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Recent Welfare and Fringe Benefit Developments

January 11, 1999
Although the 106th Congress may take up numerous issues that affect employee welfare benefit plans, including issues such as confidentiality of patient medical records, health plan appeals procedures, managed care reform (including the right for patients to sue managed care organizations for refusing coverage), and minimum hospital stays for women who have mastectomies, during the last five months of the 105th Congress, Congress passed and the President signed just one law having a significant impact on group health plans -- the Women's Health and Cancer Rights Act of 1998, which was included with legislation that enacted the 1999 fiscal year budget. This briefing summarizes this law, as well as some recent regulations affecting employee welfare or fringe benefit arrangements, and notes several items on the regulatory horizon that will affect such benefit plans in 1999.

The Women's Health and Cancer Rights Act of 1998

The Women's Health and Cancer Rights Act (Women's Health Act, P.L. 105-277), which added section 713 to the Employee Retirement Income Security Act (ERISA), was signed into law on October 21, 1998. The law includes new protections for breast cancer patients who elect breast reconstruction in connection with a mastectomy. Under the Women's Health Act, group health plans, insurance companies and health maintenance organizations (HMOs) offering mastectomy coverage must also provide coverage for reconstructive surgery in a manner determined in consultation with the attending physician and the patient. Coverage includes reconstruction of the breast on which the mastectomy was performed, surgery and reconstruction of the other breast to produce a symmetrical appearance, and prostheses and treatment of physical complications at all stages of the mastectomy. Group health plans, insurance companies or HMOs may still impose deductibles or coinsurance requirements for reconstructive surgery in connection with a mastectomy, provided that such charges are consistent with those established for other benefits under the plan or coverage, but imposing any penalties on or offering any incentives to a provider or denying coverage or enrollment to a patient to inhibit the provision of reconstructive surgery is prohibited. State laws that impose at least the same requirements on insured plans are not preempted. The reconstructive surgery requirements apply to group health plans for plan years beginning on or after October 21, 1998.

Two separate notices are required under the Women's Health Act. First, there is a one-time requirement under which group health insurance plans, and their insurance companies or HMOs, must furnish a written description of the benefits mandated by the Women's Health Act. This notice was required to be sent to participants no later than January 1, 1999. The second notice must also describe the benefits required under the Women's Health Act, but it must be provided upon enrollment in the plan and be furnished annually thereafter. The Pension and Welfare Benefits Administration (PWBA) of the Department of Labor (DOL) has published additional information available regarding recent changes in health care laws, including the notice requirements under the Women's Health Act, in a booklet entitled "Questions and Answers: Recent Changes in Health Care Law." The booklet is available on the PWBA website (http://www.dol.gov/dol/pwba/public/pubs/newq&a.htm).

Regulations Implementing the 1996 Newborns' and Mothers' Health Protection Act

On October 27, 1998, three federal agencies, the Health Care Financing Administration, the DOL, and the Internal Revenue Service (IRS), published interim final rules implementing the maternity stay provisions for group and individual health plans under the 1996 Newborns' and Mothers' Health Protection Act (NMHPA). 63 Fed. Reg. 57545 (Oct. 27, 1998), 26 CFR 54.9811-1, 29 CFR 2590.711, 45 CFR 146.130, 45 CFR 148.170. NMHPA requires group health insurance plans and health insurance issuers that offer maternity benefits to allow 48-hour hospital stays after normal deliveries or 96-hour hospital stays following cesarean deliveries. In addition, NMHPA provides that plans and insurers cannot require a physician or other health care provider to obtain an authorization to prescribe a hospital stay that is covered by the law. The minimum hospital-stay requirements, however, can be waived if an attending provider, in consultation with the mother, decides to discharge the mother or newborn earlier.

The interim rules, which became effective January 1, 1999, attempt to resolve questions concerning when maternity stay coverage starts and outline the minimum level of benefits required. Under the rules, when a delivery occurs in a hospital, the stay begins at the time of delivery. In the case of multiple births, a hospital stay begins at the time of the last delivery. For deliveries outside of a hospital, the stay begins at the time the mother or newborn is admitted to the hospital in connection with the childbirth, and whether the admission is connected to the childbirth is determined by the attending provider.

In addition, the rules define an attending provider as an individual licensed under an applicable state to provide maternity or pediatric and maternity care who is directly responsible for caring for a mother or newborn child. The rules note that a health plan, hospital, managed care organization, or other insurer cannot be classified as an attending provider.

Under NMHPA, a plan or issuer is prohibited from providing monetary payments or rebates (such as waiving co-pays) to the mother to encourage her to accept less than the minimum protections available under NMHPA. The interim rules clarify that a plan or issuer does not violate this prohibition by providing after-discharge, follow-up services to a mother and newborn discharged before the 48 (or 96) hour limit if the services provided are no more than what the mother or newborn would have received if they had stayed in the hospital for the full 48 (or 96) hours. The rules further clarify that (1) maternity hospital stays are not mandatory, (2) providing maternity benefits is not mandatory, and (3) the rules do not preclude nondiscriminatory cost-sharing requirements. Also, the rules elucidate when an insured or a partially insured plan will be subject to state law regarding maternity hospital stays, rather than the Federal law.

Finally, NMHPA provides that a plan or issuer may not penalize an attending provider who furnishes care to a mother or newborn in accordance with the law. The regulations clarify this prohibition in several ways, such as by stating that this prohibition applies to both direct and indirect incentives to attending providers.

Delay in Effective Date for Amending Cafeteria Plans Change-in-Status Provisions

The IRS has announced that it is delaying the effective date of cafeteria plan temporary and proposed regulations that were to have been effective for plan years beginning after December 31, 1998. Announcement 98-105, 1998-49 I.R.B. 21 (Dec. 7, 1998.) The temporary and proposed regulations, which were announced in 1997, expanded the circumstances in which a participant may change his or her election for accident or health coverage or group-term life insurance coverage under a cafeteria plan during the plan year. The announcement gives plan sponsors and administrators additional time to comply with the temporary regulations, without adversely affecting those employers who have already amended their plans. The temporary and proposed regulations now will not be effective before plan years beginning at least 120 days after the IRS issues further guidance. The IRS stated, however, that employers can choose between applying either the change-in-election provisions of the 1997 temporary and proposed regulations or the earlier, pre-1990 proposed regulations, regardless of whether the plan document has been amended to conform with the rules under the 1997 regulations.

Hearing On DOL's Proposed Claims Procedure Regulations

In a prior bulletin, we reported on the DOL's proposed changes to ERISA's claims procedures regulations, which were announced on September 9, 1998. The PWBA has announced that it will hold at least two days of public hearings on the controversial proposed regulations, on February 17-18, 1999, with the hearings being continued on February 19, 1999, if necessary.

The proposed rule, which governs the processing of all claims under employee benefit plans under ERISA, would require ERISA-governed group health plans to resolve benefit claims involving urgent care within 72 hours of receiving the claim and would significantly shorten other time frames for processing claims from the current regulation. The proposed rule also would increase ERISA plans' disclosure obligations and tighten other claims requirements in order to protect plan participants' rights. Since the proposed rule was published, PWBA has received more than 600 comments on the proposed regulation.

Proposed Regulations Will Result in Lower Taxes For Workers With Employer-Provided Group Life Insurance in Excess of $50,000

The IRS has issued proposed regulations that would update the uniform premium table used to calculate the cost of group-term life insurance coverage that employers provide to employees under Internal Revenue Code (Code) section 79. That section generally provides that the cost of the first $50,000 of employer-provided group term life insurance coverage is excluded from a worker's income. The value of employer-provided life insurance in excess of this $50,000 threshold is "imputed" income to the worker and reported on the worker's Form W-2. Because of improved mortality trends in recent years, the IRS determined that it would be appropriate to revise the Code section 79 table, effectively reducing the amount of income that would be reported for insurance in excess of the $50,000 limit. The new insurance-cost table is proposed to be effective on July 1, 1999; this date is intended to allow use of the lower premium rates as soon as possible, while still permitting time to adjust periodic FICA withholding on the imputed income. 64 Fed. Reg. 2164 (Jan. 13, 1999), proposing amendments to Treas. Reg. § 1.79-3.

Final Long-Term Care Regulations Issued

The IRS has issued final regulations regarding the consumer protection requirements that apply to qualified long-term care insurance contracts and the grandfather rules under which contracts issued prior to 1997 will be treated as qualified. 63 Fed. Reg. 68184 (Dec. 10, 1998), Treas. Reg. §§ 1.7702B-1 and -2. The regulations reiterate the requirement of Code section 7702B that long-term care contracts must satisfy model act and regulation provisions promulgated by the National Association of Insurance Commissioners concerning guaranteed renewability, prohibitions on limitations or exclusions, extension of benefits, continuance or conversion of coverage, prohibitions on pre-existing condition exclusions, and other standards. The regulations, which are essentially the same as those included in the proposed regulations, clarify the manner in which these rules must be coordinated with any requirements imposed by a state, and these rules are effective for contracts issued after December 10, 1999. Taxpayers may rely on either the final regulations or the rules set forth in IRS Notice 97-31, 1197-1 C.B. 417 for contracts issued before that date.

The final regulations also address when a contract issued before 1997 will be entitled to grandfather treatment and when a change in the contract will or will not result in the policy being treated as a new contract that is no longer grandfathered. The final regulations generally apply the same standards that were used in the proposed regulations and include a list of 10 changes that will not give rise to loss of the grandfather treatment. One expansion of the rule in the proposed regulations for group contracts provides that the addition of a group of participants pursuant to a corporate transaction will not cause a loss of grandfathering if the pre-1997 group contract provided that new employees are automatically eligible. Grandfather treatment will be lost, however, if employees of the new entity are not covered unless that entity is designated as a participating employer. The rules regarding grandfathered contracts are effective January 1, 1999.

More Y2K Guidance

On December 14, the PWBA provided additional guidance on fiduciary liability issues arising out of the year 2000 computer problem. The guidance, in the form of 35 questions regarding the Y2K issue, provides samples of the types of questions that the DOL itself will use in evaluating whether a plan fiduciary has prudently implemented procedures to protect the plan's interests in light of the Y2K problem. In addition, the PWBA said that it expects plan fiduciaries to establish and implement contingency plans to protect the interests of plan participants and beneficiaries in the event that a year 2000 problem arises with the plan's own computer system, the plan sponsor's computer system, or the plan service provider's computer system. PWBA has indicated that it will conduct Y2K reviews in all investigations and, in some cases, will issue warnings in cases where it determines that fiduciaries have failed to protect plan participants and beneficiaries from the potential harm caused by the computer glitch. The Y2K pamphlet is accessible from the PWBA's website, at http://www.dol.gov/dol/pwba.

IRS Delays Training Materials on Employer-Provided Meals

In August, the IRS issued proposed training materials regarding the application of Code section 119 to meals provided to employees in the hospitality industry and announced its intention to issue final materials by October 31, 1998. Instead, the IRS announced that it needed additional time to consider comments received on the proposed training materials. Announcement 98-100, 1998-46 I.R.B. 42 (Nov. 16, 1998). The delay may also have been in reaction to a letter from a bipartisan group of senators and representatives that criticized the IRS for ignoring changes to Code section 119 made in the IRS Restructuring and Reform Act. The IRS announcement said that taxpayers would continue to be able to request consideration under the settlement initiative announced in Announcement 98-78, 1998-34 I.R.B. 30 (Aug. 4, 1998) until 30 days after final training materials are issued, and clarified one aspect to the settlement initiative, which provides for adjusting the 50 percent deduction under Code section 274(n)(1) to 70 percent for certain periods.

PWBA To Publish Model Notices for Medical Child Support Orders

The DOL and the Department of Health and Human Services were directed by the Child Support Performance and Incentive Act of 1998, which President Clinton signed into law on July 16, 1998, to develop a model child support order that would automatically be deemed a qualified medical child support order for purposes of section 609 of ERISA. Under that law, the agencies are required to develop an interim rule by May 16, 1999, providing for a model child support order, with a final rule to be issued one year thereafter. In addition, the regulation will address procedures for state child support agencies to submit the notice to employers with respect to children under the care of the state agency and procedures for the employers to respond to the notice.

IRS Updates Business Expense Rules

The IRS has issued two revenue procedures to update business expense rules. In Rev. Proc. 98-63, 1998-52 I.R.B. 25 (Dec. 28, 1998), the IRS revised the standard mileage rates for automobile use for business, charitable, medical or moving expense purposes and added a business standard mileage test under which a payor's fixed and variable allowance rate will be treated as meeting limits under Code section 280F (relating to depreciation for luxury cars and cars used for business and personal use). Generally, the rules of Rev. Proc, 98-63 apply as of January 1, 1999; however, in Announcement 99-7, 1999-2 I.R.B. 45 (Jan. 11, 1999), the IRS said that the prior business standard rate of 32.5 cents per mile (rather than the new rate of 31 cents per mile) could be used until April 1, 1999 to allow additional time for implementation of the new rate. In Rev. Proc. 98-64, 1998-52 I.R.B. 32 (Dec. 28, 1998), effective January 1, 1999, the IRS updated the rules regarding deemed substantiation of business expenses for lodging, meals and incidentals when an employer or other payor provides a per diem allowance for such expenses, revising the list of high-cost localities and the rates for the high-low method, under which a payor must use the lesser of its per diem allowance or the rate specified in the revenue procedure for the locality in which the employee is traveling. The per diem rate for any locality classified as high-cost has been increased to $185 from $180, and the rate for all other localities in the continental United States has been increased to $115 from $113.

This article is intended to provide the reader with general information and should not be considered a substitute for specific legal advice or opinion. Readers are advised not to act upon this information without seeking professional counsel.

For further information please contact:

George H. Bostick
Sutherland Asbill & Brennan LLP
1275 Pennsylvania Avenue, NW
Washington, DC 20004-2415
202.383.0127
gbostick@sablaw.com

W. Mark Smith
Sutherland Asbill & Brennan LLP
1275 Pennsylvania Avenue, NW
Washington, DC 20004-2415
202.383.0221
msmith@sablaw.com

Carol A. Weiser
Sutherland Asbill & Brennan LLP
1275 Pennsylvania Avenue, NW
Washington, DC 20004-2415
202.383.0728
cweiser@sablaw.com

Walter H. Wingfield
Sutherland Asbill & Brennan LLP
999 Peachtree Street, NE
Atlanta, GA 30309-3996
Phone 404.853.8161
whwingfield@sablaw.com

Alice Murtos
Sutherland Asbill & Brennan LLP
999 Peachtree Street, NE
Atlanta, GA 30309-3996
Phone (404) 853-8410
axmurtos@sablaw.com
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