March 19, 2004
BB 04—34

Medicare Administrator Mark McClellan Clarifies Key Question on Employer Subsidy for Retiree Health

The incoming head of the Centers for Medicare and Medicaid Services (CMS), Mark McClellan, MD said — in response to questions posed by Senate Finance Committee members following his recent nomination hearing — that employers will qualify for a new federal subsidy for their retiree prescription drug plans based solely on the employer's share of the cost of the coverage. The question came as McClellan was asked to respond to recent reports in the Wall Street Journal that some companies "may incorrectly interpret" the recently enacted Medicare legislation as allowing them to include the cost of prescription drug coverage paid for by retirees in determining whether an employer's plan was "actuarially equivalent" to the Medicare drug benefit scheduled to begin in 2006. Employer plans that are actuarially equivalent to the Medicare drug benefit will be eligible for a 28 percent tax-free subsidy for the annual prescription drug costs of retirees who are Medicare beneficiaries between $250 and $5,000. These amounts are indexed in future years based on increases in the Medicare prescription drug benefit.

On the question concerning the determination of the actuarial equivalence of the employer's plan, McClellan said "it is incorrect for anyone to argue that the law calls for employers to be subsidized for costs they are not incurring." He went on to state that the intent of Congress in providing the subsidy to employers was "perfectly clear: to use federal dollars to leverage private dollars and keep employers offering prescription drug coverage to their retirees."

CMS staff are currently working on regulations to define more precisely how the actuarial equivalence test will be calculated for employers seeking to qualify for the new subsidy. Proposed regulations are expected to be completed by June 2004 and will be followed by a formal comment period. The agency is also expected to address other related questions including the data employers will be required to submit when claiming the subsidy, the payment methodology and frequency of payments to employers, and the records employers or their plan administrators will be required to maintain for future audit purposes. Council staff expect to work with the agency in providing technical advice on these issues as guidance is developed on these questions and we welcome hearing from Council members who would like to also be involved as interpretive and technical issues arise. For additional information, or to become more involved in questions related to the implementation of the new employer retiree prescription drug subsidy, please contact Paul Dennett, Council vice president, health policy, at (202) 289-6700.

PBGC Extends Interest Rate Used for Calculations through May 2004

On March 19, The Pension Benefit Guaranty Corporation (PBGC) issued Technical Update 04-2, granting an interim extension of the interest rate used by defined benefit pension plan sponsors for the valuation of vested pension benefits for the PBGC's variable rate premium. Certain reporting requirements are tied to the variable rate premium (VRP) status of the plan and therefore may be affected by the required interest rate used to calculate the vested benefits. Under the update, plan sponsors will be permitted to continue using 100 percent of the annual yield on 30-year Treasury bonds until May 31, 2004.

As we have previously reported, Senators and Representatives are now working in conference to reconcile the House and Senate versions of the Pension Stability Act (H.R. 3108), which would temporarily replace the 30-year Treasury rate with a conservative corporate bond rate. If such legislation is enacted, it would supercede this extension. For more information, contact Diann Howland, Council vice president, retirement policy, at (202) 289-6700.


The American Benefits Council is the national trade association for companies concerned about federal legislation and regulations affecting all aspects of the employee benefits system. The Council's members represent the entire spectrum of the private employee benefits community and either sponsor directly or administer retirement and health plans covering more than 100 million Americans.