When the Patient Protection and Affordable Care Act (PPACA) initially passed, most employers assumed that the rescission of coverage section only applied to an individual policy.  However, the DOL’s interim final regulations and FAQ number 7 published in early 2011 changed this assumption.  (http://www.dol.gov/ebsa/faqs/faq-aca2.html)

FAQ number 7 clearly states that if an employer takes a contribution for medical coverage, (i.e., an employee premium payment), then the employer may not process a rescission of coverage UNLESS the rescission occurs due to fraud or misrepresentation and the employee is given a 30 appeal period prior to the rescission taking effect.

Let’s take a moment and pick that sentence apart.  First, what is a rescission of coverage? 

A rescission of coverage is a termination of coverage that uses a retroactive termination date when payment has already been taken for that coverage.  Examples:

• An employee moves from full-time to part-time (or from an eligible class to a non-eligible class), but due to administrative delay, a contribution for the medical coverage is taken
• An employer performs a dependent audit and discovers that a person enrolled as a spouse is not really married to the employee; however, the employer has taken payroll deductions to cover the spouse.
• A supervisor accidently offered coverage to an employee who was not in an eligible class.  The employee enrolled and a payroll deduction was taken for the coverage
• In the above examples, coverage should be terminated prospectively unless the employer is able to accuse the employee of fraud or misrepresentation and go through the appeals process.
• A grey area occurs if the employee has not incurred claims and requests a retroactive termination of coverage and refund of contribution.  Employers should develop a consistent  policy for this situation after consulting with legal counsel.

Second, when are rescissions (retroactive terminations where premium has been taken) allowed?

• A rescission is allowed if there was fraud or intentional representation of material fact.
• A 30 day notice of termination period must apply and the employee must be given the chance to appeal during that 30 day period.
• The coverage must remain intact during that 30 day period, though if the appeal is unsuccessful a retroactive termination can be made at the end of the 30 day period.
• If claims are paid during the period of coverage and/or the appeal period, the carrier may deny the termination based on the employer’s contract with the carrier.
• Coverage may NOT be terminated retroactively if money was taken and there was no fraud or misrepresentation.

Now, let’s look at what is allowed:

• A cancellation or discontinuance of coverage is NOT a rescission if it has a prospective date or is for non-payment of premium (contribution).  Prospective terminations are allowed.
• A rescission of coverage always looks at the employee’s perspective.  It has nothing to do with transactions between the employer and the insurance company.  This means if the employer has paid the insurance company, but the employee has not paid the plan, then a retroactive termination is not a rescission of coverage and is allowed.  Said differently,
• Administrative retrospective terminations can be rescissions (and prohibited) where a member pays premium or contribution.  In this case a plan can only cancel prospectively unless fraud or misrepresentation occurs.
• Administrative retrospective terminations are not considered rescissions when there is no payment of premium.

Practical Examples:

• The following items are examples of retroactive terminations that are not a rescission of coverage:
• The employee terminated employment, was given notice of COBRA rights, no payment was taken for coverage after the termination date, but it takes the employer two months to get the employee off of the insurance company bill.
• A routine bill reconciliation uncovers a person who should have been moved from family coverage to single coverage 4 months earlier.  Payroll deductions for the past 4 months have been taken at the single level.
• A grey area can occur when an employee requests a retroactive termination date for a family member.  For example, the employee requests that his ex-spouse’s coverage be terminated coinciding with the divorce date which occurred a month in the past.
• Because the termination is at the employee’s request and it is not something “the plan” is forcing on the employee it may not be a rescission of coverage.
• However, if the ex-spouse knew contributions were taken; payment was made, then from the ex-spouse’s perspective this might be a rescission. 

A few final thoughts:

• Some carriers are using this FAQ 7 to shorten the time period for which they will provide a retroactive refund of premium.  Be attentive to changes in your contract.
• Overall, insured employers may find it easier (but more costly) to terminate prospectively even when fraud or misrepresentation occurs rather than go through the 30 day notice and appeals procedures following PPACA guidelines for internal and external review.
• Self funded plans may have a gap in reinsurance coverage if a person who does not meet the eligibility criteria for the plan cannot be terminated retroactively and becomes a high claimant during the time period between when eligibility ends and termination of coverage occurs.  Thus, self funded plans may need to consistently pursue rescissions of coverage as part of their risk management program.
• Before acting on the information in this article, please review your policies with your attorney.  The author does NOT provide legal, tax, or accounting consultation or advice.  The author has provided you with this information and/or material strictly in her capacity as an employee benefits consultant.

Elizabeth Patterson, FLMI
Managing Consultant
Team Lead, Strategy Development and Program Management