The ACA Prohibition on Rescissions

Question: How do the ACA rescission rules apply to employer-sponsored group health plans?

Short Answer: The ACA generally prohibits a retroactive termination of an employee’s or dependent’s medical coverage through the employer’s plan, referred to as a “rescission” of coverage. A few limited exceptions apply with procedural protections, such as when the individual engages in fraud or makes an intentional misrepresentation of material fact.

The Basics: ACA Market Reform Requirements

The ACA imposes a series of “market reforms” on employer-sponsored group health plans that are not “excepted benefits”. These mandates apply primarily to the major medical plan and include the ACA prohibition on rescissions.

The ACA Prohibition on Rescissions

The ACA provides that an employer-sponsored group major medical plan cannot “rescind coverage under the plan” for any covered individual. A “rescission” in this context is defined as “a cancellation or discontinuance of coverage that has retroactive effect.” Accordingly, absent an exception, any termination of an employee’s or dependent’s medical coverage must be effective prospectively.

Two Situations Where Rescissions Are Permitted

Although the ACA generally prohibits rescissions, plans may rescind an employee’s or dependent’s medical coverage in two situations:

1. Permitted Rescission: Fraud
   If the covered individual performs an act, practice, or omission that constitutes fraud, as prohibited by the terms of the plan or coverage, the plan may rescind (i.e., retroactively terminate) coverage.

2. Permitted Rescission: Intentional Misrepresentation of Material Fact
   If the covered individual makes an intentional misrepresentation of material fact, as prohibited by the terms of the plan or coverage, the plan may rescind (i.e., retroactively terminate) coverage.

These permitted rescission categories also apply if the fraud or intentional misrepresentation of material fact is performed or made by a person seeking coverage on behalf of the individual, such as an employee on behalf of a dependent.

Advance Notice of Rescission Required

In the two situations described above where the ACA permits rescissions of coverage, the plan must provide at least 30 days advance written notice to each participant who would be affected before executing the retroactive termination of coverage.

This advance notice requirement applies regardless of whether a) the plan is fully insured or self- insured, b) the rescission applies to an entire covered family or just one member within the family, or c) any contestability period may otherwise apply.

Rescission Is Subject to External Review

The ACA provides the right to seek external review of certain adverse benefit determinations by an independent review organization (IRO), including a rescission of coverage. The right to seek an external review applies whether or not the rescission has any effect on any particular benefit at that time. Individuals generally have four months after receipt of a notice of a rescission to file a request for an external review.

Note: External review rights do not apply to plans that maintain ACA grandfathered status.

Non-Rescission: Permitted Retroactive Termination of Coverage Situations

The ACA regulations provide that a retroactive termination of coverage under an employer-sponsored group health plan does not constitute a rescission in two situations:

1. Failure to Timely Pay COBRA Premiums
   The regulations permit retroactive cancellation of coverage where the individual has failed to timely pay the required premium, including COBRA premiums. Given that employees generally pay their health plan premium as a regular salary reduction contribution through payroll, this situation typically arises in the COBRA context. COBRA qualified beneficiaries have 45 days from the COBRA election date to make the first premium payment. For all subsequent monthly installments, each required premium due date has a 30-day grace period.
   
   For more details:

   • Newfront COBRA for Employers Guide

   • The COBRA Premium Grace Period

2. Initiated by the Individual
   The regulations also permit retroactive cancellation of coverage where the individual initiates the request. The employer cannot directly or indirectly take action to influence the individual’s decision to discontinue coverage retroactively. Nonetheless, there are relatively few situations that arise in employer-sponsored coverage where it would be appropriate to implement an employee’s request to terminate coverage retroactively.
   
   Tri-Agency ACA FAQ guidance includes two additional situations where a retroactive termination of coverage under an employer-sponsored group health plan does not constitute a rescission:

1. Recordkeeping Delays in the Normal Course of Business
   The FAQs recognize that benefits professionals and third-party vendors in many cases need time to reconcile eligible population data feeds, particularly with respect to terminating employees. To accommodate these practical realities that occur in the “normal course of business” because of routine delays in administrative recordkeeping, the guidance provides that the plan can retroactively eliminate coverage back to the date of termination of employment without implicating the ACA rescission rules.

2. Failure to Timely Notify the Plan of Divorce
   The FAQs confirm that the ACA rescission rules do not apply where coverage for a former spouse terminates retroactively after an employee fails to timely notify the plan of the divorce. Late divorce notifications are a common administrative challenge for employers. Although employers frequently choose the administratively simpler path of terminating the former spouse’s coverage prospectively, retroactive cancellation of the former spouse’s coverage back to the divorce date generally is permitted in this context.
   
   Although the guidance addresses only divorce specifically, the same reasoning may apply to other late notification situations, such as legal separation or loss of eligible dependent child status. The employee or spouse must provide notice to the plan within 60 days of the loss of eligibility caused by the divorce, legal separation, or loss of eligible dependent child status. Failure to provide timely notice generally will cause the spouse or child to lose COBRA rights.
   
   For more details:

   • COBRA Qualifying Event Notices from Employees and Dependents

   • Health Plan Consequences of a Late Divorce Notification

Common Situations Where the ACA Prohibition on Rescissions May Prevent Retroactive Termination

Terminated Employee Inadvertently Left on Active Coverage for Extended Period

Terminated employees inadvertently left on active coverage for an extended period post-termination can occur in multiple ways, most often because of a feed issue (e.g., the HRIS system did not properly communicate with the benefits administration platform). In these situations, the plan can terminate coverage only on a prospective basis upon discovery. The ACA prohibition on rescissions prevents a retroactive termination because the employee has not engaged in fraud or made an intentional misrepresentation of material fact.

Note that routine recordkeeping delays occurring in the “normal course of business” are not a rescission, even where it may result in retroactively eliminating coverage back to the date of termination of employment.

• For more details: Terminated Employees Not Terminated from Active Coverage

Employee Inadvertently Left on Active Coverage for Extended Period After Reduction in Hours

Systems issues or administrative errors can result in employees remaining in active coverage after a reduction in hours causing loss of eligibility. Even if the change in employment status should have resulted in the loss of coverage, the plan can terminate coverage only on a prospective basis upon discovery. The ACA prohibition on rescissions prevents a retroactive termination because the employee has not engaged in fraud or made an intentional misrepresentation of material fact.

Note that the ACA employer mandate look-back measurement method approach may impose additional eligibility considerations if the employee is in a stability period as full-time at the time of the reduction in hours.

For more details:

• Newfront ACA Employer Mandate & ACA Reporting Guide

• The ACA Look-Back Measurement Method

• When a Move to Part-Time Work Causes Loss of Health Plan Eligibility

Employee Provides Notice of Resignation

Tri-Agency ACA FAQ guidance provides an example confirming that the plan cannot retroactively terminate an employee’s health coverage where the employee provides notice of resignation. In the example, a school teacher on a 10-month teaching contract from August 1 to May 31 provides notice of resignation in July. The guidance clarifies that the ACA prohibits the plan from terminating coverage retroactively to May 31, again because the employee has not engaged in fraud or made an intentional misrepresentation of material fact.

Employee Inadvertently Left on Active Coverage for Extended Period During Leave of Absence

Employees generally have the right to continue health coverage only for the period of a leave of absence that is protected by FMLA or a state equivalent. Some employers have a non-protected leave policy to continue active health coverage even where not required, either because the protected period has ended or the leave is not protected by FMLA or a state equivalent. For example, employers often maintain a policy to extend active coverage for a period of up to six months before offering COBRA.

In some cases, employers inadvertently leave an employee on active coverage after exhausting any available period of protected or non-protected leave coverage. This most often occurs where a disabled employee is in the ADA assessment process following a period of protected leave. Unlike FMLA, the ADA generally does not provide disabled employees the right to continue active health coverage. In these situations, the plan can terminate coverage only on a prospective basis. The ACA prohibition on rescissions prevents a retroactive termination because the employee has not engaged in fraud or made an intentional misrepresentation of material fact.

For more details:

• Newfront Health Benefits While on Leave Guide

• Health Benefits During Protected and Non-Protected Leaves

• Terminating Health Benefits for Employees on Disability Leave

Qualified Beneficiary Inadvertently Left on COBRA for Extended Period

Situations may arise where a COBRA participant is inadvertently not removed from COBRA after exhausting the maximum coverage period. Where the delay is merely a routine recordkeeping delay in the “normal course of business,” retroactive correction may be permitted. However, where there is an administrative error that results in an extended period of inadvertent coverage, retroactive cancellation generally would constitute a prohibited rescission. In these situations, the plan can terminate coverage only on a prospective basis. The ACA prohibition on rescissions prevents a retroactive termination because the qualified beneficiary has not engaged in fraud or made an intentional misrepresentation of material fact.

Covered Employee or Dependent Later Discovered to be Ineligible

It is common for employers to perform eligibility audits to determine whether covered employees and their dependents are properly enrolled in the plan. Where this process uncovers individuals who were never eligible to participate, or have at some point lost eligibility, the default position is that the plan can terminate coverage only on a prospective basis.

Rescinding coverage (i.e., retroactive termination) is permitted if the plan can demonstrate that the ineligible individual enrolled through an act of fraud or an intentional misrepresentation of material fact. For example, the employer may have clear evidence the employee enrolled a dependent whom they knew was ineligible, or of the employee making a false statement in the enrollment process as to a dependent’s relationship. Where these acts violate the plan terms, the plan can pursue a retroactive termination of coverage by following the procedural requirement to provide 30 days advance written notice.

Enforcement

Failures to comply with the ACA prohibition on rescissions rules are subject to the standard ACA penalty scheme under IRC §4980D of $100 per day per affected individual.

Summary

The ACA prohibition on rescissions is a core health care reform protection to ensure employees and their dependents generally cannot retroactively lose employer-sponsored major medical coverage, and that certain culpability standards and procedural protections apply where rescissions can occur. Employers should be aware of these limitations to identify issues and prevent violations that could result in significant penalties. Employers seeking to pursue a rescission should review these rules and coordinate with the insurance carrier, third-party administrator, and/or stop-loss provider before implementing the retroactive termination.

Relevant Cites:

29 CFR §2590.715-2712:
(a) Prohibition on rescissions.
(1) A group health plan, or a health insurance issuer offering group health insurance coverage, must not rescind coverage under the plan, or under the policy, certificate, or contract of insurance, with respect to an individual (including a group to which the individual belongs or family coverage in which the individual is included) once the individual is covered under the plan or coverage, unless the individual (or a person seeking coverage on behalf of the individual) performs an act, practice, or omission that constitutes fraud, or makes an intentional misrepresentation of material fact, as prohibited by the terms of the plan or coverage. A group health plan, or a health insurance issuer offering group health insurance coverage, must provide at least 30 days advance written notice to each participant who would be affected before coverage may be rescinded under this paragraph (a)(1), regardless of whether the coverage is insured or self-insured, or whether the rescission applies to an entire group or only to an individual within the group. (The rules of this paragraph (a)(1) apply regardless of any contestability period that may otherwise apply.)
(2) For purposes of this section, a rescission is a cancellation or discontinuance of coverage that has retroactive effect. For example, a cancellation that treats a policy as void from the time of the individual's or group's enrollment is a rescission. As another example, a cancellation that voids benefits paid up to a year before the cancellation is also a rescission for this purpose.
…
Example (2)
(i) Facts. An employer sponsors a group health plan that provides coverage for employees who work at least 30 hours per week. Individual B has coverage under the plan as a full-time employee. The employer reassigns B to a part-time position. Under the terms of the plan, B is no longer eligible for coverage. The plan mistakenly continues to provide health coverage, collecting premiums from B and paying claims submitted by B. After a routine audit, the plan discovers that B no longer works at least 30 hours per week. The plan rescinds B's coverage effective as of the date that B changed from a full-time employee to a part-time employee.
(ii) Conclusion. In this Example 2, the plan cannot rescind B's coverage because there was no fraud or an intentional misrepresentation of material fact. The plan may cancel coverage for B prospectively, subject to other applicable Federal and State laws.

Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship. Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).