idm140457765399008

Internal Revenue Service

Proposed Amendments to the Regulations

Accordingly, the Treasury Department and the IRS propose to amend 26 CFR parts 1 and 54 as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805. * * *

Par 2. Section 1.105-2 is revised to read as follows:

§ 1.105-2 Amounts expended for medical care.

(a) In general. Section 105(b) provides an exclusion from gross income with respect to the amounts referred to in section 105(a) (see § 1.105-1) which are paid, directly or indirectly, to the taxpayer to reimburse the taxpayer for expenses incurred for the medical care (as defined in section 213(d)) of the taxpayer, the taxpayer’s spouse, the taxpayer’s dependents (as defined in section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof) (dependents), and any child of the taxpayer who, as of the end of the taxable year, has not attained age 27. Any child to whom section 152(e) applies shall be treated as a dependent of both parents for purposes of section 105(b). (All references to the taxpayer’s medical expenses in this section include the medical expenses of the taxpayer, the taxpayer’s spouse, the taxpayer’s dependents, and any child of the taxpayer who, as of the end of the taxable year, has not attained age 27.) However, the exclusion does not apply to amounts which are attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year. See section 213 and the regulations thereunder. Section 105(b) applies only to amounts which are paid specifically to reimburse the taxpayer for section 213(d) medical care expenses that have been incurred by the taxpayer and that are substantiated by the plan. Thus, section 105(b) does not apply to amounts that the taxpayer would be entitled to receive irrespective of the amount of medical care expenses the taxpayer incurs or that are paid to reimburse the taxpayer for incurred section 213(d) medical care expenses if the medical care expenses have not been substantiated by the plan. For example, if under a wage continuation plan the taxpayer is entitled to regular wages during a period of absence from work due to sickness or injury, amounts received under such plan are not excludable from the taxpayer’s gross income under section 105(b) even though the taxpayer may have incurred medical expenses during the period of illness. Any amounts received under a fixed indemnity plan treated as an excepted benefit under section 9832(c)(3), or any plan that pays amounts regardless of the amount of section 213(d) medical care expenses actually incurred, are not payments for medical care under section 105(b) and are included in the employee’s gross income under section 105(a). If the taxpayer incurs an obligation for medical care, payment to the obligee in discharge of such obligation shall constitute indirect payment to the taxpayer as reimbursement for medical care. Similarly, payment to or on behalf of the taxpayer’s spouse or dependents or any child of the taxpayer who, as of the end of the taxable year, has not attained age 27 shall constitute indirect payment to the taxpayer.

(b) Applicability date. These regulations apply as of the later of the date of the publication of the final regulations or January 1, 2024.

PART 54—PENSION AND EXCISE TAX

Par 3. The authority citation for part 54 continues to read as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 4. Section 54.9801-2 is amended by revising the definition of “Short-term, limited-duration insurance” to read as follows:

§ 54.9801-2 Definitions.

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Short-term, limited-duration insurance means health insurance coverage provided pursuant to a policy, certificate, or contract of insurance with an issuer that:

(1) Has an expiration date specified in the policy, certificate, or contract of insurance that is no more than 3 months after the original effective date of the policy, certificate, or contract of insurance, and taking into account any renewals or extensions, has a duration no longer than 4 months in total. For purposes of this paragraph (1), a renewal or extension includes the term of a new short-term, limited-duration insurance policy, certificate, or contract of insurance issued by the same issuer to the same policyholder within the 12-month period beginning on the original effective date of the initial policy, certificate, or contract of insurance; and

(2) Displays prominently on the first page (in either paper or electronic form, including on a website) of the policy, certificate, or contract of insurance, and in any marketing, application, and enrollment materials (including reenrollment materials) provided to individuals at or before the time an individual has the opportunity to enroll (or reenroll) in the coverage, in at least 14-point font, the language in the following notice:

“Notice to Consumers About Short-Term, Limited-Duration Insurance

IMPORTANT: This is short-term, limited-duration insurance. This is temporary insurance. It isn’t comprehensive health insurance. Review your policy carefully to make sure you understand what is covered and any limitations on coverage.

This insurance might not cover or might limit coverage for:

preexisting conditions; or

essential health benefits (such as pediatric, hospital, emergency, maternity, mental health, and substance use services, prescription drugs, or preventive care).

You won’t qualify for Federal financial help to pay for premiums or out-of-pocket costs.

You aren’t protected from surprise medical bills.

When this policy ends, you might have to wait until an open enrollment period to get comprehensive health insurance.

Visit HealthCare.gov online or call 1-800-318-2596 (TTY: 1-855-889-4325) to review your options for comprehensive health insurance. If you’re eligible for coverage through your employer or a family member’s employer, contact the employer for more information. Contact your State department of insurance if you have questions or complaints about this policy.”

(3) If any provision of this definition of “short-term, limited-duration insurance” is held to be invalid or unenforceable by its terms, or as applied to any entity or circumstance, or stayed pending further agency action, the provision shall be construed so as to continue to give the maximum effect to the provision permitted by law, along with other provisions not found invalid or unenforceable, including as applied to entities not similarly situated or to dissimilar circumstances, unless such holding is that the provision is invalid and unenforceable in all circumstances, in which event the provision shall be severable from the remainder of the definition and shall not affect the remainder thereof.

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Par. 5. Section 54.9831-1 is amended by:

a. Revising paragraph (c)(4)(i);

b. Adding paragraph (c)(4)(ii)(D);

c. Revising paragraph (c)(4)(iii); and

d. Adding paragraphs (c)(4)(iv) and (c)(4)(v).

The revisions and additions read as follows:

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

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(c) * * *

(4) * * *

(i) Excepted benefits that are not coordinated. Coverage for only a specified disease or illness (for example, cancer-only policies) or hospital indemnity or other fixed indemnity insurance is excepted only if it meets each of the applicable conditions specified in paragraph (c)(4)(ii) of this section.

(ii) * * *

(D) With respect to hospital indemnity or other fixed indemnity insurance –

(1) The benefits are paid in a fixed dollar amount per day (or per other time period) of hospitalization or illness (for example, $100/day) regardless of the actual or estimated amount of expenses incurred, services or items received, severity of illness or injury experienced by a covered participant or beneficiary, or other characteristics particular to a course of treatment received by a covered participant or beneficiary, and not on any other basis (such as on a per-item or per-service basis).

(2) The plan or issuer displays prominently on the first page (in either paper or electronic form, including on a website) of any marketing, application, and enrollment materials that are provided to participants at or before the time participants are given the opportunity to enroll in the coverage, in at least 14-point font, the language in the following notice:

“Notice to Consumers About Fixed Indemnity Insurance

IMPORTANT: This is fixed indemnity insurance. This isn’t comprehensive health insurance coverage and doesn’t have to include most Federal consumer protections for health insurance.

Visit HealthCare.gov online or call 1-800-318-2596 (TTY: 1-855-889-4325) to review your options for comprehensive health insurance. If you’re eligible for coverage through your employer or a family member’s employer, contact the employer for more information. Contact your State department of insurance if you have questions or complaints about this policy.”

(3) If participants are required to reenroll (in either paper or electronic form) for purposes of renewal or reissuance of the insurance, the notice described in paragraph (c)(4)(ii)(D)(2) of this section is displayed in any marketing and reenrollment materials provided at or before the time participants are given the opportunity to reenroll in coverage.

(4) If a plan or issuer provides a notice satisfying the requirements in paragraph (c)(4)(ii)(D)(2) and (3) of this section to a participant, the obligation to provide the notice is considered to be satisfied for both the plan and issuer.

(iii) Examples. The rules of this paragraph (c)(4) are illustrated by the following examples:

(A) Example 1—

(1) Facts. An employer sponsors a group health plan that provides coverage through an insurance policy. The policy provides benefits only related to hospital stays at a fixed percentage of hospital expenses up to a maximum of $100 a day.

(2) Conclusion. Even if the other conditions in paragraph (c)(4)(ii) of this section are satisfied, because benefits are paid based on a percentage of expenses incurred rather than a fixed dollar amount per day (or per other time period, such as per week), the policy does not qualify as an excepted benefit under this paragraph (c)(4). This is the result even if, in practice, the policy pays the maximum of $100 for every day of hospitalization.

(B) Example 2—

(1) Facts. An employer sponsors a group health plan that provides coverage through an insurance policy. The policy provides benefits when a person receives certain specific items and services in a fixed amount, such as $50 per blood test or $100 per visit. The fixed amounts apply to each specific item or service and are not paid per day or per other time period of hospitalization or illness.

(2) Conclusion. Even if the other conditions in paragraph (c)(4)(ii) of this section are satisfied, the policy does not qualify as an excepted benefit under this paragraph (c)(4) because the benefits are not paid in a fixed dollar amount per day (or per other time period) of hospitalization or illness, and are not paid without regard to the services or items received. The conclusion would be the same even if the policy added a per day (or per other time period) term to the benefit description (for example, “$50 per blood test per day”), because the benefits are not paid regardless of the services or items received.

(C) Example 3—

(1) Facts. An employer sponsors a group health plan that provides two benefit packages. The first benefit package includes benefits only for preventive services and excludes benefits for all other services. The second benefit package provides coverage through an insurance policy that pays a fixed dollar amount per day of hospitalization for a wide variety of illnesses that are not preventive services covered under the first benefit package. The two benefit packages are offered to employees at the same time and can be elected together. The benefit packages are not subject to a formal coordination of benefits arrangement.

(2) Conclusion. Even if the other conditions in paragraph (c)(4)(ii) of this section are satisfied, the second benefit package’s insurance policy does not qualify as an excepted benefit under this paragraph (c)(4) because the benefits under the second benefit package are coordinated with an exclusion of benefits under another group health plan maintained by the same plan sponsor (that is, the preventive-services-only benefit package). The conclusion would be the same even if the benefit packages were not offered to employees at the same time or if the second benefit package’s insurance policy did not pay benefits associated with a wide variety of illnesses.

(iv) Applicability date^— (A) For hospital indemnity or other fixed indemnity insurance sold or issued on or after a date 75 days after the date of publication of the final rule, the requirements of this paragraph (c)(4) apply for plan years beginning on or after the date 75 days after the date of publication of the final rule.

(B) For hospital indemnity or other fixed indemnity insurance sold or issued before [THE DATE THAT IS 75 DAYS AFTER THE DATE OF PUBLICATION OF THESE REGULATIONS AS FINAL], the requirements of this paragraph (c)(4) apply for plan years beginning on or after January 1, 2027, except that the requirements of paragraphs (c)(4)(ii)(D)(2)-(4) and (c)(4)(v) of this section, apply for plan years beginning on or after [THE DATE THAT IS 75 DAYS AFTER THE DATE OF PUBLICATION OF THESE REGULATIONS AS FINAL].

(C) Until the relevant applicability date for the requirements of this paragraph (c)(4), plans and issuers are required to continue to comply with the corresponding section of § 54.9831-1(c)(4) contained in the 26 CFR, part 54, edition revised as of April 1, 2023.

(v) Severability. If any provision of this paragraph (c)(4) is held to be invalid or unenforceable by its terms, or as applied to any entity or circumstance, or stayed pending further agency action, the provision shall be construed so as to continue to give the maximum effect to the provision permitted by law, along with other provisions not found invalid or unenforceable, including as applied to entities not similarly situated or to dissimilar circumstances, unless such holding is that the provision is invalid and unenforceable in all circumstances, in which event the provision shall be severable from the remainder of this paragraph (c)(4) and shall not affect the remainder thereof.

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