01.18.2012

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Updates

Employers that allow dependents to be covered under their health plans need to be aware of health care reform rules that may limit their ability to retroactively remove ineligible dependents from coverage.

Background

To ensure that only dependents who meet a health plan's eligibility requirements are enrolled, many employers audit dependent eligibility and require documentation to verify eligibility. In general, if an employee cannot provide verification of a dependent's eligibility, the dependent is removed from coverage either retroactively to the date of enrollment or prospectively as of a date specified by the employer. The health care reform law placed limits on retroactive cancellation of coverage, and employers will need to understand the new rules in order to avoid triggering possible penalties. Group health plans (including both grandfathered and non-grandfathered plans) and insurers that issue group or individual health insurance coverage are all subject to the rules on retroactive cancellations.

The Impact of Health Care Reform

The health care reform law defines "rescission" as a retroactive cancellation of an individual's health coverage, unless the retroactive cancellation is due to a failure to pay required premiums or contributions toward the cost of coverage. A retroactive cancellation of a dependent's coverage for failure to meet the plan's eligibility requirements would be a rescission.

Under the health care reform law, rescission is permissible only if the individual (or someone acting on behalf of the individual, such as an employee who enrolls a dependent):

    • obtained coverage through fraud or an intentional misrepresentation of material fact as prohibited by the terms of the plan or coverage and

    • is given at least 30 days' advance notice of the rescission.

The rescission can be challenged through the health plan's appeals process and, if the plan upholds the rescission, the individual can demand external review of the rescission by an outside decision maker, known as an Independent Review Organization (IRO).

The limits on rescissions put in place by the health care reform law apply very broadly. For example, if a health plan does not cover grandchildren, but an employee enrolls a grandchild anyway and then cannot provide verification of eligibility when audited, the plan cannot cancel the grandchild's coverage retroactively unless it can show that the employee made an intentional misrepresentation of the grandchild's eligibility or otherwise engaged in fraud in enrolling the grandchild. An unintentional or mistaken misrepresentation would not be sufficient to permit the plan to cancel the grandchild's coverage retroactively. A claim by the employee that the plan's eligibility rules were not clear or that the employee did not understand the eligibility rules might be enough to raise doubt about the plan's ability to cancel the grandchild's coverage retroactively. In addition, if the plan were to cancel the grandchild's coverage retroactively, the employee would have the right to appeal the cancellation and, if the plan did not change its position, the employee could take the matter to an outside IRO.

An employer can avoid having to meet the conditions for rescission by choosing to cancel coverage only on a prospective basis. While this approach avoids the difficulties presented by the health care reform rules, it may leave the health plan's fiduciaries in a difficult position, because they have a duty to follow the plan's eligibility rules and to act solely in the interest of legitimate plan participants. In addition, employers with insured plans should fully consider how best to address eligibility issues with insurers, including prospective versus retroactive cancellation. For example, insurers may insist on retroactive cancellation if a claim is large and the insurer believes there is a reasonable chance of showing fraud or an intentional misrepresentation of a material fact.

Practical Tips

Employers that want to be able to cancel coverage of ineligible dependents retroactively should consider the following actions:

    • Discuss the issue of retroactive cancellation of coverage with the plan's insurer or third-party administrator to learn how they prefer to handle removal of ineligible dependents and to ensure that they can and will support the employer's preferred approach. If the plan decides to make retroactive cancellations, be sure the plan, the insurer, or the third-party administrator has contracts in place with IROs to handle the outside review.

    • Make sure that the plan's eligibility provisions are stated very clearly and prominently in all enrollment materials, summary plan descriptions, and other plan documents to avoid claims by employees that they did not know or did not understand the eligibility rules. It might be wise to seek professional help to state the eligibility rules in very plain language.

    • Include in the enrollment materials strong and prominent language warning that dependent eligibility may be audited and that enrollment of a dependent who does not meet the plan's eligibility requirements as stated in the enrollment materials will be treated as an intentional misrepresentation of a material fact, or fraud. Inclusion of this language will not guarantee that the plan can prevail, but it may help. 

© 2012 Perkins Coie LLP