October 28, 2004
BB 04—111

In this issue:

  • Update on Dependent Definition Issue
  • Legal Analysis Supports Employer Role in Sponsoring Medicare Prescription Drug Plans

Update on Dependent Definition Issue

As we have been reporting in recent weeks, the Working Families Tax Relief Act of 2004 (H.R. 1308) (sometimes referred to as the "tax extenders" bill) made several changes to the definition of dependent that affect benefit plans. Last week the Council sent a letter to the Treasury Department summarizing our concerns and asking for relief. We have recently learned that Treasury expects to publish a notice shortly — possibly within a week — announcing its intent to make the necessary changes to the health plan regulations that would exclude them from the new age-and-income requirements of the dependent definition. Treasury will then issue a proposed rule making those changes, as well as any others that may be needed for other sections of the tax code.

Many of our members have also asked us to help clarify whether it is necessary for a divorced/separated parent to be the custodial parent in order for that person to exclude employer-provided medical expense reimbursements under Code section 105(b) for his or her child under the new definition of dependent. According to a new analysis prepared for the Council by Groom Law Group, the answer is "no," assuming certain conditions detailed in the memo are satisfied.

The Council has also requested a regulatory fix from Treasury for a definition-of-dependent issue in Code section 457(b) plans (plans for governmental and tax-exempt employers). Regulations under Code section 457 regarding "unforeseeable emergency" distributions from those plans reference Code section 152 for the definition of dependent. (The statutory language in the newly enacted nonqualified deferred compensation statute borrows from the regulatory language under section 457.) This will cause the same problem for 457 plans that exist for deferred compensation plans and 401(k) hardship distributions as discussed in our October 19 Benefits Byte. For example, without the regulatory fix, unforeseeable distributions will not be allowed for the medical expenses of a child that does not meet the age or income limitations of the newly revised 152 definition of dependent.

The Council held a Benefits Briefing conference call on October 22 to summarize the issues, expected resolution for each (if any), and next steps. A CD recording of the call is available for $50 by contacting Jason Hammersla, Council communications associate, at (202) 289-6700. For additional information, please contact Susan Relland, Council health policy legal counsel (for health issues) or Jan Jacobson, Council director of retirement policy (for retirement or non-qualified deferred compensation issues) at (202)289-6700.

Legal Analysis Supports Employer Role in Sponsoring Medicare Prescription Drug Plans

An October 22 legal analysis prepared for the Council and the Pharmaceutical Care Management Association (the organization which represents pharmaceutical benefits management (PBM) companies) concludes that state licensure requirements would not apply if a self-insured employer-sponsored retiree health plan opts to directly contract with the Centers for Medicare and Medicaid Services (CMS) to offer a Medicare prescription drug plan (PDP) to its own retirees. The analysis was prepared by William Schiffbauer, an attorney who specializes in insurance law and the Employee Retirement Income Security Act (ERISA).

The Medicare Modernization Act (MMA) includes several coverage options to assist employers in continuing to sponsor retiree health plans which include prescription drug coverage. One option available to employers starting in 2006 is to directly contract with CMS, the federal agency that administers Medicare, to sponsor an approved Medicare prescription drug plan (PDP) for the employer's own Medicare-eligible retirees and be paid a pre-set amount by CMS for each Medicare beneficiary enrolled in the employer's plan. Under broad authority provided by Congress in the MMA, employers that choose this option may also request CMS to modify or waive many statutory requirements that would otherwise apply to PDPs serving other Medicare beneficiaries without employer-sponsored coverage.

In the Council's recent comment letter to CMS on their proposed regulations to implement the new Medicare prescription drug benefit, we stated that ERISA would preempt state licensure or regulation of self-insured employer-sponsored retiree health plans that elect to contract with CMS to serve as PDPs for their retirees. The legal analysis prepared by Schiffbauer supports this conclusion after reviewing the applicable provisions of the MMA, ERISA, and federal court opinions. The analysis has also been provided to CMS as they continue their review of public comments on their proposed regulations and work to prepare a final rule, expected to be issued in early 2005.

For further information, contact Paul Dennett, Council vice president, health 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.