Michigan Small Employer, Continuation, Dependent and Guaranty Association Rules
Group health sales raise the same few questions again and again. Is this employer small, and what can the carrier insist on? What happens when an employee or a spouse loses other coverage? Who counts as a dependent child, and for how long? What does the guaranty association stand behind if the insurer fails? And what must an advertisement say about the plan? Michigan answers each of them in a specific statute or rule, and the cases below work through the answers.
Who Is a Small Employer
Chapter 37 of the Insurance Code governs health benefit plans that cover 2 or more employees of a small employer. It does not reach individual policies that are subject to form and premium approval by the Director (MCL 500.3703(1), (2)).
A small employer is a business that, during the preceding calendar year, employed an average of at least 1 but not more than 50 full-time employees and that has at least 1 employee on the first day of the plan year. Businesses that are affiliated, or eligible to file a combined tax return for state taxation, count as one employer, and full-time equivalents are treated as full-time employees for group size (MCL 500.3701(i), (q)).
An eligible employee works full time, which means a normal workweek of 30 or more hours. An employer may choose to include employees who work 17.5 to 30 hours, but only if it applies that rule uniformly to all employees and without regard to health status (MCL 500.3701(h)).
Consider two affiliated landscaping companies that averaged 30 and 28 full-time employees last year. Counted together they have 58, so they are one employer over the limit of 50. The group is not a small employer, and Chapter 37’s small group protections do not apply to it.
What a Small Employer Carrier Must and May Do
A carrier that sells to small employers must make available every health benefit plan it markets to them. It must issue any of those plans to a small employer that applies and agrees to pay the premium and meet the plan’s other reasonable provisions (MCL 500.3707(1)).
Waiting and Affiliation Periods
A small employer plan generally cannot contain a waiting period for new or late enrollees. A carrier may instead use an affiliation period, a stretch of time that must pass before coverage becomes effective, but only if the period is uniform and health-status-blind, does not exceed 60 days for new enrollees or 90 days for late enrollees, charges no premium for the enrollee, and gives no coverage during it. Sole proprietors cannot be subject to one (MCL 500.3707(2)). An affiliation period waits only for time to pass, never for health.
Minimum Participation
A carrier may refuse a small employer that does not enroll enough employees, provided its minimum participation rule is applied uniformly. The permitted ceiling depends on size (MCL 500.3709(2)):
| Eligible employees | Carrier may require enrollment of up to |
|---|---|
| 10 or fewer | 100% of employees seeking coverage |
| 11 to 25 | 75% |
| 26 to 50 | 50% |
A carrier that waives its rule for an employer cannot enforce it against that employer later (MCL 500.3709(1)). Take an employer with 24 eligible employees, 20 of whom want coverage. The employer falls in the 11 to 25 band, so 75% of 20 is 15. The carrier may require no more than 15 enrollees.
Renewal and Discontinuance
The carrier must renew or continue the plan at the option of the small employer. It may decline only for fraud or intentional misrepresentation by the employer, fraud or misrepresentation by an insured individual as to that individual’s coverage, nonpayment, noncompliance with minimum contribution or participation requirements, because it no longer offers that type of coverage in the market, or because the employer moves outside the geographic area. It may change a plan only if the change is consistent with state law and effective on a uniform basis for all small employers with that plan (MCL 500.3711).
Discontinuing is regulated separately. To drop a particular plan, the carrier gives the Director and each affected employer at least 90 days’ notice and offers each employer any other small group plan it sells, without a preexisting condition exclusion or waiting period and without regard to health status (MCL 500.3712(2)). To leave a geographic area, it gives at least 180 days’ notice and may not return to that area for 5 years (MCL 500.3712(1)).
Special Enrollment When Other Coverage Ends
National texts describe COBRA as the route for people who lose employer coverage. COBRA is federal, and Michigan’s own rule for small employer plans is not a continuation right. MCL 500.3708 is a special enrollment period, and it lets a person who declined coverage because of other coverage join midyear.
A small employer carrier must accept an eligible employee or dependent who is not enrolled if all of these are true (MCL 500.3708(2)):
- The person had a group health plan or other health benefit plan when coverage was previously offered.
- The employee stated in writing that this other coverage was the reason for declining, if the employer or carrier required that statement and gave notice of the requirement and its consequences.
- The other coverage ended by COBRA exhaustion or by loss of eligibility (legal separation, divorce, death, termination of employment, reduced hours) or because the employer stopped contributing.
- The employee asks to enroll within 30 days after the coverage or employer contribution ended.
Coverage must then take effect no later than the first day of the first calendar month beginning after the carrier receives the completed request. Suppose Priya declined her employer’s plan in January because her spouse’s plan covered her, and wrote that down. Her spouse’s coverage ends March 12. She has until April 11 (March 12 plus 30 days). If the carrier receives her completed request April 2, coverage begins by May 1.
On a plan that offers dependent coverage, marriage, birth, adoption and placement for adoption open a separate dependent special enrollment period of at least 30 days. Coverage for a birth takes effect on the date of birth, for adoption or placement on that date, and for marriage no later than the first day of the first month after the request (MCL 500.3708(3), (4)). A baby born June 9 is covered from June 9 if the employee enrolls the child within the first 30 days.
Dependent Children
Michigan’s rules for dependents sit in several sections. A health insurance policy that offers dependent coverage must make it available, at the policyholder’s option, until the dependent reaches 26, with the same benefits and premium as any other covered dependent, and must cover a newborn from the moment of birth, including medically diagnosed congenital defects and birth abnormalities. It may not deny enrollment because the child was born out of wedlock, is not claimed on the insured’s tax return, or does not live with the insured or in the insurer’s service area (MCL 500.3403(1), (2)). A family policy must make coverage available to a dependent child at least until 26 for a health insurance policy, or 19 for a disability insurance policy or a policy providing pediatric dental or vision benefits (MCL 500.3402(c)).
An older section, MCL 500.3406g, once addressed denial of coverage to a dependent child under certain conditions. It was repealed in 2016. The current rule on denying a child enrollment is MCL 500.3403(2), and the rule for a parent under a court order is MCL 500.3406h.
Parents Under Court Orders
Consider Dev, the noncustodial parent, who is ordered by a court to provide health coverage for his daughter and whose insurer has been notified of the order. These rules apply only when a court or administrative order and that notice exist. Dev is enrolled and eligible for dependent coverage but has not applied to cover her. The friend of the court, or the child’s other parent through the friend of the court, may apply, and the insurer must enroll the girl on that application. If Dev applies himself, the insurer must let him enroll her “without regard to any enrollment season restrictions.” The insurer may drop her only for unpaid premium or on satisfactory written evidence that the order is no longer in effect or that she will have comparable coverage starting no later than the day the old coverage ends. Dev’s insurer must also give the custodial parent the information needed to get benefits, let that parent (or the provider, with the parent’s approval) submit claims without Dev’s approval, and pay claims directly to the parent or provider (MCL 500.3406h(1) to (3)).
Disabled Children and Students
A contract providing hospital care or reimbursement that ends dependent coverage at a specified age does not end it for an unmarried child who cannot support herself because of a developmental or physical disability and who depends on the policyholder for support, if the policyholder submits proof no later than 31 days after the child reaches the age limit (MCL 500.2264). If the child reaches the limit on May 20, the proof is due by June 20.
A dependent student who takes a medical leave of absence from school for illness or injury keeps coverage for 12 months from the last day of attendance or until the age at which coverage would otherwise end, whichever is shorter. The student’s physician must certify in writing that the leave is medically necessary, and the rate stays the student rate (MCL 500.2264a).
Group Life Is Different
MCL 500.4426 is often placed with these rules, but it governs group life insurance. A group life policy may be extended to eligible dependents who elect it, in amounts set under a plan that precludes individual selection. A “child” for that purpose includes a biological, legally adopted, step or foster child who depends on the employee or member (MCL 500.4426(1), (2), (4)). For a small employer health plan, the adoption rules are the special enrollment period above.
The Life and Health Insurance Guaranty Association
The association exists to protect covered persons, subject to limits, against failure of an insurer to perform because of impairment or insolvency. Member insurers fund it through assessments (MCL 500.7702(1)). It covers residents, and some nonresidents in defined situations, who hold direct nongroup life, health, annuity and supplemental policies, and certificates under direct group policies, issued by member insurers (MCL 500.7704(1), (2)).
The association is not a general promise to pay. Its obligation is the lesser of what the insurer owed under the contract and the statutory maximum for one life, applied across all policies on that life. For one life the ceilings are $100,000 in health insurance benefits generally, $300,000 in disability income or long-term care benefits, and $500,000 in basic hospital, medical and surgical benefits (MCL 500.7704(6), (7)). On an example unpaid basic hospital claim of $620,000, the lesser of $620,000 and $500,000 is $500,000, and the other $120,000 is not guaranteed.
The association also excludes, among other things (MCL 500.7704(5)):
| Not covered | Example |
|---|---|
| Self-funded or uninsured portions of a plan, including a multiple employer welfare arrangement, a stop-loss plan and an administrative services only contract | An employer’s self-funded plan whose benefits the employer pays |
| Medicare Advantage and Part D benefits | A member’s Medicare Advantage claim |
| A policy issued by an insurer without a certificate of authority | A policy from an unlicensed insurer |
| Anything beyond the written terms of the policy: claims based on marketing materials or misrepresentations of benefits, side letters not filed or approved, punitive damages, bad faith claims, attorney fees and penalties | A buyer who relied on a producer’s promise of a benefit the policy never contained |
The last row concerns producers directly. If a producer misdescribes a policy and the insurer then fails, the association does not cover the buyer’s claim for the promised benefit. The practical lesson is to describe only what the policy says, in writing, and not to present the guaranty association as a reason to buy.
Checking an Advertisement Against the Rules
Michigan’s accident and sickness advertising rules reward a producer who reads copy line by line. Treat this invented ad for an insurer called Bramble Hollow Health as an invitation to contract: “Hospital Plus pays $200 a day. No medical exam required. Choose the benefit that fits you. Renewable. Only a short wait for most benefits.”
- A dollar amount with no limits. The ad cites a daily amount, so it must disclose the exceptions, reductions and limitations without which it would mislead (R 500.656(1)).
- A waiting period it hides. It must disclose the waiting or elimination period, not call it “short” (R 500.656(2)).
- “Only.” Words that understate exceptions, reductions or limitations are misleading, and “only,” “just,” “merely,” “minimum” and “necessary” may not describe how exceptions and reductions apply (R 500.656(3)).
- “No medical exam required.” If the policy does not cover losses from preexisting conditions, the ad may not use this phrase or imply that medical history will not affect a claim. It must disclose, in negative terms, how far a loss traceable to an earlier condition is not covered, and it cannot use “preexisting condition” without a definition (R 500.657(1), (2)).
- “Renewable.” The ad must disclose renewability, cancellability, termination and any change in benefits or premium because of age or other reasons, without obscuring the qualifying conditions (R 500.658).
- “Choose the benefit that fits you.” An ad referring to a choice of benefit amounts must say that the benefit depends on the plan selected and that the premium varies with the benefit (R 500.661(1)).
The corrected ad states the limits and waiting period plainly, defines the preexisting condition exclusion in negative terms, and explains renewability and the premium effect of the plan chosen.
Lesson summary
- A small employer averaged 1 to 50 full-time employees in the preceding calendar year, with affiliated businesses counted together, and Chapter 37 covers plans for 2 or more of its employees.
- A small employer carrier must issue every plan it markets to a small employer that applies, may not use a waiting period, and may use an affiliation period of at most 60 days for new and 90 days for late enrollees.
- Minimum participation rules may require up to 100% enrollment for 10 or fewer employees, 75% for 11 to 25, and 50% for 26 to 50.
- Renewal is at the employer’s option, subject to the listed exceptions, and discontinuing a plan or an area requires 90 or 180 days’ notice.
- MCL 500.3708 is a special enrollment right with a 30-day request deadline, not a continuation right; MCL 500.3406g is repealed, and the current rule on denying a child enrollment is MCL 500.3403(2).
- Dependent coverage on a health insurance policy runs to age 26, a child under a coverage order is enrolled without regard to enrollment season, and a disabled child’s coverage continues if proof is filed within 31 days.
- The guaranty association pays the lesser of the contract obligation and its statutory maximum for one life, and does not cover self-funded plans, Medicare Advantage or claims based on misrepresentation.
- An invitation to contract must disclose limits and waiting periods and avoid “only,” “no medical exam required” and undefined “preexisting condition.”