The Government could face fines from Europe over not setting the VHI on the same footing as other insurers here.
A deadline to authorise the VHI with the Central Bank by the end of the year - including making sure the insurer has sufficient capital reserves - will not now be met.
The European Court of Justice rapped Ireland on the knuckles more than two years ago for not putting the VHI on the same footing as the other insurers here.
The country's biggest health insurer would effectively fail solvency requirements unless it got a major capital injection from the taxpayer of hundreds of millions.
But the deadline to get the Central Bank to authorise the VHI - in other words regulate it like any financial institution - of the end of the year will not now be met.
The Cabinet's approved the move and backs Minister James Reilly's plan to seek a one-year extension from Brussels.
His case for the extension will be that the extra year will allow the VHI sort itself out so it won't need any public bailout - but if the Commission refuse - Ireland would face fines until such time as the authorisation takes place.