That loophole provides a "temporary" exemption from the law's so-called individual mandate requiring most Americans to have health insurance coverage or pay a federal tax penalty.
The exemption also allows people in cancelled health plans to buy bare-bones "catastrophic coverage" if it is available in their area.
The rule change comes just days before a key enrollment deadline. For consumers using the federal and state health insurance exchanges, Dec. 23 is the deadline in most states for enrolling in a health plan that would take effect on Jan. 1.
"Even though the Affordable Care Act will offer more coverage choices and protections for millions of Americans, we are committed to ensuring the smoothest transition possible for those who need to find a new health plan," U.S. Health and Human Services Secretary Kathleen Sebelius wrote in a letter outlining options for people in cancelled health plans.
Consumers with cancelled policies may call 1-866-837-0677, a dedicated hotline to help people sort through their options, Sebelius added.
The health insurance lobby issued a terse statement reacting to the 11th-hour decision.
"This latest rule change could cause significant instability in the marketplace and lead to further confusion and disruption for consumers," Karen Ignagni, president and CEO of America's Health Insurance Plans, said in the statement.
Republicans lashed out at what they called the Obama Administration's continued backpedaling on a law that they insist should be repealed.
"The Administration is recognizing the grim reality that more Americans have lost health insurance than gained it under Obamacare," Sen. Marco Rubio, R-Fla., said in a statement.
"This is a slap in the face to the thousands of Americans who have already purchased expensive insurance through the Obamacare exchanges," he noted.
In recent weeks, millions of Americans have received notice that their individual health insurance policies would not be renewed in 2014. In some cases, these health plans lacked basic coverage for hospitalization or other critical and costly health services, and did not comply with comprehensive coverage rules under the Affordable Care Act.
The cancellations, a widely unforeseen consequence of health reform, at least on Capitol Hill, riled politicians on both sides of the aisle.
Seeking relief for constituents upset by the cancellations, Sen. Mark Warner, D-Va., joined by five of his Democratic and Independent colleagues, called on Sebelius for immediate clarification of the hardship exemption.
Prior to Thursday's announcement, only people under age 30 and those aged 30 and older who obtained a hardship exemption unrelated to an insurance cancellation were allowed to buy catastrophic health coverage.
These bare-bones catastrophic health plans usually carry lower premiums -- an average of 20 percent lower than health plans available through the exchanges, Sebelius said. But unlike comprehensive medical coverage, they only provide protection against major illnesses and accidents.
Read the rules on exemptions from federal tax penalties.
To read a related HealthDay story on the pending deadlines for signing up for coverage, click here.