Short-Term Limited-Duration Insurance

Individuals can now buy “short-term limited-duration insurance” (or “STLDI”) contracts that last up to nearly a year.  These contracts are not subject to the Affordable Care Act (ACA). They can therefore exclude coverage for chronic conditions, maternity benefits, and other benefits normally required by the ACA.

The virtue of short-term limited-duration coverage is that it is cheap. In addition, starting in 2020 employers can set up Excepted Benefit HRAs (EBHRAs) that employees could use to help pay short-term limited-duration insurance premiums. 

What the ACA Normally Requires

The ACA requires that individual insurance (and to a certain extent employer insurance) provide a wide range of benefits to the insured, including:

  • hospitalization;
  • emergency services;
  • maternity care,
  • preventive care;
  • prescription drugs;
  • mental health; and
  • substance abuse disorder.

In addition, the ACA prohibits individual insurance that:

  • fails to cover pre-existing conditions;
  • imposes lifetime or annual dollar limits on benefits; or
  • drops coverage if the insured gets sick.

Early ACA Used Short-Term Limited-Duration Insurance as a Bridge to ACA Coverage

In the early ACA years, short-term limited-duration insurance was viewed as a temporary bridge to a full ACA-compliant plan. The maximum length of short-term limited-duration insurance coverage was less than 90 days.

Short-term limited-duration insurance did not provide minimum essential coverage, and did not protect the insured from liability for shared responsibility payments.  However, the shared responsibility rules provide a 90-day short-term exemption window for each calendar year.  The less-than-90-day maximum duration of short-term limited-duration insurance nicely fit into this exemption window. 

ACA’s Evolution

There have been two key changes that have made short-term limited-duration insurance practical as normal rather than temporary coverage:

  1. the maximum period is now “less than 12 months” with renewals up to 36 months; and  
  2. individual shared responsibility payments were repealed so individuals no longer need to have minimum essential coverage (note that some states have adopted substitute requirements).

In addition, as discussed below, employers can reimburse up to $1,800 a year for the cost of short-term limited duration coverage. 

Short-Term Limited-Duration Coverage Comes with Risks

For the younger, the healthier, and the not-so-likely-to-have-kids part of the population, short-term limited-duration insurance might work just fine.  These individuals can now buy inexpensive coverage that they feel is good enough. 

If it turns out they get sick from something they’ve had before or get pregnant, they can always enroll in ACA-compliant coverage at the next open enrollment.  ACA insurers have to take them.  The problem, however, is they may find themselves seriously under-insured or even uninsured until then.   

For the older, the chronically ill, and the people who want children, the down side is that that there was big jump in the cost of ACA-compliant plans for 2019.  True, premiums have evened out for 2020.  And the government through the premium tax credit has picked up a lot of this tab for less affluent taxpayers.  But middle-income taxpayers are squeezed to pay for these full ACA benefit plans.  

Note that the government is aware of the risks. It requires that short-term limited-duration insurance contracts state in 14 point type font that the plan is not covered by the ACA’s protections. 

Comment: ACA exchange coverage remains a good deal for those who qualify for the premium tax credit. Insurers with market power (typically those in rural areas) have placed most of the price increases on their benchmark silver plans, which boosts the credit amount whether the taxpayer buys that plan, the bronze plan, or the gold plan. 

Excepted Benefit HRAs (EBHRAs)

The ACA does not regulate excepted-benefit only HRAs such as stand-alone vision or dental plans.  Accordingly, these plans have always been allowable under the ACA as long as they do not also reimburse normal medical expenses that a health care plan would be expected to pick up.  They cannot be integrated with individual or traditional group plan coverage.

Starting in 2020, “excepted benefit HRAs” can be used to reimburse HRA to fund short-term, limited-duration coverage.  Short-term, limited duration insurance is treated as an excepted benefit under the employer plan rules so this is a continuation of the existing approach. However, there are two innovations.

  1. short-term, limited duration insurance has been extended from less than 90 days to less than a year, making this coverage far more useful; and
  2. the new “excepted benefit HRA” is not just limited to excepted benefits as it can also pick up other medical costs associated with the coverage.

EBHRA Requirements

Employers using an EBHRA must follow these requirements:

  • an EBHRA must be offered in conjunction with a traditional group health plan (though an EBHRA participant need not enroll in that coverage);
  • an EBHRA must provide benefits that are limited to $1,800 per year (adjusted for inflation after 2020);
  • an EBHRA cannot reimburse individual health insurance premiums, group health plan premiums (other than COBRA), or Medicare premiums, although it can reimburse premiums for excepted benefits such as dental and vision coverage as well as for short-term limited-duration insurance; and
  • the EBHRA must be uniformly available under the same terms to all similarly situated individuals.

Conclusion

Short-term limited-duration insurance coverage is a low-cost option for younger, healthier individuals who are willing to pay for limited coverage.  Excepted benefit HRAs are an option for employers that want to provide a low-cost alternative coverage alongside their traditional plan for employees whose medical needs are few.  These plans pose some risk for the insured.

By James Solheim, J.D.

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CCHTaxGroup

All stories by: CCHTaxGroup