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FOCUS on Benefits — January 2001
DOL Releases ERISA Claims Rules
Regulations that will significantly impact employers sponsoring ERISA benefit plans
have arrived from the Department of Labor. The new regulations focus on benefit claims
and appeals, and on summary plan description (SPD) requirements. The Clinton
administration pressed for these rules to secure some of the health care reforms that
stalled in Congress. According to the DOL, the rules are designed to ensure that, “Group
health plan participants in today’s managed care environment have access to a faster,
fairer, fuller process for benefit determinations.” These claims and appeals rules apply to
claims filed on or after January 1, 2002. The DOL is less clear about the effective date of
SPD changes and asserts that some of the mandates should already appear in an SPD.
The following is a summary of the key points in the lengthy new rules. Please contact
your Willis representative for additional information.
Benefit Claims and Appeals Procedures
1)
These regulations apply to group health plans and to plans that provide disability
benefits. The DOL may later extend these rules to pension plans and to other
welfare benefit programs.
2)
Faster resolution of initial claims will be required. Decisions may not be made
later than:
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72 hours for urgent care claims (no extension of time is available for
evaulating these claims)
15 days for pre-service claims (where a plan requires pre-authorizations)
30 days for post-service claims
45 days for disability claims
One 15-day extension would be allowed for pre- and post-service claims. Two
30-day extensions would be allowed for disability claims.
3)
The regulations require faster resolutions of denied claims. The new rule would
require decisions not later than:
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72 hours for urgent care claims
30 days for pre-service claims
60 days for post-service claims
45 days for disability claims
One 45-day extension would be available for disability claim appeals.
4)
Individual receiving approved medical care must have an opportunity for review
before benefits are reduced or terminated. Also, urgent care requests for an
extension of approved benefits must be decided within 24 hours.
5)
Claimants now will have more time to file appeals — 180 days rather than the 60
days under current rules. Plans may not require more than two levels of
mandatory review for denied claims.
Summary Plan Description Requirements
The new regulations expand disclosure requirements for certain SPD sections, including:

Cost-sharing requirements (including premiums, co-payments, co-insurance, and
deductibles).

Any annual or lifetime caps or other limits on benefits under the plan.
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Pre-authorization or utilization review rules, if applicable.
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Conditions or limits governing rules for obtaining emergency services.
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Authority of the plan sponsor to eliminate or terminate benefits under the plan.
The rules also require SPDs to include Qualified Medical Child Support Order (QMCSO)
information, COBRA rules, and updated information about ERISA rights. (Many SPDs
omit QMCSO procedures, or fail to provide sufficient details about the other required
items.) Please contact your Willis representative if you have questions or need additional
information.
Time Warner Settles Contingent Worker Claims
The Wall Street Journal reports that the Department of Labor has settled claims that Time
Warner Inc. improperly denied full-time employees pensions and health benefits. Time
Warner has agreed to pay the Labor Department $5.5 million for unfairly denying
company benefits between 1992 and 1997. Though Time Warner admits no wrongdoing
in the settlement, the DOL stated that the suit would send a clear message to employers
about fair treatment. The money from the settlement will go to eligible employees.
The benefit denials were reportedly the result of re-classifying some workers as
temporary employees or as independent contractors. Specifically, the DOL said that
Time continued to classify employees as temporary workers although they worked for the
company beyond four to six months — the company’s internal guidelines suggest this
period can make a worker a permanent employee. Time also classified some people as
independent contractors even though “common law” tests based on employer control
indicated that the workers were really employees. Time also allegedly failed to notify
those workers of their right to retirement and health benefits.
More and more companies have been embroiled in lawsuits filed by misclassified
workers over denied benefits, most notably Microsoft v. Vizcaino. Not all workers must
be covered by benefit plans. An employer can continue to exclude workers using clear,
exclusionary plan language.
IRS Updates Publication 502
The IRS recently released an updated version of Publication 502. Publication 502 is a
helpful guide to what expenses can be reimbursed under a health care spending account.
(Although it refers to deductions, the same rules generally apply to spending account
reimbursements.) The publication now specifically lists several items that were once
lumped into a catch-all category.
Items that are now specifically listed as allowable in Publication 502 include:

Laser Vision Surgery — Procedures such as radial keratotomy and other procedures
for the purpose of improving vision.
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Medical Conferences/Travel — The cost for admission and transportation to a
conference related to a chronic illness of the individual, his or her spouse, or a
dependent.
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Vasectomy — Includes medical expenses paid for a vasectomy.
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Weight-Loss Programs — Includes weight-loss programs prescribed by a physician to
treat an existing disease. Weight-loss programs to maintain an individual’s general
health are not deductible.
Prescription Drug Reimbursements
Publication 502 specifies certain items that are not allowable expenses such as nonprescription drugs and medicines, nutritional supplements, and controlled substances.
The IRS chose to limit deductions to “prescribed drugs” to simplify the deduction and to
bring the rule in line with rules governing coverage associated with most health insurance
policies. The ruling would effectively render vitamins and natural medicines nonreimbursable — except to the extent that such products can only be received with a valid
prescription.
The IRS also noted that expenses for non-prescription drugs are likely to represent
ordinary consumption rather than the types of medical expenses that should be
deductible. [IRS Information Letter 2000-0080.]
OSHA Ergonomics Rule — Finally
A subject of heated controversy for many months, OSHA’s final rule on ergonomics in
the workplace was released last November. Employers will find the rule lengthy,
complicated, and replete with bureaucratic red tape.
The final rule will apply to over six million work sites and affect more than 100 million
employees. The rule goes into effect on January 16, 2001; however, employers have a
short transition period that gives them until October 14, 2001 to comply. Thereafter,
employers must respond to employee reports of signs and symptoms of common
musculoskeletal disorders (MSDs). Employer compliance will also require written notice
(or electronic notice if all workers have access to computers) to employees regarding the
following:
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Common MSDs and their signs and symptoms; the importance of reporting MSD
signs and symptoms; information about how to report MSDs; and the kinds of risk
factors associated with MSD hazards.
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A short description of the requirements of OSHA’s ergonomics program standard.
Employers must furnish the above information to all current employees by October 14,
2001. Subsequently, new hires must receive this information within 14 days of hire.
Additionally, employers must post the information in a conspicuous spot in the
workplace.
The final rule addresses the steps that employers must take to respond to a worker’s
reported MSD and what an employer must do to investigate the reported injury, the job
duties, and possible ways of reducing MSDs on the job. Employers may use their present
ergonomics standards as long as the standards are written, were implemented before
November 14, 2000, and meet the requirements of OSHA’s final rule.
Insurance Industry Opposition
The OSHA regulations have angered the insurance industry. As reported in the
publication Insurance Accounting, the Independent Insurance Agents of America (IIAA),
notes that OSHA has stepped into the regulatory domain of the states and has violated
rules that prohibit the agency from affecting worker’s compensation laws. Specifically,
the IIAA says that the new rules would make employees eligible for a taxable benefit of
up to 90 percent of their salary for ergonomic-related injuries — but state programs only
allow benefits of up to 66 percent without taxes.
The article quotes William Hofmann III, president of IIAA, as saying that small
businesses, particularly establishments such as restaurants and grocery stores, will be hit
hardest by the new requirements. Industry members are petitioning the U.S. Court of
Appeals to repeal OSHA’s measures.
Medical Savings Account Pilot Program Ending
January 1, 1997 marked the start of a four-year test program for medical savings accounts
(MSAs). At press time, unless Congress takes action, the medical savings account
(MSA) program expires as of the last day of December 31, 2000.
Under the MSA concept, eligible persons (self-employed individuals, and employees of
employers with 50 or fewer employees) were allowed to purchase high-deductible health
plans to contribute on a tax-free basis to medical expense reimbursement accounts.
A two-year extension of the program is included in the tax-cut bill pending before the
Senate. As of the time of this writing, Senate passage of this proposal remained unclear.
If the Senate does not pass the bill, expiration of the program will mean that no new
MSAs can be established after December 31, 2000. (However, individuals who
previously made or received MSA contributions may continue to do so if they remain
eligible; in addition, individuals with MSAs can continue to receive distributions.) If the
legislation were enacted in its current form, the MSA program would be extended until
December 31, 2002.
Broad Employer Sponsored Health Coverage?
The publication HR Executive is reporting new statistics about the level of employer
sponsored health coverage in the United States. Their article notes that according to a
Kaiser Family Foundation survey of 3,402 public and private employers, 99 percent of
firms with more than 200 workers offer health insurance, and 67 percent of firms with
fewer than 200 employees offer health insurance.
Despite the increases in health insurance premiums, employer-sponsored health insurance
has risen 8.3 percent, and insurance coverage in small firms has risen seven percent since
1999.
Transit Passes and Taxation
In Announcement 2000-78, the Internal Revenue Service issued guidance under IRC
Section 132 clarifying that transit passes may be distributed in advance for more than one
month. According to the IRS, an employer may distribute transit passes for a subsequent
calendar quarter with a value equal to the monthly limit times three months (for example,
$65 times three equals $195) without running afoul of IRS rules.
The IRS noted that although such distribution was authorized and likely represents an
administrative convenience for employers, a problem would arise if a worker terminates
before using the passes. Consequently, the IRS says that any outstanding value of issued
passes at termination must be included in the employee’s wages for FICA, FUTA and
federal income tax purposes. By the same token, the IRS also says that tax withholding
would not be required if the employer recovers the transit pass(es) or the actual value of
the pass(es) involved.
IRS Semiannual Regulatory Agenda
The Treasury Department has released its semiannual regulatory agenda and Fiscal Year
2001 Regulatory Plan. The plan lists dozens of regulations and other planned guidance
projects.
Among the projects in the proposed rule stage are:
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Health status nondiscrimination rules under HIPAA.
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Regulations governing practice before the IRS.
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New guidance for cash or deferred arrangements.
Items in the final rule stage included:
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Additional COBRA requirements for health plans.
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Definition of “highly compensated employee.”
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Rules governing employee benefit plan loans.
Also listed is a category of long-term actions, including:
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Additional guidance on FMLA and cafeteria plans.
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Treatment of accelerated death benefits.
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Distributions from qualified plans.
The IRS does not have a great track record when it comes to releasing items on its
regulatory agenda in a timely manner. As an example, meaningful COBRA guidance
languished on the IRS’ regulatory agenda for years before some of the finalized rules
were released in 1999. Nevertheless, the agenda offers good insight to the issues that the
Treasury Department considers important.
Standard Mileage Rates for 2001
The Internal Revenue Service recently issued Rev. Proc. 2000-48, setting the standard
mileage rates for 2001. These rates are used by employees, as well as self-employed
individuals, to calculate the deductible costs of operating an automobile for business.
Standard mileage rates were also announced for use of an automobile for charitable
purposes and to obtain medical care or to move.
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The optional standard business mileage rates for taxpayers will increase from 32.5
cents per mile in 2000 to 34.5 cents per mile for 2001.
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In a news release (IRS-2000-81), the IRS said that the optional medical or relocation
mileage rate for taxpayers would increase from 10 cents per mile in 2000 to 12 cents
per mile in 2001.
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The deduction for charitable use of an automobile will remain at 14 cents per mile in
2001.
Taxpayers using the standard mileage rate may also deduct parking fees and tolls as
separate expenses. Under IRS rules, if an individual deducts the standard rate for
business travel and is reimbursed at a higher rate, the excess amount is taxable.
Employer Group Addresses Patient Safety
Employers providing health insurance to more than 20 million Americans have formed a
group whose sole purpose is to make the U. S. health care system safer. “The Leapfrog
Group,” with a membership of sixty companies, along with the Health Care Financing
Administration and the Office of Personnel Management have joined together on this
project. Together, these companies will use their purchasing power to sway health care
providers to reduce medical errors and improve health care quality. According to the
1999 Institute of Medicine report, it is estimated that approximately 98,000 deaths occur
each year because of medical negligence.
Leapfrog members are committed to buying health care based on the idea of improving
patient safety. One innovative concept touted by the group is a computerized entry
system designed to minimize mistakes that are commonly made through handwritten
prescriptions. This system would require physicians to input medication orders into a
computer linked to error prevention software. (Some Pharmacy Benefit Management
(PBM) vendors already use such software.)
The group also supports referring people to hospitals that have strong experience treating
a patient’s specific illness. The program will track hospital’s areas of expertise and help
direct patients to these medical centers when possible.
Leapfrog’s steering committee indicated that hospitals implementing their
recommendations would receive recognition. Every effort will be made to educate
employees about which hospitals meet the patient safety standards. The group will also
give financial rewards to their employees who enroll in the higher quality health plans.
Financial incentives or awards to health care facilities that satisfy higher safety standards
are possible.
Leapfrog members acknowledge that providing a safer health care environment will cost
money. Yet, these initial costs are considered a worthy investment by employers as
preliminary research suggests that long-term savings would far exceed the original
investment.
Issue Spotlight — Pursuing Employee Fraud
In Trustees of the AFTRA Health Fund v. Biondi, 2000 WL 1129988 (N.D. Ill. 2000), a
federal court found a plan participant culpable for fraud against his employer’s health
plan.
Richard and Hazel Biondi had been covered under Richard’s employee benefits.
According to their divorce settlement, Richard Biondi was required to maintain his exwife’s medical benefits for 24 months. The agreement stated that the benefits would be
continued through COBRA. Biondi claimed that he did not understand what COBRA
coverage consisted of or how to elect COBRA coverage for his ex-wife.
Instead of reporting the divorce to his employer, Biondi kept his ex-wife on the plan as if
they were still married. Not only did he keep her covered under the plan, but her active
coverage continued for 57 months. During that time, she incurred medical expenses
totaling more than $100,000, which the plan had paid. On at least one occasion, Biondi
had falsely indicated that he and his wife were still married. Eventually, Biondi alerted
his employer that he and his wife were divorced and, at that point, the plan filed suit
against Biondi.
The court outlined the fraud claim against Biondi and found that he had a duty to disclose
his divorce to his employer. The court also noted that he had violated that duty by
knowingly allowing the plan to rely on misinformation and that his failure to disclose the
divorce had damaged the employer.
Biondi attempted to shift the blame to his attorneys, saying that he did not understand
COBRA and that they did not explain it to him. The court quickly responded that, at
most, his attorneys might have been negligent. That negligence did not cause his
intentional fraud on the group health plan. The court added that it would not help him
escape the consequences of any intentional fraud.
This is a District Court decision and, as such, is not binding on other jurisdictions.
Nevertheless, the court’s response was well reasoned and will likely be cited as
persuasive support for future cases examining similar issues, particularly inside the
Seventh Circuit. The Seventh Circuit includes: Illinois, Indiana, and Wisconsin.