American Benefits Council
Benefits Byte

2014-70

August 1, 2014

The Benefits Byte is the American Benefits Council’s regular e-mail and online newsletter for members only, providing timely reports on legislative, regulatory and judicial developments, along with updates on the Council’s activities in support of employer-sponsored benefit plans.

The Benefits Byte is published by the American Benefits Council, based on staff reports and edited by Jason Hammersla, Council director of communications. Contact information for Council staff related to specific topics can be found at the end of each story.

Click here to read past issues on the Benefits Byte Archive page.

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Senate Passes House Version of Transportation Funding Measure, Including Pension Funding Stabilization Provisions; President to Sign

Shortly before adjourning for the summer on July 31, the U.S. Senate voted 81-13 to approve the House-passed version of the Highway and Transportation Funding Act (H.R. 5021), including a five-year extension of defined benefit pension plan funding stabilization (or “smoothing”) measures originally passed as part of the previous transportation bill, the Moving Ahead for Progress in the 21st Century (MAP-21) Act of 2012. The bill will now go to President Obama for his signature.

The Senate, during debate of H.R. 5021 on July 29, had effectively stripped out the pension provisions. The House voted on July 31 to reject these changes and sent back the House bill with the provisions included, thereby pressuring the Senate to approve the measure or risk a shutdown of highway projects.

The original MAP-21 provision, enacted in 2012, stabilized interest rates for purposes of calculating defined benefit plan funding by constricting the segment rates used to determine funding status within 10 percent of a 25-year average of prior segment rates. The phase-out of the original MAP-21 stabilization provision – under which the 10 percent corridor is gradually increased to 30 percent – has reduced the effectiveness of the measure for a number of companies.

The H.R. 5021 provision essentially delays the MAP-21 phase-out until 2017. Because 2017 is the earliest year that pension interest rates could return to normal based on the Federal Reserve Board's stated monetary approach, this provision matches congressional intent with the Fed’s announced policy:

Under H.R. 5021, As Passed By Congress

If the calendar year is:

The applicable minimum percentage is:

The applicable maximum percentage is:

2012 - 2017

90%

110%

2018

85%

115%

2019

80%

120%

2020

75%

125%

After 2020

70%

130%

 

The legislation would be effective for the 2013 plan year. However, under the legislation, plan sponsors would be able to elect to have the funding stabilization extension first become effective for the 2014 plan year. This election could be made for all purposes for which funding stabilization applies, or it could be made only for purposes of benefit restrictions that apply to pension plans that do not meet certain funding levels.

This election is needed by some companies to avoid unintended consequences for plan qualifications. In the absence of the legislation just passed by Congress, a plan might be less than 80 percent funded for the 2013 plan year and, therefore (in accordance with statutory benefit restriction requirements) a plan would be required to prohibit participants from taking their full benefit in a lump sum. However, with the new legislation, a plan might be over 80 percent funded for 2013 and thus err in applying the benefit restrictions. If the benefit restrictions were not actually applicable in 2013, denying lump sum payments that were owed to a participant could be treated as a violation of the qualification rules. Accordingly, some plan sponsors may want to elect to have the new funding stabilization rules first become effective for the 2014 plan year (rather than for the 2013 plan year) for purposes of benefit restrictions.

 

The legislation also contains a glitch that needs to be addressed. Under the effective date provision described above, employers do not have the option to delay the application of the legislation until 2015 for benefit restriction purposes. Thus, the problem described above for 2013 could happen in 2014. If an employer has the situation described above for 2014, the employer does not have an option of not taking the legislation into account for 2014 for benefit restriction purposes. Technically, this would raise plan qualification issues. Moreover, we would expect this situation not to be uncommon. The U.S. Department of Treasury has the authority to address this issue in a workable manner and the Council will urge the Treasury Department to exercise that power quickly to avoid unintended problems.

The legislation includes three other funding-related provisions. Under current law, there is a special benefit restriction prohibiting a plan from paying lump sums (or other prohibited payments) if the plan sponsor is in bankruptcy. However, this prohibition does not apply if the plan is 100 percent funded. Under the legislation, the determination of whether a plan is 100 percent funded is to be made without regard to funding stabilization, i.e., the 25-year average rule would not apply at all. This portion of the legislation would generally be effective for the 2015 year, but would not take effect until 2016 for collectively bargained plans. The legislative provision gives employers until at least the end of the 2016 plan year to amend their plans to reflect this change, but operational compliance is required as of the effective dates noted above.

In addition, the legislation includes a conforming change to the funding stabilization extension. Under current law, under certain circumstances, the annual funding notice provided to participants (and others) must include information on the effects of funding stabilization for the 2012-2014 plan years. The legislation extends this requirement through the 2019 plan year. 

Finally, the legislation includes a technical change for small plans (100 or fewer participants) that use a valuation date other than the first day of the plan year.

The Treasury Department and Internal Revenue Service have begun reviewing the legislation to provide needed guidance necessary for implementation. For more information, contact Lynn Dudley, senior vice president, global retirement & compensation policy, or Diann Howland, vice president, legislative affairs, at (202) 289-6700.



Council Comments on FAQ Guidance Regarding Reference-Based Pricing

In July 29 written comments to the U.S. Department of Labor (DOL) Employee Benefits Security Administration, the Council supported recent guidance on the application of the out-of-pocket limitations for plans using “reference-based pricing” and cautioned against any future regulation that would stifle innovation of these programs.

Generally, reference-based pricing is a program under which the plan pays a fixed amount for a particular procedure (for example, a knee replacement) which certain providers will accept as payment in full. If an individual uses a provider that does not accept the reference price, the individual pays the difference between the reference price and the actual price of the drug, procedure or other service.

Under Section 2707(b) of the Public Health Service Act (PHSA), as added by the Patient Protection and Affordable Care Act (PPACA), any annual cost-sharing imposed under a non-grandfathered group health plan must not exceed certain limitations on out-of-pocket costs. For plan or policy years beginning in 2014, these limits are $6,350 for self-only coverage and $12,700 for coverage other than self-only coverage, with future limits increased by a statutorily-defined percentage. The U.S. Department of Health and Human Services (HHS) has proposed 2015 limits of $6,600 for self-only coverage and $13,200 for other coverage.

On May 2, the U.S. Departments of Treasury, DOL, and HHS released Frequently Asked Questions (FAQ) Part XIX providing guidance on plans’ ability to count out-of-pocket costs for out-of-network items and services toward the annual out-of-pocket maximum and their ability to use “any reasonable method” for doing so. The departments requested specific comment on FAQ-4, which provides that until guidance is issued and effective, with respect to a large group market plan or self-insured group health plan that utilizes a reference-based pricing program, the departments will not consider a plan or issuer as failing to comply with the out-of-pocket maximum requirements even though it treats providers that accept the reference amount as the only in-network providers, as long as the plan uses a reasonable method to ensure that it provides adequate access to quality providers.

The Council’s comment letter describes how reference-based pricing is beneficial for both employers and employees by facilitating greater price and quality transparency and competition among health care providers. “The existing FAQ appropriately ensures plan sponsors have the flexibility needed to craft innovative benefit designs that increase competition and price and quality transparency, while at the same time ensuring access to quality care and an adequate network of providers,” the letter read.

The Council believes that additional rulemaking on this subject is unnecessary, but should the departments pursue a formal rulemaking, it should:

  • Preserve flexibility in designing reference-based pricing arrangements and retain the reasonableness standard set forth in the FAQ.
  • Increase price and quality transparency by allowing employers the flexibility to implement reference-based-pricing programs that also put downward pressure on prices.  
  • Preserve the essential structure of reference-based pricing arrangements, which the FAQ achieves by stating that a plan may treat providers that accept the reference-based amount as the only in-network providers, as long as the plan uses a reasonable method to ensure it provides adequate access to quality providers.

The comment letter also described approaches reference-based pricing programs currently use to maintain participants’ access to quality care and an adequate network of providers, including for example, giving employees a reprieve from paying the amount above the reference price if there are not providers accepting the reference price in their area or if a complication develops during or after the procedure.  

For more information, contact Katy Spangler, senior vice president, health policy, or Kathryn Wilber, senior counsel, health policy, at (202) 289-6700.



Lawmakers Introduce Measure Addressing Frozen Defined Benefit Plan Nondiscrimination Issue

Representatives Pat Tiberi (R-OH) and Richard Neal (D-MA) have introduced legislation (H.R. 5381) that would address the inadvertent harmful effects of ERISA’s nondiscrimination rules on plans that grandfather some or all of a defined benefit plan’s existing participants from changes to the plan. The Council has worked very closely with Tiberi and Neal to emphasize the urgent need for a legislative solution in the absence of permanent guidance from the Internal Revenue Service (IRS).

H.R. 5381 was introduced on July 31 and has been referred to the House Ways and Means Committee (Tiberi and Neal are the chair and ranking member, respectively, of the Ways and Means Subcommittee on Select Revenue Measures).

As we have previously reported, the increasingly necessary practice of defined benefit plan sponsors " soft freezing" their plans (closing them to new entrants) has created new challenges for employers. These plan sponsors have used various approaches to assist older employees with the transition to the new system, such as grandfathering existing participants. However, over time, some of these transition approaches can become technically inconsistent with current regulations prohibiting discrimination in favor of highly compensated employees.

Generally, to avoid claims of nondiscrimination, both the old and new plans must pass one of three tests (requiring the plans to (1) be primarily defined benefit in character, (2) be broadly available, or (3) meet a minimum aggregate allocation gateway) before they can combine the plans for another round of nondiscrimination testing. Because of the difficulty in meeting those tests, in some cases, many employers have already been compelled to completely freeze pension benefits on a prospective basis and this could happen on a much broader scale in the coming years if the law is not changed to prevent the nondiscrimination rules from having this adverse unintended effect. In addition to our work with Congress on this matter, earlier this year the Council also filed written comments with the IRS urging a permanent solution to the problem.

Under H.R. 5381, if a grandfathered group of employees is a nondiscriminatory group when it is first formed, it would be treated as a nondiscriminatory group permanently (unless the group is modified in discriminatory ways by plan amendment). This would prevent these closed plans from inadvertently violating the Treasury rules prohibiting discrimination in favor of highly compensated employees, and thus help mitigate the need for “hard freezes” (in which participants receive no further benefit accruals) that would otherwise be effectively compelled by the nondiscrimination rules.

The measure follows Section 406 of the Retirement Plan Simplification and Enhancement Act (S. 2117), a comprehensive retirement policy reform bill introduced by Neal in May 2013. For more information, contact Diann Howland, vice president, legislative affairs, or Lynn Dudley, senior vice president, senior vice president, retirement and international benefits 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.

Notice: the information contained herein is general in nature. It is not, and should not be construed as, accounting, consulting, legal or tax advice or opinion provided by the American Benefits Council or any of its employees. As required by the IRS, we inform you that any information contained herein was not intended or written to be used or referred to, and cannot be used or referred to (i) for the purpose of avoiding penalties under the Internal Revenue Code, or (ii) in promoting, marketing or recommending to another party any transaction or matter addressed herein (and any attachment).