Internal Revenue Bulletin 2005-8 (PDF rendition): IRS Announcements

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

Bulletin No. 200
5-8
February 22, 200
5
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Notice 2005–16, page 605.
Low-income housing tax credit; private activity bonds.
Resident populations of the 50 states, the District of Columbia,
Puerto Rico, and the insular areas are provided for purposes
of determining the 2005 calendar year (1) state housing credit
ceiling under section 42(h) of the Code, (2) private activity bond
volume cap under section 146, and (3) private activity bond
volume limit under section 142(k)(5).
Notice 20
05–17, page 606.
This noti
ce grants an extension of time of the transitional relief
provided
in Notice 2004–80, 2004–50 I.R.B. 963, for mate-
rial advi
sors to comply with the new filing requirements under
section 6
111. Notice 2004–80 updated.
Announcement 2005–13, page 627.
This document contains corrections to temporary regulations
(T.D. 9170, 2005–4 I.R.B. 363) that provide guidance concern-
ing the applicability of section 1374 to S corporations that ac-
quire assets in carryover basis transactions from C corpora-
tions on or after December 27, 1994, and to certain corpora-
tions that terminate S corporation status and later elect again
to become S corporations.
EMPLOY
EE PLANS
T.D. 91
66, page 558.
Final r
egulations under section 9801 of the Code provide guid-
ance on
the Health Insurance Portability and Accountability Act
of 1996
(HIPAA) portability requirements relating to the restric-
tions o
n the extent to which group health plans can impose pre-
exist
ing condition exclusions, the furnishing of certificates of
credi
table coverage, the provision of special enrollment rights,
and certain definitions used in and exceptions to the HIPAA
portability requirements.
REG–130370–04, page 608.
Proposed regulations under section 9801of the Code would
provide guidance on the HIPAA portability requirements relating
to interaction with the Family and Medical Leave Act of 1993,
special enrollment procedures, and miscellaneous issues.
EXEMPT ORGANIZATIONS
T.D. 9173, page 557.
Final regulations under section 6104 of the Code provide guid-
ance about the fees which the IRS and exempt organizations
may charge for providing copies of material required to be pub-
licly available.
Fi
nding Lists begin on page ii.

The IRS Mission
Provide America’s taxpayers top quality service by helping
them understand and meet their tax responsibilities and by
applying the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Sec-
retary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The c
ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
February 22, 20052005–8 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 6104.—Publicity
of Information Required
From Certain Exempt
Organizations and Certain
Trusts
26 CFR 301.6104(b)–1: Publicity of information on
certain information returns.
T.D. 9173
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 301
Authority to Charge Fees for
Furnishing Copies of Exempt
Organizations’ Material Open
to Public Inspection
AGENCY:Internal Revenue Service
(IRS), Treasury.
ACTION:Final regulations.
SUMMARY
:These final regulations
adopt as
final without change the tempo-
rary reg
ulations (T.D. 9070, 2003–2 C.B.
574) pub
lished in the Federal Register on
July 9,
2003, which amended the then-ex-
isting
regulations regarding fees for copies
of exem
pt organizations’ material the IRS
must ma
ke available to the public under
sectio
n 6104 of the Internal Revenue Code
(Code)
. These final regulations also adopt
as fin
al without change the conforming
amend
ment included in the temporary
regul
ations concerning the fees that an
exemp
t organization may charge for fur-
nishi
ng copies of such material when
requ
ired to do so.
DATES:These final regulations are effec-
tive January 5, 2005.
FOR FURTHER INFORMATION
CONTACT:Sarah Tate, 202–622–4560
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The temporary regulations published
at 68 FR 40768, July 9, 2003, amended
the then-existing regulations to make clear
that any fee assessed by the IRS for fur-
nishing copies of documents required to
be made publicly available under section
6104 of the Code shall be no more than
the fee under the IRS’ Freedom of Infor-
mation Act (FOIA) fee schedule. Those
temporary regulations also amended the
then-existing regulations to make clear
that an exempt organization may charge
the applicable per-page copying fee un-
der the IRS’ FOIA fee schedule for any
number of pages, without regard to the
fee exclusion applicable to the IRS for the
first 100 pages.
The IRS simultaneously published
a notice of proposed rulemaking
(REG–142538–02, 2003–2 C.B. 590)
at 68 FR 40849, July 9, 2003, with a
cross-reference to the text of the tempo-
rary regulations. The notice of proposed
rulemaking invited public comment on
the temporary regulations. The IRS has
not received any public comments or any
request for a public hearing. The IRS
has not identified any reason that the text
of the temporary regulations should be
altered. The text of the temporary rules,
now adopted as final, is identical to the
text of that proposed rule.
Special Analyses
It has been determined that these fi-
nal regulations are not a significant regu-
latory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It has also been determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does
not apply to these final regulations, and
because these final regulations do not im-
pose a collection of information on small
entities, the Regulatory Flexibility Act (5
U.S.C. chapter 6) does not apply. Pursuant
to section 7805(f) of the Code, the notice
of proposed rulemaking preceding these fi-
nal regulations was submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration (SBA) for comment
on their impact on small businesses.
Drafting Information
The principal author of these final reg-
ulations is Sarah Tate, Office of the As-
sociate Chief Counsel (Procedure and Ad-
ministration), Disclosure and Privacy Law
Division. However, other personnel from
the IRS and Treasury Department partici-
pated in their development.
PART 301 — PROCEDURE AND
ADMINISTRATION
Accordingly, the IRS and the Depart-
ment of the Treasury adopt as final without
change the temporary regulations amend-
ing 26 CFR, part 301, which were pub-
lished July 9, 2003.
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved December 28, 2004.
Eric Solomon,
Acting Deputy Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on January 4,
2005, 8:45 a.m., and published in the issue of the Federal
Register for January 5, 2005, 70 F.R. 704)
2005–8 I.R.B.557February 22, 2005

Section 9801.—Increased
Portability Through
Limitation on Preexisting
Condition Exclusions
T.D. 9166
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Parts 54 and 602
DEPARTMENT OF LABOR
Employee Benefits
Security Administration
29 CFR Part 2590
DEPARTMENT OF HEALTH
AND HUMAN SERVICES
Centers for Medicare
& Medicaid Services
45 CFR Parts 144 and 146
Final Regulations for Health
Coverage Portability for
GroupHealthPlansandGroup
Health Insurance Issuers
Under HIPAA Titles I & IV
AGENCIES:Internal Revenue Service,
Department of the Treasury; Employee
Benefits Security Administration, Depart-
ment of Labor; Centers for Medicare &
Medicaid Services, Department of Health
and Human Services.
ACTION:Final regulation.
SUMMARY:This document contains fi-
nal regulations governing portability re-
quirements for group health plans and is-
suers of health insurance coverage offered
in connection with a group health plan.
The rules contained in this document im-
plement changes made to the Internal Rev-
enue Code, the Employee Retirement In-
come Security Act, and the Public Health
Service Act enacted as part of the Health
Insurance Portability and Accountability
Act of 1996.
DATES:Effective Date.These final regu-
lations are effective February 28, 2005.
Applicability Date.These final regula-
tions apply for plan years beginning on or
after July 1, 2005.
FOR FURTHER INFORMATION
CONTACT:Dave Mlawsky, Centers for
Medicare & Medicaid Services (CMS),
Department of Health and Human Ser-
vices, 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 con-
cerning changes in health care law may
call a toll-free number, 1–866–444–EBSA
(3272), or access the publications on-line
atwww.dol.gov/ebsa, the Department of
Labor’s website. These regulations as well
as other information on the new health
care laws are also available on the De-
partment of Labor’s interactive web pages,
HealthElaws. In addition, CMS’s pub-
lication entitled “Protecting Your Health
Insurance Coverage” is available by call-
ing 1–800–633–4227 or on the Depart-
ment of Health and Human Services’ web-
site (www.cms.hhs.gov/hipaa1), which in-
cludes the interactive webpages, HIPAA
Online. Copies of the HIPAA regulations,
as well as notices and press releases re-
lated to HIPAA and other health care laws,
are also available atthe above-referenced
websites.
A. Background
The Health Insurance Portability and
Accountability Act of 1996 (HIPAA), Pub-
lic Law 104–191, was enacted on August
21, 1996. HIPAA amended the Internal
Revenue Code of 1986 (Code), the Em-
ployee Retirement Income Security Act of
1974 (ERISA), and the Public Health Ser-
vice Act (PHS Act) to provide for, among
other things, improved portability and con-
tinuity of health coverage. Interim final
regulations implementing the HIPAA pro-
visions were first made available to the
public on April 1, 1997 (published in the
Federal Registeron April 8, 1997, 62
FR 16894) (April 1997 interim rules) (T.D
8716, 1997–1 C.B. 225). On December
29, 1997, the Departments published in the
Federal Register(62 FR 67688) a clarifi-
cation of the April 1997 interim rules as
they relate to excepted benefits. On Octo-
ber 25, 1999, the Departments published
a notice in theFederal 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 these final
regulations. These final regulations do not
significantly modify the framework es-
tablished in the April 1997 interim rules.
Instead, these final regulations imple-
ment changes to improve the portability of
health coverage while seeking to minimize
burdens on group health plans and group
health insurance issuers. These final reg-
ulations become applicable to plans and
issuers on the first day of the plan year be-
ginning on or after July 1, 2005. Each plan
or issuer must continue to comply with the
April 1997 interim rules until these fi-
nal regulations become applicable to that
plan or issuer. In addition, the Depart-
ments are publishing proposed regulations
(REG–130370–04) elsewhere in this issue
of the Bulletin to address additional and
discrete issues.
B. Overview of the Final Regulations
1.Definitions — 26 CFR 54.9801–2,
29 CFR 2590–701–2, 45 CFR 144.103
This section of the final regulations pro-
vides most of the definitions used in the
regulations implementing HIPAA. In ad-
dition to some minor restructuring of the
April 1997 interim rules (i.e.,somedef-
initions have been moved into other sec-
tions of the regulations), some additional
terms have been added. Among the new
terms is the definition of the termdepen-
dent.Dependentis defined as any indi-
vidual who is or may become eligible for
coverage under the terms of a group health
plan because of a relationship to a partic-
ipant. This is intended to clarify that for
purposes of HIPAA the terms of the group
health plan determine which individuals
February 22, 20055582005–8 I.R.B.

are eligible for coverage as a dependent
under the plan. Thus, for example, the plan
terms control the age (if any) at which and
conditions under which a child of a partic-
ipant ceases to be eligible for coverage as
a dependent. Moreover, whether an indi-
vidual is eligible for special enrollment as
a dependent is determined in part based on
the plan’s definition of dependent.
2.Limitations on Preexisting Condition
Exclusions — 26 CFR 54.9801–3,
29 CFR 2590.701–3, 45 CFR 146.111
This section of the final regulations ad-
dresses HIPAA’s limitations on a plan’s
or issuer’s ability to impose a preexisting
condition exclusion. Comments address-
ing this topic generally approved of the
approach taken in the Departments’ April
1997 interim rules. Accordingly, these
final regulations do not modify signifi-
cantly the April 1997 interim rules but in-
stead add several clarifications to the gen-
eral framework already established. Also,
some comments reflect a misunderstand-
ing of the notice requirements for plans
and issuers that impose a preexisting con-
dition exclusion. Thus, these final regula-
tions are restructuredto clarify these no-
tice obligations. In addition, an example
in the regulations contains language that
plans and issuers can use to satisfy the no-
tice requirements.
Definition of a preexisting condition
exclusion
In these final regulations, a preexist-
ing condition exclusion continues to be
defined broadly. A preexisting condition
exclusion is any limitation or exclusion
of benefits relating to a condition based
on the fact that the condition was present
before the effective date of coverage,
whether or not any medical advice, di-
agnosis, care, or treatment was recom-
mended or received before that day. This
definition has been moved to this section
on limitations on preexisting condition
exclusions to emphasize the difference
between the broadness of the definition
and the narrowness of permissible preex-
isting condition exclusions. The definition
has also been modified slightly from the
previous definition and clarifications of its
application have been added.
If a plan exclusion satisfies the defini-
tion of a preexisting condition exclusion, it
is subject to the rules of this section for pre-
existing condition exclusions. Under the
April 1997 interim rules, whether an exclu-
sion is a preexisting condition exclusion is
determined by whether the plan provision
restricts benefits for a condition because it
was present before the “first day of cover-
age.” These final regulations have replaced
the termfirst day of coveragewitheffective
date of coverage under a group health plan
or health insurance coverage. In the case
of a plan that changes health insurance is-
suers, “first day of coverage” can be read to
mean only the first day of coverage under
the plan and not the first day of coverage
under the new issuer’s policy or contract
(because “first day of coverage” is thus de-
fined for purposes of determining the en-
rollment date). This reading would mean
that an exclusion of benefits based on the
fact that a condition existed before the ef-
fective date of coverage in the health insur-
ance of the succeeding issuer would not be
a preexisting condition (because it would
not apply based on the fact that a condition
existed before the first day of coverage un-
der the plan). The phrase “effective date
of coverage under a group health plan or
health insurance coverage” under the final
regulations thus applies to coverage either
under a plan or health insurance coverage.
Therefore, a provision used by a succeed-
ing issuer to deny benefits for a condition
because it arose before the effective date of
coverage under the new policy would also
fit the definition of a preexisting condition
exclusion.
Since the April 1997 interim rules were
published, several situations have repeat-
edly arisen in which a plan exclusion is not
designated as a preexisting condition ex-
clusion but nevertheless satisfies the def-
inition of a preexisting condition exclu-
sion. Examples have been added to il-
lustrate some of these common plan pro-
visions. These situations include a plan
provision that provides coverage for acci-
dental injury only if the injury occurred
while covered under the plan, a plan pro-
vision that counts against a lifetime limit
benefits received under prior health cover-
age, and a plan provision that denies ben-
efits for pregnancy until 12 months after
an individual generally becomes eligible
for benefits under the plan.
1
The regula-
tions also include a series of examples re-
lating to exclusions for congenital condi-
tions. These examples illustrate that a plan
that generally provides benefits for a con-
dition cannot exclude benefits for the con-
dition in instances where it arises congeni-
tally without complying with these limita-
tions on preexisting condition exclusions.
However, these limitations would not ap-
ply if a plan excludes benefits for all in-
stances of a condition, even if all instances
are likely to be congenital. Plans and poli-
cies that contain these types of preexist-
ing condition exclusions that are not desig-
nated as such should be modified to com-
ply with HIPAA’s requirements for pre-
existing condition exclusions, or the ex-
clusions should be deleted. In addition,
because a preexisting condition exclusion
discriminates against individuals based on
one or more health factors, unless a pre-
existing condition exclusion complies with
HIPAA’s limitations on preexisting con-
dition exclusions, the plan provision will
also violate the HIPAA nondiscrimination
provisions.
2
General rules governing preexisting
condition exclusions
In addition to modifying the definition
of a preexisting condition exclusion, these
final regulations set forth HIPAA’s limita-
tions on preexisting condition exclusions,
as follows:
Six-month look-back rule
The final regulations retain the 6-month
look back rule set forth in the April 1997
interim rules. In addition, these regula-
tions clarify that a plan or issuer can use
a period shorter than 6 months for pur-
poses of applying the 6-month look-back
rule. Examples in these final regulations
also clarify that if a doctor’s recommen-
dation for treatment occurs before the
6-month look-back period, an individual
can be subject to a preexisting condition
exclusion only if theindividual receives
1
Several comments (including those of several state insurance commissioner’s offices) have asked the Departments to clarify that a preexisting condition exclusion would also include any
waiting period or other temporary benefit exclusion (other than a waiting period on all benefits). The Departments invite further comments on this issue of benefit-specific waiting periods.
2
See 26 CFR 54.9802–1T(b)(3), 29 CFR 2590.702(b)(3), and 45 CFR 146.121(b)(3), published on January 8, 2001 at 66 FR 1378 (T.D. 8931, 2001–1 C.B. 542).
2005–8 I.R.B.559February 22, 2005

the recommended treatment within the
6-month look-back period.
Maximum length of preexisting condition
exclusion
The final regulations retain the rule set
forth in the April 1997 interim rules that a
preexisting condition exclusion is not per-
mitted to extend for more than 12 months
(18 months in the case of a late enrollee)
after the enrollment date.
Reducing a preexisting condition
exclusion period by creditable coverage
The final regulations retain the rule set
forth in the April 1997 interim rules. Ac-
cordingly, under these final regulations,
the period of any preexisting condition
exclusion that would otherwise apply to
an individual under a group health plan is
reduced by the number of days of cred-
itable coverage
3
the individual has as of
the enrollment date (not including any
days before a significant break in cover-
age). Some comments asked how this rule
applies to individuals who currently have
coverage under another plan (that is, the
coverage has not yet ended). An example
clarifies that a plan or issuer must count
all days of creditable coverage prior to an
individual’s enrollment date, even if that
coverage is still in effect.
Other standards
The final regulations retain the state-
ment that other legal standards may apply
to group health coverage preexisting con-
dition exclusions. In this connection, the
Department of Labor’s Veterans’ Employ-
ment and Training Service (VETS) has
commented that the Uniformed Services
Employment and Reemployment Rights
Act (USERRA) provides reemployment
rights for persons who leave civilian em-
ployment to perform service in the uni-
formed services and prohibits employer
discrimination against any person on the
basis of the person’s military service,
obligations, intent to join or certain other
protected activities. In general, USERRA
reemployment rights apply to persons who
leave civilian employment to serve a single
enlistment period in the active military or
to employees who are members of the Na-
tional Guard or Reserve and are required
to perform intermittent military service
or training. USERRA provides rights re-
garding both continuation of group health
plan coverage by an employee who is ab-
sent to perform service in the uniformed
services and reinstatement of group health
plan coverage upon reemployment if the
coverage was interrupted by the service.
In response to this comment, the final reg-
ulations include a statement that USERRA
can affect the application of a preexisting
condition exclusion to certain individu-
als who are reinstated in a group health
plan following active military service. For
more information, a VETS directory and
additional USERRA information is avail-
able atwww.dol.gov/vets.
Enrollment definitions
Both the 6-month look-back period and
the maximum length of preexisting condi-
tion exclusion are measured with respect to
an individual’s enrollment date. The final
regulations generally retain the enrollment
definitions that were set forth in the April
1997 interim rules (including definitions
of enrollment date, waiting period, and late
enrollee). Under HIPAA, the April 1997
interim rules, and these final regulations,
the enrollment date is the first day of cov-
erage under the plan or, if there is a wait-
ing period, the first day of the waiting pe-
riod. These final regulations clarify that
if an individual receiving benefits under a
group health plan changes benefit package
options, or if the plan changes group health
insurance issuers, the individual’s enroll-
ment date remains the same.
The Departments received several com-
ments reflecting confusion about the rela-
tionship between the preexisting condition
exclusion rules and the definitions of en-
rollment date and waiting period. Accord-
ingly, guidance concerning waiting peri-
ods previously located in the definitions
section has been moved to this section of
the regulations and expanded. In addition,
the definition of waiting period has been
modified with respect to individuals seek-
ing individual market coverage. Specifi-
cally, these final rules clarify that if an in-
dividual seeks coverage in the individual
market, a waiting period begins on the date
the individual submits a substantially com-
plete application for coverage and ends on
either the date coverage begins (if the ap-
plication results in coverage), or the date
on which the application is denied by the
issuer or the date on which the offer of cov-
erage lapses (if the application does not re-
sult in coverage). Under the statute, the
April 1997 interim rules, and these final
regulations, the effect of considering this
period a waiting period is that the period is
not counted when determining the length
of any break in coverage. This rule mod-
ifies the rule contained in the April 1997
interim rules (which provided a waiting
period only if the individual actually ob-
tained coverage). The modification ad-
dresses situations where some individuals
have been denied individual market poli-
cies or individuals declined coverage be-
cause, for example, the policies had an ex-
orbitant premium.
Additional examples illustrate the in-
teraction between a waiting period and the
6-month look-back period, the application
of the 6-month look-back and maximum
preexisting condition exclusion period
rules to plans with more than one benefit
package option at open season, and the
interaction between these rules and other
eligibility criteria under the plan.
Individuals and conditions that cannot
be subject to a preexisting condition
exclusion
Under HIPAA, the April 1997 interim
rules, and these final rules, a preexisting
condition exclusion cannot be applied to
pregnancy. Nor can a preexisting condi-
tion exclusion be applied to a newborn,
adopted child, or child placed for adoption
if the child is covered under a group health
plan (or other creditable coverage) within
30 days after birth, adoption, or placement
for adoption.
One comment noted that the rule for
newborns in the April 1997 interim rules
is expressed inconsistently. Some of those
expressions are inconsistent with the rule
for adopted children. Specifically, the rule
for adopted children and one expression of
the rule for newborns refers to eligibility
being conditioned on being covered under
any creditable coverage as of the last day
of the 30-day period after birth, adoption,
3
For purposes of these regulations, the phrase “days of creditable coverage” has the same meaning as the phrase “aggregate of the periods of creditablecoverage” as such phrase is used in
the statute.
February 22, 20055602005–8 I.R.B.

or placement for adoption. However, in
other expressions of the rule for newborns,
a reference is made to being covered under
creditable coverage within 30 days after
birth. These final regulations use one term
consistently, referring to coverage within
30 days after birth, adoption, or placement
for adoption. This accords with the con-
ference report. H.R. Conf. Rep. No. 736,
104
th
Cong. 2d Session 184–185 (1996).
Consequently, if, for example, a child is
covered within 30 days of birth, the child
cannot be subject to a preexisting condi-
tion exclusion even if the child is no longer
covered under the plan on the 30
th
day af-
ter birth (unless the child has a significant
break in coverage).
Several comments noted that state laws
applicable to health insurance issuers
sometimes require that a mother’s health
coverage must provide benefits for health
care expenses incurred for the child for a
specified period following birth and can-
not be recouped even if the child never
enrolls in the plan under which the mother
is covered. A new example clarifies that,
in this situation, the child has creditable
coverage within 30 days after birth and,
therefore, no preexisting condition exclu-
sion may be imposed on the child unless
the child has a subsequent significant
break in coverage.
Finally, HIPAA, the April 1997 interim
rules, and these final regulations provide
that a group health plan, and a health in-
surance issuer offering group health in-
surance coverage, may not impose a pre-
existing condition exclusion relating to a
condition based solely on genetic informa-
tion. Comments expressed concern that
the definition of genetic information in the
April 1997 interim rules was too broad
and would prevent the application of a pre-
existing condition exclusion to conditions
that would be otherwise permitted inde-
pendent of any genetic information. Al-
though these regulations have not changed
the definition of genetic information, the
regulations clarify that if an individual is
diagnosed with a condition, even if the
condition relates to genetic information,
the plan may impose a preexisting condi-
tion exclusion with respect to the condi-
tion, subject to the other limitations of this
section. This rule was located in the defini-
tion of medical condition in the April 1997
interim rules. Some comments indicated
this rule was difficult to locate. Thus, it
hasbeenmovedtothissection,andanex-
ample illustrating the rule has been added.
First notice of preexisting condition
exclusion — general notice
Under these final regulations, as with
the April 1997 interim rules, a group health
plan imposing a preexisting condition ex-
clusion, and a health insurance issuer of-
fering group health insurance coverage un-
der a plan imposing a preexisting condition
exclusion, must provide a written general
notice of preexisting condition exclusion
before it can impose a preexisting condi-
tion exclusion.
After publication of the April 1997
interim rules, the Departments received
questions about the operation of this re-
quirement. The April 1997 interim rules
provided that a plan or issuer could not
impose a preexisting condition exclusion
with respect to a participant or dependent
before providing the general notice to
the participant. Several comments asked
whether plans and issuers could delay
providing the general notice until a large
claim was filed and then pend the claim
until the general notice was sent. Other
comments expressed concern that if plans
do not notify individuals upon enrollment
about the benefit exclusions that apply to
their coverage, individuals will not be able
to make informed decisions about their
health care choices.
The Departments had contemplated un-
der the April 1997 interim rules that in-
dividuals should be provided the informa-
tion required in the general notice before
they incurred claims that could be denied
under a preexisting condition exclusion.
These final regulations clarify the proce-
dural requirements for the general notice
of preexisting condition exclusion. Specif-
ically, under the final regulations, the gen-
eral notice of preexisting condition exclu-
sion must be provided as part of any writ-
ten application materials distributed by the
plan or issuer for enrollment. If the plan or
issuer does not distribute such materials,
the notice must be provided by the earli-
est date following a request for enrollment
that the plan or issuer, acting in a reason-
able and prompt fashion, can provide the
notice. Moreover, regarding the content
of this general notice, the final regulations
clarify precisely what is required when
disclosing the existence and terms of the
plan’s preexisting condition exclusion. In
addition, these final regulations require the
notice to include the person to contact (in-
cluding an address or telephone number)
for obtaining additional information or as-
sistance regarding the preexisting condi-
tion exclusion. An example in these final
regulations sets forth sample language that
plans and issuers can use when developing
the general notice for their coverages.
Issuers that sell different policies to
different plans should also be aware that
when describing the existence and terms
of the maximum preexisting condition ex-
clusion period, the issuer must describe to
individuals the actual maximum exclusion
period under their policy. Therefore, if
an issuer sells two policies, one with a
6-month and one with a 12-month maxi-
mum preexisting condition exclusion, the
issuer could not send one notice to indi-
viduals under both policies indicating that
the maximum preexisting condition exclu-
sion is 12 months. Instead, the issuer is
required to send one notice to participants
under the policy with the 6-month pre-
existing condition exclusion (indicating
that the maximum exclusion period is 6
months) and a different notice to partici-
pants under the policy with the 12-month
preexisting condition exclusion (indicat-
ing that the maximum exclusion period is
12 months).
Determination of creditable coverage
These final regulations require a plan or
issuer that imposes a preexisting condition
exclusion to make a determination of cred-
itable coverage within a reasonable time
after receiving information regarding prior
health coverage. This rule was included in
the section of the April 1997 interim rules
addressing certification and disclosure of
previous coverage, and it has been moved
to this section on preexisting condition ex-
clusions unchanged. These final regula-
tions clarify that a plan or issuer may not
impose any limit on the amount of time
that an individual has to present a certifi-
2005–8 I.R.B.561February 22, 2005

cate or other evidence of creditable cover-
age.
4
Second notice of preexisting condition
exclusion — individual notice
These final regulations retain the re-
quirement to provide an individual a writ-
ten notice of the length of preexisting con-
dition exclusion that remains after offset-
ting for prior creditable coverage. These
final regulations clarify that this individ-
ual notice is not required to identify any
medical conditions specific to the individ-
ual that could be subject to the exclusion.
Also, a plan or issuer is not required to
provide this notice if the plan or issuer
does not impose any preexisting condi-
tion exclusion on the individual or if the
plan’s preexisting condition exclusion is
completely offset by the individual’s prior
creditable coverage. These final regula-
tions add a new example that illustrates
how the notice works and includes sam-
ple language that may be helpful to plans
and issuers in developing this type of no-
tice with respect to their coverage.
Reconsideration
Consistent with the April 1997 interim
rules, these final regulations do not pre-
vent a plan or issuer from modifying an ini-
tial determination of creditable coverage
if it determines that the individual did not
have the claimed creditable coverage and
if certain procedural requirements are met.
The final regulations have been slightly re-
organized and modified to make clearer
that a plan or issuer is permitted to modify
its initial determination if a notice of the
new determination (that meets the require-
ments of the second, individual notice of
preexisting condition exclusion, described
above) is provided and, until the notice of
the new determination is provided, the plan
or issuer acts in a manner consistent with
the initial determination for purposes of
approving access to medical services (such
as pre-surgery authorization).
3.Rules Relating to Creditable
Coverage — 26 CFR 54.9801–4,
29 CFR 2590.701–4, 45 CFR 146.113
This section of the final regulations
describes the varieties of health coverage
that constitute creditable coverage and
sets forth rules for how to count creditable
coverage for purposes of the rule requiring
plans and issuers to offset the maximum
length of a preexisting condition exclusion
by prior creditable coverage.
Creditable coverage
The rules in the final regulations de-
scribing the varieties of health coverage
that constitute creditable coverage gener-
ally follow the April 1997 interim rules,
with two modifications. The April 1997
interim rules contain ten categories of
creditable coverage. After publication of
the April 1997 interim rules, Congress cre-
ated the State Children’s Health Insurance
Program (S-CHIP), which allows states to
provide health coverage to eligible chil-
dren through Medicaid expansion or pri-
vate market mechanisms. This coverage
meets the definition of creditable coverage
as either Medicaid coverage, group health
plan coverage, or health insurance cov-
erage. In addition, Congress specifically
provides
5
that S-CHIP coverage is cred-
itable coverage under HIPAA. Therefore,
these final regulations have added cover-
age under S-CHIP as an eleventh category
of creditable coverage.
The second modification is to the def-
inition of public health plan. This defini-
tion has been changed in two ways. The
first change relates to the type of health
coverage provided by a public health plan.
The statute does not define the term. The
April 1997 interim rules limit the defini-
tion of public health plans to certain plans
provided through healthinsurancecover-
age. Some comments suggested it was un-
necessary to restrict the definition to in-
sured coverage and argued that the term
public health plan should be expanded.
These final regulations delete the word
“insurance” from that requirement so that
any health coverage provided by a govern-
mental entity, regardless of whether it has
the risk-shifting or risk-distributing effects
of insurance, is a public health plan.
The second change to the definition of
public health plan relates to the type of
governmental entity that can establish or
maintain a public health plan. Under the
April 1997 interim rules, only health cov-
erage provided under a plan established or
maintained by a state, a county, or another
political subdivision of a state can be a
public health plan. This definition does not
include a plan established or maintained by
a foreign government or the U.S. govern-
ment. The preamble to the April 1997 in-
terim rules specifically solicited comments
on whether public health systems of for-
eign countries shouldbe considered public
health plans.
Many comments addressed this issue,
arguing both for and against including
public health systems of foreign govern-
ments in the definition of public health
plan. The comments in favor of inclusion
argued that generally the health coverage
provided through public health systems in
foreign countries is more comprehensive
than that received in this country. Some
comments argued that the exclusion of
foreign public health systems from the
definition of public health plan arbitrar-
ily penalizes individuals who maintain
continuous health coverage through a for-
eign public health system. The comments
against inclusion focused on the difficulty
for a plan or issuer to verify whether some-
one had the coverage they claimed under
a foreign public health system.
Under these final regulations, the def-
inition of a public health plan includes
health coverage provided under a plan es-
tablishedormaintainedbyaforeigncoun-
try or a political subdivision. While this
result can inconvenience plans and issuers,
verifying this type of coverage may be
no more inconvenient than verifying cer-
tain other types of coverage, such as group
health coverage provided through foreign
employers. In addition, this result is much
less inequitable than denying an individ-
ual coverage for a preexisting condition
in a case in which the individual can pro-
vide reliable evidence of having coverage
under the public health system of a for-
eign government. Under the rules for es-
4
Of course, after a claim has been denied under a preexisting condition exclusion,otherlaws,suchassection503ofERISA,maysetforthtimingrulesfor an individual to appeal a denied
claim.
5
Section 2109 of the Social Security Act, enacted by section 4901 of the Balanced Budget Act of 1997, Public Law 105–33, 111 Stat. 567.
February 22, 20055622005–8 I.R.B.

tablishing creditable coverage in the ab-
sence of a certificate of creditable cover-
age, an individual is required to present at
a minimum some corroborating evidence
of the claimed creditable coverage and is
required to cooperate with a plan’s or is-
suer’s efforts to verify coverage. Thus, in
the case of an individual claiming cover-
age under the public health system of a for-
eign country, a plan or issuer could require
some evidence of residency in the foreign
country (or evidence that some other eligi-
bility standard had been met) and the in-
dividual would have to cooperate with the
plan’s or issuer’s efforts to verify that the
individual had coverage under that coun-
try’s health system.
Under the revised definition in these fi-
nal regulations, health coverage provided
under a plan established or maintained by
the U.S. Government is also a public health
plan.
Counting creditable coverage
The rules in the final regulations for
how to count creditable coverage are
adopted with stylistic and conforming
changes from the April 1997 interim
rules. In addition, a technical modifica-
tion was added, as required by a statutory
change made by the Trade Act of 2002
(“the Trade Act”, Public Law 107–210,
enacted on August 6, 2002). Under the
Trade Act, workers whose employment is
adversely affected by international trade
may become entitled to receive trade ad-
justment assistance (TAA) and a 65%
health coverage tax credit (HCTC). The
Trade Act also amended COBRA contin-
uation coverage provisions in ERISA, the
Public Health Service Act, and the Inter-
nal Revenue Code, to provide a second
opportunity to elect COBRA for individ-
uals who are eventually determined to
qualify for TAA, but who did not elect
COBRA after their original loss of health
coverage. Because this could result in a
“significant break in coverage” for pur-
poses of HIPAA, the Trade Act specifies
that the period beginning with the loss of
coverage, and ending on the first day of
the second election period, for individu-
als who elect COBRA during this second
election period, should be disregarded for
purposes of the HIPAA pre-existing condi-
tion provisions. Accordingly, as required
by the Trade Act, under these final rules
the days between the date an individual
lost group health plan coverage and the
first day of the second COBRA election
period are not taken into account in de-
termining whether a significant break in
coverage has occurred. For more infor-
mation on TAA, contact the Department
of Labor’s Employment and Training
Administration at 877–US2–JOBS or at
www.doleta.gov/tradeact.Formorein-
formation on the HCTC, contact the IRS
toll-free at 866–628–4282.
Theexistingexamplesrelatingtothe
tolling of the period for determining a sig-
nificant break in coverage in the case of
individuals seeking coverage in the indi-
vidual market have also been modified to
conform to the changein the definition
of waiting period, which under these final
regulations includesthe period beginning
when an individual submits a substantially
complete application for coverage in the
individual market and ends when the appli-
cation is denied or when the offer of cover-
age lapses. In addition, here, as throughout
these final regulations, references in the
April 1997 interim rules to “plan or pol-
icy” have been revised so that the reference
includes health insurance coverage not of-
fered through a policy of insurance, such as
health insurance coverage offered through
a contract of a health maintenance organi-
zation.
Published elsewhere in this issue of the
Bulletin is a proposed rule that provides
that the period that determines 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 cov-
erage ceases. In those cases, the signif-
icant-break-in-coverage period would be
tolled until a certificate is provided or, if
earlier, until 44 days after the coverage
ceases.
These final regulations retain the meth-
ods in the April 1997 interim rules for
counting creditable coverage, that is,
the standard method and the alternative
method. Comments requested that the
alternative method be expanded so that a
plan or issuer could elect to have it apply to
categories in addition to the five categories
prescribed in the April 1997 interim rules
(mental health; substance abuse treatment;
prescription drugs; dental care; and vision
care). The types of categories described
in the comments were significant dif-
ferences in deductibles, cost-sharing, or
out-of-pocket maximums between plans.
One comment suggested that any com-
parison between plans on the basis of
difference in deductibles or cost sharing
was unworkable.
It is the view of the Departments that a
comparison between plans, and allowing
one plan not to count creditable coverage
(in whole or in part) under another plan,
based solely on differences in deductibles
or in some other cost-sharing mecha-
nism or in all cost-sharing mechanisms,
is an insufficient basis for determining
the comparative value of benefits under
the plans. A plan with a low deductible
or low co-payments might also have an
annual or per-incident limit on benefits so
low as to make the plan with the higher
deductible or higher cost sharing actually
more valuable. Similarly, a plan with a
higher deductible or coinsurance might
also have a higher table of usual, custom-
ary, and reasonable costs, might be much
more liberal in covering treatments con-
sidered experimental, and might provide
a much broader base of benefits than the
plan with the lower deductible or coinsur-
ance. Because of the numerous ways that
plans or issuers can limit the amount of
benefits available under the plan, it is very
complicated to compare the value of one
plan or coverage with another. Singling
out one or several of these features is in-
sufficient for making a true comparison of
the value of the benefits.
4.Evidence of Creditable Coverage —
26 CFR 54.9801–5, 29 CFR 2590.701–5,
45 CFR 146.115
This section of the final regulations sets
forth guidance regarding the certification
requirements and other requirements for
disclosure of information relating to prior
creditable coverage. The provision of a
certificate and certain other disclosures
of information provided for in the statute,
the April 1997 interim rules, and these
final regulations are intended to enable an
individual to establish prior creditable cov-
erage for purposes of reducing or elimi-
nating any preexisting condition exclusion
imposed on the individual by any subse-
quent group health plan coverage. The
Departments received generally favorable
comments on the April 1997 interim rules
from interested parties who submitted
2005–8 I.R.B.563February 22, 2005

comments with regard to the certifica-
tion requirements. For example, several
comments praised the Departments’ pro-
mulgation of a model certificate in the
April 1997 interim rules as a vehicle that
helped reduce compliance burdens associ-
ated with the statutory requirements under
HIPAA.
Form of certificate
These final regulations retain the re-
quirement that the certificate must gen-
erally be provided in writing. The April
1997 interim rules clarified that for this
purpose a writing included any form
approved by the Secretaries as a writ-
ing. These final regulations modify that
standard to include any other medium ap-
proved by the Secretary. As with the April
1997 interim rules, these final regulations
provide that where an individual requests
that the certificate be sent to another plan
or issuer instead of the individual, and the
other plan or issuer agrees, the certifica-
tion information may be provided by other
means, such as by telephone.
Information in certificate
The information required to be pro-
vided in a certificate under these final
regulations is the same as required under
the April 1997 interim rules with one ad-
dition. In response to recommendations
made by the U.S. General Accounting
Office (GAO)
6
and several comments, the
Departments have modified the April 1997
interim rules to require that an educational
statement be provided as part of a cer-
tificate of creditable coverage in order to
inform consumers of their HIPAA rights.
Some comments stated that such educa-
tional language was not necessary, but
indicated that if the Departments adopted
such an approach they should provide
language for compliance purposes. In
response to the GAO recommendation,
the Departments have amended the re-
quirements for the certificate of creditable
coverage in the final regulations to include
the provision of an educational statement
regarding certain HIPAA protections.
Model educational language is provided
in the model certificate (set forth below).
This eliminates the burden on plans and
issuers of developing language to satisfy
this requirement.
Model certificate
The first model certificate below has
been authorized by the Secretary of each
of the Departments. The model educa-
tional statement is set forth under the
heading “Statement of HIPAA Portability
Rights.” Use of the model certificate by
group health plans and group health insur-
ance issuers will satisfy the requirements
of paragraph (a)(3)(ii) of the regulations.
The second model certificate below has
been authorized by the Secretary of Health
and Human Services. State Medicaid pro-
grams may use this version. Once these
final regulations are applicable, use of
the previously-published model certificate
(published in the preamble to the April
1997 interim rules) will no longer satisfy
paragraph (a)(3)(ii) of the regulations.
In addition to these model certificates,
the Departments are publishing a dif-
ferent model certificate for group health
plans and group health insurance issuers
in the preamble to the proposed rules
published elsewhere in this issue of the
Bulletin. That model certificate includes
in its educational statement an additional
paragraph regarding coordination with
rules under the Family and Medical Leave
Act (FMLA). The Secretaries of the De-
partments authorize plans and issuers
to use either model certificate in fulfill-
ment of their obligations under paragraph
(a)(3)(ii) of this section in the final regu-
lations. State Medicaid programs may use
either the model certificate below that is
designated for Medicaid programs, or the
model certificate in the proposed rules that
is so designated and includes an additional
paragraph on FMLA.
6
In the report entitled “PRIVATE HEALTH INSURANCE: Progress And Challenges in Implementing 1996 Federal Standards” (GAO/HEHS–99–100, May 12, 1999)the GAO recommended
that the Departments revise the model certificate of creditable health plancoverage to more explicitly inform consumers of their new rights under HIPAA. At a minimum, the GAO recom-
mended that the certificate of creditable coverage should inform consumers about appropriate contacts for additional information about HIPAA and highlight key provisions and restrictions,
including (1) the limits on preexisting condition exclusion periods and the guaranteed renewability of all healthcoverage; (2) the reduction or elimination of preexisting condition exclusion
periods for employees changing jobs; (3) the prohibition against excludingan individual from an employer health plan on the basis of health status; and (4) the guarantee of access to insurance
products for certain individuals losing group health coverage and the restrictions placed on that guarantee.
February 22, 20055642005–8 I.R.B.

CERTIFICATE OF GROUP HEALTH PLAN COVERAGE
1. Date of this certificate:
7. For further information, call:
2. Name of group health plan:
3. Name of participant:
8. If the individual(s) identified in line 5 has (have) at
least 18 months of creditable coverage (disregarding
periods of coverage before a 63-day break), check here
and skip lines 9 and 10:
4. Identification number of participant:9. Date waiting period or affiliation period (if any)
began:
5. Name of individuals to whom this certificate applies:10. Date coverage began:
11. Date cov
erage ended (or if coverage has not ended,
enter “cont
inuing”):
6. Name, address, and telephone number of plan
administrator or issuer responsible for providing this
certificate:
[Note: separate certificates will be furnished if information is not identical for the participant and each beneficiary.]
Statement
of HIPAA Portability Rights
IMPORTANT — KEEP THIS CERTIFICATE.This certificate is evidence of your coverage under this plan. Under a federal
law known as HIPAA, you may need evidence of your coverage to reduce a preexisting condition exclusion period under
another plan, to help you get special enrollment in another plan,or to get certain types of individual health coverage even if
you have health problems.
P
reexistingconditionexclusions.Some group health plans restrict coverage for medical conditions present before an
individual’s enrollment. These restrictions are known as “preexisting condition exclusions.” A preexisting condition exclusion
can apply only to conditions for which medical advice, diagnosis, care, or treatmentwas recommended or received within the 6
months before your “enrollment date.” Your enrollment date is your first day of coverage under the plan, or, if there is a waiting
period, the first day of your waiting period (typically, your first day of work). In addition, a preexisting condition exclusion
cannot last for more than 12 months after your enrollment date (18 months if you are a late enrollee). Finally, a preexisting
condition exclusion cannot apply to pregnancy and cannot apply to a child who is enrolled in health coverage within 30 days
after birth, adoption,or placement for adoption.
If a pla
n imposes a preexisting condition exclusion, the length ofthe exclusion must be reduced by the amount of your prior
credit
able coverage. Most health coverage is creditable coverage, including group health plan coverage, COBRA continuation
covera
ge, coverage under an individual health policy, Medicare, Medicaid, State Children’s Health Insurance Program (SCHIP),
and cov
erage through high-risk pools and the Peace Corps. Not all forms of creditable coverage are required toprovide certificates
like t
his one. If you do not receive a certificate for pastcoverage, talk to your new plan administrator.
You can add up any creditable coverage youhave,includingthecoverageshownonthis certificate. However, if at any time
you went for 63 days or more without any coverage (called a break in coverage) a plan may nothave to count the coverage
you had before the break.
Therefore, once your coverage ends, you should try to obtain alternative coverage as soon as possible to avoid a 63-day
break. You may use this certificate as evidence of your creditable coverage to reduce the length of any preexisting
condition exclusion if you enroll in another plan.
R
igh
ttogetspecialenrollmentinanotherplan.Under HIPAA, if you lose your group health plan coverage, you may be able
to ge
t into another group health plan for which you are eligible (such as a spouse’s plan), even if the plan generally does not
acce
pt late enrollees, if you request enrollment within 30 days. (Additional special enrollment rights are triggered by marriage,
bir
th, adoption, and placement for adoption.)
Therefore, once your coverage ends, if you are eligible for coverage in another plan (such as a spouse’s plan), you should
request special enrollment as soon as possible.
2005–8 I.R.B.565February 22, 2005

CERTIFICATE OF MEDICAID COVERAGE
1. Date of this certificate:
7. For further information, call:
2. Name of state Medicaid program:
3. Name of recipient:
8. If the individual(s) identified in line 5 has (have) at
least 18 months of creditable coverage (disregarding
periods of coverage before a 63-day break), check here
and skip line 9:
4. Identification number of recipient:9. Date coverage began:
5. Name of individuals to whom this certificate applies:10. Date coverage ended (or if coverage has not ended,
enter “continuing”):
6. Name, address, and telephone number of state
Medicaid agency responsible for providing this
certificate:
[Note: separate certificates will be furnished if information is not identical for the recipient and each dependent.]
Statement of HIPAA Portability Rights
IMPORTANT — KEEP THIS CERTIFICATE.This certificate is evidence of your coverage under this state Medicaid
program. Under a federal law known as HIPAA, you may need evidence of your coverage to reduce a preexisting condition
exclusion period under a group health plan, to help you get special enrollment ina group health plan, or to get certain types of
individual health coverage even if you have health problems.
P
reexistingconditionexclusions.Some group health plans restrict coverage for medical conditions present before an
individual’s enrollment. These restrictions are known as “preexisting condition exclusions.” A preexisting condition exclusion
can apply only to conditions for which medical advice, diagnosis, care, or treatmentwas recommended or received within the 6
months before your “enrollment date.” Your enrollment date is your first day of coverage under the plan, or, if there is a waiting
period, the first day of your waiting period (typically, your first day of work). In addition, a preexisting condition exclusion
cannot last for more than 12 months after your enrollment date (18 months if you are a late enrollee). Finally, a preexisting
condition exclusion cannot apply to pregnancy and cannot apply to a child who is enrolled in health coverage within 30 days
after birth, adoption,or placement for adoption.
If a plan imposes a preexisting condition exclusion, the length of the exclusion must be reduced by the amount of your prior
creditable coverage. Most health coverage is creditable coverage, including group health plan coverage, COBRA continuation
coverage, coverage under an individual health policy, Medicare,Medicaid, State Children’s Health Insurance Program (SCHIP),
and coverage through high-risk pools and the Peace Corps. Not all forms of creditable coverage are required toprovide certificates
like this one. If you do not receive a certificate for past coverage, talk to your new plan administrator.
You can add up any creditable coverage youhave,includingthecoverageshownonthis certificate. However, if at any time
you went for 63 days or more without any coverage (called a break in coverage) a plan may nothave to count the coverage
you had before the break.
Therefore, once your coverage ends, you should try to obtain alternative coverage as soon as possible to avoid a 63-day
break. You may use this certificate as evidence of your creditable coverage to reduce the length of any preexisting condition
exclusion if you enroll in a group health plan.
R
ighttogetspecialenrollmentinanotherplan.Under HIPAA, if you lose your group health plan coverage, you may be able
to get into another group health plan for which you are eligible (such as a spouse’s plan), even if the plan generally does not
accept late enrollees, if you request enrollment within 30 days. (Additional special enrollment rights are triggered by marriage,
birth, adoption, and placement for adoption.)
Therefore, once your coverage in a group health plan ends, if you are eligible for coverage in another plan (such as
a spouse’s plan), you should request special enrollment as soon as possible.
2005–8 I.R.B.567February 22, 2005

Prohibitionagainstdiscriminationbasedonahealthfactor.Under HIPAA, a group health plan may not keep you (or your
dependents) out of the plan based on anything related to your health. Also, a group health plan may not charge you (or your
dependents) more for coverage, based on health, than the amount charged a similarly situated individual.
R
ighttoindividualhealthcoverage.Under HIPAA, if you are an “eligible individual,” you have a right to buy certain individual
health policies (or in some states, to buy coverage through a high-risk pool) without a preexisting condition exclusion. To be an
eligible individual, you must meet the following requirements:
•
You have had coverage for at least 18 months without a break in coverage of 63 days or more;
•
Your most recent coverage was under a group health plan;
•
Your group coverage was not terminated because of fraud or nonpayment of premiums;
•
You are not eligible for COBRA continuation coverage or youhave exhausted your COBRA benefits (or continuation
coverage under a similar state provision); and
•
You are not eligible for another group health plan, Medicare, or Medicaid, and do not have any other health insurance
coverage.
The right to buy individual coverage is the same whether you are laid off, fired, or quit your job.
Therefore, if you are interested in obtaining individual coverage and you meet the other criteria to be an eligible individual,
you should apply for this coverage as soon as possible to avoid losing your eligible individual status due to a 63-day break.
S
tateflexibility.This certificate describes minimum HIPAA protections under federal law.States may require insurers and
HMOs to provide additional protections to individuals in that state.
F
ormoreinformation.If you have questions about your HIPAA rights, you may contact your state insurance department or the
U.S. Department of Labor, Employee Benefits Security Administration (EBSA) toll-free at 1–866–444–3272 (for free HIPAA
publications ask for publications concerning changes in health care laws). You may also contact the CMS publication hotline at
1–800–633–4227 (ask for “Protecting Your Health Insurance Coverage”). These publications and other useful information are
also available on the Internet at:http://www.dol.gov/ebsaorhttp://www.cms.hhs.gov/hipaa1.
Procedure for requesting certificates
The April 1997 interim rules require
plans and health insurance issuers to estab-
lish a procedure for individuals to request
and receive certificates of creditable cov-
erage. The Departments have received re-
quests to clarify whether such procedures
need to be in writing. These final regula-
tions clarify that the procedures need to be
in writing, helping to ensure that individu-
als are aware of their right to request a cer-
tificate and how to make the request.
In addition, the Departments have be-
come aware that some plans and issuers
believe they are not required to provide a
certificate to individuals who request one
while their coverage is still in effect. This
requirement exists under the April 1997 in-
terim rules. However, due to these ques-
tions being raised, the final regulations
more explicitly state this requirement.
Dependent coverage information
Under HIPAA, plans and health in-
surance issuers are required to issue cer-
tificates of creditable coverage (automat-
ically, and upon request) to dependents
who are or were covered under a group
health plan. In response to comments,
and in order to allow entities responsi-
ble for issuing certificates adequate time
to modify their data collection systems,
the Departments established a transitional
rule in the April 1997 interim rules for pro-
viding dependent coverage information.
Under this transitional rule, a group health
plan or health insurance issuer that, after
having made reasonable efforts, could not
provide a certificate of creditable cov-
erage for a dependent could satisfy the
requirements for providing a certificate
to the dependent by providing the name
of the participant covered by the group
health plan or health insurance issuer and
specifying that the type of coverage de-
scribed in the certificate was for dependent
coverage (for example, family coverage
or employee-plus-spouse coverage). This
transitional rule was effective through
June 30, 1998.
Under these final regulations, the tran-
sitional rule is no longer in effect and de-
pendents are entitled to receive individual-
ized certificates of creditable coverage un-
der the same circumstances as other indi-
viduals. As with the April 1997 interim
rules, these final regulations permit a sin-
gle certificate of creditable coverage to be
provided with respect to both a participant
and the participant’s dependents if the in-
formation is identical for each individual.
In addition, these final regulations retain
the provisions of the April 1997 interim
rules permitting the combining of informa-
tion for families. As a result, in situations
where coverage information is not identi-
cal for a participant and the participant’s
dependents, these final regulations allow
certificates for all individuals to be pro-
vided on one form if the form provides all
the required information for each individ-
ual and separately states the information
that is not identical.
Special rules for certain entities
Section 2791(a)(3) of the PHS Act pro-
vides that certain entities not otherwise
subject to HIPAA’s requirements are to
comply with the statutory certification of
coverage requirements that apply to group
health plans, with respect to providing cer-
tificates of creditable coverage for Medi-
care, Medicaid, TRICARE, and medical
care programs provided through the In-
dian Health Service or a tribal organiza-
tion. These rules further establish that such
February 22, 20055682005–8 I.R.B.

entities are required to comply with the
general statutory requirement to provide
certificates. However, the Departments
recognize that these programs operate in
a different manner than do private em-
ployment-based group health plans, non-
federal governmental group health plans,
and health insurance issuers. In addition,
the populations served by these programs
are unique. Therefore, it may be appro-
priate to allow these programs to imple-
ment the certification process in a man-
ner that addresses these unique character-
istics and better serves the individuals cov-
ered by these programs, including requir-
ing different information elements (for ex-
ample, see the above model certificate of
creditable coverage for use by state Med-
icaid programs). HHS will coordinate with
the appropriate entities responsible for is-
suing these certificates and will issue sepa-
rate guidance to these entities on how they
must comply with the certification require-
ments.
5.Special Enrollment Periods — 26
CFR 54.9801–6, 29 CFR 2590.701–6,
45 CFR 146.117
Under HIPAA, the April 1997 interim
rules, and these final regulations, a group
health plan and a health insurance issuer
offering group health insurance coverage
are required to provide for special enroll-
ment periods during which certain individ-
uals are allowed to enroll (without hav-
ing to wait until a late enrollment opportu-
nity and regardless of whether the plan of-
fers late enrollment). A special enrollment
right can arise if a person with other health
coverage loses eligibility for that coverage
or employer contributions toward the other
coverage cease, or if a person becomes a
dependent through marriage, birth, adop-
tion, or placement for adoption.
In order to qualify for special enroll-
ment, an individual must be otherwise el-
igible for coverage under the plan. Being
otherwise eligible for coverage means hav-
ing met the plan’s substantive eligibility
requirements (such as satisfying any wait-
ingperiod,beinginaneligiblejobclassi-
fication, or working full time), regardless
of whether the individual previously sat-
isfied the plan’s procedural requirements
for becoming enrolled (such as complet-
ing written application materials or provid-
ing them to the plan within a specified time
frame) during any enrollment opportunity
prior to special enrollment.
The special enrollment rules have been
reorganized and clarified. As discussed
below, the special enrollment rules have
also been modified in response to com-
ments.
Loss of eligibility for other coverage
A special enrollment right resulting
from loss of eligibility for other coverage
is available to employees and their depen-
dents who meet certain requirements. As
under the April 1997 interim rules, the
employee or dependent must otherwise be
eligible for coverage under the terms of
the plan. When coverage was previously
declined, the employee or dependent must
have been covered under another group
health plan or must have had other health
insurance coverage. The plan can require
that, when coverage in the plan was pre-
viously declined, the employee must have
declared in writing that the reason was
other coverage, in which case the plan
must at that time have provided notice
of this requirement and the consequences
of the employee’s failure to provide the
statement.
These regulations include an example
that clarifies that the initial opportunity for
enrollment (generally provided when em-
ployment begins) is not the only time when
an individual with other health coverage
may decline coverage for purposes of sat-
isfying the prerequisites to special enroll-
ment upon loss of other coverage. (Other
examples discussed below also illustrate
this principle.) An individual who initially
did not enroll for coverage without having
other health coverage might later be eligi-
ble for special enrollment. This could oc-
cur if, after subsequently enrolling in other
coverage, the individual had an opportu-
nity for late enrollment or special enroll-
ment under the plan, but again chose not
to enroll.
These final regulations, like the April
1997 interim rules, contain a list of situ-
ations when an individual loses eligibility
for other coverage. While the list is not ex-
haustive, it has nonetheless been expanded
in these final regulations to address situ-
ations that have prompted frequent ques-
tions. Thus, these regulations clarify that a
loss of eligibility for coverage occurs, in
the case of individual coverage provided
through an HMO, when an individual no
longer resides, lives, or works in the ser-
vice area of the HMO (whether or not
within the choice of the individual) and the
HMO does not provide coverage for that
reason. In the case of group coverage pro-
vided through an HMO, the same rule ap-
plies, provided that there is no other cover-
age under the plan available to the individ-
ual. For purposes of this rule, the HMO
service area is typically defined by state
law. In addition, the regulations clarify
that a loss of eligibility for coverage oc-
curs due to the cessation of dependent sta-
tus. For example, a child who “ages out”
of dependent coverage — who attains an
age in excess of the maximum age for cov-
erage of a dependent child — incurs a loss
of eligibility for coverage for purposes of
special enrollment.
The regulations alsoclarify that a loss
of eligibility for coverage occurs when a
plan no longer offers any benefits to a class
of similarly situated individuals. Thus, if
a plan terminated health coverage for all
part-time workers, the part-time workers
incur a loss of eligibility for coverage, even
if the plan continues to provide coverage
to other employees. An example in the fi-
nal regulations also illustrates how the loss
of eligibility rule applies to a plan that ter-
minates a benefit package option. Simi-
larly, if an issuer providing one of the op-
tions ceases to operate in the group mar-
ket, thus terminating one of the options of-
fered by the plan, the individuals formerly
in the terminated option would incur a loss
of eligibility for coverage for purposes of
special enrollment, unless the plan other-
wise provided a current right to enroll in al-
ternative health coverage. In addition, the
final regulations clarify that an employee
whoisalreadyenrolledinabenefitpack-
age may enroll in another benefit package
under the plan if a dependent of that em-
ployee has a special enrollment right in the
plan because the dependent lost eligibility
for other coverage.
These regulations clarify that a loss of
eligibility for coverage is still considered
to exist even if there are subsequent cover-
age opportunities. As under the April 1997
interim rules, an individual does not have
to elect COBRA continuation coverage or
exercise similar continuation rights in or-
der to preserve the right to special enroll-
ment. Moreover, a special enrollment right
exists even if an individual who lost cover-
2005–8 I.R.B.569February 22, 2005

age elects COBRA continuation coverage.
In that case, if an individual declines spe-
cial enrollment, and instead elects and ex-
hausts COBRA continuation coverage, the
individual has a second special enrollment
right upon exhausting the COBRA contin-
uation coverage.
In addition, as under the statute and the
April 1997 interim rules, even if there is
no loss of eligibility for coverage, a spe-
cial enrollment rightcan result when em-
ployer contributions towards other cover-
age terminate. This is the case even if an
individual continues the other coverage by
paying the amount previously paid by the
employer.
Lifetime benefit limits
Comments asked how the special en-
rollment rules apply when an individual
reaches a lifetime limit on all benefits un-
der a plan. The regulations clarify that
where an individual has a claim denied due
to the operation of a lifetime limit on all
benefits, there is a loss of eligibility for
coverage for special enrollment purposes.
In this regard, an individual has a special
enrollment right when a claim that would
exceed a lifetime limit on all benefits is in-
curred, and the right continues at least until
30 days after the earliest date that a claim is
denied due to the operation of the lifetime
limit. Accordingly, because individuals
who are keeping track of claims in relation
to a lifetime limit can request enrollment
immediately (after the claim is incurred,
but before it is denied by the plan), the pe-
riod for requesting special enrollment can
be longer than 30 days. (Timeframes for
providing certificates of creditable cover-
age and determining when COBRA is ex-
hausted for individuals who have reached
a lifetime limit on all benefits are set forth
elsewhere in these final regulations, un-
der the certificate andthe definition pro-
visions, respectively.)
Tolling of the special enrollment period
Proposed rules, published elsewhere in
this issue of the Bulletin, would toll the be-
ginning of the 30-day period for request-
ing special enrollmentuntil a certificate of
creditable coverage is provided to the per-
son losing coverage, up to a maximum of
44 days of tolling. This tolling rule would
be in the paragraph reserved for special en-
rollment procedures in these final regula-
tions.
Dependent special enrollment
Comments asked for clarification of the
interaction of coverage for children under
a State Children’s Health Insurance Pro-
gram (S-CHIP) and special enrollment. In
particular, it was asked whether a child
would have a right to special enrollment in
a group health plan if the child becomes el-
igible for benefitsunder S-CHIP and the
child is otherwise eligible for dependent
coverage under the plan. This situation
would arise if a state creates a children’s
health program that provides payments to
a parent to cover the increased cost of en-
rolling a dependent child in the parent’s
employer’s group health. However, with-
out a special enrollment right, the parent
might not be able to take advantage of the
program until the next late enrollment op-
portunity, if the plan allows late enrollment
at all. The statutory language of HIPAA,
however, only provides special enrollment
if there is loss of eligibility for other cov-
erage, loss of employer contributions, or
addition of a new dependent to the em-
ployee’s family. Becoming eligible under
a health program such as S-CHIP does not
fall under any of these categories.
7
Under these final regulations, as under
the April 1997 interim rules, the special
enrollment of dependents is subject to the
plan’s general eligibility requirements.
For example, a plan may require an em-
ployee to remain enrolled, or to special
enroll, in order to special enroll the em-
ployee’s dependent. However, a plan’s
general eligibility requirements cannot
prevent the application of a special en-
rollment right. For example, a plan may
not deny special enrollment to an other-
wise eligible dependent merely because
the individual became a dependent of the
participant after the participant’s first day
of coverage under the plan.
Modification of special enrollment
procedures
Under proposed rules, published else-
whereinthisissueoftheBulletin,more
detailed procedures are described for how
plans and issuers would have to enroll in-
dividuals requesting special enrollment.
When coverage begins under special
enrollment
Where the special enrollment right re-
sults from marriage or a loss of eligibil-
ity, coverage generally begins no later than
the first day of the first calendar month
after the date the plan or issuer receives
the request for special enrollment. 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 place-
ment for adoption.
Clarification of special enrollment during
a late enrollment opportunity
The April 1997 interim rules provided
a definition of the termspecial enrollment
date. The purpose of the definition and
accompanying examples was to illustrate
that if an individual who qualified for spe-
cial enrollment enrolled during a coincid-
ing late enrollment opportunity, the indi-
vidual could not be treated as a late en-
rollee. The final regulations eliminate the
termspecial enrollment dateand clarify
this issue by providing that if an individual
requests enrollment while the individual is
entitled to special enrollment, the individ-
ual is a special enrollee, even if the request
coincides with a late enrollment opportu-
nity under the plan. Thus, the individual
cannot be treated as a late enrollee.
Notice of special enrollment
The preamble to the April 1997 interim
rules stated that a plan must provide a de-
scription of the special enrollment rights to
anyone who declines coverage. However,
the text of the April 1997 interim rules re-
quired the notice to be provided to all eli-
gible employees. Even employees who en-
roll may need to avail themselves of their
special enrollment rights in the future, ei-
ther for a spouse or other dependent, or if
they lose the present coverage. Thus, these
regulations reiterate the requirement in the
April 1997 interim rules that a plan must
7
Nonetheless, in addition to the dependent special enrollment rights underHIPAA, for plans subject to ERISA, section 609 of ERISA imposes additionalrequirements on group health plans
to provide benefits to certain children, including in cases where a qualified medical child support order applies, as well as in cases of adoption. HIPAA does not prevent states from imposing
similar requirements on nonfederal governmental plans.
February 22, 20055702005–8 I.R.B.

provide all employees (those who enroll as
well as those who decline enrollment) with
a notice of special enrollment at or before
the time the employee is initially offered
the opportunity to enroll in the plan. The
regulation also provides model language
that plans can use to satisfy this require-
ment.
Treatment of special enrollees
HIPAA provides that a late enrollee
does not include an individual who enrolls
when first eligible or who enrolls during
a special enrollment period. These regu-
lations further clarify that individuals who
enroll during a special enrollment period
must generally be treated the same as in-
dividuals who enroll when first eligible.
That is, relative to similarly situated in-
dividuals who enroll when first eligible,
special enrollees must be offered all the
same benefit packages, cannot be required
to pay more for coverage, and cannot be
subject to a longer preexisting condition
exclusion.
6.HMO Affiliation Period as an
Alternative to a Preexisting Condition
Exclusion — 29 CFR 2590.701–7,
45 CFR 146.119
Under HIPAA, the April 1997 interim
rules, and these final regulations, a group
health plan that offers health insurance
coverage through an HMO, or an HMO
that offers health insurance coverage in
connection with a group health plan, may
impose an affiliation period under cer-
tain conditions. An affiliation period is
aperiodoftimethatmustexpirebefore
health insurance coverage provided by an
HMO becomes effective and during which
time the HMO is not required to provide
benefits. Under these final regulations, an
affiliation period can be imposed if each
of the following requirements is satisfied:
1. No preexisting condition exclusion is
imposed with respect to any cover-
age offered by the HMO in connection
with the particular group health plan.
2. No premium is charged to a partici-
pant or beneficiary for the affiliation
period.
3. The affiliation period for the HMO
coverage is imposed consistent with
the requirements of the HIPAA
nondiscrimination provisions.
4. The affiliation period does not exceed
2 months (or 3 months for a late en-
rollee).
5. The affiliation period begins on the
enrollment date (or, in the case of a
late enrollee, the affiliation period be-
gins on the day that would be the first
day of coverage, but for the affiliation
period).
6. The affiliation period for enrollment
in the HMO under a plan runs concur-
rently with any waiting period.
The requirements related to HMO affil-
iation periods contained in these final reg-
ulations clarify that agroup health plan of-
fering health insurance through an HMO
or an HMO that offers health insurance
coverage in connection with a group health
plan may impose different affiliation peri-
ods, so long as the affiliation period com-
plies with the requirements of the HIPAA
nondiscrimination provisions. To illus-
trate this clarification, these final regula-
tions contain an example where a group
health plan that provides benefits through
an HMO imposes an affiliation period with
respect to salaried employees but does not
impose an affiliation period with respect
to hourly employees. This example il-
lustrates that it is permissible to impose
an affiliation period on salaried employ-
ees but not hourly employees, so long as
treating these two groups differently com-
plies with the requirements of the HIPAA
nondiscrimination provisions.
The April 1997 interim rules and these
final regulations specify that the affilia-
tion period begins on the enrollment date
(which is the first day of coverage under
the plan, or if there is a waiting period for
coverage under the plan, the first day of
the waiting period), not when coverage un-
der a particular benefit package option be-
gins. Accordingly, an example in these fi-
nal regulations illustrates that if a group
health plan offers multiple benefit pack-
age options simultaneously, the HMO can-
not impose an affiliation period on a plan
participant who later switches to the HMO
benefit package option, assuming the pe-
riod of time that has elapsed since the en-
rollment date (during which the participant
was covered under the first benefit pack-
age option) exceeds the duration of the
HMO affiliation period. Moreover, these
regulations clarify that, in the case of a late
enrollee, the affiliation period begins on
the day that would be the first day of cov-
erage, but for the affiliation period.
The April 1997 interim rules and these
final regulations allow an HMO to use
alternative methodsin lieu of an affilia-
tion period to address adverse selection, as
approved by the state insurance commis-
sioner or other official designated to regu-
late HMOs. Because an affiliation period
may be imposed only if no preexisting con-
dition exclusion is imposed, an alternative
to an affiliation period may not encompass
an arrangement that is in the nature of a
preexisting condition exclusion.
7.Interaction with the Family and
Medical Leave Act — 26 CFR 54.9801–7,
29 CFR 701–8, 45 CFR 146.120
This section has been reserved. For
proposed rules on the interaction with the
Family and Medical Leave Act, see the
Departments’ notice of proposed rulemak-
ing, published elsewhere in this issue of the
Bulletin.
8.Special rules; Excepted Plans and
Excepted Benefits — 26 CFR 54.9831–1,
29 CFR 2590.732, 45 CFR 146.145
This section of the final regulations
contains special rules that apply for Chap-
ter 100 of the Code, Part 7 of Subtitle B
of Title I of ERISA (Part 7 of ERISA),
and Title XXVII of the PHS Act. For ease
in applying these rules, the definition of
group health planhas been moved from
the definitions section to this section (and
the reference to employees in that defi-
nition has been modified to clarify that
the term includes both current and for-
mer employees). New rules have been
added for defining limited scope dental
and vision benefits and for determining
the extent to which benefits provided un-
der a health flexible spending arrangement
are excepted benefits. Special rules for
partnerships have also been clarified.
Determination of the number of plans
A paragraph has been reserved in the fi-
nal regulation for determining the number
of plans an employer or employee organ-
ization maintains. For proposed rules on
this topic, see the Departments’ notice of
proposed rulemaking, published elsewhere
in this issue of the Bulletin.
2005–8 I.R.B.571February 22, 2005

Coverage provided by an employer
through two or more individual policies
If an employer provides coverage to its
employees through two or more individ-
ual policies, the coverage may be consid-
ered coverage offered in connection with
a group health plan and, therefore, sub-
ject to the group market provisions under
HIPAA. A determination of whether there
is a group health plan depends on the par-
ticular facts and circumstances surround-
ing the extent of the employer’s involve-
ment. For example, one significant fac-
tor in establishing whether there is a group
health plan is the extent to which the em-
ployer makes contributions to health in-
surance premiums. The fact that health
insurance coverage is provided through a
contract regulated under state law as indi-
vidual health insurance coverage does not
necessarily prevent the coverage from be-
ing treated for HIPAA purposes as cover-
age sold in the group market. Similarly,
the policy that provides the coverage does
not have to be considered a “group” pol-
icy under state law in order for the group
market requirements to apply. Further, the
mere fact that an employer forwards em-
ployee payroll deductions to a health insur-
ance issuer will not, alone, cause the cov-
erage to become group health plan cover-
age. However, the employer need not be a
party to the insurance policy, or arrange or
pay for it directly, in order for its coverage
to be considered group health plan cover-
age. For example, if an employer’s actions
appear to endorse one or more policies of-
fered by a health insurance issuer (or is-
suers), the coverage might be considered
group health plan coverage.
General exception for certain small group
health plans
Under HIPAA, the April 1997 interim
rules, and these final regulations, the
group market requirements do not apply
to a group health plan or to group health
insurance coverage offered in connection
with a 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. As noted in the
preamble to the April 1997 interim rules,
a state may apply some or all of the group
market provisions in the PHS Act to health
insurance issuers in connection with group
health plans with fewer than two partic-
ipants who are current employees on the
first day of the plan year. In this case,
to the extent the state applies its group
market provisions to such insurance, the
insurance would not be subject to the in-
dividual market requirements.
In the event a group health plan has two
or more participants who are current em-
ployees on the first day of the plan year
but the number of participants who are cur-
rent employees drops below two during the
plan year, under these final regulations the
group market requirements continue to ap-
ply to the group health plan for the duration
of the plan year.
To the extent a health insurance is-
suer offers group health insurance that
is subject to HIPAA’s group health in-
surance requirements, HIPAA generally
prohibits the issuer from terminating or
failing to offer to renew the insurance (see
45 CFR 146.152). With respect to very
small employers, whether group health
insurance is subject to the requirements of
45 CFR 146.152 is generally determined
by whether the group health plan has two
or more participants who are current em-
ployees on the first day of the plan year.
If so, the issuer generally must provide
such coverage throughout the plan year,
and is prohibited from terminating cover-
age in the midst of that plan year merely
because the number of current-employee
participants drops below two.
8
However,
an issuer is permitted to terminate an em-
ployer’s coverage in the midst of a plan
year if the employer fails to satisfy any
valid plan participation requirements in
the midst of that plan year (see 45 CFR
146.152(a)(3)), including instances where
such failure causes the number of cur-
rent-employee participants to drop below
two.
Excepted benefits
Under HIPAA, the April 1997 interim
rules, and these final regulations, certain
benefits are excepted from HIPAA in all
circumstances, including coverage only
for accident (including accidental death
and dismemberment); disability income
coverage; liability insurance, including
general liability insurance and automotive
liability insurance; coverage issued as a
supplement to liability insurance; work-
ers’ compensation or similar coverage;
automobile medical payment insurance;
credit-only insurance (for example, mort-
gage insurance); and coverage for on-site
medical clinics.
Limited excepted benefits
Under HIPAA, the April 1997 interim
rules, and these final regulations, limited
scope dental benefits, limited scope vi-
sion benefits, and long-term care benefits
9
are excepted if they are provided under a
separate policy, certificate, or contract of
insurance, or are otherwise not an inte-
gral part of a plan that is subject to these
regulations. Benefits are not an integral
part of such a plan if participants have the
right not to elect coverage for the bene-
fits, and if participants who elect such cov-
erage must pay an additional premium or
contribution for it. These regulations clar-
ify that whether limited scope dental bene-
fits, limited scope vision benefits, or long-
term care benefits are provided through a
plan that is subject to these regulations, or
through a separate plan, is irrelevant to de-
termining whether such benefits are an in-
tegral part of a plan that is subject to these
regulations. Thus, if participants can de-
cline coverage for the limited-scope bene-
fits, and those electing such coverage must
pay an additional premium or contribution,
the limited scope benefits could be consid-
ered not to be an integral part of a plan that
is subject to these regulations, even if such
benefits are not provided through that plan.
Limited scope vision and dental benefits
These regulations definelimited scope
dental benefitsas benefits substantially all
of which are for treatment of the mouth (in-
cluding any organ or structure within the
mouth). These regulations also definelim-
ited scope vision benefitsas benefits sub-
stantially all of which are for treatment of
the eye. Thus, if benefits meet the defini-
tion of limited scope dental benefits or lim-
ited scope vision benefits, they will be ex-
8
See CMS Program Memorandum No. 99–03,Group Size Issues Under Title XXVII of the Public Health Service Act, September 1999.
9
Long term care benefits are defined as benefits that are either subject to state long-term care insurance laws; that meet the qualifications of section 7702B(c)(1) or 7702B(b) of the Internal
Revenue Code; or are based on cognitive impairment or loss of functional capacity thatis expected to be chronic.
February 22, 20055722005–8 I.R.B.

cepted benefits if they satisfy the require-
ments set forth in these regulations.
These definitions were added in re-
sponse to questions raised in comments
about the prior guidance. The April 1997
interim rules did not define these terms.
The preamble to the April 1997 interim
rules suggested that the termlimited scope
dental benefitstypically does not include
medical services, such as those procedures
associated with oral cancer or with a mouth
injury that results in broken, displaced, or
lost teeth. Similarly, the preamble to the
April 1997 interim rules suggested that
the termlimited scope vision benefitsdoes
not include benefits for such ophthalmo-
logical services as treatment of an eye
disease (such as glaucoma or a bacterial
eye infection) or an eye injury. Comments
indicated that typically most independent
dental and vision coverages include ben-
efits for these types of medical services.
Accordingly, these regulations include
definitions of limited scope dental bene-
fits and limited scope vision benefits that
reflect this market reality.
Health FSAs
Some comments asked about the extent
to which health flexible spending arrange-
ments (FSAs) are subject to these regula-
tions. A health FSA generally is a benefit
program that provides employees with
coverage under which specified, incurred
expenses may be reimbursed (subject to
reimbursement maximums and any other
reasonable conditions) and under which
the maximum amount of reimbursement
that is reasonably available to a partici-
pant for a period of coverage is not sub-
stantially in excess of the total premium
(including both employee-paid and em-
ployer-paid portions of the premium) for
the participant’s coverage. Coverage and
reimbursements provided to an individual
under a group health plan that is a health
FSA and that conforms to the generally ap-
plicable rules for accident or health plans
qualify for the same tax-favored treatment
that generally is extended to coverage and
reimbursements under employer-provided
accident or health plans. Health FSA re-
imbursements typically provide coverage
for medical care expenses not otherwise
covered by the employer’s primary group
health plan. A healthFSA is permitted to
operate under a cafeteria plan described in
section 125 of the Code. Pursuant to the
rules of section 125, an employee can elect
to reduce the employee’s salary in order to
pay for health FSA coverage without the
employee having to include that portion of
the salary in gross income. Commonly, the
maximum benefit payable under a health
FSA for any year is equal to the amount of
the employee’s salary reduction election
for the year, plus any additional employer
contribution for the year.
The April 1997 interim rules did not ad-
dress the extent to which health FSAs qual-
ify as excepted benefits. On December
29, 1997, a clarification to the April 1997
interim rules was published that specified
the circumstances under which a health
FSA qualifies as excepted benefits. (62 FR
67688) That clarification stated that bene-
fits under a health FSA are treated as ex-
cepted benefits if the FSA meets certain
requirements. Specifically, FSA benefits
are treated as excepted benefits if the max-
imum benefit payable for the employee un-
der the FSA for the year does not exceed
two times the employee’s salary reduction
election under the FSA for the year (or,
if greater, the amount of the employee’s
salary reduction election under the FSA for
the year, plus $500). In addition, the em-
ployee must have other coverage available
under a group health plan of the employer
for the year, and that other coverage can-
not be limited to benefits that are excepted
benefits.
Based on section 9832(c)(2)(C) of the
Code, section 733(c)(2)(C) of ERISA, and
section 2791(c)(2)(C) of the PHS Act,
these regulations adopt the December 29,
1997 guidance with some additional clar-
ifications. Specifically, these regulations
clarify that to be considered excepted
benefits, a health FSA must meet the defi-
nition of a health FSA in section 106(c)(2)
of the Code. Also, these regulations clarify
that other group health plan coverage not
limited to excepted benefits must be made
available for the year to the class of par-
ticipants by reason of their employment.
Similarly, the maximum amount payable
to any participant in the class for the year
is the amount to consider when determin-
ing whether the maximum amount payable
under the FSA for the year complies with
the limit specified in the previous para-
graph. Additionally, these regulations
clarify that an employer credit under a
health FSA that an employee can elect to
receive as taxable income is considered an
employee salary reduction election. How-
ever, if the employee cannot receive the
employer credit as taxable income (that is,
the credit is lost unless the employee uses
the amount for nontaxable benefits under
a cafeteria plan), then the amount is not
considered an employee salary reduction
election.
Application to HSAs and HDHPs
Section 1201 of the Medicare Pre-
scription Drug, Improvement, and Mod-
ernization Act of 2003, Public Law No.
108–173, added section 223 to the Internal
Revenue Code to permit individuals to es-
tablish Health Savings Accounts (HSAs).
HSAs are established to receive tax-fa-
vored contributions and amounts in an
HSA may be used to pay or reimburse
qualified medical expenses. Questions
have arisen concerning the application of
HIPAA to HSAs.
In order to establish and contribute to
an HSA, an individual must be covered by
a High Deductible Health Plan (HDHP).
An HDHP is a health plan that satisfies
certain requirements with respect to de-
ductibles and out-of-pocket expenses. An
HDHP may be a group health plan spon-
sored by an employer or individual health
insurance coverage purchased in the indi-
vidual market. There is no provision in the
HIPAA rules that excludes an HDHP, by
virtue of qualifying as an HDHP, from the
respective HIPAA requirements for group
health plans or individual health insurance
coverage. Generally, employer-sponsored
HDHPs are employee welfare benefit
plans. See Department of Labor Field As-
sistance Bulletin 2004–01 (FAB 2004–01),
issued on April 7, 2004. Because an em-
ployer-sponsored HDHP provides medical
care, it is generally subject to the porta-
bility requirements of HIPAA and the
applicable regulations.
FAB 2004–01 concluded that HSAs,
in contrast to HDHPs, generally will not
constitute employee welfare benefit plans.
See Department of Labor Field Assistance
Bulletin 2004–01 (FAB 2004–01), issued
on April 7, 2004. Because HSAs are gen-
erally not employee welfare benefit plans,
the HIPAA portability requirements under
ERISA or the PHS Act generally will not
apply.
2005–8 I.R.B.573February 22, 2005

Moreover, the HIPAA portability re-
quirements generally are not relevant
for purposes of HSAs. Due to the rules
imposed by the Internal Revenue Code
with respect to HSAs, employers or HSA
trustees do not have discretion with re-
spect to the coverage provided by an HSA,
both with respect to what expenses qual-
ify for reimbursement as well as which
individuals’ expenses are eligible. For ex-
ample, expenses reimbursable by an HSA
cannot generally be restricted by the em-
ployer or HSA trustee. Under the statute
and administrativeguidance, any expense
incurred after an HSA is established is
eligible for reimbursement, without re-
striction by an employer contributing to
the HSA or trustee of the HSA. Thus,
as a practical matter, whether or not an
expense relates to a preexisting condition
cannot determine the reimbursement. As
such HSAs by design cannot impose a pre-
existing condition exclusion. Similarly,
due to comparability rules requiring uni-
form contributions to HSAs by employers,
employers and trustees generally cannot
use differing amounts of contributions to
impose a preexisting condition exclusion.
The eligibility for tax-free reimburse-
ment from an HSA is also determined
by statute; namely, the qualified medi-
cal expenses of the HSA owner and the
HSA owner’s dependents incurred after
the HSA is established may be reimbursed
on a tax-free basis by the HSA. Special
enrollment rules for dependent children
or spouses are not relevant because once
an HSA is established they are eligible
for tax-free reimbursements immediately.
With respect to special enrollment upon
loss of coverage, the rules for employer
contributions generally require that all
employees who are eligible for HSA
contributions and participating in the em-
ployer’s HDHP receive comparable HSA
contributions. Thus, the combination of
the comparability rules and the applica-
tion of the special enrollment rules to the
HDHP will generally ensure compliance
with respect to employer HSA contribu-
tions because once an employee is enrolled
in an employer-provided HDHP due to the
special enrollment rules, the employer
must make comparable contributions to
the employee’s HSA.
Indemnity insurance
Under HIPAA, the April 1997 interim
rules, and these final regulations, hospital
indemnity and other fixed-dollar indem-
nity insurance are excepted benefits if the
benefits are provided under a separate pol-
icy, certificate, or contract of insurance;
if there is no coordination of benefits be-
tween the provision of the benefits and
an exclusion of benefits under any group
health plan maintained by the same plan
sponsor; and if the benefits are paid with
respect to an event regardless of whether
benefits are provided with respect to the
event under any group health plan main-
tained by the same plan sponsor. These
regulations clarify that, for hospital indem-
nity or other fixed-dollar indemnity insur-
ance to qualify as excepted benefits, such
insurance must pay a fixed dollar amount
per day (or other period), regardless of the
amount of expenses incurred. An example
clarifies that if a policy provides benefits
only for hospital stays at a fixed percent-
age of hospital expenses up to a maximum
amount per day, the benefits are not ex-
cepted benefits. This is the result even if,
in practice, the policy pays the maximum
for every day of hospitalization.
Supplemental insurance
Under HIPAA, the April 1997 interim
rules, and these final regulations, Medi-
care supplemental health insurance (as de-
fined under section 1882(g)(1) of the So-
cial Security Act); coverage supplemen-
tal to TRICARE; and similar coverage that
is supplemental to a group health plan are
excepted benefits if they are provided un-
der a separate policy, certificate, or con-
tract of insurance. These regulations clar-
ify that, for coverage supplemental to a
group health plan to qualify as excepted
benefits, the coverage must be specifically
designed to fill gaps in primary coverage,
such as coinsurance or deductibles. Cover-
age that becomes secondary or supplemen-
tal only under a coordination-of-benefits
provision in the insurance contract or plan
documents does not qualify as excepted
supplemental benefits.
Treatment of partnerships
Any plan, fund, or program that is es-
tablished or maintained by a partnership
and that provides medical care to present
or former partners or their dependents, and
that otherwise would not be an employee
welfare benefit plan, is considered an em-
ployee welfare benefit plan that is a group
health plan under Part 7 of ERISA and
Title XXVII of the PHS Act.
10
As such,
the partnership is considered the employer
with respect to any partner. Participants
in the plan include individuals who are
partners of the partnership. Additionally,
with respect to group health plans main-
tained by self-employed individuals (un-
der which one or more employees are par-
ticipants), the self-employed individual is
considered a participant if this individual is
or may become eligible to receive a benefit
under the plan or if the individual’s bene-
ficiaries may be so eligible. These regu-
lations clarify that, for purposes of Part 7
of ERISA and Title XXVII of PHS Act, a
partner must be abona fidepartner in or-
dertobeconsideredanemployee,andthe
partnership is considered the employer of
a partner only if the partner is abona fide
partner. These final regulations also clar-
ify that whether an individual is abona fide
partner is determined based on all the rel-
evant facts and circumstances, including
whether the individual performs services
on behalf of the partnership.
Counting the average number of
employees
A paragraph has been reserved in the fi-
nal rules for determining the average num-
ber of employees employed by an em-
ployer for a year. For proposed rules on
this topic, see the Departments’ notice of
proposed rulemaking, published elsewhere
in this issue of the Bulletin.
C. Economic Impact and Paperwork
Burden
Summary — Department of Labor and
Department of Health and Human
Services
HIPAA’s group market portability pro-
visions, which include limitations on the
10
Such a plan, fund, or program is also considered a group healthplan under section 5000(b)(1) and Chapter 100 of the Code.
February 22, 20055742005–8 I.R.B.

scope and application of preexisting con-
dition exclusions, and special enrollment
rights, provide a minimum standard of
protection designed to increase access to
health coverage. The Departments crafted
these final regulations to secure these
protections, consistent with the intent of
Congress,andtodosoinamannerthatis
economically efficient.
The primary economic effects of
HIPAA’s portability provisions ensue
directly from the statute. These regula-
tions, by clarifying and securing HIPAA’s
statutory protections, will delineate and
possibly expand HIPAA’s effects at the
margin.
Effects of the statute
HIPAA’s statutory group market porta-
bility provisions extend coverage to cer-
tain individuals and preexisting conditions
not otherwise covered. This extension of
coverage entails both benefits and costs.
Individuals enjoying expanded coverage
will realize benefits. In some instances
these individuals will gain coverage for
services they otherwise would have pur-
chased out-of-pocket. In other instances
the extension of coverage will induce in-
dividuals to consume more (or different)
health care services, which in some cases
may improve health outcomes. The dol-
lar value of the extended coverage is es-
timatedtobe$515millionannually. Po-
tential additional benefits from improved
health outcomes are difficult to quantify
(and the Departments have not attempted
to do so), but may be large in aggregate,
and will be large for at least some individ-
uals whose health outcomes may be sub-
stantially improved. Another indirect ben-
efit of HIPAA’s portability provisions is a
reduction in so-called “job lock” — a phe-
nomenon in which individuals keep jobs
they would prefer to leave to avoid los-
ing coverage for preexisting conditions. If
workers move into more productive jobs,
the overall economy will benefit.
It should be noted that the benefits
of HIPAA’s portability provisions in any
given year will be concentrated in a rela-
tively small population that gains coverage
under HIPAA for needed care that would
otherwise not be covered. The number
that might so benefit has been estimated at
100,000 individuals.
The direct costs of HIPAA’s portabil-
ity provisions generally include the cost
of extending coverage to additional ser-
vices, as well as certain attendant admin-
istrative costs. The cost of extended cov-
erage is estimatedat $515 million annu-
ally. The major administrative costs in-
clude the cost of providing certificates of
creditable coverage, and possibly the cost
of carrying out specialenrollments and off-
sets of preexisting condition exclusion pe-
riods. The Departments did not attempt to
fully estimate the administrative costs of
the HIPAA statute but in crafting this regu-
lation did attempt to constrain these costs.
The Departments believe that the cost
of HIPAA is borne by covered workers.
Cost can be shifted to workers through in-
creases in employee premium shares or
reductions (or smaller increases) in pay
or other components of compensation, or
by increases in deductibles or other cost
sharing or other reductions in the richness
of health benefits. Whereas the benefits
of HIPAA are concentrated in a relatively
small population, the costs are distributed
broadly across plans and enrollees.
The Departments have considered
whether the costs imposed by HIPAA’s
statutory portability provisions have had
any major indirect negative effects, and
concluded that such effects are possible
but probably small.
Any mandate to increase the richness
or availability of health insurance adds to
the cost of insurance. It is possible that
some small number of employers and em-
ployees already at the brink of affordability
would drop coverage in response to the im-
plementation of HIPAA. The Departments
also note that the estimated $515 million
cost associated with extensions of cover-
age under HIPAA amounts to a small frac-
tion of one percent of total expenditures by
private group health plans. This suggests
thatthecostofHIPAAisasmall,possibly
negligible, factor in most employers’ deci-
sions to offer health coverage and workers’
decisions to enroll.The Departments be-
lieve that the benefits of HIPAA’s statutory
group market portability provisions justify
their cost. The Departments’ full assess-
ment of the costs and benefits of HIPAA’s
statutory provisions and their basis for that
assessment is detailed later in the pream-
ble.
Effects of the final regulations
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 direct and indirect economic effects
of HIPAA’s statutory portability provi-
sions. The Departments believe that the
regulation’s benefits will justify its costs.
Additional economic benefits derive
from the regulations’ clarifications of
HIPAA’s portability requirements. By
clarifying employees’ rights and plan
sponsors’ obligations under HIPAA’s
portability provisions, the regulations will
reduce uncertainty over health benefits,
thereby fostering labor market efficiency
and the establishment and continuation of
group health plans by employers.
Many provisions of the final regula-
tions closely resemble provisions included
in the interim final regulations that the fi-
nal regulations supplant. This regulatory
action, however, adds or amends both cer-
tain provisions directed at the scope of
HIPAA’s portability protections and cer-
tain provisions establishing administrative
requirements intended to safeguard those
protections.
Scope of protections
These final regulations are intended
to secure and implement HIPAA’s group
market portability provisions under cer-
tain special circumstances. The final
regulations therefore contain a number
of provisions intended to clearly delimit
the scope of HIPAA’s portability protec-
tions. Most of these provisions closely
resemble and will have the same effect
as provisions of the interim final regula-
tions. Others, however, clarify or expand
at the margin the range of situations to
which HIPAA’s portability protections ap-
ply or in which a loss of eligibility may
trigger special enrollment rights. These in-
clude the requirement that health coverage
under foreign government programs be
treated as creditable coverage for purposes
of limiting the application of preexisting
condition exclusions; the extension of spe-
cial enrollment rights to individuals who
lose eligibility for coverage in connection
with the application of lifetime benefit
limits, movement out of an HMO’s ser-
2005–8 I.R.B.575February 22, 2005

vice area, or the termination of a health
coverage option previously offered under
a group health plan; and the establishment
of a special enrollment right for a partici-
pant to change among available coverage
options under a group health plan when
adding one or more dependents in connec-
tion with marriage, adoption, or placement
for adoption. Each of these provisions is
expected to result in a small increase in
the economic effects of HIPAA’s statutory
portability protections. The Departments
have no basis to quantify these small in-
creases. The potential size of affected sub
populations is explored later in the pream-
ble.
Administrative requirements
In order to secure and implement
HIPAA’s group market special enroll-
ment and portability provisions, both the
HIPAA statute and these final regulations
establish certain administrative require-
ments.
As noted above, the HIPAA statute gen-
erally requires plans and issuers to pro-
vide certifications of prior coverage to in-
dividuals leaving coverage. These regu-
lations additionally require plans and is-
suers to notify individuals of their special
enrollments rights, any preexisting con-
dition exclusion provisions, and the ap-
plicability of such exclusions where indi-
viduals provide evidence of prior cover-
age that is of insufficient duration to fully
offset exclusion periods. Plans will in-
cur cost to comply with these administra-
tive requirements. The Departments es-
timate the administrative cost to prepare
and distribute certifications and notices to
be $97 million per year. Nearly all of
this, or $96 million, is attributable to the
preparation and distribution of certifica-
tions as required under HIPAA’s statutory
provisions. These final regulations include
numerous special provisions that serve to
reduce plans’ cost of providing certifica-
tions. A more strict interpretation of the
statute would require plans to send an indi-
vidual certificate to each affected enrollee.
Such strict interpretation would result in
plans sending 80.1 million certificates an-
nually at cost of $157.6 million, which is
$61.6 million more than the burden im-
posed by the final regulations.
Generally all of the major administra-
tive requirements included in the final reg-
ulations were also included in the interim
final regulations. The final regulations
make minor additions to two requirements,
however. They require plans to include ed-
ucational statements in certificates of cred-
itable coverage and to maintain in writing
their procedures for requesting certificates.
The cost of these additional requirements
is expected to be small, and was not esti-
mated separately from the overall cost of
providing certificates.
Other changes included in these final
regulations are likely to slightly reduce
plans’ cost to provide certain HIPAA-re-
quired notices. Included with the final reg-
ulation is new sample language for general
and specific noticesof preexisting condi-
tion exclusions, which may serve to reduce
some plans’ costs of providing these no-
tices, and revised sample language for spe-
cial enrollment rights notices. The final
regulations also clarify the narrow scope of
the requirement to notify certain affected
participants of the specific application of
preexisting condition exclusions. The De-
partments did not estimate the impact of
these provisions separately from the over-
all cost of providing general and specific
notices of preexisting condition exclusions
and notices of special enrollment rights.
The Departments’ full assessment of
the costs and benefits of this regulation and
their basis for that assessment is detailed
later in this preamble.
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 ac-
tion is “significant” and therefore subject
to the requirements of the Executive Or-
der and subject to review by the Office of
Management and Budget (OMB). Under
section 3(f), the order defines a “signifi-
cant regulatory action” as an action that is
likely to result in a rule: (1) having an an-
nual effect on the economy of $100 mil-
lion or more, or adversely and materially
affecting a sector of the economy, produc-
tivity, 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 oth-
erwise interfering with an action taken or
planned by another agency; (3) materially
altering the budgetary impacts of entitle-
ment grants, user fees, or loan programs
or the rights and obligations of recipients
thereof; or (4) raising novel legal or pol-
icy 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, this action is“economically signif-
icant” and subject to OMB review under
Section 3(f) of the Executive Order. Con-
sistent with the Executive Order, the De-
partments have assessed the costs and ben-
efits of this action. The Departments’ as-
sessment, and the analysis underlying that
assessment, is detailed below. The Depart-
ments performed a comprehensive, unified
analysis to estimate the costs and bene-
fits attributable to the regulations for pur-
poses of compliance with Executive Order
12866, the Regulatory Flexibility Act, and
the Paperwork Reduction Act.
Statement of need for action
These final regulations are needed to
clarify and interpret the HIPAA porta-
bility provisions (increased portability
through limitation on preexisting condi-
tion exclusions) under Section 701 of the
Employee Retirement Income Security
Act of 1974 (ERISA), Section 2701 of
the Public Health Service Act, and Sec-
tion 9801 of the Internal Revenue Code
of 1986. The provisions are needed to
improve the availability and portability
of health coverage by limiting preexisting
condition exclusions and their use, and re-
quiring that group health plans and group
health insurance issuers allow individu-
als to enroll under certain circumstances
(special enrollment). Additional guidance
was required to clarify certain definitions,
such as the definition of creditable cover-
age; to clarify the method of determining
the proper length of a preexisting condi-
tion exclusion period for an individual; to
describe the circumstances under which
an individual must be allowed a special
enrollment opportunity; and to describe
notices that group health plans and group
health insurance issuers must provide to
individuals.
Economic effects
The Departments believe that this regu-
lation’s benefits will justify its costs. This
February 22, 20055762005–8 I.R.B.

belief is grounded in the assessment of
costs and benefit that is summarized ear-
lier in the preamble and detailed below.
Regulatory Flexibility Act — Department
of Labor and Department of Health and
Human Services
The Regulatory Flexibility Act (5
U.S.C. 601et 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 Ad-
ministrativeProcedureAct(5U.S.C.551
et seq.) that are likely to have a significant
economic impact on a substantial num-
ber of small entities. Unless an agency
certifies that a rule will not have a sig-
nificant economic impact on a substantial
number of small entities, section 604 of
the RFA requires the agency to present a
final regulatory flexibility analysis at the
time of the publication of the notice of
final rulemaking describing the impact of
the rule on small entities. Small entities
include small businesses, organizations,
and governmental jurisdictions.
Because these final rules are being is-
sued without prior notices of proposed
rulemaking, the RFA does not apply, and
the Departments arenot required to either
certify that the rule will not have a sig-
nificant impact on a substantial number
of small entities or conduct a regulatory
flexibility analysis. The Departments
nonetheless crafted these regulations in
careful consideration of their effects on
small entities.
For purposes of this discussion, 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 re-
ports for pension plans which cover fewer
than 100 participants. Under section
104(a)(3), the Secretary may also provide
for simplified annual reporting and dis-
closure if the statutory requirements of
part 1 of Title I of ERISA would other-
wise 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 re-
porting provisions and limited exemptions
from reporting and disclosure require-
ments 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 gener-
ally 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. 631et seq.). The Depart-
ment of Labor solicited comments on the
use of this standard for evaluating the ef-
fects of the interim final regulations on
small entities. No comments were re-
ceived with respect to the standard.
The Departments believe that the bene-
fits of this regulation will justify its costs.
This belief is grounded in the assessment
of costs and benefit that is summarized
earlier in the preamble and detailed be-
low in the “Basis for Assessment of Eco-
nomic Impact” section. The direct finan-
cial value of coverage extensions pursuant
to HIPAA’s portability provisions are es-
timated to be approximately $180 million
for small plans, or a small fraction of one
percent of total small plan expenditures.
11
In order to secure and implement
HIPAA’s portability provisions, the
HIPAA statute and interim final regu-
lations established certain administrative
requirements, including requirements to
provide certifications of creditable cov-
erage and notices of special enrollment
rights and preexisting condition exclu-
sions. The Departments estimate the cost
for small plans to prepare and distribute
certifications and notices to be $13 million
per year.
12
These costs will initially be
borne by issuers who supply small group
insurance products and by third-party ad-
ministrators who provide services to small
insured plans. These two types of entities
will spread the costs across a much larger
pool of small plans who will in turn trans-
fer cost broadly to plan enrollees.
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 it has been
determined that this Treasury decision is
not a significant regulatory action. Pur-
suant to sections 603(a) and 605(b) of the
Regulatory Flexibility Act, it is hereby
certified that the collections of informa-
tion referenced in this Treasury decision
(see §§54.9801–3, 54.9801–4, 54.9801–5,
and 54.9801–6) will not have a significant
economic impact on a substantial number
of small entities. Although a substantial
number of small entities will be subject to
the collection of information requirements
in these regulations, the requirements will
not have a significant economic impact on
these entities. The average time required
to complete a certification required under
these regulations is estimated to be 4 to
5 minutes for all employers. This aver-
age is based on the assumption that most
employers will automate the certification
process. The paperwork requirements
other than certifications that are contained
in the regulations are estimated to impose
less than 2% of the burden imposed by
the certifications. Many small employers
that maintain group health plans have their
11
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.
12
As noted above, the total cost for certificates and notices is estimated to be $97 million. We estimate that 13 percent of individuals receiving certificates and notices receive them from small
group health plans, and on that basis estimates that 13% of the total cost falls on such plans. As noted below, we estimate that out of a total of 54 millionindividuals who leave coverage under
group health plans, individual health insurance policies or public programs, 20 million, or 44 percent, are leaving private-sector group plans. Assuming that the proportion of these that are
leaving small plans is equal to the proportion of covered, private-sector jobleaverswholeavesmallfirms(estimatedtobe35percent,asnotedabove), 13 percent of those leaving any type of
coverage are leaving coverage under small group plans.
2005–8 I.R.B.577February 22, 2005

plans administered by an insurance com-
pany or third party administrators (TPAs).
Most insurers and TPAs are expected to
automate the certification process and
therefore their average time to produce a
certificate should be similar to the 4 to 5
minute average estimated for all employ-
ers. However, even for small employers
that do not automate the certification
process, the collection of information re-
quirements in the regulation will not have
a significant impact. Even if it is conser-
vatively assumed that their average time
to produce a certificate is 3 times as long
as the highest estimate for all employers
(i.e., 15 minutes per certificate) and that
all of their employees are covered by their
group health plan and that half of the em-
ployees receive a certificate each year, the
average burden per employee is less than
8 minutes per year. This can be rounded
up to 8 minutes to more than account
for the additional burden imposed by the
other paperwork requirements of the final
regulations. Thus, for example, for an
employer with 10 employees, the annual
burden would be not more than 1 hour
and 20 minutes per year. At an estimated
cost of $18 per hour, this would result in
a cost of not more than $24 per year for
the employer, which is not a significant
economic impact. Because the collection
of information requirements of this Trea-
sury decision will not have a significant
economic impact on a substantial number
of small entities, a Regulatory Flexibility
Analysis under the Regulatory Flexibility
Act (5 U.S.C. chapter 6) is not required.
Pursuant to section 7805(f) of the Code,
the notice of proposed rulemaking pre-
ceding these regulations was submitted
to the Small Business Administration for
comment on its impact on small business.
Paperwork Reduction Act
Department of Labor
These final regulations include three
separate collections of information as that
term is defined in the Paperwork Reduc-
tion Act of 1995 (PRA 95), 44 U.S.C.
3502(3): the Notice of Enrollment Rights,
Notice of Preexisting Condition Exclu-
sion, and Certificate of Creditable Cover-
age. Each of these disclosures is currently
approved by the Office of Management
and Budget (OMB) through October 31,
2006, in accordancewith PRA 95 under
control numbers 1210–0101, 1210–0102,
and 1210–0103.
Department of the Treasury
These final regulations include a col-
lection of information as that term is de-
fined in PRA 95: the Notice of Enroll-
ment Rights, Notice of Preexisting Con-
dition Exclusion, and Certificate of Cred-
itable Coverage. Each of these disclosures
is currently approved by OMB under con-
trol number 1545–1537.
An agency may not conduct or sponsor,
and a person is not required to respond to, a
collection of information unless it displays
a valid control number assigned by the Of-
fice of Management and Budget.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required
by 26 U.S.C. 6103.
Department of Health and Human
Services
These final 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 dis-
closures 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
This final rule is subject to the provi-
sions of the Small Business Regulatory
Enforcement Fairness Act of 1996 (5
U.S.C. 801et seq.) and is being trans-
mitted to Congress and the Comptroller
General for review. The final rule, is a
“major rule,” as that term is defined in 5
U.S.C. 804, because it may result in (1) an
annual effect on the economy of $100 mil-
lion or more; (2) a major increase in costs
or prices for consumers, individual indus-
tries, 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 agen-
cies assess anticipated costs and benefits
before issuing any rule that may result in
an expenditure in any 1 year by state, lo-
cal, or tribal governments, in the aggre-
gate, or by the private sector, of $100 mil-
lion. These final regulations have no such
mandated consequential effect on state, lo-
cal, 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 funda-
mental principles of federalism. It requires
adherence to specific criteria by federal
agencies in formulating and implementing
policies that have “substantial direct ef-
fects” on the States, the relationship be-
tween the national government and States,
or on the distribution of power and re-
sponsibilities among the various levels of
government. Federal agencies promulgat-
ing 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 andlocal officials in the
preamble to the regulation.
In the Departments’ view, these final
regulations have federalism implications
because they may have substantial direct
effects on the States, the relationship be-
tween the national government and States,
or on the distribution of power and re-
sponsibilities among the various levels
of government. However, in the Depart-
ments’ view, the federalism implications
of these final 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 stan-
dards.
In general, through section 514, ERISA
supersedes State laws to the extent that
they relate to any covered employee ben-
efit plan, and preserves State laws that
February 22, 20055782005–8 I.R.B.

regulate insurance, banking or securities.
While ERISA prohibits States from regu-
lating a plan as an insurance or investment
company or bank, HIPAA added a new
sectiontoERISA(aswellastothePHS
Act) narrowly preempting State require-
ments for issuers of group health insur-
ance coverage. Specifically, with respect
to seven provisions of the HIPAA portabil-
ity rules, states may impose stricter obliga-
tions on health insurance issuers.
13
More-
over, with respect to other requirements for
health insurance issuers, states may con-
tinue to apply state law requirements ex-
cept to the extent that such requirements
prevent the application of HIPAA’s porta-
bility, access, and renewability provisions.
In enacting these new preemption pro-
visions, 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 preemp-
tion of State laws with regard to health
insurance issuers. H.R. Conf. Rep. No.
736, 104
th
Cong. 2d Session 205 (1996).
State insurance laws that are more strin-
gent than the federal requirements are
unlikely to “prevent the application of”
the HIPAA portability provisions, and be
preempted. Accordingly, States have sig-
nificant latitude to impose requirements
on health insurance insurers that are more
restrictive than the federal law.
Guidance conveying this interpreta-
tion of HIPAA’s preemption provisions
was published in theFederal Register
on April 8, 1997. 62 F.R. 16904. These
final 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 en-
force the provisions of HIPAA as they per-
tain to issuers, but that the Secretary of
Health and Human Services must enforce
any provisions that a State fails to substan-
tially enforce. Currently, HHS enforces
the HIPAA portability provisions in only
one State in accordance with that State’s
specific request to do so. When exercis-
ing its responsibility to enforce the pro-
visions of HIPAA, HHS works coopera-
tively with the State for the purpose of ad-
dressing the State’s concerns and avoid-
ing conflicts with the exercise of State au-
thority. HHS has developed procedures
to implement its enforcement responsibil-
ities, and to afford the States the maxi-
mum opportunity to enforce HIPAA’s re-
quirements in the first instance. HHS’s
procedures address the handling of reports
that States may not be substantially enforc-
ing HIPAA’s requirements, and the mecha-
nism for allocating responsibility between
the States and HHS. In compliance with
Executive Order 13132’srequirement that
agencies examine closely any policies that
may have federalism implications or limit
the policymaking discretion of the States,
DOL and HHS 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 estab-
lished 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 ap-
propriate. Its members meet, discuss and
offer solutions to mutual problems. The
NAIC sponsors quarterly meetings to pro-
vide a forum for the exchange of ideas and
in-depth consideration of insurance issues
by regulators, industryrepresentatives and
consumers. CMS and the Department
of Labor staff have consistently attended
these quarterly meetings to listen to the
concerns of the State Insurance Depart-
ments 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 quarterlyconferences. This
meeting provides CMS and the Depart-
ment of Labor with the opportunity to
provide updates on regulations, bulletins,
enforcement actions, and outreach efforts
regarding HIPAA.
The Departments received written com-
ments on the interim regulation from the
NAIC and from ten States. In general,
these comments raised technical issues
that the Departments considered in con-
junction with similar issues raised by
other commenters. In a letter sent before
issuance of the interim regulation, the
NAIC expressed concerns that the Depart-
ments interpret the new preemption provi-
sions 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 specifi-
cally consulted with the NAIC in devel-
oping these final regulations. Through
the NAIC, the Departments sought and
received the input of State insurance de-
partments regarding certain insurance in-
dustry 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 these regulations.
The Departments have also cooperated
with the States in several ongoing outreach
initiatives, through which information on
HIPAA is shared among federal regula-
tors, State regulators and the regulated
community. In particular, the Department
of Labor has established a Health Benefits
EducationCampaignwithmorethan70
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 Con-
ferences in August 1999, 2000, 2001,
2002, and 2003. Furthermore, both the
Department of Labor and CMS websites
offer links to important State websites and
13
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).
2005–8 I.R.B.579February 22, 2005

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 provi-
sions 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 De-
partments’ 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 these final
regulations, the Departments certify that
the Employee Benefits Security Admin-
istration and the Centers for Medicare &
Medicaid Services have complied with the
requirements of Executive Order 13132
for the attached final regulation, Final Reg-
ulations for Health Coverage Portability
for Group Health Plans and Group Health
Insurance Issuers (RIN 1210–AA54 and
RIN 0938–AL43), 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. These
regulations, by clarifying and securing
HIPAA’s statutory protections, will delin-
eate and possibly expand HIPAA’s effects
at the margin.
Effects of the statute
In order to determine how many work-
ers could benefit from crediting prior
coverage against a new health plan’s pre-
existing condition exclusion period, we
examined the 18 million individuals who
changed jobs in 2002. Of these, approx-
imately 1 in 3 had health care coverage
at those jobs and an additional 8 million
dependents also received employer-spon-
sored health care coverage through these
job changers. By allowing prior creditable
coverage, 4 million job changers, who had
at least 12 months of prior creditable cov-
erage, were able to change jobs without the
risk of a preexisting condition exclusions
for them or their 5 million dependents. An
additional 2 million workers who changed
jobs and had some smaller amount of prior
coverage, faced reduced waiting periods
before receiving full coverage for them
and their 3 million dependents.
14
The most direct effect of HIPAA’s statu-
tory group market portability provisions is
the extension of coverage to individuals
and preexisting conditions not otherwise
covered. This extension of coverage en-
tails both benefits and costs. Individuals
enjoying expanded coverage will realize
benefits. In some instances these individ-
uals will gain coverage for services they
otherwise would have purchased out-of-
pocket, thereby reaping a simple and direct
financial benefit. In other instances the ex-
tension of coverage will induce individuals
to consume more (or different) health care
services, reaping a benefit which has finan-
cial value, and which in some cases will
produce additional indirect benefits both to
the individual (improved health) and pos-
sibly to the economy at large (increased
productivity).
15
The simple financial value
of the direct benefits (essentially the dol-
lar value of the extended coverage) is esti-
matedtobe$515million.
16
The indirect benefits are difficult to
quantify (and the Departments have not
attemptedtodoso),butmaybelargein
aggregate, and will be large for at least
some individuals whose health outcomes
may be substantially improved.
Another indirect (though intended) ben-
efit of HIPAA’s portability provisions is a
reduction in so-called “job lock.” Job lock
occurs when an individual stays in a job
with health insurance that he or she would
prefer to leave out of concern that he or she
would lose coverage for care of his or her
own or a covered dependent’s preexisting
condition.
17
No attempt is made here to quantify in-
creases in labor force mobility attributable
to reduced job lock under HIPAA. How-
ever, it is noted that at least two indirect
economic effects are likely to follow such
increased mobility. First, the cost of cov-
erage for some preexisting conditions will
be transferred from one plan or issuer to
14
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). This approach to the question of how many people are impacted by increased portability parallels that of the September 1995 U.S. General Accounting Office (GAO),
Report HEHS–95–257, “Health Insurance Portability: Reform Could Ensure Continued Coverage for up to 25 Million Americans,”’ September 1995.
15
For more detailed information, see Ellen O’Brien’s article “Employer’ Benefits from Workers’ Health Insurance” Milbank Quarterly, Vol.1 No. 1, 2003. She provides an extensive analysis
of the literature on benefits accruing to employers from offering health benefits. She reports that researchers are beginning to calculate the coststo employers of unhealthy employees. Her
work provides information on studies that have demonstrated that poor health may be related to lower productivity. For example, she discusses studies that have examined the effects on
workplace productivity of specific health conditions and show that poor health reduces workers’ productivity at work, and that effective health care treatments can reduce productivity losses
and may even pay for themselves in terms of increased productivity.
16
The estimate of $515 million is the 1999 projection published in the August 1, 1996, Congressional Budget Office (CBO) report, “Estimate of Costs of Private Sector Mandates;” Bill
Nu
mber H.R. 3103, indexed. The index is derived from the average annual percent change from 1999 to 2004 in aggregate private health insurance expenditures, as reported in Table 3 of
th
e “National Health Care Projections Tables” by the Centers for Medicare & Medicaid Services, Office of the Actuary. CBO estimated the direct cost to the private sector would total about
$
300 million in 1999. The specific items included in the estimate are: (1) limiting the length of time employer-sponsored and group insurance plans could withhold coverage for pre-existing
c
onditions, and (2) requiring that periods of continuous prior health plan coverage be credited against pre-existing condition exclusions of a new plan.
A
ccording to CBO, two-thirds of the cost reflects the provision to limit exclusions for pre-existing conditions. The key components of this estimate are: (1) the number of people who
w
ould have more of their medical expenses covered by insurance if exclusionswere limited to one year or less, and (2) the average cost to insurers of thatnewly insured medical care. The
p
rovision crediting prior coverage against current exclusions will account for a third of the cost. This estimate is based on two components: (1) the number of people who would receive some
added coverage, and (2) the additional full-year cost of coverage, adjusted to reflect the estimated number of months of that coverage.
17
Findings on the effect of health insurance coverage on job mobility have been mixed. A thorough assessment of the job lock literature in the past 10 years concluded that the most convincing
evidence suggests that health insurance plays an important role in job mobility decisions, but is unclear as to its implications (see Gruber, Jonathan and Brigitte C. Madrian, 2002, Health
Insurance, Labor Supply and Job Mobility: A Critical Review of the Literature, NBER Working Paper Series, No. 8817). A major concern in this literature has been to find an identification
strategy able to overcome the potential correlation between the holding of employer-sponsored health insurance and other factors affecting job mobility independent from health insurance
(see Anna Sanz de Galdeano, 2004. Health Insurance and Job Mobility: Evidence from Clinton’s Second Mandate, Center for Studies in Economics and Finance Working Paper, No. 122).
This is illustrated by the 2004 Health Confidence Survey which finds that 27 percent of the non-aged population reported that they or an immediate family member had experienced some
form of job lock, but only 15 percent of those attributed the job-lock to a preexisting condition (see Ruth Helman & Paul Frostin, “Public Attitudes on the U.S. Health Care System: Findings
from the Health Confidence Survey.” Employee Benefits Research Institute, Issue Brief No. 275 (EBRI, November 2004)).
February 22, 20055802005–8 I.R.B.

another.
18
Second, if, as is likely, a result
is movement of workers into more produc-
tive jobs, the overall economy will benefit.
It should be noted that the benefits
of HIPAA’s portability provisions in any
given year will be concentrated in a rel-
atively small population — generally,
individuals who because of some com-
bination of family health status and use
of health services, job mobility, and plan
provisions related to preexisting condition
exclusions or enrollment opportunities,
gain coverage under HIPAA for needed
care that would otherwise not be covered.
AccordingtoCBO,anypointintime,
about 100,000 individuals would have a
preexisting condition exclusion reduced
for prior creditable coverage. An addi-
tional 45,000 would gain added coverage
in the individual market.
19
The direct costs of HIPAA’s portabil-
ity provisions generally include the cost
of extending coverage to additional ser-
vices, as well as certain attendant admin-
istrative costs. The cost of extended cov-
erage is estimated at $515 million annu-
ally. The major administrative costs in-
clude the cost of providing certificates of
creditable coverage, and possibly the cost
of carrying out special enrollments and off-
sets of preexisting condition exclusion pe-
riods. The Departments did not attempt
to fully estimate the administrative costs
of the HIPAA statute but did, in crafting
this regulation, attempt to constrain these
costs, where possible. without compro-
mising HIPAA’s intent, as discussed be-
low.
The Departments considered the prob-
able incidence of these costs. The Depart-
ments believe that by and large the cost of
HIPAA, like all of the cost of group health
benefits, are borne by covered workers.
20
The most direct ways this cost can be
shiftedtoworkersisthroughincreasesin
employee premium shares or reductions
(or smaller increases) in pay or other com-
ponents of compensation. Other paths for
shifting of HIPAA’s cost to workers might
include increases in deductibles or other
cost sharing, or other reductions in the
richness of health benefits.
Whereas the benefits of HIPAA are
concentrated in a relatively small popu-
lation, the costs are distributed broadly
across plans and enrollees. The cost for
affected large, self-insured or experience
rated group plans is spread across all en-
rollees in the plan. The cost for small
insured plans typically is spread across
large populations of small plans and their
enrollees, partly as a result of state laws
that compress small group premium rates.
The Departments have considered
whether the costs imposed by HIPAA’s
statutory portability provisions have had
any major indirect negative effects, and
concluded that such effects are possible
but probably small.
Any mandate to increase the richness
or availability of health insurance adds to
the cost of insurance. It is possible that
some small number of employers already
at the brink of affordability would drop
coverage in response to the implementa-
tion of HIPAA. The number of employers
so affected is probably limited in part be-
cause as noted above, employers can shift
HIPAA’s cost to workers in various ways,
including through increases in employee
premium shares or cost sharing — though
such increases might prompt some work-
ers at the margin to decline coverage. Eco-
nomic literature provides some estimates
of the responsiveness of employers and
workers to increases in the price of insur-
ance.
21
The Departments note, however, that
cost increases attributable to HIPAA are
not price increasesper sebut reflect the
cost to enrich benefits, implying that neg-
ative responses should be smaller than
would be expected in connection with
pure price increases. The Departments
also note that the estimated $515 million
cost associated with extensions of cov-
erage under HIPAA amounts to a small
fraction of one percent of total expen-
ditures by private group health plans.
22
This compares with average annual group
premium growth of 9.4 percent for family
coverage between 1996 and 2002.
23
To
the extent that such increases are small,
they are likely to have a negligible effect
on employers’ decisions to provide health
insurance and in workers’ decisions to
enroll.
Various other studies to date suggest
that any negative indirect effects of HIPAA
18
This transfer generally implies offsetting costs and benefits. It is possible, however, that in some instances individuals’ mobility will allow them to exploit opportunities for adverse selection
by moving into a richer health plan (see Cutler, D. and Reber, S., 1998. Paying for health insurance: the tradeoff between competition and adverse selection. Quarterly Journal of Economics
113, 433–466. and Cutler, D. and Zeckhauser, R. 2000. The anatomy of health insurance, in Culyer, A., Newhouse, J.P. (Eds.), Handbook of Health Economics, Vol. 1A. Elsevier, Amsterdam,
pp. 564–629. For a contrasting study see, Pauly, M.V., Mitchell, O. and Zeng, Y. 2004 “Death Spiral Or Euthanasia?The Demise Of Generous Group Health Insurance Coverage” NBER
Working Paper No. 10464. for a discussion). Such movements would constitute extensions of coverage with costs andbenefits resembling those of direct extensions of coverage under HIPAA.
19
Congressional Budget Office, “Estimate of Costs of Private Sector Mandates; Bill Number H.R. 3103, August 1, 1996.
20
The voluntary nature of the employment-based health benefit system in conjunction with the open anddynamic character of labor markets make explicitas well as implicit negotiations
on compensation a key determinant of the prevalence of employee benefits coverage. It is likely that80% 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,”TaxPolicyand
Economy(1991); Jonathan Gruber, “The Incidence of Mandated Maternity Benefits,”American Economic Review, Vol. 84 (June 1994), pp. 622–641; Lawrence H. Summers, “Some Simple
Economics of Mandated Benefits,”American Economic Review, Vol. 79, No. 2 (May 1989); Louise Sheiner, “Health Care Costs, Wages, and Aging,” Federal Reserve Board of Governors
working paper, April 1999; 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). The prevalence of benefits is therefore largely dependent on the efficacy of this exchange. If workers perceive that there isthe 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. To the extent which workersperceive 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.
21
Research shows that while the share of employers offering insurance is generally stable and eligibility rates have only declined slightly over time,the overall increase in uninsured workers is
due to the decline in worker take-up rates, which workers primarily attribute to cost. Research on elasticity of coverage, however, has focused on getting uninsured workers to adopt coverage
(which appears to require large subsidies) rather than covered workers opting out of coverage. This makes it difficult to ascertain the loss in coverage that would result from a marginal
increase in costs. (See, for example, David M. Cutler “Employee Costs and the Decline in Health Insurance Coverage” NBER Working Paper #9036. July 2002; Gruber, Jonathon and Ebonya
Washington. “Subsidies to Employee Health Insurance Premiums and the Health Insurance Market” NBER Working Paper #9567. March 2003; and Cooper, PF and J. Vistnes. “Workers’
Decisions to Take-up Offered Insurance Coverage: Assessing the Importance of Out-of-Pocket Costs” Med Care 2003, 41 (7 Suppl): III35–43.) Finally,economic discussions on elasticity of
insurance tend to view coverage as a discrete concept and does not consider that the value of coverage may have also changed.
22
While these costs are expected in aggregate to be less than one percent of total expenditures by group health plans, the statute may disproportionately affect particular plans.
23
This is the average annual rate of increase in total family premiums as reported in the Medical Expenditure Panel Survey, Insurance Component (MEPS-IC) public tables, 1996–2002.
2005–8 I.R.B.581February 22, 2005

are relatively minor. In one study
24
,large
employers and health benefit consultants
reported few ongoing problems in adopt-
ing HIPAA’s portability provisions. Many
issuers interviewed for the report said that
their plans tended to require few changes
to comply with HIPAA. This is proba-
bly because many large employer plans
had already incorporated portability pro-
tections, similar to those of HIPAA. A sec-
ond study indicates that while the share
of small firms (those with fewer than 200
workers) offering health insurance has in-
creased slightly from 1996 to 2004, the
share has drifted downward from its high
of 68 percent in the economic boom year of
2000.
25
In addition, in aggregate, employ-
ers covered a larger proportion of health
care costs for family plans in 2002 than in
1996, with a slight decrease in the share of
singleplansoverthesametimeperiod.
26
The data above suggest that the HIPAA
changes may have been less significant in
the decision about health insurance cover-
age than overall economic conditions and
labor market forces. In fact, there is no
evidence that any indirect economic ef-
fect, positive or negative, can be readily
attributed to the statute. Therefore, it ap-
pears that HIPAA has not placed an unrea-
sonable burden on health plans.
There has been a significant decrease
in the prevalence of preexisting condition
exclusion clauses among large plans. A
major employee benefits survey
27
reported
that in 1996, 59 percent of the employees
in small firms (less than 200 employees)
were subject to pre-existing condition lim-
itations. In 2002, the figure had dropped to
33 percent. If pre-existing condition limi-
tation exists for new employees, the aver-
age number of months to wait before cov-
erage declined from 10.7 months in 1996
to 10.0 months in 2002. A discussion of re-
sults from a 1998 version of the same sur-
vey noted that, overall, 42 percent of em-
ployers reported making changes to their
plans’ preexisting condition clauses due to
HIPAA. The Departments are not aware of
any surveys that have consistently tracked
the prevalence of preexisting condition ex-
clusions in smaller plans (less than 200
employees) since 1996.
Another significant trend involves the
use of waiting periods. According to a sur-
vey of employers with 200 or more em-
ployees, the average number of days that
new enrollees must wait before health cov-
erage takes effect increased from 40 days
in1996to58daysin1998. Someat-
tribute this increase indirectly to HIPAA,
suggesting that some plans may be replac-
ing the preexisting condition exclusion pe-
riod with a longer waiting period.
Effects of the final regulations
By clarifying and securing HIPAA’s
statutory portability protections, these reg-
ulations will help ensure that HIPAA rights
are fully realized. The result is likely to be
a small increase at the margin in the direct
and indirect 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 un-
der HIPAA’s portability provisions, the
regulations will reduce uncertainty and
costly disputes over these rights and obli-
gations. They will promote employers’
and employees’ common understanding of
the value of group health plan benefits and
confidence in the security and predictabil-
ity of those benefits, thereby improving
labor market efficiency and fostering the
establishment and continuation of group
health plans by employers.
Many provisions of the final regula-
tions closely resemble provisions included
in the interim final regulations that the
final regulations supplant. The economic
impact of this regulatory action therefore
generally will be limited to the impact
of provisions that were not so included.
These include both provisions directed at
the scope of HIPAA’s portability protec-
tions and provisions establishing adminis-
trative requirements intended to safeguard
those protections.
Scope of protections
These final regulations are intended
to secure and implement HIPAA’s group
market portability provisions under cer-
tain special circumstances. The final
regulations therefore contain a number of
provisions intended to clearly delimit the
scope of HIPAA’s portability protections.
Most of these provisions closely resemble
and will have the same effect as provisions
of the interim final regulations. Others,
however, clarify or expand at the margin
the range of situations to which HIPAA’s
portability protections explicitly apply.
These include the requirement that health
coverage under foreign government pro-
grams be treated as creditable coverage
for purposes of limiting the application
of preexisting condition exclusions; the
extension of special enrollment rights to
individuals who lose eligibility for cover-
age in connection with the application of
lifetime benefit limits, movement out of
an HMO’s service area, or the termination
of a health coverage option previously
offered under a group health plan; and
the establishment of a special enrollment
right for a participant to change among
available coverage options under a group
health plan when adding one or more
dependents in connection with marriage,
adoption, or placement for adoption. Each
of these provisions is expected to result in
a small increase in the economic effects of
HIPAA’s statutory portability protections.
The Departments lack any firm basis
for quantifying the number of individuals
likely to be affectedby these provisions,
and therefore were unable to quantify the
resultant increase in transfers. However,
given the special and narrow circum-
stances to which these provisions apply,
the number of affected individuals, and
therefore the increase in transfers under
these regulations, is expected to be small.
In reaching this conclusion, the Depart-
ments considered the following.
In 2002, an estimated 359,000 em-
ployer sponsored insurance enrollees had
24
U.S. General Accounting Office, Report HEH–99–100, “Private Health Insurance: Progress and Challenges in Implementing 1996 Federal Standards,” pp. 6–7, May 1999.
25
Gabel, Jon R.et al. “Health Benefits in 2004: Four Years of Double Digit Premium Increases Take Their Toll on Coverage” Health Affairs, Volume 23, Number 5, September/October 2004.
26
As reported in the MEPS-IC 1996–2002 public tables.
27
Employee Health Benefits 2002 Study, Kaiser Family Foundation.
February 22, 20055822005–8 I.R.B.

moved from abroad in the previous year.
28
It is not known what fraction of these had
been covered under foreign government
programs, or of those, what fraction joined
group health plans that included preexist-
ing condition exclusions while suffering
from and requiring additional care for pre-
existing conditions. Comparing GAO’s
estimate of the number of individuals who
could potentially benefit from HIPAA’s
portability protections (20 million or more
individuals with prior creditable coverage
who join new health plans in a given year)
with CBO estimates of the number who
might actually have added coverage for
needed care (145,000) produces a ratio of
about 1 percent. If this proportion holds
for group health plan enrollees who moved
to the U.S. from abroad, and if all such
enrollees were previously covered under
a foreign government program (an upper
bound), then about 4,000 individuals an-
nually might gain coverage for needed
care under the final regulation’s provision
treating coverage under such programs as
creditable coverage.
29
The provision that clarifies the special
enrollment rights of individuals who lose
eligibility for coverage in connection with
the movement out of an HMO’s service
area is expected mainly to benefit certain
individuals with COBRA continuation
coverage. The number of individuals af-
fected in any given year is expected to
be small. It is estimated that in 2002,
fewer than 10,000 COBRA enrollees were
covered by HMOs, moved across state or
county lines, and were potentially eligible
for coverage under another family mem-
ber’s group plan.
30
Lifetime benefit limits (LBL) are fairly
common in-group health plans and are typ-
ically set at $1 million or more.
31
Based
on tabulations made by an actuarial con-
sulting firm,
32
inplanswithLBLsof$1
million, annually about 27 per one million
enrollees will exceed the benefit limits. In
plans with a $500,000 LBL, the compa-
rable figure is 181 per million enrollees;
and in plans with a $2 million LBL, 5
per million enrollees. Combining these
proportions with a distribution of LBLs
by plan enrollment reported by a national
employer survey, yields about 8,700 plan
enrollees who will annually reach their
plan’s LBL. The Departments recognize
that those individuals who do encounter
such limits by definition have very high
expenses, a large portion of which would
be transferred to thegroup health plans
into which they special enroll. It is pos-
sible, however, that a large share of such
transfers would have occurred even with-
out the provisions of these final regulations
establishing a right to special enroll upon
encountering lifetime limits. For exam-
ple, the same individuals might have en-
rolled in these plans during open enroll-
ment opportunities, either before or after
encountering the limits. Alternatively, par-
ticipants who have met their LBL might
have left their jobs in order to create a spe-
cial enrollment opportunity.
The Departments estimate that annually
about 1 million families will be eligible
for special enrollments due to marriage, 2
million due to births. About one-half of
employees offered coverage at work have
a choice of plan options.
33
Taken together,
this suggests that the number of individ-
uals gaining special enrollment rights to
switch among options within group health
plans when adding dependents may be
large. However, it is unclear how many
will elect to switch, or how many who do
would have been so permitted even absent
the applicable requirement of these final
regulations. More important, it is unclear
whether merely switching among options
will increase or decrease the transfer from
the affected health plans to the affected
individuals. In any event, individuals ex-
ercising this special enrollment right to
switch options are not gaining coverage
under any particular group health plan but
are merely modifying that coverage.
Administrative requirements
In order to secure and implement
HIPAA’s group market special enroll-
ment and portability provisions, both the
HIPAA statute and these final regulations
establish certain administrative require-
ments. As noted above, the HIPAA statute
generally requires plans and issuers to
provide certifications of prior coverage
to individuals leaving coverage. These
regulations additionally require plans and
issuers to notify individuals of their spe-
cial enrollments rights, any preexisting
condition exclusion provisions, and the
applicability of suchexclusions where
individuals provide evidence of prior cov-
erage that is of insufficient duration to
fully offset exclusion periods. Plans will
incur cost to comply with these admin-
istrative requirements. The Departments
estimate the administrative cost to prepare
and distribute certifications and notices to
be $97 million per year.
34
Nearly all of this, or $96 million, is
attributable to the preparation and distri-
bution of certifications as required under
HIPAA’s statutory provisions. These fi-
nal regulations include numerous special
provisions that serve to reduce plans’ cost
of providing certifications. These pro-
visions serve to streamline and standard-
ize certifications’ content and format, min-
imize the number of duplicative certifi-
cations issued, and encourage the use of
telephone calls and other modes of com-
munication when they will suffice in lieu
of written certifications. The provisions
are designed to minimize certifications’
cost while ensuring that individuals and
plans (respectively) can efficiently and ef-
fectively demonstrate and verify prior cov-
erage. Demonstration and verification of
prior coverage enable individuals to secure
and plans to appropriately honor individu-
als’ portability rights under HIPAA.
First, an intermediate issuer will not
have to issue a certificate of creditable cov-
28
Calculation from the 2003 March CPS.
29
This number is 1 percent of the number of ESI holders in 2002 who moved from abroad the previous year.
30
Estimates using the March 2003 CPS. It should be noted that CPS is a weighted survey and that the number of actual observations of individuals that were COBRA enrollees with HMO
coverage, moved across counties and/or states and were eligible for coverage under another family member’s group plan was extremely small. As a result, this estimate is extremely noisy.
31
See, for example, U.S. Bureau of Labor Statistics,Employee Benefits in Medium and Large Establishments,2000(Washington, DC: U.S. Government Printing Office, 2003).
32
Milliman USA memorandum dated December 6, 2001.
33
Sally Trude, “Who Has A Choice of Health Plans?” Center for Studying Health Systems Change,Issue Brief: Findings from HSC, No. 27, Feb. 2000.
34
The Departments assumed that a clerical-level employee at a total labor cost (wages, fringe benefits, and overhead) of $17.24 per-hour would generate the certificates. The Departments
further assumed that the average time required to complete a certification is 4 to 5 minutes for all employers. Thisaverage is based on the assumption that most employers will automate the
certification process. The cost of printing/copying, an envelope and postage is assumed to be $0.53 per employee.
2005–8 I.R.B.583February 22, 2005

erage when an individual changes options
under the same health plan. In lieu of the
certificate, the issuer could simply trans-
mit to the plan information regarding indi-
viduals’ effective date of coverage and the
last date of coverage. An individual would
retain the right to get a certificate automat-
ically and upon request if he/she leaves the
plan.
Second, telephoniccertification will
fulfill the requirement to send a certificate
if the receiving plan, prior plan, and the
participant mutually agree to that arrange-
ment. The individual can get a written
certificate upon request.
Third, in situations where the issuer and
the plan contract for the issuer to complete
the certificates, the plan would not remain
liable even if the issuer failed to send the
certificates.
Fourth, the period of coverage listed on
automatic certificates will be only the last
continuous period of coverage without any
break. This is the most efficient and sim-
plest method of record keeping for plans
and issuers.
Fifth, the period of coverage contained
in the on-request certification will be all
periods of coverage ending within 24
months before the date of the request. Es-
sentially, a plan may simply look back two
years and send copies of any automatic
certificates issued during that period.
Sixth, a single certificate of creditable
coverage can be provided with respect to
both a participant and the participant’s de-
pendent if the information is identical for
each individual. In addition, certificates
may contain combined information for
families.
Seventh, plans and issuers are not re-
quired to furnish an individual an auto-
matic certificate with respect to a depen-
dent until they know or should know of
the dependent’s cessation of coverage un-
der the plan.
The above reductions in burdens on
plans and issuers may cause more frequent
circumstances in which participants are
required to demonstrate creditable cover-
age. In order to help offset some of the
additional burdens that will be shifted to
the participants, the regulations provide
the following protections:
First, if an individual is required to
demonstrate dependent status, the group
health plan or issuer is required to treat
the individual as having furnished a cer-
tificate showing the dependent status if
the individual attests to such dependency
and the period of dependent status, and
the individual cooperates with the plan’s
or issuer’s efforts to verify the dependent
status.
Second, if the accuracy of a certificate
is contested or a certificate is unavailable
when needed, individuals have the right to
demonstrate creditable coverage through
the presentation of relevant corroborating
evidence of creditable coverage during the
relevant time period and by cooperating
with the plan’s efforts to verify the indi-
vidual’s coverage.
Third, plans and issuers that impose
preexisting condition exclusion periods
must notify participants of this fact. They
must also explain that prior creditable
coverage can reduce the length of a preex-
isting condition exclusion period, and that
the plan or issuer will assist in obtaining
a certificate of creditable coverage from
any prior plan or issuer, if necessary. An
exclusion may not be imposed until this
notice is given. This is beneficial to par-
ticipants insofar as it forewarns them of
potential claim denials and enables them
to more easily exercise their right to pro-
tection from such denials under HIPAA’s
portability provisions.
Fourth, after an individual has pre-
sented evidence of creditable coverage,
the plan or issuer must give the individual
a written notice of the length of any pre-
existing condition exclusion that remains
after offsetting for creditable coverage.
Fifth, certificates of creditable cover-
age now contain educational language that
more explicitly informs consumers of their
HIPAA rights.
As noted earlier in this preamble, GAO
and others recommended that educational
statements be added to certifications. The
Departments have provided a suitable
statement for use by plans, thereby elimi-
nating any need for plans to develop their
own. The cost of providing such state-
ments is therefore expected to be minimal.
The administrative cost associated
with provision of certifications under the
HIPAA statute and these final regulations
was estimated as follows.
The ongoing burden associated with
the issuance of automatic certifications by
group plans is estimated as a function of
(1) the number of events that trigger such
issuances; (2) the statutory and regula-
tory specifications for the content of the
certificates; and (3) the assumed burden
associated with the preparation and distri-
bution of each certificate.
Certifications must be issued when an
event, defined as the loss of health cover-
age by a participant or by a dependent, oc-
curs. Survey tabulations indicate that there
were 54.3 million events in 2002.
35
Addi-
tionally, results from the March 1999 CPS
indicate that about 3 percent of the events
involve a dependent who lives at a differ-
ent address than the participant. In such
cases the plan is required to send out at
least 2 separate certificates.
The model certificate illustrates how
plans may incur a lesser burden when it
is certified that prior periods of coverage
were of at least 18 months duration; that is,
in lieu of a specific date that coverage be-
gan and waiting/affiliation period informa-
tion, such certifications may simply indi-
cate that the prior period of coverage lasted
at least 18 months. In contrast, certifica-
tions of shorter periods of prior coverage
must contain the specific dates when cov-
erage — and waiting/affiliation periods, if
applicable — began.
Combining the options for the ad-
dresses with the time periods results in
four categories of certifications: (1) one
address and less than 18 months of prior
creditable coverage (12 million annual
events); (2) one address and 18 months
or more of prior creditable coverage (42.3
million); (3) more than one address and
prior creditable coverage of less than 18
months (.4 million); and (4) more than one
address and 18 months or more of prior
creditable coverage (1.3 million).
Consistent with the interim regulations,
we assume that the per-certificate prepa-
ration effort requires 5 minutes for prior
creditable coverage of less than 18 months
and 4 minutes for creditable coverage that
is greater than or equal to 18 months. The
additional cost involved in sending certifi-
cates to multiple addresses for a given par-
35
This total is based on internal estimates. The ESI total (24.0 million or 20.4 private-sector and 3.6 public sector) was the sum of policy-holders who left jobs, according to the 2002
MEPS-HC, and their dependents, which were derivedby multiplying this number by the CPS ratio of dependents to policy holders. Based on counts of the number of people with partial year
coverage off the March 2003 CPS, we estimated the SCHIP and Medicaid total to be 14.9 million and the private individual market to be 15.4 million.
February 22, 20055842005–8 I.R.B.

ticipant is assumed to be 50 percent of the
cost of sending a certificate to one address.
The Departments assumed that the cer-
tificates would be generated by a cleri-
cal-level employee who costs the plans
$17.24 per-hour in wages, benefits, and
overhead.
36
The cost of printing/copying,
envelope and postage is assumed to be
$0.53 per envelope. The resulting annual
burden is $96 million.
A more strict interpretation of the
statute would require plans to send an
individual certificate to each affected en-
rollee. Obviously, this requirement would
significantly increase the administrative
burden. Such strict interpretation would
result in plans sending 80.1 million certifi-
cates annually at cost of $157.6 million,
which is $61.6 million more than the bur-
den imposed by the final regulations.
The final regulations require that plans,
in response to requests made by or on
behalf of individuals, provide certificates
at any time while the individual is covered
under the plan and for up to 24 months
after coverage ceases. Such requests are
mostlikelytobemadebyanindividual
who is unable to locate the certificate of
creditable coveragefrom his/her prior
health plan and is seeking to enroll in a
group health plan that imposes preexist-
ing condition exclusions or is seeking to
reduce or eliminate any preexisting con-
dition exclusions that may otherwise be
appliedbyasourceofindividual coverage.
The Departments believe that the re-
quested certificate burden is negligible for
several reasons. First, as reported by a ma-
jor health benefits survey
37
the proportion
of enrollees that are in plans with preex-
isting condition exclusion has not changed
from the 2000 share of 30 percent, which
is down from the pre-HIPAA level of
60 percent. In addition, the educational
statement contained within the certificate
serves to highlight the importance of the
document, thus encouraging its retention.
Furthermore, the final rules permit indi-
viduals to establish andverifycreditable
coverage through other means. Finally,
evidence of creditable coverage may be
transmitted throughmeans other than doc-
umentation, such as by a telephone call
fromtheplantoathirdparty.
Apart from the provision of certifica-
tions of prior creditable coverage, the re-
maining $1 million in administrative ex-
penses is attributable to notices of special
enrollment rights and of the existence and
application of preexisting condition exclu-
sions, which are required under these fi-
nal regulations. The Departments believe
that these notices are necessary to ensure
that individuals understand and can effec-
tively exercise their special enrollment and
portability rights under HIPAA, and that
the benefits of ensuring this outweigh the
associated administrative cost.
The regulations provide that a plan must
provide all employees with a notice de-
scribing special enrollment rights at or be-
fore the time the employee is initially of-
fered the opportunity to enroll in the plan.
The final regulations provide model lan-
guage that can be used to satisfy the spe-
cial enrollment notice requirement.
The Departments believe that the vast
majority of plans have incorporated spe-
cial enrollment language into their plan en-
rollment materials. Thus, the cost of the
special enrollment notice is assumed to be
a minor component of the overall cost of
providing plan enrollment materials.
The number of employees who are
hiredannuallybyfirmsthatofferhealth
coverage and who are eligible for such
coverage was developed by using the
proportion of workers with less than one
year of tenure as reported by the 2002
MEPS-HC. We find that 10.8 million em-
ployees will be newly hired and eligible
for health coverage on an annual basis.
We assume that the special enrollment
notice is a component of plan enrollment
materials and requires one-third of a sheet
of paper. Using a printing/copying cost
of $0.05 per page, we assume that the
per-notice cost is $0.0167. The resulting
burden is estimated to be $180,687.
The final regulations provide that every
plan with a preexisting condition exclusion
must provide in writing a general notice of
such provisions to individuals eligible for
enrollment under the plan. The regulations
specify what is required of the plan when
it discusses the amount and terms of its
preexisting condition exclusion, including
the person to contact for further informa-
tion regarding the exclusions. In addition,
the regulations clarify that issuers must de-
scribe the actual maximum exclusion pe-
riod that is applicable to a specific plan. A
regulatory example provides sample lan-
guage that the plans can use to develop the
general notice.
Based on results from the 2000
Kaiser/HRET Employer survey, we as-
sume that 35 percent of plans with fewer
than 100 participants, and 28 percent of
plans with 100 or more participants, apply
preexisting condition exclusions to new
enrollees. If we apply these proportions to
the number of new employees hired each
year by employers that offer health cov-
erage, we find that 3.1 million employees
will annually receivethe general notice.
As with the special enrollment notice,
we assume that the general notice of preex-
isting condition exclusions is a component
of standard plan enrollment materials and
also requires one-third of a sheet of paper.
Assuming a printing/copying cost of $0.05
per page, the per-notice cost is $0.0167.
The annual cost to distribute the notices is
therefore estimated to be $51,852.
The regulations provide sample notice
language, thus relieving the plans of the
burden of developing their own forms.
Plans that impose preexisting condition
exclusions must, in writing, notify par-
ticipants who have failed to demonstrate
sufficient prior coverage that the exclu-
sions will affect them and indicate what the
length of the preexisting condition exclu-
sion period is, with respect to each indi-
vidual. This notice is required only in situ-
ations in which the individual presents ev-
idence of prior creditable coverage and its
duration is less than the maximum length
of the preexisting condition exclusion pe-
riod. These final regulations clarify that
the notice does not have to identify any
medical conditions that are specific to the
individual and subject to the exclusion.
Tabulations from the 2002 MEPS-HC
indicate that, of those individuals in the
private sector who changed jobs and hold
insurance, 16 percent have prior creditable
coverage of between 1 day and 12 months,
which is the statutory preexisting condi-
tion exclusion maximum for individuals
who enroll when first eligible. The compa-
36
The total labor cost is derived from wage and compensation data from the Bureau of Labor Statistics and includes an overhead component, which is a multiple of compensation based on
the Government Cost Estimate.
37
Kaiser Family Foundation and Health Research and Educational Trust, Employer Health Benefits 2002 Annual Survey
2005–8 I.R.B.585February 22, 2005

rable proportion for state and local govern-
mental plans is 18 percent. Applying these
proportion to the number of general pre-
existing exclusion notices required, yields
478,569 notices that will be prepared an-
nually.
Because the notice must be customized
to reflect each individual’s applicable pre-
existing condition exclusion period, the
per-notice time burden will be greater than
that for the general notice of preexisting
condition exclusions. Consistent with the
interim final regulations, the Departments
assume that the preparation of each notice
will take two minutes of a clerical-level
employee’s time, plus $0.47 for printing,
envelope, and postage, yielding a per-no-
tice cost of $1.05. The resulting annual
burden is estimated to be $582,497.
The estimated burden represents only
the cost of producing and distributing the
notices and does not include the expense
involved in determining the adequacy of a
participant’s prior coverage, since such ex-
pense is considered to be part of the regu-
lar business practices necessary to comply
with HIPAA’s statutory portability protec-
tions.
Generally, all of the major administra-
tive requirements included in the final reg-
ulations were also included in the interim
final regulations. The final regulations
make minor additions to two requirements,
however. They require plans to include ed-
ucational statements in certificates of cred-
itable coverage and to maintain in writing
their procedures for requesting certificates.
The cost of these additional requirements
is expected to be small, and was not esti-
mated separately from the overall cost of
providing certificates.
The requirement that certification re-
quest procedures be in writing is essen-
tially a clarification of the interim final
regulations’ requirement that plans have
such procedures. The Departments believe
it is likely that most plans already maintain
written procedures, and therefore expect
the cost of this requirement to be small.
The Departments did not estimate the cost
of this requirement separately from the
cost of providing certifications on request.
Other changes included in these final
regulations are likely to slightly reduce
plans’ cost to provide certain HIPAA-re-
quired notices. Included with the final reg-
ulation is new sample language for general
and specific noticesof preexisting condi-
tion exclusions, which may serve to reduce
some plans’ costs of providing these no-
tices, and revised sample language for spe-
cial enrollment rights notices. The final
regulations also clarify the narrow scope of
the requirement to notify certain affected
participants of the specific application of
preexisting condition exclusions, thereby
potentially relieving some plans of the bur-
den associated with a more expansive in-
terpretation of that requirement. The De-
partments did not estimate the impact of
these provisions separately from the over-
all cost of providing general and specific
notices of preexisting condition exclusions
and notices of special enrollment rights.
Statutory
Authority
The Department of the Treasury final
rule is adopted pursuant to the authority
contained in sections 7805 and 9833 of the
Code (26 U.S.C. 7805, 9833).
The Department of Labor final rule
is adopted pursuant to the authority con-
tained in 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), Public Law
104–191, 101 Stat. 1936; sec. 401(b),
Public Law 105–200, 112 Stat. 645 (42
U.S.C. 651 note); Secretary of Labor’s
Order 1–2003, 68 FR 5374 (Feb. 3, 2003).
The Department of HHS final rule is
adopted pursuant to the authority con-
tained in sections 2701 through 2763,
2791, and 2792 of the PHS Act (42 U.S.C.
300gg through 300gg–63, 300gg–91, and
300gg–92), as added by HIPAA (Pub-
lic Law 104–191, 110 Stat. 1936), and
amended by MHPA and NMHPA (Pub-
lic Law 104–204, 110 Stat. 2935), and
WHCRA (Public Law 105–277, 112 Stat.
2681–436).
*****
Adoption of Amendments to the
Regulations
Internal Revenue Service
26 CFR Chapter I
Accordingly, 26 CFR Parts 54 and 602
are amended as follows:
PART 54 — PENSION EXCISE TAXES
Paragraph 1. The authority citation for
part 54 is amended by:
a.Removing the citations for
54.9801–1T, 54.9801–2T, 54.9801–3T,
54.9801–4T, 54.9801–5T, 54.9801–6T,
54.9831–1T, and 54.9833–1T.
b. Adding entries in numerical order
for 54.9801–1, 54.9801–2, 54.9801–3,
54.9801–4, 54.9801–5, 54.9801–6,
54.9802–1, 54.9831–1, and 54.9833–1.
The additions read as follows:
Authority: 26 U.S.C. 7805. * * *
Section 54.9801–1 also issued under 26
U.S.C. 9833.
Section 54.9801–2 also issued under 26
U.S.C. 9833.
Section 54.9801–3 also issued under 26
U.S.C. 9801(c)(4), 9801(e)(3), and 9833.
Section 54.9801–4 also issued under 26
U.S.C. 9801(c)(1)(I) and 9833.
Section 54.9801–5 also issued under 26
U.S.C. 9801(c)(4), 9801(e)(3), and 9833.
Section 54.9801–6 also issued under 26
U.S.C. 9833.
Section 54.9802–1 also issued under 26
U.S.C. 9833. * * *
Section 54.9831–1 also issued under 26
U.S.C. 9833.
Section 54.9833–1 also issued under 26
U.S.C. 9833.
Par.2.Sections 54.9801–1T,
54.9801–2T, 54.9801–3T, 54.9801–4T,
54.9801–5T, 54.9801–6T, 54.9831–1T,
and 54.9833–1T are removed.
Par. 3. Sections 54.9801–1, 54.9801–2,
54.9801–3, 54.9801–4, 54.9801–5,
54.9801–6, 54.9831–1, and 54.9833–1
are added to read as follows:
§54.9801–1 Basis and scope.
(a)Statutory basis. Sections 54.9801–1
through54.9801–6,54.9802–1,
54.9802–1T, 54.9811–1T, 54.9812–1T,
54.9831–1, and 54.9833–1 (portability
sections) implement Chapter 100 of
Subtitle K of the Internal Revenue Code
of 1986.
(b)Scope. A group health plan may
provide greater rights to participants and
beneficiaries than those set forth in these
portability sections. These portability sec-
tions set forth minimum requirements for
group health plans concerning:
(1) Limitations on a preexisting condi-
tion exclusion period.
(2) Certificates and disclosure of previ-
ous coverage.
(3) Rules relating to creditable cover-
age.
February 22, 20055862005–8 I.R.B.

(4) Special enrollment periods.
(5) Prohibition against discrimination
on the basis of health factors.
(c)Similar Requirements under the Em-
ployee Retirement Income Security Act and
the Public Health Service Act. Sections
701, 702, 703, 711, 712, 732, and 733
of the Employee Retirement Income Secu-
rity Act of 1974 and sections 2701, 2702,
2704, 2705, 2721, and 2791 of the Public
Health Service Act impose requirements
similar to those imposed under Chapter
100 of Subtitle K with respect to health
insurance issuers offering group health in-
surance coverage. See 29 CFR Part 2590
and 45 CFR Parts 144, 146, and 148. See
alsoPartBofTitleXXVIIofthePublic
Health Service Act and 45 CFR Part 148
for other rules applicable to health insur-
ance offered in the individual market (de-
fined in §54.9801–2)
§54.9801–2 Definitions.
Unless otherwise provided, the defi-
nitions in this section govern in applying
the provisions of §§54.9801–1 through
54.9801–6, 54.9802–1, 54.9802–1T,
54.9811–1T, 54.9812–1T, 54.9831–1, and
54.9833–1.
Affiliation periodmeans a period of
time that must expire before health in-
surance coverage provided by an HMO
becomes effective, and during which the
HMO is not required to provide benefits.
COBRAdefinitions:
(1)COBRAmeans Title X of the Con-
solidated Omnibus Budget Reconciliation
Act of 1985, as amended.
(2)COBRA continuation coverage
means coverage, under a group health
plan, that satisfies an applicable COBRA
continuation provision.
(3)COBRA continuation provision
means section 4980B (other than para-
graph(f)(1)ofsection4980Binsofaras
it relates to pediatric vaccines), sections
601–608 of ERISA, or Title XXII of the
PHS Act.
(4)Exhaustion of COBRA continua-
tion coveragemeans that an individual’s
COBRA continuation coverage ceases for
any reason other than either failure of the
individual to pay premiums on a timely
basis, or for cause (such as making a
fraudulent claim or an intentional misrep-
resentation of a material fact in connection
with the plan). An individual is considered
to have exhausted COBRA continuation
coverage if such coverage ceases —
(i) Due to the failure of the employer or
other responsible entity to remit premiums
on a timely basis;
(ii) When the individual no longer re-
sides, lives, or works in the service area
of an HMO or similar program (whether
or not within the choice of the individual)
and there is no other COBRA continuation
coverage available to the individual; or
(iii) When the individual incurs a claim
that would meet or exceed a lifetime
limit on all benefits and there is no other
COBRA continuation coverage available
to the individual.
Conditionmeans amedical condition.
Creditable coveragemeanscred-
itable coveragewithin the meaning of
§54.9801–4(a).
Dependentmeans any individual who is
or may become eligible for coverage under
the terms of a group health plan because of
a relationship to a participant.
Employee Retirement Income Security
Act of 1974 (ERISA)means the Employee
Retirement Income Security Act of 1974,
as amended (29 U.S.C. 1001et seq.).
Enrollmeans to become covered for
benefits under a group health plan (that is,
when coverage becomes effective), with-
out regard to when the individual may have
completed or filed any forms that are re-
quired in order to become covered under
the plan. For this purpose, an individual
who has health coverage under a group
health plan is enrolled in the plan regard-
less of whether the individual elects cov-
erage, the individual is a dependent who
becomes covered as a result of an election
by a participant, or the individual becomes
covered without an election.
Enrollment datedefinitions (enrollment
date,first day of coverage,andwaiting pe-
riod) are set forth in §54.9801–3(a)(3)(i),
(ii), and (iii).
Excepted benefitsmeans the benefits
described as excepted in §54.9831(c).
Genetic informationmeans information
about genes, gene products, and inherited
characteristics that may derive from the
individual or a family member. This in-
cludes information regarding carrier sta-
tus and information derived from labora-
tory tests that identify mutations in specific
genes or chromosomes, physical medical
examinations, family histories, and direct
analysis of genes or chromosomes.
Group health insurance coverage
means health insurance coverage offered
in connection with a group health plan.
Group health planorplanmeans a
group health planwithin the meaning of
§54.9831(a).
Group marketmeans the market for
health insurance coverage offered in con-
nection with a group health plan. (How-
ever, certain very small plans may be
treated as being in the individual market,
rather than the group market; see the defi-
nition ofindividual marketin this section.)
Health insurance coveragemeans ben-
efits consisting of medical care (provided
directly, through insurance or reimburse-
ment, or otherwise) under any hospital
or medical service policy or certificate,
hospital or medical service plan contract,
or HMO contract offered by a health in-
surance issuer. Health insurance coverage
includes group health insurance cover-
age, individual health insurance coverage,
and short-term, limited-duration insur-
ance. However, benefits described in
§54.9831(c)(2) are not treated as benefits
consisting of medical care.
Health insurance issuerorissuermeans
an insurance company, insurance service,
or insurance organization (including an
HMO)thatisrequiredtobelicensedto
engage in the business of insurance in a
state and that is subject to state law that
regulates insurance (within the meaning of
section 514(b)(2) of ERISA). Such term
does not include a group health plan.
Health maintenance organizationor
HMOmeans —
(1) A federally qualified health mainte-
nance organization (as defined in section
1301(a) of the PHS Act);
(2) An organization recognized under
state law as a health maintenance organi-
zation; or
(3) A similar organization regulated un-
der state law for solvency in the same man-
ner and to the same extent as such a health
maintenance organization.
Individual health insurance coverage
means health insurance coverage offered
to individuals in the individual market, but
does not include short-term, limited-dura-
tion insurance. Individual health insurance
coverage can include dependent coverage.
Individual marketmeans the market
for health insurance coverage offered to
individuals other than in connection with
a group health plan. Unless a state elects
2005–8 I.R.B.587February 22, 2005

otherwise in accordance with section
2791(e)(1)(B)(ii) of the PHS Act, such
term also includes coverage offered in
connection with a group health plan that
has fewer than two participants who are
current employees on the first day of the
plan year.
Issuermeans ahealth insurance issuer.
Late enrollmentdefinitions (late en-
rolleeandlate enrollment) are set forth in
§54.9801–3(a)(3)(v) and (vi) .
Medical carehas the meaning given
such term by section 213(d), determined
without regard to section 213(d)(1)(C) and
so much of section 213(d)(1)(D) as relates
to qualified long-term care insurance.
Medical conditionorconditionmeans
any condition, whether physical or mental,
including, but not limited to, any condi-
tion resulting from illness, injury (whether
or not the injury is accidental), pregnancy,
or congenital malformation. However, ge-
netic information is not a condition.
Participantmeansparticipantwithin
the meaning of section 3(7) of ERISA.
Placement, or being placed, for adop-
tionmeans the assumption and retention of
a legal obligation for total or partial sup-
port of a child by a person with whom the
child has been placed in anticipation of the
child’s adoption. The child’s placement
foradoptionwithsuchpersonendsupon
the termination of such legal obligation.
Plan yearmeans the year that is desig-
nated as the plan year in the plan document
of a group health plan, except that if the
plan document does not designate a plan
year or if there is no plan document, the
plan year is —
(1) The deductible or limit year used
under the plan;
(2) If the plan does not impose de-
ductibles or limits on a yearly basis, then
the plan year is the policy year;
(3) If the plan does not impose de-
ductibles or limits on a yearly basis, and
either the plan is not insured or the insur-
ance policy is not renewed on an annual
basis, then the plan year is the employer’s
taxable year; or
(4) In any other case, the plan year is the
calendar year.
Preexisting condition exclusionmeans
preexisting condition exclusionwithin the
meaning of §54.9801–3(a)(1).
Public health planmeanspublic
health planwithin the meaning of
§54.9801–4(a)(1)(ix).
Public Health Service Act (PHS Act)
means the Public Health Service Act (42
U.S.C. 201,et seq.).
Short-term, limited-duration insurance
means health insurance coverage provided
pursuant to a contract with an issuer that
has an expiration date specified in the con-
tract (taking intoaccount any extensions
that may be elected by the policyholder
without the issuer’s consent) that is less
than 12 months after the original effective
date of the contract.
Significant break in coveragemeans a
significant break in coveragewithin the
meaning of §54.9801–4(b)(2)(iii).
Special enrollmentmeans enrollment in
a group health plan under the rights de-
scribed in §54.9801–6 or in group health
insurance coverage under the rights de-
scribed in 29 CFR 2590.701–6 or 45 CFR
146.117.
State health benefits risk poolmeans a
state health benefits risk poolwithin the
meaning of §54.9801–4(a)(1)(vii).
Waiting periodmeanswait-
ing periodwithin the meaning of
§54.9801–3(a)(3)(iii).
§54.9801–3 Limitations on preexisting
condition exclusion period.
(a)Preexisting condition exclusion—
(1)Defined—(i)Apreexisting condition
exclusionmeans a limitation or exclusion
of benefits relating to a condition based
on the fact that the condition was present
before the effective date of coverage un-
der a group health plan or group health
insurance coverage, whether or not any
medical advice, diagnosis, care, or treat-
ment was recommended or received before
that day. A preexisting condition exclu-
sion includes any exclusion applicable to
an individual as a result of information re-
lating to an individual’s health status be-
fore the individual’s effective date of cov-
erage under a group health plan or group
health insurance coverage, such as a con-
dition identified as a result of a pre-enroll-
ment questionnaire or physical examina-
tion given to the individual, or review of
medical records relatingtothepre-enroll-
ment period.
(ii)Examples. The rules of this para-
graph (a)(1) are illustrated by the follow-
ing examples:
Example 1.(i)Facts. A group health plan pro-
vides benefits solely through an insurance policy of-
feredbyIssuerS. At the expiration of the policy, the
plan switches coverage to a policy offered by Issuer
T. IssuerT’s policy excludes benefits for any prosthe-
sis if the body part was lost before the effective date
of coverage under the policy.
(ii)Conclusion.InthisExample 1, the exclusion
of benefits for any prosthesis if the body part was lost
before the effective date of coverage is a preexist-
ing condition exclusion because it operates to exclude
benefits for a condition based on the fact that the con-
dition was present before the effective date of cov-
erage under the policy. (Therefore, the exclusion of
benefits is required to comply with the limitations on
preexisting condition exclusions in this section. For
an example illustrating the application of these limi-
tations to a succeeding insurance policy, seeExample
3of paragraph (a)(3)(iv) of this section.)
Example 2.(i)Facts. A group health plan pro-
vides coverage for cosmetic surgery in cases of acci-
dental injury, but only if the injury occurred while the
individual was covered under the plan.
(ii)Conclusion.InthisExample 2, the plan provi-
sion excluding cosmetic surgery benefits for individ-
uals injured before enrolling in the plan is a preexist-
ing condition exclusion because it operates to exclude
benefits relating to a condition based on the fact that
the condition was present before the effective date of
coverage. The plan provision, therefore, is subject to
the limitations on preexisting condition exclusions in
this section.
Example 3.(i)Facts. A group health plan pro-
vides coverage for the treatment of diabetes, gener-
ally not subject to any lifetime dollar limit. However,
if an individual was diagnosed with diabetes before
the effective date of coverage under the plan, diabetes
coverage is subject to a lifetime limit of $10,000.
(ii)Conclusion.InthisExample 3, the $10,000
lifetime limit is a preexisting condition exclusion be-
cause it limits benefits for a condition based on the
fact that the condition waspresent before the effec-
tive date of coverage. The plan provision, therefore,
is subject to the limitations on preexisting condition
exclusions in this section.
Example 4.(i)Facts. A group health plan pro-
vides coverage for the treatment of acne, subject to
a lifetime limit of $2,000. The plan counts against
this $2,000 lifetime limit acne treatment benefits pro-
vided under prior health coverage.
(ii)Conclusion. In thisExample 4, counting ben-
efits for a specific condition provided under prior
health coverage against a lifetime limit for that con-
dition is a preexisting condition exclusion because it
operates to limit benefits for a condition based on the
fact that the condition waspresent before the effec-
tive date of coverage. The plan provision, therefore,
is subject to the limitations on preexisting condition
exclusions in this section.
Example 5.(i)Facts. When an individual’s cov-
erage begins under a group health plan, the individual
generally becomes eligible for all benefits. However,
benefits for pregnancy are not available until the indi-
vidual has been covered under the plan for 12 months.
(ii)Conclusion.InthisExample 5,therequire-
ment to be covered under the plan for 12 months to
be eligible for pregnancy benefits is a subterfuge for a
preexisting condition exclusion because it is designed
to exclude benefits for a condition (pregnancy) that
arose before the effective date of coverage. Because
a plan is prohibited under paragraph (b)(5) of this sec-
tion from imposing any preexisting condition exclu-
February 22, 20055882005–8 I.R.B.

sion on pregnancy, the plan provision is prohibited.
However, if the plan provision included an exception
for women who were pregnant before the effective
date of coverage under the plan (so that the provision
applied only to women who became pregnant on or
after the effective date of coverage) the plan provi-
sion would not be a preexisting condition exclusion
(and would not be prohibited by paragraph (b)(5) of
this section).
Example 6.(i)Facts. A group health plan pro-
vides coverage for medically necessary items and ser-
vices, generally including treatment of heart condi-
tions. However, the plan does not cover those same
items and services when used for treatment of con-
genital heart conditions.
(ii)Conclusion.InthisExample 6, the exclusion
of coverage for treatment of congenital heart condi-
tions is a preexisting condition exclusion because it
operates to exclude benefits relating to a condition
based on the fact that the condition was present be-
fore the effective date of coverage. The plan provi-
sion, therefore, is subject to the limitations on preex-
isting condition exclusions in this section.
Example 7.(i)Facts. A group health plan gener-
ally provides coverage for medically necessary items
and services. However, the plan excludes coverage
for the treatment of cleft palate.
(ii)Conclusion.InthisExample 7, the exclusion
of coverage for treatment of cleft palate is not a preex-
isting condition exclusion because the exclusion ap-
plies regardless of when the condition arose relative
to the effective date of coverage. The plan provision,
therefore, is not subject to the limitations on preexist-
ing condition exclusions in this section.
Example 8.(i)Facts. A group health plan pro-
vides coverage for treatment of cleft palate, but only
if the individual being treated has been continuously
covered under the plan from the date of birth.
(ii)Conclusion.InthisExample 8, the exclusion
of coverage for treatment of cleft palate for individ-
uals who have not been covered under the plan from
the date of birth operates to exclude benefits in rela-
tion to a condition based on the fact that the condition
was present before the effective date of coverage. The
plan provision, therefore, is subject to the limitations
on preexisting condition exclusions in this section.
(2)General rules. Subject to paragraph
(b) of this section (prohibiting the impo-
sition of a preexisting condition exclusion
with respect to certain individuals and con-
ditions), a group health plan may impose,
with respect to a participant or beneficiary,
a preexisting condition exclusion only if
the requirements of this paragraph (a)(2)
are satisfied. (See section 701 of ERISA
and section 2701 of the PHS Act, under
which these requirements are also imposed
on a health insurance issuer offering group
health insurance coverage.)
(i)6-month look-back rule. A preex-
isting condition exclusion must relate to a
condition (whether physical or mental), re-
gardless of the cause of the condition, for
which medical advice, diagnosis, care, or
treatment was recommended or received
within the 6-month period (or such shorter
period as applies under the plan) ending on
the enrollment date.
(A) For purposes of this paragraph
(a)(2)(i), medical advice, diagnosis, care,
or treatment is taken into account only if it
is recommended by, or received from, an
individual licensed or similarly authorized
to provide such services under state law
and operating within the scope of practice
authorized by state law.
(B) For purposes of this paragraph
(a)(2)(i), the 6-month period ending on
the enrollment date begins on the 6-month
anniversary date preceding the enrollment
date. For example, for an enrollment date
of August 1, 1998, the 6-month period
preceding the enrollment date is the pe-
riod commencing on February 1, 1998,
and continuing through July 31, 1998. As
another example, for an enrollment date
of August 30, 1998, the 6-month period
preceding the enrollment date is the period
commencing on February 28, 1998, and
continuing through August 29, 1998.
(C) The rules of this paragraph (a)(2)(i)
are illustrated by the following examples:
Example 1.(i)Facts. IndividualAis diagnosed
with a medical condition 8 months beforeA’s enroll-
ment date in EmployerR’s group health plan.A’s
doctor recommends thatAtake a prescription drug
for 3 months, andAfollows the recommendation.
(ii)Conclusion. In thisExample 1, Employer
R’s plan may impose a preexisting condition exclu-
sion with respect toA’s condition becauseAreceived
treatment during the 6-month period ending onA’s
enrollment date in EmployerR’s plan by taking the
prescription medication during that period. How-
ever, ifAdid not take the prescription drug during
the 6-month period, EmployerR’s plan would not be
able to impose a preexisting condition exclusion with
respect to that condition.
Example 2.(i)Facts. IndividualBis treated for
a medical condition 7 months before the enrollment
date in EmployerS’s group health plan. As part of
such treatment,B’s physician recommends that a fol-
low-up examination be given 2 months later. Despite
this recommendation,Bdoes not receive a follow-up
examination, and no other medical advice, diagnosis,
care, or treatment for that condition is recommended
toBor received byBduring the 6-month period end-
ing onB’s enrollment date in EmployerS’s plan.
(ii)Conclusion.InthisExample 2, EmployerS’s
plan may not impose a preexisting condition exclu-
sion with respect to the condition for whichBre-
ceived treatment 7 months prior to the enrollment
date.
Example 3.(i)Facts. Same facts asExample 2,
except that EmployerS’s plan learns of the condition
and attaches a rider toB’s certificate of coverage ex-
cluding coverage for the condition. Three months af-
ter enrollment,B’s condition recurs, and Employer
S’s plan denies payment under the rider.
(ii)Conclusion.InthisExample 3, the rider is
a preexisting condition exclusion and EmployerS’s
plan may not impose a preexisting condition exclu-
sion with respect to the condition for whichBre-
ceived treatment 7 months prior to the enrollment
date. (In addition, such a rider would violate the pro-
visions of §54.9802–1, even ifBhad received treat-
ment for the condition within the 6-month period end-
ing on the enrollment date.)
Example 4.(i)Facts. IndividualChas asthma
and is treated for that condition several times during
the 6-month period beforeC’s enrollment date in Em-
ployerT’s plan. Three months after the enrollment
date,Cbegins coverage under EmployerT’s plan.
Two months later,Cis hospitalized for asthma.
(ii)Conclusion.InthisExample 4,EmployerT’s
plan may impose a preexisting condition exclusion
with respect toC’s asthma because care relating to
C’s asthma was received during the 6-month period
ending onC’s enrollment date (which, under the rules
of paragraph (a)(3)(i) of this section, is the first day
of the waiting period).
Example 5.(i)Facts. IndividualD, who is subject
to a preexisting condition exclusion imposed by Em-
ployerU’s plan, has diabetes, as well as retinal degen-
eration, a foot condition, and poor circulation (all of
which are conditions that may be directly attributed
to diabetes).Dreceives treatment for these condi-
tions during the 6-month period ending onD’s en-
rollment date in EmployerU’s plan. After enrolling
in the plan,Dstumbles and breaks a leg.
(ii)Conclusion.InthisExample 5,thelegfrac-
ture is not a condition related toD’s diabetes, reti-
nal degeneration, foot condition, or poor circulation,
even though they may have contributed to the acci-
dent. Therefore, benefits to treat the leg fracture can-
not be subject to a preexisting condition exclusion.
However, any additional medical services that may
be needed because ofD’s preexisting diabetes, poor
circulation, or retinal degeneration that would not be
needed by another patient with a broken leg who does
not have these conditions may be subject to the preex-
isting condition exclusion imposed under Employer
U’s plan.
(ii)Maximum length of preexisting con-
dition exclusion. A preexisting condition
exclusion is not permitted to extend for
more than 12 months (18 months in the
case of a late enrollee) after the enrollment
date. For example, for an enrollment date
of August 1, 1998, the 12-month period af-
ter the enrollment date is the period com-
mencing on August 1, 1998, and continu-
ing through July 31, 1999; the 18-month
period after the enrollment date is the pe-
riod commencing on August 1, 1998, and
continuing through January 31, 2000.
(iii)Reducing a preexisting condition
exclusion period by creditable coverage
— (A) The period of any preexisting
condition exclusion that would other-
wiseapplytoanindividualunderagroup
health plan is reduced by the number
of days of creditable coverage the indi-
vidual has as of the enrollment date, as
2005–8 I.R.B.589February 22, 2005

counted under §54.9801–4. Creditable
coverage may be evidenced through a cer-
tificate of creditable coverage (required
under §54.9801–5(a)), or through other
means in accordance with the rules of
§54.9801–5(c).
(B) The rules of this paragraph
(a)(2)(iii) are illustrated by the follow-
ing example:
Example.(i)Facts. IndividualDworks for Em-
ployerXand has been covered continuously under
X’s group health plan.D’s spouse works for Em-
ployerY.Ymaintains a group health plan that im-
poses a 12-month preexisting condition exclusion (re-
duced by creditable coverage) on all new enrollees.D
enrolls inY’s plan, but also stays covered underX’s
plan.DpresentsY’s plan with evidence of creditable
coverage underX’s plan.
(ii)Conclusion.InthisExample,Y’s plan must
reduce the preexisting condition exclusion period that
applies toDby the number of days of coverage that
Dhad underX’s plan as ofD’s enrollment date inY’s
plan (even thoughD’s coverage underX’s plan was
continuing as of that date).
(iv)Other standards. See §54.9802–1
for other standards that may apply with re-
spect to certain benefit limitations or re-
strictions under a group health plan. Other
laws may also apply, such as the Uni-
formed Services Employment and Reem-
ployment Rights Act (USERRA), which
can affect the application of a preexisting
condition exclusion to certain individuals
who are reinstated in a group health plan
following active military service.
(3)Enrollment definitions—(i)Enroll-
ment datemeans the first day of cover-
age (as described in paragraph (a)(3)(ii) of
this section) or, if there is a waiting pe-
riod, the first day of the waiting period.
If an individual receiving benefits under
a group health plan changes benefit pack-
ages, or if the plan changes group health
insurance issuers, the individual’s enroll-
ment date does not change.
(ii)First day of coveragemeans, in the
case of an individual covered for benefits
under a group health plan, the first day of
coverage under the plan and, in the case of
an individual covered by health insurance
coverage in the individual market, the first
day of coverage under the policy or con-
tract.
(iii)Waiting periodmeans the period
that must pass before coverage for an em-
ployee or dependent who is otherwise eli-
gible to enroll under the terms of a group
health plan can become effective. If an em-
ployee or dependent enrolls as a late en-
rollee or special enrollee, any period be-
fore such late or special enrollment is not
a waiting period. If an individual seeks
coverage in the individual market, a wait-
ing period begins on the date the individual
submits a substantially complete applica-
tion for coverage and ends on —
(A) If the application results in cover-
age, the date coverage begins;
(B) If the application does not result in
coverage, the date on which the application
is denied by the issuer or the date on which
the offer of coverage lapses.
(iv) The rules of paragraphs (a)(3)(i),
(ii), and (iii) of this section are illustrated
by the following examples:
Example 1.(i)Facts. EmployerV’s group health
plan provides for coverage to begin on the first day
of the first payroll period following the date an em-
ployee is hired and completes the applicable enroll-
ment forms, or on any subsequent January 1 after
completion of the applicable enrollment forms. Em-
ployerV’s plan imposes a preexisting condition ex-
clusion for 12 months (reduced by the individual’s
creditable coverage) following an individual’s enroll-
ment date. EmployeeEishiredbyEmployerVon
October 13, 1998, and on October 14, 1998,Ecom-
pletes and files all the forms necessary to enroll in the
plan.E’s coverage under the plan becomes effective
on October 25, 1998 (which is the beginning of the
first payroll period afterE’s date of hire).
(ii)Conclusion.InthisExample 1,E’s enrollment
date is October 13, 1998 (which is the first day of the
waiting period forE’s enrollment and is alsoE’s date
of hire). Accordingly, with respect toE, the permissi-
ble 6-month period in paragraph (a)(2)(i) is the period
from April 13, 1998 through October 12, 1998, the
maximum permissible period during which Employer
V’s plan can apply a preexisting condition exclusion
under paragraph (a)(2)(ii) is the period from October
13, 1998 through October 12, 1999, and this period
must be reduced under paragraph (a)(2)(iii) byE’s
days of creditable coverage as of October 13, 1998.
Example 2.(i)Facts. A group health plan has two
benefit package options, Option 1 and Option 2. Un-
der each option a 12-month preexisting condition ex-
clusion is imposed. IndividualBis enrolled in Option
1 on the first day of employment with the employer
maintaining the plan, remains enrolled in Option 1 for
more than one year, and then decides to switch to Op-
tion2atopenseason.
(ii)Conclusion.InthisExample 2,Bcannot be
subject to any preexisting condition exclusion under
Option 2 because any preexisting condition exclusion
period would have to begin onB’s enrollment date,
which isB’s first day of coverage, rather than the date
thatBenrolled in Option 2. Therefore, the preexisting
condition exclusion period expired beforeBswitched
to Option 2.
Example 3.(i)Facts. On May 13, 1997, Individ-
ualEishiredbyanemployerandenrollsintheem-
ployer’s group health plan. The plan provides bene-
fits solely through an insurance policy offered by Is-
suerS. On December 27, 1998,E’s leg is injured in
an accident and the leg is amputated. On January 1,
1999, the plan switches coverage to a policy offered
by IssuerT. IssuerT’s policy excludes benefits for
any prosthesis if the body part was lost before the ef-
fective date of coverage under the policy.
(ii)Conclusion.InthisExample 3,E’s enroll-
ment date is May 13, 1997,E’s first day of coverage.
Therefore, the permissible6-month look-back period
for the preexisting condition exclusion imposed un-
der IssuerT’s policy begins on November 13, 1996,
and ends on May 12, 1997. In addition, the 12-month
maximum permissible preexisting condition exclu-
sion period begins on May 13, 1997, and ends on
May 12, 1998. Accordingly, because no medical ad-
vice, diagnosis, care, or treatment was recommended
to or received byEfor the leg during the 6-month
look-back period (even though medical care was pro-
vided within the 6-month period preceding the ef-
fective date ofE’s coverage under IssuerT’s pol-
icy), the plan may not impose any preexisting condi-
tion exclusion with respect toE. Moreover, even ifE
had received treatment during the 6-month look-back
period, the plan still would not be permitted to im-
pose a preexisting condition exclusion because the
12-month maximum permissible preexisting condi-
tion exclusion period expired on May 12, 1998 (be-
foretheeffectivedateofE’s coverage under Issuer
T’s policy). See 29 CFR 2590.701–3(a)(3)(iv)Exam-
ple 3and 45 CFR 146.111(a)(3)(iv)Example 3for a
conclusion that IssuerTis similarly prohibited from
imposing a preexisting condition exclusion with re-
spect toE.
Example 4.(i)Facts. A group health plan lim-
its eligibility for coverage to full-time employees of
EmployerY. Coverage becomes effective on the first
day of the month following the date the employee
becomes eligible. EmployeeCbegins working full-
time for EmployerYon April 11. Prior to this date,
Cworked part-time forY.Cenrolls in the plan and
coverage is effective May 1.
(ii)Conclusion.InthisExample 4,C’s enroll-
ment date is April 11 and the period from April 11
through April 30 is a waiting period. The period
whileCwas working part-time, and therefore not in
an eligible class of employees, is not part of the wait-
ing period.
Example 5.(i)Facts. To be eligible for cover-
age under a multiemployer group health plan in the
current calendar quarter, the plan requires an individ-
ual to have worked 250 hours in covered employment
during the previous quarter. If the hours requirement
is satisfied, coverage becomes effective on the first
day of the current calendar quarter. EmployeeDbe-
gins work on January 28 and does not work 250 hours
in covered employment during the first quarter (end-
ing March 31).Dworks at least 250 hours in the sec-
ond quarter (ending June 30) and is enrolled in the
plan with coverage effective July 1 (the first day of
the third quarter).
(ii)Conclusion.InthisExample 5,D’s enroll-
ment date is the first day of the quarter during which
Dsatisfies the hours requirement, which is April 1.
The period from April 1 through June 30 is a waiting
period.
(v)Late enrolleemeans an individual
whose enrollment in a plan is a late enroll-
ment.
(vi) (A)Late enrollmentmeans enroll-
ment of an individual under a group health
plan other than —
February 22, 20055902005–8 I.R.B.

(1) On the earliest date on which cover-
age can become effective for the individual
under the terms of the plan; or
(2) Through special enrollment. (For
rules relating to special enrollment, see
§54.9801–6.)
(B) If an individual ceases to be eligible
for coverage under the plan, and then sub-
sequently becomes eligible for coverage
under the plan, only the individual’s most
recent period of eligibility is taken into ac-
count in determining whether the individ-
ual is a late enrollee under the plan with re-
spect to the most recent period of coverage.
Similar rules apply if an individual again
becomes eligible for coverage following a
suspension of coverage that applied gener-
ally under the plan.
(vii)Examples. The rules of paragraphs
(a)(3)(v) and (vi) of this section are illus-
trated by the following examples:
Example 1.(i)Facts. EmployeeFfirst becomes
eligible to be covered by EmployerW’s group health
plan on January 1, 1999, but elects not to enroll in the
plan until a later annual open enrollment period, with
coverage effective January 1, 2001.Fhas no special
enrollment right at that time.
(ii)Conclusion.InthisExample 1,Fisalateen-
rollee with respect toF’s coverage that became effec-
tive under the plan on January 1, 2001.
Example 2.(i)Facts. Same facts asExample 1,
except thatFterminates employment with Employer
Won July 1, 1999, without having had any health in-
surance coverage under the plan.Fis rehired by Em-
ployerWon January 1, 2000, and is eligible for and
elects coverage under EmployerW’s plan effective on
January 1, 2000.
(ii)Conclusion.InthisExample 2,Fwould not
be a late enrollee with respect toF’s coverage that
became effective on January 1, 2000.
(b)Exceptions pertaining to preexist-
ing condition exclusions—(1)Newborns
—(i)In general. Subject to paragraph
(b)(3) of this section, a group health plan
may not impose any preexisting condi-
tion exclusion on a child who, within 30
days after birth, is covered under any cred-
itable coverage. Accordingly, if a child is
enrolled in a group health plan (or other
creditable coverage) within 30 days af-
ter birth and subsequently enrolls in an-
other group health plan without a signif-
icant break in coverage (as described in
§54.9801–4(b)(2)(iii)), the other plan may
not impose any preexisting condition ex-
clusion on the child.
(ii)Examples. The rules of this para-
graph (b)(1) are illustrated by the follow-
ing examples:
Example 1.(i)Facts. IndividualE, who has no
prior creditable coverage, begins working for Em-
ployerWand has accumulated 210 days of creditable
coverage under EmployerW’s group health plan on
the dateEgives birth to a child. Within 30 days af-
ter the birth, the child is enrolled in the plan. Ninety
days after the birth, bothEand the child terminate
coverage under the plan. BothEand the child then
experience a break in coverage of 45 days beforeEis
hired by EmployerXand the two are enrolled in Em-
ployerX’s group health plan.
(ii)Conclusion.InthisExample 1, becauseE’s
child is enrolled in EmployerW’s plan within 30 days
after birth, no preexisting condition exclusion may
be imposed with respect to the child under Employer
W’s plan. Likewise, EmployerX’s plan may not im-
pose any preexisting condition exclusion onE’s child
because the child was covered under creditable cov-
erage within 30 days after birth and had no signifi-
cant break in coverage before enrolling in Employer
X’s plan. On the other hand, becauseEhad only 300
days of creditable coverage prior toE’s enrollment
date in EmployerX’s plan, EmployerX’s plan may
impose a preexisting condition exclusion onEfor up
to 65 days (66 days if the 12-month period afterE’s
enrollment date inX’s plan includes February 29).
Example 2.(i)Facts. IndividualFis enrolled
in a group health plan in which coverage is provided
through a health insurance issuer.Fgives birth. Un-
der state law applicable to the health insurance issuer,
health care expenses incurred for the child during the
30 days following birth are covered as part ofF’s cov-
erage. AlthoughFmay obtain coverage for the child
beyond 30 days by timely requesting special enroll-
ment and paying an additional premium, the issuer is
prohibited under state law from recouping the cost of
any expenses incurred for the child within the 30-day
period if the child is not later enrolled.
(ii)Conclusion. In thisExample 2, the child is
covered under creditable coverage within 30 days af-
ter birth, regardless of whether the child enrolls as a
special enrollee under the plan. Therefore, no pre-
existing condition exclusion may be imposed on the
child unless the child has a significant break in cov-
erage.
(2)Adopted children. Subject to para-
graph (b)(3) of this section, a group health
plan may not impose any preexisting con-
dition exclusion on achild who is adopted
or placed for adoption before attaining 18
years of age and who, within 30 days af-
ter the adoption or placement for adop-
tion, is covered under any creditable cov-
erage. Accordingly, if a child is enrolled
in a group health plan (or other creditable
coverage) within 30 days after adoption or
placement for adoption and subsequently
enrolls in another group health plan with-
out a significant break in coverage (as de-
scribed in §54.9801–4(b)(2)(iii)), the other
plan may not impose any preexisting con-
dition exclusion on the child. This rule
does not apply to coverage before the date
of such adoption or placement for adop-
tion.
(3)Significant break in coverage.
Paragraphs (b)(1) and (2) of this sec-
tion no longer apply to a child after
a significant break in coverage. (See
§54.9801–4(b)(2)(iii) for rules relating to
the determination of a significant break in
coverage.)
(4)Special enrollment. For special en-
rollment rules relating to new dependents,
see §54.9801–6(b).
(5)Pregnancy. A group health plan
may not impose a preexisting condition ex-
clusion relating to pregnancy.
(6)Genetic information—(i)Agroup
health plan may not impose a preexisting
condition exclusion relating to a condition
based solely on genetic information. How-
ever, if an individual is diagnosed with a
condition, even if the condition relates to
genetic information, the plan may impose
a preexisting condition exclusion with re-
spect to the condition, subject to the other
limitations of this section.
(ii) The rules of this paragraph (b)(6)
are illustrated by the following example:
Example.(i)Facts. IndividualAenrolls in a
group health plan that imposes a 12-month maximum
preexisting condition exclusion. Three months be-
foreA’s enrollment,A’s doctor told A that, based on
genetic information,Ahas a predisposition towards
breast cancer.Awas not diagnosed with breast can-
cer at any time prior toA’s enrollment date in the plan.
Nine months afterA’s enrollment date in the plan,A
is diagnosed with breast cancer.
(ii)Conclusion.InthisExample, the plan may not
impose a preexisting condition exclusion with respect
toA’s breast cancer because, prior toA’s enrollment
date,Awas not diagnosed with breast cancer.
(c)General notice of preexisting condi-
tion exclusion. A group health plan im-
posing a preexisting condition exclusion
must provide a written general notice of
preexisting condition exclusion to partic-
ipants under the plan and cannot impose
a preexisting condition exclusion with re-
spect to a participant or a dependent of
the participant until such a notice is pro-
vided. (See 29 CFR 2590.701–3(c) and 45
CFR 146.111(c), which also impose this
requirement on a health insurance issuer
offering group health insurance coverage
subject to a preexisting condition exclu-
sion.)
(1)Manner and timing.Aplanmust
provide the general notice of preexisting
condition exclusion as part of any writ-
ten application materials distributed by the
plan for enrollment. If the plan does not
distribute such materials, the notice must
be provided by the earliest date following
a request for enrollment that the plan, act-
2005–8 I.R.B.591February 22, 2005

ing in a reasonable and prompt fashion, can
provide the notice.
(2)Content. The general notice of pre-
existing condition exclusion must notify
participants of the following:
(i) The existence and terms of any
preexisting condition exclusion under the
plan. This descriptionincludes the length
of the plan’s look-back period (which is
not to exceed 6 months under paragraph
(a)(2)(i) of this section); the maximum
preexisting condition exclusion period
under the plan (which cannot exceed 12
months (or 18-months for late enrollees)
under paragraph (a)(2)(ii) of this sec-
tion); and how the plan will reduce the
maximum preexisting condition exclusion
period by creditable coverage (described
in paragraph (a)(2)(iii) of this section).
(ii) A description of the rights of indi-
viduals to demonstrate creditable cover-
age, and any applicable waiting periods,
through a certificate of creditable cov-
erage (as required by §54.9801–5(a)) or
through other means (as described in
§54.9801–5(c)). This must include a de-
scription of the right of the individual to
request a certificate from a prior plan or
issuer, if necessary, and a statement that
the current plan will assist in obtaining a
certificate from any prior plan or issuer, if
necessary.
(iii) A person to contact (including an
address or telephone number) for obtain-
ing additional information or assistance re-
garding the preexisting condition exclu-
sion.
(3)Duplicate notices not required.
If a notice satisfying the requirements
of this paragraph (c) is provided to an
individual by another party, the plan’s
obligation to provide a general notice of
preexisting condition exclusion with re-
spect to that individual is satisfied. (See
29 CFR 2590.701–3(c)(3) and 45 CFR
146.111(c)(3), which provide that the is-
suer’s obligation is similarly satisfied.)
(4)Example with sample language.
The rules of this paragraph (c) are illus-
trated by the following example, which
includes sample language that plans can
use as a basis for preparing their own no-
tices to satisfy the requirements of this
paragraph (c):
Example.(i)Facts. A group health plan makes
coverage effective on the first day of the first calen-
dar month after hire and on each January 1 following
an open season. The plan imposes a 12-month maxi-
mum preexisting condition exclusion (18 months for
late enrollees) and uses a 6-month look-back period.
As part of the enrollment application materials, the
plan provides the following statement:
This plan imposes a preexisting condition ex-
clusion. This means that if you have a med-
ical condition before coming to our plan, you
might have to wait a certain period of time be-
fore the plan will provide coverage for that condi-
tion. This exclusion applies only to conditions for
which medical advice, diagnosis, care, or treat-
ment was recommended or received within a six-
month period. Generally, this six-month period
ends the day before your coverage becomes effec-
tive. However, if you were in a waiting period for
coverage, the six-month period ends on the day
before the waiting period begins. The preexisting
condition exclusion does not apply to pregnancy
nor to a child who is enrolled in the plan within 30
days after birth, adoption, or placement for adop-
tion.
This exclusion may last up to 12 months (18
months if you are a late enrollee) from your first
day of coverage, or, if you were in a waiting pe-
riod, from the first day of your waiting period.
However, you can reduce the length of this ex-
clusion period by the number of days of your prior
“creditable coverage.” Most prior health coverage
is creditable coverage and can be used to reduce
the preexisting condition exclusion if you have
not experienced a break in coverage of at least 63
days. To reduce the 12-month (or 18-month) ex-
clusion period by your creditable coverage, you
should give us a copy of any certificates of cred-
itable coverage you have. If you do not have a
certificate, but you do have prior health coverage,
we will help you obtain one from your prior plan
or issuer. There are also other ways that you can
show you have creditable coverage. Please con-
tact us if you need help demonstrating creditable
coverage.
All questions about the preexisting condition
exclusion and creditable coverage should be di-
rected to IndividualBat AddressMor Telephone
NumberN.
(ii)Conclusion.InthisExample, the plan satisfies
the general notice requirement of this paragraph (c).
(d)Determination of creditable cov-
erage—(1)Determination within reason-
able time. If a group health plan receives
creditable coverage information under
§54.9801–5, the plan is required, within
a reasonable time following receipt of
the information, to make a determination
regarding the amount of the individual’s
creditable coverage and the length of any
exclusion that remains. Whether this
determination is made within a reason-
able time depends on the relevant facts
and circumstances. Relevant facts and
circumstances include whether a plan’s
application of a preexisting condition ex-
clusion would prevent an individual from
having access to urgent medical care.
(See 29 CFR 2590.701–3(d) and 45 CFR
146.111(d), which also impose this re-
quirement on a health insurance issuer
offering group health insurance coverage.)
(2)No time limit on presenting evidence
of creditable coverage.Aplanmaynotim-
pose any limit on the amount of time that
an individual has to present a certificate or
other evidence of creditable coverage.
(3)Example. The rules of this para-
graph (d) are illustrated by the following
example:
Example.(i)Facts. A group health plan im-
poses a preexisting condition exclusion period of
12 months. After receiving the general notice of
preexisting condition exclusion, IndividualHde-
velops an urgent health condition before receiving
a certificate of creditable coverage fromH’s prior
group health plan.Hattests to the period of prior
coverage, presents corroborating documentation of
the coverage period, and authorizes the plan to re-
quest a certificate onH’s behalf in accordance with
the rules of §54.9801–5.
(ii)Conclusion. In thisExample, the plan must re-
view the evidence presented byHand make a deter-
mination of creditable coverage within a reasonable
time that is consistent with the urgency ofH’s health
condition. (This determination may be modified as
permitted under paragraph (f) of this section.)
(e)Individual notice of period of pre-
existing condition exclusion. After an in-
dividual has presented evidence of cred-
itable coverage and after the plan has made
a determination of creditable coverage un-
der paragraph (d) of this section, the plan
must provide the individual a written no-
tice of the length of preexisting condi-
tion exclusion that remains after offsetting
for prior creditable coverage. This indi-
vidual notice is not required to identify
any medical conditions specific to the in-
dividual that could be subject to the ex-
clusion. A plan is not required to pro-
vide this notice if the plan does not im-
pose any preexisting condition exclusion
on the individual or if the plan’s preexist-
ing condition exclusion is completely off-
set by the individual’s prior creditable cov-
erage. (See 29 CFR 2590.701–3(e) and 45
CFR 146.111(e), which also impose this
requirement on a health insurance issuer
offering group health insurance coverage.)
(1)Manner and timing. The individ-
ual notice must be provided by the earli-
est date following a determination that the
plan, acting in a reasonable and prompt
fashion, can provide the notice.
(2)Content. A plan must disclose —
(i) Its determination of any preexisting
condition exclusion period that applies to
the individual (including the last day on
which the preexisting condition exclusion
applies);
February 22, 20055922005–8 I.R.B.

(ii) The basis for such determination,
including the source and substance of any
informationonwhichtheplanrelied;
(iii) An explanation of the individual’s
right to submit additional evidence of cred-
itable coverage; and
(iv) A description of any applicable ap-
peal procedures established by the plan.
(3)Duplicate notices not required.
If a notice satisfying the requirements
of this paragraph (e) is provided to an
individual by another party, the plan’s
obligation to provide this individual notice
of preexisting condition exclusion with
respect to that individual is satisfied. (See
29 CFR 2590.701–3(e)(3) and 45 CFR
146.111(e)(3), which provide that the is-
suer’s obligation is similarly satisfied.)
(4)Examples. Therulesofthispara-
graph (e) are illustrated by the following
examples:
Example 1.(i)Facts. A group health plan im-
poses a preexisting condition exclusion period of 12
months. After receiving the general notice of pre-
existing condition exclusion, IndividualGpresents a
certificate of creditable coverage indicating 240 days
of creditable coverage. Within seven days of receipt
of the certificate, the plan determines thatGis sub-
ject to a preexisting condition exclusion of 125 days,
the last day of which is March 5. Five days later, the
plan notifiesGthat, based on the certificateGsubmit-
ted,Gis subject to a preexisting condition exclusion
period of 125 days, ending on March 5. The notice
also explains the opportunity to submit additional ev-
idence of creditable coverage and the plan’s appeal
procedures. The notice does not identify any ofG’s
medical conditions that could be subject to the exclu-
sion.
(ii)Conclusion.InthisExample 1, the plan satis-
fies the requirements of this paragraph (e).
Example 2.(i)Facts. Same facts as inExample 1,
except that the plan determines thatGhas 430 days of
creditable coverage based onG’s certificate indicat-
ing 430 days of creditable coverage underG’s prior
plan.
(ii)Conclusion. In thisExample 2, the plan is not
required to notifyGthatGwill not be subject to a
preexisting condition exclusion.
(f)Reconsideration. Nothing in this
section prevents a plan from modifying an
initial determination of creditable cover-
age if it determines that the individual did
not have the claimed creditable coverage,
provided that —
(1) A notice of the new determination
(consistent with the requirements of para-
graph (e) of this section) is provided to the
individual; and
(2) Until the notice of the new determi-
nation is provided, the plan, for purposes
of approving access to medical services
(such as a pre-surgery authorization), acts
in a manner consistent with the initial de-
termination.
§54.9801–4 Rules relating to creditable
coverage.
(a)General rules—(1)Creditable cov-
erage. For purposes of this section, except
as provided in paragraph (a)(2) of this sec-
tion, the termcreditable coveragemeans
coverage of an individual under any of the
following:
(i) A group health plan as defined in
§54.9831–1(a).
(ii) Health insurance coverage as de-
fined in §54.9801–2 (whether or not the
entity offering the coverage is subject to
Chapter 100 of Subtitle K, and without re-
gard to whether the coverage is offered in
the group market, the individual market, or
otherwise).
(iii) Part A or B of Title XVIII of the
Social Security Act (Medicare).
(iv) Title XIX of the Social Security Act
(Medicaid), other than coverage consisting
solely of benefits under section 1928 of
the Social Security Act (the program for
distribution of pediatric vaccines).
(v) Title 10 U.S.C. Chapter 55 (medi-
cal and dental care for members and cer-
tain former members of the uniformed ser-
vices, and for their dependents; for pur-
poses of Title 10 U.S.C. Chapter 55,uni-
formed servicesmeans the armed forces
and the Commissioned Corps of the Na-
tional Oceanic and Atmospheric Adminis-
tration and of the Public Health Service).
(vi) A medical care program of the In-
dian Health Service or of a tribal organiza-
tion.
(vii) A state health benefits risk pool.
Forpurposesofthissection,astate health
benefits risk poolmeans —
(A) An organization qualifying under
section 501(c)(26);
(B) A qualified high risk pool described
in section 2744(c)(2) of the PHS Act; or
(C) Any other arrangement sponsored
by a state, the membership composition of
which is specified by the state and which
is established and maintained primarily
to provide health coverage for individuals
who are residents of such state and who,
by reason of the existence or history of a
medical condition —
(1) Are unable to acquire medical care
coverage for such condition through insur-
ance or from an HMO, or
(2) Are able to acquire such coverage
only at a rate which is substantially in ex-
cess of the rate for such coverage through
the membership organization.
(viii) A health plan offered under Title 5
U.S.C. Chapter 89 (the Federal Employees
Health Benefits Program).
(ix) A public health plan. For purposes
of this section, apublic health planmeans
any plan established or maintained by a
state, the U.S. government, a foreign coun-
try, or any political subdivision of a state,
the U.S. government, or a foreign country
that provides health coverage to individu-
als who are enrolled in the plan.
(x) A health benefit plan under section
5(e) of the Peace Corps Act (22 U.S.C.
2504(e)).
(xi) Title XXI of the Social Security
Act (State Children’s Health Insurance
Program).
(2)Excluded coverage. Creditable
coverage does not include coverage of
solely excepted benefits (described in
§54.9831–1).
(3)Methods of counting creditable
coverage. For purposes of reducing any
preexisting condition exclusion period,
as provided under §54.9801–3(a)(2)(iii),
the amount of an individual’s creditable
coverage generally is determined by using
the standard method described in para-
graph (b) of this section. A plan may use
the alternative method under paragraph
(c) of this section with respect to any or
all of the categories of benefits described
under paragraph (c)(3) of this section or
may provide that a health insurance issuer
offering health insurance coverage under
the plan may use the alternative method of
counting creditable coverage.
(b)Standard method—(1)Specific
benefits not considered. Under the stan-
dard method, the amount of creditable
coverage is determined without regard to
the specific benefits included in the cov-
erage.
(2)Counting creditable coverage—(i)
Basedondays. For purposes of reducing
the preexisting condition exclusion period
that applies to an individual, the amount
of creditable coverage is determined by
counting all the days on which the indi-
vidual has one or more types of creditable
coverage. Accordingly, if on a particular
day an individual has creditable coverage
from more than one source, all the cred-
itable coverage on that day is counted as
2005–8 I.R.B.593February 22, 2005

one day. Any days in a waiting period for
coverage are not creditable coverage.
(ii)Days not counted before significant
break in coverage. Days of creditable cov-
erage that occur before a significant break
in coverage are not required to be counted.
(iii)Significant break in coverage de-
fined— A significant break in coverage
means a period of 63 consecutive days
during each of which an individual does
not have any creditable coverage. (See
section 731(b)(2)(iii) of ERISA and sec-
tion 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 signifi-
cant break in coverage for purposes of state
law.)
(iv)Periods that toll a significant break.
Days in a waiting period and days in an af-
filiation period are not taken into account
in determining whether a significant break
in coverage has occurred. In addition, for
an individual who elects COBRA contin-
uation coverage during the second elec-
tion period provided under the Trade Act
of 2002, the days between the date the indi-
vidual lost group health plan coverage and
the first day of the second COBRA elec-
tion period are not taken into account in
determining whether a significant break in
coverage has occurred.
(v)Examples. Therulesofthispara-
graph (b)(2) are illustrated by the follow-
ing examples:
Example 1.(i)Facts. IndividualAhas creditable
coverage under EmployerP’s plan for 18 months
before coverage ceases.Ais provided a certificate
of creditable coverage onA’s last day of coverage.
Sixty-four days after the last date of coverage under
P’s plan,Ais hired by EmployerQand enrolls inQ’s
group health plan.Q’s plan has a 12-month preexist-
ing condition exclusion.
(ii)Conclusion.InthisExample 1,Ahas a break
in coverage of 63 days. BecauseA’s break in cover-
age is a significant break in coverage,Q’s plan may
disregardA’s prior coverage andAmay be subject to
a 12-month preexisting condition exclusion.
Example 2.(i)Facts. Same facts asExample 1,
except thatAis hired byQand enrolls inQ’s plan on
the 63rd day after the last date of coverage underP’s
plan.
(ii)Conclusion.InthisExample 2,Ahas a break
in coverage of 62 days. BecauseA’sbreakincov-
erage is not a significant break in coverage,Q’s plan
must countA’s prior creditable coverage for purposes
of reducing the plan’s preexisting condition exclusion
period that applies toA.
Example 3.(i)Facts. Same facts asExample 1,
except thatQ’s plan provides benefits through an in-
surance policy that, as required by applicable state in-
surance laws, defines a significant break in coverage
as 90 days.
(ii)Conclusion.InthisExample 3, under state
law, the issuer that provides group health insurance
coverage toQ’s plan must countA’s period of cred-
itable coverage prior to the 63-day break. (How-
ever, ifQ’s plan was a self-insured plan, the cover-
age would not be subject to state law. Therefore, the
health coverage would not be governed by the longer
break rules andA’s previous health coverage could be
disregarded.)
Example 4.[Reserved]
Example 5.(i)Facts. IndividualChas creditable
coverage under EmployerS’s plan for 200 days be-
fore coverage ceases.Cis provided a certificate of
creditable coverage onC’s last day of coverage.C
then does not have any creditable coverage for 51
days before being hired by EmployerT.T’s plan has a
3-month waiting period.Cworks forTfor 2 months
and then terminates employment. Eleven days after
terminating employment withT,Cbegins working
for EmployerU.U’s plan has no waiting period, but
has a 6-month preexisting condition exclusion.
(ii)Conclusion.InthisExample 5,Cdoes not
have a significant break in coverage because, after
disregarding the waiting period underT’s plan,Chad
only a 62-day break in coverage (51 days plus 11
days). Accordingly,Chas 200 days of creditable cov-
erage, andU’s plan may not apply its 6-month preex-
isting condition exclusion with respect toC.
Example 6.[Reserved]
Example 7.(i)Facts. IndividualEhas creditable
coverage under EmployerX’s plan.Eis provided a
certificate of creditable coverage onE’s last day of
coverage. On the 63rd day without coverage,Esub-
mits a substantially complete application for a health
insurance policy in the individual market.E’s appli-
cation is accepted and coverage is made effective 10
days later.
(ii)Conclusion.InthisExample 7, becauseE
applied for the policy before the end of the 63rd day,
the period between the date of application and the first
day of coverage is a waiting period and no significant
break in coverage occurred even though the actual
period without coverage was 73 days.
Example 8.(i)Facts. Same facts asExample 7,
except thatE’s application for a policy in the individ-
ual market is denied.
(ii)Conclusion.InthisExample 8, even thoughE
did not obtain coverage following application, the pe-
riod between the date of application and the date the
coverage was denied is a waiting period. However,
to avoid a significant break in coverage, no later than
the day after the application for the policy is denied
Ewould need to do one of the following: submit a
substantially complete application for a different in-
dividual market policy; obtain coverage in the group
market; or be in a waiting period for coverage in the
group market.
(vi)Other permissible counting meth-
ods—(A)Rule. Notwithstanding any
other provisions of this paragraph (b)(2),
for purposes of reducing a preexisting
condition exclusion period (but not for
purposes of issuing a certificate under
§54.9801–5), a group health plan may de-
termine the amount of creditable coverage
in any other manner that is at least as fa-
vorable to the individual as the method set
forth in this paragraph (b)(2), subject to
the requirements of other applicable law.
(B)Example. The rule of this paragraph
(b)(2)(vi) is illustrated by the following ex-
ample:
Example.(i)Facts. IndividualFhas coverage
under Group Health PlanYfrom January 3, 1997,
through March 25, 1997.Fthen becomes covered
by Group Health PlanZ.F’s enrollment date in Plan
ZisMay1,1997.PlanZhas a 12-month preexisting
condition exclusion.
(ii)Conclusion.InthisExample,PlanZmay
determine, in accordancewith the rules prescribed
in paragraphs (b)(2)(i), (ii), and (iii) of this section,
thatFhas 82 days of creditable coverage (29 days in
January,28daysinFebruary,and25daysinMarch).
Thus, the preexisting condition exclusion will no
longer apply toFon February 8, 1998 (82 days
before the 12-month anniversary ofF’s enrollment
(May 1)). For administrative convenience, however,
PlanZmay consider that the preexisting condition
exclusion will no longer apply toFon the first day
of the month (February 1).
(c)Alternative method—(1)Specific
benefits considered. Under the alternative
method, a group health plan determines
the amount of creditable coverage based
on coverage within any category of ben-
efits described in paragraph (c)(3) of this
section and not based on coverage for any
other benefits. The plan may use the al-
ternative method for any or all of the cate-
gories. The plan may apply a different pre-
existing condition exclusion period with
respect to each category (and may apply
a different preexisting condition exclusion
period for benefits that are not within any
category). The creditable coverage deter-
mined for a category of benefits applies
only for purposes of reducing the preex-
isting condition exclusion period with re-
spect to that category. An individual’s
creditable coverage for benefits that are
not within any category for which the alter-
native method is being used is determined
under the standard method of paragraph
(b)ofthissection.
(2)Uniform application.Aplanusing
the alternative method is required to apply
it uniformly to all participants and bene-
ficiaries under the plan. A plan that pro-
vides benefits (in part or in whole) through
one or more policies or contracts of insur-
ance will not fail the uniform application
requirement of this paragraph (c)(2) if the
alternative method is used (or not used)
separately with respect to participants and
beneficiaries under any policy or contact,
provided that the alternative method is ap-
February 22, 20055942005–8 I.R.B.

plied uniformly with respect to all cover-
age under that policy or contract. The use
of the alternative method is required to be
set forth in the plan.
(3)Categories of benefits. The alterna-
tive method for counting creditable cover-
age may be used for coverage for the fol-
lowing categories of benefits —
(i) Mental health;
(ii) Substance abuse treatment;
(iii) Prescription drugs;
(iv) Dental care; or
(v) Vision care.
(4)Plan notice. If the alternative
method is used, the plan is required to —
(i) State prominently that the plan is
using the alternative method of counting
creditable coverage in disclosure state-
ments concerning the plan, and state this
to each enrollee at the time of enrollment
under the plan; and
(ii) Include in these statements a de-
scription of the effect of using the alterna-
tive method, including an identification of
the categories used.
(5)Disclosure of information on previ-
ous benefits. See §54.9801–5(b) for spe-
cial rules concerning disclosure of cover-
age to a plan (or issuer) using the alterna-
tive method of counting creditable cover-
age under this paragraph (c).
(6)Counting creditable coverage—(i)
In general. Under the alternative method,
the group health plan counts creditable
coverage within a category if any level of
benefits is provided within the category.
Coverage under a reimbursement account
or arrangement, such as a flexible spend-
ing arrangement (as defined in section
106(c)(2)), does not constitute coverage
within any category.
(ii)Special rules. Incountinganin-
dividual’s creditable coverage under the
alternative method, the group health plan
first determines the amount of the indi-
vidual’s creditable coverage that may be
counted under paragraph (b) of this sec-
tion, up to a total of 365 days of the most
recent creditable coverage (546 days for
a late enrollee). The period over which
this creditable coverage is determined is
referred to as the determination period.
Then, for the category specified under
the alternative method, the plan counts
within the category all days of coverage
that occurred duringthe determination
period (whether or not a significant break
in coverage for that category occurs), and
reduces the individual’s preexisting con-
dition exclusion period for that category
by that number of days. The plan may de-
termine the amount of creditable coverage
in any other reasonable manner, uniformly
applied, that is at least as favorable to the
individual.
(iii)Example. The rules of this para-
graph (c)(6) are illustrated by the follow-
ing example:
Example.(i)Facts. IndividualDenrolls in Em-
ployerV’s plan on January 1, 2001. Coverage under
the plan includes prescription drug benefits. On April
1, 2001, the plan ceases providing prescription drug
benefits.D’s employment with EmployerVends on
January 1, 2002, afterDwas covered under Employer
V’s group health plan for 365 days.Denrolls in
EmployerY’s plan on February 1, 2002 (D’s enroll-
ment date). EmployerY’s plan uses the alternative
method of counting creditable coverage and imposes
a 12-month preexisting condition exclusion on pre-
scription drug benefits.
(ii)Conclusion. In thisExample,EmployerY’s
plan may impose a 275-day preexisting condition ex-
clusion with respect toDfor prescription drug ben-
efits becauseDhad 90 days of creditable coverage
relating to prescription drug benefits within D’s de-
termination period.
§54.9801–5 Evidence of creditable
coverage.
(a)Certificate of creditable coverage
—(1)Entities required to provide cer-
tificate—(i)In general. A group health
plan is required to furnish certificates of
creditable coverage in accordance with
this paragraph (a). (See section 701(e) of
ERISA and section 2701(e) of the PHS
Act, under which this obligation is also
imposed on each health insurance issuer
offering group health insurance coverage
under the plan.)
(ii)Duplicate certificates not required.
An entity required to provide a certifi-
cate under this paragraph (a) with respect
to an individual satisfies that requirement
if another party provides the certificate,
but only to the extent that the certificate
contains the information required in para-
graph (a)(3) of this section. For example, a
group health plan is deemed to have satis-
fied the certification requirement with re-
spect to a participant or beneficiary if any
other entity actually provides a certificate
that includes the information required un-
der paragraph (a)(3) of this section with re-
spect to the participant or beneficiary.
(iii)Special rule for group health plans.
To the extent coverage under a plan con-
sists of group health insurance coverage,
the plan satisfies thecertification require-
ments under this paragraph (a) if any issuer
offering the coverage is required to provide
the certificates pursuant to an agreement
between the plan and the issuer. For ex-
ample, if there is an agreement between an
issuer and an employer sponsoring a plan
under which the issuer agrees to provide
certificates for individuals covered under
the plan, and the issuer fails to provide a
certificate to an individual when the plan
would have been required to provide one
under this paragraph (a), then the plan does
not violate the certification requirements
of this paragraph (a) (though the issuer
would have violated the certification re-
quirements pursuant to section 701(e) of
ERISA and section 2701(e) of the PHS
Act).
(iv)Special rules relating to issuers
providing coverage under a plan—(A)(1)
Responsibility of issuer for coverage pe-
riod. See 29 CFR 2590.701–5 and 45
CFR 146.115, under which an issuer is not
required to provide information regarding
coverage provided to an individual by an-
other party.
(2)Example. The rule referenced by
this paragraph (a)(1)(iv)(A) is illustrated
by the following example:
Example.(i)Facts. A plan offers coverage with
an HMO option from one issuer and an indemnity op-
tion from a different issuer. The HMO has not entered
into an agreement with the plan to provide certificates
as permitted under paragraph (a)(1)(iii) of this sec-
tion.
(ii)Conclusion.InthisExample,ifanemployee
switches from the indemnity option to the HMO op-
tion and later ceases to be covered under the plan, any
certificate provided by the HMO is not required to
provide information regarding the employee’s cover-
age under the indemnity option.
(B)(1)Cessation of issuer coverage
prior to cessation of coverage under a
plan. If an individual’s coverage under
an issuer’s policy or contract ceases be-
fore the individual’s coverage under the
plan ceases, the issuer is required (un-
der section 701(e) of ERISA and section
2701(e) of the PHS Act) to provide suffi-
cient information to the plan (or to another
partydesignatedbytheplan)toenable
the plan (or other party), after cessation of
the individual’s coverage under the plan,
to provide a certificate that reflects the
period of coverage under the policy or
contract. By providing that information to
the plan, the issuer satisfies its obligation
to provide an automatic certificate for that
period of creditable coverage with respect
2005–8 I.R.B.595February 22, 2005

to the individual under paragraph (a)(2)(ii)
of this section. The issuer, however, must
still provide a certificate upon request as
required under paragraph (a)(2)(iii) of this
section. In addition, the issuer is required
to cooperate with the plan in responding to
any request made under paragraph (b)(2)
of this section (relating to the alternative
method of counting creditable coverage).
Moreover, if the individual’s coverage
under the plan ceases at the time the in-
dividual’s coverage under the issuer’s
policy or contract ceases, the issuer must
still provide an automatic certificate under
paragraph (a)(2)(ii) of this section. If an
individual’s coverage under an issuer’s
policy or contract ceases on the effec-
tive date for changing enrollment options
under the plan, the issuer may presume
(absent information to the contrary) that
the individual’s coverage under the plan
continues. Therefore, the issuer is required
to provide information to the plan in accor-
dance with this paragraph (a)(1)(iv)(B)(1)
(and is not required to provide an auto-
matic certificate underparagraph (a)(2)(ii)
of this section).
(2)Example. The rule of this paragraph
(a)(1)(iv)(B) is illustrated by the following
example:
Example.(i)Facts. A group health plan pro-
vides coverage under an HMO option and an indem-
nity option through different issuers, and only allows
employees to switch on each January 1. Neither the
HMO nor the indemnity issuer has entered into an
agreement with the plan to provide certificates as per-
mitted under paragraph (a)(1)(iii) of this section.
(ii)Conclusion. In thisExample,ifanemployee
switches from the indemnity option to the HMO op-
tion on January 1, the indemnity issuer must provide
theplan(orapersondesignatedbytheplan)with
appropriate information with respect to the individ-
ual’s coverage with the indemnity issuer. However,
if the individual’s coverage with the indemnity issuer
ceases at a date other than January 1, the issuer is in-
stead required to provide the individual with an auto-
matic certificate.
(2)Individuals for whom certificate
must be provided; timing of issuance—
(i)Individuals. A certificate must be pro-
vided, without charge, for participants or
dependents who are or were covered under
a group health plan upon the occurrence of
any of the events described in paragraph
(a)(2)(ii) or (iii) of this section.
(ii)Issuance of automatic certificates.
The certificates described in this paragraph
(a)(2)(ii) are referred to as automatic cer-
tificates.
(A)Qualified beneficiaries upon a
qualifying event. Inthecaseofanindi-
vidual who is a qualified beneficiary (as
defined in section 4980B(g)(3)) entitled
to elect COBRA continuation coverage,
an automatic certificate is required to be
provided at the time the individual would
lose coverage under the plan in the ab-
sence of COBRA continuation coverage
or alternative coverage elected instead of
COBRA continuation coverage. A plan
satisfies this requirement if it provides
the automatic certificate no later than
thetimeanoticeisrequiredtobefur-
nished for a qualifying event under section
4980B(f)(6) (relating to notices required
under COBRA ).
(B)Other individuals when coverage
ceases. In the case of an individual who
is not a qualified beneficiary entitled to
elect COBRA continuation coverage, an
automatic certificatemustbeprovidedat
the time the individual ceases to be cov-
ered under the plan. A plan satisfies the
requirement to provide an automatic cer-
tificate at the time the individual ceases
to be covered if it provides the automatic
certificate within a reasonable time after
coverage ceases (or after the expiration of
any grace period for nonpayment of premi-
ums).
(1) The cessation of temporary continu-
ation coverage (TCC) under Title 5 U.S.C.
Chapter 89 (the Federal Employees Health
Benefit Program) is a cessation of cover-
age upon which an automatic certificate
must be provided.
(2) In the case of an individual who is
entitled to elect to continue coverage un-
der a state program similar to COBRA and
who receives the automatic certificate not
later than the time a notice is required to be
furnished under the state program, the cer-
tificate is deemed to be provided within a
reasonable time after coverage ceases un-
der the plan.
(3) If an individual’s coverage ceases
due to the operation of a lifetime limit
on all benefits, coverage is considered
to cease for purposes of this paragraph
(a)(2)(ii)(B) on the earliest date that a
claim is denied due to the operation of the
lifetime limit.
(C)Qualified beneficiaries when
COBRA ceases. In the case of an indi-
vidual who is a qualified beneficiary and
has elected COBRA continuation cov-
erage (or whose coverage has continued
after the individual became entitled to
elect COBRA continuation coverage), an
automatic certificate is to be provided at
the time the individual’s coverage un-
der the plan ceases. A plan satisfies this
requirement if it provides the automatic
certificate within a reasonable time after
coverage ceases (or after the expiration
of any grace period for nonpayment of
premiums). An automatic certificate is re-
quired to be provided to such an individual
regardless of whether the individual has
previously received an automatic certifi-
cate under paragraph (a)(2)(ii)(A) of this
section.
(iii)Any individual upon request. A cer-
tificate must be provided in response to a
request made by, or on behalf of, an indi-
vidual at any time while the individual is
coveredunderaplanandupto24months
after coverage ceases. Thus, for exam-
ple, a plan in which an individual enrolls
may, if authorized by the individual, re-
quest a certificate of theindividual’s cred-
itable coverage on behalf of the individual
from a plan in which the individual was
formerly enrolled. After the request is re-
ceived,aplanorissuerisrequiredtopro-
vide the certificate by the earliest date that
the plan, acting in a reasonable and prompt
fashion, can provide the certificate. A cer-
tificateisrequiredtobeprovidedunder
this paragraph (a)(2)(iii) even if the indi-
vidual has previously received a certificate
under this paragraph (a)(2)(iii) or an auto-
matic certificate under paragraph (a)(2)(ii)
of this section.
(iv)Examples. The rules of this para-
graph (a)(2) are illustrated by the follow-
ing examples:
Example 1.(i)Facts. IndividualAterminates
employment with EmployerQ.Ais a qualified ben-
eficiary entitled to elect COBRA continuation cover-
age under EmployerQ’s group health plan. A notice
of the rights provided under COBRA is typically fur-
nished to qualified beneficiaries under the plan within
10 days after a covered employee terminates employ-
ment.
(ii)Conclusion.InthisExample 1, the automatic
certificate may be provided at the same time thatAis
provided the COBRA notice.
Example 2.(i)Facts. Same facts asExample
1, except that the automatic certificate forAis not
completed by the time the COBRA notice is furnished
toA.
(ii)Conclusion.InthisExample 2, the automatic
certificate may be provided after the COBRA notice
but must be provided within the period permitted by
law for the delivery of notices under COBRA.
Example 3.(i)Facts. EmployerRmaintains
an insured group health plan.Rhas never had 20
February 22, 20055962005–8 I.R.B.

employees and thusR’s plan is not subject to the
COBRA continuation provisions. However,Ris in
a state that has a state program similar to COBRA.
Bterminates employment withRand loses coverage
underR’s plan.
(ii)Conclusion.InthisExample 3,the automatic
certificate must be provided not later than the time
a notice is required to be furnished under the state
program.
Example 4.(i)Facts. IndividualCterminates em-
ployment with EmployerSand receives both a notice
ofC’s rights under COBRA and an automatic certifi-
cate.Celects COBRA continuation coverage under
EmployerS’s group health plan. After four months
of COBRA continuation coverage and the expiration
of a 30-day grace period,S’s group health plan de-
termines thatC’s COBRA continuation coverage has
ceased due to a failure to make a timely payment for
continuation coverage.
(ii)Conclusion.InthisExample 4, the plan must
provide an updated automatic certificate toCwithin
a reasonable time after the end of the grace period.
Example 5.(i)Facts. IndividualDis currently
covered under the group health plan of EmployerT.
Drequests a certificate, as permitted under paragraph
(a)(2)(iii) of this section. Under the procedure for
T’s plan, certificates are mailed (by first class mail) 7
business days following receipt of the request. This
date reflects the earliest date that the plan, acting in
a reasonable and prompt fashion, can provide certifi-
cates.
(ii)Conclusion.InthisExample 5, the plan’s pro-
cedure satisfies paragraph (a)(2)(iii) of this section.
(3)Form and content of certificate—(i)
Written certificate—(A)In general.Ex-
cept as provided in paragraph (a)(3)(i)(B)
of this section, the certificate must be pro-
vided in writing (including any form ap-
proved by the Secretary as a writing).
(B)Other permissible forms.Nowrit-
ten certificate is required to be provided
under this paragraph (a) with respect to
a particular event described in paragraph
(a)(2)(ii) or (iii) of this section, if —
(1) An individual who is entitled to re-
ceive the certificate requests that the cer-
tificate be sent to another plan or issuer in-
stead of to the individual;
(2) The plan or issuer that would other-
wise receive the certificate agrees to accept
the information in this paragraph (a)(3)
through means other than a written certifi-
cate (such as by telephone); and
(3) The receiving plan or issuer receives
the information from the sending plan or
issuer through such means within the time
required under paragraph (a)(2) of this sec-
tion.
(ii)Required information. The certifi-
cate must include the following —
(A) The date the certificate is issued;
(B) The name of the group health plan
that provided the coverage described in the
certificate;
(C) The name of the participant or de-
pendent with respect to whom the certifi-
cate applies, and any other information
necessary for the plan providing the cov-
erage specified in the certificate to iden-
tify the individual, such as the individual’s
identification number under the plan and
the name of the participant if the certificate
is for (or includes) a dependent;
(D) The name, address, and telephone
number of the plan administrator or issuer
required to provide the certificate;
(E) The telephone number to call
for further information regarding the
certificate (if different from paragraph
(a)(3)(ii)(D) of this section);
(F)Either—
(1) A statement that an individual has at
least 18 months (for this purpose, 546 days
is deemed to be 18 months) of creditable
coverage, disregarding days of creditable
coverage before a significant break in cov-
erage, or
(2) The date any waiting period (and
affiliation period, if applicable) began and
the date creditable coverage began;
(G) The date creditable coverage ended,
unless the certificate indicates that cred-
itable coverage is continuing as of the date
of the certificate; and
(H) An educational statement regarding
HIPAA, which explains:
(1) The restrictions on the ability of a
plan or issuer to impose a preexisting con-
dition exclusion (including an individual’s
ability to reduce a preexisting condition
exclusion by creditable coverage);
(2) Special enrollment rights;
(3) The prohibitions against discrimina-
tion based on any health factor;
(4) The right to individual health cover-
age;
(5) The fact that state law may require
issuers to provide additional protections to
individuals in that state; and
(6) Where to get more information.
(iii)Periods of coverage under the
certificate. If an automatic certificate is
provided pursuant to paragraph (a)(2)(ii)
of this section, the period that must be
included on the certificate is the last pe-
riod of continuous coverage ending on the
date coverage ceased. If an individual re-
quests a certificate pursuant to paragraph
(a)(2)(iii) of this section, the certificate
provided must include each period of
continuous coverage ending within the
24-month period ending on the date of the
request (or continuing on the date of the
request). A separate certificate may be
provided for each such period of continu-
ous coverage.
(iv)Combining information for fami-
lies. A certificate may provide information
with respect to both a participant and the
participant’s dependents if the information
is identical for each individual. If the in-
formation is not identical, certificates may
be provided on one form if the form pro-
vides all the required information for each
individual and separately states the infor-
mation that is not identical.
(v)Model certificate. The requirements
of paragraph (a)(3)(ii) of this section are
satisfied if the planprovides a certificate
in accordance with a model certificate au-
thorized by the Secretary.
(vi)Excepted benefits; categories of
benefits. No certificate is required to
be furnished with respect to excepted
benefits described in §54.9831–1(c). In
addition, the information in the certifi-
cate regarding coverage is not required to
specify categories of benefits described in
§54.9801–4(c) (relating to the alternative
method of counting creditable coverage).
However, if excepted benefits are pro-
vided concurrently with other creditable
coverage (so that the coverage does not
consist solely of excepted benefits), in-
formation concerning the benefits may be
required to be disclosed under paragraph
(b)ofthissection.
(4)Procedures—(i)Method of deliv-
ery. The certificate is required to be pro-
vided to each individual described in para-
graph (a)(2) of this section or an entity re-
questing the certificate on behalf of the in-
dividual. The certificate may be provided
by first-class mail. If the certificate or cer-
tificates are provided to the participant and
the participant’s spouse at the participant’s
last known address, then the requirements
of this paragraph (a)(4) are satisfied with
respect to all individuals residing at that
address. If a dependent’s last known ad-
dress is different than the participant’s last
known address, a separate certificate is re-
quired to be provided to the dependent at
the dependent’s last known address. If
separate certificates are being provided by
mail to individuals who reside at the same
2005–8 I.R.B.597February 22, 2005

address, separate mailings of each certifi-
cate are not required.
(ii)Procedure for requesting certifi-
cates. A plan or issuer must establish a
written procedure for individuals to re-
quest and receive certificates pursuant to
paragraph (a)(2)(iii) of this section. The
written procedure must include all contact
information necessary to request a certifi-
cate (such as name and phone number or
address).
(iii)Designated recipients.Ifanauto-
matic certificate is required to be provided
under paragraph (a)(2)(ii) of this section,
and the individual entitled to receive the
certificate designates another individual or
entity to receive the certificate, the plan or
issuer responsible for providing the certifi-
cate is permitted to provide the certificate
to the designated individual or entity. If a
certificate is required to be provided upon
request under paragraph (a)(2)(iii) of this
section and the individual entitled to re-
ceive the certificate designates another in-
dividual or entity to receive the certificate,
the plan or issuer responsible for provid-
ing the certificate is required to provide the
certificate to the designated individual or
entity.
(5)Special rules concerning dependent
coverage—(i)(A)Reasonable efforts.A
plan is required to use reasonable efforts
to determine any information needed for
a certificate relating to dependent cover-
age. In any case in which an automatic
certificate is required to be furnished with
respect to a dependent under paragraph
(a)(2)(ii) of this section, no individual cer-
tificate is required to be furnished until the
plan knows (or making reasonable efforts
should know) of the dependent’s cessation
of coverage under the plan.
(B)Example. Therulesofthispara-
graph (a)(5)(i) are illustrated by the fol-
lowing example:
Example.(i)Facts. A group health plan covers
employees and their dependents. The plan annually
requests all employees to provide updated informa-
tion regarding dependents,including the specific date
on which an employee has a new dependent or on
which a person ceases to be a dependent of the em-
ployee.
(ii)Conclusion. In thisExample, the plan has
satisfied the standard in this paragraph (a)(5)(i) of this
section that it make reasonable efforts to determine
the cessation of dependents’coverage and the related
dependent coverage information.
(ii)Special rules for demonstrating cov-
erage. If a certificate furnished by a plan
or issuer does not provide the name of any
dependent covered by the certificate, the
procedures described in paragraph (c)(5)
of this section may be used to demonstrate
dependent status. In addition, these pro-
cedures may be used to demonstrate that
a child was covered under any creditable
coverage within 30 days after birth, adop-
tion, or placement for adoption. See also
§54.9801–3(b), under which such a child
cannot be subject to a preexisting condi-
tion exclusion.
(6)Special certification rules for en-
tities not subject to Chapter 100 of Sub-
title K—(i)Issuers.Forrulesrequir-
ing that issuers in the group and individ-
ual markets provide certificates consistent
with the rules in this section, see section
701(e) of ERISA and sections 2701(e),
2721(b)(1)(B), and 2743 of the PHS Act.
(ii)Other entities. For special rules
requiring that certain other entities not
subject to Chapter 100 of Subtitle K pro-
vide certificates consistent with the rules
in this section, see section 2791(a)(3)
of the PHS Act applicable to entities de-
scribed in sections 2701(c)(1)(C), (D), (E),
and (F) of the PHS Act (relating to Medi-
care, Medicaid, TRICARE, and Indian
Health Service), section 2721(b)(1)(A)
of the PHS Act applicable to nonfederal
governmental plans generally, and section
2721(b)(2)(C)(ii) of the PHS Act applica-
ble to nonfederal governmental plans that
elect to be excluded from the requirements
of Subparts 1 through 3 of Part A of Title
XXVIIofthePHSAct.
(b)Disclosure of coverage to a plan
or issuer using the alternative method of
counting creditable coverage—(1)In
general. After an individual provides a
certificate of creditable coverage to a plan
(or issuer) using the alternative method
under §54.9801–4(c), that plan (or issuer)
(requesting entity) must request that the
entity that issued the certificate (prior en-
tity) disclose the information set forth in
paragraph (b)(2) of this section. The prior
entity is required to disclose this informa-
tion promptly.
(2)Information to be disclosed.The
prior entity is required to identify to the
requesting entity the categories of benefits
with respect to which the requesting entity
is using the alternative method of counting
creditable coverage, and the requesting en-
tity may identify specific information that
the requesting entity reasonably needs in
order to determine the individual’s cred-
itable coverage with respect to any such
category.
(3)Charge for providing information.
The prior entity may charge the requesting
entity for the reasonable cost of disclosing
such information.
(c)Ability of an individual to demon-
strate creditable coverage and waiting pe-
riod information—(1)Purpose.Therules
in this paragraph (c) implement section
9801(c)(4), which permits individuals to
demonstrate the duration of creditable cov-
erage through means other than certifi-
cates, and section 9801(e)(3), which re-
quires the Secretary to establish rules de-
signed to prevent an individual’s subse-
quent coverage under a group health plan
or health insurance coverage from being
adversely affected by an entity’s failure to
provide a certificate with respect to that in-
dividual.
(2)In general. If the accuracy of a cer-
tificate is contested or a certificate is un-
available when needed by an individual,
the individual has the right to demonstrate
creditable coverage (and waiting or affili-
ation periods) through the presentation of
documents or other means. For example,
the individual may make such a demon-
strationwhen—
(i) An entity has failed to provide a cer-
tificate within the required time;
(ii) The individual has creditable cov-
erageprovidedbyanentitythatisnotre-
quired to provide a certificate of the cov-
erage pursuant to paragraph (a) of this sec-
tion;
(iii) The individual has an urgent med-
ical condition that necessitates a determi-
nation before the individual can deliver a
certificate to the plan; or
(iv) The individual lost a certificate that
the individual had previously received and
is unable to obtain another certificate.
(3)Evidence of creditable coverage—
(i)Consideration of evidence—(A)A
plan is required to take into account all
information that it obtains or that is pre-
sented on behalf of an individual to make a
determination, based on the relevant facts
and circumstances, whether an individual
has creditable coverage. A plan shall treat
the individual as having furnished a cer-
tificate under paragraph (a) of this section
if —
(1) The individual attests to the period
of creditable coverage;
February 22, 20055982005–8 I.R.B.

(2) The individual also presents rele-
vant corroborating evidence of some cred-
itable coverage during the period; and
(3) The individual cooperates with the
plan’s efforts to verify the individual’s
coverage.
(B) For purposes of this paragraph
(c)(3)(i), cooperation includes providing
(upon the plan’s or issuer’s request) a writ-
ten authorization for the plan to request
a certificate on behalf of the individual,
and cooperating in efforts to determine the
validity of the corroborating evidence and
the dates of creditable coverage. While a
plan may refuse to credit coverage where
the individual fails to cooperate with the
plan’s or issuer’s efforts to verify cover-
age, the plan may not consider an indi-
vidual’s inability to obtain a certificate to
be evidence of the absence of creditable
coverage.
(ii)Documents. Documents that cor-
roborate creditable coverage (and waiting
or affiliation periods) include explanations
of benefits (EOBs) or other correspon-
dence from a plan or issuer indicating
coverage, pay stubs showing a payroll
deduction for health coverage, a health
insurance identification card, a certificate
of coverage under a group health pol-
icy, records from medical care providers
indicating health coverage, third party
statements verifying periods of coverage,
and any other relevant documents that
evidence periods of health coverage.
(iii)Other evidence. Creditable cov-
erage (and waiting or affiliation periods)
may also be corroborated through means
other than documentation, such as by a
telephone call from the plan or provider to
a third party verifyingcreditable coverage.
(iv)Example. The rules of this para-
graph (c)(3) are illustrated by the follow-
ing example:
Example.(i)Facts. IndividualFterminates em-
ployment with EmployerWand, a month later, is
hired by EmployerX.X’s group health plan imposes a
preexisting condition exclusion of 12 months on new
enrollees under the plan and uses the standard method
of determining creditable coverage.Ffails to receive
a certificate of prior coverage from the self-insured
group health plan maintained byF’s prior employer,
W, and requests a certificate. However,F(andX’s
plan, onF’s behalf and withF’s cooperation) is un-
able to obtain a certificate fromW’s plan.Fattests
that, to the best ofF’s knowledge,Fhadatleast12
months of continuous coverage underW’s plan, and
that the coverage ended no earlier thanF’s termina-
tion of employment fromW. In addition,Fpresents
evidence of coverage, such as an explanation of ben-
efits for a claim that was made during the relevant
period.
(ii)Conclusion.InthisExample, based solely on
these facts,Fhas demonstrated creditable coverage
for the 12 months of coverage underW’s plan in the
same manner as ifFhad presented a written certifi-
cate of creditable coverage.
(4)Demonstrating categories of cred-
itable coverage. Procedures similar to
those described in this paragraph (c) ap-
ply in order to determine the duration of
an individual’s creditable coverage with
respect to any category under paragraph
(b) of this section (relating to determining
creditable coverageunder the alternative
method).
(5)Demonstrating dependent status.If,
in the course of providing evidence (in-
cluding a certificate) of creditable cover-
age, an individual is required to demon-
strate dependent status, the group health
plan or issuer is required to treat the in-
dividual as having furnished a certificate
showing the dependent status if the indi-
vidual attests to such dependency and the
period of such status and the individual co-
operates with the plan’s or issuer’s efforts
to verify the dependent status.
§54.9801–6 Special enrollment periods.
(a)Special enrollment for certain indi-
viduals who lose coverage—(1)In gen-
eral. A group health plan is required to
permit current employees and dependents
(as defined in §54.9801–2) who are de-
scribed in paragraph (a)(2) of this sec-
tion to enroll for coverage under the terms
of the plan if the conditions in paragraph
(a)(3) of this section are satisfied. The
special enrollment rights under this para-
graph (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 obliga-
tion is also imposed on a health insurance
issuer offering group health insurance cov-
erage.)
(2)Individuals eligible for special en-
rollment—(i)When employee loses cov-
erage. A current employee and any depen-
dents (including the employee’s spouse)
each are eligible for special enrollment in
any benefit package under the plan (sub-
ject to plan eligibility rules conditioning
dependent enrollment on enrollment of the
employee) if —
(A) The employee and the dependents
are otherwise eligible to enroll in the ben-
efit package;
(B) When coverage under the plan was
previously offered, the employee had cov-
erage under any group health plan or health
insurance coverage; and
(C) The employee satisfies the condi-
tions of paragraph (a)(3)(i), (ii), or (iii) of
this section and, if applicable, paragraph
(a)(3)(iv) of this section.
(ii)When dependent loses coverage—
(A) A dependent of a current employee
(including the employee’s spouse) and the
employee each are eligible for special en-
rollment in any benefit package under the
plan (subject to plan eligibility rules con-
ditioning dependent enrollment on enroll-
ment of the employee) if —
(1) The dependent and the employee are
otherwise eligible to enroll in the benefit
package;
(2) When coverage under the plan was
previously offered, the dependent had cov-
erage under any group health plan or health
insurance coverage; and
(3) The dependent satisfies the condi-
tions of paragraph (a)(3)(i), (ii), or (iii) of
this section and, if applicable, paragraph
(a)(3)(iv) of this section.
(B) However, the plan is not required to
enroll any other dependent unless that de-
pendent satisfies the criteria of this para-
graph (a)(2)(ii), or the employee satisfies
the criteria of paragraph (a)(2)(i) of this
section.
(iii)Examples. Therulesofthispara-
graph (a)(2) are illustrated by the follow-
ing examples:
Example 1.(i)Facts. IndividualAworks for Em-
ployerX.A,A’s spouse, andA’s dependent children
are eligible but not enrolled for coverage underX’s
group health plan.A’s spouse works for EmployerY
and at the time coverage was offered underX’s plan,
Awas enrolled in coverage underY’s plan. Then,A
loses eligibility for coverage underY’s plan.
(ii)Conclusion.InthisExample 1, becauseA
satisfies the conditions for special enrollment under
paragraph (a)(2)(i) of this section,A,A’s spouse, and
A’s dependent children are eligible for special enroll-
ment underX’s plan.
Example 2.(i)Facts. IndividualAandA’s spouse
are eligible but not enrolled for coverage under Group
Health PlanPmaintained byA’s employer. When
Awas first presented with an opportunity to enroll
AandA’s spouse, they did not have other coverage.
Later,AandA’s spouse enroll in Group Health Plan
Qmaintained by the employer ofA’s spouse. During
a subsequent open enrollment period inP,AandA’s
spouse did not enroll because of their coverage under
Q. They then lose eligibility for coverage underQ.
2005–8 I.R.B.599February 22, 2005

(ii)Conclusion.InthisExample 2, becauseAand
A’s spouse were covered underQwhen they did not
enroll inPduring open enrollment, they satisfy the
conditions for special enrollment under paragraphs
(a)(2)(i) and (ii) of this section. Consequently,Aand
A’s spouse are eligible for special enrollment under
P.
Example 3.(i)Facts. IndividualBworks for Em-
ployerX.BandB’s spouse are eligible but not en-
rolled for coverage underX’s group health plan.B’s
spouse works for EmployerYand at the time cover-
age was offered underX’s plan,B’s spouse was en-
rolled in self-only coverage underY’s group health
plan. Then,B’s spouse loses eligibility for coverage
underY’s plan.
(ii)Conclusion. In thisExample 3, becauseB’s
spouse satisfies the conditions for special enrollment
under paragraph (a)(2)(ii) of this section, bothBand
B’s spouse are eligible for special enrollment under
X’s plan.
Example 4.(i)Facts. IndividualAworks for Em-
ployerX.Xmaintains 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.Aenrolls for self-only coverage
in the HMO option.A’s spouse works for Employer
Yand was enrolled for self-only coverage underY’s
plan at the time coverage was offered underX’s plan.
Then,A’s spouse loses coverage underY’s plan.Are-
quests special enrollment forAandA’s spouse under
the plan’s indemnity option.
(ii)Conclusion. In thisExample 4,becauseA’s
spouse satisfies the conditions for special enrollment
under paragraph (a)(2)(ii) of this section, bothAand
A’s spouse can enroll in either benefit package un-
derX’s plan. Therefore, ifArequests enrollment in
accordance with the requirements of this section, the
plan must allowAandA’s spouse to enroll in the in-
demnity option.
(3)Conditions for special enrollment
—(i)Loss of eligibility for coverage.In
the case of an employee or dependent who
has coverage that is not COBRA continu-
ation coverage, the conditions of this para-
graph (a)(3)(i) are satisfied at the time the
coverage is terminated as a result of loss
of eligibility (regardless of whether the in-
dividual is eligible for or elects COBRA
continuation coverage). Loss of eligibil-
ity under this paragraph (a)(3)(i) does not
include a loss due to the failure of the
employee or dependent to pay premiums
on a timely basis or termination of cover-
age for cause (such as making a fraudulent
claim or an intentional misrepresentation
of a material fact in connection with the
plan). Loss of eligibility for coverage un-
der this paragraph (a)(3)(i) includes (but is
not limited to) —
(A) Loss of eligibility for coverage as
a result of legal separation, divorce, cessa-
tion of dependent status (such as attaining
themaximumagetobeeligibleasade-
pendent child under the plan), death of an
employee, termination of employment, re-
duction in the number of hours of employ-
ment, and any loss of eligibility for cover-
age after a period that is measured by ref-
erence to any of the foregoing;
(B) In the case of coverage offered
through an HMO, or other arrangement, in
the individual market that does not provide
benefits to individuals who no longer re-
side, live, or work in a service area, loss of
coverage because an individual no longer
resides, lives, or works in the service area
(whether or not within the choice of the
individual);
(C) In the case of coverage offered
through an HMO, or other arrangement,
in the group market that does not provide
benefits to individuals who no longer re-
side, live, or work in a service area, loss of
coverage because an individual no longer
resides, lives, or works in the service area
(whether or not within the choice of the
individual), and no other benefit package
is available to the individual;
(D) A situation in which an individual
incurs a claim that would meet or exceed a
lifetime limit on all benefits; and
(E) A situation in which a plan no
longer offers any benefits to the class of
similarly situated individuals (as described
in §54.9802–1(d)) that includes the indi-
vidual.
(ii)Termination of employer contribu-
tions. In the case of an employee or depen-
dent who has coverage that is not COBRA
continuation coverage, the conditions of
this paragraph (a)(3)(ii) are satisfied at the
time employer contributions towards the
employee’s or dependent’s coverage ter-
minate. Employer contributions include
contributions by any current or former em-
ployer that was contributing to coverage
for the employee or dependent.
(iii)Exhaustion of COBRA continua-
tion coverage.Inthecaseofanemployee
or dependent who has coverage that is
COBRA continuation coverage, the con-
ditions of this paragraph (a)(3)(iii) are
satisfied at the time the COBRA con-
tinuation coverage is exhausted. For
purposes of this paragraph (a)(3)(iii), an
individual who satisfies the conditions for
special enrollment of paragraph (a)(3)(i)
of this section, does not enroll, and instead
elects and exhausts COBRA continua-
tion coverage satisfies the conditions of
this paragraph (a)(3)(iii). (Exhaustion of
COBRA continuation coverageis defined
in §54.9801–2.)
(iv)Written statement. A plan may re-
quire an employee declining coverage (for
the employee or any dependent of the em-
ployee) to state in writing whether the cov-
erage is being declined due to other health
coverage only if, at or before the time the
employee declines coverage, the employee
is provided with notice of the requirement
to provide the statement (and the conse-
quences of the employee’s failure to pro-
vide the statement). If a plan requires such
a statement, and an employee does not pro-
vide it, the plan is not required to pro-
vide special enrollment to the employee
or any dependent of the employee under
this paragraph (a)(3). A plan must treat an
employee as having satisfied the plan re-
quirement permittedunder this paragraph
(a)(3)(iv) if the employee provides a writ-
ten statement that coverage was being de-
clined because the employee or dependent
had other coverage; a plan cannot require
anything more for the employee to satisfy
the plan’s requirement to provide a written
statement. (For example, the plan cannot
require that the statement be notarized.)
(v) The rules of this paragraph (a)(3) are
illustrated by the following examples:
Example 1.(i)Facts. IndividualDenrolls in a
group health plan maintained by EmployerY.Atthe
timeDenrolls,Ypays 70 percent of the cost of em-
ployee coverage andDpays the rest.Yannounces
that beginning January 1,Ywill no longer make em-
ployer contributions towards the coverage. Employ-
ees may maintain coverage, however, if they pay the
total cost of the coverage.
(ii)Conclusion. In thisExample 1, employer con-
tributions towardsD’s coverage ceased on January 1
and the conditions of paragraph (a)(3)(ii) of this sec-
tion are satisfied on this date (regardless of whether
Delects to pay the total cost and continue coverage
underY’s plan).
Example 2.(i)Facts. A group health plan pro-
vides coverage through two options — Option 1 and
Option 2. Employees can enroll in either option only
within 30 days of hire or on January 1 of each year.
EmployeeAis eligible for both options and enrolls in
Option 1. Effective July 1 the plan terminates cov-
erage under Option 1 and the plan does not create an
immediate open enrollment opportunity into Option
2.
(ii)Conclusion. In thisExample 2,Ahas expe-
rienced a loss of eligibility for coverage that satis-
fies paragraph (a)(3)(i) of this section, and has sat-
isfied the other conditions for special enrollment un-
der paragraph (a)(2)(i) of this section. Therefore, ifA
satisfies the other conditions of this paragraph (a), the
plan must permitAto enroll in Option 2 as a special
enrollee. (Amay also be eligible to enroll in another
group health plan, such as a plan maintained by the
employer ofA’s spouse, as a special enrollee.) The
February 22, 20056002005–8 I.R.B.

outcome would be the same if Option 1 was termi-
nated by an issuer and the plan made no other cover-
ageavailabletoA.
Example 3.(i)Facts. IndividualCis covered un-
der a group health plan maintained by EmployerX.
While covered underX’s plan,Cwas eligible for but
did not enroll in a plan maintained by EmployerZ,
the employer ofC’s spouse.Cterminates employ-
ment withXand loses eligibility for coverage under
X’s plan.Chas a special enrollment right to enroll in
Z’s plan, butCinstead elects COBRA continuation
coverage underX’s plan. C exhausts COBRA contin-
uation coverage underX’s plan and requests special
enrollment inZ’s plan.
(ii)Conclusion. In thisExample 3,Chas satis-
fied the conditions for special enrollment under para-
graph (a)(3)(iii) of this section, and has satisfied the
other conditions for special enrollment under para-
graph (a)(2)(i) of this section. The special enrollment
right thatChad intoZ’s plan immediately after the
loss of eligibility for coverage underX’s plan was an
offer of coverage underZ’s plan. WhenClater ex-
hausts COBRA coverage underX’s plan,Chas a sec-
ond special enrollment right inZ’s plan.
(4)Applying for special enrollment and
effective date of coverage— (i) A plan
or issuer must allow an employee a pe-
riod of at least 30 days after an event de-
scribed in paragraph (a)(3) of this section
(other than an event described in paragraph
(a)(3)(i)(D)) to request enrollment (for the
employee or the employee’s dependent).
In the case of an event described in para-
graph (a)(3)(i)(D) of this section (relating
to loss of eligibility for coverage due to the
operation of a lifetime limit on all bene-
fits), a plan or issuer must allow an em-
ployee a period of at least 30 days after a
claim is denied due to the operation of a
lifetime limit on all benefits.
(ii) 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.
(b)Special enrollment with respect to
certain dependent beneficiaries—(1)In
general. A group health plan that makes
coverage available with respect to depen-
dents is required to permit individuals de-
scribed in paragraph (b)(2) of this sec-
tion to be enrolled for coverage in a ben-
efit package under thetermsoftheplan.
Paragraph (b)(3) of this section describes
the required special enrollment period and
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 oth-
erwise 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.)
(2)Individuals eligible for special en-
rollment. An individual is described in this
paragraph (b)(2) if the individual is oth-
erwise eligible for coverage in a benefit
package under the plan and if the individ-
ual is described in paragraph (b)(2)(i), (ii),
(iii), (iv), (v), or (vi) of this section.
(i)Current employee only. A current
employee is described in this paragraph
(b)(2)(i) if a person becomes a dependent
of the individual through marriage, birth,
adoption, or placement for adoption.
(ii)Spouse of a participant only.An
individual is described in this paragraph
(b)(2)(ii) if either —
(A) The individual becomes the spouse
of a participant; or
(B) The individual is a spouse of a par-
ticipant and a child becomes a dependent
of the participant through birth, adoption,
or placement for adoption.
(iii)Current employee and spouse.A
current employee and an individual who is
or becomes a spouse of such an employee,
are described in this paragraph (b)(2)(iii) if
either —
(A) The employee and the spouse be-
come married; or
(B) The employee and spouse are mar-
ried and a child becomes a dependent of
the employee through birth, adoption, or
placement for adoption.
(iv)Dependent of a participant only.
An individual is described in this para-
graph (b)(2)(iv) if the individual is a de-
pendent (as defined in §54.9801–2) of a
participant and the individual has become
a dependent of the participant through mar-
riage, birth, adoption, or placement for
adoption.
(v)Current employee and a new depen-
dent. A current employee and an individ-
ual who is a dependent of the employee,
are described in this paragraph (b)(2)(v) if
the individual becomes a dependent of the
employee through marriage, birth, adop-
tion, or placement for adoption.
(vi)Current employee, spouse, and a
new dependent. A current employee, the
employee’s spouse, and the employee’s
dependent are described in this paragraph
(b)(2)(vi) if the dependent becomes a de-
pendent of the employee through marriage,
birth, adoption, or placement for adoption.
(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).
(ii)Reasonable procedures for special
enrollment.[Reserved.]
(iii)Date coverage must begin—(A)
Marriage. In the case of marriage, cover-
age must begin no later than the first day
of the first calendar month beginning af-
ter the date the plan (or any issuer offering
health insurance coverage under the plan)
receives the request for special enrollment.
(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 cover-
age available).
(4)Examples. The rules of this para-
graph (b) are illustrated by the following
examples:
Example 1.(i)Facts. An employer maintains
a group health plan that offers all employees em-
ployee-only coverage, employee-plus-spouse cover-
age, or family coverage. Under the terms of the plan,
any employee may elect to enroll when first hired
(with coverage beginning on the date of hire) or dur-
ing an annual open enrollment period held each De-
cember (with coverage beginning the following Jan-
uary 1). EmployeeAishiredonSeptember3.Ais
married toB, and they have no children. On March
15 in the following year a childCis born toAandB.
Before that date,AandBhave not been enrolled in
the plan.
(ii)Conclusion.InthisExample 1, the conditions
for special enrollment of an employee with a spouse
and new dependent under paragraph (b)(2)(vi) of this
section are satisfied. IfAsatisfies the conditions of
paragraph (b)(3) of this section for requesting enroll-
ment timely, the plan will satisfy this paragraph (b) if
it allowsAto enroll either with employee-only cover-
age, with employee-plus-spouse coverage (forAand
B), or with family coverage (forA,B,andC). The
plan must allow whatever coverage is chosen to be-
gin on March 15, the date ofC’s birth.
Example 2.(i)Facts. IndividualDworks for
EmployerX.Xmaintains 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.Denrolls for self-only coverage
in the HMO option. Then, a child,E, is placed for
2005–8 I.R.B.601February 22, 2005

adoption withD. Within 30 days of the placement of
Efor adoption,Drequests enrollment forDandE
under the plan’s indemnity option.
(ii)Conclusion.InthisExample 2,DandEsat-
isfy the conditions for special enrollment under para-
graphs (b)(2)(v) and (b)(3) of this section. Therefore,
the plan must allowDandEto enroll in the indemnity
coverage, effective as of the date of the placement for
adoption.
(c)Notice of special enrollment.Ator
before the time an employee is initially of-
fered the opportunity to enroll in a group
health plan, the plan must furnish the em-
ployee with a notice of special enrollment
that complies with the requirements of this
paragraph (c).
(1)Description of special enrollment
rights. The notice of special enrollment
must include a description of special en-
rollment rights. The following model lan-
guage may be used to satisfy this require-
ment:
If you are declining enrollment for
yourself or your dependents (including
your spouse) because of other health in-
surance or group health plan coverage,
you may be able to enroll yourself and
your dependents in this plan if you or
your dependents lose eligibility for that
other coverage (or if the employer stops
contributing towards your or your de-
pendents’ other coverage). However,
you must request enrollment within [in-
sert “30 days” or any longer period that
applies under the plan] after your or
your dependents’ other coverage ends
(or after the employer stops contribut-
ing toward the other coverage).
In addition, if you have a new de-
pendent as a result of marriage, birth,
adoption, or placement for adoption,
you may be able to enroll yourself and
your dependents. However, you must
request enrollment within [insert “30
days” or any longer period that applies
under the plan] after the marriage, birth,
adoption, or placement for adoption.
To request special enrollment or ob-
tain more information, contact [insert
the name, title, telephone number, and
any additional contact information of
the appropriate plan representative].
(2)Additional information that may be
required. The notice of special enrollment
must also include, if applicable, the notice
described in paragraph (a)(3)(iv) of this
section (the notice required to be furnished
to an individual declining coverage if the
plan requires the reason for declining cov-
erage to be in writing).
(d)Treatment of special enrollees—(1)
If an individual requests enrollment while
the individual is entitled to special enroll-
ment under either paragraph (a) or (b) of
this section, the individual is a special en-
rollee, even if the request for enrollment
coincides with a late enrollment opportu-
nity under the plan. Therefore, the indi-
vidual cannot be treated as a late enrollee.
(2) Special enrollees must be offered
all the benefit packages available to simi-
larly situated individuals who enroll when
first eligible. For this purpose, any dif-
ference in benefits or cost-sharing require-
ments for different individuals constitutes
a different benefit package. In addition, a
special enrollee cannot be required to pay
more for coverage than a similarly situ-
ated individual who enrolls in the same
coverage when first eligible. The length
of any preexisting condition exclusion that
may be applied to a special enrollee can-
not exceed the length of any preexisting
condition exclusion that is applied to simi-
larly situated individuals who enroll when
first eligible. For rules prohibiting the
application of a preexisting condition ex-
clusion to certain newborns, adopted chil-
dren, and children placed for adoption, see
§54.9801–3(b).
(3) The rules of this section are illus-
trated by the following example:
Example.(i)Facts. EmployerYmaintains a
group health plan that has an enrollment period for
late enrollees every November 1 through November
30 with coverage effective the following January
1. On October 18, IndividualBloses coverage
under another group health plan and satisfies the
requirements of paragraphs (a)(2), (3), and (4) of
this section.Bsubmits a completed application for
coverage on November 2.
(ii)Conclusion. In thisExample,Bis a special
enrollee. Therefore, even thoughB’s request for en-
rollment coincides with an open enrollment period,
B’s coverage is required to be made effective no later
than December 1 (rather than the plan’s January 1 ef-
fective date for late enrollees).
§54.9831–1 Special rules relating to
group health plans.
(a)Group health plan—(1)Defined.
A group health plan means a plan (includ-
ing a self-insured plan) of, or contributed
to by, an employer (including a self-em-
ployed person) or employee organization
to provide health care (directly or other-
wise) to the employees, former employ-
ees, the employer, others associated or for-
merly associated with the employer in a
business relationship, or their families.
(2)Determination of number of plans.
[Reserved.]
(b)General exception for certain small
group health plans. The requirements
of §§54.9801–1 through 54.9801–6,
54.9802–1, 54.9802–1T, 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 §§54.9801–1 through
54.9801–6, 54.9802–1, 54.9802–1T,
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).
(2)Benefits excepted in all circum-
stances. The following benefits are ex-
cepted in all circumstances —
(i) Coverage only for accident (includ-
ing accidental death and dismemberment);
(ii) Disability income coverage;
(iii) Liability insurance, including gen-
eral liability insurance and automobile lia-
bility insurance;
(iv) Coverage issued as a supplement to
liability insurance;
(v) Workers’ compensation or similar
coverage;
(vi) Automobile medical payment in-
surance;
(vii) Credit-only insurance (for exam-
ple, mortgage insurance); and
(viii) Coverage for on-site medical clin-
ics.
(3)Limited excepted benefits—(i)In
general. Limited-scope dental benefits,
limited-scope vision benefits, or long-term
care benefits are excepted if they are pro-
vided under a separate policy, certificate,
or contract of insurance, or are otherwise
not an integral part of a group health plan
as described in paragraph (c)(3)(ii) of this
section. In addition, benefits provided un-
der a health flexible spending arrangement
are excepted benefits if they satisfy the re-
quirements of paragraph (c)(3)(v) of this
section.
(ii)Notanintegralpartofagroup
health plan. For purposes of this para-
graph (c)(3), benefits are not an integral
part of a group health plan (whether the
February 22, 20056022005–8 I.R.B.

benefits are provided through the same
plan or a separate plan) only if the follow-
ing two requirements are satisfied—
(A) Participants must have the right to
elect not to receive coverage for the bene-
fits; and
(B) If a participant elects to receive cov-
erage for the benefits, the participant must
pay an additional premium or contribution
for that coverage.
(iii)Limited scope—(A)Dental bene-
fits. Limited scope dental benefits are ben-
efits substantially all of which are for treat-
ment of the mouth (including any organ or
structure within the mouth).
(B)Vision benefits. Limited scope vi-
sion benefits are benefits substantially all
of which are for treatment of the eye.
(iv)Long-term care. Long-term care
benefits are benefits that are either—
(A) Subject to state long-term care in-
surance laws;
(B) For qualified long-term care ser-
vices, as defined in section 7702B(c)(1), or
provided under a qualified long-term care
insurance contract, as defined in section
7702B(b); or
(C) Based on cognitive impairment or a
loss of functional capacity that is expected
to be chronic.
(v)Health flexible spending arrange-
ments. Benefits provided under a health
flexible spending arrangement (as defined
in section 106(c)(2)) are excepted for a
class of participants only if they satisfy the
following two requirements—
(A) Other group health plan coverage,
not limited to excepted benefits, is made
available for the year to the class of partic-
ipants by reason of their employment; and
(B) The arrangement is structured so
that the maximum benefit payable to any
participant in the class for a year cannot ex-
ceed two times the participant’s salary re-
duction election under the arrangement for
the year (or, if greater, cannot exceed $500
plus the amount of the participant’s salary
reduction election). For this purpose, any
amount that an employee can elect to re-
ceive as taxable income but elects to ap-
ply to the health flexible spending arrange-
ment is considered a salary reduction elec-
tion (regardless of whether the amount is
characterized as salary or as a credit under
the arrangement).
(4)Noncoordinated benefits—(i)Ex-
cepted benefits that are not coordinated.
Coverage for only a specified disease or
illness (for example, cancer-only policies)
or hospital indemnity or other fixed indem-
nity insurance is excepted only if it meets
each of the conditions specified in para-
graph (c)(4)(ii) of this section. To be hos-
pital indemnity or other fixed indemnity
insurance, the insurance must pay a fixed
dollar amount per day (or per other period)
of hospitalization or illness (for example,
$100/day) regardless of the amount of ex-
penses incurred.
(ii)Conditions. Benefits are described
in paragraph (c)(4)(i)of this section only
if—
(A) The benefits are provided under a
separate policy, certificate, or contract of
insurance;
(B) There is no coordination between
the provision of the benefits and an ex-
clusion of benefits under any group health
plan maintained by the same plan sponsor;
and
(C) The benefits are paid with respect
to an event without regard to whether ben-
efits are provided with respect to the event
under any group health plan maintained by
thesameplansponsor.
(iii)Example. The rules of this para-
graph (c)(4) are illustrated by the follow-
ing example:
Example.(i)Facts. An employer sponsors a
group health plan that provides coverage through an
insurance policy. The policy provides benefits only
for hospital stays at a fixed percentage of hospital ex-
penses up to a maximum of $100 a day.
(ii)Conclusion. In thisExample, even though
the benefits under the policy satisfy the conditions in
paragraph (c)(4)(ii) of this section, because the policy
pays a percentage of expenses incurred rather than
a fixed dollar amount, the benefits under the policy
are not excepted benefits under this paragraph (c)(4).
This is the result even if, in practice, the policy pays
the maximum of $100 for every day of hospitaliza-
tion.
(5)Supplemental benefits.(i)Thefol-
lowing benefits are excepted only if they
are provided under a separate policy, cer-
tificate, or contract of insurance—
(A) Medicare supplemental health
insurance (as defined under section
1882(g)(1) of the Social Security Act;
also known as Medigap or MedSupp in-
surance);
(B) Coverage supplemental to the cov-
erage provided under Chapter 55, Title 10
of the United States Code (also known as
TRICARE supplemental programs); and
(C) Similar supplemental coverage pro-
vided to coverage under a group health
plan. To be similar supplemental cover-
age, the coverage must be specifically de-
signed to fill gaps in primary coverage,
such as coinsurance or deductibles. Sim-
ilar supplemental coverage does not in-
clude coverage that becomes secondary or
supplemental only under a coordination-
of-benefits provision.
(ii) The rules of this paragraph (c)(5) are
illustrated by the following example:
Example.(i)Facts. An employer sponsors a
group health plan that provides coverage for both ac-
tive employees and retirees. The coverage for retirees
supplements benefits provided by Medicare, but does
not meet the requirementsfor a supplemental policy
under section 1882(g)(1) of the Social Security Act.
(ii)Conclusion.InthisExample, the coverage
provided to retirees does not meet the definition of
supplemental excepted benefits under this paragraph
(c)(5) because the coverage is not Medicare supple-
mental insurance as defined under section 1882(g)(1)
of the Social Security Act, is not a TRICARE supple-
mental program, and is not supplemental to coverage
provided under a group health plan.
(d)Treatment of partnerships.Forpur-
poses of this part:
(1)Treatment as a group health plan.
(See 29 CFR 2590.732(d)(1) and 45 CFR
146.145(d)(1), under which a plan provid-
ing medical care, maintained by a part-
nership, and usually not treated as an em-
ployee welfare benefit plan under ERISA
is treated as a group health plan for pur-
poses of Part 7 of Subtitle B of Title I of
ERISA and Title XXVII of the PHS Act.)
(2)Employment relationship.Inthe
case of a group health plan, the termem-
ployeralso includes the partnership in re-
lation to anybona fidepartner. In addition,
the termemployeealso includes anybona
fidepartner. Whether or not an individual
is abona fidepartner is determined based
on all the relevant facts and circumstances,
including whether the individual performs
services on behalf of the partnership.
(3)Participants of group health plans.
In the case of a group health plan, the
termparticipantalso includes any individ-
ual described in paragraph (d)(3)(i) or (ii)
of this section if the individual is, or may
become, eligible to receive a benefit under
the plan or the individual’s beneficiaries
may be eligible to receive any such ben-
efit.
(i)Inconnectionwithagrouphealth
plan maintained by a partnership, the in-
dividual is a partner in relation to the part-
nership.
(ii) In connection with a group health
plan maintained by a self-employed indi-
vidual (under which one or more employ-
2005–8 I.R.B.603February 22, 2005

ees are participants), the individual is the
self-employed individual.
(e)Determining the average number of
employees.[Reserved.]
§54.9833–1 Effective dates.
Sections54.9801–1through
54.9801–6, 54.9831–1, and this section
are applicable for plan years beginning on
or after July 1, 2005.
PART 602—OMB CONTROL
NUMBERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 4. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 5. In §602.101, paragraph (b) is
amended by:
a. Removing the entries in the table for
§§54.9801–3T, 54.9801–4T, 54.9801–5T,
and 54.9801–6T.
b. Adding the following entries in nu-
merical order to the table:
§602.101 OMB Control numbers.
*****
(b) * * *
CFR part or section where
identified and described
Current OMB
control No.
*****
54.9801–3........................................................... 1545–1537
54.9801–4........................................................... 1545–1537
54.9801–5........................................................... 1545–1537
54.9801–6........................................................... 1545–1537
*****
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved July 14, 2004.
Gregory F. Jenner,
Acting Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on December 29,
2004, 8:45 a.m., and published in the issue of the Federal
Register for December 30, 2004, 69 F.R. 78719)
February 22, 20056042005–8 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
2005 Calendar Year Resident
Population Estimates
Notice 2005–16
This notice informs (1) state and lo-
cal housing credit agencies that allocate
low-income housing tax credits under
§ 42 of the Internal Revenue Code and
(2) states and other issuers of tax-exempt
private activity bonds under § 141, of
the proper population figures to be used
for calculating the 2005 calendar year
population-based component of the state
housing credit ceiling (Credit Ceiling)
under § 42(h)(3)(C)(ii), the 2005 calen-
dar year volume cap (Volume Cap) under
§ 146, and the 2005 volume limit (Volume
Limit) under § 142(k)(5).
The population figures both for the
population-based component of the Credit
Ceiling and for the Volume Cap are de-
termined by reference to § 146(j). That
section provides generally that determina-
tions of population for any calendar year
are made on the basis of the most recent
census estimate of the resident population
of a state (or issuing authority) released
by the Bureau of the Census before the
beginning of such calendar year. Section
142(k)(5) provides that the Volume Limit
is based on the State population.
The population-based component of
the Credit Ceiling and the Volume Cap
are adjusted for inflation pursuant to
§§ 42(h)(3)(H) and 146(d)(2), respec-
tively. The adjustments for the 2005 cal-
endar year were published in Rev. Proc.
2004–71, 2004–50 I.R.B. 970. Section
3.07 of Rev. Proc. 2004–71 provides that,
for calendar years beginning in 2005, the
amounts used under § 42(h)(3)(C)(ii) to
calculate the Credit Ceiling is the greater
of $1.85 multiplied by the State population
(see the resident population figures pro-
vided below) or $2,125,000. Further, sec-
tion 3.15 of Rev. Proc. 2004–71 provides
that the amounts used under § 146(d)(1)
to calculate the Volume Cap for calendar
year 2005 is the greater of $80 multiplied
by the State population (see the resident
population figures provided below) or
$239,180,000.
The proper population figures for calcu-
lating the Credit Ceiling, the Volume Cap,
and the Volume Limit for the 2005 cal-
endar year are the estimates of the resi-
dent population of the 50 states, the Dis-
trict of Columbia, and Puerto Rico released
by the Bureau of the Census on Decem-
ber 22, 2004, in Press Release CB04–246.
The proper population figures for calcu-
lating the Credit Ceiling, the Volume Cap,
and the Volume Limit for the 2005 calen-
dar year for the insular areas (American
Samoa, Guam, Northern Mariana Islands,
and U.S. Virgin Islands) are the figures re-
leased electronicallyby the Bureau of the
Census on July 17, 2003, and referenced in
Census Bureau Tip Sheet TP03–14, dated
July 11, 2003. For convenience, these es-
timates are reprinted below.
Resident P
opulation Figures
Alabama4,530,182
Alaska655,435
American
Samoa
57,902
Arizona5,743,834
Arkansas2,752,629
California35,893,799
Colorado4,601,403
Conne
cticut
3,503
,604
Delaware830,364
D.C.553,523
Florida17,397,161
Georgia8,829,383
Guam166,090
Hawai1,262,840
I
daho
1
,393,262
Illinois12,713,634
Indiana6,237,569
Iowa2,954,451
Kansas2,735,502
Kentucky4,145,922
2005–8 I.R.B.605February 22, 2005

Louisiana4,515,770
Maine1,317,253
Maryland5,558,058
Massachusetts6,416,505
Michigan10,112,620
Minnesota5,100,958
Mississipp
i
2,902,966
Missouri5,754,618
Montana926,865
Nebraska1,747,214
Nevada2,334,771
New Hamps
hire
1,299,50
0
New Jersey8,698,879
New Mexico1,903,289
New York19,227,088
North Carolina8,541,221
North Dakota634,366
North
ern Mariana Islands
78,25
2
Ohio11,459,011
Oklahoma3,523,553
Oregon3,594,586
Pen
nsylvania
12,
406,292
Puerto Rico3,894,855
Rhode Island1,080,632
South Carolina4,198,068
S
outh Dakota
7
70,883
Tennessee5,900,962
Texas22,490,022
U.S. Virgin Islands108,775
Utah2,389,039
Vermont621,394
Virginia7,459,827
Washington6,203,788
West Virginia1,815,354
Wisconsin5,509,026
Wyoming506,529
The principal authors of this notice are
Christopher J. Wilson, Office of the As-
sociate Chief Counsel (Passthroughs and
Special Industries) and Timothy L. Jones,
Office of the Division Counsel/Associate
Chief Counsel (Tax-Exempt and Govern-
ment Entities). For further information re-
garding this notice, contact Mr. Wilson at
(808) 539–2874 or Susan Reaman at (202)
622–3040 (not toll-free calls).
Temporary Rules Under
Sections 6111 and 6112
Notice 2005–17
The purpose of this notice is to grant an
extension of time for material advisors to
comply with the new filing requirements
under § 6111.
February 22, 20056062005–8 I.R.B.

BACKGROUND
Section6111,asamendedbythe
American Jobs Creation Act of 2004,
P.L. 108–357, 118 Stat. 1418, (the Act),
requires that each material advisor with
respect to any reportable transaction make
a return setting forth information identi-
fying and describing the transaction and
any potential tax benefits expected to re-
sult from the transaction no later than the
date specified by the Secretary. Notice
2004–80, 2004–50 I.R.B. 963 (December
13, 2004) announced that the Service and
Treasury intend to issue regulations pro-
viding rules under § 6111.
Notice 2004–80 also provides interim
rules implementing the requirements of
§ 6111 until the Secretary prescribes reg-
ulations. Under Notice 2004–80, each
material advisor with respect to a re-
portable transaction must file a return on
Form 8264,Application for Registration
of a Tax Shelter, within 30 days after the
date on which the person becomes a mate-
rial advisor. Notice 2004–80 also provides
transitional relief in the case of a person
who becomes a material advisor after Oc-
tober 22, 2004, and on or before December
31, 2004, that allows the material advisor
to file the return anytime before February
1, 2005.
Since the issuance of Notice 2004–80,
questions have arisen regarding when a
person becomes a material advisor. The
Service and Treasury intend to provide fur-
ther guidance on the issue of the date on
which a person becomes a material advi-
sor with respect to a reportable transaction
(including whether the obligation of a ma-
terial advisor arises only when a reportable
transaction is entered into by a taxpayer).
Because further guidance is under consid-
eration, the transitional relief provided in
Notice 2004–80 for disclosure of a trans-
action under § 6111 is extended. If a per-
son becomes a material advisor after Octo-
ber 22, 2004, and on or before January 29,
2005, that material advisor must file the re-
turn before March 1, 2005.
DRAFTING INFORMATION
The principal author of this notice
is Tara P. Volungis of the Office of the
Associate Chief Counsel (Passthroughs
& Special Industries). For further in-
formation regarding this notice, contact
Ms. Volungis at (202) 622–3080 (not a
toll-free call).
2005–8 I.R.B.607February 22, 2005

Part IV. Items of General Interest
Notice of Proposed
Rulemaking for Health
Coverage Portability
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 & IV
REG–130370–04
AGENCIES:Internal Revenue Service,
Department of the Treasury; Employee
Benefits Security Administration, Depart-
ment of Labor; Centers for Medicare &
Medicaid Services, Department of Health
and Human Services.
ACTION:Notice of proposed rulemaking
and request for comments.
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 Ac-
countability 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 submis-
sions) to any of the addresses specified be-
low. 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 trans-
mitted electronically via the IRS In-
ternet site at:www.irs.gov/regsor
via the Federal eRulemaking Por-
tal atwww.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-de-
livered between the hours of 9:00 a.m. and
5:00 p.m. to the same address. Com-
ments may also be transmitted by e-mail
to:e-ohpsca.ebsa@dol.gov.
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) transmis-
sion.
You may submit comments in one of
three ways (no duplicates, please):
1.Electronically.Youmay
submit electronic comments on
specific issues in this regulation
tohttp://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 com-
ments (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 pre-
fer, you may deliver (by hand or courier)
your written comments (one original and
two copies) before the close of the com-
ment period to one of the following ad-
dresses. If you intend to deliver your com-
ments to the Baltimore address, please call
telephone number (410) 786–7195 in ad-
vance 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 SecurityBoulevard
Baltimore, MD 21244–1850
(Because access to the interior of the
HHH Building is not readily available to
persons without Federal Government iden-
tification, commenters are encouraged to
leave their comments in the CMS drop
slots located in the main lobby of the build-
ing. A stamp-in clock is available for per-
sons 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 in-
dicated 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 require-
ments by mailing your comments to the
addresses provided at the end of the “Col-
lection of Information Requirements”
section in this document.
February 22, 20056082005–8 I.R.B.

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 inspec-
tion and copying in the Public Disclosure
Room, Employee Benefits Security Ad-
ministration, 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 inspec-
tion as they are received, generally begin-
ning approximately three weeks after pub-
lication of a document, at the headquarters
for the Centers for Medicare & Medicaid
Services, 7500 Security Boulevard, Balti-
more, 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 Ser-
vices, 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 con-
cerning changes in health care law may
call a toll free number, 1–866–444-EBSA
(3272), or access the publications on-line
atwww.dol.gov/ebsa, the Department of
Labor’s website. These regulations as well
as other information on the new health
care laws are also available on the De-
partment of Labor’s interactive web pages,
HealthElaws. In addition, CMS’s pub-
lication entitled “Protecting Your Health
Insurance Coverage” is available by call-
ing 1–800–633–4227 or on the Depart-
ment of Health and Human Services’ web-
site (www.cms.hhs.gov/hipaa1), which in-
cludes the interactive webpages, HIPAA
Online. Copies of the HIPAA regulations,
as well as notices and press releases re-
lated to HIPAA and other health care laws,
are also available atthe above-referenced
websites.
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 Secu-
rity Act of 1974 (ERISA), and the Public
Health Service Act (PHS Act) to provide
for, among other things, improved porta-
bility 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 theFederal Registeron
April 8, 1997, 62 FR 16894) (April 1997
interim rules) (T.D. 8716, 1997–1 C.B.
225). On December 29, 1997, the De-
partments 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) solicit-
ing 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 regula-
tions (T.D. 9166) elsewhere in this issue
of the Bulletin. These proposed rules ad-
dress additional and discrete issues for
which the Departments are soliciting fur-
ther comment before promulgating final
regulations.
B. Overview of the Proposed
Regulations
1.Rules Relating to Creditable Cov-
erage — 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 pe-
riod 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 cov-
erage ceases. In those cases, the signifi-
cant-break-in-coverage period is tolled un-
til 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)inanefforttoaddressthe
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 miss-
ing 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 ter-
mination 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 Bulletin) 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 affect-
ing 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 pre-
vent 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 cer-
tificates within 44 days (although some
plans and issuers may be required to pro-
vide 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
2005–8 I.R.B.609February 22, 2005

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 cov-
erage 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 Bulletin,
will satisfy the requirements of paragraph
(a)(3)(ii) in this section of the final reg-
ulations. Similarly, for purposes of com-
plying with those final regulations, State
Medicaid programs may use the second
version below, or may use the appropri-
ate 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 Bulletin. 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.
CERTIFICATE OF GROUP HEALTH PLAN COVERAGE
1. Date of this certificate:7. For further information, call:
2. Name of group health plan:
3. Name of participant:
8. If the individual(s) identified in line 5 has (have) at
least 18 months of creditable coverage (disregarding
periods of coverage before a 63-day break), check here
and skip lines 9 and 10:
4. Identification number of participant:9. Date waiting period or affiliation period (if any)
began:
5. Name of individuals to whom this certificate applies:
10. Date coverage began:
11. Date
coverage ended (or if coverage has not ended,
enter “c
ontinuing”):
6. Name, address, and telephone number of plan
administrator or issuer responsible for providing this
certificate:
[Note: separate certificates will be furnished if information is not identical for the participant and each beneficiary.]
Statem
ent of HIPAA Portability Rights
IMPORTANT — KEEP THIS CERTIFICATE.This certificate is evidence of your coverage under this plan. Under a federal
law known as HIPAA, you may need evidence of your coverage to reduce a preexisting condition exclusion period under
another plan, to help you get special enrollment in another plan,or to get certain types of individual health coverage even if
you have health problems.
P
reexistingconditionexclusions.Some group health plans restrict coverage for medical conditions present before an
individual’s enrollment. These restrictions are known as “preexisting condition exclusions.” A preexisting condition exclusion
can apply only to conditions for which medical advice, diagnosis, care, or treatmentwas recommended or received within the 6
months before your “enrollment date.” Your enrollment date is your first day of coverage under the plan, or, if there is a waiting
period, the first day of your waiting period (typically, your first day of work). In addition, a preexisting condition exclusion
cannot last for more than 12 months after your enrollment date (18 months if you are a late enrollee). Finally, a preexisting
condition exclusion cannot apply to pregnancy and cannot apply to a child who is enrolled in health coverage within 30 days
after birth, adoption,or placement for adoption.
If a
plan imposes a preexisting condition exclusion, the lengthof the exclusion must be reduced by the amount of your prior
cre
ditable coverage. Most health coverage is creditable coverage, including group health plan coverage, COBRA continuation
cov
erage, coverage under an individual health policy, Medicare, Medicaid, State Children’s Health Insurance Program (SCHIP),
and
coverage through high-risk pools and the Peace Corps. Not all forms of creditable coverage are required toprovide certificates
lik
e this one. If you do not receive a certificate for pastcoverage, talk to your new plan administrator.
February 22, 20056102005–8 I.R.B.

You can add up any creditable coverage youhave,includingthecoverageshownonthis certificate. However, if at any time
you went for 63 days or more without any coverage (called a break in coverage) a plan may nothave to count the coverage
you had before the break.
Therefore, once your coverage ends, you should try to obtain alternative coverage as soon as possible to avoid a 63-day
break. You may use this certificate as evidence of your creditable coverage to reduce the length of any preexisting
condition exclusion if you enroll in another plan.
R
ighttogetspecialenrollmentinanotherplan.Under HIPAA, if you lose your group health plan coverage, you may be able
to get into another group health plan for which you are eligible (such as a spouse’s plan), even if the plan generally does not
accept late enrollees, if you request enrollment within 30 days. (Additional special enrollment rights are triggered by marriage,
birth, adoption, and placement for adoption.)
Therefore, once your coverage ends, if you are eligible for coverage in another plan (such as a spouse’s plan), you should
request special enrollment as soon as possible.
P
rohibitionagainstdiscriminationbasedonahealthfactor.Under HIPAA, a group health plan may not keep you (or your
dependents) out of the plan based on anything related to your health. Also, a group health plan may not charge you (or your
dependents) more for coverage, based on health, than the amount charged a similarly situated individual.
R
ighttoindividualhealthcoverage.Under HIPAA, if you are an “eligible individual,” you have a right to buy certain individual
health policies (or in some states, to buy coverage through a high-risk pool) without a preexisting condition exclusion. To be an
eligible individual, you must meet the following requirements:
•
You have had coverage for at least 18 months without a break in coverage of 63 days or more;
•
Your most recent coverage was under a group healthplan (which can be shown by this certificate);
•
Your group coverage was not terminated because of fraud or nonpayment of premiums;
•
You are not eligible for COBRA continuation coverage or youhave exhausted your COBRA benefits (or continuation
coverage under a similar state provision); and
•
You are not eligible for another group health plan, Medicare, or Medicaid, and do not have any other health insurance
coverage.
The right to buy individual coverage is the same whether you are laid off, fired, or quit your job.
Therefore, if you are interested in obtaining individual coverage and you meet the other criteria to be an eligible individual,
you should apply for this coverage as soon as possible to avoid losing your eligible individual status due to a 63-day break.
S
pecialinformationforpeopleonFMLAleave.If you are taking leave under the Family and Medical Leave Act (FMLA) and
you drop health coverage during your leave, any days without health coverage while on FMLA leave will not count towards a
63-day break in coverage. In addition, if you do not return fromleave, the 30-day period to request special enrollment in
another plan will not start before your FMLA leave ends.
Therefore, when you apply for other health coverage, you should tell your plan administrator or health insurer about any
prior FMLA leave.
S
tateflexibility.This certificate describes minimum HIPAA protections under federal law.States may require insurers and
HMOs to provide additional protections to individuals in that state.
F
ormoreinformation.If you have questions about your HIPAA rights, you may contact your state insurance department or
the U.S. Department of Labor, Employee Benefits Security Administration (EBSA) toll-free at 1–866–444–3272 (for free
HIPAA publications ask for publications concerning changes in health care laws). Youmay also contact the CMS publication
hotline at 1–800–633–4227 (ask for “Protecting Your Health Insurance Coverage”). These publications and other useful
information are also available on the Internet at:http://www.dol.gov/ebsa, the DOL’s interactive web pages — HealthElaws,
orhttp://www.cms.hhs.gov/hipaa1.
2005–8 I.R.B.611February 22, 2005

CERTIFICATE OF MEDICAID COVERAGE
1. Date of this certificate:
7. For further information, call:
2. Name of state Medicaid program:
3. Name of recipient:
8. If the individual(s) identified in line 5 has (have) at
least 18 months of creditable coverage (disregarding
periods of coverage before a 63-day break), check here
andskiplines9:
4. Identification number of recipient:9. Date coverage began:
5. Name of individuals to whom this certificate applies:10. Date coverage ended (or if coverage has not ended,
enter “continuing”):
6. Name, address, and telephone number of state
Medicaid agency responsible for providing this
certificate:
[Note: separate certificates will be furnished if information is not identical for the recipient and each dependent.]
Statement of HIPAA Portability Rights
IMPORTANT — KEEP THIS CERTIFICATE.This certificate is evidence of your coverage under this state Medicaid
program. Under a federal law known as HIPAA, you may need evidence of your coverage to reduce a preexisting condition
exclusion period under a group health plan, to help you get special enrollment ina group health plan, or to get certain types of
individual health coverage even if you have health problems.
P
reexistingconditionexclusions.Some group health plans restrict coverage for medical conditions present before an
individual’s enrollment. These restrictions are known as “preexisting condition exclusions.” A preexisting condition exclusion
can apply only to conditions for which medical advice, diagnosis, care, or treatmentwas recommended or received within the 6
months before your “enrollment date.” Your enrollment date is your first day of coverage under the plan, or, if there is a waiting
period, the first day of your waiting period (typically, your first day of work). In addition, a preexisting condition exclusion
cannot last for more than 12 months after your enrollment date (18 months if you are a late enrollee). Finally, a preexisting
condition exclusion cannot apply to pregnancy and cannot apply to a child who is enrolled in health coverage within 30 days
after birth, adoption,or placement for adoption.
If a plan imposes a preexisting condition exclusion, the length of the exclusion must be reduced by the amount of your prior
creditable coverage. Most health coverage is creditable coverage, including group health plan coverage, COBRA continuation
coverage, coverage under an individual health policy, Medicare,Medicaid, State Children’s Health Insurance Program (SCHIP),
and coverage through high-risk pools and the Peace Corps. Not all forms of creditable coverage are required toprovide certificates
like this one. If you do not receive a certificate for past coverage, talk to your new plan administrator.
You can add up any creditable coverage youhave,includingthecoverageshownonthis certificate. However, if at any time
you went for 63 days or more without any coverage (called a break in coverage) a plan may nothave to count the coverage
you had before the break.
Therefore, once your coverage ends, you should try to obtain alternative coverage as soon as possible to avoid a 63-day
break. You may use this certificate as evidence of your creditable coverage to reduce the length of any preexisting condition
exclusion if you enroll in a group health plan.
R
ighttogetspecialenrollmentinanotherplan.Under HIPAA, if you lose your group health plan coverage, you may be able
to get into another group health plan for which you are eligible (such as a spouse’s plan), even if the plan generally does not
accept late enrollees, if you request enrollment within 30 days. (Additional special enrollment rights are triggered by marriage,
birth, adoption, and placement for adoption.)
Therefore, once your coverage in a group health plan ends, if you are eligible for coverage in another plan (such as
a spouse’s plan), you should request special enrollment as soon as possible.
February 22, 20056122005–8 I.R.B.

Prohibitionagainstdiscriminationbasedonahealthfactor.Under HIPAA, a group health plan may not keep you (or your
dependents) out of the plan based on anything related to your health. Also, a group health plan may not charge you (or your
dependents) more for coverage, based on health, than the amount charged a similarly situated individual.
R
ighttoindividualhealthcoverage.Under HIPAA, if you are an “eligible individual,” you have a right to buy certain individual
health policies (or in some states, to buy coverage through a high-risk pool) without a preexisting condition exclusion. To be an
eligible individual, you must meet the following requirements:
•
You have had coverage for at least 18 months without a break in coverage of 63 days or more;
•
Your most recent coverage was under a group health plan;
•
Your group coverage was not terminated because of fraud or nonpayment of premiums;
•
You are not eligible for COBRA continuation coverage or youhave exhausted your COBRA benefits (or continuation
coverage under a similar state provision); and
•
You are not eligible for another group health plan, Medicare, or Medicaid, and do not have any other health insurance
coverage.
The right to buy individual coverage is the same whether you are laid off, fired, or quit your job.
Therefore, if you are interested in obtaining individual coverage and you meet the other criteria to be an eligible individual,
you should apply for this coverage as soon as possible to avoid losing your eligible individual status due to a 63-day break.
S
pecialinformationforpeopleonFMLAleave.If you are taking leave under the Family and Medical Leave Act (FMLA) and
you drop health coverage during your leave, any days without health coverage while on FMLA leave will not count towards a
63-day break in coverage. In addition, if you do not return fromleave, the 30-day period to request special enrollment in
another plan will not start before your FMLA leave ends.
Therefore, when you apply for other health coverage, you should tell your plan administrator or health insurer about any
prior FMLA leave.
S
tateflexibility.This certificate describes minimum HIPAA protections under federal law.States may require insurers and
HMOs to provide additional protections to individuals in that state.
F
ormoreinformation.If you have questions about your HIPAA rights, you may contact your state insurance department or the
U.S. Department of Labor, Employee Benefits Security Administration (EBSA) toll-free at 1–866–444–3272 (for free HIPAA
publications ask for publications concerning changes in health care laws). You may also contact the CMS publication hotline at
1–800–633–4227 (ask for “Protecting Your Health Insurance Coverage”). These publications and other useful information are
also available on the Internet at:http://www.dol.gov/ebsaorhttp://www.cms.hhs.gov/hipaa1.
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 individ-
ual 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 coverage. For
individuals whose coverage ceases and a
certificate of creditable coverage is not
provided on or before the date cover-
age ceases, this regulation provides for
proposed tolling rules similar to those
described above for determining a signifi-
cant 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 es-
tablish 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 is-
suers could require individuals requesting
special enrollment to file completed appli-
cations 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 enrollmentperiod(forexam-
ple, 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 em-
ployee 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 indi-
viduals are only required to make an oral
or written request for special enrollment.
The proposed regulations provide fur-
ther that after a timely request, the plan or
2005–8 I.R.B.613February 22, 2005

issuer may require the individual to com-
plete all enrollment materials within a rea-
sonabletimeaftertheendofthespecial
enrollment period. However, the enroll-
ment procedure may only require informa-
tion required from individuals who enroll
when first eligible and information about
the event giving rise to the special enroll-
ment right. While a plan can impose a
deadline for submitting the completed en-
rollment materials, the deadline must be
extended for information that an individ-
ual making reasonable efforts cannot ob-
tain within that deadline.
Thus, even where a plan requires social
security numbers from individuals who en-
roll when first eligible, the plan must pro-
vide 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 se-
curity number for the newborn within the
special enrollment period.
As regards the effective date of cover-
age for special enrollments, the proposed
rules generally follow the statute, the April
1997 interim final rules, and the final reg-
ulations being published elsewhere in this
issue of the Bulletin. However clarifica-
tions 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 mar-
riage, coverage generally must begin no
later than the first day of the first calen-
dar month after the date the plan or is-
suer receives the request for special en-
rollment. However, if the plan or issuer
requires completion ofadditional enroll-
ment materials, coverage must begin no
later than the first day of the first calen-
dar month after the plan or issuer receives
enrollment materials that are substantially
complete.
Where the special enrollment right re-
sults from a birth, coverage must begin on
the date of birth. In the case of adoption or
placement for adoption, coverage must be-
gin no later than the date of such adoption
or placement for adoption. If a plan or is-
suer requires completion of additional en-
rollment materials, the plan or issuer must
provide benefits once the plan or issuer re-
ceives substantiallycomplete enrollment
materials. However, the benefits provided
at that time must be retroactive to the date
of birth, adoption, or placement for adop-
tion.
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 regu-
lations 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 em-
ployee taking leave under FMLA.
With respect to the rules concerning a
significant break in coverage, if an em-
ployee 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 signif-
icant 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 sig-
nificant 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 em-
ployee’s FMLA leave. Further, if an indi-
vidual 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 sig-
nificant break in coverage. Nonetheless, a
plan or issuer is not prevented from mod-
ifying its initial determination of FMLA
leave if it determines that the individual
did not have the claimed FMLA leave, pro-
vided that the plan or issuer follows proce-
dures for reconsideration similar to those
set forth in the final rules governing deter-
minations of creditable coverage.
The question has arisen whether it
would be appropriate to waive the general
requirement to provide automatic certifi-
cates of creditable coverage in the case
of an individual who declines coverage
when electing FMLA leave if the individ-
ualwillbereinstatedattheendofFMLA
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 con-
nection with FMLA leave may result in
some certificates being issued when indi-
viduals ceasing coverage will not need the
certificates as evidence of coverage (be-
cause of later 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 spe-
cial enrollment period if the individual’s
group health coverage is terminated at any
time during FMLA leave and the individ-
ual does not return to work for the em-
ployer at the end of FMLA leave. This spe-
cial enrollment period begins when the pe-
riod of FMLA leave ends. Moreover, the
rules that delay the start of the special en-
rollment period until the receipt of a cer-
tificate of creditable coverage continue to
operate.
February 22, 20056142005–8 I.R.B.

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 certifi-
cate of creditable coverage must be pro-
vided when an individual ceases to be cov-
ered under a group health plan. Under
the April 1997 interim rules, it was not al-
ways clear whether an individual changing
benefit elections among those offered by
an employer or employee organization was
merely switching between benefit pack-
ages under a single plan or was switching
from one plan to another. These proposed
regulations add rules to remove this uncer-
tainty.
Under these proposed regulations, all
medical care benefits made available by
an employer or employee organization
(including a board of trustees of a multi-
employer 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 ben-
efits that the benefits are being provided
under separate plans and if the arrange-
ments are operated pursuant to the instru-
ments as separate plans. A multiemployer
plan and a nonmultiemployer plan are al-
ways 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 employ-
ers 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 con-
sidered a single group health plan, there
is no need to furnish a certificate of cred-
itable 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 op-
erated pursuant to the plan documents as
separate plans.
The anti-abuse rule limits the flexibil-
ity 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 arrange-
ment 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 require-
ments 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 par-
ticipants who are current employees. This
would give the impression that the plans
would not have to comply with the pro-
hibitions against discriminating based on
one or more health factors, with the restric-
tions on preexisting condition exclusions,
nor with any of the other requirements of
Chapter 100 of the Code, Part 7 of ERISA,
andTitleXXVIIofthePHSAct. The
anti-abuse rule would require the aggrega-
tion 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
rulewouldapplyinsimilarfashiontopre-
vent the evasion of any other law that ap-
plies 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 em-
ployees employed by an employer dur-
ing a year.
1
Various rules in Chapter 100
of the Code, Part 7 of ERISA, and Title
XXVII of the PHS Act require the deter-
mination of such an average number, in-
cluding the Mental Health Parity Act pro-
visions, the guaranteed access provisions
under the PHS Act for small employers,
and the exemption from the excise tax un-
der the Code for certain small employers.
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 en-
tire 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 un-
der the employer’s general employment
practices (but not exceeding 40 hours per
week). Any resultingfraction is disre-
garded. For example, if these calculations
produce a result of 50.9, the average num-
ber of employees is considered to be 50.
If an employer existed for less than the
entire previous calendar year (includ-
ing 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 cur-
rent 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 pro-
visions, which limit the scope and appli-
cation of preexisting condition exclusions
and establish special enrollment rights,
provide a minimum standard of protection
designed to increase access to health cov-
erage. The Departments crafted these pro-
posed regulations to secure these protec-
tions 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
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.
2005–8 I.R.B.615February 22, 2005

benefits and costs, but believe that their
benefits will justify their costs.
HIPAA’s primary economic effects en-
sue directly from its statutory provisions.
HIPAA’s statutory group market portabil-
ity 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 includ-
ing 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 Bulletin.
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 mar-
gin in the economic effects of HIPAA’s
statutory portability provisions.
These proposed regulations are in-
tended to secure and implement HIPAA’s
group market portability and special en-
rollment provisions under certain special
circumstances. The regulations will secure
HIPAA’s portability rights for individu-
als 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 is-
suers, and promote confidence among em-
ployees in health benefits’ value, thereby
promoting labor market efficiency and
fostering the establishment and continua-
tion by employers of group health plans.
Benefits under these regulations will
be concentrated among a small number
of affected individualswhilecostswillbe
spread thinly across group plan enrollees.
Affected individuals will generally in-
clude 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 cer-
tificate 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
Bulletin, access to coverage for needed
medical care is important to individu-
als’ health and productivity. However,
the number of affected individuals, and
therefore the aggregate cost of extended
access to coverage under these regula-
tions, 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 cover-
age 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 cer-
tificates are often provided promptly after
coverage ends and many family leave
periods are far shorter than the guaran-
teed 12 weeks. Third, it is generally in
individuals’ interest to minimize periods
of uninsurance. Individuals are likely to
exercise their portability and special en-
rollment rights as soon as possible after
coverage ends, whichwill 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 in-
dividuals who avoid a significant break in
coverage as a direct result of these regula-
tions 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 spe-
cial enrollment rights if plans or issuers
failed to recognize their requests for spe-
cial enrollment or imposed unreasonable
deadlines or requirements for completion
of enrollment materials.
As noted above, the Departments ex-
pect 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 in-
creases will be small on aggregate, adding
only a small increment to the costs attrib-
utable 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 ex-
pect 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’ conclu-
sions is detailed below.
The Departments solicit comments on
their conclusions and their basis for them,
and empirical data or other information
that would support afuller or more accu-
rate 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 ac-
tion is “significant” and therefore subject
to the requirements of the Executive Or-
der and subject to review by the Office of
Management and Budget (OMB). Under
section 3(f), the order defines a “signifi-
cant regulatory action” as an action that is
likely to result in a rule: (1) having an an-
nual effect on the economy of $100 mil-
lion or more, or adversely and materially
February 22, 20056162005–8 I.R.B.

affecting a sector of the economy, produc-
tivity, 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 oth-
erwise interfering with an action taken or
planned by another agency; (3) materially
altering the budgetary impacts of entitle-
ment grants, user fees, or loan programs
or the rights and obligations of recipients
thereof; or (4) raising novel legal or pol-
icy 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 Ex-
ecutive Order, the Departments have as-
sessed the costs and benefits of this reg-
ulatory action. The Departments’ assess-
ment, and the analysis underlying that as-
sessment, is detailed below. The Depart-
ments performed a comprehensive, unified
analysis to estimate the costs and bene-
fits attributable to the regulations for pur-
poses 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 Re-
tirement 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 im-
plement HIPAA’s portability rights for
individuals who are not timely notified
that their coverage has ended and for
individuals whose coverage ends in con-
nection 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 eco-
nomic effects ensue directly from its statu-
tory provisions. HIPAA’s statutory group
market portability provisions extend cov-
erage to certain individuals and preexist-
ing conditions not otherwise covered. This
extension of coverage entails both bene-
fits and costs. The economic effects of
HIPAA’s statutory portability provisions is
summarized above and discussed in detail
under the “Basis for Assessment of Eco-
nomic Impact” section of the preamble to
the final regulation, published elsewhere in
this issue of the Bulletin.
Also as noted above, by clarifying and
securing HIPAA’s statutory portability
protections, these regulations will help en-
sure 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 uncer-
tainty about health benefits’ scope and
value, thereby promoting employee health
benefit coverage and labor market effi-
ciency. The Departments believe that the
regulations’ benefits will justify their cost.
The Departments assessment of the ex-
pected 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. 601et seq.) (RFA), imposes certain
requirements with respect to Federal rules
that are subject to the notice and com-
ment requirements of section 553(b) of the
Administrative Procedure Act (5 U.S.C.
551et seq.) and which are likely to have
a significant economic impact on a sub-
stantial 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 flexi-
bility 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 busi-
nesses, 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 re-
ports for pension plans which cover fewer
than 100 participants. Under section
104(a)(3), the Secretary may also provide
for simplified annual reporting and dis-
closure if the statutory requirements of
part1ofTitleIofERISAwouldother-
wise 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 re-
porting provisions and limited exemptions
from reporting and disclosure require-
ments for small plans, including unfunded
or insured welfare plans covering fewer
than 100 participants and which satisfy
certain other requirements.
Further,whilesomesmallplansare
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 gener-
ally 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. 631et seq.). The Depart-
ment 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 “Regu-
latory Flexibility Act — Department of
Labor and Department of Health and Hu-
2005–8 I.R.B.617February 22, 2005

man Services” section of the preamble to
the final regulation, published elsewhere
in this issue of the Bulletin.
By clarifying and securing HIPAA’s
statutory portability protections, these reg-
ulations 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 di-
rect financial value of coverage extensions
pursuant to HIPAA’s statutory portability
provisions are estimated to be approxi-
mately $180 million for small plans, or a
small fraction of one percent of total small
plan expenditures.
2
The regulations also will reduce un-
certainty about healthbenefits’ scope and
value, thereby promoting employee health
benefit coverage, including coverage un-
der small plans, and labor market effi-
ciency.
The benefits of these regulations will
be concentrated among a small number of
affected small groupplan enrollees, while
their costs will be spread thinly across
small group plans enrollees. The bene-
fits 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’ conclu-
sions is detailed below.
The Departments generally expect the
impact of the regulations on any particular
smallplantobesmall.Averylargemajor-
ity 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 pre-
miums are tied closely to their particular
claims experience, might bear all or most
of the cost associated with extensions of
coverage attributabledirectly to these reg-
ulations. 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 pur-
suant to 5 U.S.C. 603(a), which exempts
from the Regulatory Flexibility Act’s re-
quirements certain rules involving the in-
ternal revenue laws. Pursuant to section
7805(f) of the Internal Revenue Code, this
notice of proposed rulemaking will be sub-
mitted 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 final regulations include three
separate collections of information as that
term is defined in the Paperwork Reduc-
tion Act of 1995 (PRA 95), 44 U.S.C.
3502(3): the Notice of Enrollment Rights,
Notice of Preexisting Condition Exclu-
sion, and Certificate of Creditable Cover-
age. Each of these disclosures is currently
approved by the Office of Management
and Budget (OMB) through October 31,
2006, in accordancewith PRA 95 under
control numbers 1210–0101, 1210–0102,
and 1210–0103.
Department of the Treasury
These final regulations include a col-
lection of information as that term is de-
fined in PRA 95: the Notice of Enroll-
ment Rights, Notice of Preexisting Con-
dition Exclusion, and Certificate of Cred-
itable Coverage. Each of these disclosures
is currently approved by OMB under con-
trol number 1545–1537.
Department of Health and Human
Services
These final 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 dis-
closures 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 Reg-
ulatory Enforcement Fairness Act of 1996
(5 U.S.C. 801et seq.) and, if finalized, will
be transmitted to Congress and the Comp-
troller 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 econ-
omy 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 com-
pete with foreign-based enterprises in do-
mestic 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 ex-
penditure in any 1 year by state, local, or
tribal governments, in the aggregate, or by
the private sector, of $100 million. These
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.
February 22, 20056182005–8 I.R.B.

proposed regulations have no such man-
dated 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 funda-
mental principles of federalism. It requires
adherence to specific criteria by federal
agencies in formulating and implementing
policies that have “substantial direct ef-
fects” on the States, the relationship be-
tween the national government and States,
or on the distribution of power and re-
sponsibilities among the various levels of
government. Federal agencies promulgat-
ing 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 pro-
posed regulations have federalism impli-
cations because they may have substantial
direct effects on the States, the relation-
ship between the national government and
States, or on the distribution of power and
responsibilities among the various levels
of government. However, in the Depart-
ments’ view, the federalism implications
of these proposed regulations are substan-
tially mitigated because, with respect to
health insurance issuers, the vast majority
of States have enacted laws which meet or
exceed the federal HIPAA portability stan-
dards.
In general, through section 514, ERISA
supersedes State laws to the extent that
they relate to any covered employee ben-
efit plan, and preserves State laws that
regulate insurance, banking or securities.
While ERISA prohibits States from regu-
lating a plan as an insurance or investment
company or bank, HIPAA added a new
sectiontoERISA(aswellastothePHS
Act) narrowly preempting State require-
ments for issuers of group health insur-
ance coverage. Specifically, with respect
to seven provisions of the HIPAA portabil-
ity rules, states may impose stricter obliga-
tions on health insurance issuers.
3
More-
over, with respect to other requirements for
health insurance issuers, states may con-
tinue to apply state law requirements ex-
cept to the extent that such requirements
prevent the application of HIPAA’s porta-
bility, access, and renewability provisions.
In enacting these new preemption pro-
visions, 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 preemp-
tion of State laws with regard to health
insurance issuers. H.R. Conf. Rep. No.
736, 104
th
Cong. 2d Session 205 (1996).
State insurance laws that are more strin-
gent than the federal requirements are
unlikely to “prevent the application of”
the HIPAA portability provisions, and be
preempted. Accordingly, States have sig-
nificant latitude to impose requirements
on health insurance insurers that are more
restrictive than the federal law.
Guidance conveying this interpreta-
tion of HIPAA’s preemption provisions
was published in theFederal Register
on April 8, 1997, 62 F.R. 16904. These
proposed regulations clarify and imple-
ment 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 en-
force the provisions of HIPAA as they per-
tain to issuers, but that the Secretary of
Health and Human Services must enforce
any provisions that a State fails to substan-
tially enforce. To date, CMS enforces the
HIPAA portability provisions in only one
State in accordance with that State’s spe-
cific 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 en-
force 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 responsibil-
ity between the States and CMS. In com-
pliance with Executive Order 13132’s re-
quirement that agencies examine closely
any policies that may have federalism im-
plications or limit the policymaking dis-
cretion of the States, the Department of La-
bor 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 estab-
lished 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 ap-
propriate. Its members meet, discuss and
offer solutions to mutual problems. The
NAIC sponsors quarterly meetings to pro-
vide 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 Depart-
ments 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 quarterlyconferences. This
meeting provides CMS and the Depart-
ment of Labor with the opportunity to
provide updates on regulations, bulletins,
enforcement actions, and outreach efforts
regarding HIPAA.
The Departments received written com-
ments on the interim regulation from the
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).
2005–8 I.R.B.619February 22, 2005

NAIC and from ten States. In general,
these comments raised technical issues
that the Departments considered in con-
junction with similar issues raised by
other commenters. In a letter sent before
issuance of the interim regulation, the
NAIC expressed concerns that the Depart-
ments interpret the new preemption provi-
sions 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 specifi-
cally consulted with the NAIC in develop-
ing these proposed regulations. Through
the NAIC, the Departments sought and
received the input of State insurance de-
partments regarding certain insurance in-
dustry 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
Bulletin.
The Departments have also cooperated
with the States in several ongoing outreach
initiatives, through which information on
HIPAA is shared among federal regula-
tors, 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 Con-
ferences in August 1999, 2000, 2001,
2002, and 2003. Furthermore, both the
Department of Labor and CMS websites
offer links to important State websites 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 provi-
sions 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 De-
partments’ 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 cer-
tify that the Employee Benefits Security
Administration and the Centers for Medi-
care & Medicaid Services have complied
with the requirements of Executive Order
13132 for the attached proposed regula-
tion, 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 De-
partment’s assessment of the economic ef-
fects of HIPAA’s statutory portability pro-
visions and the basis for the assessment is
presented in detail under the “Basis for As-
sessment of Economic Impact” section of
the preamble to the final regulation, pub-
lished elsewhere in this issue of the Bul-
letin. By clarifying and securing HIPAA’s
statutory portability protections, these reg-
ulations 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 un-
der HIPAA’s portability provisions, the
regulations will reduce uncertainty and
costly disputes over these rights and obli-
gations. They will promote employers’
and employees’ common understanding of
the value of group health plan benefits and
confidence in the security and predictabil-
ity of those benefits, thereby improving
labor market efficiency and fostering the
establishment and continuation of group
health plans by employers.
4
These proposed regulations are in-
tended to secure and implement HIPAA’s
group market portability provisions under
certain special circumstances. The reg-
ulations 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 indi-
viduals’ 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 in-
clude those who would have lost access to
coverage for needed medical care after for-
feiting HIPAA portability and/or special
enrollment rights due to time spent with-
out coverage prior to receiving a certificate
or while on FMLA-guaranteed leave. Af-
4
The voluntary nature of the employment-based health benefit system in conjunction with the open and dynamic character of labor markets make explicitas well as implicit negotiations on
compensation a key determinant of the prevalenceof 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.84No.
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 EconomicsVol 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 beprovided. 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.
February 22, 20056202005–8 I.R.B.

fected individuals may also include some
who would have been denied special en-
rollment rights if plans or issuers failed to
recognize their requests for special enroll-
ment or imposed unreasonable deadlines
or requirements for completion of enroll-
ment materials. The benefits of these reg-
ulations for any particular affected individ-
ual may be large. As noted above, access
to coverage for needed medical care is im-
portant to individuals’ health and produc-
tivity. However, the number of affected in-
dividuals, 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 individu-
als 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 pro-
vide certificates with COBRA notices, up
to 44 days after coverage ends. Plans,
however, often do have the option of pro-
viding certificates immediately when cov-
erage ends or even in advance, for ex-
ample as part of exit packages given to
terminating employees or in mailings to
covered dependents in advance of birth-
days that will end their eligibility for cov-
erage. With respect to FMLA-protected
leave, data provided in a 1996 report to
Congress suggests that the number of em-
ployees 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 sur-
veyed employees took what they reported
to be FMLA leave. A similar survey of
employers found that 3.6 percent of em-
ployees 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 em-
ployees 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 in-
surance.
5
Putting these numbers together
andconvertingtoanannualbasis,ina
given year between 0.02 percent and 0.07
percent of employees, or well under one
in one thousand, might lose health cov-
erage in connection with FMLA-protected
leave. Many of these will ultimately ex-
ercise their right to bereinstated 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 conclu-
sion of FMLA-protected leave, enjoy ex-
tended portability rights under HIPAA as
a result of these regulations, is likely to be
very small.
Second, the period over which this reg-
ulation 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. As noted above,
plans generally are required to provide cer-
tificates no later than 44 days after cov-
erage ends and may provide them sooner.
According to the aforementioned report to
Congress on FMLA-protected leave, 41
percent of employeestaking FMLA-pro-
tected 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’ in-
terest 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 exten-
sion of such rights under these regulations
becomes effective. Over one 36-month pe-
riod prior to HIPAA, 71 percent of Amer-
icans 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 insur-
ance lasted less than 5 months. As noted
above, few employees taking FMLA-pro-
tected 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 spec-
ified under the final regulations and as
modified under these proposed regula-
tions, are minimum standards. Plans are
free to provide additional enrollment op-
portunities.
Fifth, only a small minority of individ-
uals who avoid a significant break in cov-
erage solely as a direct result of these regu-
lations would otherwise have lost coverage
for needed medical care. The affected mi-
nority would be those who suffer from pre-
existing conditions, join health plans that
exclude coverage for such conditions, and
require treatment of such conditions dur-
ing the exclusion periods. GAO estimated
that HIPAA could ensure continued cover-
age for up to 25 million Americans.
6
More
recent estimates suggest that the number of
individual policy holders and their depen-
dents 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 ac-
tually 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 in-
clude all job changers with prior cover-
age and their dependents, irrespective of
whether their new employer offers a plan,
whether their new plan imposed a pre-
existing condition exclusion period, and
whether they actually suffer from a preex-
isting condition. Accounting for these nar-
rower criteria, CBO estimated that, at any
point in time, about 100,000 individuals
would have a preexisting condition exclu-
sion reduced for prior creditable coverage.
An additional 45,000 would gain added
coverage in the individual market. The
CBO estimate demonstrates that the num-
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.
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.
2005–8 I.R.B.621February 22, 2005

ber of individuals actually gaining cover-
age for needed medical services will be a
small fraction of all those whose right to
such coverage HIPAA’s portability provi-
sions guarantee. Accordingly, the Depart-
ments expect that the number gaining cov-
erage 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 es-
tablish.
The Departments attempted to esti-
mate 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 cov-
erage 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 incre-
ments. 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 find-
ing 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 propor-
tionate or disproportionately large share
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 portabil-
ity 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 re-
ceived 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 preex-
isting conditions. Comparing GAO’s (20
million or more) and our (14 million) es-
timates 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 thistolling provision,
then an upper bound of about 26,000 in-
dividuals annually might gain coverage
for needed care under the proposed regu-
lation’s provision treating coverage under
such programs as creditable coverage.
The Departments considered whether
certain individuals whose HIPAA porta-
bility 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-pro-
tected leave, may be so likely. On the
other hand, individuals in such circum-
stances are also particularly unlikely to
allow their health insurance from their
prior job to lapse while they are on leave.
Accordingly, most such individuals’ spe-
cial enrollment periods and countable
breaks in coverage (if any) would prob-
ably have begun at the conclusion of the
FMLA-protected leave even in absence
of these proposed regulations. The De-
partments 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 ques-
tion.
Affected individuals may also include
some who would have been denied spe-
cial enrollment rights if plans or issuers
failed to recognize their requests for spe-
cial enrollment or imposed unreasonable
deadlines or requirements for completion
of enrollment materials.
As noted above, the Departments ex-
pect 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 frac-
tion of one percent of health plan expendi-
tures. 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 ex-
pect 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.
*****
Propos
ed Amendments to the
Regula
tions
Internal Revenue Service
26 CFR Chapter I
Accordingly, 26 CFR part 54 is pro-
posed 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 §§54.9801–4
and 54.9801–6.
b. Adding an entry in numerical order
for §54.9801–7.
The addition and revisions read as fol-
lows:
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. * * *
§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.
February 22, 20056222005–8 I.R.B.

§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. AddingExamples 4and6in para-
graph (b)(2)(v).
The revisions and additions read as fol-
lows:
§54.9801–4 Rules relating to creditable
coverage.
*****
(b)Standard method.***
(2)Counting creditable coverage.***
(iii)Significant break in coverage de-
fined.Asignificant break in coverage
means a period of 63 consecutive days dur-
ing 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 cover-
age. (See section 731(b)(2)(iii) of ERISA
and section 2723(b)(2)(iii) of the PHS Act,
which exclude from preemption state in-
surance laws that require a break of more
than 63 days before an individual has a sig-
nificant break in coverage for purposes of
state law.)
(iv)Periods that toll a significant break.
Days in a waiting period and days in an af-
filiation period are not taken into account
in determining whether a significant break
in coverage has occurred. In addition, for
an individual who elects COBRA contin-
uation coverage during the second elec-
tion period provided under the Trade Act
of 2002, the days between the date the in-
dividual 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 cov-
erage 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 cred-
itable 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 oc-
curred:
(A) The date that a certificate of cred-
itable coverage with respect to that cessa-
tion is provided; or
(B) The date 44 days after coverage
ceases.
(v)Examples.***
Example 4.(i)Facts. IndividualBterminates
coverage under a group health plan, and a certificate
of creditable coverage is provided 10 days later.B
begins employment with EmployerRand begins en-
rollment inR’s plan 60 days after the certificate is
provided.
(ii)Conclusion.InthisExample 4, even though
Bhad 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. EmployerVsponsors a
group health plan. Under the terms of the plan, the
only benefits provided are those provided under an
insurance policy. IndividualDworks forVand has
creditable coverage underV’s plan.Vfails to pay the
issuer the premiums for the coverage period begin-
ning March 1. Consistent with applicable state law,
the issuer terminates the policy so that the last day of
coverage is April 30.Vgoes out of business on July
31. On August 15Dbegins employment with Em-
ployerWand enrolls inW’s group health plan.W’s
plan imposes a 12-month preexisting condition exclu-
sion on all enrollees.Dnever receives a certificate of
creditable coverage for coverage underV’s plan.
(ii)Conclusion.InthisExample 6, the period
from May 1 (the first day without coverage) through
June 13 (the date 44 days after coverage underV’s
plan ceases) is not taken into account in determin-
ing 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. There-
fore, even thoughD’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,Dhas not expe-
rienced a significant break in coverage, andD’s prior
coverage must be counted byW’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:
§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. RevisingExample2 in paragraph
(b)(4).
f. AddingExamples 3,4,and5in para-
graph (b)(4).
The additions and revisions read as fol-
lows:
§54.9801–6 Special enrollment periods.
(a)Special enrollment for certain indi-
viduals who lose coverage—(1)In gen-
eral. A group health plan is required to
permit current employees and dependents
(as defined in §54.9801–2) who are de-
scribed in paragraph (a)(2) of this sec-
tion to enroll for coverage under the terms
of the plan if the conditions in paragraph
(a)(3) of this section are satisfied. Para-
graph (a)(4) of this section describes pro-
cedures that a plan may require an em-
ployee to follow and describes the date
by which coverage must begin. The spe-
cial 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 obliga-
tion is also imposed on a health insurance
issuer offering group health insurance cov-
erage.)
*****
(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
2005–8 I.R.B.623February 22, 2005

COBRA continuation coverage) to request
enrollment (for the employee or the em-
ployee’s dependent). For this purpose, any
written or oral request made to any of the
following constitutes a request for enroll-
ment —
(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 representa-
tive.
(ii)Tolling of period for requesting spe-
cial enrollment. (A) In the case of an in-
dividual whose coverage ceases, if a cer-
tificate of creditable coverage with respect
to that cessation is not provided on or be-
fore the date coverage ceases, then the pe-
riod for requesting special enrollment de-
scribed in paragraph (a)(4)(i) of this sec-
tion does not end until 30 days after the
earlier of —
(1) The date that a certificate of cred-
itable coverage with respect to that cessa-
tion 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 eligi-
bility 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. EmployerVprovides group
health coverage through a policy provided by Issuer
M. IndividualDworks forVand is covered underV’s
plan.Vfails to payMthe premiums for the coverage
period beginning March 1. Consistent with applica-
ble state law,Mterminates the policy so that the last
day of coverage is April 30. On May 15,Mprovides
Dwith a certificate of creditable coverage with re-
spect toD’s cessation of coverage underV’s plan.
(ii)Conclusion. In thisExample 1, the period to
request special enrollment ends no earlier than June
14 (which is 30 days after May 15, the day a certifi-
cate of creditable coverage is provided with respect
toD).
Example 2.(i)Facts. Same facts asExample
1, exceptDis never provided with a certificate of
creditable coverage.
(ii)Conclusion. In thisExample 2, the period to
request special enrollment ends no earlier than July
13. (July 13 is 74 days after April 30, the date cover-
age ceases. That is, July 13 is 30 days after the end
of the 44-day maximum tolling period.)
Example 3.(i)Facts. IndividualEworks for Em-
ployerWand has coverage underW’s plan.W’s plan
has a lifetime limit of $1 million on all benefits un-
der the plan. On September 13,Eincurs a claim that
would exceed the plan’s lifetime limit. On Septem-
ber 28,Wdenies the claim due to the operation of the
lifetime limit and a certificate of creditable coverage
is provided on October 3.Eis otherwise eligible to
enroll in the group health plan of the employer ofE’s
spouse.
(ii)Conclusion. In thisExample 3, the period to
request special enrollment in the plan of the employer
ofE’s spouse ends no earlier than November 2 (30
days after the date the certificate is provided) and be-
gins not later than September 13, the dateElost eli-
gibility for coverage.
(iii)Reasonable procedures for spe-
cial 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 materi-
als, 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.Ifthe
plan requires completion of additional
enrollment materials in accordance with
paragraph (a)(4)(iii) of this section, cov-
erage 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 spe-
cial 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 that makes
coverage available with respect to depen-
dents is required to permit individuals de-
scribed in paragraph (b)(2) of this sec-
tion to be enrolled for coverage in a ben-
efit package under the terms of the plan.
Paragraph (b)(3) of this section describes
procedures that a plan may require an in-
dividual to follow and describes the date
by which coverage must begin. The spe-
cial 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 im-
posed 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 gener-
ally available) to request enrollment (for
the individual or the individual’s depen-
dent). For this purpose, any written or oral
request made to any of the following con-
stitutes 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 representa-
tive.
(ii)Reasonable procedures for spe-
cial 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 materi-
als, but such a deadline must be extended
February 22, 20056242005–8 I.R.B.

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, cov-
erage 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 calen-
dar 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 cover-
age available). If the plan requires com-
pletion of additional enrollment materials
in accordance with paragraph (b)(3)(ii) of
this section, the plan must provide bene-
fits (including benefits retroactively to the
date of birth, adoption, or placement for
adoption) once the plan receives enroll-
ment materials that are substantially com-
plete.
(4)Examples.***
Example 2.(i)Facts. IndividualDworks for Em-
ployerX.Xmaintains a group health plan with two
benefit packages — an HMO option and an indem-
nity option. Self-only and family coverage are avail-
able under both options.Denrolls for self-only cov-
erage in the HMO option. Then, a child,E, is placed
for adoption withD. Within 30 days of the placement
ofEfor adoption,Drequests enrollment forDandE
under the plan’s indemnity option and submits com-
pleted enrollment materials timely.
(ii)Conclusion.InthisExample 2,DandEsat-
isfy the conditions for special enrollment under para-
graphs (b)(2)(v) and (b)(3) of this section. Therefore,
the plan must allowDandEto enroll in the indemnity
coverage, effective as of the date of the placement for
adoption.
Example 3.(i)Facts. Same facts asExample
1. On March 17 (two days after the birth ofC),A
telephones the plan administrator and requests special
enrollment ofA,B,andC. The plan administrator
sendsAan 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.InthisExample 3, the plan does
not satisfy paragraph (b)(3) of this section. The plan
may require only thatArequest enrollment during the
30-day period afterC’s birth.Adidsobytelephon-
ing the plan administrator. The plan may not con-
dition special enrollment on filing additional enroll-
ment materials during the 30-day period. To comply
with paragraph (b)(3) of this section, the plan must
allowAa reasonable time after the end of the 30-day
period to submit any additional enrollment materi-
als. Once these enrollment materials are received, the
plan must allow whatever coverage is chosen to be-
ginonMarch15,thedateofC’s birth.
Example 4.(i)Facts. Same facts asExample 3,
except thatAtelephones the plan administrator to re-
quest enrollment on April 13 (29 days afterC’s birth).
Also, under the terms of the plan, the deadline for sub-
mitting 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 afterC’s
birth). The form requests the same information forA,
B,andC(name, date of birth, and place of birth) as
well as a copy ofC’s birth certificate.Afills out the
enrollment form and delivers it to the plan adminis-
trator on April 28. At that timeAdoes not have a
birth certificate forCbut applies on that day for one
from the appropriate government office.Areceives
the birth certificate on June 1 and furnishes a copy of
the birth certificate to the plan administrator shortly
thereafter.
(ii)Conclusion.InthisExample 4,A,B,andC
are entitled to special enrollment under the plan even
thoughAdid not satisfy the plan’s requirement of pro-
viding a copy ofC’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 infor-
mation that an individual making reasonable efforts
does not obtain by that deadline.Adelivered the en-
rollment form to the plan administrator by the dead-
line and made reasonable efforts to furnish the birth
certificate that the plan requires.
Example 5.(i)Facts. Same facts asExample
4. OnMay3(afterAhas delivered the enrollment
form to the plan administrator but beforeAprovides
the birth certificate)Asubmits claims for all medical
expenses incurred forBandCfromthedateofC’s
birth.
(ii)Conclusion. In thisExample 5, the plan must
pay all of the claims submitted byA. Because the
plan requires that individuals seeking special enroll-
ment complete additional enrollment materials, it is
required to provide benefits once it receives enroll-
ment materials that are substantially complete. The
form thatAsubmitted on April 28 was substantially
complete. BecauseC’s birth is the event giving rise
to the special enrollment right, on April 28A,B,and
Cbecome entitled to benefits under the plan retroac-
tive to the date ofC’s birth.
*****
Par. 7. A new §54.9801–7 is added to
read as follows:
§54.9801–7 Interaction with the Family
and Medical Leave Act.
(a)In general.Therulesof
§§54.9801–1 through 54.9801–6 apply
with respect to an individual on leave un-
der the Family and Medical Leave Act of
1993 (29 U.S.C. 2601) (FMLA), and ap-
ply with respect to a dependent of such an
individual, except to the extent otherwise
provided in this section.
(b)Tolling of significant break in cover-
age during FMLA leave. In the case of an
individual (or a dependent of the individ-
ual) who is covered under a group health
plan, if the individual takes FMLA leave
and does not continue group health cover-
age for any period of FMLA leave, that pe-
riod is not taken into account in determin-
ing whether a significant break in coverage
has occurred under §54.9801–4(b)(2)(iii).
(c)Application of certification provi-
sions—(1)Timing of issuance of cer-
tificate— (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 au-
tomatic certificate must be provided in
accordance with the timing rules set forth
in §54.9801–5(a)(2)(ii)(B) (which gener-
ally require plans to provide certificates
within a reasonable time after coverage
ceases).
(ii) In the case of an individual (or a de-
pendent of the individual) who is covered
under a group health plan, if the individ-
ual 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 auto-
matic certificate must be provided in ac-
cordance with the timing rules set forth in
§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 in-
formation about FMLA leave that it ob-
tains or that is presented on behalf of an
individual. A plan must treat the individ-
ual 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 determina-
2005–8 I.R.B.625February 22, 2005

tion of FMLA leave if it determines that
the individual did not have the claimed
FMLA leave, provided that the plan fol-
lows procedures for reconsideration simi-
lar to those set forth in §54.9801–3(f).
(d)Relationship to loss of eligibility
special enrollment rules. In the case of
an individual (or a dependent of the in-
dividual) who is covered under a group
health plan and who takes FMLA leave,
a loss of eligibility for coverage under
§54.9801–6(a) occurs when the period of
FMLA leave ends if —
(1) The individual’s group health cover-
age 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. Adding paragraph (e).
The additions and revisions read as fol-
lows:
§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 (in-
cluding 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 gov-
erning 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 non-
multiemployer plan are always separate
plans.
(iii) If a principal purpose of establish-
ing separate plans is to evade any require-
ment of law, then the separate plans will be
considered a single plan to the extent nec-
essary to prevent the evasion.
(b)General exception for certain small
grouphealthplans. The requirements
of §§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 ap-
ply 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 §§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 determina-
tion 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 cal-
culating 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 employ-
ees 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 un-
der paragraph (e)(3)(ii) of this section by a
figure that represents the annual full-time
hours under the employer’s general em-
ployment 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 un-
der paragraph (e)(3)(iii) of this section to
the number determined under paragraph
(e)(3)(i).
(4)Rounding. For purposes of para-
graph (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 en-
tire 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 employ-
ees that it is reasonably expected the em-
ployer 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.
(7)Special rule for multiemployer
plans. (i) With respect to the applica-
tion of a rule in this part to a multiem-
ployer 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 Multiem-
ployer PlanM. Among these 25 employers, Employer
Khas 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
aruleinthisparttoM, each of the 25 employers is
considered to employ 51 employees.
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on December 29,
2004, 8:45 a.m., and published in the issue of the Federal
Register for December 30, 2004, 69 F.R. 78800)
February 22, 20056262005–8 I.R.B.

Section 1374 Effective Dates;
Correction
Announcement 2005–13
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Correcting amendment.
SUMMARY: This document corrects tem-
porary regulations (T.D. 9170, 2005–4
I.R.B. 363) that were published in the
Federal Registeron Wednesday, Decem-
ber 22, 2004 (69 FR 76612), that provides
guidance concerningthe applicability of
section 1374 to S corporations that acquire
assets in carryover basis transactions from
C corporations on or after December 27,
1994, and to certain corporations that ter-
minate S corporation status and later elect
again to become S corporations.
DATES: This document is effective on De-
cember 22, 2004.
FOR FURTHER INFORMATION
CONTACT: Stephen R. Cleary, (202)
622–7750 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The final and temporary regulations
(T.D. 9170) that is the subject of this
correction are under 1374 of the Internal
Revenue Code.
Need for Correction
As published, the final and temporary
regulations (T.D. 9170) contains an error
that may prove to be misleading and are in
need of clarification.
*****
Correction of Publication
Accordingly, 26 CFR Part 1 is cor-
rected by making the following correcting
amendment:
PART 1 - INCOME TAXES
Paragraph 1.The authority citation for
part 1 continues to read in part as follows:
Authority:26 USC 7805 * * *
2. In §1.1374–8T, the section heading,
and paragraphs (a)(1) and (a)(2) are re-
vised to read as follows:
§1.1374–8T 1374(d)(8) transactions
(temporary).
(a)(1) (Reserved) For further guidance
see §1.1374–8(a).
(2) Section 1374(d)(8) applies to any
§1.1374(d)(8) transaction, as defined in
paragraph (a)(1) of this section, that occurs
on or after December 27, 1994, without re-
gard to the date of the corporation’s elec-
tion to be an S corporation under section
1362.
*****
Cynthia E. Grigsby,
Acting Chief, Publications
and Regulations Branch,
Legal Processing Division,
Associate Chief Counsel
(Procedures and Administration).
(Filed by the Office of the Federal Register on January 31,
2005, 8:45 a.m., and published in the issue of the Federal
Register for February 1, 2005, 70 F.R. 5044)
2005–8 I.R.B.627February 22, 2005

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations
to show that the previous published rul-
ings will not be applied pending some
future action such as the issuance of new
or amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
February 22, 2005i2005–8 I.R.B.

Numerical Finding List
1
Bulletins 2005–1 through 2005–8
Announcements:
2005-1, 2005-1 I.R.B.257
2005-2, 2005-2 I.R.B.319
2005-3, 2005-2 I.R.B.270
2005-4, 2005-2 I.R.B.319
2005-5, 2005-3 I.R.B.353
2005-6, 2005-4 I.R.B.377
2005-7, 2005-4 I.R.B.377
2005-8, 2005-4 I.R.B.380
2005-9, 2005-4 I.R.B.380
2005-10, 2005-5 I.R.B.450
2005-11, 2005-5 I.R.B.451
2005-12, 2005-7 I.R.B.555
2005-13, 2005-8 I.R.B.627
Notices:
2005-1, 2005-2 I.R.B.274
2005-2, 2005-3 I.R.B.337
2005-3, 2005-5 I.R.B.447
2005-4, 2005-2 I.R.B.289
2005-5, 2005-3 I.R.B.337
2005-6, 2005-5 I.R.B.448
2005-7, 2005-3 I.R.B.340
2005-8, 2005-4 I.R.B.368
2005-9, 2005-4 I.R.B.369
2005-10, 2005-6 I.R.B.474
2005-11, 2005-7 I.R.B.493
2005-12, 2005-7 I.R.B.494
2005-14, 2005-7 I.R.B.498
2005-15, 2005-7 I.R.B.527
2005-16, 2005-8 I.R.B.605
2005-17, 2005-8 I.R.B.606
Proposed Regulations:
REG-117969-00, 2005-7 I.R.B.533
REG-125628-01, 2005-7 I.R.B.536
REG-129709-03, 2005-3 I.R.B.351
REG-130370-04, 2005-8 I.R.B.608
REG-139683-04, 2005-4 I.R.B.371
REG-152945-04, 2005-6 I.R.B.484
REG-159824-04, 2005-4 I.R.B.372
Revenue Procedures:
2005-1, 2005-1 I.R.B.1
2005-2, 2005-1 I.R.B.86
2005-3, 2005-1 I.R.B.118
2005-4, 2005-1 I.R.B.128
2005-5, 2005-1 I.R.B.170
2005-6, 2005-1 I.R.B.200
2005-7, 2005-1 I.R.B.240
2005-8, 2005-1 I.R.B.243
2005-9, 2005-2 I.R.B.303
Revenue Procedures— Continued:
2005-10, 2005-3 I.R.B.341
2005-11, 2005-2 I.R.B.307
2005-12, 2005-2 I.R.B.311
2005-14, 2005-7 I.R.B.528
Revenue Rulings:
2005-1, 2005-2 I.R.B.258
2005-2, 2005-2 I.R.B.259
2005-3, 2005-3 I.R.B.334
2005-4, 2005-4 I.R.B.366
2005-5, 2005-5 I.R.B.445
2005-6, 2005-6 I.R.B.471
2005-7, 2005-6 I.R.B.464
2005-8, 2005-6 I.R.B.466
2005-9, 2005-6 I.R.B.470
2005-10, 2005-7 I.R.B.492
Tax Conventions:
2005-3, 2005-2 I.R.B.270
Treasury Decisions:
9164, 2005-3 I.R.B.320
9165, 2005-4 I.R.B.357
9166, 2005-8 I.R.B.558
9167, 2005-2 I.R.B.261
9168, 2005-4 I.R.B.354
9169, 2005-5 I.R.B.381
9170, 2005-4 I.R.B.363
9171, 2005-6 I.R.B.452
9172, 2005-6 I.R.B.468
9173, 2005-8 I.R.B.557
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2004–27 through 2004–52 is in Internal Revenue Bulletin
2004–52, dated December 27, 2004.
2005–8 I.R.B.iiFebruary 22, 2005

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2005–1 through 2005–8
Notices:
88-30
Obsoleted by
Notice 2005-4, 2005-2 I.R.B.289
88-132
Obsoleted by
Notice 2005-4, 2005-2 I.R.B.289
89-29
Obsoleted by
Notice 2005-4, 2005-2 I.R.B.289
89-38
Obsoleted by
Notice 2005-4, 2005-2 I.R.B.289
2004-80
Updated by
Notice 2005-17, 2005-8 I.R.B.606
Proposed Regulations:
REG-149519-03
Corrected by
Ann. 2005-11, 2005-5 I.R.B.451
REG-114726-04
Corrected by
Ann. 2005-10, 2005-5 I.R.B.450
Revenue Procedures:
98-16
Modified and superseded by
Rev. Proc. 2005-11, 2005-2 I.R.B.307
2001-22
Superseded by
Rev. Proc. 2005-12, 2005-2 I.R.B.311
2002-9
Modified and amplified by
Rev. Proc. 2005-9, 2005-2 I.R.B.303
2004-1
Superseded by
Rev. Proc. 2005-1, 2005-1 I.R.B.1
2004-2
Superseded by
Rev. Proc. 2005-2, 2005-1 I.R.B.86
2004-3
Superseded by
Rev. Proc. 2005-3, 2005-1 I.R.B.118
2004-4
Superseded by
Rev. Proc. 2005-4, 2005-1 I.R.B.128
Revenue Procedures— Continued:
2004-5
Superseded by
Rev. Proc. 2005-5, 2005-1 I.R.B.170
2004-6
Superseded by
Rev. Proc. 2005-6, 2005-1 I.R.B.200
2004-7
Superseded by
Rev. Proc. 2005-7, 2005-1 I.R.B.240
2004-8
Superseded by
Rev. Proc. 2005-8, 2005-1 I.R.B.243
2004-35
Corrected by
Ann. 2005-4, 2005-2 I.R.B.319
2004-60
Superseded by
Rev. Proc. 2005-10, 2005-3 I.R.B.341
Revenue Rulings:
92-63
Modified and superseded by
Rev. Rul. 2005-3, 2005-3 I.R.B.334
95-63
Modified and superseded by
Rev. Rul. 2005-3, 2005-3 I.R.B.334
2004-43
Revoked by
Rev. Rul. 2005-10, 2005-7 I.R.B.492
2004-103
Superseded by
Rev. Rul. 2005-3, 2005-3 I.R.B.334
Treasury Decisions:
9170
Corrected by
Ann. 2005-13, 2005-8 I.R.B.627
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2004–27 through 2004–52 is in Internal Revenue Bulletin 2004–52, dated December 27,
2004.
February 22, 2005iii2005–8 I.R.B.
*U.S.Government PrintingOffice:2005—310–365/70003

Internal Revenue Bulletin 2005-8 (PDF rendition): IRS Announcements

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