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Employee Benefits Developments

September 1, 1999
Transportation Fringes May Be Funded Through Salary Reduction. In the Taxpayer Relief Act of 1997, Internal Revenue Code ("Code") section 132(f) was amended to provide that an employee may choose between receiving qualified parking fringe benefits and compensation, thus permitting the benefits to be funded through salary reduction. In P.L. 105-78, the Transportation Equity Act for the 21st Century, which was enacted on June 9, 1998, section 132(f) was further revised to provide that employees may choose between receiving any qualified transportation fringe benefits or compensation. Accordingly, van-pooling and transit passes may also now be paid for with salary reduction contributions or employers may give employees the choice between receiving these benefits or a bonus or other compensation. However, it continues to be prohibited to provide section 132 qualified transportation fringe benefits under a cafeteria plan. The changes apply to tax years beginning after December 31, 1997.

Effective for tax years beginning after December 31, 1998, the maximum exclusion for van-pooling and transit passes is increased from $60 to $65 per month, and the monthly exclusion for parking is increased from $155 to $175. In addition, for subsequent years, these amounts are to be adjusted for increases in cost-of-living in increments of $5. Finally, the $65 limit is to be adjusted to $100 for years after 2001, and the $100 maximum is to be used as the new base amount for any future COLAs.

Department of Labor Guidance on Fiduciary Issues Regarding Y2K. On July 23, 1998, the Department of Labor ("DOL") issued a press release alerting employee benefit plan administrators and service providers that they need to act "to protect workers' benefits against the looming year 2000 software problem." DOL has also published guidance in the form of a series of questions and answers aimed at addressing many of the inquiries the agency has received from employers and benefits professionals concerning the year 2000 ("Y2K") problem. The questions and answers are available on DOL's web site, at

DOL's informal guidance addresses fiduciary responsibility issues and the question of what constitutes reasonable expenses charged to plans for fixing Y2K issues that arise. The guidance says that plan fiduciaries are responsible for:

  • establishing and implementing prudent procedures to ensure that the plans' own computers and, to the extent possible, the computers of the plans' service providers are Y2K compliant;
  • determining "whether the plan's critical operations will be endangered by the computer systems of unrelated service providers, such as third party administrators;" and
  • developing contingency plans that will be implemented if the plan's essential operations are affected by the Y2K problem.

Finally, the release states that DOL will pursue enforcement actions against plan fiduciaries who fail to act prudently in performing plan duties with respect to the Y2K problem, where such omissions adversely affect plan participants and beneficiaries. DOL spokespersons have been quoted as saying that, in future plan audits, PWBA investigators will routinely ask questions concerning what steps fiduciaries have taken to ensure Y2K compliance (and we have recently seen such audit inquiries).

DOL Proposes Changes to Regulations Regarding Claims Procedures. The DOL has proposed regulations that would significantly revise the rules for claims processing under employee plans, particularly for health plans. 63 FR 48390 (9/9/98). The proposed regulations clarify a number of the requirements of the current rules, among other things providing additional details regarding the items that must be included in a denial of a claim, the description of the claims procedures that must be provided to participants in the summary plan description, prohibited practices that would unduly hamper submission of claims, the manner in which any notices required under the rules must be given and even when a claim will be considered denied. It is emphasized that although the plan administrator may delegate responsibility for claims review, e.g., to a third party administrator, the plan administrator remains responsible for ensuring that the plan's procedures comply with ERISA. The proposals would also require that:

  • the minimum standards under the regulations apply in the same manner to insured and self-insured plans;
  • a claimant be notified within five days if his benefit request is insufficient to trigger the claims procedure (the period would be reduced to 24 hours for a health claim);
  • a claim may not be rejected for failure to obtain preauthorization if obtaining the preauthorization would have been impossible or would have seriously jeopardized the claimant's life or health;
  • a procedure may not require arbitration or more than one appeal before a rejected claim may be challenged in court;
  • expedited procedures be established for any claim involving urgent care, which must permit submission of information by telephone, facsimile or similar means;
  • if additional information is needed to review a claim, the claimant must be informed as soon as possible, but in no more than 45 days (15 days for a disability benefit) and must have at least 180 days to provide the information; then the review must be completed within 45 days (15 days for disability) after the earlier of receipt of the additional information or the end of the period in which the claimant was permitted to provide the information, if he or she fails to provide it;
  • the 90-day period for initial review of a claim (established under current regulations) be reduced to 30 days for disability plans;
  • the initial review of health plan claims be completed within 15 days (72 hours for urgent care), with claimants being told if more information is needed within 5 days (24 hours for urgent care) and being given at least 45 days to provide the information (48 hours for urgent care), and with the review being completed within 15 days (48 hours for urgent care) after the earlier of the receipt of the additional information or the end of the period the claimant had to provide it;
  • health claimants be notified in advance if any benefit preapproved for a specific or indefinite period of time will be reduced or terminated;
  • claimants under disability and health plans have a minimum of 180 days to submit an appeal of a claim that has been initially denied;
  • appeals may not be heard by the person or entity which rejected the initial claim or any subordinate of that person or entity, may not give deference to the initial review, and must consider all relevant material, not only the material considered during the initial review;
  • the appeals reviewer of a health claim must consult with qualified medical personnel independent of any person who participated in or advised on the initial review;
  • health and disability benefits appeals be reviewed in accordance with expedited schedules similar to those for the initial review; and
  • if the plan's procedures do not comply with the minimum standards set forth in the regulations, (1) claimants' administrative remedies will be deemed exhausted, giving them an immediate right to go to court, (2) any decision made pursuant to the claims procedures will not be entitled to deference, and (3) claimants could have a right to equitable relief.

Comments regarding the proposed regulations must be submitted to the DOL by November 9, 1998, and the DOL specifically solicits comments on a number of aspects of the rules. The DOL proposes to make the changes in these regulations effective 180 days after publication of final regulations for plan years that begin on or after that date.

Proposed Changes for Contents of Summary Plan Descriptions. The DOL has also proposed amendments to the regulations specifying what must be included in a summary plan description ("SPD"). 63 FR 48376 (9/9/98). The changes are being proposed primarily in response to the recommendations of the President's Advisory Commission on Consumer Protection and Quality in the Health Care Industry, but also include a number of updates and clarifications to the current rules for both welfare and pension plan SPDs. Specifically, it is proposed that:

  • the statement of the type of plan specify if the plan is intended to be an ERISA section 404(c) plan and, for a health plan, refer to it as a "group health plan," the term that is used to identify plans subject to COBRA and HIPAA;
  • the SPD for a pension plan must include a description of the plan's procedures for reviewing QDROs and the SPD for a health plan must include a description of the plan's procedures for reviewing QMSCOs or, in either case, a statement that the actual procedures may be obtained without charge from the plan administrator;
  • the SPD for a health plan must include information on cost-sharing, annual or lifetime benefit caps, preauthorization and utilization review, use and identity of network providers, out-of-network coverage, drug coverage, medical testing coverage, the availability of preventive services, conditions or limits on primary care provider or specialty care provider selection or emergency care (for certain of these items, the new rules would require that the SPD state if benefits are not provided, for example, coverage for new and existing drugs);
  • SPDs for all types of plans shall include a description of the rules authorizing amendment or termination of the plan or elimination of benefits, as well as the rights of participants upon the occurrence of those events, including, for a pension plan, the rules regarding accrual, vesting and allocation of assets upon plan termination;
  • the model statements describing PBGC coverage and ERISA rights be revised and expanded in several respects;
  • a health plan SPD must describe participants' COBRA rights and the rules of the plan concerning notices, elections and other COBRA provisions;
  • SPDs for all types of plans must include additional details regarding the plan's claims procedures, including rules for preauthorization or other approvals and utilization review for a health plan, plan requirements for filing claims, notifications of benefit determinations, and time limits for the review and appeal of claims (the description of these procedures could be provided separately, if the SPD so stated); and
  • the exemption for SPDs of health plans providing benefits through HMOs be repealed; the exemption allows these SPDs to omit descriptions of rules for eligibility to receive benefits or loss or denial of benefits, funding media and the involvement of a health insurance issuer in funding or administering the plan, and the claims procedures.

Comments regarding the proposal must be submitted to the DOL by November 9, 1998, and the revisions are proposed to become effective 60 days after publication of the final regulations.

PBGC Model Participant Notice Regarding Funding Level of Pension Plan. ERISA section 4011 requires administrators of plans subject to Title IV of ERISA that are less than 90 percent funded to notify participants annually of the plan's funded status and the level of PBGC guarantees. In Technical Update 98-1 (July 16, 1998), the PBGC provided an updated model participant notice that plan administrators may complete and distribute to participants to meet this notice obligation. The model notice reflects the increase in PBGC's maximum guaranteed benefits and the increase from $3,500 to $5,000 in the maximum value of benefits that PBGC may pay in the form of a lump-sum to participants in pension plans that have been terminated and been assumed by the agency. The model notice is available on PBGC's web site, at

Internal Revenue Service Announcements on Hospitality Industry Employee Meals. In Announcement 98-77, 1998-34 IRB 30 (Aug. 24, 1998), the Internal Revenue Service ("IRS") released draft training materials regarding the tax-treatment of employer-provided meals in the hospitality industry, which includes casinos, hotels, resorts, and similar establishments. The training materials are intended to provide guidance to both IRS auditors and taxpayers on the application of current law. Comments on the materials may be submitted through September 30, 1998, and the IRS expects to release the final training materials by October 31, 1998.

In Announcement 98-78, 1998-34 IRB 30 (Aug. 24, 1998), the IRS outlined a settlement initiative that allows hospitality industry taxpayers to resolve tax issues relating to employer-provided meals for periods through December 31, 1998. The issues to be resolved under the settlement initiative include employer deductions and withholding and employment taxes related to the provision of meals on the employer's premises, as well as income and employment taxes on employees for the value of the meals. Although many issues related to employer-provided meals were resolved by the changes in Code section 119 made by the Act (described above), in Information Release 98-53, the IRS said that it was providing the settlement initiative to provide certainty and closure to taxpayers whose issues were not resolved by the legislative change.

Model Amendments and Determination Letter Process for Section 457 Plans. The IRS has issued Rev. Proc. 98-41, 1998-32 IRB 7 (Aug. 10, 1998), providing model amendments that employers who sponsor Code section 457(b) plans may use to amend the plans to comply with changes made to section 457 by the Small Business Job Protection Act of 1996 and the Taxpayer Relief Act of 1997. The IRS also released Rev. Proc. 98-40, 1998-32 IRB 6 (Aug. 10, 1998), which describes the procedures that the sponsor of a Code section 457(b) deferred compensation plan must follow to obtain a ruling from the IRS as to whether that plan takes into account changes made under the 1996 and 1997 tax legislation.

George H. Bostick
Sutherland Asbill & Brennan LLP
1275 Pennsylvania Avenue, NW
Washington, DC 20004-2415

W. Mark Smith
Sutherland Asbill & Brennan LLP
1275 Pennsylvania Avenue, NW
Washington, DC 20004-2415

Carol A. Weiser
Sutherland Asbill & Brennan LLP
1275 Pennsylvania Avenue, NW
Washington, DC 20004-2415
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