In this scenario, the employer has been covering an ex-spouse and/or stepchild(ren) when they are no longer eligible. For plan purposes, the first thing that an employer (as plan administrator) needs to do is determine whether this situation is considered a rescission of coverage or a simple retroactive termination.
The Affordable Care Act (ACA) defines rescission of coverage as “the retroactive cancellation of an insurance policy” or health plan coverage when payment has already been taken for that coverage. That means that an employer is prohibited from retroactively terminating an employee or an employee’s dependent coverage, except under certain circumstances.
When is a rescission of coverage allowed? Coverage can only be rescinded due to fraud or an intentional misrepresentation of material fact. This may occur when a change of request form or divorce decree was not provided timely in an attempt to intentionally continue coverage for an ex-spouse and/or any stepchild(ren).
Let’s use this example to better understand what would happen next. In this case, once the employer is made aware of the change in marital status, a letter of rescission must be sent to the employee notifying him or her that coverage for his affected ex-spouse and/or stepchild(ren) will be rescinded.
In the letter of rescission, the employer must indicate that the affected ex-spouse and/or stepchild(ren) are no longer eligible for coverage due to the divorce as of the applicable termination date. The letter must include appeal rights that allow the employee 30 days to appeal the decision – for instance, if the employee believes there has been a mistake and that the affected ex-spouse and/or stepchild(ren) should still be eligible for coverage. The affected ex-spouse and/or stepchild(ren) must remain active with coverage during this time.
If the appeal is not completed or is denied, the affected ex-spouse and/or stepchild(ren) will then be terminated back to the date they should have been terminated in accordance with the plan language. At this point, any claims that have been processed during the time of ineligibility can be adjusted to be denied.
Can a member be terminated retroactively without it being considered a rescission of coverage? The answer is yes, in certain situations.
A rescission of coverage would not apply if the cancellation is due to failure to timely pay premiums or contributions (including COBRA contributions). Another example in which a retroactive termination would not be considered a rescission of coverage would be if the employer changed the payroll deduction for premium due from one coverage category to another (for instance, from employee/spouse coverage to employee-only coverage) and the third party administrator (TPA) or health insurance carrier was not advised to make the change in the level of coverage.
What happens when an employee voluntarily, and without coercion from the employer, requests a retroactive termination date for a family member? In this situation, the plan may need to treat it as a rescission of coverage if the ex-spouse knew that the contributions were taken. If the employer finds out about the divorce and notifies the employee before the employee notifies the employer or health insurance carrier then this termination would be treated like a rescission of coverage.
Unfortunately, some situations are not so clearly defined in the rules regarding rescission versus retroactive termination of coverage. For example, if an employee requests a retroactive termination date and a reimbursement of premium paid for a dependent who has not incurred any claims, it is unclear if the termination must be treated as a rescission. In cases like this, it may best to seek the advice of legal counsel and develop an internal policy in order to treat all covered employees consistently.
MedBen knows that these are complicated rules for plan sponsors. If you have any questions regarding when a termination of coverage must be treated as a rescission of coverage, please feel free to contact Erin Kelly, MedBen Director of Compliance at 800-423-3151, ext. 368 or firstname.lastname@example.org.