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Laws, rules impacting benefits funding


Ever since the passage of the Employee Retirement Income Security Act, federal lawmakers and regulators have approved numerous bills and rules that have affected the funding of health care benefits. Those laws and rules include:


• Federal lawmakers include a provision—responding to lobbying by then Sears Roebuck & Co.—in ERISA to allow employers to use their captive and other insurance company subsidiaries to fund parent benefit risks as long as no more than 5% of the captive’s business is related to its parent.

• ERISA provision pre-empts state laws and rules that relate to employee benefit plans.


• Congress mandates that employers provide the same health care coverage for pregnancy and childbirth as for other medical conditions. Prior to the passage of the Pregnancy Discrimination Act, it was not uncommon for employers to put dollar caps on pregnancy-related health care expenses.


• Modifying the “5% test,” the Labor Department says employers can fund benefit risks through their domestic captive insurance companies so long as at least 50% of the captive’s business is third-party risk. Certain conditions are imposed, including that the captive be licensed in a U.S. state or territory.


• Congress approves legislation making employers the primary payer of health care bills for employees ages 65-69.


• The Internal Revenue Service issues “use it or lose it” rule that requires flexible spending account participants to forfeit unused account balances at the end of the plan year.


• Congress approves legislation to require employers to extend group coverage to employees for up to 18 months after termination of employment, or up to 36 months to employees’ dependents in situations involving death, divorce or marital separation. Employers can charge beneficiaries up to 102% of the group rate for coverage.


• Congress allows transfer of some surplus pension plan assets to special retiree health care accounts.


• Congress curbs employers’ ability to deny coverage for new employees’ pre-existing medical conditions.


• In a filing involving Columbia Energy Group, the Labor Department gives employers an alternative to the 1979 captive benefit funding requirement that at least 50% of the captive’s risk be third-party business in order for the captive to fund benefit risks of the parent. To comply with the alternative, captive parents, among other things, must sweeten plan participants’ benefits, and coverages funded by the captive must be written by a highly rated commercial insurer.


• Congress approves legislation to allow employers to offer high-deductible health insurance plans linked to health savings accounts. Employees and employers can make tax-favored contributions to HSAs, which employees can withdraw tax-free to pay for uncovered health care expenses that fall under the deductible, with unused amounts rolled over to pay for succeeding years’ expenses.


• The IRS rules that high-deductible health care plans to which HSAs must be linked can provide first-dollar coverage for preventive services.


• The IRS modifies the 21-year-old “use it or lose it” rule to allow employees to carry over balances unused at the end of a plan year to pay for expenses incurred during the first two and a half months of the next plan year.


• Congress approves legislation repealing requirement linking maximum HSA contribution to size of deductible in health care plan linked to the HSA.

• Congress approves measure allowing one-time transfers of FSA and health reimbursement arrangement balances to HSAs.