Medicare Reform Adopted. The Medicare Prescription Drug and Modernization Act of 2003 was signed into law December 8. The law includes a number of features. The centerpiece, a Medicare prescription drug program, does not go into effect fully until 2006.

The statute makes Health Savings Accounts (HSAs) a permanent feature of the tax law beginning in 2004. HSAs are designed to allow pre-tax contributions and accumulations by individuals covered in high-deductible health plans (HDHPs). The HSA works like a medical flexible spending account (FSA) in a cafeteria (Section 125 of the Internal Revenue Code (Code)) plan or the previously authorized Medical Savings Accounts (MSAs), but there are important differences. The new HSAs may be funded through employer contributions, salary-reduction contributions, and tax deductible individual contributions. There is no “use it or lose it” rule; so the amounts accumulated can be used in future years. HSAs are portable and kept by individuals when changing jobs. HSAs primarily will pay the out-of-pocket expenses not covered by the HDHP, including the deductibles and co-pays. HSAs may be used to pay premiums for long-term care, COBRA, and retiree health premiums. If withdrawals are made for non-qualifying expenses, there is an additional 10% excise tax, but the distribution will not disqualify the account.

MSAs were authorized under a temporary law limited to small employers (50 or fewer employees) and were not widely used. HSAs are for all employers and the legislation is “permanent.” The HDHPs required to use HSAs must have minimum deductibles of $1,000 for individual and $2,000 for family coverage, and out-of-pocket limits on covered expenses of no more than $5,000 for individuals and $10,000 for families.

Because HSAs will be available in 2004, more news about these arrangements should be forthcoming. Health carriers are expected to develop the HDHPs that will accompany HSAs and begin to market the products.

Beginning in June 2004, there will be an interim program allowing Medicare-eligible individuals to purchase a drug discount card. The discount drug cards will be offered by private companies who contract with Medicare. The program to authorize these cards is off to a fast start under the Department of Health and Human Services. The amount of the drug discounts is not set by the law, and estimates on possible savings, ranging from less than 10% to 25%, are based on discounts available under similar plans presently available. Low-income individuals who are eligible for the program will receive additional benefits, including a $600 credit toward drug costs and a waiver of the annual fees that may be charged by those offering the cards. Details on this part of the new law will develop over the next few months as the program is implemented. Medicare-eligible individuals will be able to find information on how the discount drug card program operates and how to join at www.medicare.gov.

The new Medicare prescription drug benefit, which goes into effect in 2006, will work like an insurance program, with covered individuals paying a $250 deductible and a 25% co-pay. Premiums on Part B of Medicare will begin to rise more dramatically in 2007, with a sliding scale and higher premiums applied to higher-income recipients.

The law also will provide tax credits beginning in 2007 to employers who maintain retiree prescription drug coverage at a level at least as good as the new Medicare program. (Medicare Prescription Drug and Modernization Act of 2003, Public Law 108-173.)

Agency Rulings, Etc.

ERISA Filing Requirements Eased for Investment Advisors. The Department of Labor (DOL) issued a proposed regulation that would eliminate the current requirement under the Employee Retirement Income Security Act (ERISA) that registered investment advisors file copies of their state-filed registration forms with the DOL. Since September 2000, the Securities and Exchange Commission (SEC) has required pension plan investment advisors to register with the SEC electronically through the Investment Adviser Registration Depository (IARD), a centralized filing system whose forms also are accepted for state registration purposes. The proposed regulation provides that filing with the IARD will satisfy the ERISA filing requirements. Because the IARD filings are accessible to the DOL, continuing to require advisers to file copies of the registration forms with the DOL was considered an unnecessary burden. The regulation is proposed to become effective February 7, 2004. Plan fiduciaries can check to see if a particular advisor is registered under the IARD on the SEC website: www.sec.gov. (68 FR 68710, Dec. 9, 2003.)

No Pension Funding Relief Passed This Year. Underfunded defined benefit plans did not receive the holiday gift they were hoping for this year. The Senate failed to agree on a measure to replace the 30-year Treasury interest rate with a composite corporate bond rate for pension funding determinations and to provide employers a holiday from certain deficit-reduction contributions. In November, the House passed a bill that included those provisions. Apparently there was a lack of consensus on the deficit-reduction contribution relief. The Senate is expected to take up this matter again in early January 2004.

SEC Proposes Rules in Response to Mutual Fund Scandals. The SEC issued proposed rules on December 3 in an attempt to curb mutual fund trading abuses. Among other things, the rules would impose a strict 4 p.m. EST cutoff on transactions to stop late trading. Under the rules, if a fund or its transfer agent receives a trade order after that time, the trade would be processed at the next day’s closing price. Because of the extensive processing required for 401(k) plans, commentators have noted this rule would require plan participants to make investment decisions very early in the day (possibly as early as 10 a.m.) to receive that day’s trading price. The proposed rules also contain a range of new compliance requirements for mutual funds, including the appointment of a chief compliance officer who would report directly to the fund’s directors. In addition, the rules would require more complete disclosure of trading policies in a mutual fund’s prospectus. The proposals currently are out for a 45-day comment period. (SEC Release Nos. 33-8343; IC-26287, Dec. 3, 2003.)

Cases

No Check, No Reimbursement. A health plan participant was not required to reimburse a plan sponsor’s assignee the amount of medical expenses the plan paid on the participant’s behalf, the U.S. Court of Appeals for the Third Circuit held recently. Karen Bergeron was involved in a car accident and incurred $40,000 in medical expenses. The health plan paid the expenses. Karen then sued the parties allegedly responsible for the accident and received a $100,000 check as a settlement offer. She refused the offer and returned the check. Meanwhile, having heard about the check, the plan’s assignee sued Karen for reimbursement of the $40,000 paid by the plan. The federal appellate court noted that for there to be an action for reimbursement under § 502(a)(3) of ERISA, there must be identifiable or traceable funds. Because the participant rejected the settlement offer, there were no identifiable funds from which reimbursement could be made. (Pan-American Life Insurance Co. v. Bergeron, 5th Cir. No. 03-30500, Dec. 8, 2003.)

Receive Check, Subject to Reimbursement. Because a health maintenance organization (HMO) is not an “insurer” under Louisiana state law, the U.S. Court of Appeals for the Fifth Circuit held a Louisiana law that prohibited insurers from coordinating benefits in a way that results in reduced benefits payable to their insured does not apply to HMOs. In this case, Julio Arana suffered injuries in a car accident. At the time, he was covered under his mother’s health plan, an HMO. The HMO paid $180,000 in medical expenses incurred by Julio. Four automobile insurance policies providing coverage for the accident awarded Julio $1 million (unlike Karen, above, Julio cashed this check). The HMO contended it had a contractual right to reimbursement of the health benefits it paid on Julio’s behalf based on a subrogation clause in the HMO contract. Julio argued a Louisiana state law prohibited insurers from issuing policies that reduce the payment of benefits to an insured by reason of benefits being paid under any other individually underwritten contract or plan of insurance for the same claim determination period. Thus, he argued, the HMO was not entitled to reimbursement. The federal appellate court disagreed, holding that, because an HMO is not an insurer under Louisiana state law, it was not subject to the statute. Moreover, the court determined even if the HMO was subject to the state law, the law did not prohibit subrogation; it merely prohibited coordination of benefits, which is legally distinct from subrogation. (Arana v. Ochsner Health Plan, 5th Cir., No. 01-30922, Dec. 8, 2003.)

This Cash Balance Conversion Did Not Violate ERISA, ADEA. The U.S. Court of Appeals for the Ninth Circuit held CBS Corp.’s conversion of its traditional defined benefit plan to a cash balance plan did not violate ERISA or the Age Discrimination in Employment Act (ADEA). When CBS did its conversion, it categorized its employees into three groups. The first group consisted of those closest to retirement. That group continued to accrue benefits under the terms of the existing defined benefit plan. The second group, those over age 40, converted to the cash balance formula but received “transition pay credits” ranging from .5% to 6.5% of annual pay. The credits were based on an employee’s age and years of service. The third group, those under age 41, were simply transferred to the cash balance formula. The second group filed suit claiming the conversion decreased benefit accruals in violation of ERISA and violated ADEA because it provided fewer benefits to older workers. The federal appellate court held the second group failed to show any evidence supporting its claims. (Godinez v. CBS Corp., 9th Cir., No. 02-56148, unpublished, Nov. 21, 2003.)

Reserve the Right to Terminate. A Seventh Circuit Court of Appeals case underlines the importance of an employer retaining the right to amend, modify, or terminate a retiree welfare benefit plan. ERISA imposes no “vesting” rules on welfare plans, but an employer can find itself stuck with a retiree medical plan if the right to change or terminate the plan is not explicitly reserved. Although Rockford Powertrain stated in its plan booklet that retiree medical and life insurance plans were expected to continue “indefinitely,” the right to amend or terminate the plans was also included. Participants sued to maintain these coverages after Rockford cut back and then terminated its retiree benefits. The federal appellate court upheld a district court summary judgment in favor of the employer based on the language in the Rockford plan booklets. (UAW v. Rockford Powertrain, Inc., No. 03-1855, 7th Cir., Dec. 3, 2003.)

Golden Handcuffs Do Not Violate New York State Labor Law. The New York Court of Appeals ruled an employer’s deferred compensation plan that contained a golden handcuff provision under which employee participants who are terminated for cause will forfeit their plan holdings does not violate a New York State labor law. The state law at issue was New York State Labor Law § 193, which permits an employer to deduct a portion of an employee’s wages only if the deduction is expressly authorized by the employee and is for “insurance premiums, pension, or health and welfare benefits … and similar payments for the benefit of the employee.” In making its determination, the appellate court in New York noted participants received sufficient notice of the potential for forfeiture in the plan documents, and the existence of the forfeiture provision did not negate the multiple benefits the participants received under the plan. Accordingly, the deductions were for the benefit of the employee and otherwise complied with the statute. (Marsh v. Prudential Securities Inc., N.Y., No. 126, Nov. 24, 2003.)