BENEFITS BYTE

July 13, 2004
BB 04—79

In this issue:

  • CMS Refutes New York Times Article on New Medicare Drug Law
  • IRS Releases Corporate Bond Rate for Plan Years Beginning in July 2004
  • IRS Revises Procedure for Amortization Extension Request

CMS Refutes New York Times Article on New Medicare Drug Law

An article in the July 14 New York Times (free registration required to view story) reports that the new Medicare prescription drug benefit, which will begin in 2006, will result in employers reducing or eliminating prescription drug benefits for 3.8 million retirees. The Centers for Medicare and Medicaid Services (CMS) immediately issued a press release stating that article was incorrect and that the story was based on a staff proposal that was previously rejected because it did not adequately protect benefits for seniors under Medicare. CMS Administrator Mark McClellan reaffirmed that one of the central goals of the new Medicare law is to strengthen, rather than undermine, employer-sponsored retiree health benefits.

CMS is expected to release proposed regulations on the new law shortly and will seek comments on options for employers including a financial incentive (28 percent payment from the government to employers) to continue providing prescription drug coverage that it is at least the same value to retirees as the benefits soon to be available under Medicare. The new law also allows employers to supplement the coverage a retiree may obtain under the new Medicare prescription drug benefit, providing these retirees with better benefits than they are likely to have been able to obtain on their own. Employers will also be permitted to contract with Medicare, either on their own or through a health insurer, to be the sponsor of the Medicare drug benefit for their retirees under a waiver program that could benefit employers, retirees and the Medicare program when fully implemented. A 60-day comment period will follow the release of the proposed regulations.

The Council actively supported enactment of a Medicare prescription drug benefit and continues to play a leadership role as a steering committee member of the Employers' Coalition on Medicare (ECOM). The Council is working with CMS to provide technical advice and will submit official comments once the proposed rules are released. For more information contact Paul Dennett, Council vice president, health policy, at (202) 289-6700.

IRS Releases Corporate Bond Rate for Plan Years Beginning in July 2004

The Internal Revenue Service (IRS) recently issued Notice 2004-51 providing a corporate bond weighted average of 6.32 percent for plan years beginning in July 2004 (the 90 to 100 percent permissible range is 5.69 to 6.32 percent). Under the Pension Funding Equity Act of 2004, the interest rates used to calculate current liability and to determine the required contributions to defined benefit plans for plan years beginning in 2004 or 2005 must be within a permissible range based on the weighted average of rates of interest on amounts invested conservatively in long-term investment grade corporate bonds during the four-year period ending on the last day before the beginning of the plan year. Notice 2004-51 also provides information on the weighted average for 30-year Treasury bond rates used for determining the minimum lump-sum value of a participant's benefit. For more information, contact Jan Jacobson, Council director, retirement policy, at (202) 289-6700.

IRS Revises Procedure for Amortization Extension Request

The Internal Revenue Service (IRS) has issued Revenue Procedure 2004-44 outlining the procedure for a plan administrator or sponsor to request an extension of the period by which unfunded plan liabilities can be amortized. The revised procedures apply to all ruling requests received after August 2, 2004, and, in many cases, significantly expand the information required to seek an extension of the amortization period. The new guidance provides a model notice and checklist to assist plan administrators and sponsors in complying with the requirements.

Under the minimum funding rules, contributions to a defined benefit plan must be sufficient to pay the normal cost of funding the plan and to amortize unfunded liabilities (which may be due to plan amendments, changes in actuarial assumptions and/or gains or losses to plan assets). The IRS can extend the applicable amortization period for up to 10 years in order to protect the interests of plan participants and beneficiaries. Under Section 304(a) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), and Internal Revenue Code Section 412(e), the amortization period may be extended but only if the failure to permit the extension would (1) result in a substantial risk to the voluntary continuation of the plan, or a substantial curtailment of pension benefit levels or employee compensation, and (2) be adverse to the interest of plan participants in the aggregate. For more information, contact Jan Jacobson, Council director, retirement policy, at (202) 289-6700.

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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.