September 1996

Health Insurance Portability and Accountability Act of 1996

H.R. 3103 restricts group health plans, insurers, and HMOs from denying coverage because of preexisting conditions. Tax penalties are imposed for noncompliance. Only individuals with "creditable coverage" under a health plan are eligible for protection under the law; essentially, the amount of time a health plan may deny coverage for a preexisting condition is reduced by the amount of time a participant or beneficiary has had creditable coverage under a previous plan. If an individual has been without coverage more than 63 days, earlier coverage does not count. A group health plan is required to provide written certification of prior "creditable" coverage.
Effective Date: July 1, 1997. Creditable coverage dates from July 1, 1996.

Guaranteed issue and nondiscrimination. To help individuals renew and enroll in health plans or purchase insurance, plans may not discriminate based on health status, including medical history; claims experience; genetic information; and disability.
Effective Date: July 1, 1997. Creditable coverage dates from July 1, 1996.

COBRA provisions. Extends 29-month eligibility for the disabled to disabled beneficiaries of the covered individual. Also modifies COBRA to allow the 11-month extension if the disability occurs within the first 60 days of the initial COBRA qualifying event for the covered employee and family members. Modifies the definition of a qualified beneficiary to include a child born to or placed for adoption with the covered employee.
Effective date: January 1, 1997

Begins a trial use of medical savings accounts (MSAs), which are tax-preferred individual trusts or custodial accounts similar to individual retirement accounts (IRAs). Participation is limited to the self-employed or employees of businesses with 50 or fewer workers covered under a high-deductible health plan. A "high-deductible health plan" is a plan with annual deductibles for single coverage of between $1,500 and $2,250, deductibles for family coverage of between $3,000 and $4,500, and out-of-pocket limits not exceeding $3,000 for single coverage and $5,500 for family coverage. The total number of such accounts nationwide may not exceed 750,000 during the four-year demonstration period.

Individual contributions are tax deductible, and employer contributions are excludable from income up to 65 percent of the deductible for single coverage and 75 percent of the deductible for individual coverage. Earnings on the MSA are not includable in income, and withdrawals for qualified medical expenses are excluded from income. The MSA must be used in conjunction with a high deductible health insurance policy. MSA balances generally may not be used to pay health insurance premiums, except for COBRA premiums, long-term care insurance premiums, and premiums paid while unemployed. If Congress does not renew or expand the pilot program at the end of four years, current MSA participants may retain their accounts but no new MSAs will be allowed.
Effective Date: Demonstration runs from December 31, 1996 to December 31, 2000.

Establishes favorable tax treatment of long-term care insurance similar to that currently granted to medical insurance premiums. Individuals can deduct long-term care premiums to the extent these premiums exceed 7.5 percent of adjusted gross income, up to an age-weighted dollar amount. Employment-based coverage is excludable unless provided through a cafeteria plan. MSA balances may be used to pay long-term care insurance premiums, but FSAs may not be used for this purpose.
Effective Date: January 1, 1997

Increases the deduction for health insurance expenses for self-employed individuals from 30 percent to 40 percent in taxable years beginning in 1997, 45 percent in 1998 through 2002, 50 percent in 2003, 60 percent in 2004, 70 percent in 2005, and 80 percent in 2006 and thereafter.

Viatical settlements. Excludes from income accelerated death benefits under life insurance contracts paid to chronically ill or terminally ill individuals.
Effective Date: Amounts received after December 31, 1996

Notice of changes in benefits. Health plans are required to give prompt notice to participants of any reduction in benefits or covered services within 60 days after the changes are adopted.
Effective Date: January 1, 1997

Allows penalty-free withdrawals from IRAs for medical expenses in excess of 7.5 percent of adjusted gross income. The 7.5 percent floor does not apply if an individual has received unemployment compensation for at least 12 weeks.
Effective Date: January 1, 1997

For more information, contact Bill Pierron (202) 775-6353 or Ken McDonnell, (202) 775-6342.