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WASHINGTON-For the second year in a row, employers and employees have reason to welcome tax legislation awaiting President Clinton's signature.
The measure, on which congressional conferees put their finishing touches last week, contains a slew of employee benefit provisions that would help employers and workers.
Among other things, the bill would overhaul the payment structure for so-called Medicare risk health maintenance organizations, a change that would open up HMOs to millions of Medicare-eligible retirees, give those retirees better benefits and reduce health care costs for their former employers.
The measure also would reduce employers' pension administration hassles. Employers, for example, would be able to remove from their pension rolls former employees with small benefits. Companies no longer would have to file certain employee benefit reports with the federal government, and public employers' pension plans would be exempt from non-discrimination rules.
In addition, employers would not feel the wrath of the Internal Revenue Service if their pension plans-through no fault of their own-accepted new employees' pension rollovers from plans that unbeknownst to employers were disqualified by the IRS.
The pact also would put federal regulatory agencies on track to let employers use electronic information systems to provide employee benefit notices.
Employers aren't the only ones welcoming the pact. Workers, for example, would be the beneficiaries of provisions permanently repealing a federal excise tax on big pension distributions. Employees also would benefit from provisions that would: extend the tax-favored status of employer-provided educational assistance plans through May 2000; greatly expand eligibility for tax-deductible individual retirement accounts; and create new non-deductible IRAs that would allow tax-free withdrawals in certain situations.
Employers have another reason to be jubilant: Their earlier lobbying efforts knocked out a provision that would have required written spousal consent on 401(k) plan withdrawals, which would have increased employers' administrative costs and reduced employee participation in the plans, critics of the provision maintained.
"The business community was active, made its voice heard, turned the situation around and got the 401(k) spousal provision removed," said James Klein, president of the Assn. of Private Pension & Welfare Plans in Washington.
"This success should underscore to benefit professionals the importance of getting involved," said Mr. Klein. The APPWP was one of several business groups that lobbied strongly on the 401(k) provision.
But there were a handful of setbacks for employers. Effective upon enactment of the legislation, employers would be the primary payer of medical bills for 30 months for employees who developed end-stage renal disease. Under current law, employers are the primary payers for those with ESRD for 18 months, and after that, the liability goes to Medicare. Medical bills for those with the kidney impairment often run about $50,000 a year.
This expansion of employer liability is "a straight cost shift to employers," said Frank McArdle, a consultant with Hewitt Associates L.L.C. in Washington.
Another Medicare-related provision also would increase costs for employers. That provision involves situations in which the federal government finds out that employer plans-not Medicare-should have paid an employee's medical bill. These situations typically have occurred when employees stay on the job after 65 and hospitals bill Medicare rather than group plans.
Under the legislation, 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 bring an action against employers or others for payments Medicare improperly made. This provision would in effect overturn a federal appeals court decision that gave the government in many cases only a year after a service was delivered to bring a legal action.
A related provision also would allow the government to bring action against third-party claims administrators for Medicare overpayments as long as the TPA was retained by the employer at the time the government filed for recovery and the TPA had means for recovering its cost from the employer.
While a handful of provisions would increase employer costs, "on balance, the outcome of this bill is pretty favorable," Mr. McArdle said.
Over the long term, the most significant benefit-related provision in the legislation is likely to involve the overhaul of the way the government pays HMOs for providing benefits to retirees eligible for Medicare.
Under a 1982 law, payment rates established for HMOs that agree to take over from Medicare the responsibility of providing health care benefits to retirees are based on Medicare's costs of providing benefits to participants on a county-by-county basis.
But benefit managers and others have complained that the current payment system is irrational and encourages waste. That is because the more money that Medicare spends in a county, the higher the payments to HMOs are. By contrast, the payment rates are lowest in those counties where buyers and providers have done the best job of controlling costs.
As a result, HMOs in areas of the country with high payment rates from the government provide rich benefits packages and typically charge either no or very low premiums, while payment rates in other areas are so low that it is not fiscally possible for HMOs to enter the Medicare retiree market.
The legislation would change the payment structure by basing payment rates on a blend of local and national Medicare costs. It also would set a minimum HMO payment rate of $367 a month per retiree.
The result of these changes would mean HMOs could vastly expand their presence in the risk HMO market.
"There will be more choices for people around the country," said Susan Foote, president of Durenberger/Foote, a Washington-based health care policy consulting firm.
If so, that will be good news for employers with retiree health care plans that supplement the traditional Medicare market. To the extent that retirees migrate into Medicare risk HMOs, they will have less need for health care coverage from their former employers (see story, page 3).
Another group winning big from the tax legislation is upper-middle and upper-income employees with pension plans who want to set up tax-deductible and non-deductible IRAs.
IRAs would be expanded by provisions that would:
Allow individuals without pension coverage to qualify for a tax-deductible IRA even if a spouse were covered by a pension plan. A $2,000 tax-deductible contribution could be made to spousal IRA for joint filers with an adjusted gross income of $150,000. The $2,000 deduction would be phased out for joint filers with AGI of between $150,000 and $160,000.
Increase the income that taxpayers with pension coverage could earn and still make a tax-deductible contribution to an IRA.
Under current law, the full $2,000 tax deduction for IRAs is allowed only for individuals with an AGI of less than $25,000 and joint filers with an AGI of less than $40,000. The $2,000 tax deduction under current law is reduced, based on a sliding scale, for individuals with an AGI of between $25,000 and $35,000 and joint filers with an AGI of $40,000 to $50,000.
Under the legislation, the income threshold for making the full tax-deductible contribution to an IRA would be lifted next year to $30,000 for individuals and $50,000 for joint filers. These income limits would be gradually increased. The income limit for an individual to make the full deduction would top out at $50,000 in 2005, while the limit for joint filers would be capped in 2007 at $80,000. Smaller tax deductions would be allowed for individuals earning between $50,000 and $60,000 and joint filers earning between $80,000 and $100,000.
The current 10% excise tax on IRA withdrawals before age 591/2 would be waived for distributions taken to pay for educational expenses and a down payment-up to $10,000-used toward the purchase of a first home.
Establish new non-tax-deductible IRAs in which up to $2,000 in aftertax contributions could be made. Individuals with AGI of up to $95,000 could make the full contribution, while those with an AGI of between $95,000 and $110,000 could contribute smaller amounts. In addition, joint filers with an AGI of up to $150,000 could make the full contribution, while the $2,000 contribution would be phased out-based on a sliding scale for those with an AGI of between $150,000 and $160,000.
Funds could be withdrawn tax- and penalty-free for people at least 591/2 and who held the contributions at least five years. Funds could be withdrawn without the normal 10% excise tax to pay for education expenses and the downpayment on a home.
While the IRA provisions would greatly increase the availability and appeal of IRAs, benefit experts doubt employees would divert contributions they normally would have made to a 401(k) plan-especially if there were an employer match.
"In general, employees in a matched savings plan still will be better off in a 401(k) plan than in an IRA," Mr. McArdle said.
The legislation, though, also is significant for what it does not include. Dropped from the bill, amid lobbying from senior citizen groups, was a provision that would have raised the Medicare eligibility age to 67 from the current 65, a provision that would have raised costs significantly for employers with retiree health care plans.
That issue, warned Stuart Brahs, vp-federal government relations with The Principal Financial Group in Washington, will be revisited.
The tax agreement also contains a provision that would make amend the Internal Revenue Code to make it more tax favorable for an employer to use structured settlements in workers compensation claims. The provision, a bill introduced in May by Rep. Clay Shaw, R-Fla., would allow employers to assign a structured settlement to a financial institution rather than maintaining ownership of it on behalf of the employee. The employer then would be able to immediately write off the entire value of the settlement rather than recognizing the expense as payments are made to the employee, and would pay the financial institution to administer it for the injured worker.