on business days in the current calendar year. For a 
multiemployer plan, the number of employees employed by the employer 
with the most employees is attributed to each employer with at least 
one employee participating in the plan.

C. Economic Impact and Paperwork Burden

Summary--Department of Labor and Department of Health and Human 
Services

    HIPAA's group market portability provisions, which limit the scope 
and application of preexisting condition exclusions and establish 
special enrollment rights, provide a minimum standard of protection 
designed to increase access to health coverage. The

[[Page 78808]]

Departments crafted these proposed regulations to secure these 
protections under certain special circumstances, consistent with the 
intent of Congress, and to do so in a manner that is economically 
efficient. The Departments are unable to quantify the regulations' 
economic benefits and costs, but believe that their benefits will 
justify their costs.
    HIPAA's primary economic effects ensue directly from its statutory 
provisions. HIPAA's statutory group market portability provisions 
extend coverage to certain individuals and preexisting conditions not 
otherwise covered. This extension of coverage entails both benefits and 
costs. Individuals enjoying expanded coverage will realize benefits, 
sometimes including improvements in health and relief from so-called 
``job lock.'' The costs of HIPAA's portability provisions generally 
include the cost of extending coverage, as well as certain attendant 
administrative costs. The Departments believe that the benefits of 
HIPAA are concentrated in a relatively small population, while the 
costs are distributed broadly across group plan enrollees. The economic 
effects of HIPAA's statutory portability provisions are discussed in 
detail in the preamble to the final regulation under the ``Effects of 
the Statute'' of the ``Basis for Assessment of Economic Impact'' 
section, published elsewhere in this issue of the Federal Register.
    By clarifying and securing HIPAA's statutory portability 
protections, these proposed regulations will help ensure that HIPAA 
rights are fully realized. The result is likely to be a small increase 
at the margin in the economic effects of HIPAA's statutory portability 
provisions.
    These proposed regulations are intended to secure and implement 
HIPAA's group market portability and special enrollment provisions 
under certain special circumstances. The regulations will secure 
HIPAA's portability rights for individuals who are not timely notified 
that their coverage has ended and for individuals whose coverage ends 
in connection with the taking of leave that is guaranteed under FMLA. 
The regulations also will clarify and thereby secure individuals' 
special enrollment rights under HIPAA, and clarify the methodologies to 
be used by employers to determine the number of plans offered and the 
average number of individuals employed during a given year.
    Additional economic benefits derive from the regulations' 
clarifications of HIPAA requirements. The regulations will reduce 
uncertainty and costly disputes between employees, employers and 
issuers, and promote confidence among employees in health benefits' 
value, thereby promoting labor market efficiency and fostering the 
establishment and continuation by employers of group health plans.
    Benefits under these regulations will be concentrated among a small 
number of affected individuals while costs will be spread thinly across 
group plan enrollees.
    Affected individuals will generally include those who would have 
lost access to coverage for needed medical care after being denied 
HIPAA portability and/or special enrollment rights due to time spent 
without coverage prior to receiving a certificate or while on FMLA-
guaranteed leave. The benefits of these regulations for any particular 
affected individual may be significant. As noted above and under 
``Effects of the Statute'' in the ``Basis for Assessment of Economic 
Impact'' section of the preamble to the final regulation, published 
elsewhere in this issue of the Federal Register, access to coverage for 
needed medical care is important to individuals' health and 
productivity. However, the number of affected individuals, and 
therefore the aggregate cost of extended access to coverage under these 
regulations, is expected to be small, for several reasons. First, these 
regulations extend HIPAA rights only in instances where individuals are 
not timely notified that their coverage has ended or their coverage 
ends in connection with the taking of FMLA-guaranteed leave. Second, 
the period over which this regulation extends rights will often be 
short, insofar as certificates are often provided promptly after 
coverage ends and many family leave periods are far shorter than the 
guaranteed 12 weeks. Third, it is generally in individuals' interest to 
minimize periods of uninsurance. Individuals are likely to exercise 
their portability and special enrollment rights as soon as possible 
after coverage ends, which will often be before any extension of such 
rights under these regulations becomes effective. Fourth, only a 
portion of individuals who enroll in health plans in circumstances 
where these regulations alone guarantee their special enrollment or 
portability rights would otherwise have been denied such rights. Fifth, 
only a small minority of individuals who avoid a significant break in 
coverage as a direct result of these regulations would otherwise have 
lost coverage for needed medical care. (The affected minority would be 
those who suffer from preexisting conditions, join health plans that 
exclude coverage for such conditions, and require treatment of such 
conditions during the exclusion periods.)
    Affected individuals may also include some who would have been 
denied special enrollment rights if plans or issuers failed to 
recognize their requests for special enrollment or imposed unreasonable 
deadlines or requirements for completion of enrollment materials.
    As noted above, the Departments expect that these regulations will 
increase at the margin the economic effects of HIPAA's statutory 
portability provisions. For the reasons stated immediately above, the 
Departments believe that these increases will be small on aggregate, 
adding only a small increment to the costs attributable to HIPAA's 
statutory portability provisions, which themselves amount to a small 
fraction of one percent of health plan expenditures. Additionally, as 
with the cost of HIPAA's statutory portability provisions, the majority 
of these costs will be borne by group plan enrollees. The Departments 
expect these regulations to have little or no perceptible negative 
impact on employers' propensity to offer health benefit plans or on the 
generosity of those plans. In sum, the Departments expect that the 
benefits of these regulations, which can be very large for a particular 
affected individual, will justify their costs. The basis for the 
Departments' conclusions is detailed below.
    The Departments solicit comments on their conclusions and their 
basis for them, and empirical data or other information that would 
support a fuller or more accurate analysis.

Executive Order 12866--Department of Labor and Department of Health and 
Human Services

    Under Executive Order 12866 (58 FR 551735, Oct. 4, 1993), the 
Departments must determine whether a regulatory action is 
``significant'' and therefore subject to the requirements of the 
Executive Order and subject to review by the Office of Management and 
Budget (OMB). Under section 3(f), the order defines a ``significant 
regulatory action'' as an action that is likely to result in a rule: 
(1) Having an annual effect on the economy of $100 million or more, or 
adversely and materially affecting a sector of the economy, 
productivity, competition, jobs, the environment, public health or 
safety, or state, local or tribal governments or communities (also 
referred to as ``economically significant''); (2) creating serious 
inconsistency or otherwise interfering with an action taken or planned 
by another agency; (3) materially altering the budgetary

[[Page 78809]]

impacts of entitlement grants, user fees, or loan programs or the 
rights and obligations of recipients thereof; or (4) raising novel 
legal or policy issues arising out of legal mandates, the President's 
priorities, or the principles set forth in the Executive Order.
    Pursuant to the terms of the Executive Order, the Departments have 
determined that this action raises novel policy issues arising out of 
legal mandates. Therefore, this notice is ``significant'' and subject 
to OMB review under Section 3(f)(4) of the Executive Order. Consistent 
with the Executive Order, the Departments have assessed the costs and 
benefits of this regulatory action. The Departments' assessment, and 
the analysis underlying that assessment, is detailed below. The 
Departments performed a comprehensive, unified analysis to estimate the 
costs and benefits attributable to the regulations for purposes of 
compliance with Executive Order 12866, the Regulatory Flexibility Act, 
and the Paperwork Reduction Act.
Statement of Need for Proposed Action
    These proposed regulations clarify and interpret the HIPAA 
portability provisions under Section 701 of the Employee Retirement 
Income Security Act of 1974 (ERISA), Section 2701 of the Public Health 
Service Act, and Section 9801 of the Internal Revenue Code of 1986. The 
regulations are needed to secure and implement HIPAA's portability 
rights for individuals who are not timely notified that their coverage 
has ended and for individuals whose coverage ends in connection with 
the taking of leave that is guaranteed under FMLA, and to clarify and 
secure individuals' special enrollment rights under HIPAA.
Economic Effects
    As noted above, HIPAA's primary economic effects ensue directly 
from its statutory provisions. HIPAA's statutory group market 
portability provisions extend coverage to certain individuals and 
preexisting conditions not otherwise covered. This extension of 
coverage entails both benefits and costs. The economic effects of 
HIPAA's statutory portability provisions is summarized above and 
discussed in detail under the ``Basis for Assessment of Economic 
Impact'' section of the preamble to the final regulation, published 
elsewhere in this issue of the Federal Register.
    Also as noted above, by clarifying and securing HIPAA's statutory 
portability protections, these regulations will help ensure that HIPAA 
rights are fully realized. The result is likely to be a small increase 
at the margin in the economic effects of HIPAA's statutory portability 
provisions. The benefits of these regulations will be concentrated 
among a small number of affected individuals, while their costs will be 
spread thinly across plans and issuers. The regulations also will 
reduce uncertainty about health benefits' scope and value, thereby 
promoting employee health benefit coverage and labor market efficiency. 
The Departments believe that the regulations' benefits will justify 
their cost. The Departments assessment of the expected economic effects 
of the regulation are summarized above and discussed in detail below.

Regulatory Flexibility Act--The Department of Labor and Department of 
Health and Human Services

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA), 
imposes certain requirements with respect to Federal rules that are 
subject to the notice and comment requirements of section 553(b) of the 
Administrative Procedure Act (5 U.S.C. 551 et seq.) and which are 
likely to have a significant economic impact on a substantial number of 
small entities. Section 603 of the RFA stipulates that an agency, 
unless it certifies that a proposed rule will not have a significant 
economic impact on a substantial number of small entities, must present 
an initial regulatory flexibility analysis at the time of publication 
of the notice of proposed rulemaking that describes the impact of the 
rule on small entities and seeks public comment on such impact. Small 
entities include small businesses, organizations, and governmental 
jurisdictions.
    For purposes of analysis under the RFA, the Departments consider a 
small entity to be an employee benefit plan with fewer than 100 
participants. The basis for this definition is found in section 
104(a)(2) of ERISA, which permits the Secretary of Labor to prescribe 
simplified annual reports for pension plans which cover fewer than 100 
participants. Under section 104(a)(3), the Secretary may also provide 
for simplified annual reporting and disclosure if the statutory 
requirements of part 1 of Title I of ERISA would otherwise be 
inappropriate for welfare benefit plans. Pursuant to the authority of 
section 104(a)(3), the Department of Labor has previously issued at 29 
CFR 2520.104-20, 2520.104-21, 2520.104-41, 2520.104-46 and 2520.104b-10 
certain simplified reporting provisions and limited exemptions from 
reporting and disclosure requirements for small plans, including 
unfunded or insured welfare plans covering fewer than 100 participants 
and which satisfy certain other requirements.
    Further, while some small plans are maintained by large employers, 
most are maintained by small employers. Both small and large plans may 
enlist small third party service providers to perform administrative 
functions, but it is generally understood that third party service 
providers transfer their costs to their plan clients in the form of 
fees. Thus, the Departments believe that assessing the impact of this 
rule on small plans is an appropriate substitute for evaluating the 
effect on small entities. The definition of small entity considered 
appropriate for this purpose differs, however, from a definition of 
small business based on size standards promulgated by the Small 
Business Administration (SBA) (13 CFR 121.201) pursuant to the Small 
Business Act (5 U.S.C. 631 et seq.). The Department of Labor solicited 
comments on the use of this standard for evaluating the effects of the 
proposal on small entities. No comments were received with respect to 
the standard. Therefore, a summary of the initial regulatory 
flexibility analysis based on the 100 participant size standard is 
presented below.
    The economic effects of HIPAA's statutory provisions on small plans 
are discussed extensively under the ``Regulatory Flexibility Act--
Department of Labor and Department of Health and Human Services'' 
section of the preamble to the final regulation, published elsewhere in 
this issue of the Federal Register.
    By clarifying and securing HIPAA's statutory portability 
protections, these regulations will help ensure that these benefits are 
fully realized. The result is likely to be a small increase in the 
economic effects of HIPAA's statutory provisions. The Departments were 
unable to estimate the amount of this increase. However, the direct 
financial value of coverage extensions pursuant to HIPAA's statutory 
portability provisions are estimated to be approximately $180 million 
for small plans, or a small fraction of one percent of total small plan 
expenditures.\2\
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    \2\ Computer runs using Medical Expenditure Survey Household 
Component (MEPS-HC) and the Robert Wood Johnson Employer Health 
Benefits Survey determined that the share of covered private-sector 
job leavers at small firms average 35 percent of all covered private 
sector job leavers. From this, we inferred that the financial burden 
borne by small plans is approximately 35 percent of the total 
expenditures by private-sector group health plans which was 
estimated to be $515 million.
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    The regulations also will reduce uncertainty about health benefits' 
scope and value, thereby promoting employee

[[Page 78810]]

health benefit coverage, including coverage under small plans, and 
labor market efficiency.
    The benefits of these regulations will be concentrated among a 
small number of affected small group plan enrollees, while their costs 
will be spread thinly across small group plans enrollees. The benefits 
of these regulations for any particular affected individual, which may 
include improved health and productivity, may be significant. However, 
as previously noted, the number of affected individuals, and therefore 
the aggregate cost of these regulations, is expected to be small. The 
Departments believe that the benefits to affected individuals of the 
application of these regulations to small plans justify the cost to 
small plans of such application. The basis for the Departments' 
conclusions is detailed below.
    The Departments generally expect the impact of the regulations on 
any particular small plan to be small. A very large majority of small 
plans are fully insured, so the cost will fall nominally on issuers 
rather than from plans. Issuers are expected to pass this cost back to 
plans and enrollees, but will spread much of it across a large number 
of plans, thereby minimizing the impact on any particular plan. 
However, it is possible that small plans that self-insure, or fully 
insured small plans whose premiums are tied closely to their particular 
claims experience, might bear all or most of the cost associated with 
extensions of coverage attributable directly to these regulations. The 
Departments have no way to quantify the incidence or magnitude of such 
costs, and solicit comments on such incidence and magnitude, and on 
whether these regulations would have a significant impact on a 
substantial number of small plans.

Special Analyses--Department of the Treasury

    Notwithstanding the determinations of the Departments of Labor and 
of Health and Human Services, for purposes of the Department of the 
Treasury this notice of proposed rulemaking is not a significant 
regulatory action. Because this notice of proposed rulemaking does not 
impose a collection of information on small entities and is not subject 
to section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 
5), the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply 
pursuant to 5 U.S.C. 603(a), which exempts from the Regulatory 
Flexibility Act's requirements certain rules involving the internal 
revenue laws. Pursuant to section 7805(f) of the Internal Revenue Code, 
this notice of proposed rulemaking will be submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business.

Paperwork Reduction Act

Department of Labor
    These proposed regulations include three separate collections of 
information as that term is defined in the Paperwork Reduction Act of 
1995 (PRA 95), 44 U.S.C. 3502(3): the Notice of Enrollment Rights, 
Notice of Preexisting Condition Exclusion, and Certificate of 
Creditable Coverage. Each of these disclosures is currently approved by 
the Office of Management and Budget (OMB) through October 31, 2006 in 
accordance with PRA 95 under control numbers 1210-0101, 1210-0102, and 
1210-0103.
Department of the Treasury
    These proposed regulations include a collection of information as 
that term is defined in PRA 95: the Notice of Enrollment Rights, Notice 
of Preexisting Condition Exclusion, and Certificate of Creditable 
Coverage. Each of these disclosures is currently approved by OMB under 
control number 1545-1537.
Department of Health and Human Services
    These proposed regulations include three separate collections of 
information as that term is defined in PRA 95: the Notice of Enrollment 
Rights, Notice of Preexisting Condition Exclusion, and Certificate of 
Creditable Coverage. Each of these disclosures is currently approved by 
OMB through June 30, 2006 in accordance with PRA 95 under control 
number 0938-0702.

Small Business Regulatory Enforcement Fairness Act

    The rule being issued here is subject to the provisions of the 
Small Business Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 
801 et seq.) and, if finalized, will be transmitted to Congress and the 
Comptroller General for review. The rule is not a ``major rule'' as 
that term is defined in 5 U.S.C. 804, because it is not likely to 
result in (1) an annual effect on the economy of $100 million or more; 
(2) a major increase in costs or prices for consumers, individual 
industries, or federal, state, or local government agencies, or 
geographic regions; or (3) significant adverse effects on competition, 
employment, investment, productivity, innovation, or on the ability of 
United States-based enterprises to compete with foreign-based 
enterprises in domestic or export markets.

Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 requires 
that agencies assess anticipated costs and benefits before issuing any 
rule that may result in an expenditure in any 1 year by state, local, 
or tribal governments, in the aggregate, or by the private sector, of 
$100 million. These proposed regulations have no such mandated 
consequential effect on state, local, or tribal governments, or on the 
private sector.

Federalism Statement Under Executive Order 13132--Department of Labor 
and Department of Health and Human Services

    Executive Order 13132 outlines fundamental principles of 
federalism. It requires adherence to specific criteria by federal 
agencies in formulating and implementing policies that have 
``substantial direct effects'' on the States, the relationship between 
the national government and States, or on the distribution of power and 
responsibilities among the various levels of government. Federal 
agencies promulgating regulations that have these federalism 
implications must consult with State and local officials, and describe 
the extent of their consultation and the nature of the concerns of 
State and local officials in the preamble to the regulation.
    In the Departments' view, these proposed regulations have 
federalism implications because they may have substantial direct 
effects on the States, the relationship between the national government 
and States, or on the distribution of power and responsibilities among 
the various levels of government. However, in the Departments' view, 
the federalism implications of these proposed regulations are 
substantially mitigated because, with respect to health insurance 
issuers, the vast majority of States have enacted laws which meet or 
exceed the federal HIPAA portability standards.
    In general, through section 514, ERISA supersedes State laws to the 
extent that they relate to any covered employee benefit plan, and 
preserves State laws that regulate insurance, banking or securities. 
While ERISA prohibits States from regulating a plan as an insurance or 
investment company or bank, HIPAA added a new section to ERISA (as well 
as to the PHS Act) narrowly preempting State requirements for issuers 
of group health insurance coverage. Specifically, with respect to

[[Page 78811]]

seven provisions of the HIPAA portability rules, states may impose 
stricter obligations on health insurance issuers.\3\ Moreover, with 
respect to other requirements for health insurance issuers, states may 
continue to apply state law requirements except to the extent that such 
requirements prevent the application of HIPAA's portability, access, 
and renewability provisions.
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    \3\ States may shorten the six-month look-back period prior to 
the enrollment date; shorten the 12-month and 18-month maximum 
preexisting condition exclusion periods; increase the 63-day 
significant break in coverage period; increase the 30-day period for 
newborns, adopted children, and children placed for adoption to 
enroll in the plan with no preexisting condition exclusion; further 
limit the circumstances in which a preexisting condition exclusion 
may be applied (beyond the federal exceptions for certain newborns, 
adopted children, children placed for adoption, pregnancy, and 
genetic information in the absence of a diagnosis; require 
additional special enrollment periods; and reduce the HMO 
affiliation period to less than 2 months (3 months for late 
enrollees).
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    In enacting these new preemption provisions, Congress intended to 
preempt State insurance requirements only to the extent that they 
prevent the application of the basic protections set forth in HIPAA. 
HIPAA's conference report states that the conferees intended the 
narrowest preemption of State laws with regard to health insurance 
issuers. H.R. Conf. Rep. No. 736, 104th Cong. 2d Session 205 (1996). 
State insurance laws that are more stringent than the federal 
requirements are unlikely to ``prevent the application of'' the HIPAA 
portability provisions, and be preempted. Accordingly, States have 
significant latitude to impose requirements on health insurance 
insurers that are more restrictive than the federal law.
    Guidance conveying this interpretation of HIPAA's preemption 
provisions was published in the Federal Register on April 8, 1997, 62 
FR 16904. These proposed regulations clarify and implement the 
statute's minimum standards and do not significantly reduce the 
discretion given the States by the statute. Moreover, the Departments 
understand that the vast majority of States have requirements that meet 
or exceed the minimum requirements of the HIPAA portability provisions.
    HIPAA provides that the States may enforce the provisions of HIPAA 
as they pertain to issuers, but that the Secretary of Health and Human 
Services must enforce any provisions that a State fails to 
substantially enforce. To date, CMS enforces the HIPAA portability 
provisions in only one State in accordance with that State's specific 
request to do so. When exercising its responsibility to enforce the 
provisions of HIPAA, CMS works cooperatively with the State for the 
purpose of addressing the State's concerns and avoiding conflicts with 
the exercise of State authority. CMS has developed procedures to 
implement its enforcement responsibilities, and to afford the States 
the maximum opportunity to enforce HIPAA's requirements in the first 
instance. CMS's procedures address the handling of reports that States 
may not be enforcing HIPAA's requirements, and the mechanism for 
allocating responsibility between the States and CMS. In compliance 
with Executive Order 13132's requirement that agencies examine closely 
any policies that may have federalism implications or limit the 
policymaking discretion of the States, the Department of Labor and CMS 
have engaged in numerous efforts to consult and work cooperatively with 
affected State and local officials.
    For example, the Departments sought and received input from State 
insurance regulators and the National Association of Insurance 
Commissioners (NAIC). The NAIC is a non-profit corporation established 
by the insurance commissioners of the 50 States, the District of 
Columbia, and the four U.S. territories. In most States the Insurance 
Commissioner is appointed by the Governor, in approximately 14 States, 
the insurance commissioner is an elected official. Among other 
activities, it provides a forum for the development of uniform policy 
when uniformity is appropriate. Its members meet, discuss and offer 
solutions to mutual problems. The NAIC sponsors quarterly meetings to 
provide a forum for the exchange of ideas and in-depth consideration of 
insurance issues by regulators, industry representatives and consumers. 
CMS and the Department of Labor staff have consistently attended these 
quarterly meetings to listen to the concerns of the State Insurance 
Departments regarding HIPAA portability issues. In addition to the 
general discussions, committee meetings, and task groups, the NAIC 
sponsors the standing CMS/DOL meeting on HIPAA issues for members 
during the quarterly conferences. This meeting provides CMS and the 
Department of Labor with the opportunity to provide updates on 
regulations, bulletins, enforcement actions, and outreach efforts 
regarding HIPAA.
    The Departments received written comments on the interim regulation 
from the NAIC and from ten States. In general, these comments raised 
technical issues that the Departments considered in conjunction with 
similar issues raised by other commenters. In a letter sent before 
issuance of the interim regulation, the NAIC expressed concerns that 
the Departments interpret the new preemption provisions of HIPAA 
narrowly so as to give the States flexibility to impose more stringent 
requirements. As discussed above, the Departments address this concern 
in the preamble to the interim regulation.
    In addition, the Departments specifically consulted with the NAIC 
in developing these proposed regulations. Through the NAIC, the 
Departments sought and received the input of State insurance 
departments regarding certain insurance industry definitions, 
enrollment procedures and standard coverage terms. This input is 
generally reflected in the discussion of comments received and changes 
made in Section B--Overview of the Regulations of the preamble to the 
final regulations published elsewhere in this issue of the Federal 
Register.
    The Departments have also cooperated with the States in several 
ongoing outreach initiatives, through which information on HIPAA is 
shared among federal regulators, State regulators and the regulated 
community. In particular, the Department of Labor has established a 
Health Benefits Education Campaign with more than 70 partners, 
including CMS, NAIC and many business and consumer groups. CMS has 
sponsored conferences with the States--the Consumer Outreach and 
Advocacy conferences in March 1999 and June 2000, and the 
Implementation and Enforcement of HIPAA National State-Federal 
Conferences in August 1999, 2000, 2001, 2002, and 2003. Furthermore, 
both the Department of Labor and CMS Web sites offer links to important 
State web sites and other resources, facilitating coordination between 
the State and federal regulators and the regulated community.
    Throughout the process of developing these regulations, to the 
extent feasible within the specific preemption provisions of HIPAA, the 
Departments have attempted to balance the States' interests in 
regulating health insurance issuers, and the Congress' intent to 
provide uniform minimum protections to consumers in every State. By 
doing so, it is the Departments' view that they have complied with the 
requirements of Executive Order 13132.
    Pursuant to the requirements set forth in Section 8(a) of Executive 
Order 13132, and by the signatures affixed to proposed final 
regulations, the Departments certify that the Employee Benefits 
Security Administration and the Centers for Medicare & Medicaid 
Services have complied with the requirements of Executive Order 13132 
for the attached proposed regulation,

[[Page 78812]]

Notice of Proposed Rulemaking for Health Coverage Portability: Tolling 
and Certain Time Periods and Interaction with the Family and Medical 
Leave Act under HIPAA Titles I & IV (RIN 1210-AA54 and RIN 0938-AL88), 
in a meaningful and timely manner.

Basis for Assessment of Economic Impact--Department of Labor and 
Department of Health and Human Services

    As noted above, the primary economic effects of HIPAA's portability 
provisions ensue directly from the statute. The Department's assessment 
of the economic effects of HIPAA's statutory portability provisions and 
the basis for the assessment is presented in detail under the ``Basis 
for Assessment of Economic Impact'' section of the preamble to the 
final regulation, published elsewhere in this issue of the Federal 
Register. By clarifying and securing HIPAA's statutory portability 
protections, these regulations will help ensure that HIPAA rights are 
fully realized. The result is likely to be a small increase in the 
economic effects of HIPAA's statutory portability provisions.
    Additional economic benefits derive from the regulations' 
clarifications of HIPAA's portability requirements. The regulations 
provide clarity through both their provisions and their examples of how 
those provisions apply in various circumstances. By clarifying 
employees' rights and plan sponsors' obligations under HIPAA's 
portability provisions, the regulations will reduce uncertainty and 
costly disputes over these rights and obligations. They will promote 
employers' and employees' common understanding of the value of group 
health plan benefits and confidence in the security and predictability 
of those benefits, thereby improving labor market efficiency and 
fostering the establishment and continuation of group health plans by 
employers.\4\
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    \4\ The voluntary nature of the employment-based health benefit 
system in conjunction with the open and dynamic character of labor 
markets make explicit as well as implicit negotiations on 
compensation a key determinant of the prevalence of employee 
benefits coverage. It is likely that 80% to 100% of the cost of 
employee benefits is borne by workers through reduced wages (see for 
example Jonathan Gruber and Alan B. Krueger, ``The Incidence of 
Mandated Employer-Provided Insurance: Lessons from Workers 
Compensation Insurance,'' in, David Bradford, ed., Tax Policy and 
Economy, pp:111-143 (Cambridge, MA: MIT Press, 1991); Jonathan 
Gruber, ``The Incidence of Mandated Maternity Benefits,'' American 
Economic Review, Vol. 84 no. 3 (June 1994), pp. 622-641; Lawrence H. 
Summers, ``Some Simple Economics of Mandated Benefits,'' American 
Economic Review, Vol. 79, No. 2 (May 1989), pp:177-183; Louise 
Sheiner, ``Health Care Costs, Wages, and Aging,'' Federal Reserve 
Board of Governors working paper, April 1999; Mark Pauly and Brad 
Herring, Pooling Health Insurance Risks (Washington, DC: AEI Press, 
1999), Gail A. Jensen and Michael A. Morrisey, ``Endogenous Fringe 
Benefits, Compensating Wage Differentials and Older Workers,'' 
International Journal of Health Care Finance and Economics Vol 1, 
No. 3-4 (forthcoming), and Edward Montgomery, Kathryn Shaw, and Mary 
Ellen Benedict, ``Pensions and Wages: An Hedonic Price Theory 
Approach,'' International Economic Review, Vol. 33 No. 1 (Feb. 
1992.), pp:111-128.) The prevalence of benefits is therefore largely 
dependent on the efficacy of this exchange. If workers perceive that 
there is the potential for inappropriate denial of benefits they 
will discount their value to adjust for this risk. This discount 
drives a wedge in the compensation negotiation, limiting its 
efficiency. With workers unwilling to bear the full cost of the 
benefit, fewer benefits will be provided. The extent to which 
workers perceive a federal regulation supported by enforcement 
authority to improve the security and quality of benefits, the 
differential between the employers costs and workers willingness to 
accept wage offsets is minimized.
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    These proposed regulations are intended to secure and implement 
HIPAA's group market portability provisions under certain special 
circumstances. The regulations will secure HIPAA's portability rights 
for individuals who are not timely notified that their coverage has 
ended and for individuals whose coverage ends in connection with the 
taking of leave that is guaranteed under FMLA. The regulations also 
will clarify and thereby secure individuals' special enrollment rights 
under HIPAA, and clarify the methodologies to be used by employers to 
determine the number of plans offered and the average number of 
individuals employed during a given year.
    The benefits of these regulations will be concentrated among a 
small number of affected individuals.
    Affected individuals will generally include those who would have 
lost access to coverage for needed medical care after forfeiting HIPAA 
portability and/or special enrollment rights due to time spent without 
coverage prior to receiving a certificate or while on FMLA-guaranteed 
leave. Affected individuals may also include some who would have been 
denied special enrollment rights if plans or issuers failed to 
recognize their requests for special enrollment or imposed unreasonable 
deadlines or requirements for completion of enrollment materials. The 
benefits of these regulations for any particular affected individual 
may be large. As noted above, access to coverage for needed medical 
care is important to individuals' health and productivity. However, the 
number of affected individuals, and therefore the aggregate cost of 
extended access to coverage under these regulations, is expected to be 
small, for several reasons.
    First, these regulations extend HIPAA rights only in instances 
where individuals do not receive certificates immediately when coverage 
ends or their coverage ends in connection with the taking of FMLA-
guaranteed leave. The Departments know of no source of data on the 
timeliness with which certificates are typically provided. The final 
regulations that accompany these proposed regulations permit plans to 
provide certificates with COBRA notices, up to 44 days after coverage 
ends. Plans, however, often do have the option of providing 
certificates immediately when coverage ends or even in advance, for 
example as part of exit packages given to terminating employees or in 
mailings to covered dependents in advance of birthdays that will end 
their eligibility for coverage. With respect to FMLA-protected leave, 
data provided in a 1996 report to Congress suggests that the number of 
employees who lose coverage in connection with FMLA-protected leave is 
likely to be small. The report notes that over an 18-month period just 
1.2 percent of surveyed employees took what they reported to be FMLA 
leave. A similar survey of employers found that 3.6 percent of 
employees took such leave. Nearly all of those taking leave continued 
their health coverage. (This is not surprising, given that FMLA 
requires covered employers to extend eligibility for health insurance 
to employees on FMLA-protected leave on the same terms that applied 
when the employees were not on leave.) Just 9 percent of leave-takers 
reported that they lost some kind of employee benefit, with one-third 
of these reporting that they lost health insurance.\5\ Putting these 
numbers together and converting to an annual basis, in a given year 
between 0.02 percent and 0.07 percent of employees, or well under one 
in one thousand, might lose health coverage in connection with FMLA-
protected leave. Many of these will ultimately exercise their right to 
be reinstated in the job from which they took leave and to exercise 
their FMLA-guaranteed right to resume their previous health coverage. 
Therefore, the number of employees who will lose coverage and then, 
later and at the conclusion of FMLA-protected leave, enjoy extended 
portability rights under HIPAA as a result of these regulations, is 
likely to be very small.
---------------------------------------------------------------------------

    \5\ Commission on Family and Medical Leave and U.S. Department 
of Labor, A Workable Balance: Report to Congress on Family and 
Medical Leave Policies, transmitted April 30, 1996.
---------------------------------------------------------------------------

    Second, the period over which this regulation extends rights will 
often be

[[Page 78813]]

short, insofar as certificates are often provided promptly after 
coverage ends and many family leave periods are far shorter than the 
guaranteed 12 weeks. As noted above, plans generally are required to 
provide certificates no later than 44 days after coverage ends and may 
provide them sooner. According to the aforementioned report to Congress 
on FMLA-protected leave, 41 percent of employees taking FMLA-protected 
leave did so for less than 8 days. Fifty-eight percent were on leave 
for less than 15 days, and two-thirds were on leave for less than 29 
days. (FMLA protects leaves of up to 12 weeks, or 84 days.)
    Third, it is generally in individuals' interest to minimize periods 
of uninsurance. Individuals are likely to exercise their portability 
and special enrollment rights as soon as possible after coverage ends, 
which will often be before any extension of such rights under these 
regulations becomes effective. Over one 36-month period prior to HIPAA, 
71 percent of Americans had continuous coverage--that is, incurred not 
even a single, one-month break in coverage. Just 4 percent were 
uninsured for the entire period. About one-half of observed spells 
without insurance lasted less than 5 months. As noted above, few 
employees taking FMLA-protected leave had a lapse in health coverage.
    Fourth, only a portion of individuals who enroll in health plans in 
circumstances where these regulations alone guarantee their special 
enrollment or portability rights would otherwise have been denied such 
rights. HIPAA special enrollment and portability requirements, both as 
specified under the final regulations and as modified under these 
proposed regulations, are minimum standards. Plans are free to provide 
additional enrollment opportunities.
    Fifth, only a small minority of individuals who avoid a significant 
break in coverage solely as a direct result of these regulations would 
otherwise have lost coverage for needed medical care. The affected 
minority would be those who suffer from preexisting conditions, join 
health plans that exclude coverage for such conditions, and require 
treatment of such conditions during the exclusion periods. GAO 
estimated that HIPAA could ensure continued coverage for up to 25 
million Americans.\6\ More recent estimates suggest that the number of 
individual policy holders and their dependents which could be helped by 
HIPAA's portability provisions are more in the 14 million range.\7\ As 
noted above, however, the number of workers and dependents actually 
gaining coverage for a preexisting condition due to credit for prior 
coverage following a job change under HIPAA will be smaller than this. 
Both GAO's and our estimates of people who could benefit include all 
job changers with prior coverage and their dependents, irrespective of 
whether their new employer offers a plan, whether their new plan 
imposed a preexisting condition exclusion period, and whether they 
actually suffer from a preexisting condition. Accounting for these 
narrower criteria, CBO estimated that, at any point in time, about 
100,000 individuals would have a preexisting condition exclusion 
reduced for prior creditable coverage. An additional 45,000 would gain 
added coverage in the individual market. The CBO estimate demonstrates 
that the number of individuals actually gaining coverage for needed 
medical services will be a small fraction of all those whose right to 
such coverage HIPAA's portability provisions guarantee. Accordingly, 
the Departments expect that the number gaining coverage for needed 
services as a direct result of these regulations will be a small 
fraction of the already small number whose right to such coverage these 
regulations would establish.
---------------------------------------------------------------------------

    \6\ U.S. General Accounting Office, Report HEHS-95-257, ``Health 
Insurance Portability: Reform Could Ensure Continued Coverage for up 
to 25 Million Americans,'' September 1995.
    \7\ We calculated these estimates using internal runs off the 
MEPS-HC. These runs gave the number of total job changers, total job 
changers that had employer-sponsored insurance (ESI), and whether 
this coverage had been for less than 12 months or not. Estimates for 
dependents were based off the ratio of policy-holders to total 
dependents from the March 2003 Current Population Survey (March 
CPS). It should be noted, however, that the EBSA estimate of 14 
million does not include estimate of individuals no longer eligible 
for COBRA continuation coverage or individuals facing job lock, 
while the GAO numbers do.
---------------------------------------------------------------------------

    The Departments attempted to estimate the number of individuals who 
might avoid a break in coverage because of the provision of these 
proposed regulations that tolls the break until the individual receives 
a certification but not more than 44 days. The Departments examined 
coverage patterns evident in the Survey of Income and Program 
Participation (SIPP), a longitudinal household survey that tracks 
transitions in coverage. SIPP interviews households once every four 
months. The Departments estimate that, in a given year, about 7 million 
individuals have breaks in coverage lasting 4 months or less. The 
survey data suffer from so-called ``seam bias''--respondents tend to 
report that status as unchanged over 4-month increments. Of the 7 
million reporting breaks of 4 months or less, 6.5 million report breaks 
of exactly 4 months. This finding is consistent with the more general 
finding that breaks of 4 months or less are far more common than longer 
breaks. It seems likely that the 7 million breaks of 4 months or less 
actually included proportionate or disproportionately large shares of 
breaks of 1 or 2 months. Assuming the breaks are actually distributed 
evenly by length between 1 day and 4 months, then about one-half of the 
breaks, or 3.5 million breaks, would have lasted less than 63 days and 
therefore would not have constituted breaks for purposes of HIPAA's 
portability protections even without reference to the provision of this 
proposed regulation that tolls the break until the individual receives 
a certification but not more than 44 days. Approximately three-fourths 
of the remaining breaks or about 2.6 million breaks, would have lasted 
between 1 and 44 additional days and thereby potentially have been 
tolled until the individuals received their certifications but not more 
than 44 days. Thus 2.6 million provides a reasonable upper bound on the 
number of individuals who might avoid a break in coverage in a given 
year because of this tolling provision. It is not known what fraction 
of these would subsequently join group health plans that include 
preexisting condition exclusions while suffering from and requiring 
additional care for preexisting conditions. Comparing GAO's (20 million 
or more) and our (14 million) estimates of the number of individuals 
who could potentially benefit from HIPAA's portability protections 
(individuals with prior creditable coverage who join new health plans 
in a given year) with the CBO estimate of the number who might actually 
have added group coverage for needed care (100,000) produces a ratio of 
about 1 percent. If this proportion holds for group health plan 
enrollees who avoid breaks because of this tolling provision, then an 
upper bound of about 26,000 individuals annually might gain coverage 
for needed care under the proposed regulation's provision treating 
coverage under such programs as creditable coverage.
    The Departments considered whether certain individuals whose HIPAA 
portability rights these proposed regulations would extend may be 
disproportionately likely to be in (or have dependents who are in) poor 
health. Specifically, individuals taking FMLA-protected leave, 
especially those who elect not to be reinstated in their prior jobs 
following FMLA-protected leave, may be so likely. On the other

[[Page 78814]]

hand, individuals in such circumstances are also particularly unlikely 
to allow their health insurance from their prior job to lapse while 
they are on leave. Accordingly, most such individuals' special 
enrollment periods and countable breaks in coverage (if any) would 
probably have begun at the conclusion of the FMLA-protected leave even 
in absence of these proposed regulations. The Departments are therefore 
uncertain whether individuals who would exercise HIPAA portability 
rights extended solely by these regulations would be more costly to 
insure than others exercising HIPAA portability rights, and solicit 
comments on this question.
    Affected individuals may also include some who would have been 
denied special enrollment rights if plans or issuers failed to 
recognize their requests for special enrollment or imposed unreasonable 
deadlines or requirements for completion of enrollment materials.
    As noted above, the Departments expect that these regulations will 
result in a small increase in the economic effects of HIPAA's statutory 
provisions. For the reasons stated immediately above, the Departments 
believe that this increase will be small on aggregate, adding only a 
small increment to the cost attributable to HIPAA's statutory 
portability provisions, which themselves amount to a small fraction of 
one percent of health plan expenditures. Thus the increase will be 
negligible relative to typical year-to-year increases in premiums 
charged by issuers, which can amount to several percentage points or 
more. Therefore, the Departments expect these regulations to have 
little or no perceptible negative impact on employers' propensity to 
offer health benefit plans or on the generosity of those plans. In sum, 
the Departments expect that the benefits of these regulations, which 
can be very large for a particular affected individual, will justify 
their costs.

List of Subjects

26 CFR Part 54

    Excise taxes, Health care, Health insurance, Pensions, Reporting 
and recordkeeping requirements.

29 CFR Part 2590

    Continuation coverage, Disclosure, Employee benefit plans, Group 
health plans, Health care, Health insurance, Medical child support, 
Reporting and recordkeeping requirements.

45 CFR Part 146

    Health care, Health insurance, Reporting and recordkeeping 
requirements, and State regulation of health insurance.

Proposed Amendments to the Regulations

Internal Revenue Service

26 CFR Chapter I

    Accordingly, 26 CFR part 54 is proposed to be amended as follows:

PART 54--PENSION EXCISE TAXES

    Paragraph 1. The authority citation for part 54 is amended by:
    a. Revising the entries for Sec. Sec.  54.9801-4 and 54.9801-6.
    b. Adding an entry in numerical order for Sec.  54.9801-7.
    The addition and revisions read as follows:

    Authority: 26 U.S.C. 7805. * * *
    Section 54.9801-4 also issued under 26 U.S.C. 9801(e)(3) and 
9833.* * *
    Section 54.9801-6 also issued under 26 U.S.C. 9801(e)(3) and 
9833.
    Section 54.9801-7 also issued under 26 U.S.C. 9833.* * *


Sec.  54.9801-1  [Amended]

    Par. 2. Section 54.9801-1 is amended in paragraph (a)(1) by 
removing the language ``54.9801-6'' and adding ``54.9801-7'' in its 
place.


Sec.  54.9801-2  [Amended]

    Par. 3. Section 54.9801-2 is amended in the first sentence by 
removing the language ``54.9801-6'' and adding ``54.9801-7'' in its 
place.
    Par. 4. Section 54.9801-4 is amended by:
    a. Revising paragraphs (b)(2)(iii) and (b)(2)(iv).
    b. Adding Examples 4 and 6 in paragraph (b)(2)(v).
    The revisions and additions read as follows:


Sec.  54.9801-4  Rules relating to creditable coverage.

* * * * *
    (b) Standard method. * * *
    (2) Counting creditable coverage. * * *
    (iii) Significant break in coverage defined. A significant break in 
coverage means a period of 63 consecutive days during each of which an 
individual does not have any creditable coverage, except that periods 
described in paragraph (b)(2)(iv) of this section are not taken into 
account in determining a significant break in coverage. (See section 
731(b)(2)(iii) of ERISA and section 2723(b)(2)(iii) of the PHS Act, 
which exclude from preemption state insurance laws that require a break 
of more than 63 days before an individual has a significant break in 
coverage for purposes of state law.)
    (iv) Periods that toll a significant break. Days in a waiting 
period and days in an affiliation period are not taken into account in 
determining whether a significant break in coverage has occurred. In 
addition, for an individual who elects COBRA continuation coverage 
during the second election period provided under the Trade Act of 2002, 
the days between the date the individual lost group health plan 
coverage and the first day of the second COBRA election period are not 
taken into account in determining whether a significant break in 
coverage has occurred. Moreover, in the case of an individual whose 
coverage ceases, if a certificate of creditable coverage with respect 
to that cessation is not provided on or before the date coverage 
ceases, then the period that begins on the first date that an 
individual has no creditable coverage and that continues through the 
earlier of the following two dates is not taken into account in 
determining whether a significant break in coverage has occurred:
    (A) The date that a certificate of creditable coverage with respect 
to that cessation is provided; or
    (B) The date 44 days after coverage ceases.
    (v) Examples. * * *

    Example 4.  (i) Facts. Individual B terminates coverage under a 
group health plan, and a certificate of creditable coverage is 
provided 10 days later. B begins employment with Employer R and 
begins enrollment in R's plan 60 days after the certificate is 
provided.
    (ii) Conclusion. In this Example 4, even though B had no 
coverage for 69 days, the 10 days before the certificate of 
creditable coverage is provided are not taken into account in 
determining a significant break in coverage. Therefore, B's break in 
coverage is only 59 days and is not a significant break in coverage. 
Accordingly, B's prior coverage must be counted by R's plan.
* * * * *
    Example 6.  (i) Facts. Employer V sponsors a group health plan. 
Under the terms of the plan, the only benefits provided are those 
provided under an insurance policy. Individual D works for V and has 
creditable coverage under V's plan. V fails to pay the issuer the 
premiums for the coverage period beginning March 1. Consistent with 
applicable state law, the issuer terminates the policy so that the 
last day of coverage is April 30. V goes out of business on July 31. 
On August 15 D begins employment with Employer W and enrolls in W's 
group health plan. W's plan imposes a 12-month preexisting condition 
exclusion on all enrollees. D never receives a certificate of 
creditable coverage for coverage under V's plan.
    (ii) Conclusion. In this Example 6, the period from May 1 (the 
first day without coverage) through June 13 (the date 44 days after 
coverage under V's plan ceases) is not

[[Page 78815]]

taken into account in determining a 63-day break in coverage. This 
is because, in cases in which a certificate of creditable coverage 
is not provided by the date coverage is lost, the break begins on 
the date the certificate is provided, or the date 44 days after 
coverage ceases, if earlier. Therefore, even though D's actual 
period without coverage was 106 days (May 1 through August 14), 
because the period from May 1 through June 13 is not taken into 
account, D's break in coverage is only 62 days (June 14 through 
August 14). Thus, D has not experienced a significant break in 
coverage, and D's prior coverage must be counted by W's plan.
* * * * *
    Par. 5. Section 54.9801-5 is amended by:
    a. Redesignating paragraphs (a)(3)(ii)(H)(5) and (6) as paragraphs 
(a)(3)(ii)(H)(6) and (7), respectively.
    b. Adding a new paragraph (a)(3)(ii)(H)(5).
    The addition reads as follows:


Sec.  54.9801-5  Evidence of creditable coverage.

    (a) Certificate of creditable coverage. * * *
    (3) Form and content of certificate. * * *
    (ii) Required information. * * *
    (H) * * *
    (5) The interaction with the Family and Medical Leave Act;
* * * * *
    Par. 6. Section 54.9801-6 is amended by:
    a. Revising paragraph (a)(1).
    b. Revising paragraph (a)(4).
    c. Revising paragraph (b)(1).
    d. Revising paragraph (b)(3).
    e. Revising Example 2 in paragraph (b)(4).
    f. Adding Examples 3, 4, and 5 in paragraph (b)(4).
    The additions and revisions read as follows:


Sec.  54.9801-6  Special enrollment periods.

    (a) Special enrollment for certain individuals who lose coverage--
(1) In general. A group health plan is required to permit current 
employees and dependents (as defined in Sec.  54.9801-2) who are 
described in paragraph (a)(2) of this section to enroll for coverage 
under the terms of the plan if the conditions in paragraph (a)(3) of 
this section are satisfied. Paragraph (a)(4) of this section describes 
procedures that a plan may require an employee to follow and describes 
the date by which coverage must begin. The special enrollment rights 
under this paragraph (a) apply without regard to the dates on which an 
individual would otherwise be able to enroll under the plan. (See 
section 701(f)(1) of ERISA and section 2701(f)(1) of the PHS Act, under 
which this obligation is also imposed on a health insurance issuer 
offering group health insurance coverage.)
* * * * *
    (4) Applying for special enrollment and effective date of 
coverage--(i) Request. A plan must allow an employee a period of at 
least 30 days after an event described in paragraph (a)(3) of this 
section (loss of eligibility for coverage, termination of employer 
contributions, or exhaustion of COBRA continuation coverage) to request 
enrollment (for the employee or the employee's dependent). For this 
purpose, any written or oral request made to any of the following 
constitutes a request for enrollment --
    (A) The plan administrator;
    (B) An issuer offering health insurance coverage under the plan;
    (C) A person who customarily handles claims for the plan (such as a 
third party administrator); or
    (D) Any other designated representative.
    (ii) Tolling of period for requesting special enrollment. (A) In 
the case of an individual whose coverage ceases, if a certificate of 
creditable coverage with respect to that cessation is not provided on 
or before the date coverage ceases, then the period for requesting 
special enrollment described in paragraph (a)(4)(i) of this section 
does not end until 30 days after the earlier of --
    (1) The date that a certificate of creditable coverage with respect 
to that cessation is provided; or
    (2) The date 44 days after coverage ceases.
    (B) For purposes of this paragraph (a)(4), if an individual's 
coverage ceases due to the operation of a lifetime limit on all 
benefits, coverage is considered to cease on the earliest date that a 
claim is denied due to the operation of the lifetime limit. 
(Nonetheless, the date of a loss of eligibility for coverage is 
determined under the rules of paragraph (a)(3) of this section, which 
provides that a loss of eligibility occurs when a claim that would meet 
or exceed a lifetime limit on all benefits is incurred, not when it is 
denied.)
    (C) The rules of this paragraph (a)(4)(ii) are illustrated by the 
following examples:

    Example 1. (i) Facts. Employer V provides group health coverage 
through a policy provided by Issuer M. Individual D works for V and 
is covered under V's plan. V fails to pay M the premiums for the 
coverage period beginning March 1. Consistent with applicable state 
law, M terminates the policy so that the last day of coverage is 
April 30. On May 15, M provides D with a certificate of creditable 
coverage with respect to D's cessation of coverage under V's plan.
    (ii) Conclusion. In this Example 1, the period to request 
special enrollment ends no earlier than June 14 (which is 30 days 
after May 15, the day a certificate of creditable coverage is 
provided with respect to D).
    Example 2. (i) Facts. Same facts as Example 1, except D is never 
provided with a certificate of creditable coverage.
    (ii) Conclusion. In this Example 2, the period to request 
special enrollment ends no earlier than July 13. (July 13 is 74 days 
after April 30, the date coverage ceases. That is, July 13 is 30 
days after the end of the 44-day maximum tolling period.)

    Example 3. (i) Facts. Individual E works for Employer W and has 
coverage under W's plan. W's plan has a lifetime limit of $1 million 
on all benefits under the plan. On September 13, E incurs a claim 
that would exceed the plan's lifetime limit. On September 28, W 
denies the claim due to the operation of the lifetime limit and a 
certificate of creditable coverage is provided on October 3. E is 
otherwise eligible to enroll in the group health plan of the 
employer of E's spouse.
    (ii) Conclusion. In this Example 3, the period to request 
special enrollment in the plan of the employer of E's spouse ends no 
earlier than November 2 (30 days after the date the certificate is 
provided) and begins not later than September 13, the date E lost 
eligibility for coverage.

    (iii) Reasonable procedures for special enrollment. After an 
individual has requested enrollment under paragraph (a)(4)(i) of this 
section, a plan may require the individual to complete enrollment 
materials within a reasonable time after the end of the 30-day period 
described in paragraph (a)(4)(i) of this section. In these enrollment 
materials, the plan may require the individual only to provide 
information required of individuals who enroll when first eligible and 
information about the event giving rise to the special enrollment 
right. A plan may establish a deadline for receiving completed 
enrollment materials, but such a deadline must be extended for 
information that an individual making reasonable efforts does not 
obtain by that deadline.
    (iv) Date coverage must begin. If the plan requires completion of 
additional enrollment materials in accordance with paragraph 
(a)(4)(iii) of this section, coverage must begin no later than the 
first day of the first calendar month beginning after the date the plan 
receives enrollment materials that are substantially complete. If the 
plan does not require completion of additional enrollment materials, 
coverage must begin no later than the first day of the first calendar 
month beginning after the date the plan receives the request for 
special enrollment under paragraph (a)(4)(i) of this section.

[[Page 78816]]

    (b) Special enrollment with respect to certain dependent 
beneficiaries--(1) In general. A group health plan that makes coverage 
available with respect to dependents is required to permit individuals 
described in paragraph (b)(2) of this section to be enrolled for 
coverage in a benefit package under the terms of the plan. Paragraph 
(b)(3) of this section describes procedures that a plan may require an 
individual to follow and describes the date by which coverage must 
begin. The special enrollment rights under this paragraph (b) apply 
without regard to the dates on which an individual would otherwise be 
able to enroll under the plan. (See 29 CFR 2590.701-6(b) and 45 CFR 
146.117(b), under which this obligation is also imposed on a health 
insurance issuer offering group health insurance coverage.)
* * * * *
    (3) Applying for special enrollment and effective date of 
coverage--(i) Request. A plan must allow an individual a period of at 
least 30 days after the date of the marriage, birth, adoption, or 
placement for adoption (or, if dependent coverage is not generally made 
available at the time of the marriage, birth, adoption, or placement 
for adoption, a period of at least 30 days after the date the plan 
makes dependent coverage generally available) to request enrollment 
(for the individual or the individual's dependent). For this purpose, 
any written or oral request made to any of the following constitutes a 
request for enrollment--
    (A) The plan administrator;
    (B) An issuer offering health insurance coverage under the plan;
    (C) A person who customarily handles claims for the plan (such as a 
third party administrator); or
    (D) Any other designated representative.
    (ii) Reasonable procedures for special enrollment. After an 
individual has requested enrollment under paragraph (b)(3)(i) of this 
section, a plan may require the individual to complete enrollment 
materials within a reasonable time after the end of the 30-day period 
described in paragraph (b)(3)(i) of this section. In these enrollment 
materials, the plan may require the individual only to provide 
information required of individuals who enroll when first eligible and 
information about the event giving rise to the special enrollment 
right. A plan may establish a deadline for receiving completed 
enrollment materials, but such a deadline must be extended for 
information that an individual making reasonable efforts does not 
obtain by that deadline.
    (iii) Date coverage must begin--(A) Marriage. In the case of 
marriage, if the plan requires completion of additional enrollment 
materials in accordance with paragraph (b)(3)(ii) of this section, 
coverage must begin no later than the first day of the first calendar 
month beginning after the date the plan receives enrollment materials 
that are substantially complete. If the plan does not require such 
additional enrollment materials, coverage must begin no later than the 
first day of the first calendar month beginning after the date the plan 
receives the request for special enrollment under paragraph (b)(3)(i) 
of this section.
    (B) Birth, adoption, or placement for adoption. Coverage must begin 
in the case of a dependent's birth on the date of birth and in the case 
of a dependent's adoption or placement for adoption no later than the 
date of such adoption or placement for adoption (or, if dependent 
coverage is not made generally available at the time of the birth, 
adoption, or placement for adoption, the date the plan makes dependent 
coverage available). If the plan requires completion of additional 
enrollment materials in accordance with paragraph (b)(3)(ii) of this 
section, the plan must provide benefits (including benefits 
retroactively to the date of birth, adoption, or placement for 
adoption) once the plan receives enrollment materials that are 
substantially complete.

    (4) Examples. * * *

    Example 2. (i) Facts. Individual D works for Employer X. X 
maintains a group health plan with two benefit packages--an HMO 
option and an indemnity option. Self-only and family coverage are 
available under both options. D enrolls for self-only coverage in 
the HMO option. Then, a child, E, is placed for adoption with D. 
Within 30 days of the placement of E for adoption, D requests 
enrollment for D and E under the plan's indemnity option and submits 
completed enrollment materials timely.
    (ii) Conclusion. In this Example 2, D and E satisfy the 
conditions for special enrollment under paragraphs (b)(2)(v) and 
(b)(3) of this section. Therefore, the plan must allow D and E to 
enroll in the indemnity coverage, effective as of the date of the 
placement for adoption.
    Example 3. (i) Facts. Same facts as Example 1. On March 17 (two 
days after the birth of C), A telephones the plan administrator and 
requests special enrollment of A, B, and C. The plan administrator 
sends A an enrollment form. Under the terms of the plan, enrollment 
is denied unless a completed form is submitted within 30 days of the 
event giving rise to the special enrollment right (in this case, C's 
birth).
    (ii) Conclusion. In this Example 3, the plan does not satisfy 
paragraph (b)(3) of this section. The plan may require only that A 
request enrollment during the 30-day period after C's birth. A did 
so by telephoning the plan administrator. The plan may not condition 
special enrollment on filing additional enrollment materials during 
the 30-day period. To comply with paragraph (b)(3) of this section, 
the plan must allow A a reasonable time after the end of the 30-day 
period to submit any additional enrollment materials. Once these 
enrollment materials are received, the plan must allow whatever 
coverage is chosen to begin on March 15, the date of C's birth.
    Example 4. (i) Facts. Same facts as Example 3, except that A 
telephones the plan administrator to request enrollment on April 13 
(29 days after C's birth). Also, under the terms of the plan, the 
deadline for submitting the enrollment form is 14 days after the end 
of the 30-day period for requesting special enrollment (thus, in 
this case, April 28, which is 44 days after C's birth). The form 
requests the same information for A, B, and C (name, date of birth, 
and place of birth) as well as a copy of C's birth certificate. A 
fills out the enrollment form and delivers it to the plan 
administrator on April 28. At that time A does not have a birth 
certificate for C but applies on that day for one from the 
appropriate government office. A receives the birth certificate on 
June 1 and furnishes a copy of the birth certificate to the plan 
administrator shortly thereafter.
    (ii) Conclusion. In this Example 4, A, B, and C are entitled to 
special enrollment under the plan even though A did not satisfy the 
plan's requirement of providing a copy of C's birth certificate by 
the plan's 14-day deadline. While a plan may establish such a 
deadline, the plan must extend the deadline for information that an 
individual making reasonable efforts does not obtain by that 
deadline. A delivered the enrollment form to the plan administrator 
by the deadline and made reasonable efforts to furnish the birth 
certificate that the plan requires.
    Example 5. (i) Facts. Same facts as Example 4. On May 3 (after A 
has delivered the enrollment form to the plan administrator but 
before A provides the birth certificate) A submits claims for all 
medical expenses incurred for B and C from the date of C's birth.
    (ii) Conclusion. In this Example 5, the plan must pay all of the 
claims submitted by A. Because the plan requires that individuals 
seeking special enrollment complete additional enrollment materials, 
it is required to provide benefits once it receives enrollment 
materials that are substantially complete. The form that A submitted 
on April 28 was substantially complete. Because C's birth is the 
event giving rise to the special enrollment right, on April 28 A, B, 
and C become entitled to benefits under the plan retroactive to the 
date of C's birth.
* * * * *
    Par. 7. A new Sec.  54.9801-7 is added to read as follows:


Sec.  54.9801-7  Interaction with the Family and Medical Leave Act.

    (a) In general. The rules of Sec. Sec.  54.9801-1 through 54.9801-6 
apply

[[Page 78817]]

with respect to an individual on leave under the Family and Medical 
Leave Act of 1993 (29 U.S.C. 2601) (FMLA), and apply with respect to a 
dependent of such an individual, except to the extent otherwise 
provided in this section.
    (b) Tolling of significant break in coverage during FMLA leave. In 
the case of an individual (or a dependent of the individual) who is 
covered under a group health plan, if the individual takes FMLA leave 
and does not continue group health coverage for any period of FMLA 
leave, that period is not taken into account in determining whether a 
significant break in coverage has occurred under Sec.  54.9801-
4(b)(2)(iii).
    (c) Application of certification provisions--(1) Timing of issuance 
of certificate--(i) In the case of an individual (or a dependent of the 
individual) who is covered under a group health plan, if the individual 
takes FMLA leave and the individual's group health coverage is 
terminated during FMLA leave, an automatic certificate must be provided 
in accordance with the timing rules set forth in Sec.  54.9801-
5(a)(2)(ii)(B) (which generally require plans to provide certificates 
within a reasonable time after coverage ceases).
    (ii) In the case of an individual (or a dependent of the 
individual) who is covered under a group health plan, if the individual 
takes FMLA leave and continues group health coverage for the period of 
FMLA leave, but then ceases coverage under the plan at the end of FMLA 
leave, an automatic certificate must be provided in accordance with the 
timing rules set forth in Sec.  54.9801-5(a)(2)(ii)(A) (which generally 
require plans to provide a certificate no later than the time a notice 
is required to be furnished for a qualifying event under a COBRA 
continuation provision).
    (2) Demonstrating FMLA leave. (i) A plan is required to take into 
account all information about FMLA leave that it obtains or that is 
presented on behalf of an individual. A plan must treat the individual 
as having been on FMLA leave for a period if --
    (A) The individual attests to the period of FMLA leave; and
    (B) The individual cooperates with the plan's efforts to verify the 
individual's FMLA leave.
    (ii) Nothing in this section prevents a plan from modifying its 
initial determination of FMLA leave if it determines that the 
individual did not have the claimed FMLA leave, provided that the plan 
follows procedures for reconsideration similar to those set forth in 
Sec.  54.9801-3(f).
    (d) Relationship to loss of eligibility special enrollment rules. 
In the case of an individual (or a dependent of the individual) who is 
covered under a group health plan and who takes FMLA leave, a loss of 
eligibility for coverage under Sec.  54.9801-6(a) occurs when the 
period of FMLA leave ends if--
    (1) The individual's group health coverage is terminated at any 
time during FMLA leave; and
    (2) The individual does not return to work for the employer at the 
end of FMLA leave.
    Par. 8. Section 54.9831-1 is amended by:
    a. Adding paragraph (a)(2).
    b. Revising paragraph (b).
    c. Revising paragraph (c)(1).
    d. By adding paragraph (e).
    The additions and revisions read as follows:


Sec.  54.9831-1  Special rules relating to group health plans.

    (a) Group health plan. * * *
    (2) Determination of number of plans. The number of group health 
plans that an employer or employee organization (including for this 
purpose a joint board of trustees of a multiemployer trust affiliated 
with one or more multiemployer plans) maintains is determined under the 
rules of this paragraph (a)(2).
    (i) Except as provided in paragraph (a)(2)(ii) or (iii) of this 
section, health care benefits provided by a corporation, partnership, 
or other entity or trade or business, or by an employee organization, 
constitute one group health plan, unless--
    (A) It is clear from the instruments governing the arrangement or 
arrangements to provide health care benefits that the benefits are 
being provided under separate plans; and
    (B) The arrangement or arrangements are operated pursuant to such 
instruments as separate plans.
    (ii) A multiemployer plan and a nonmultiemployer plan are always 
separate plans.
    (iii) If a principal purpose of establishing separate plans is to 
evade any requirement of law, then the separate plans will be 
considered a single plan to the extent necessary to prevent the 
evasion.
    (b) General exception for certain small group health plans. The 
requirements of Sec. Sec.  54.9801-1 through 54.9801-7, 54.9802-1, 
54.9802-2, 54.9811-1T, 54.9812-1T, and 54.9833-1 do not apply to any 
group health plan for any plan year if, on the first day of the plan 
year, the plan has fewer than two participants who are current 
employees.
    (c) Excepted benefits--(1) In general. The requirements of 
Sec. Sec.  54.9801-1 through 54.9801-7, 54.9802-1, 54.9802-2, 54.9811-
1T, 54.9812-1T, and 54.9833-1 do not apply to any group health plan in 
relation to its provision of the benefits described in paragraph 
(c)(2), (3), (4), or (5) of this section (or any combination of these 
benefits).
* * * * *
    (e) Determining the average number of employees--(1) Scope. 
Whenever the application of a rule in this part depends upon the 
average number of employees employed by an employer, the determination 
of that number is made in accordance with the rules of this paragraph 
(e).
    (2) Full-time equivalents. The average number of employees is 
determined by calculating the average number of full-time equivalents 
on business days during the preceding calendar year.
    (3) Methodology. For the preceding calendar year, the average 
number of full-time equivalents is determined by--
    (i) Determining the number of employees who were employed full-time 
by the employer throughout the entire calendar year;
    (ii) Totaling all employment hours (not to exceed 40 hours per 
week) for each part-time employee, and for each full-time employee who 
was not employed full-time with the employer throughout the entire 
calendar year;
    (iii) Dividing the total determined under paragraph (e)(3)(ii) of 
this section by a figure that represents the annual full-time hours 
under the employer's general employment practices, such as 2,080 hours 
(although for this purpose not more than 40 hours per week may be 
used); and
    (iv) Adding the quotient determined under paragraph (e)(3)(iii) of 
this section to the number determined under paragraph (e)(3)(i).
    (4) Rounding. For purposes of paragraph (e)(3)(iv) of this section, 
all fractions are disregarded. For instance, a figure of 50.9 is deemed 
to be 50.
    (5) Employers not in existence in the preceding year. In the case 
of an employer that was in existence for less than the entire preceding 
calendar year (including an employer that was not in existence at all), 
a determination of the average number of employees that the employer 
employs is based on the average number of employees that it is 
reasonably expected the employer will employ on business days in the 
current calendar year.
    (6) Scope of the term ``employer.'' For purposes of this paragraph 
(e), employer includes any predecessor of the employer. In addition, 
all persons treated as a single employer under section 414(b), (c), 
(m), or (o) are treated as one employer.

[[Page 78818]]

    (7) Special rule for multiemployer plans. (i) With respect to the 
application of a rule in this part to a multiemployer plan (as defined 
in section 3(37) of ERISA), each employer with at least one employee 
participating in the plan is considered to employ the same average 
number of employees. That number is the highest number that results by 
applying the rules of paragraphs (e)(1) through (6) of this section 
separately to each of the employers.
    (ii) The rules of this paragraph (e)(7) are illustrated by the 
following example:

    Example. (i) Facts. Twenty five employers have at least one 
employee who participates in Multiemployer Plan M. Among these 25 
employers, Employer K has 51 employees, determined under the rules 
of paragraphs (e)(1) through (6) of this section. Each of the other 
24 employers has fewer than 50 employees.
    (ii) Conclusion. With respect to the application of a rule in 
this part to M, each of the 25 employers is considered to employ 51 
employees.

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement, Internal Revenue 
Service.

Employee Benefits Security Administration

29 CFR Chapter XXV

    For the reasons set forth above, 29 CFR Part 2590 is proposed to be 
amended as follows:

PART 2590--RULES AND REGULATIONS FOR GROUP HEALTH PLANS

    1. The authority citation for Part 2590 continues to read as 
follows:

    Authority: 29 U.S.C. 1027, 1059, 1135, 1161-1168, 1169, 1181-
1183, 1181 note, 1185, 1185a, 1185b, 1191, 1191a, 1191b, and 1191c, 
sec. 101(g), Pub. L. 104-191, 101 Stat. 1936; sec. 401(b), Pub. L. 
105-200, 112 Stat. 645 (42 U.S.C. 651 note); Secretary of Labor's 
Order 1-2003, 68 FR 5374 (Feb. 3, 2003).

    2. Section 2590.701-4 is amended by revising paragraphs (b)(2)(iii) 
and (b)(2)(iv) and adding Examples 4 and 6 in paragraph (b)(2)(v) as 
follows:


Sec.  2590.701-4  Rules relating to creditable coverage.

* * * * *
    (b) Standard method. * * *
    (2) Counting creditable coverage. * * *
    (iii) Significant break in coverage defined. A significant break in 
coverage means a period of 63 consecutive days during each of which an 
individual does not have any creditable coverage, except that periods 
described in paragraph (b)(2)(iv) of this section are not taken into 
account in determining a significant break in coverage. (See also Sec.  
2590.731(c)(2)(iii) regarding the applicability to issuers of state 
insurance laws that require a break of more than 63 days before an 
individual has a significant break in coverage for purposes of state 
insurance law.)
    (iv) Periods that toll a significant break. Days in a waiting 
period and days in an affiliation period are not taken into account in 
determining whether a significant break in coverage has occurred. In 
addition, for an individual who elects COBRA continuation coverage 
during the second election period provided under the Trade Act of 2002, 
the days between the date the individual lost group health plan 
coverage and the first day of the second COBRA election period are not 
taken into account in determining whether a significant break in 
coverage has occurred. Moreover, in the case of an individual whose 
coverage ceases, if a certificate of creditable coverage with respect 
to that cessation is not provided on or before the date coverage 
ceases, then the period that begins on the first date that an 
individual has no creditable coverage and that continues through the 
earlier of the following two dates is not taken into account in 
determining whether a significant break in coverage has occurred:
    (A) The date that a certificate of creditable coverage with respect 
to that cessation is provided; or
    (B) The date 44 days after coverage ceases.
    (v) Examples. The rules of this paragraph (b)(2) are illustrated by 
the following examples:
* * * * *
    Example 4. (i) Facts. Individual B terminates coverage under a 
group health plan, and a certificate of creditable coverage is 
provided 10 days later. B begins employment with Employer R and 
begins enrollment in R's plan 60 days after the certificate is 
provided.
    (ii) Conclusion. In this Example 4, even though B had no 
coverage for 69 days, the 10 days before the certificate of 
creditable coverage is provided are not taken into account in 
determining a significant break in coverage. Therefore, B's break in 
coverage is only 59 days and is not a significant break in coverage. 
Accordingly, B's prior coverage must be counted by R's plan.
* * * * *
    Example 6. (i) Facts. Employer V sponsors a group health plan. 
Under the terms of the plan, the only benefits provided are those 
provided under an insurance policy. Individual D works for V and has 
creditable coverage under V's plan. V fails to pay the issuer the 
premiums for the coverage period beginning March 1. Consistent with 
applicable state law, the issuer terminates the policy so that the 
last day of coverage is April 30. V goes out of business on July 31. 
On August 15 D begins employment with Employer W and enrolls in W's 
group health plan. W's plan imposes a 12-month preexisting condition 
exclusion on all enrollees. D never receives a certificate of 
creditable coverage for coverage under V's plan.
    (ii) Conclusion. In this Example 6, the period from May 1 (the 
first day without coverage) through June 13 (the date 44 days after 
coverage under V's plan ceases) is not taken into account in 
determining a 63-day break in coverage. This is because, in cases in 
which a certificate of creditable coverage is not provided by the 
date coverage is lost, the break begins on the date the certificate 
is provided, or the date 44 days after coverage ceases, if earlier. 
Therefore, even though D's actual period without coverage was 106 
days (May 1 through August 14), because the period from May 1 
through June 13 is not taken into account, D's break in coverage is 
only 62 days (June 14 through August 14). Thus, D has not 
experienced a significant break in coverage, and D's prior coverage 
must be counted by W's plan.
* * * * *
    3. Section 2590.701-5 is amended by redesignating paragraphs 
(a)(3)(ii)(H)(5) and (6) as paragraphs (a)(3)(ii)(H)(6) and (7), 
respectively, and by adding a new paragraph (a)(3)(ii)(H)(5) as 
follows:


Sec.  2590.701-5  Evidence of creditable coverage.

    (a) Certificate of creditable coverage. * * *
    (3) Form and content of certificate. * * *
    (ii) Required information. * * *
    (H) * * *
    (5) The interaction with the Family and Medical Leave Act;
* * * * *
    4. Section 2590.701-6 is amended by revising paragraphs (a)(1), 
(a)(4), (b)(1), (b)(3), and Example 2 in paragraph (b)(4), and adding 
Examples 3, 4, and 5 in paragraph (b)(4) as follows:


Sec.  2590.701-6  Special enrollment periods.

    (a) Special enrollment for certain individuals who lose coverage--
(1) In general. A group health plan, and a health insurance issuer 
offering health insurance coverage in connection with a group health 
plan, is required to permit current employees and dependents (as 
defined in Sec.  2590.701-2) who are described in paragraph (a)(2) of 
this section to enroll for coverage under the terms of the plan if the 
conditions in paragraph (a)(3) of this section are satisfied. Paragraph 
(a)(4) of this section describes procedures that a plan or issuer may 
require an employee to follow and describes the date by which coverage 
must begin. The special enrollment rights under this paragraph (a) 
apply without regard to the dates on

[[Page 78819]]

which an individual would otherwise be able to enroll under the plan.
* * * * *
    (4) Applying for special enrollment and effective date of 
coverage--(i) Request. A plan or issuer must allow an employee a period 
of at least 30 days after an event described in paragraph (a)(3) of 
this section (loss of eligibility for coverage, termination of employer 
contributions, or exhaustion of COBRA continuation coverage) to request 
enrollment (for the employee or the employee's dependent). For this 
purpose, any written or oral request made to any of the following 
constitutes a request for enrollment--
    (A) The plan administrator;
    (B) The issuer;
    (C) A person who customarily handles claims for the plan (such as a 
third party administrator); or
    (D) Any other designated representative.
    (ii) Tolling of period for requesting special enrollment. (A) In 
the case of an individual whose coverage ceases, if a certificate of 
creditable coverage with respect to that cessation is not provided on 
or before the date coverage ceases, then the period for requesting 
special enrollment described in paragraph (a)(4)(i) of this section 
does not end until 30 days after the earlier of --
    (1) The date that a certificate of creditable coverage with respect 
to that cessation is provided; or
    (2) The date 44 days after coverage ceases.
    (B) For purposes of this paragraph (a)(4), if an individual's 
coverage ceases due to the operation of a lifetime limit on all 
benefits, coverage is considered to cease on the earliest date that a 
claim is denied due to the operation of the lifetime limit. 
(Nonetheless, the date of a loss of eligibility for coverage is 
determined under the rules of paragraph (a)(3) of this section, which 
provides that a loss of eligibility occurs when a claim that would meet 
or exceed a lifetime limit on all benefits is incurred, not when it is 
denied.)
    (C) The rules of this paragraph (a)(4)(ii) are illustrated by the 
following examples:

    Example 1. (i) Facts. Employer V provides group health coverage 
through a policy provided by Issuer M. Individual D works for V and 
is covered under V's plan. V fails to pay M the premiums for the 
coverage period beginning March 1. Consistent with applicable state 
law, M terminates the policy so that the last day of coverage is 
April 30. On May 15, M provides D with a certificate of creditable 
coverage with respect to D's cessation of coverage under V's plan.
    (ii) Conclusion. In this Example 1, the period to request 
special enrollment ends no earlier than June 14 (which is 30 days 
after May 15, the day a certificate of creditable coverage is 
provided with respect to D).
    Example 2. (i) Facts. Same facts as Example 1, except D is never 
provided with a certificate of creditable coverage.
    (ii) Conclusion. In this Example 2, the period to request 
special enrollment ends no earlier than July 13. (July 13 is 74 days 
after April 30, the date coverage ceases. That is, July 13 is 30 
days after the end of the 44-day maximum tolling period.)
    Example 3. (i) Facts. Individual E works for Employer W and has 
coverage under W's plan. W's plan has a lifetime limit of $1 million 
on all benefits under the plan. On September 13, E incurs a claim 
that would exceed the plan's lifetime limit. On September 28, W 
denies the claim due to the operation of the lifetime limit and a 
certificate of creditable coverage is provided on October 3. E is 
otherwise eligible to enroll in the group health plan of the 
employer of E's spouse.
    (ii) Conclusion. In this Example 3, the period to request 
special enrollment in the plan of the employer of E's spouse ends no 
earlier than November 2 (30 days after the date the certificate is 
provided) and begins not later than September 13, the date E lost 
eligibility for coverage.
    (iii) Reasonable procedures for special enrollment. After an 
individual has requested enrollment under paragraph (a)(4)(i) of this 
section, a plan or issuer may require the individual to complete 
enrollment materials within a reasonable time after the end of the 30-
day period described in paragraph (a)(4)(i) of this section. In these 
enrollment materials, the plan or issuer may require the individual 
only to provide information required of individuals who enroll when 
first eligible and information about the event giving rise to the 
special enrollment right. A plan or issuer may establish a deadline for 
receiving completed enrollment materials, but such a deadline must be 
extended for information that an individual making reasonable efforts 
does not obtain by that deadline.
    (iv) Date coverage must begin. If the plan or issuer requires 
completion of additional enrollment materials in accordance with 
paragraph (a)(4)(iii) of this section, coverage must begin no later 
than the first day of the first calendar month beginning after the date 
the plan or issuer receives enrollment materials that are substantially 
complete. If the plan or issuer does not require completion of 
additional enrollment materials, coverage must begin no later than the 
first day of the first calendar month beginning after the date the plan 
or issuer receives the request for special enrollment under paragraph 
(a)(4)(i) of this section.
    (b) Special enrollment with respect to certain dependent 
beneficiaries--(1) In general. A group health plan, and a health 
insurance issuer offering health insurance coverage in connection with 
a group health plan, that makes coverage available with respect to 
dependents is required to permit individuals described in paragraph 
(b)(2) of this section to be enrolled for coverage in a benefit package 
under the terms of the plan. Paragraph (b)(3) of this section describes 
procedures that a plan or issuer may require an individual to follow 
and describes the date by which coverage must begin. The special 
enrollment rights under this paragraph (b) apply without regard to the 
dates on which an individual would otherwise be able to enroll under 
the plan.
* * * * *
    (3) Applying for special enrollment and effective date of 
coverage--(i) Request. A plan or issuer must allow an individual a 
period of at least 30 days after the date of the marriage, birth, 
adoption, or placement for adoption (or, if dependent coverage is not 
generally made available at the time of the marriage, birth, adoption, 
or placement for adoption, a period of at least 30 days after the date 
the plan makes dependent coverage generally available) to request 
enrollment (for the individual or the individual's dependent). For this 
purpose, any written or oral request made to any of the following 
constitutes a request for enrollment--
    (A) The plan administrator;
    (B) The issuer;
    (C) A person who customarily handles claims for the plan (such as a 
third party administrator); or
    (D) Any other designated representative.
    (ii) Reasonable procedures for special enrollment. After an 
individual has requested enrollment under paragraph (b)(3)(i) of this 
section, a plan or issuer may require the individual to complete 
enrollment materials within a reasonable time after the end of the 30-
day period described in paragraph (b)(3)(i) of this section. In these 
enrollment materials, the plan or issuer may require the individual 
only to provide information required of individuals who enroll when 
first eligible and information about the event giving rise to the 
special enrollment right. A plan or issuer may establish a deadline for 
receiving completed enrollment materials, but such a deadline must be 
extended for information that an individual making reasonable efforts 
does not obtain by that deadline.
    (iii) Date coverage must begin--(A) Marriage. In the case of 
marriage, if the plan or issuer requires completion of

[[Page 78820]]

additional enrollment materials in accordance with paragraph (b)(3)(ii) 
of this section, coverage must begin no later than the first day of the 
first calendar month beginning after the date the plan or issuer 
receives enrollment materials that are substantially complete. If the 
plan or issuer does not require such additional enrollment materials, 
coverage must begin no later than the first day of the first calendar 
month beginning after the date the plan or issuer receives the request 
for special enrollment under paragraph (b)(3)(i) of this section.
    (B) Birth, adoption, or placement for adoption. Coverage must begin 
in the case of a dependent's birth on the date of birth and in the case 
of a dependent's adoption or placement for adoption no later than the 
date of such adoption or placement for adoption (or, if dependent 
coverage is not made generally available at the time of the birth, 
adoption, or placement for adoption, the date the plan makes dependent 
coverage available). If the plan or issuer requires completion of 
additional enrollment materials in accordance with paragraph (b)(3)(ii) 
of this section, the plan or issuer must provide benefits (including 
benefits retroactively to the date of birth, adoption, or placement for 
adoption) once the plan or issuer receives enrollment materials that 
are substantially complete.
    (4) Examples. * * *

    Example 2. (i) Facts. Individual D works for Employer X. X 
maintains a group health plan with two benefit packages--an HMO 
option and an indemnity option. Self-only and family coverage are 
available under both options. D enrolls for self-only coverage in 
the HMO option. Then, a child, E, is placed for adoption with D. 
Within 30 days of the placement of E for adoption, D requests 
enrollment for D and E under the plan's indemnity option and submits 
completed enrollment materials timely.
    (ii) Conclusion. In this Example 2, D and E satisfy the 
conditions for special enrollment under paragraphs (b)(2)(v) and 
(b)(3) of this section. Therefore, the plan must allow D and E to 
enroll in the indemnity coverage, effective as of the date of the 
placement for adoption.
    Example 3. (i) Facts. Same facts as Example 1. On March 17 (two 
days after the birth of C), A telephones the plan administrator and 
requests special enrollment of A, B, and C. The plan administrator 
sends A an enrollment form. Under the terms of the plan, enrollment 
is denied unless a completed form is submitted within 30 days of the 
event giving rise to the special enrollment right (in this case, C's 
birth).
    (ii) Conclusion. In this Example 3, the plan does not satisfy 
paragraph (b)(3) of this section. The plan may require only that A 
request enrollment during the 30-day period after C's birth. A did 
so by telephoning the plan administrator. The plan may not condition 
special enrollment on filing additional enrollment materials during 
the 30-day period. To comply with paragraph (b)(3) of this section, 
the plan must allow A a reasonable time after the end of the 30-day 
period to submit any additional enrollment materials. Once these 
enrollment materials are received, the plan must allow whatever 
coverage is chosen to begin on March 15, the date of C's birth.
    Example 4. (i) Facts. Same facts as Example 3, except that A 
telephones the plan administrator to request enrollment on April 13 
(29 days after C's birth). Also, under the terms of the plan, the 
deadline for submitting the enrollment form is 14 days after the end 
of the 30-day period for requesting special enrollment (thus, in 
this case, April 28, which is 44 days after C's birth). The form 
requests the same information for A, B, and C (name, date of birth, 
and place of birth) as well as a copy of C's birth certificate. A 
fills out the enrollment form and delivers it to the plan 
administrator on April 28. At that time A does not have a birth 
certificate for C but applies on that day for one from the 
appropriate government office. A receives the birth certificate on 
June 1 and furnishes a copy of the birth certificate to the plan 
administrator shortly thereafter.
    (ii) Conclusion. In this Example 4, A, B, and C are entitled to 
special enrollment under the plan even though A did not satisfy the 
plan's requirement of providing a copy of C's birth certificate by 
the plan's 14-day deadline. While a plan may establish such a 
deadline, the plan must extend the deadline for information that an 
individual making reasonable efforts does not obtain by that 
deadline. A delivered the enrollment form to the plan administrator 
by the deadline and made reasonable efforts to furnish the birth 
certificate that the plan requires.
    Example 5. (i) Facts. Same facts as Example 4. On May 3 (after A 
has delivered the enrollment form to the plan administrator but 
before A provides the birth certificate), A submits claims for all 
medical expenses incurred for B and C from the date of C's birth.
    (ii) Conclusion. In this Example 5, the plan must pay all of the 
claims submitted by A. Because the plan requires that individuals 
seeking special enrollment complete additional enrollment materials, 
it is required to provide benefits once it receives enrollment 
materials that are substantially complete. The form that A submitted 
on April 28 was substantially complete. Because C's birth is the 
event giving rise to the special enrollment right, on April 28 A, B, 
and C become entitled to benefits under the plan retroactive to the 
date of C's birth.
* * * * *
    5. Section 2590.701-8 is added to read as follows:


Sec.  2590.701-8  Interaction with the Family and Medical Leave Act.

    (a) In general. The rules of Sec. Sec.  2590.701-1 through 
2590.701-7 apply with respect to an individual on leave under the 
Family and Medical Leave Act of 1993 (29 U.S.C. 2601) (FMLA), and apply 
with respect to a dependent of such an individual, except to the extent 
otherwise provided in this section.
    (b) Tolling of significant break in coverage during FMLA leave. In 
the case of an individual (or a dependent of the individual) who is 
covered under a group health plan, if the individual takes FMLA leave 
and does not continue group health coverage for any period of FMLA 
leave, that period is not taken into account in determining whether a 
significant break in coverage has occurred under Sec.  2590.701-
4(b)(2)(iii).
    (c) Application of certification provisions--(1) Timing of issuance 
of certificate--(i) In the case of an individual (or a dependent of the 
individual) who is covered under a group health plan, if the individual 
takes FMLA leave and the individual's group health coverage is 
terminated during FMLA leave, an automatic certificate must be provided 
in accordance with the timing rules set forth in Sec.  2590.701-
5(a)(2)(ii)(B) (which generally require plans and issuers to provide 
certificates within a reasonable time after coverage ceases).
    (ii) In the case of an individual (or a dependent of the 
individual) who is covered under a group health plan, if the individual 
takes FMLA leave and continues group health coverage for the period of 
FMLA leave, but then ceases coverage under the plan at the end of FMLA 
leave, an automatic certificate must be provided in accordance with the 
timing rules set forth in Sec.  2590.701-5(a)(2)(ii)(A) (which 
generally require plans and issuers to provide a certificate no later 
than the time a notice is required to be furnished for a qualifying 
event under a COBRA continuation provision).
    (2) Demonstrating FMLA leave. (i) A plan or issuer is required to 
take into account all information about FMLA leave that it obtains or 
that is presented on behalf of an individual. A plan or issuer must 
treat the individual as having been on FMLA leave for a period if--
    (A) The individual attests to the period of FMLA leave; and
    (B) The individual cooperates with the plan's or issuer's efforts 
to verify the individual's FMLA leave.
    (ii) Nothing in this section prevents a plan or issuer from 
modifying its initial determination of FMLA leave if it determines that 
the individual did not have the claimed FMLA leave, provided that the 
plan or issuer follows procedures for reconsideration similar to those 
set forth in Sec.  2590.701-3(f).

[[Page 78821]]

    (d) Relationship to loss of eligibility special enrollment rules. 
In the case of an individual (or a dependent of the individual) who is 
covered under a group health plan and who takes FMLA leave, a loss of 
eligibility for coverage under Sec.  2590.701-6(a) occurs when the 
period of FMLA leave ends if --
    (1) The individual's group health coverage is terminated at any 
time during FMLA leave; and
    (2) The individual does not return to work for the employer at the 
end of FMLA leave.
    6. Section 2590.732 is amended by adding paragraphs (a)(2) and (e) 
to read as follows:


Sec.  2590.732  Special rules relating to group health plans.

    (a) Group health plan. * * *
    (2) Determination of number of plans. The number of group health 
plans that an employer or employee organization (including for this 
purpose a joint board of trustees of a multiemployer trust affiliated 
with one or more multiemployer plans) maintains is determined under the 
rules of this paragraph (a)(2).
    (i) Except as provided in paragraph (a)(2)(ii) or (iii) of this 
section, medical care benefits provided by a corporation, partnership, 
or other entity or trade or business, or by an employee organization, 
constitute one group health plan, unless--
    (A) It is clear from the instruments governing the arrangement or 
arrangements to provide medical care benefits that the benefits are 
being provided under separate plans; and
    (B) The arrangement or arrangements are operated pursuant to such 
instruments as separate plans.
    (ii) A multiemployer plan and a nonmultiemployer plan are always 
separate plans.
    (iii) If a principal purpose of establishing separate plans is to 
evade any requirement of law, then the separate plans will be 
considered a single plan to the extent necessary to prevent the 
evasion.
* * * * *
    (e) Determining the average number of employees--(1) Scope. 
Whenever the application of a rule in this part depends upon the 
average number of employees employed by an employer, the determination 
of that number is made in accordance with the rules of this paragraph 
(e).
    (2) Full-time equivalents. The average number of employees is 
determined by calculating the average number of full-time equivalents 
on business days during the preceding calendar year.
    (3) Methodology. For the preceding calendar year, the average 
number of full-time equivalents is determined by--
    (i) Determining the number of employees who were employed full-time 
by the employer throughout the entire calendar year;
    (ii) Totaling all employment hours (not to exceed 40 hours per 
week) for each part-time employee, and for each full-time employee who 
was not employed full-time with the employer throughout the entire 
calendar year;
    (iii) Dividing the total determined under paragraph (e)(3)(ii) of 
this section by a figure that represents the annual full-time hours 
under the employer's general employment practices, such as 2,080 hours 
(although for this purpose not more than 40 hours per week may be 
used); and
    (iv) Adding the quotient determined under paragraph (e)(3)(iii) of 
this section to the number determined under paragraph (e)(3)(i).
    (4) Rounding. For purposes of paragraph (e)(3)(iv) of this section, 
all fractions are disregarded. For instance, a figure of 50.9 is deemed 
to be 50.
    (5) Employers not in existence in the preceding year. In the case 
of an employer that was in existence for less than the entire preceding 
calendar year (including an employer that was not in existence at all), 
a determination of the average number of employees that the employer 
employs is based on the average number of employees that it is 
reasonably expected the employer will employ on business days in the 
current calendar year.
    (6) Scope of the term ``employer''. For purposes of this paragraph 
(e), employer includes any predecessor of the employer. In addition, 
all persons treated as a single employer under section 414(b), (c), 
(m), or (o) of the Internal Revenue Code are treated as one employer.
    (7) Special rule for multiemployer plans. (i) With respect to the 
application of a rule in this part to a multiemployer plan (as defined 
in section 3(37) of the Act), each employer with at least one employee 
participating in the plan is considered to employ the same average 
number of employees. That number is the highest number that results by 
applying the rules of paragraphs (e)(1) through (6) of this section 
separately to each of the employers.
    (ii) The rules of this paragraph (e)(7) are illustrated by the 
following example:

    Example. (i) Facts. Twenty five employers have at least one 
employee who participates in Multiemployer Plan M. Among these 25 
employers, Employer K has 51 employees, determined under the rules 
of paragraphs (e)(1) through (6) of this section. Each of the other 
24 employers has fewer than 50 employees.
    (ii) Conclusion. With respect to the application of a rule in 
this part to M, each of the 25 employers is considered to employ 51 
employees.

    Signed at Washington, DC, this 1st day of December, 2004.
Ann L. Combs,
Assistant Secretary, Employee Benefits Security Administration, U.S. 
Department of Labor.

Department of Health and Human Services

45 CFR Subtitle A

    For the reasons set forth in the preamble, the Department of Health 
and Human Services proposes to amend 45 CFR Part 146 follows:

PART 146--REQUIREMENTS FOR THE GROUP HEALTH INSURANCE MARKET

    1. The authority citation for Part 146 is revised to read as 
follows:

    Authority: Secs. 2701 through 2763, 2791, and 2792 of the Public 
Health Service Act, 42 U.S.C. 300gg through 300gg-63, 300gg-91, 
300gg-92 as amended by HIPAA (Pub. L. 104-191, 110 Stat. 1936), MHPA 
(Pub. L. 104-204, 110 Stat. 2944, as amended by Pub. L. 107-116, 115 
Stat. 2177), NMHPA (Pub. L. 104-204, 110 Stat. 2935), WHCRA (Pub. L. 
105-277, 112 Stat. 2681-436), and section 103(c)(4) of HIPAA.

    2. In Sec.  146.113, revise paragraphs (b)(2)(iii) and (b)(2)(iv), 
and Examples 4 and 6 in paragraph (b)(2)(v) to read as follows:


Sec.  146.113  Rules relating to creditable coverage.

* * * * *
    (b) Standard method. * * *
    (2) Counting creditable coverage. * * *
    (iii) Significant break in coverage defined. A significant break in 
coverage means a period of 63 consecutive days during each of which an 
individual does not have any creditable coverage, except that periods 
described in paragraph (b)(2)(iv) of this section are not taken into 
account in determining a significant break in coverage. (See also Sec.  
146.143(c)(2)(iii) regarding the applicability to issuers of State 
insurance laws that require a break of more than 63 days before an 
individual has a significant break in coverage for purposes of State 
insurance law.)
    (iv) Periods that toll a significant break. Days in a waiting 
period and days in an affiliation period are not taken into account in 
determining whether a significant break in coverage has occurred. In 
addition, for an individual who elects COBRA

[[Page 78822]]

continuation coverage during the second election period provided under 
the Trade Act of 2002, the days between the date the individual lost 
group health plan coverage and the first day of the second COBRA 
election period are not taken into account in determining whether a 
significant break in coverage has occurred. Moreover, in the case of an 
individual whose coverage ceases, if a certificate of creditable 
coverage with respect to that cessation is not provided on or before 
the date coverage ceases, then the period that begins on the first date 
that an individual has no creditable coverage and that continues 
through the earlier of the following two dates is not taken into 
account in determining whether a significant break in coverage has 
occurred:
    (A) The date that a certificate of creditable coverage with respect 
to that cessation is provided; or
    (B) The date 44 days after coverage ceases.
    (v) Examples. * * *

    Example 4. (i) Facts. Individual B terminates coverage under a 
group health plan, and a certificate of creditable coverage is 
provided 10 days later. B begins employment with Employer R and 
begins enrollment in R's plan 60 days after the certificate is 
provided.
    (ii) Conclusion. In this Example 4, even though B had no 
coverage for 69 days, the 10 days before the certificate of 
creditable coverage is provided are not taken into account in 
determining a significant break in coverage. Therefore, B's break in 
coverage is only 59 days and is not a significant break in coverage. 
Accordingly, B's prior coverage must be counted by R's plan.
* * * * *
    Example 6. (i) Facts. Employer V sponsors a group health plan. 
Under the terms of the plan, the only benefits provided are those 
provided under an insurance policy. Individual D works for V and has 
creditable coverage under V's plan. V fails to pay the issuer the 
premiums for the coverage period beginning March 1. Consistent with 
applicable State law, the issuer terminates the policy so that the 
last day of coverage is April 30. V goes out of business on July 31. 
On August 15 D begins employment with Employer W and enrolls in W's 
group health plan. W's plan imposes a 12-month preexisting condition 
exclusion on all enrollees. D never receives a certificate of 
creditable coverage for coverage under V's plan.
    (ii) Conclusion. In this Example 6, the period from May 1 (the 
first day without coverage) through June 13 (the date 44 days after 
coverage under V's plan ceases) is not taken into account in 
determining a 63-day break in coverage. This is because, in cases in 
which a certificate of creditable coverage is not provided by the 
date coverage is lost, the break begins on the date the certificate 
is provided, or the date 44 days after coverage ceases, if earlier. 
Therefore, even though D's actual period without coverage was 106 
days (May 1 through August 14), because the period from May 1 
through June 13 is not taken into account, D's break in coverage is 
only 62 days (June 14 through August 14). Thus, D has not 
experienced a significant break in coverage, and D's prior coverage 
must be counted by W's plan.
* * * * *
    3. In Sec.  146.115, revise paragraphs (a)(3)(ii)(H)(5) and (6) and 
add paragraph (a)(3)(ii)(H)(7) to read as follows:


Sec.  146.115  Certification and disclosure of previous coverage.

    (a) Certificate of creditable coverage. * * *
    (3) Form and content of certificate. * * *
    (ii) Required information. * * *
    (H) * * *
    (5) The interaction with the Family and Medical Leave Act;
    (6) The fact that State law may require issuers to provide 
additional protections to individuals in that State; and
    (7) Where to get more information.
* * * * *
    4. In Sec.  146.117, revise paragraphs (a)(1), (a)(4), (b)(1), 
(b)(3), and example 2 in paragraph (b)(4), and add examples 3, 4, and 5 
in paragraph (b)(4), to read as follows:


Sec.  146.117  Special enrollment periods.

    (a) Special enrollment for certain individuals who lose coverage--
(1) In general. A group health plan, and a health insurance issuer 
offering health insurance coverage in connection with a group health 
plan, is required to permit current employees and dependents (as 
defined in Sec.  144.103 of this chapter) who are described in 
paragraph (a)(2) of this section to enroll for coverage under the terms 
of the plan if the conditions in paragraph (a)(3) of this section are 
satisfied. Paragraph (a)(4) of this section describes procedures that a 
plan or issuer may require an employee to follow and describes the date 
by which coverage must begin. The special enrollment rights under this 
paragraph (a) apply without regard to the dates on which an individual 
would otherwise be able to enroll under the plan.
* * * * *
    (4) Applying for special enrollment and effective date of 
coverage--(i) Request. A plan or issuer must allow an employee a period 
of at least 30 days after an event described in paragraph (a)(3) of 
this section (loss of eligibility for coverage, termination of employer 
contributions, or exhaustion of COBRA continuation coverage) to request 
enrollment (for the employee or the employee's dependent). For this 
purpose, any written or oral request made to any of the following 
constitutes a request for enrollment --
    (A) The plan administrator;
    (B) The issuer;
    (C) A person who customarily handles claims for the plan (such as a 
third party administrator); or
    (D) Any other designated representative.
    (ii) Tolling of period for requesting special enrollment. (A) In 
the case of an individual whose coverage ceases, if a certificate of 
creditable coverage with respect to that cessation is not provided on 
or before the date coverage ceases, then the period for requesting 
special enrollment described in paragraph (a)(4)(i) of this section 
does not end until 30 days after the earlier of--
    (1) The date that a certificate of creditable coverage with respect 
to that cessation is provided; or
    (2) The date 44 days after coverage ceases.
    (B) For purposes of this paragraph (a)(4), if an individual's 
coverage ceases due to the operation of a lifetime limit on all 
benefits, coverage is considered to cease on the earliest date that a 
claim is denied due to the operation of the lifetime limit.


(Nonetheless, the date of a loss of eligibility for coverage is 
determined under the rules of paragraph (a)(3) of this section, which 
provides that a loss of eligibility occurs when a claim that would meet 
or exceed a lifetime limit on all benefits is incurred, not when it is 
denied.)
    (C) The rules of this paragraph (a)(4)(ii) are illustrated by the 
following examples:

    Example 1. (i) Facts. Employer V provides group health coverage 
through a policy provided by Issuer M. Individual D works for V and 
is covered under V's plan. V fails to pay M the premiums for the 
coverage period beginning March 1. Consistent with applicable state 
law, M terminates the policy so that the last day of coverage is 
April 30. On May 15, M provides D with a certificate of creditable 
coverage with respect to D's cessation of coverage under V's plan.
    (ii) Conclusion. In this Example 1, the period to request 
special enrollment ends no earlier than June 14 (which is 30 days 
after May 15, the day a certificate of creditable coverage is 
provided with respect to D).
    Example 2. (i) Facts. Same facts as Example 1, except D is never 
provided with a certificate of creditable coverage.
    (ii) Conclusion. In this Example 2, the period to request 
special enrollment ends no earlier than July 13. (July 13 is 74 days 
after April 30, the date coverage ceases. That is, July 13 is 30 
days after the end of the 44-day maximum tolling period.)
    Example 3. (i) Facts. Individual E works for Employer W and has 
coverage under W's plan. W's plan has a lifetime limit of $1 million 
on all benefits under the plan. On

[[Page 78823]]

September 13, E incurs a claim that would exceed the plan's lifetime 
limit. On September 28, W denies the claim due to the operation of 
the lifetime limit and a certificate of creditable coverage is 
provided on October 3. E is otherwise eligible to enroll in the 
group health plan of the employer of E's spouse.
    (ii) Conclusion. In this Example 3, the period to request 
special enrollment in the plan of the employer of E's spouse ends no 
earlier than November 2 (30 days after the date the certificate is 
provided) and begins not later than September 13, the date E lost 
eligibility for coverage.
    (iii) Reasonable procedures for special enrollment. After an 
individual has requested enrollment under paragraph (a)(4)(i) of this 
section, a plan or issuer may require the individual to complete 
enrollment materials within a reasonable time after the end of the 30-
day period described in paragraph (a)(4)(i) of this section. In these 
enrollment materials, the plan or issuer may require the individual 
only to provide information required of individuals who enroll when 
first eligible and information about the event giving rise to the 
special enrollment right. A plan or issuer may establish a deadline for 
receiving completed enrollment materials, but such a deadline must be 
extended for information that an individual making reasonable efforts 
does not obtain by that deadline.
    (iv) Date coverage must begin. If the plan or issuer requires 
completion of additional enrollment materials in accordance with 
paragraph (a)(4)(iii) of this section, coverage must begin no later 
than the first day of the first calendar month beginning after the date 
the plan or issuer receives enrollment materials that are substantially 
complete. If the plan or issuer does not require completion of 
additional enrollment materials, coverage must begin no later than the 
first day of the first calendar month beginning after the date the plan 
or issuer receives the request for special enrollment under paragraph 
(a)(4)(i) of this section.
    (b) Special enrollment with respect to certain dependent 
beneficiaries--(1) In general. A group health plan, and a health 
insurance issuer offering health insurance coverage in connection with 
a group health plan, that makes coverage available with respect to 
dependents is required to permit individuals described in paragraph 
(b)(2) of this section to be enrolled for coverage in a benefit package 
under the terms of the plan. Paragraph (b)(3) of this section describes 
procedures that a plan or issuer may require an individual to follow 
and describes the date by which coverage must begin. The special 
enrollment rights under this paragraph (b) apply without regard to the 
dates on which an individual would otherwise be able to enroll under 
the plan.
* * * * *
    (3) Applying for special enrollment and effective date of 
coverage--(i) Request. A plan or issuer must allow an individual a 
period of at least 30 days after the date of the marriage, birth, 
adoption, or placement for adoption (or, if dependent coverage is not 
generally made available at the time of the marriage, birth, adoption, 
or placement for adoption, a period of at least 30 days after the date 
the plan makes dependent coverage generally available) to request 
enrollment (for the individual or the individual's dependent). For this 
purpose, any written or oral request made to any of the following 
constitutes a request for enrollment--
    (A) The plan administrator;
    (B) The issuer;
    (C) A person who customarily handles claims for the plan (such as a 
third party administrator); or
    (D) Any other designated representative.
    (ii) Reasonable procedures for special enrollment. After an 
individual has requested enrollment under paragraph (b)(3)(i) of this 
section, a plan or issuer may require the individual to complete 
enrollment materials within a reasonable time after the end of the 30-
day period described in paragraph (b)(3)(i) of this section. In these 
enrollment materials, the plan or issuer may require the individual 
only to provide information required of individuals who enroll when 
first eligible and information about the event giving rise to the 
special enrollment right. A plan or issuer may establish a deadline for 
receiving completed enrollment materials, but such a deadline must be 
extended for information that an individual making reasonable efforts 
does not obtain by that deadline.
    (iii) Date coverage must begin--(A) Marriage. In the case of 
marriage, if the plan or issuer requires completion of additional 
enrollment materials in accordance with paragraph (b)(3)(ii) of this 
section, coverage must begin no later than the first day of the first 
calendar month beginning after the date the plan or issuer receives 
enrollment materials that are substantially complete. If the plan or 
issuer does not require such additional enrollment materials, coverage 
must begin no later than the first day of the first calendar month 
beginning after the date the plan or issuer receives the request for 
special enrollment under paragraph (b)(3)(i) of this section.
    (B) Birth, adoption, or placement for adoption. Coverage must begin 
in the case of a dependent's birth on the date of birth and in the case 
of a dependent's adoption or placement for adoption no later than the 
date of such adoption or placement for adoption (or, if dependent 
coverage is not made generally available at the time of the birth, 
adoption, or placement for adoption, the date the plan makes dependent 
coverage available). If the plan or issuer requires completion of 
additional enrollment materials in accordance with paragraph (b)(3)(ii) 
of this section, the plan or issuer must provide benefits (including 
benefits retroactively to the date of birth, adoption, or placement for 
adoption) once the plan or issuer receives enrollment materials that 
are substantially complete.
    (4) Examples. * * *

    Example 2. (i) Facts. Individual D works for Employer X. X 
maintains a group health plan with two benefit packages--an HMO 
option and an indemnity option. Self-only and family coverage are 
available under both options. D enrolls for self-only coverage in 
the HMO option. Then, a child, E, is placed for adoption with D. 
Within 30 days of the placement of E for adoption, D requests 
enrollment for D and E under the plan's indemnity option and submits 
completed enrollment materials timely.
    (ii) Conclusion. In this Example 2, D and E satisfy the 
conditions for special enrollment under paragraphs (b)(2)(v) and 
(b)(3) of this section. Therefore, the plan must allow D and E to 
enroll in the indemnity coverage, effective as of the date of the 
placement for adoption.
    Example 3. (i) Facts. Same facts as Example 1. On March 17 (two 
days after the birth of C), A telephones the plan administrator and 
requests special enrollment of A, B, and C. The plan administrator 
sends A an enrollment form. Under the terms of the plan, enrollment 
is denied unless a completed form is submitted within 30 days of the 
event giving rise to the special enrollment right (in this case, C's 
birth).
    (ii) Conclusion. In this Example 3, the plan does not satisfy 
paragraph (b)(3) of this section. The plan may require only that A 
request enrollment during the 30-day period after C's birth. A did 
so by telephoning the plan administrator. The plan may not condition 
special enrollment on filing additional enrollment materials during 
the 30-day period. To comply with paragraph (b)(3) of this section, 
the plan must allow A a reasonable time after the end of the 30-day 
period to submit any additional enrollment materials. Once these 
enrollment materials are received, the plan must allow whatever 
coverage is chosen to begin on March 15, the date of C's birth.
    Example 4. (i) Facts. Same facts as Example 3, except that A 
telephones the plan administrator to request enrollment on April 13 
(29 days after C's birth). Also, under the terms of the plan, the 
deadline for submitting

[[Page 78824]]

the enrollment form is 14 days after the end of the 30-day period 
for requesting special enrollment (thus, in this case, April 28, 
which is 44 days after C's birth). The form requests the same 
information for A, B, and C (name, date of birth, and place of 
birth) as well as a copy of C's birth certificate. A fills out the 
enrollment form and delivers it to the plan administrator on April 
28. At that time A does not have a birth certificate for C but 
applies on that day for one from the appropriate government office. 
A receives the birth certificate on June 1 and furnishes a copy of 
the birth certificate to the plan administrator shortly thereafter.
    (ii) Conclusion. In this Example 4, A, B, and C are entitled to 
special enrollment under the plan even though A did not satisfy the 
plan's requirement of providing a copy of C's birth certificate by 
the plan's 14-day deadline. While a plan may establish such a 
deadline, the plan must extend the deadline for information that an 
individual making reasonable efforts does not obtain by that 
deadline. A delivered the enrollment form to the plan administrator 
by the deadline and made reasonable efforts to furnish the birth 
certificate that the plan requires.
    Example 5. (i) Facts. Same facts as Example 4. On May 3 (after A 
has delivered the enrollment form to the plan administrator but 
before A provides the birth certificate) A submits claims for all 
medical expenses incurred for B and C from the date of C's birth.
    (ii) Conclusion. In this Example 5, the plan must pay all of the 
claims submitted by A. Because the plan requires that individuals 
seeking special enrollment complete additional enrollment materials, 
it is required to provide benefits once it receives enrollment 
materials that are substantially complete. The form that A submitted 
on April 28 was substantially complete. Because C's birth is the 
event giving rise to the special enrollment right, on April 28 A, B, 
and C become entitled to benefits under the plan retroactive to the 
date of C's birth.
* * * * *
    5. Add new Sec.  146.120 to read as follows:


Sec.  146.120  Interaction with the Family and Medical Leave Act.

    (a) In general. The rules of this part apply with respect to an 
individual on leave under the Family and Medical Leave Act of 1993 (29 
U.S.C. 2601) (FMLA), and apply with respect to a dependent of such an 
individual, except to the extent otherwise provided in this section.
    (b) Tolling of significant break in coverage during FMLA leave. In 
the case of an individual (or a dependent of the individual) who is 
covered under a group health plan, if the individual takes FMLA leave 
and does not continue group health coverage for any period of FMLA 
leave, that period is not taken into account in determining whether a 
significant break in coverage has occurred under Sec.  
146.113(b)(2)(iii).
    (c) Application of certification provisions--(1) Timing of issuance 
of certificate--(i) In the case of an individual (or a dependent of the 
individual) who is covered under a group health plan, if the individual 
takes FMLA leave and the individual's group health coverage is 
terminated during FMLA leave, an automatic certificate must be provided 
in accordance with the timing rules set forth in Sec.  
146.115(a)(2)(ii)(B) (which generally require plans and issuers to 
provide certificates within a reasonable time after coverage ceases).
    (ii) In the case of an individual (or a dependent of the 
individual) who is covered under a group health plan, if the individual 
takes FMLA leave and continues group health coverage for the period of 
FMLA leave, but then ceases coverage under the plan at the end of FMLA 
leave, an automatic certificate must be provided in accordance with the 
timing rules set forth in Sec.  146.115(a)(2)(ii)(A) (which generally 
require plans and issuers to provide a certificate no later than the 
time a notice is required to be furnished for a qualifying event under 
a COBRA continuation provision).
    (2) Demonstrating FMLA leave. (i) A plan or issuer is required to 
take into account all information about FMLA leave that it obtains or 
that is presented on behalf of an individual. A plan or issuer must 
treat the individual as having been on FMLA leave for a period if--
    (A) The individual attests to the period of FMLA leave; and
    (B) The individual cooperates with the plan's or issuer's efforts 
to verify the individual's FMLA leave.
    (ii) Nothing in this section prevents a plan or issuer from 
modifying its initial determination of FMLA leave if it determines that 
the individual did not have the claimed FMLA leave, provided that the 
plan or issuer follows procedures for reconsideration similar to those 
set forth in Sec.  146.111(f).
    (d) Relationship to loss of eligibility special enrollment rules. 
In the case of an individual (or a dependent of the individual) who is 
covered under a group health plan and who takes FMLA leave, a loss of 
eligibility for coverage under Sec.  146.117(a) occurs when the period 
of FMLA leave ends if--
    (1) The individual's group health coverage is terminated at any 
time during FMLA leave; and
    (2) The individual does not return to work for the employer at the 
end of FMLA leave.
    6. In Sec.  146.145, add paragraphs (a)(2) and (e) to read as 
follows:


Sec.  146.145  Special rules relating to group health plans.

    (a) Group health plan. * * *
    (2) Determination of number of plans. The number of group health 
plans that an employer or employee organization (including for this 
purpose a joint board of trustees of a multiemployer trust affiliated 
with one or more multiemployer plans) maintains is determined under the 
rules of this paragraph (a)(2).
    (i) Except as provided in paragraph (a)(2)(ii) or (iii) of this 
section, medical care benefits provided by a corporation, partnership, 
or other entity or trade or business, or by an employee organization, 
constitute one group health plan, unless--
    (A) It is clear from the instruments governing the arrangement or 
arrangements to provide medical care benefits that the benefits are 
being provided under separate plans; and
    (B) The arrangement or arrangements are operated pursuant to such 
instruments as separate plans.
    (ii) A multiemployer plan and a nonmultiemployer plan are always 
separate plans.
    (iii) If a principal purpose of establishing separate plans is to 
evade any requirement of law, then the separate plans will be 
considered a single plan to the extent necessary to prevent the 
evasion.
* * * * *
    (e) Determining the average number of employees--(1) Scope. 
Whenever the application of a rule in this part depends upon the 
average number of employees employed by an employer, the determination 
of that number is made in accordance with the rules of this paragraph 
(e).
    (2) Full-time equivalents. The average number of employees is 
determined by calculating the average number of full-time equivalents 
on business days during the preceding calendar year.
    (3) Methodology. For the preceding calendar year, the average 
number of full-time equivalents is determined by--
    (i) Determining the number of employees who were employed full-time 
by the employer throughout the entire calendar year;
    (ii) Totaling all employment hours (not to exceed 40 hours per 
week) for each part-time employee, and for each full-time employee who 
was not employed full-time with the employer throughout the entire 
calendar year;
    (iii) Dividing the total determined under paragraph (e)(3)(ii) of 
this section by a figure that represents the annual full-time hours 
under the employer's general employment practices, such as

[[Page 78825]]

2,080 hours (although for this purpose not more than 40 hours per week 
may be used); and
    (iv) Adding the quotient determined under paragraph (e)(3)(iii) of 
this section to the number determined under paragraph (e)(3)(i).
    (4) Rounding. For purposes of paragraph (e)(3)(iv) of this section, 
all fractions are disregarded. For instance, a figure of 50.9 is deemed 
to be 50.
    (5) Employers not in existence in the preceding year. In the case 
of an employer that was in existence for less than the entire preceding 
calendar year (including an employer that was not in existence at all), 
a determination of the average number of employees that the employer 
employs is based on the average number of employees that it is 
reasonably expected the employer will employ on business days in the 
current calendar year.
    (6) Scope of the term ``employer''. For purposes of this paragraph 
(e), employer includes any predecessor of the employer. In addition, 
all persons treated as a single employer under section 414(b), (c), 
(m), or (o) of the Internal Revenue Code are treated as one employer.
    (7) Special rule for multiemployer plans. (i) With respect to the 
application of a rule in this part to a multiemployer plan (as defined 
in section 3(37) of ERISA), each employer with at least one employee 
participating in the plan is considered to employ the same average 
number of employees. That number is the highest number that results by 
applying the rules of paragraphs (e)(1) through (6) of this section 
separately to each of the employers.
    (ii) The rules of this paragraph (e)(7) are illustrated by the 
following example:

    Example. (i) Facts. Twenty five employers have at least one 
employee who participates in Multiemployer Plan M. Among these 25 
employers, Employer K has 51 employees, determined under the rules 
of paragraphs (e)(1) through (6) of this section. Each of the other 
24 employers has fewer than 50 employees.
    (ii) Conclusion. With respect to the application of a rule in 
this part to M, each of the 25 employers is considered to employ 51 
employees.

    Dated: November 24, 2004.
Mark B. McClellan,
Administrator, Centers for Medicare & Medicaid Services.
    Approved: December 2, 2004.
Tommy G. Thompson,
Secretary, Department of Health and Human Services.
[FR Doc. 04-28113 Filed 12-29-04; 8:45 am]
BILLING CODE 4830-01-P; 4510-29-P; 4120-01-P