EMPLOYERS BLAST 401(K) RESTRICTION IN TAX LEGISLATION

WASHINGTON-An amendment added without fanfare to tax legislation now working its way through Congress could tarnish the appeal to employees and complicate the administration of 401(k) plans.

The 401(k) amendment would require written approval by a spouse before an employee could take lump-sum distributions, hardship withdrawals or loans from 401(k) plans. Without approval, a 401(k) plan account balance would have to be distributed as an annuity payable over the life expectancy of the participant or over a period of at least 10 years. The provision was added by Sen. Carol Moseley-Braun, D-Ill., earlier this month in executive session when the bill was being considered by the Senate Finance Committee.

The bill, which was approved by the Senate last week, also contains a slew of other employee-benefit related provisions that would shift billions of dollars in costs to employers and retirees from Medicare. Those include proposals that would raise the Medicare eligibility age for future retirees and introduce a new means test to determine the amount of Medicare Part B premiums that retirees pay.

The Senate measure and a companion bill passed by the House also would increase the length of time that employers are the primary payers of medical bills for employees with end-stage renal disease. The bills also would give the government more time to bring suit against employers to recover hospital and doctors' bills that they-not Medicare-should have paid for workers age 65 and older.

In addition, a potentially far-reaching amendment in the Senate bill would mandate that group health care plans in which dependents' premiums are subsidized by the states would have to provide full mental health care benefits parity to children.

While the health care provisions could shift enormous costs to employers from Medicare, employer groups last week were concentrating their fire and anger on the 401(k) plan amendment.

Benefit lobbyists are angered because of the damage they say the proposal would wreak on 401(k) plans and their participants.

"While the provision is advertised as helping women, it isn't going to help those who contribute to 401(k) plans. The assumption that spousal consent rules favor women is based on an outdated view of the workforce," said Pam Scott, a principal at The Kwasha Lipton Group in Fort Lee, N.J.

Requiring written spousal consent before loans, hardship withdrawals or lump sum distributions can be made "is the death knell of electronic processing of many 401(k) transactions," said Lynn Dudley, director of retirement policy at the Assn. of Private Pension & Welfare Plan in Washington.

Benefit lobbyists also say the proposal, which is intended to protect women from husbands depleting 401(k) plan assets, could result in lower-paid women cutting back on their 401(k) plan contributions.

While no doubt there have been situations in which husbands withdrew and then squandered 401(k) account balances, benefit consultants and lobbyists say there is no evidence that such a problem is widespread.

"No doubt there are horror stories, but this kind of requirement seems like real overkill," said Fred Rumack, director of taxes and legal services at Buck Consultants Inc. in New York.

Scenarios far more likely to develop if the amendment becomes law are that working women who are covered by 401(k) plans and need immediate access to 401(k) funds, such as for medical emergencies, could find that access blocked by husbands who have abandoned them.

"The woman is going to need the consent of her husband, and the husband is likely to demand a share of the distribution. The amendment is going to put women in a worse position than they are under current law," said Mark Ugoretz, president of the ERISA Industry Committee in Washington.

With immediate access to 401(k) funds conditioned on spousal approval, the APPWP's Ms. Dudley predicts that women, especially the lower-paid, would cut back on their contributions to the plans.

"We really think it will hurt participation levels and we are madder than heck about it," she said.

No comparable measure was included a tax bill passed by the House last week. Benefit lobbyists are gearing up to convince congressional conferees, who will meet next month to iron out differences in the House and Senate tax bills, to drop the Moseley-Braun amendment.

"We are trying to get rid of it," said the ERIC's Mr. Ugoretz.

The 401(k) plan provision is just one of numerous provisions in the House and Senate tax bills affecting employee benefit programs. Standing at the top in terms of financial impact, though, is a provision in the Senate bill that would raise the eligibility age for Medicare to 67 from 65 over a 24-year period beginning in 2003.

While an exact dollar estimate is not available, raising the eligibility age for Medicare would mean a multibillion-dollar cost shift to employers that offer retiree health care plans, as well as to future retirees. The most hard hit would be employers that provide health care coverage to early retirees and continue those programs until the former workers are eligible for Medicare.

"For employers and future retirees, this is the single most important provision in the Senate bill," said Frank McArdle, a consultant at Hewitt Associates L.L.C. in Washington.

A comparable provision does not exist in the House-passed bill and whether to keep, modify or drop the provision will be one of the most contentious issues in the conference committee, benefit experts say. The Clinton administration says it is opposed to a higher eligibility age for Medicare.

But other Medicare provisions in both House and Senate bills, while having a significant cost impact on employers and plan administrators, are non-controversial and will be approved by conferees. Those include proposals that would:

Increase to 30 months the amount of time employer plans are the primary payer of health care bills for employees who develop end-stage renal disease, or kidney failure. Under current law, employer plans are liable to pay medical bills of those with ESRD for 18 months after which the responsibility shifts to Medicare.

While even very large employers may have only a handful of employees with ESRD, the cost of treatment is expensive, typically in the range of $50,000 a year per individual.

Give the government more time to file suit to recover funds from employers, insurers and third-party claims administrators for health care claims group health care plans-not Medicare-should have paid (BI, Feb. 17; March 27, 1995).

Under this provision, which would end years of litigation on the issue, the government would have up to three years after a health care service was delivered to an employee to bring an action against employers or others for payments Medicare improperly made. This provision would have the effect of overturning a 1994 federal appeals court decision that gave the government in many cases only a year after a service was delivered to bring a legal action.

The provision is directly tied to the federal government's huge Medicare Data Match program, in which the Health Care Financing Administration has been auditing employment records and medical bills to determine if Medicare paid bills that were the responsibility of group health care plans and then has tried to recover the funds for Medicare.

This problem chiefly involves workers who have stayed on the job after 65 and hospitals that incorrectly sent those older workers' medical bills to Medicare rather than to employer plans.

Allow the government to sue and recover Medicare overpayments from third-party administrators that administer group plans. This provision also would overturn the 1994 appeals court decision, which said the government only could sue TPAs if they actually insured an employer's plan.

However, the provision would let TPAs off the hook if they had no means to recover from their clients, such as if an employer went bankrupt.

And late last week, benefit experts were poring over a surprise amendment by Sens. Pete Domenici, R-N.M., and Paul Wellstone, D-Minn., that would expand-via a backdoor-a 1996 law that calls for limited mental health care benefits parity.

Under the 1996 law, which doesn't go into effect until next year, group health care plans have to offer the same annual and lifetime limits on mental health care benefits as they do for physical disorders. The 1996 law, though, contains numerous loopholes, including one that says group health care plans do not have to upgrade their mental health care benefits if the upgrade would increase employer costs by at least 1%.

The latest provision applies to a new program-called for in the Senate bill-under which the federal government would give states several billion dollars a year in grants to design programs to reduce the number of children without health insurance.

One of the ways states could cut down on the number of uninsured children would be to subsidize premiums for lower-income employees who opt for dependent coverage. If an employer plan enrolled children with funds from a state's grant, the employer would have to provide the same coverage for mental health care benefits for children as they do for physical disorders. However, treatment for substance abuse and chemical dependency would not be considered mental health care services.

The new amendment is a sign that the 1996 law is only a first step in the drive of advocates to achieve complete mental health care benefits parity.

"This is a signal that the proponents of mental health care benefits parity will continue to advance that issue at every opportunity," said Mr. McArdle of Hewitt.

On the pension side, except for the 401(k) provision, the House and Senate bills generally would ease employers' administrative costs and taxes on employees.

For example, both bills would allow employers to give workers terminating employment the present cash value-up to $5,000-of their pension benefits and remove the workers from their plans. That's an increase from the current $3,500 limit on so-called cash outs.

Raising the threshold for cash outs means more participants can be terminated from the plan, which reduces employer overhead costs incurred for such items as sending out annual reports to those individuals and paying Pension Benefit Guaranty Corp. premiums for them, noted Henry Saveth, a principal with William M. Mercer Inc. in New York.

The Senate bill also would exempt employers from filing certain pension reports-the summary plan description and the summary of material modifications-with the Department of Labor and opens the door to electronic transmission of employee benefit materials to employees.

The two bills also would exempt public pension plans from non-discrimination rules-now scheduled to go into effect in 1999-while the Senate bill would protect the tax-favored status of pension plans if they accepted benefit rollovers from new employees' former pension plans, even if the former plans ran into trouble with the Internal Revenue Service.

The Senate bill also contains an amendment-proposed by Sen. Barbara Boxer, D.-Calif.-that would bar employers from requiring employees to invest more than 10% of their 401(k) plan deferrals in their companies' stock.

In addition, the Senate bill would subject all public employers to the 1.45% Medicare payroll tax. The measure also would increase the tax deductions the self-employed can take for health insurance premiums they pay.