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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: 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: 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. Pre-authorization or utilization review rules, if applicable. Conditions or limits governing rules for obtaining emergency services. 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. 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. Vasectomy — Includes medical expenses paid for a vasectomy. 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: 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. 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: Health status nondiscrimination rules under HIPAA. Regulations governing practice before the IRS. New guidance for cash or deferred arrangements. Items in the final rule stage included: Additional COBRA requirements for health plans. Definition of “highly compensated employee.” Rules governing employee benefit plan loans. Also listed is a category of long-term actions, including: Additional guidance on FMLA and cafeteria plans. Treatment of accelerated death benefits. 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. 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. 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. 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.