How Does the 3-Month Health Insurance Premium Grace Period Work?

Some people now have a 3 month grace period for overdue premiums

If you get a premium subsidy, you've got a 3 month premium grace period
If part of your health insurance premium is paid with a subsidy, you've got a three month grace period if you fall behind on your part of the premium. Sean Russell/Creative RF/Getty Images

 Prior to the Affordable Care Act (ACA), states were free to set their own regulations in terms of health insurance premium grace periods, and 30 days tended to be the most common grace period. Those state regulations are still in place, but they now only apply to people who are not receiving premium subsidies through the exchange.

At the end of the 2016 open enrollment period, there were about 10.6 million people who were receiving premium subsidies to offset the cost of coverage purchased through the exchanges.

For these folks, there's a three month premium grace period, as long as they pay their initial premium on-time (here's the ACA text of this provision). 

How the grace period works

If you're NOT receiving a premium subsidy (ie, you have a health plan that you purchased outside the exchange, or you bought an exchange plan but are paying full price for it), your grace period is still governed by your state's regulations, and will be spelled out in your health insurance policy materials. A 30-day grace period is most common in this case, which means that if your premium for May is due on May 1, you'll have until the end of May to pay your premium. If you don't, your coverage will be retroactively terminated as of April 30 (since you paid for April, but not May). 

But if you ARE receiving a premium subsidy, you've got a three month grace period (note that the subsidy gets sent directly to the insurance company, rather than to you).

There's no grace period for the first month's premium - it has to be paid by the due date in order to activate the policy. But assuming you've paid the first month, subsequent premium payments qualify for the three month grace period.

So if you don't pay your June premium, your grace period would be June, July, and August.

The exchange will keep sending your premium subsidy to your health insurance company for those three months; your portion of the premiums would be the part that's past-due. 

If you get your premiums paid-up by the end of August, your coverage would continue without any breaks. But if you don't, your coverage would be retroactively terminated, but only back to the end of June, despite the fact that you didn't pay the June premium.

Any claims that you had in June would still be paid by the health insurance company, although they don't have to pay claims that you had in July or August if your coverage ends up getting terminated back to the end of June (they can pend claims that come in during the second and third month of the grace period, and wait to see if you get caught up on your premiums before they pay the claims).

In this scenario - where your coverage is cancelled due to non-payment of premiums by the end of the three-month grace period - you'd also have to pay back the premium subsidy that was paid on your behalf for June.

This would be handled when you file your tax return and reconcile your premium subsidy with the IRS

Why is there a 3-month grace period?

When the ACA was being written, lawmakers understood that some people would have difficulties paying their premiums, despite the assistance of premium subsidies. Premium subsidies are available to applicants with income as low as the poverty level (138% of the poverty level in the 30 states and DC where Medicaid has been expanded). So a family of four with a $35,000 income will be eligible for significant premium subsidies, but will also be responsible for paying about three or four percent of their income for the benchmark plan in their area.

The problem is that people with relatively low incomes might struggle to come up with their portion of the premium. And under the normal state guidelines, their coverage would generally be cancelled once their premium was a month overdue.

This is compounded by the fact that the ACA only allows people to enroll during the annual open enrollment period, or if they have a qualifying event. Loss of coverage is a qualifying event, but not if it occurs because of non-payment of premiums. So people whose coverage is terminated for non-payment of premiums generally have to wait until the next open enrollment period to re-enroll in coverage. The three-month grace period gives them a little more leeway and protection than they would otherwise have had.

This helps to address the fact that some people have incomes that fluctuate significantly, and also the fact that income tends to be more volatile at the lower end of the income spectrum. Enrollees whose income drops to the Medicaid eligibility level will be able to contact the exchange and switch to Medicaid at that point (assuming they're in a state that has accepted federal funding to expand Medicaid under the ACA). But enrollees who remain at a subsidy-eligible level have a three-month window to get caught up with their portion of the premiums if they do happen to fall behind at some point during the year.

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