[Code of Federal Regulations]
[Title 26, Volume 17]
[Revised as of April 1, 2005]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR54.9801-4]

[Page 367-371]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 54_PENSION EXCISE TAXES--Table of Contents
 
Sec. 54.9801-4  Rules relating to creditable coverage.

    (a) General rules--(1) Creditable coverage. For purposes of this 
section, except as provided in paragraph (a)(2) of this section, the 
term creditable coverage means coverage of an individual under any of 
the following:
    (i) A group health plan as defined in Sec. 54.9831-1(a).
    (ii) Health insurance coverage as defined in Sec. 54.9801-2 
(whether or not the entity offering the coverage is subject to Chapter 
100 of Subtitle K, and without regard to whether the coverage is offered 
in the group market, the individual market, or otherwise).
    (iii) Part A or B of Title XVIII of the Social Security Act 
(Medicare).
    (iv) Title XIX of the Social Security Act (Medicaid), other than 
coverage consisting solely of benefits under section 1928 of the Social 
Security Act (the program for distribution of pediatric vaccines).
    (v) Title 10 U.S.C. Chapter 55 (medical and dental care for members 
and certain former members of the uniformed services, and for their 
dependents; for purposes of Title 10 U.S.C. Chapter 55, uniformed 
services means the armed forces and the Commissioned Corps of the 
National Oceanic and Atmospheric Administration and of the Public Health 
Service).
    (vi) A medical care program of the Indian Health Service or of a 
tribal organization.

[[Page 368]]

    (vii) A State health benefits risk pool. For purposes of this 
section, a State health benefits risk pool means--
    (A) An organization qualifying under section 501(c)(26);
    (B) A qualified high risk pool described in section 2744(c)(2) of 
the PHS Act; or
    (C) Any other arrangement sponsored by a State, the membership 
composition of which is specified by the State and which is established 
and maintained primarily to provide health coverage for individuals who 
are residents of such State and who, by reason of the existence or 
history of a medical condition --
    (1) Are unable to acquire medical care coverage for such condition 
through insurance or from an HMO, or
    (2) Are able to acquire such coverage only at a rate which is 
substantially in excess of the rate for such coverage through the 
membership organization.
    (viii) A health plan offered under Title 5 U.S.C. Chapter 89 (the 
Federal Employees Health Benefits Program).
    (ix) A public health plan. For purposes of this section, a public 
health plan means any plan established or maintained by a State, the 
U.S. government, a foreign country, or any political subdivision of a 
State, the U.S. government, or a foreign country that provides health 
coverage to individuals who are enrolled in the plan.
    (x) A health benefit plan under section 5(e) of the Peace Corps Act 
(22 U.S.C. 2504(e)).
    (xi) Title XXI of the Social Security Act (State Children's Health 
Insurance Program).
    (2) Excluded coverage. Creditable coverage does not include coverage 
of solely excepted benefits (described in Sec. 54.9831-1).
    (3) Methods of counting creditable coverage. For purposes of 
reducing any preexisting condition exclusion period, as provided under 
Sec. 54.9801-3(a)(2)(iii), the amount of an individual's creditable 
coverage generally is determined by using the standard method described 
in paragraph (b) of this section. A plan may use the alternative method 
under paragraph (c) of this section with respect to any or all of the 
categories of benefits described under paragraph (c)(3) of this section 
or may provide that a health insurance issuer offering health insurance 
coverage under the plan may use the alternative method of counting 
creditable coverage.
    (b) Standard method--(1) Specific benefits not considered. Under the 
standard method, the amount of creditable coverage is determined without 
regard to the specific benefits included in the coverage.
    (2) Counting creditable coverage--(i) Based on days. For purposes of 
reducing the preexisting condition exclusion period that applies to an 
individual, the amount of creditable coverage is determined by counting 
all the days on which the individual has one or more types of creditable 
coverage. Accordingly, if on a particular day an individual has 
creditable coverage from more than one source, all the creditable 
coverage on that day is counted as one day. Any days in a waiting period 
for coverage are not creditable coverage.
    (ii) Days not counted before significant break in coverage. Days of 
creditable coverage that occur before a significant break in coverage 
are not required to be counted.
    (iii) Significant break in coverage defined--A significant break in 
coverage means a period of 63 consecutive days during each of which an 
individual does not have any creditable coverage. (See section 
731(b)(2)(iii) of ERISA and section 2723(b)(2)(iii) of the PHS Act, 
which exclude from preemption State insurance laws that require a break 
of more than 63 days before an individual has a significant break in 
coverage for purposes of State law.)
    (iv) Periods that toll a significant break. Days in a waiting period 
and days in an affiliation period are not taken into account in 
determining whether a significant break in coverage has occurred. In 
addition, for an individual who elects COBRA continuation coverage 
during the second election period provided under the Trade Act of 2002, 
the days between the date the individual lost group health plan coverage 
and the first day of the second COBRA election period are not taken into 
account in determining whether a significant break in coverage has 
occurred.

[[Page 369]]

    (v) Examples. The rules of this paragraph (b)(2) are illustrated by 
the following examples:

    Example 1. (i) Facts. Individual A has creditable coverage under 
Employer P's plan for 18 months before coverage ceases. A is provided a 
certificate of creditable coverage on A's last day of coverage. Sixty-
four days after the last date of coverage under P's plan, A is hired by 
Employer Q and enrolls in Q's group health plan. Q's plan has a 12-month 
preexisting condition exclusion.
    (ii) Conclusion. In this Example 1, A has a break in coverage of 63 
days. Because A's break in coverage is a significant break in coverage, 
Q's plan may disregard A's prior coverage and A may be subject to a 12-
month preexisting condition exclusion.
    Example 2. (i) Facts. Same facts as Example 1, except that A is 
hired by Q and enrolls in Q's plan on the 63rd day after the last date 
of coverage under P's plan.
    (ii) Conclusion. In this Example 2, A has a break in coverage of 62 
days. Because A's break in coverage is not a significant break in 
coverage, Q's plan must count A's prior creditable coverage for purposes 
of reducing the plan's preexisting condition exclusion period that 
applies to A.
    Example 3. (i) Facts. Same facts as Example 1, except that Q's plan 
provides benefits through an insurance policy that, as required by 
applicable State insurance laws, defines a significant break in coverage 
as 90 days.
    (ii) Conclusion. In this Example 3, under State law, the issuer that 
provides group health insurance coverage to Q's plan must count A's 
period of creditable coverage prior to the 63-day break. (However, if 
Q's plan was a self-insured plan, the coverage would not be subject to 
State law. Therefore, the health coverage would not be governed by the 
longer break rules and A's previous health coverage could be 
disregarded.)
    Example 4. [Reserved]
    Example 5. (i) Facts. Individual C has creditable coverage under 
Employer S's plan for 200 days before coverage ceases. C is provided a 
certificate of creditable coverage on C's last day of coverage. C then 
does not have any creditable coverage for 51 days before being hired by 
Employer T. T's plan has a 3-month waiting period. C works for T for 2 
months and then terminates employment. Eleven days after terminating 
employment with T, C begins working for Employer U. U's plan has no 
waiting period, but has a 6-month preexisting condition exclusion.
    (ii) Conclusion. In this Example 5, C does not have a significant 
break in coverage because, after disregarding the waiting period under 
T's plan, C had only a 62-day break in coverage (51 days plus 11 days). 
Accordingly, C has 200 days of creditable coverage, and U's plan may not 
apply its 6-month preexisting condition exclusion with respect to C.
    Example 6. [Reserved]
    Example 7. (i) Facts. Individual E has creditable coverage under 
Employer X's plan. E is provided a certificate of creditable coverage on 
E's last day of coverage. On the 63rd day without coverage, E submits a 
substantially complete application for a health insurance policy in the 
individual market. E's application is accepted and coverage is made 
effective 10 days later.
    (ii) Conclusion. In this Example 7, because E applied for the policy 
before the end of the 63rd day, the period between the date of 
application and the first day of coverage is a waiting period and no 
significant break in coverage occurred even though the actual period 
without coverage was 73 days.
    Example 8. (i) Facts. Same facts as Example 7, except that E's 
application for a policy in the individual market is denied.
    (ii) Conclusion. In this Example 8, even though E did not obtain 
coverage following application, the period between the date of 
application and the date the coverage was denied is a waiting period. 
However, to avoid a significant break in coverage, no later than the day 
after the application for the policy is denied E would need to do one of 
the following: submit a substantially complete application for a 
different individual market policy; obtain coverage in the group market; 
or be in a waiting period for coverage in the group market.

    (vi) Other permissible counting methods--(a) Rule. Notwithstanding 
any other provisions of this paragraph (b)(2), for purposes of reducing 
a preexisting condition exclusion period (but not for purposes of 
issuing a certificate under Sec. 54.9801-5), a group health plan may 
determine the amount of creditable coverage in any other manner that is 
at least as favorable to the individual as the method set forth in this 
paragraph (b)(2), subject to the requirements of other applicable law.
    (B) Example. The rule of this paragraph (b)(2)(vi) is illustrated by 
the following example:

    Example. (i) Facts. Individual F has coverage under Group Health 
Plan Y from January 3, 1997 through March 25, 1997. F then becomes 
covered by Group Health Plan Z. F's enrollment date in Plan Z is May 1, 
1997. Plan Z has a 12-month preexisting condition exclusion.
    (ii) Conclusion. In this Example, Plan Z may determine, in 
accordance with the rules prescribed in paragraphs (b)(2)(i), (ii), and 
(iii) of this section, that F has 82 days of creditable

[[Page 370]]

coverage (29 days in January, 28 days in February, and 25 days in 
March). Thus, the preexisting condition exclusion will no longer apply 
to F on February 8, 1998 (82 days before the 12-month anniversary of F's 
enrollment (May 1)). For administrative convenience, however, Plan Z may 
consider that the preexisting condition exclusion will no longer apply 
to F on the first day of the month (February 1).

    (c) Alternative method--(1) Specific benefits considered. Under the 
alternative method, a group health plan determines the amount of 
creditable coverage based on coverage within any category of benefits 
described in paragraph (c)(3) of this section and not based on coverage 
for any other benefits. The plan may use the alternative method for any 
or all of the categories. The plan may apply a different preexisting 
condition exclusion period with respect to each category (and may apply 
a different preexisting condition exclusion period for benefits that are 
not within any category). The creditable coverage determined for a 
category of benefits applies only for purposes of reducing the 
preexisting condition exclusion period with respect to that category. An 
individual's creditable coverage for benefits that are not within any 
category for which the alternative method is being used is determined 
under the standard method of paragraph (b) of this section.
    (2) Uniform application. A plan using the alternative method is 
required to apply it uniformly to all participants and beneficiaries 
under the plan. A plan that provides benefits (in part or in whole) 
through one or more policies or contracts of insurance will not fail the 
uniform application requirement of this paragraph (c)(2) if the 
alternative method is used (or not used) separately with respect to 
participants and beneficiaries under any policy or contact, provided 
that the alternative method is applied uniformly with respect to all 
coverage under that policy or contract. The use of the alternative 
method is required to be set forth in the plan.
    (3) Categories of benefits. The alternative method for counting 
creditable coverage may be used for coverage for the following 
categories of benefits--
    (i) Mental health;
    (ii) Substance abuse treatment;
    (iii) Prescription drugs;
    (iv) Dental care; or
    (v) Vision care.
    (4) Plan notice. If the alternative method is used, the plan is 
required to--
    (i) State prominently that the plan is using the alternative method 
of counting creditable coverage in disclosure statements concerning the 
plan, and state this to each enrollee at the time of enrollment under 
the plan; and
    (ii) Include in these statements a description of the effect of 
using the alternative method, including an identification of the 
categories used.
    (5) Disclosure of information on previous benefits. See Sec. 
54.9801-5(b) for special rules concerning disclosure of coverage to a 
plan (or issuer) using the alternative method of counting creditable 
coverage under this paragraph (c).
    (6) Counting creditable coverage--(i) In general. Under the 
alternative method, the group health plan counts creditable coverage 
within a category if any level of benefits is provided within the 
category. Coverage under a reimbursement account or arrangement, such as 
a flexible spending arrangement (as defined in section 106(c)(2)), does 
not constitute coverage within any category.
    (ii) Special rules. In counting an individual's creditable coverage 
under the alternative method, the group health plan first determines the 
amount of the individual's creditable coverage that may be counted under 
paragraph (b) of this section, up to a total of 365 days of the most 
recent creditable coverage (546 days for a late enrollee). The period 
over which this creditable coverage is determined is referred to as the 
determination period. Then, for the category specified under the 
alternative method, the plan counts within the category all days of 
coverage that occurred during the determination period (whether or not a 
significant break in coverage for that category occurs), and reduces the 
individual's preexisting condition exclusion period for that category by 
that number of days. The plan may determine the amount of creditable 
coverage in any other reasonable manner, uniformly applied, that is at 
least as favorable to the individual.

[[Page 371]]

    (iii) Example. The rules of this paragraph (c)(6) are illustrated by 
the following example:

    Example. (i) Facts. Individual D enrolls in Employer V's plan on 
January 1, 2001. Coverage under the plan includes prescription drug 
benefits. On April 1, 2001, the plan ceases providing prescription drug 
benefits. D's employment with Employer V ends on January 1, 2002, after 
D was covered under Employer V's group health plan for 365 days. D 
enrolls in Employer Y's plan on February 1, 2002 (D's enrollment date). 
Employer Y's plan uses the alternative method of counting creditable 
coverage and imposes a 12-month preexisting condition exclusion on 
prescription drug benefits.
    (ii) Conclusion. In this Example, Employer Y's plan may impose a 
275-day preexisting condition exclusion with respect to D for 
prescription drug benefits because D had 90 days of creditable coverage 
relating to prescription drug benefits within D's determination period.

[T.D. 9166, 69 FR 78746, Dec. 30, 2004]