U.S. Income Series
Compensation Planning
	 Portfolio 389-4th: Medical Plans -- COBRA, HIPAA, HRAs, H...
Medical Plans -- COBRA, HIPAA, HRAs, HSAs
and Disability
by David E. Kenty, Esq. 

Schnader, Harrison, Segal & Lewis
Philadelphia, Pennsylvania

Special Consultant to Tax Management
PORTFOLIO DESCRIPTION
Tax Management Portfolio, Medical Plans -- COBRA, HIPAA, HRAs, HSAs and Disability, No. 389-4th, analyzes the requirements of §§104, 105, 106, 220, 223, 401(h), 420, 4980B, 4980D, 7702B, and 9801-9806. It examines the exclusions from gross income provided by §104 for workers' compensation and other statutory benefits, accident and health insurance benefits not financed by an employer, and damages for personal injuries; the exclusion provided under §105 for employer-financed sickness and personal injury benefits; the exclusion provided by §106 for employer-financed coverage; and the health care continuation rules under §4980B (i.e., "COBRA").
Included are analyses of the use of pension plan assets to provide retiree medical benefits under §§401(h) and 420. The Portfolio also describes the provisions of the Health Insurance Portability and Accountability Act of 1996 (P.L. 104-191), including the privacy standards for protected health information; the rules governing Health Savings Accounts (HSAs) and Health Reimbursement Accounts (HRAs); the treatment of long-term care insurance as amounts provided under an accident or health plan; and the application and enforcement of the group health plan portability, access, and renewability requirements. The federal legislation mandating certain benefits and mental health coverage parity also is covered.
In addition, this Portfolio discusses the requirements of ERISA applicable to welfare benefit plans, including qualified medical child support orders, and the impact of federal employment discrimination and medical and family leave legislation.
This Portfolio may be cited as Kenty, 389-4th T.M., Medical Plans -- COBRA, HIPAA, HRAs, HSAs and Disability.
David E. Kenty, College of Wooster (B.A. 1967), Harvard Law School (J.D. 1970).

DETAILED ANALYSIS
I. Introduction
Benefit arrangements that protect against medical expenses and working time lost by reason of sickness or injury pervade our economy. Coverage of job-related disabilities is virtually universal through state and federal workers' compensation laws. Self-employed individuals, or employees who do not receive sickness and injury benefits in connection with their jobs, frequently obtain accident and health insurance coverage for themselves.
The taxation of sickness and personal injury payments, including damages received for personal injury claims, are governed principally by Code §§104, 105 and 106.1 Section 104 provides for the exclusion from income of a taxpayer certain amounts received through workers' compensation and other statutory benefits, accident and health insurance benefits not financed by an employer, and damages for personal injuries. The taxation of benefits provided by an employer is dictated by §105, and the taxation of coverage provided by the employer by §106. In addition, §4980B imposes excise taxes for violation of the medical coverage continuation rules enacted in 1985 and known as "COBRA" (see VII, below).
1All section references herein are to the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder, unless otherwise stated.
After a hiatus of more than a decade, the federal government once again legislated to fill gaps in employer based health care coverage. The Health Insurance Portability and Accountability Act of 1996 prohibited certain group health plan provisions that limit coverage. In a departure from precedent, related legislation virtually mandated certain levels of coverage for maternity, mastectomy and mental illness. (See IX, below.)
II. Statutory and Nonemployer Financed Benefits
Section 104 provides exclusions from gross income for the following types of sickness and disability benefits: (1) workers' compensation act benefits; (2) damages for personal injuries; (3) benefits not financed by an employer; and (4) disability benefits paid to military personnel and certain other federal employees.
A. Workers' Compensation Act Benefits
The two criteria for excludibility under  §104(a)(1) are that a benefit:

(1) be mandated by statute; and
(2) constitute compensation for an occupational sickness or injury.2
2Regs. §1.104-1(b). Compare PLR 9533037 (disability payments paid by a city under a union contract were not excludible under  §104(a)(1) because even though the union contract was authorized by a city resolution, it was not a "statute" and did not have the force and effect of law).
The exclusion is available to a disabled employee or to the dependents of a deceased employee.3 Payments that constitute advances against workers' compensation (that are later reimbursed to the employer) also are excludible. Interest received because of erroneous underpayments is not excludible, in contrast.4 However, disability benefits received under a private employer's plan, without statutory mandate, are not ordinarily excludible under §104(a)(1).5
3Regs. §1.104-1(b). See also Rev. Ruls. 72-400, 1972-2 C.B. 75, and 77-235, 1977-2 C.B. 45.
4Pagliarulo v. Comr., T.C. Memo 1994-506.
5Rev. Ruls. 57-399, 1957-2 C.B. 101, and 56-83, 1956-1 C.B. 79. Note that the Taxpayer Relief Act of 1997 (TRA '97) extended the exclusion from gross income for qualified assignments under  §130 to amounts assigned for assuming a liability to pay compensation under any workers' compensation act. Thus, a qualified assignment under §130 includes the assignment of a liability to make payments of amounts received under workers' compensation acts as compensation for personal injuries or sickness. TRA '97 requires that the assignee assume the liability from a person who is a party to the workers' compensation claim. It also requires that: (1) the periodic payment be excludible from the recipient's gross income under §104(a)(1); (2) the periodic payments are fixed and determinable as to amount and time of payment; (3) the payments cannot be accelerated, deferred, increased, or decreased by the recipient; and (4) the assignee's obligation is no greater than that of the assignor. See P.L. 105-34, §962. See also H.R. Conf. Rep. No. 220, 105th Cong., 1st Sess. (1997), pp. 468-69. The provision applies to claims under workers' compensation acts filed after Aug. 5, 1997.
In addition to payments under a workers' compensation act, benefits under a law that is "in the nature of" a workers' compensation act, also may qualify for exclusion. A statute is in the nature of a workers' compensation act if it provides compensation to employees solely for disabilities incurred in the course of employment.6
6Rev. Rul. 80-14, 1980-1 C.B. 33. Workers' compensation payments also are excepted from wages for FICA tax purposes. See Prop. Regs. §31.3121(a)(2)-1(d). REG-160315-03, 70 Fed. Reg. 12164 (3/11/05).
Examples: Payments to coal miners disabled by pneumoconiosis, under the federal Black Lung Benefits Act of 1972, which supplements state workers' compensation acts, are excludible under  §104(a)(1).7 Likewise, the payment made under federal law by the Law Enforcement Assistance Administration to the dependents of a public safety officer killed in the line of duty are excludible.8
7Rev. Rul. 72-400, 1972-2 C.B. 75.
8Rev. Rul. 77-235, 1977-2 C.B. 45. An interim relief payment pending processing of a claim also is nontaxable. Rev. Rul. 78-46, 1978-1 C.B. 22.
Furthermore, the statute may be as informal as an ad hoc municipal ordinance providing a pension to the surviving spouses of volunteer firefighters killed in the course of service to the municipality.9
9Rev. Rul. 72-291, 1972-1 C.B. 36. Compare Rev. Rul. 73-346, 1973-2 C.B. 24, holding against excludibility where a similar ordinance provided that survivor benefits could be terminated at any time.
Note: Benefits awarded under a collective bargaining agreement are not excludible unless they are made pursuant to a statute, ordinance, or regulation in the nature of a workers' compensation act.10
10Compare Rev. Rul. 81-47, 1981-1 C.B. 55 (payments made pursuant to collective bargaining agreement incorporated by reference into county code are excludible), with Rutter v. Comr., 760 F.2d 466 (2d Cir. 1985) (benefits paid pursuant to labor contract not excludible).
Benefits that are paid under a dual purpose statute also can be excludible. If the statute provides benefits for both employment-related and other disabilities, benefits received under the employment-related disability provisions qualify under §104(a)(1).11 In contrast, a benefit that is paid whether or not the sickness, injury, or death is work-related does not qualify under §104(a)(1).12 For this reason, disability benefits from the federal Civil Service Retirement and Disability Fund are not excludible.13
11Rev. Rul. 80-84, 1980-1 C.B. 35. CompareSmelley v. U.S., 806 F. Supp. 932 (N.D. Ala. 1992), aff'd per curiam, 3 F.3d 389 (11th Cir. 1993) (state retirement statute that does not require a retiree to establish that hypertension was work-related is not in the nature of a workers' compensation act), and Green v. Comr., T.C. Memo 1994-264, with Givens v. Comr., 90 T.C. 1145 (1988), nonacq., 1989-1 C.B. 1 (accumulated sick leave excludible because applicable statute distinguishes between work-related injuries and others). See also PLR 9721025 (lump-sum payments received for accrued annual leave after disability retirement not excludible under §104(a)(1)).
12Kane v. U.S., 43 F.3d 1446 (Fed. Cir. 1994). See PLR 9749009 (early retirement pension benefits paid under union pension fund to individual receiving Social Security disability benefits was includible in income because no evidence was submitted to indicate that individual's disability was incurred in the course of his employment or to show that his union disability retirement pension was received pursuant to a workers' compensation act or a statute in the nature of a workers' compensation act).
13Haar v. Comr., 78 T.C. 864 (1982), aff'd per curiam, 709 F.2d 1206 (8th Cir. 1983).
Note: If an individual begins to receive occupational disability benefits but shifts to regular retirement benefits at mandatory retirement age, he apparently loses the §104(a)(1) exclusion.14
14Rev. Rul. 80-14; Wiedmaier v. Comr., 774 F.2d 109 (6th Cir. 1985); Picard v. Comr., T.C. Memo 1997-320 (recomputation of disability retirement payments using length of service as a criterion results in the payments no longer being excludible under  §104(a)(1)). Cf., Rev. Rul. 80-44, 1980-1 C.B. 34.
Payments can be excludible under §104(a)(1) even if they represent continuation of full salary.15 However, temporary salary continuation payments under the Federal Employees' Compensation Act (FECA),16 made to fill the gap until disability benefits commence, apparently are not excludible.17 Continuation of salary in addition to regular workers' compensation benefits may also be outside the scope of the exclusion.18
15Dyer v. Comr., 71 T.C. 560 (1979), acq. in result, 1979-2 C.B. 1; Rev. Rul. 68-10, 1968-1 C.B. 50. While Regs. §1.104-1(b) provides that payments exceeding the amount provided under the applicable workers' compensation act are not excludible, Rev. Rul. 72-45, 1972-1 C.B. 34, modified by Rev. Rul. 83-91, 1983-1 C.B. 38, explains that this principle does not apply to payments in lieu of workers' compensation. See also Rev. Rul. 80-14.
165 USC §8102 (1982).
17Rev. Rul. 78-416, 1978-2 C.B. 103. Though these payments appear indistinguishable from those held to be excludible in Rev. Rul. 68-10, there was apparently an indication in the legislative history that the payments were intended to be taxable. See Dyer, 71 T.C. at 563, n. 13. If a federal employee repays sick pay in order to receive retroactive FECA benefits for the period during which his disability claim is being processed, the retroactive FECA benefits are excludible under  §104(a)(1). If the repayment is made after the taxable year in which the sick pay is received,  §1341 does not apply, but the employee is entitled to deduct the repaid amounts under §165. Rev. Rul. 79-322, 1979-2 C.B. 76.
18SeeBlackburn v. Comr., 15 T.C. 336 (1950), construing the predecessor of §104(a)(1) under the 1939 Code, holding that a highway patrolman's regular salary paid while he was disabled and receiving workers' compensation benefits constituted extra compensation for his hazardous job and was not excludible. See also PLR 9721025 (lump-sum payments received for accrued annual leave after disability retirement were not excludible from gross income under §104(a)(1) where, unlike the situation in Givens v. Comr., 90 T.C. 1145 (1988), nonacq., 1989-1 C.B. 1, the accrued annual leave paid to the taxpayer after retirement was not paid under a workers' compensation statute or pursuant to a statute that allowed annual leave to be used as a supplement to normal workers' compensation).
Failure to establish that a disability is job-related is fatal to a claim of excludibility.19 Furthermore, inclusion of benefits for nonoccupational disability under the umbrella of a state workers' compensation law does not qualify such benefits for exclusion under  §104(a)(1).20
19Golden v. Comr., T.C. Memo 1971-162.
20Rev. Rul. 72-191, 1972-1 C.B. 45, amplified by Rev. Rul. 75-499, 1975-2 C.B. 43, and modified by Rev. Rul. 81-192, 1981-2 C.B. 50.
Moreover, benefits based upon age or length of service are not considered to be sickness or injury payments.21 If benefits are computed partially according to a formula referring to an employee's age, length of service or prior contributions, the benefit is excludible only to the extent that it concerns employment-related disability.22 If an individual qualifies for both disability and regular retirement benefits, only the portion of the benefit that he would have received had he not qualified for regular retirement can be excluded under  §104(a)(1).23 Rev. Rul. 80-44 details how the component excludible under §104(a)(1) is calculated when the retiree elects a survivor annuity reducing his benefit.
21Regs. §1.104-1(b).
22Rev. Rul. 85-104, 1985-2 C.B. 52. SeePicard v. Comr., 165 F.3d 744, 22 EBC 2317 (9th Cir. 1999) (reduction in taxpayer's payments on 25th anniversary of hire date did not convert disability pension into retirement pension; thus, recalculated benefits remain excludible from income under §104(a)(1)); see, e.g., PLR 9850005.
23Carlton v. U.S., 782 F.2d 173, 6 EBC 2721 (Fed. Cir. 1986); Rev. Rul. 80-44, 1980-1 C.B. 34.
Note: Disability benefits computed by reference to the consumer price index, or pay increases given to active employees, are excludible under §104(a)(1), because these factors do not refer to age, length of service, or prior contributions.24
24See PLR 9227024. If only a portion of the benefit computed under such a statute qualifies for exclusion under  §104(a), only a pro rata portion of the cost-of-living increase attributable to the benefit is excludible.
Under one state statute, the accidental disability retirement allowance included an annuity based on a police officer's aggregate contributions to the retirement system. The IRS ruled that the taxpayer could exclude the full statutory disability payments under  §104(a)(1), because benefits in this amount were payable regardless of prior contributions.25
25PLR 9245037; see also PLRs 9320040, 9331014 and 9416030.
B. Damages for Personal Injuries
Under §104(a)(2), personal injury is limited to physical injury or sickness. Accordingly, if a personal injury consists of emotional distress, only the physical portion (the medical expenses) are excludible.26
26§104(a) (flush language).
The exclusion is not limited to the person who sustains the physical injury or sickness. Section 104(c) makes it clear that damages received by reason of fatal personal injuries, by a person maintaining a wrongful death action, are excludible. Any other damages that flow from the physical injury or illness, such as loss of consortium, also are excludible.27
27H.R. Rep. No. 3448, 104th Cong., 2d Sess., 142 (1996).
Punitive damages, however, generally are taxable. Section 104(c) makes an exception for damages in a wrongful death action, if before September 13, 1995, the applicable state law limited damages to punitive damages.
1.	Prior Law
Before August 21, 1996,28 injury had a broader meaning in §104(a)(2) than in the remainder of §104, or in §§105 and 106. It included not only physical trauma, but also other damages from actionable torts of a personal, rather than a business, nature. Thus, defamation,29 alienation of affection,30 and invasion of privacy31 were all injuries for which indemnification was excludible under  §104(a)(2).
28P.L. 104-188, §1605(d)(1). Prior law remains in effect for damages received under a written binding agreement, court decree, or mediation award in effect on (or issued on or before) Sept. 13, 1995.
29Seay v. Comr., 58 T.C. 32 (1972); Rev. Rul. 58-418, 1958-2 C.B. 18, superseded by Rev. Rul. 85-98, 1985-2 C.B. 51. Compare Anderson v. Comr., T.C. Memo 1997-309, in which damages were found to be contractual rather than tortious in nature.
30Rev. Rul. 74-77, 1974-1 C.B. 33, obsoleted by Rev. Rul. 98-37, 1998-32 I.R.B. 5, in which the IRS also ruled that a payment in consideration for surrender of custody of a child was excludible, because it related to "personal or family rights, not property rights." Compare the IRS position which prevailed in Starrels v. Comr., 304 F.2d 574 (9th Cir. 1962), that an amount paid for voluntary relinquishment of a right cannot constitute damages under §104(a)(2).
31See Starrels and Roosevelt v. Comr., 43 T.C. 77 (1964), both indicating, in dicta, that payment for damages actually sustained through an invasion of privacy would be excludible.
At least some recoveries under employment discrimination laws came within the ambit of §104(a)(2). The U.S. Supreme Court's opinion in Comr. v. Schleier32 explains that the exclusion applies to tort-type damages under such laws if paid on account of personal injury. The Court held, specifically, that damages under the federal Age Discrimination in Employment Act, which are limited to back pay and liquidated damages, are taxable. The back pay is taxable because the loss is caused by the employer's unlawful action, not the personal injury; the liquidated damages are taxable because they are intended to punish intentional wrong doing rather than compensate the victim.
32515 U.S. 323 (1995).
In contrast, other federal discrimination laws provide for noneconomic damages that seem to be intended to compensate for personal injury, instead of punishing intentional misconduct. Thus, damages under the Fair Labor Standards Act, Title VII of the Civil Rights Act of 1964, the Equal Pay Act and the Americans with Disabilities Act of 1990 were apparently excludible under §104(a)(2). However, these statutes also provide for back pay and other remedies that are apparently not excludible. Consequently, under §104(a)(2) as interpreted in Schleier, it apparently was necessary to allocate between excludible and nonexcludible damages.
In what may be an historical anomaly, one court held that a settlement of a claim for discharge to prevent vesting under the Employee Retirement Income Security Act of 1974 is excludible in part.33 The parties regarded part of the recovery as on account of personal injuries such as loss of dignity and diminished long-term employment prospects. Subsequent cases indicate that such remedies are not available under ERISA.34
33Dotson v. U.S., 87 F.3d 682, 20 EBC 1484 (5th Cir. 1996); see also Gerbec v. U.S., 164 F.3d 1015, 22 EBC 2297 (6th Cir. 1999) (compensatory settlement award for nonphysical personal injuries under ERISA §510 are excludible under Code §104(a)(2)).
34See Mertens v. Hewitt Assoc., 508 U.S. 248 (1993); see also Hemelt v. U.S., 122 F.3d 204 (4th Cir. 1997); Mayberry v. U.S., 151 F.3d 855, 22 EBC 1513 (8th Cir. 1998) (settlement award received by taxpayer in class action against former employer for violating ERISA §510 not excludible from gross income as damages received for personal injury, and constitutes wages subject to FICA tax).
Moreover, it appears that punitive damages were never excludible under §104(a)(2). Before August 20, 1996, the last sentence of subsection (a) stated that punitive damages for nonphysical injury are not excludible. However, courts have not drawn a negative inference from this provision. It appears that punitive damages are not excludible even if they do involve physical injury or sickness.35
35See O'Gilvie v. U.S., 519 U.S. 79 (1996).
Note: A payment for consent to perform an act apparently was not treated as damages for injuries resulting from an unauthorized act. The Ninth Circuit held in Starrels v. Comr.36 that a payment for prior consent to the commercial use of a taxpayer's name is not excludible, even though damages for unauthorized use would have been, because only in the latter situation would the payment compensate the taxpayer for a loss rather than add to his wealth.37
36304 F.2d 574 (9th Cir. 1962).
37Id. at 576.
The IRS took the position that damages for defamation of business or professional reputation, as opposed to personal reputation, were not excludible under §104(a)(2).38 But at least two appellate courts disagreed, holding that damages (or a settlement) for defamation are all in the nature of a "personal injury" and, therefore, excludible.39
38Rev. Rul. 85-143, 1985-2 C.B. 55, obsoleted by Rev. Rul. 98-37, 1998-32 I.R.B. 5. In Rev. Rul. 85-98, 1985-2 C.B. 51, however, the IRS made no distinction between damages received for injury to personal reputation as opposed to professional reputation.
39Threlkeld v. Comr., 848 F.2d 81 (6th Cir. 1988); Roemer v. Comr., 716 F.2d 693 (9th Cir. 1983); see also Bent v. Comr., 835 F.2d 67 (3d Cir. 1987) (damages received in settlement for violation of constitutional right of free speech entirely excludible); Fabry v. Comr., 223 F.3d 1261 (11th Cir. 2000), rev'g, 111 T.C. 305 (1998) (portion of tort settlement attributable to damage to business reputation of taxpayers is excludible as damages received on account of personal injury).
Not all damages that arose out of a personal injury action, however, were excludible. In the context of an employment discrimination suit, as indicated above, that portion of a settlement or damages allocated to back pay or interest thereon is likely to be income under  §104(a)(2).40
40Rev. Rul. 96-65, 1996-2 C.B. 6.
2.	Interpretive Authority
Damages include amounts received in settlement as well as by judgment.41 However, the amount must have been paid in settlement of a specific claim.42 A payment made in consideration of a taxpayer's waiver of compensation for any potential injury is not damages within the meaning of §104(a)(2). A taxpayer need not demonstrate that the settled claim was meritorious, but only that it was for personal injuries of a type within the scope of  §104(a)(2).43
41Regs. §1.104-1(c). See Barnes v. Comr., T.C. Memo 1997-25 (amounts received in settlement of taxpayer's claim for wrongful termination held partially attributable to emotional distress and excludible from gross income).
42Taggi v. U.S., 835 F. Supp. 744 (S.D.N.Y. 1993), aff'd, 35 F.3d 93 (2d Cir. 1994).
43Seay v. Comr., 58 T.C. 32 (1972).
Note: In Rev. Rul. 65-29,44 the IRS ruled that if a lump-sum damage payment is invested for the benefit of a taxpayer who has actual or constructive receipt of such payment, only the lump-sum payment is excludible under  §104(a)(2) and not the income received therefrom. If there is no constructive receipt of the value of the annuity when it is purchased, however, the taxpayer's exclusion is not limited to the discounted present (lump-sum) value of the annuity. A taxpayer can exclude all of the annuity payments from income under §104(a)(2) if he had a right to receive only the monthly payments, and did not actually or constructively receive the lump-sum amount that was invested by the defendant to yield that monthly payment.45
441965-1 C.B. 59. See PLR 9741035 (disability insurance benefits were excludible from employee's gross income even though employer paid insurance premiums at time of original injury, because ownership of policies was transferred to employee who paid premiums when subsequent disability began).
45Rev. Rul. 79-220, 1979-2 C.B. 74.
Just as payments in kind can be taxable under  §61, such payments can be excludible under §104(a)(2). In a private letter ruling,46 the IRS held free use of a residence by a disabled child to be excludible from income. The exclusion also applied to the child's family so long as they provided the child with a home environment.
46PLR 9526014.
Nearly any judgment or settlement in a typical negligence case is likely to include a component reflecting lost earnings. The IRS has held that the component of a personal injury judgment or settlement representing lost earnings is within the scope of §104(a)(2) and is, therefore, excludible.47
47Rev. Rul. 85-97, 1985-2 C.B. 50.
Under §104(a), to the extent damages reimburse the taxpayer for medical expenses which were previously deducted, they also are taxable.48 Difficulties inevitably arise in apportioning damages among taxable and nontaxable components, particularly in settlements. The IRS's position is that damages should be allocated first to medical expenses, and thereafter to "speculative" pain and suffering claims, unless the parties expressly make another reasonable allocation.49 If the lawsuit is settled before trial, the relevant inquiry is the payor's purpose in making the settlement payment. If the settlement follows a verdict, the allocation made by the jury is a better guide than the plaintiff's complaint.
48See Comr. v. Schleier, 515 U.S. 323 (1995).
49Rev. Rul. 75-230, 1975-1 C.B. 93. As a corollary, future expenses may not be deducted to the extent they are determined to have been covered by an award. Rev. Rul. 79-427, 1979-2 C.B. 120.
Note: The IRS announced that it will not issue advance rulings as to the propriety of allocation of settlement proceeds in the absence of unique and compelling reasons.50
50Rev. Proc. 2001-3, 2000-1 I.R.B. 111.
For a further discussion of §104(a)(2), see 522 T.M., Tax Aspects of Settlements and Judgments.
C. Accident and Health Benefits Not Financed by an Employer
1.	In General
Section 104(a)(3) permits an individual to receive benefits under a disability or medical insurance policy tax free, if the individual has paid all the premiums. In fact, accident or health benefits financed by someone other than the recipient can be excludible from gross income, as long as the benefactor is not the recipient's employer.
Example: Benefits received by an injured automobile passenger under the insurance policy maintained by the owner are not includible in the passenger's income.51
51Rev. Rul. 73-155, 1973-1 C.B. 50. See also Rev. Rul. 75-45, 1975-1 C.B. 47, revoked by Rev. Rul. 84-108, 1984-2 C.B. 32.
Section 104(a)(3) provides that insurance benefits include amounts received from a noninsured fund.52 Accident or health benefits from a qualified pension, profit-sharing, or stock bonus plan also are within the scope of  §104(a)(3).53 Under §105(e)(2), benefits from a state disability fund also are treated as insurance.
52This was true before  §104(a)(3) was amended to make it explicit. Regs. §1.104-1(d); Rev. Rul. 73-347, 1973-2 C.B. 25. See III, F, below, for a discussion of welfare benefit funds that may qualify for tax-exempt status under  §501(c)(9).
53§104(a) flush language; Trappey v. Comr., 34 T.C. 407 (1960). See III, E, 2, below, for a discussion of the circumstances in which qualified plan distributions can be treated as accident or health benefits.
Note: If the owner of an endowment policy has premiums paid for him under a waiver of premium provision, the proceeds of the policy upon maturity can be partially or wholly excludible by him as disability benefits.54
54Wong Wing Non Est. v. Comr., 18 T.C. 205 (1952), construing the predecessor section of the 1939 Code.
Medical benefits are excludible even though they do not bear any relationship to actual medical expenses.55 However, there are two limitations on excludibility under  §104(a)(3). First, payments are not excludible to the extent they reimburse the taxpayer for medical expenses deducted under §213 in a prior taxable year.
55Rev. Rul. 58-602, 1958-2 C.B. 109, modified by Rev. Rul. 68-212, 1968-1 C.B. 91. But see Rev. Rul. 55-264, 1955-1 C.B. 11 (reimbursement for business expenses during period of disability is not excludible).
Second, payments are not excludible under  §104(a)(3) to the extent they are financed by the recipient's employer. The IRS has recognized long-term disability benefit coverage as employee-financed under a plan that gives participants the choice of having the premiums paid on a pre-tax or after-tax basis. So long as the entire premium for a year is paid by the employee, a benefit resulting from disability during the year is recognized as excludible.56 Accident and health benefits that are attributable partly to employer premiums (or contributions) and partly to employee premiums (or contributions) are excludible based on apportionment in accordance with Regs.  §1.105-1.57
56See PLRs 200019005 and 200312001; Rev. Rul. 2004-55, 2004-26 I.R.B. 1081 (disability benefits are nontaxable to employee if premiums are paid by employer on after-tax basis); PLR 200527012 (following Rev. Rul. 2004-55).
57Regs. §1.104-1(d). See III, A, below.
Note: The portion of medical benefits financed by the employer may be excludible under §105. See III, B, C, and D, below.
Benefits are not excludible if attributable to employer contributions that are not includible in the employee's income, which would include any salary reduction contributions under a §125 cafeteria plan. An employer may act as an agent or conduit for employee contributions or premium payments without affecting excludibility.58
58Bouquett v. Comr., T.C. Memo 1994-212; PLR 199930015; Tuka v. Comr., 120 T.C. 1 (2003).
Employee contributions required under a state disability statute are deductible under §164(a) as state taxes.59 However, there does not appear to be any limitation on excludibility of nonoccupational disability benefits reflecting deductibility of contributions under  §164.
59Rev. Ruls. 81-191, 1981-2 C.B. 49; 81-192, 1981-2 C.B. 50; 81-193, 1981-2 C.B. 52; 81-194, 1981-2 C.B. 54.
2.	Self-employed Individuals
Self-employed individuals generally are treated the same as employees under §104(a)(3). Consequently, if a self-employed individual pays premiums for disability or medical insurance, benefits received are excludible.
Benefits received by a self-employed person generally are not considered to be financed by an employer for purposes of  §§104 and 105.60 This is true even though health insurance premiums paid by a self-employed individual are partly deductible under  §162(l) (see V, A, 2, below).
60§§104(a) and 105(g); Rev. Rul. 58-90, 1958-1 C.B. 88.
Note: However, the flush language of  §104(a) provides that accident and health benefits paid from a Keogh plan to or for a self-employed individual are considered to be employer financed.
A self-employed individual also can exclude disability or medical benefits paid from a noninsured plan, at least after 1996. Before amendment of §104(a)(3) to include an arrangement having the effect of accident or health insurance,61 the IRS took the position that benefits from a noninsured plan were taxable to a self-employed person, even if he had paid the full cost of coverage.62
61P.L. 104-191, §311(b), effective for taxable years after 1996.
62See III, A, below.
A noninsured employer plan would be considered insurance only if it resulted in sufficient shifting of risk.63 A mere reimbursement arrangement would not qualify.
63Gen. Explanation of Tax Legis. Enacted in the 104th Cong. 334 (1996).
Comment: A noninsured plan of a proprietorship would presumably not qualify as insurance unless common law employees made substantial contributions for coverage.
D. Military and Certain Other Federal Disability Benefits
1.	Persons in Service Before September 25, 1975
Disability pensions, annuities and "similar allowances" paid to members of the armed services of any country, the National Oceanic and Atmospheric Administration,64 and the Public Health Service are excludible from gross income under §104(a)(4).65
64Formerly called the Coast and Geodetic Survey. See H.R. Rep. No. 658, 94th Cong., 1st Sess. 152 (1975).
65The exclusion also applies to a disability annuity payable under §808 of the Foreign Service Act of 1980.
Note: No part of regular active duty pay can be excluded under §104(a)(4), even during a period of disability.66
66Hernandez v. Comr., 72 T.C. 1234 (1979).
A retiring member of the U.S. armed forces has the option of taking a pension based on years of service times 21/2% of monthly base pay or on a percentage of disability times monthly base pay.67 If the years of service alternative produces a larger benefit, the amount a disabled retiree could have received based on the percentage of disability alternative is nevertheless excludible under §104(a)(4).68
6710 USC §§1401 and 1402 (1986 Supp.). The percentage disability alternative is available only if the retiree has at least 20 years of service or is at least 30% disabled. 10 USC §1201 (1986 Supp.). See Berger v. Comr., 76 T.C. 687 (1981); Rev. Rul. 80-9, 1980-1 C.B. 11.
6810 USC §1403 (1986). See Regs.  §§1.104-1(e) and 1.105-4(a)(3)(i)(A) as to treatment of the excess. Under 10 USC §1401 (1976), a member of the armed forces placed on temporary disability is entitled to at least 50% of his monthly base pay. If his disability percentage benefit is less than 50% of monthly base pay but more than his years of service benefit, the entire 50% benefit is excludible. If his years of service benefit exceeds his disability percentage benefit, only the latter amount is excludible under §104(a)(4). Rev. Rul. 55-88, 1955-1 C.B. 241.
The Veterans Administration (V.A.) is empowered to make a determination of disability independent of, and on different grounds than, the determination made by an armed service.69 All benefits administered by the V.A. are tax free.70 For taxable years beginning after 1975, a portion of a pension at least equal to the amounts a retiree would be entitled to receive from the V.A. is excludible, whether or not application is actually made for those benefits.71 The portion of the retiree's pension representing tax-free V.A. benefits is to be applied first to the component that is excludible under  §104(a)(4).72
69See generally Parks v. Comr., T.C. Memo 1979-182.
7038 USC §3101(a) (1986).
71§104(b)(4). This minimum exclusion presumably applies as of the effective date of a retroactive determination of disability. See Rev. Rul. 78-161, 1978-1 C.B. 31. However, it did not apply retroactively in the case of a "lump sum readjustment payment" under former 10 USC §687(a) (1976). Rev. Rul. 80-9. In St. Clair v. U.S., 778 F. Supp. 894 (E.D. Va. 1991), the court held that a disability severance payment under 10 USC §1212, received by the taxpayer from the air force, was excludible under §104(a)(4) and was not analogous to a readjustment payment. In AOD 1992-006, the Chief Counsel's Office stated that Rev. Rul. 80-9 will be modified to the extent that it is inconsistent with this case.
72Regs. §1.122-1(c)(3) and  (d), Ex. (4). This rule applies by its terms to the portion of a retiree's pension that is waived in order to receive V.A. benefits. Parks v. Comr., T.C. Memo 1979-182; see also Haar v. Comr., 709 F.2d 1206 (8th Cir. 1983). But see PLR 199931043 (taxpayer whose military retirement pay is based on years of service, not personal injuries or sickness, and who reduced taxable retired pay by his excludible disability benefits, is not entitled to a second 10% exclusion from base pay under Regs. §1.221-(d), Ex. 4, because of the same disability determination).
In Palm v. U.S.,73 the court held that separation benefits received by the taxpayer after her military discharge retained their taxable status, despite the V.A.'s subsequent award of disability compensation and recoupment of separation benefits through withholding of an equivalent amount from her tax-exempt disability compensation pursuant to 10 USC §1174(h). While admitting that the special separation benefits payment was taxable income at the time she received it, the taxpayer argued that it retroactively became nontaxable when the V.A. awarded her disability compensation and sought recoupment of the separation benefits payment. Acknowledging the apparent inequity in recouping taxable separation pay by withholding nontaxable disability compensation, the court found that total recoupment without tax relief was clearly intended by Congress based upon a review of the recoupment statute's history.74
73904 F. Supp. 1312 (M.D. Ala. 1995).
74See P.L. 96-513, §109(c); H.R. Rep. No. 1462, 96th Cong., 2d Sess. (1980).
The limitations period under §6511 was applicable to a refund claim for taxes paid on military benefits that were reclassified subsequently as nontaxable disability benefits and effective retroactively.75 During an eight-year period, the taxpayer's disability ratings for his military disability payments were adjusted six times. Eventually, he received a 100% disability rating, retroactive to 1988. The taxpayer did not file a protective claim for a possible 100% disability in the future, pursuant to §6514. The court concluded that the taxpayer's claim was a tax refund case, not a suit to acquire the full benefit of his entitlement from the V.A. Section 6511 contains no exception for subsequent revisions to military disability benefits by the VA.
75Sullivan v. U.S., 46 Fed. Cl. 480 (2000).
Note: The IRS ruled, in Rev. Rul. 77-318,76 that  §104(a)(4) cannot apply to any disability benefits paid by a civilian retirement system other than those named in §104(a)(4). Thus, it ruled that benefits received from the Civil Service Retirement and Disability Fund were not excludible, even though paid by reason of a disability resulting from military service and for which V.A. benefits also were being paid.
761977-2 C.B. 45.
2.	Persons in Service After September 24, 1975
Because of abuses perceived by Congress,77 the scope of the §104(a)(4) exemption was cut back significantly by the Tax Reform Act of 1976 (1976 TRA).78 The purpose of the change was to restrict the exclusion to combat-related injuries. However, in deference to the possible expectations of persons who had already joined the armed services or one of the other organizations covered, the change was made effective only for persons who became members after September 24, 1975.79 The change also does not affect a person who on that date was under a binding written commitment to become a member, or was a member of a reserve component of one of the armed services.
77See H.R. Rep. No. 658, 94th Cong., 1st Sess. 152 (1975).
78P.L. 94-455.
79§104(b)(2) and  (3).
Section 104(b)(3) lists the types of disability that are to be considered combat-related. The reference to an "instrumentality of war" is intended to refer, inter alia, to weapons.80
80H.R. Rep. No. 658, 94th Cong., 1st Sess. 152, at 153 (1975).
3.	Disability from Foreign Terrorist Attack
Section 104(a)(5) provides an exclusion for disability benefits received as a result of a terrorist or military action.81 A terrorist or military action is defined in  §692(c)(2).
81P.L. 107-134, §113(a), amending §104(a)(5).
The exclusion includes military or civilian employees, and terrorist or military action in or out of the United States. The exclusion applies if the preponderance of the evidence indicates that the terroristic activity was directed against the United States or any of its allies. For this purpose, allies include any multinational force in which the United States is participating under §692(c).82
82§692(c)(3).
III. Employer-Financed Sickness and Personal Injury Benefits
A. In General
The general rule, set forth in §105(a), is that amounts received by an employee for personal injuries or sickness through accident and health insurance are taxable if such amounts are paid by the employer or are attributable to employer contributions not included in the gross income of the employee. The main focus of §105 is, however, on the exemptions for:

(1) medical expense reimbursements under  §105(b); and
(2) permanent injury payments within the meaning of  §105(c).
Under §105(e)(1), benefits received under an accident or health plan for employees are treated as amounts received through accident and health insurance. Benefits received from a sickness and disability fund for employees maintained under state law are afforded the same treatment under  §105(e)(2).83
83Rev. Rul. 75-479, 1975-2 C.B. 44 (nonoccupational disability benefits under the Hawaii Temporary Disability Law, funded by employer contributions, treated as received through accident and health insurance under §105).
Section 105 supplements §104(a)(3), which excludes only sickness and personal injury benefits not financed by an employer. Disability benefits are nontaxable to the employee if the premiums are paid by the employer on or after tax basis.84 If both the employer and the employee(s) pay the premiums on accident or health insurance or contribute to a noninsured accident or health plan, it is necessary to determine what portion of a benefit is subject to  §104(a)(3) and what portion to  §105. Under Regs.  §1.105-1(c)(1), each benefit received is divided in proportion to the amounts contributed (or the premiums paid) by the respective sources.
84See Rev. Rul. 2004-55, 2004-26 I.R.B. 1081 (short- or long-term disability benefits received by employee who made annual irrevocable election before beginning of plan year to have premiums paid by employer on after-tax basis for year employee became disabled are excludible from employee's gross income under §104(a)(3) and benefits received by employee for whom coverage is paid by employer on pre-tax basis are includible in gross income); PLR 200527012 (following Rev. Rul. 2004-55).
Under Regs. §1.105-1(c)(2), a separate determination of the amount attributable to employer contributions must be made for each class of employees to which different rates of contributions (either employer or employee) apply.85
85See PLR 9705007 (when long-term disability insurance policy became noncontributory, employees who paid premiums on policy ruled separate class of employees under Regs.  §1.105-1(c)).
Example: Employees above a specified compensation threshold who pay their full group long-term disability insurance premiums are treated as a class separate from lower paid employees whose premiums are paid fully by the employer. In addition, the IRS treated the contributory portion of the plan as a new plan for purposes of Regs.  §1.105-1(d)(2).86
86PLR 9111027. See also PLR 9709051 (employees covered by basic noncontributory benefit are separate class from those with optional contributory coverage in accordance with Regs.  §1.105-1(d)(2)).
Benefits paid to self-employed persons under noninsured plans are not excludible under §105 because such an individual is not regarded as an "employee."87 Benefits can be excludible under §104(a)(3), however, if the plan results in adequate risk shifting (see II, C, 2, above).
87§105(g); Regs. §1.105-5(b). Employee status is determined in accordance with the usual common law criteria. Rev. Rul. 56-400, 1956-2 C.B. 116. Full-time life insurance salesmen who are treated as employees for FICA purposes also are considered employees for  §105 purposes.  §7701(a)(20). Although members of the clergy are treated as self-employed for Social Security tax purposes under  §1402(c), they ordinarily are employees for §105 purposes. Rev. Rul. 70-179, 1970-1 C.B. 23.
Note: A self-employed individual can receive pre-tax coverage as a dependent of a spouse who is a common law employee of the business.88
88Rev. Rul. 71-588, 1971-2 C.B. 91.
Comment: The ability to pay medical expenses entirely with pre-tax dollars remained a significant advantage of incorporating through 2002. In contrast, self-employed persons can deduct medical expenses, under §213(a), only to the extent they exceed 7.5% of adjusted gross income. Further, as discussed in V, A, 2, below, prior to 2003, only a portion of medical insurance premiums paid for a self-employed individual and his family could be deducted under  §162(l).
Amounts paid to the beneficiary of a deceased employee may be excluded from the beneficiary's gross income if the amounts would have been excludible under §105 by the employee had he lived.89
89§691(a)(3); Rev. Rul. 59-64, 1959-1 C.B. 31.
Note: For §105 purposes, the term "employees" includes retired employees.90
90See Rev. Rul. 62-199, 1962-2 C.B. 38. See also PLR 200520014 (payments and reimbursements of medical care expenses of retired employees and their spouses and dependents are excludible from income under §104(a)(3) or §105(b)).
B. Medical Benefits
1.	In General
The general effect of §105(b) is to exclude from gross income amounts paid to an employee to reimburse him for the cost of medical care for him or his spouse or dependents. In addition, reimbursement payments are not subject to federal income tax withholding or to FICA or FUTA taxes, provided it is reasonable to believe that the payments are excludible.91 However, reimbursements for expenses that were deducted by the employee under  §213 are not excludible.
91§§3401(a)(20), 3121(a)(2)(B) and 3306(b)(2)(B). The FICA and FUTA exclusions generally are, though not precisely, congruent with §105(b). Regs. §§31.3121(a)(2)-1 and 31.3306(b)(2)-1. Some persons who are dependents for §105(b) purposes are not for FICA and FUTA purposes, creating the possibility that certain reimbursements may be subject to FICA and FUTA taxes. SeeAmerican Family Mutual Ins. Co. v. U.S., 815 F. Supp. 1206 (W.D. Wis. 1992) (medical benefits paid under cafeteria plan that failed to qualify for exclusion from gross income under §105(b), due to a retroactive election feature and failure to provide advance notice to employees, are subject to employment and income taxes under §§3121 and 3401).
The §105(b) exclusion applies whether the payments are made through insurance or under a noninsured health reimbursement plan.92 In Rev. Rul. 2005-55, 2005-33 I.R.B. 284, the IRS addressed a profit-sharing plan that provided each participant a separate medical reimbursement account (in addition to a profit-sharing account). The IRS concluded that because the plan restricts the distribution of amounts held in the medical reimbursement accounts to the reimbursement of substantiated medical expenses incurred by a plan participant or a participant's spouse and dependents, the plan is considered to impose a condition on the entitlement of the participant (and beneficiaries) to the amounts held in the medical reimbursement accounts and, as a result of that restriction, the amounts in those accounts fail to be nonforfeitable. The IRS ruled that the plan did not meet the §411 vesting requirements and, thus, failed to satisfy the plan qualification requirement of §401(a)(7) and, the IRS added, may fail to satisfy other §401(a) qualification requirements as well. According to the ruling, if the plan instead provided that amounts payable from the medical reimbursement accounts were available for distribution under the same terms as the amounts held in the plan's profit-sharing accounts, the plan would not fail to satisfy §411, but amounts paid from the plan would be includible in gross income under §402(a), instead of being excludible under §105(b). Pursuant to §7805(b), Rev. Rul. 2005-55 provides some relief from retroactive application of the ruling that requires corrective plan amendments.
92See Rev. Rul. 2002-58, 2002-38 I.R.B. 541 (payments received under self-insured medical expense reimbursement plan for medical expenses incurred by employee before adoption of plan are not excludible from gross income under  §105(b)).
Note: Medicare Part A basic hospital insurance benefits are tax free apart from §105, as are survivor and disability benefits under Social Security.93
93Rev. Rul. 70-341, 1970-2 C.B. 31.
Though §105(b) refers to "reimbursement" for expenses, it also applies to payments made directly to medical care providers in discharge of the taxpayer's or his spouse's or dependents' obligations.94 In addition, it applies to discounted services offered by hospitals to their employees.95 Discounted services offered by a charity to nonemployees also do not result in taxable income.96
94Regs. §1.105-2.
95See PLR 9506025.
96See PLR 9525033.
2.	Self-Insured Plans
A very large employer might take on the role of an insurance carrier, accepting all of the risks of benefit claims. A smaller employer might partially self-insure, with stop-loss insurance to avoid liability for particularly large claims.
Self-insured plans often are designed to reimburse medical expenses only up to a specified dollar limit. Such a plan would operate in a similar fashion to a flexible spending account (FSA) under  §125. In fact, every medical FSA includes a self-insured medical benefit reimbursement plan. While medical FSAs are subject to the §105(h) nondiscrimination rules, they must be structured principally to satisfy the elaborate rules under §125. Nonelective medical expense reimbursement plans, typically referred to as health reimbursement arrangements, afford more flexibility in design, as described in III, B, 2, d below.
Section 105(h) provides, in general, that a self-insured medical expense reimbursement plan can provide fully nontaxable benefits to highly compensated employees (HCEs) only if the plan does not discriminate in favor of such HCEs as to either eligibility to participate or benefits provided under the plan. Thus, if a self-insured plan fails to satisfy the discrimination standards set forth in  §105(h)(3) and (4), part or all of the benefits received by the HCEs will be includible in their gross incomes.
a.	Discrimination in Eligibility
In order to avoid "excess reimbursements," which are not excludible, a plan must meet either one of two numerical tests or a nondiscriminatory classification test set forth in §105(h)(3). The numerical test is satisfied if the plan covers either (a) at least 70% of all employees, or (b) at least 80% of all employees who are eligible to benefit under the plan if at least 70% of all employees are eligible to benefit.
Note: Employees who elect an HMO option can be counted as benefiting under the self-insured medical plan if the employer contributes at least as much for the HMO coverage.97
97Regs. §1.105-11(c)(4)(iii).
The nondiscriminatory classification test is met if the plan benefits a classification of employees set up by the employer which is found by the IRS not to be discriminatory in favor of highly compensated employees. In general, this determination is made based upon the facts and circumstances of each case.98
98Regs.  §1.105-11(c)(2)(ii).
Note: The special rules in  §401(a)(5) concerning eligibility to participate do not, however, apply to self-insured medical plans.99
99Id.
In determining whether any of the three tests are met, an employer may exclude: (1) employees who have not completed three years of service or reached the age of 25 before the beginning of the plan year; (2) employees who are considered to be part-time or seasonal; (3) employees covered by a collective bargaining agreement; and (4) nonresident aliens earning no income from sources within the United States.100
100§105(h)(3)(B). Bargaining employees may be disregarded only if the employer has bargained in good faith on the subject of accident and health benefits.
Section 105(h) permits exclusion of part-time or seasonal employees, determined by reference to customary weekly employment on an essentially full-time, nine-month schedule.101 The three-year eligibility waiting period may be measured without reference to break in service rules such as those in  §410(a)(5). Thus, an employee who separates from service and is reemployed can be treated as a new employee for purposes of the discrimination test.102
101Regs.  §1.105-11(c)(2)(iii)(C). Note, however, that the 35-hour per week and nine-month per year standards may be used as full-time standards only if other employees in similar work with the employer or in the industry have substantially more hours or months, respectively. If not, 25 hours per week and 7 months per year are the full-time standards.
102Regs. §1.105-11(c)(2)(iii)(A).
Note: Employment in an excluded category must be counted toward the three-year requirement if an employee later ceases to be excludible.
Under §105(h)(5), "highly compensated" employees are defined as: (1) the five highest paid officers; (2) shareholders who own (after application of  §318) more than 10% in value of the employer's stock; and (3) the highest paid 25% of the employees (excluding nonparticipants and employees who are excludible for purposes of the eligibility test). If the number of employees who are not excludible is not divisible by four, the fraction is rounded up.103 Officer and stockholder status are determined at the time of each separate benefit payment.
103Regs. §1.105-11(d).
Note: In contrast to the highly compensated definition for qualified retirement plan purposes in §414(q), the highest paid 25% under  §105(h) is based on compensation for the same year that is being tested for discrimination.
All employees of businesses under common control, or forming an affiliated service group, must be treated as employed by a single employer, both in applying the discrimination tests and in identifying the highest paid 25% of employees.104 Corporations are under common control if part of a parent-subsidiary or a brother-sister controlled group as defined in §1563(a). Section 414(c) applies analogous principles to unincorporated businesses. These rules, and the elaborate affiliated service group rules, are set forth in detail in 351 T.M., Plan Qualification -- Pension and Profit-Sharing Plans.
104§§105(h)(8), 414(b),  (c) and  (m).
b.	Discrimination in Benefits
The discrimination standard in §105(h)(4) relates to benefits. In order to avoid nonexcludible "excess reimbursements," a plan must provide benefits on a nondiscriminatory basis. Section 105(h)(4) requires that all benefits provided to highly compensated employees must also be provided for all other participants. In addition, all the benefits available for the dependents of employees who are highly compensated must also be available on the same basis for the dependents of all other participants.105
105Regs.  §1.105-11(c)(3)(i).
Note: Certain benefits may nevertheless be provided on a discriminatory basis. Reimbursement for routine diagnostic procedures, such as medical examinations, x-rays and blood tests, need not be considered by an employer to be part of a medical plan, if performed at a facility that does not provide services other than medical services and ancillary services.106
106Regs. §1.105-11(g). Transportation expenses are included in this exception, but not food or lodging.
Though §105(h)(4) does not so state, making benefits proportional to compensation would violate the nondiscrimination requirement.107 Discrimination is determined by reference to benefits available under the plan, not to amounts actually paid.108 Offsetting plan benefits by amounts received under Medicare or any other governmental accident or health program, or under another insured or noninsured plan of the employer or another employer, is, however, permissible.109
107Regs. §1.105-11(c)(3)(i).
108Id.
109Regs. §1.105-11(c)(1).
Note: An amount reimbursed to an employee for a hospital expense under a medical plan maintained by the employer of the employee's spouse may be offset against the self-insured benefit only if the self-insured plan covering the employee provides the same type of hospital benefit.110
110Id.
c.	Excess Reimbursements
The consequence of failure to satisfy the discrimination standards depends on whether the discrimination is in eligibility or benefits. A benefit paid with respect to a highly compensated employee (HCE) that is not available to all other participants is not excludible under  §105(b).111 If a benefit is available to a highly compensated individual in a greater amount than to any other participant, then the amount includible in gross income is the excess of the payments made in a plan year over the maximum benefit available to the other participant.112
111§105(h)(1) and  (7); Regs.  §1.105-11(e)(2).
112Regs. §1.105-11(e)(1).
If a plan fails to satisfy the eligibility tests, a portion of any benefit paid with respect to an HCE constitutes an excess reimbursement and is not excludible. That portion is determined by multiplying the total amount reimbursed to an employee by a fraction. The numerator of the fraction is the total amount reimbursed during that plan year to all HCEs. The denominator of the fraction is the total amount reimbursed during that plan year to all participants.113 Benefits that constitute excess reimbursements because they are available only to highly compensated individuals are excluded from both the numerator and the denominator. Excess reimbursements for a plan year are includible in income in the HCE's taxable year in which the plan year ends.114
113Regs.  §1.105-11(e)(3).
114§105(h)(10).
d.	Health Reimbursement Arrangements
The IRS refers to self-insured medical expense reimbursement plans that are not elective, and reimburse medical expenses only up to a specified dollar limit, as health reimbursement arrangements (HRAs). Reimbursements under an HRA are excludible from gross income provided the HRA follows the guidelines promulgated by the IRS.115
115Notice 2002-45, 2002-28 I.R.B. 93, Part I. See. e.g., PLR 200329014 (medical reimbursement plan meets requirements of Notice 2002-45 and Rev. Rul. 2002-41, 2002-28 I.R.B. 75); PLR 200452013 (coverage and reimbursements made by employer under its medical reimbursement plan are excludible from employees' gross income under §§106 and 105, respectively, because requirements of Rev. Rul. 2002-41 and Notice 2002-45 were met). Section 6041(f)(2), as added by P.L. 108-173, §1203, excludes HRA payments for reimbursements from the information reporting requirements of §6041, effective for payments made after Dec. 31, 2002.
Each expense submitted for reimbursement under an HRA must be substantiated.116 In addition, HRA reimbursements may not be made on a retroactive basis. Only expenses incurred after the HRA is adopted, and after the participant has become eligible for it, can be reimbursed on a pre-tax basis.117 Among the medical expenses that may be reimbursed under an HRA is insurance covering medical expenses.118 The plan can cover retirees and/or COBRA qualified beneficiaries in addition to active employees and their dependents, but not self-employed individuals. However, under §106(c), long-term care expenses cannot be reimbursed under an HRA.
116See Rev. Rul. 2003-43, 2003-21 I.R.B. 935, for guidance regarding the use of debit or credit cards and other electronic media to reimburse medical care expenses and the methods and procedures for substantiating expenses.
117Notice 2002-45, Part II.
118Id.
A medical reimbursement arrangement will not qualify as an HRA if payments of unused reimbursement amounts are made to employees in cash or other benefits.118.1 In the IRS addressed four situations with similar reimbursement plans.
118.1Rev. Rul. 2005-24, 2005-16 I.R.B. 892, amplifying Notice 2002-45, and applicable to reimbursement arrangements within the scope of Rev. Rul. 2005-24, effective for plan years beginning after Dec. 31, 2005.
To qualify for the §105(b) exclusion, an HRA only can provide benefits that reimburse medical care expenses.118.2 If any person has the right to receive cash or any other benefit under the HRA other than the reimbursement of medical care expenses, the HRA does not qualify for the exclusion. Further, if any person has such a right, all distributions to all persons made from the HRA in the current year are included in gross income, even the amounts paid to reimburse medical care expenses. HRAs that provide for the payment of a death benefit, a bonus, or a separation payment without regard to medical care expenses do not qualify for tax-favored treatment.118.3 Other arrangements outside the HRA that provide for the adjustment of an employee's compensation or receipt of any other benefit are considered in determining whether the arrangement is an HRA and whether the benefits are eligible for the gross income exclusion.
118.2Notice 2002-45, Part II; Regs. §1.105-2.
118.3Notice 2002-45.
In the following examples, in general, a plan made reimbursements to former and current employees and their spouses and dependents solely for substantiated §213(d) medical expenses.118.4
118.4Rev. Rul. 2005-24.
Example 1: The plan also reimbursed medical care expenses of a surviving spouse and surviving dependents. Upon the death of the surviving spouse and last dependent, or upon the death of the employee if there is no surviving spouse or dependent, any unused reimbursements amount is forfeited. At the end of each plan year, a portion of an employee's available reimbursement amount is forfeited if not used to reimburse medical expenses and the remaining unused reimbursement amount is carried forward into subsequent plan years. No other payments are made under the plan except for the reimbursement of medical care expenses. When an employee retires, the employer contributes an amount to the plan equal to the value of all or a portion of the retired employee's accumulated unused vacation and sick leave. Under no circumstances can this amount be paid in cash or other benefits.
The arrangement is an HRA that meets the requirements for tax-favored treatment under §§106 and 105(b) because it is an employer-provided accident and health plan under §106 with payments that are limited to the reimbursement of substantiated medical care expenses as required by §105(b).
Example 2: The plan is the same as in Example 1, except that the employee receives a cash payment equal to all or a portion of the employee's available unused reimbursement amount at the end of the plan year or upon termination of employment, if earlier. The employer treats the cash payment as taxable income to the employee.
The plan is not an HRA because it provides for a cash payment of the employee's available unused reimbursement amount at the end of the plan year or upon termination.
Example 3: The plan is the same as in Example 1, except that upon an employee's death all or a portion of the unused reimbursement amount is paid in cash to the employee's beneficiary. If no beneficiary exists, payment is made to the deceased employee's estate.
The plan is not an HRA because it provides for a death benefit upon the employee's death of the unused reimbursement amount without regard to medical care expenses.
Example 4: The plan is the same as in Example 1, except that the employer also has an option plan that is separate from the plan. If an employee elects to participate in the option plan, any unused reimbursement amount available at the end of the plan year is forfeited. However, the employee may elect to transfer all or a portion of the forfeited amount to a retirement plan or to receive the amount in cash. If an employee does not elect to participate in the option plan, any unused reimbursement amount is carried forward.
The option plan is not an HRA because it permits conversion of unused reimbursement amounts to cash or other benefits regardless of whether or not medical expenses were incurred. Although the option plan claims to be outside the plan, it and the plan are one plan.
Further, because the Plans in Examples 2 through 4 pay amounts regardless of whether medical care expenses were incurred, no amount paid under those plans to any person is excludible from gross income under §105(b).
Because employees are not given any choice of cash or other benefits instead of medical reimbursements, unused HRA balances are not subject to a "use it or lose it" rule. This rule seems to apply to retirees.118.5
118.5PLR 200535015. The IRS ruled that, after the addition of a "spend-down option," medical care reimbursements to employees and retired employees under an HRA qualified for the exclusion under §105(b), contributions, including nonelective contributions equal to the value of a retiring employee's unused sick leave, and coverage under the plan were excludible under §106. The spend-down option was available to all participants who retired. The plan continued to reimburse all eligible retired employees for medical care until all unused accumulated amounts were exhausted. The employer also contributed to the plan an amount equal to all or a portion of the value of a retired employee's unused sick days at retirement. Retired employees made no election as to the contribution of the unused sick leave, and a retired employee had no right to receive the value of the unused sick leave in cash or other benefits. Before the start of each plan year, the employer determined whether it would contribute all or a portion of the value of unused sick days to the plan on behalf of any employee who retired during the year. The IRS concluded that the plan met the requirements of Rev. Rul. 2002-41, Notice 2002-45, and Rev. Rul. 2005-24.
Comment: Permitting participants to accumulate unused balances is likely to encourage them to economize on medical expenses rather than utilize them.
However, unused account balances at termination of employment cannot be paid out.118.6 A plan that provided for payout (in cash or other benefits) would be subject to the medical flexible spending account (FSA) rules under §125.119 An HRA comes within the definition of an FSA in §106(c)(2), but is not subject to the regulations under  §125 that govern FSAs.120
118.6See  Rev. Rul. 2005-24.
119Notice 2002-45, Part II.
120Id., Parts I and VIII.
Comment: In order to take full advantage of the carryover feature of an HRA, a participant may wish to elect coverage under an FSA as well. If FSA reimbursements were used first, unneeded HRA reimbursements could be saved for future use. The IRS takes the position that benefits can be paid first from a medical FSA only if certain conditions are satisfied. Any medical expense that is reimbursible by both plans ordinarily must be reimbursed first under the HRA. This rule may be overridden by the plan document if it specifies, prior to the beginning of an FSA plan year, that reimbursement must be made from the FSA, and once the FSA is exhausted, from the HRA.121
121Id., Part V. See Rev. Rul. 2004-45, 2004-22 I.R.B. 971, which includes guidance on reimbursements under HSAs, FSAs and IRAs.
In contrast to FSAs, HRAs need not credit the full annual reimbursement amount at the beginning of a benefit period.122 An employer may credit an HRA on a monthly or other basis so that participants who terminate employment during the year are not entitled to the full year's reimbursement amount.
122Notice 2002-45, Part IV.
HRAs also are subject to a variety of statutory rules such as:

•  the deduction limitations under  §§419, 419A and 404;
•  the nondiscrimination requirements under HIPAA in addition to other HIPAA requirements;
•  the requirements for welfare benefit plans under ERISA; and123
•  the COBRA continuation coverage requirements.124
123Id., Part VIII.
124Id. at Part VII.
3.	Medical Care
a.	Definition
In order to be excludible under §105, a payment must generally be a reimbursement for one of the types of expenses that can give rise to deductions under §213. These include, under §213(d), expenditures not only for the diagnosis, treatment or prevention of disease, or for the purpose of affecting a structure or function of the body, but also for transportation primarily for and essential to the foregoing, for qualified long-term care services, and for insurance covering such medical care, transportation or for any qualified long-term care insurance contract.125
125The hospital insurance components of Social Security taxes withheld from employees' compensation under  §3101(b) do not constitute insurance premiums, and presumably may not be excluded from gross income as reimbursements under §105(b). Rev. Rul. 66-216, 1966-2 C.B. 100. But see Rev. Rul. 67-360, 1967-2 C.B. 71 (employer reimbursements for Medicare Part B supplementary medical insurance can be excluded (if not previously deducted under §213)).
The IRS also treats over-the-counter medication as medical expenses for purposes of §105.126 Thus, an employer may pay or reimburse the cost of nonprescription medicine or drugs through its health benefit plan. However, expenses that merely are beneficial to general health, such as dietary supplements, are not eligible.
126Rev. Rul. 2003-102, 2003-38 I.R.B. 559.
Note: Although the IRS referred only to medicines and drugs, its interpretation would also apply to medical supplies.127
127See Regs. §1.213-1(e)(1),  (2).
Medical care includes dental care.128 However, expenses for cosmetic surgery are excluded under  §213(d)(9) unless necessary to correct a congenital deformity, personal injury resulting from an accident or trauma, or disfiguring disease.129
128Regs. §1.213-1(e)(1)(ii).
129See Rev. Rul. 2003-57, 2003-22 I.R.B. 959 (teeth whitening expenses not deductible but breast cancer reconstruction surgery and vision correction surgery are deductible medical expenses).
Note: The limits on deductible amounts in  §213 have no relevance to  §105; the cross-reference to  §213 is to the definition of medical care only.
b.	Dependents
The expenses within the ambit of §105(b) are those incurred by an employee for medical care for his or her spouse, dependents and self. The applicable definition of dependent, in §152,130 comprehends a broad range of persons related by marriage as well as by blood, and includes certain unrelated members of an employee's household. The requirement that cuts across all of the categories of dependents is that the employee provide over half of each dependent's support.
130The Working Families Tax Relief Act of 2004 (WFTRA), P.L. 108-311, §201, amended the definition of dependent in §152, effective for tax years beginning Jan. 1, 2005. However, for purposes of  §105(b), an individual's status as a dependent is determined without regard to §152(b)(1),  (2) and  (d)(1)(B), as amended.  §105(b), as amended by WFTRA, §207(a).
Comment: A person can be a dependent for  §105(b) purposes even if he or she cannot be claimed as a dependent on the employee's tax return under  §151(c) because his or her income exceeds the stated exemption amount in a given year.
An increasingly common issue is whether coverage can be provided tax free to an employee's domestic partner. Unless such a domestic partner is a spouse under state law, benefits are excludible only if the domestic partner qualifies as a dependent under §152. If not, benefits under a noninsured plan are taxable to the employee.131
131See PLR 9603011.
Note: Under an insured plan, the value of the coverage for the domestic partner is includible in the employee's income, and insurance benefits are excludible under §104(a)(3). See II, C, above.
Under §152(f)(3) a domestic partner cannot qualify as a dependent if the "relationship" is in violation of local law.132 For a further discussion of domestic partners, see IV, B, below.
132Former §152(b)(5) was amended and redesignated as  §152(f)(3) by P.L. 108-311, §201, effective for tax years beginning Jan. 1, 2005. See PLR 200339001.
C. Permanent Injury Payments
A payment received by an employee under accident or health insurance or under an accident or health plan is excludible under  §105(c) to the extent it is:

(1) for the permanent loss or loss of use of a member or function of the body, or for permanent disfigurement; and
(2) based on the nature of the injury (rather than the expense incurred) without regard to the length of absence from work.133 Section 105(c) applies whether the injury is to the employee, his spouse, or a dependent as defined in §152.134
133Though Regs. §1.105-3 focuses on the criterion that payments be unrelated to the period of absence, the Tax Court treats §105(c)(2) as having two separate tests that must be satisfied. SeeHines v. Comr., 72 T.C. 715, 720 (1979) (payment made to former airline pilot because his heart attack made it impossible for him to continue his occupation was nevertheless includible in income, on the ground that his heart, although somewhat damaged, continued to function normally). CompareWood v. U.S., 590 F.2d 321 (9th Cir. 1979) (payment from qualified profit-sharing plan held excludible under  §105(c)). See also CCA 200336033 (disability payments to participant who suffered coronary artery spasm not excudible under §105(c) even though participant was deemed permanently disabled under disability plan).
134The Working Families Tax Relief Act of 2004 (WFTRA), P.L. 108-311, §201 amended the definition of dependent in §152, effective for tax years beginning Jan. 1, 2005. However, for purposes of  §105(c)(1), an individual's status as a dependent is determined without regard to §152(b)(1),  (2) and  (d)(1)(B), as amended. §105(c)(1), as amended by WFTRA, §207(9).
Loss or loss of use of a bodily member or function includes (but is not limited to) loss or loss of use of an appendage, the loss of an eye, loss of substantially all of the vision of an eye, and the loss of substantially all of the hearing in one or both ears.135 However, the fact that an injury makes it impossible for an employee to continue his particular job does not necessarily make it a loss of use of a function of the body.136
135Regs. §1.105-3.
136West v. Comr., T.C. Memo 1992-617 (injury resulting in construction worker's partial loss of back function which limited him to sedentary work held not to be loss of bodily member or bodily function).
The IRS also has taken the position that permanent loss of use of a function of the body includes permanent disability caused by illness.
Examples: An indemnity payment under an employer's group life or disability insurance policy to an employee disabled by terminal cancer is excludible.137
A $100,000 payment made by a hospital to an employee who contracts HIV on the job is excludible because of a permanent loss of immune function.138
137Rev. Rul. 63-181, 1963-2 C.B. 74.
138PLR 9321068.
The IRS argued successfully in Beisler v. Comr.,139 however, that disability benefits are not excludible under §105(c) unless they vary according to the type and severity of the injury. Even the National Football League Player Retirement Plan, which in 1975 provided disability benefits in the event of at least 50% loss of use of neck or back, 60% loss of use of arm or leg, or 80% loss of use of hand or foot, did not satisfy this requirement.
139814 F.2d 1304 (9th Cir. 1987) (en banc). The court distinguished Rev. Rul. 63-181 on the ground that the plan it dealt with provided benefits only if disability was total and permanent and, thus, was not required to relate the amount to the type and severity of the injury.
The other key factor in establishing applicability of  §105(c) is showing that the absence was not in lieu of compensation lost during absence from work.140
140Turner v. U.S., 95-2 USTC ¶50,381 (E.D. Cal. 1995).
Example: A disabled employee may not exclude under §105(c) a lump-sum payment in lieu of monthly disability insurance benefits.141 The fact that an offset to employer benefits varies with the severity of the injury does not qualify the plan benefit under §105(c). The net plan benefit would be in inverse proportion to the severity of the injury.142
141Rev. Rul. 74-603, 1974-2 C.B. 35.
142Turner.
The term "disfigurement" is not defined in the Code. Regs. §1.105-3 provides that it "be given interpretation in light of all the facts and circumstances."
D. Disability Retirement Benefits
Recipients of disability retirement payments are provided a tax credit under §22. Section 22 provides that a "qualified individual" is allowed a credit equal to 15% of the individual's "Section 22 amount" for the taxable year. A qualified individual, for this purpose, is defined as any individual: (1) who has attained age 65 before the close of the taxable year; or (2) who retired on disability before the close of the taxable year and who, upon retirement, was permanently and totally disabled.143 The §22 credit is not available to a nonresident alien.144
143§22(b).
144§22(f).
An individual's "Section 22 amount" for a taxable year is his "initial amount," subject to certain reductions.145 The "initial amount" is: (1) $5,000 for a single individual or a joint return if only one spouse is a qualified individual; (2) $7,500 for a joint return if both spouses are qualified individuals; and (3) $3,750 for a married individual filing separately. However, if a qualified individual has not attained age 65 before the close of the taxable year (unless both spouses are qualified individuals and file jointly), the "initial amount" may not exceed disability income for the taxable year.146 For married taxpayers filing jointly,  §22(c)(2)(B)(ii) provides that, if both spouses have not reached age 65 before the close of the taxable year, the initial amount may not exceed the sum of the spouses' disability income. If the spouses file jointly and one spouse has reached age 65 by the end of the taxable year, the initial amount may not exceed the sum of $5,000 plus the disability income of the spouse who has not yet attained age 65. Disability income, for this purpose, means the aggregate amount includible in the individual's gross income for the taxable year under §§72 and 105(a), to the extent that such amount constitutes wages (or payments in lieu of wages) for the period during which the individual is absent from work on account of permanent and total disability.
145§22(c).
146§22(c)(2)(B).
The initial amount is reduced by the sum of the amounts received by the individual (or, in the case of a joint return, by either spouse), as a pension, annuity or disability benefit:

(i) which is excluded from gross income and payable under --
(I) title II of the Social Security Act,
(II) the Railroad Retirement Act of 1974, or
(III) a law administered by the Veterans' Administration; or
(ii) which is excluded from gross income under any provision of law not contained in this title.147 No reduction in the initial amount is to be made under  §22(c)(3)(A)(i)(III) for any amount described in §104(a)(4). Further, for purposes of §22(c)(3)(A), any amount treated as a Social Security benefit under  §86(d)(3) is considered a benefit payable under title II of the Social Security Act.
147§22(c)(3)(A).
The "initial amount," reduced per  §22(c)(3), yields the  §22 amount unless the adjusted gross income limit of §22(d) applies. Under this limit, if the taxpayer's adjusted gross income exceeds: (1) $7,500 for single individuals; (2) $10,000 for married taxpayers filing jointly; or (3) $5,000 for married taxpayers filing separately, the initial amount must be reduced by half the amount by which the taxpayer's adjusted gross income exceeds the relevant adjusted gross income limit in arriving at the §22 amount.
Section 22(e) provides certain interpretive rules. First, a married couple, to claim the credit, must file jointly unless the couple is living apart at all times during the taxable year. Second, marital status for §22 purposes is determined under §7703. Finally, §22(e)(3) provides that an individual is considered permanently and totally disabled for credit purposes if he is unable to engage in any gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last not less than 12 months. An individual will not be considered permanently and totally disabled unless he furnishes proof of the existence of the disability in the form and manner, and at such times, as may be required.
E. Plan Requirement
Cutting across subsections (b) and (c) of  §105 is the requirement that benefits, if not received through insurance, be received through an accident or health plan for employees in order to be excludible. In most respects, the plan requirement applies in the same way to both subsections. The arrangement must satisfy certain minimal formal requisites in order to constitute a plan under §105(e). It must provide accident or health benefits, instead of or in addition to some other type(s) of benefits. Also, it must cover persons in their capacities as employees, rather than with reference to some other status, such as stock ownership.
1.	Existence of Plan
Regs. §1.105-5 spells out the formal requisites for a plan within the meaning of §105(e). An arrangement for accident or health benefits need not be in writing to constitute a plan, but may be simply a policy or custom.
Note: ERISA requires that accident and health plans be committed to writing. See XII, D, 1, below.
Employees' rights under a plan need not be enforceable. However, if they are not, the plan must have been communicated to a covered employee before the onset of his illness or the occurrence of his injury.
Comment: The requirement that the plan be communicated before illness or injury seems to be intended to prevent claims of exclusion under §105 for ad hoc payments.148
148American Foundry v. Comr., 59 T.C. 231 (1972), aff'd and rev'd in part, 536 F.2d 289 (9th Cir. 1976), can be read as supporting this view insofar as it deals with the board of directors resolution concerning disability benefits.
If a plan is communicated to employees as a compensatory benefit and only can be modified prospectively, so that employees' rights under the plan are enforceable, it can cover pre-existing illnesses.149 However, it cannot reimburse expenses already incurred before the plan is adopted.150
149Rev. Rul. 71-403, 1971-2 C.B. 91.
150American Family Mutual Ins. Co. v. U.S., 815 F. Supp. 1206 (W.D. Wis. 1992); see also  Wollenburg v. U.S., 75 F. Supp.2d 1032 (D. Neb. 1999) (employee may not exclude from gross income under §105(b) medical expense reimbursements made by employer between retroactive effective date of medical expense reimbursement plan and date the plan was adopted); Rev. Rul. 2002-58, 2002-38 I.R.B. 541 (payments received under medical expense reimbursement plan for medical expenses incurred by exployee before plan adopted are not excludible under  §105(b)).
A plan presupposes the existence of principles governing the scope of coverage and benefits.151 However, the principles need not be articulated if the employer's practice is consistent.152 Failure to establish all the terms of the plan is not necessarily fatal.153
151Lang v. Comr., 41 T.C. 352 (1963).
152Greer v. Comr., 70 T.C. 294 (1978), aff'd, 634 F.2d 1044 (6th Cir. 1980), acq., 1979-1 C.B. 1.
153Pickle v. Comr., T.C. Memo 1971-304. However, see Levine v. Comr., 50 T.C. 422 (1968), where failure to specify the duration of disability benefits led the court to conclude that benefits paid to the taxpayer over a period of 5 years were made by reason of his ownership of a majority of the stock of the employer rather than pursuant to the disability plan.
The regulations provide that a plan may cover a class of employees or only a single employee. However, the IRS has often contended that an arrangement covering a single employee is not a plan "for employees" under §105(d) if the employee is a controlling stockholder (see E, 3, below).
2.	Sickness or Injury Benefits
a.	Employee Election
Sickness or injury benefits include, of course, medical expense reimbursements and payments for loss of use of bodily members or functions excludible under subsections (b) and (c), respectively, of  §105. However, an employee cannot transform taxable compensation into excludible medical benefits simply by arranging with his employer to divert directly to a provider of medical services or an accident and health insurer amounts that the employee is entitled to receive in cash. In general, no amount the employee would have received even if he had not incurred the medical expenses is subject to  §105(b).154
154Regs. §1.105-2. An exception would be medical benefits elected under a cafeteria plan described in §125. See IV, below.
Example: Amounts representing accrued sick leave applied at retirement at the employee's election to accident and health insurance cannot be excluded from gross income.155
155See Rev. Rul. 75-539, 1975-2 C.B. 45, which mentions only §106 as a possible basis for excludibility.
It is possible to substitute excludible medical benefits for unused sick leave or vacation pay. Medical benefits would be excludible if the employee has no right to receive cash instead.156
156Compare PLRs 9515010 and 9323006 with PLR 9419025 (retiring employee who relinquished right to cash payment for accrued sick leave in exchange for additional pension service credit recognized taxable income under §451 in amount of cash employee was entitled to receive).
b.	Pension and Profit-Sharing Plans
The principal difficulties in distinguishing sickness and injury benefits from other benefits arise in connection with tax-qualified pension, profit-sharing and stock bonus plans. Qualified profit-sharing and stock bonus plans may pay benefits upon separation from service by reason of disability.157 Qualified pension plans may pay benefits only upon retirement, but may pay retirement and medical benefits to employees who terminate by reason of disability.158
157Regs.  §1.401-1(b)(1)(ii) and (iii). Plan contributions may be used to purchase accident and health insurance, so long as the amounts used are within the limits that apply to life insurance premiums. Rev. Rul. 61-164, 1961-2 C.B. 99.
158Regs.  §§1.401-1(b)(1)(i) and 1.401-14.
The IRS's view is that ostensible sickness or injury benefits paid under qualified plans are subject to §105, however, only if different in amount or in timing from other plan benefits.
Note: The IRS's treatment of a person entitled to workers' compensation act benefits, but who also qualifies for a larger benefit based on age and length of service, is exactly the opposite. The amount the person would have received had he not also qualified for regular retirement benefits is excludible under §104(a)(1).159
159See II, A, above.
This view did not at first find acceptance in the courts. The taxpayer in Stewart v. U.S.160 elicited a holding that the  §105(d) exclusion applied to pension payments that were available both by reason of disability and by reason of satisfaction of the age and service requirements for early retirement. And in Wood v. U.S.,161 the court held that an employee could exclude a lump-sum distribution from a profit-sharing plan even though 85% of his account balance was vested and payable upon separation from service for any reason. Both courts could have ruled on narrower grounds because, in Stewart, early retirement required consent of the employer (which was routinely given), and, in Wood, the distribution included the 15% nonvested portion of the employee's account because he was disabled. However, each court made clear its rejection of the IRS postulate that an amount payable in the absence of disability cannot be excluded under §105.
160313 F. Supp. 195 (W.D. Pa. 1970).
161590 F.2d 321 (9th Cir. 1979). See also Masterson v. U.S., 478 F. Supp. 454 (N.D. Ill. 1979).
In Caplin v. U.S.,162 however, the court stated that a provision for full vesting in the event of disability is not sufficient to make a profit-sharing plan an accident or health plan as well. It concluded that even if the taxpayer's benefit had been processed as a disability benefit based on adequate evidence of disability, instead of a benefit vested by years of service, it would not have been excludible under §105(c). The Tax Court has also adopted this view.163
162718 F.2d 544, 4 EBC 2142 (2d Cir. 1983).
163See Gordon v. Comr., 88 T.C. 630, 8 EBC 1336 (1987) (disability provision in plan was merely one of several events that could trigger participant's claim to accrued retirement benefits); Hall Est. v. Comr., T.C. Memo 1996-93 (petitioners failed to clearly prove that pension plan was intended to serve dual purpose of providing accident or health benefits as well as retirement benefits; disability provision in plan was merely one of several events that could trigger participant's claim to accrued retirement benefits).
Moreover, the IRS has taken the position that under no circumstances may a qualified profit-sharing plan distribution be subject to  §105(b). Rev. Rul. 69-141164 concluded that because such a plan is a vehicle for deferral of compensation for services rendered, distributions cannot constitute excludible medical expense reimbursements. In holding a lump-sum distribution from a profit-sharing plan excludible under §105(c), Wood brought the viability of this position into question.
1641969-1 C.B. 48.
The rationale of Rev. Rul. 69-141 makes it difficult to understand how profit-sharing plan benefits could have constituted disability retirement benefits excludible under former §105(d). However, Regs. §1.72-15(a) and (f) states that distributions from profit-sharing plans can be so excludible, and Rev. Rul. 77-123165 leaves open this possibility. In addressing excludibility of payments under an annuity distributed from a profit-sharing plan to a disability retiree, that revenue ruling refers to the principles applicable to pension plans and ignores Rev. Rul. 69-141.
1651977-1 C.B. 28.
A disability benefit provided under a qualified pension plan independent of and in addition to the normal retirement benefit is treated by the IRS as a payment made under an accident or health plan under  §105(e).166 A disability benefit equal in value to, but available earlier than, a regular retirement benefit, or a disability benefit larger than a regular retirement benefit commencing at the same time, apparently is subject to  §105.167 Medical benefits paid from a qualified pension plan to retirees are subject to §105(b).168
166Rev. Rul. 59-158, 1959-1 C.B. 34, dealing with a plan under which the normal retirement benefit commenced at age 65 based on service including any period during which disability retirement benefits were paid.
167Regs. §1.72-15(a),  (b) and  (f).
168Regs. §1.72-15(h). See Regs.  §1.401-14.
c.	Other Employee Plans
It might be possible to exclude under  §105(b) benefits received from other types of employer plans. However, as in the case of retirement plans, the benefit would have to be different from the benefit the plan ordinarily provides.
Example: The income from exercise of a stock option by a disabled optionee could not be excludible, at least unless the optionee could not have exercised had he not been disabled.169
169See Fisher v. Comr., 2 F.3d 1148 (1st Cir. 1993) (unpub. opin.).
3.	Plan for Employees
The principal battleground in the area of taxation of sickness and injury benefits has been the "for employees" language in §105(e).
Medical expense reimbursement plans and disability benefit plans were popular among owners of closely held corporations. Availability of such plans was frequently cited by tax advisers as an advantage of conducting business in the corporate form.170 The IRS has often assailed plans which cover only the controlling shareholder or shareholders. The seminal case is Larkin v. Comr.,171 involving a medical expense reimbursement plan established by a corporation owned in equal shares by two brothers. Because the plan had no objective participation criteria, covered the shareholders' father, whose modest salary bespoke a relatively insignificant role in the corporation's business, and provided only nominal benefits to the only unrelated employee covered by the plan, the court determined that the plan was intended to benefit primarily the stockholders. Therefore, the plan failed to satisfy the requirement of §105(e) that it be for employees.
170See,e.g., Smithback Plumbing, Inc. v. U.S., 76-1 USTC ¶9139 (Ct. Cl. 1976).
17148 T.C. 629 (1967), aff'd, 394 F.2d 494 (1st Cir. 1968).
Inclusion of nonemployees can be fatal to a plan. In Charlie Sturgill Motor Co. v. Comr.,172 the Tax Court disallowed medical expense reimbursements to the two covered shareholder employees because the plan also covered their nonemployee (and nondependent) sons, even though benefits were not paid to the sons.
172T.C. Memo 1973-281.
The Larkin case raised the fundamental question whether a plan that covers only employees who are shareholders of the employer can constitute an accident or health plan under §105. The Tax Court answered the question affirmatively in Bogene, Inc. v. Comr.,173 Seidel v. Comr.,174 and Epstein v. Comr.175 Each plan covered only stockholder-employees, but in none of them were benefits proportional to stock ownership.
173T.C. Memo 1968-147.
174T.C. Memo 1971-238.
175T.C. Memo 1972-53.
Comment: Not only should participation criteria for a §105 plan be cast in terms of employment classification, but limits on benefits should be a function of some criterion other than percentage of ownership. Limiting eligibility in a medical expense reimbursement plan, or tying benefits to salary, could of course result in excess reimbursements as described in III, B, 2, c, above.
A sole stockholder who wishes to establish an employer plan covering him alone faces the most onerous burden. Smithback Plumbing Inc. v. U.S.176 illustrates the difficulty of overcoming the inference that such a plan is designed to benefit the stockholder in that capacity rather than as employee. However, Smith v. Comr.177 suggests that such a plan can nevertheless succeed. In Smith, the Tax Court approved a plan which covered Mr. and Mrs. Smith, who owned all the stock of their employer as community property.
17676-1 USTC ¶9139 (Ct. Cl. 1976); see also Kennedy v. Comr., T.C. Memo 1977-210.
177T.C. Memo 1970-243.
If a plan is determined to be for stockholders, rather than employees, the consequences can be more detrimental than just inclusion of benefits in the gross incomes of the employees. In Larkin, payments under the medical expense reimbursement plan were treated as dividends, depriving the employer of its deductions for the payments, and in American Foundry v. Comr.,178 the Tax Court treated disability payments in the same manner. But in American Foundry, the Tax Court held that medical expense reimbursements, which it also determined to be nonexcludible, were compensatory and thus deductible by the employer.
17859 T.C. 231 (1972), aff'd and rev'd in part, 536 F.2d 289 (9th Cir. 1976).
F. Funding
1.	VEBAs
An employer that provides sickness or injury benefits on a self-insured basis may nevertheless wish to fund its commitment. If employees make contributions to a noninsured plan, their contributions constitute plan assets which must be held in trust (see XIII, D, 2, below). The employer may also voluntarily create a trust fund beyond the reach of its creditors for the accumulation of its own contributions in order to give its employees the assurance that assets will be available to provide the promised benefits. A collective bargaining agreement may require such contributions and segregation of assets.
The taxation of benefits received from and contributions made to a trust fund established for the payment of costs incurred from sickness and disability is governed by §§104, 105, 106 and 419. The trust itself can be tax exempt under  §501(c)(9), if it meets the requirements thereof.
Note: Trust income may, however, in certain cases be taxable under §511(a)(2)(A) as unrelated business taxable income under §512(a)(3). See 870 T.M., Tax-Exempt Organizations: Reporting, Disclosure and Other Procedural Aspects (Estates, Gifts, and Trusts Series).
The statutory requirements for tax-exempt status concern the nature of benefits that may be paid, the criteria for eligibility, and the voluntariness of participation. Besides benefits of the types that can be excluded under  §105(b) and  (c), a trust may provide death benefits and other benefits designed to prevent illness or injury or protect against loss of earnings.179 A trust established to satisfy an employer's legal obligation to pay workers' compensation benefits cannot, however, qualify for tax-exempt status.180
179Regs.  §1.501(c)(9)-3(d). Dependents who may be benefited by a §501(c)(9) trust include all persons who are dependents for  §105(b) purposes. Regs.  §1.501(c)(9)-3(a).
180Rev. Rul. 74-18, 1974-1 C.B. 139.
Example: A §501(c)(9) trust may pay vacation benefits or subsidize recreational activities, and it may pay severance benefits other than at mandatory or voluntary retirement.
Participation in the trust must be voluntary. Thus, if the plan of which the trust is a part requires employee contributions, participation may not be required as a condition of employment.181 Participation in a contributory plan may be required, however, pursuant to a collective bargaining agreement.182
181Regs. §1.501(c)(9)-2(c)(2).
182Id.
The trust must, in general, benefit only employees. Under Regs. §1.501(c)(9)-2(b), employees for this purpose need not be employees by reference only to the usual common law criteria. They also can include employees who are absent from work on leave, employees who are working temporarily for another employer or as independent contractors, or employees who have been terminated by reason of retirement, disability or layoff after having become participants.
Example: An individual who in the normal course of employment is employed intermittently by more than one employer in an industry characterized by short-term employment by several different employers, such as in the construction industry, will not, by reason of temporary unemployment, cease to be an employee. A trust may benefit others, even if they are self-employed, as long as the nonqualified participants do not constitute more than 10% of the group benefited.183
183Regs.  §1.501(c)(9)-2(a)(1).
Section 505 imposes the additional condition that the plan of which the trust is a part be nondiscriminatory. For a full discussion of these rules, see 395 T.M., VEBAs and Other Self-Insured Arrangements.
2.	The §401(h) Account
a.	Contribution and Other Limits
Section 401(h) permits an employer to use a pension or annuity plan to provide medical benefits for retired employees, their spouses and dependents. Contributions to a  §401(h) account may not exceed 25% of the aggregate contributions to the plan. This "subordinate" test applies to contributions made after the date the  §401(h) account is established. Thus, the earlier the §401(h) account is established, the more contributions an employer may make to the account.
Section 401(h) also requires that:

(1) a separate account be established and maintained for medical benefits;
(2) employer contributions to the separate account be reasonable and ascertainable;
(3) it be impossible, at any time before the satisfaction of all liabilities under the plan to provide such benefits, for any part of the corpus or income of the separate account to be used for, or diverted to, any purpose other than providing such benefits;
(4) once all liabilities under the plan to provide medical benefits are satisfied, any amount remaining in such separate account must, under the terms of the plan, be returned to the employer; and
(5) a separate account be established and maintained for each "key employee" (within the meaning of §416(i)) (and the key employee's spouse and dependents) and such benefits (to the extent attributable to plan years beginning after March 31, 1984, for which the employee is a key employee) be payable to such employee (and the employee's spouse and dependents) from such separate account.
The coverage rules require that benefits must be provided only to those who are eligible to receive retirement benefits under the pension plan or retired from an employer providing such medical benefits by reason of permanent disability.184 A plan that provides medical benefits under  §401(h) may not discriminate in favor of officers, shareholders, supervisory employees, or highly compensated employees.185
184Regs.  §1.401-14(b)(1).
185Regs.  §1.401-14(b)(2).
Example: An ancillary health insurance benefit provided by a retirement plan is a "benefit, right or feature" of that plan.186 As such, each medical benefit must satisfy the  §410(b) coverage test.187 If two or more ancillary benefits are not available on substantially the same terms, they are considered different ancillary benefits, requiring separate application of the §410(b) coverage test for each benefit.188
186Regs.  §1.401(a)(4)-4(a).
187Regs. §1.401(a)(4)-4(b). Note that the average benefit percentage test of Regs. §1.410(b)-5 is not applicable to this determination.
188Regs. §1.401(a)(4)-4(e)(2).
The test for nondiscrimination is performed independent of the pension benefit portion of the plan. A determination that either portion of the plan discriminates can cause both portions to fail to qualify under  §401.189
189Id.
Deductibility of contributions to a §401(h) account is subject to limits in addition to the 25% limit. Deductions cannot exceed the total cost of providing medical benefits, determined in accordance with any generally accepted actuarial method that is reasonable under the circumstances. The deduction limit for any given year is the greater of:

(1) an amount determined by distributing the remaining unfunded costs of past and current service credits as a level amount; or as a level percentage of compensation, over the remaining future service of each employee; or
(2) 10% of the cost that would be required to fund completely or purchase such medical benefits.190
190See Regs.  §1.404(a)-3(f).
In a private ruling,191 the IRS ruled that in determining the deductible limit under §404 for the employer's contributions to §401(h) accounts, future medical claims experience may be estimated. This estimate is to take into consideration anticipated future increases in the cost of medical care that are reasonably related to the employer's recent claims experience and the interest rate assumption used to calculate the  §401(h) account contributions.
191PLR 98340037.
b.	Use of Excess Pension Plan Assets
If a plan is fully funded, no contributions would be permitted to a §401(h) account. However, it is possible for a limited time to transfer excess pension assets to a §401(h) account, provided the requirements of §420 are satisfied. Section 420(b)(5) closes this avenue for funding effective December 31, 2013.
The excess pension assets available for transfer generally are those that exceed 125% of the plan's "current liability."192 However, if the plan's accrued liability determined under  §412(c)(7)(A)(i) is greater than 125% of its current liability, only the assets in excess of the accrued liability are available for transfer.
192§420(e)(2).
A transfer under §420 imposes other constraints on the employer. First,  §420(e) requires that the accrued pension benefits must become nonforfeitable as if the plan had terminated immediately before the transfer.
Second, the employer must continue retiree health benefits for a period of four taxable years after the taxable year in which the transfer is made. For transfers made before December 18, 1999, the employer's obligation was to provide substantially the same benefits throughout this benefit maintenance period. For transfers after December 17, 1999, the employer's obligation is to maintain the employer's average per capita cost of benefits for the cost maintenance period. Like the benefit maintenance period, the cost maintenance period consists of the taxable year of the transfer and the four succeeding taxable years.
The change from a "maintenance of benefit" requirement to a "maintenance of cost" requirement has the potential to impose different standards during the same period of time with respect to different annual transfers. To prevent this, Congress provided that the benefit maintenance requirement remains in effect until the benefit maintenance period for the last pre-December 18, 1999 transfer has expired.193
193P.L. 106-170, §535(c)(2).
The benefit continuation requirement does not apply to key employee accounts.194 It can be applied separately to Medicare and non-Medicare eligible retirees.195
194§420(e)(1)(D).
195§420(c)(3)(C).
The regulations address employers that significantly reduce retiree health coverage during the cost maintenance period.196 Because the minimum cost requirement relates to per capita cost, an employer could satisfy the minimum cost requirement by maintaining the average cost even though the employer reduces the number of individuals covered by the health plan.
196Regs. §1.420-1.
Further, employers will not fail the minimum cost requirement if the employer reduces employer cost by an amount not in excess of the reduction in costs that would have occurred if the employer made the maximum permissible reduction allowed under the regulations.197 Thus, insignificant cost reductions are permitted.
197§420(c)(3)(E)(ii), as added by the American jobs Creation Act (AJCA), P.L. 108-357, §709(b)(1), effective for tax years ending after Oct. 22, 2004.
The minimum cost requirement of §420(c)(3) is not met if the employer significantly reduces retiree health coverage during the cost maintenance period.198 Whether an employer significantly reduces retiree health coverage is measured by looking at the number of individuals (retirees, their spouses, and dependents) who lost coverage during the cost maintenance period as a result of employer actions, measured on both an annual basis and a cumulative basis. An employer does not satisfy the minimum cost requirement if the number of individuals provided with applicable health benefits falls, due to employer action, by more than 10% in any year, or if the sum of the annual percentage decreases during the cost maintenance period is more than 20%.199
198Regs. §1.420-1(a). Regs. §1.420-1(a). See Rev. Rul. 2004-65, 2004-27 I.R.B. 1 (employer reduces retiree health coverage under §420(c)(3)(E) if covered individual accepts employer's offer to waive such coverage in exchange for enhanced pension benefits; offer constitutes employer action under Regs. §1.420-1(b)(4)).
199Regs. §1.420-1(b)(1).
In Rev. Rul. 2005-60,199.1 the IRS ruled that the employer subsidy for maintaining prescription drug coverage provided under §1860D-22 of the Social Security Act (SSA)199.2 is not taken into account in computing the applicable employer cost for purposes of determining whether the minimum cost requirement of §420(c)(3) is satisfied. The applicable employer cost under §420(c)(3) is based on qualified current retiree health liabilities, which in turn, is based on aggregate amounts which would be allowable as a deduction to the employer for the taxable year with respect to applicable health benefits. In accordance with §139A, the determination of the aggregate amounts which would be allowable as a deduction to the employer for the taxable year with respect to applicable health benefits is made without regard to the employer subsidy for maintaining prescription drug coverage.  Accordingly, the receipt of that subsidy is not taken into account in determining applicable employer cost.
199.12005-37 I.R.B. __.
199.2As added by §101 of the Medicare Prescription Drug, Improvement and Modernization Act of 2003, P.L. 108-173, SSA §1860D-22 provides a subsidy for sponsors of retiree prescription drug plans that provide drug coverage that is at least "actuarially equivalent" to the Medicare Part D benefit. The subsidy is available only with respect to retirees who are eligible for, but do not enroll in, Medicare Part D and who are covered under the employer's retiree prescription drug plan.
The 20% cumulative test applies with respect to transfers of excess pension assets occurring on or after December 18, 1999. However, the regulations take into account any reinstatement of coverage that occurs during the portion of a cost maintenance period that precedes the first day of the first taxable year beginning on or after January 1, 2002 (the initial period). Thus, for purposes of the cumulative test, if an employer reduced retiree health coverage by more than 20%, the employer can, before the end of the initial period, resume providing coverage for individuals who lost coverage and treat those individuals as not having lost coverage. However, if an employer reduces retiree health coverage by more than 20% during the initial period and does not "correct" by again providing coverage for individuals who lost coverage, the employer would fail the cumulative test. Also, the annual test of significant reduction applies only to taxable years beginning on or after January 1, 2002.
For more information on the regulations, see 351 T.M., Plan Qualification -- Pension and Profit-Sharing Plans.
Only one transfer may be made in a taxable year, and the amount transferred is limited to a reasonable estimate of the amount that will be paid out of the §401(h) account during the taxable year of the transfer. Amounts transferred may be used only to pay qualified current retiree health liabilities for the taxable year of the transfer.
The use of a §401(h) account enables an employer to prefund retiree medical benefits on a tax-deductible basis in a manner that offsets FAS 106 liabilities. Furthermore, earnings on the trust income accumulate tax-free. Amounts accumulating in a §401(h) account also provide plan participants with a certain level of assurance that the employer intends to fulfill its obligations to provide retiree health coverage.
For a more complete description of §401(h) accounts, see 351 T.M., Plan Qualification -- Pension and Profit-Sharing Plans.
G. Withholding
As in the case of other forms of compensation, amounts paid to employees by the employer under an accident or health plan for a period of absence from work due to personal injury or sickness are subject to withholding whenever the payments are includible in the employee's gross income.200 Payments subject to withholding do not include:
200Regs.  §31.3401(a)-1(b)(8).

(1) payments excluded from the definition of wages by §3401(a)(1)-(20);
(2) payments excluded from wages under  §3402(e); or
(3) payments to employees who do not expect to incur any income tax liability for the taxable year as provided in  §3402(n).201
Note: Section 3401(a)(20) excludes reimbursements from a self-insured medical plan even if the plan violates the nondiscrimination rules in  §105(h) (see III, B, 2, above).
201Regs. §31.3401(a)-1(b)(8)(i)(c)(1).
Withholding also is required with respect to payments by third party agents of the employer. Status as a third party agent of the employer depends upon whether the third party bears any insurance risk. If the third party is paid an insurance premium and is not reimbursed on a cost plus fee basis, the third party is not an agent of the employer. Payments made by third party agents are considered to be supplemental wages for which the agent may use a flat rate as the amount of tax to be withheld, unless the agent also is the agent for purposes of withholding tax from the employee's regular wages. If the agent also is the agent for purposes of withholding from regular wages, the availability of the flat rate must be defermined under the general rules of Regs. §31.3402(g)-1.201.1
201.1See, e.g., IRS Info. Letter 2005-0066 (taxpayer subject to flat withholding rate of 25% under Regs. §31.3402(g)-1 for disability income paid by insurer acting as employer's agent).
IV. Employer-Provided Accident and Health Coverage
A. In General
The Code provisions that govern the taxability of various types of sickness and injury benefits, §§104 and 105, are followed by  §106, which deals with the tax consequences to employees of employer-provided coverage. The general rule of  §106 is that coverage under an accident or health plan that is financed by an employer is not taxable to the employee. The exclusion applies whether the contributions are made in the form of insurance premiums or to a trust or fund.202
202Regs. §1.106-1; see PLR 9325011; Rev. Rul. 70-179, 1970-1 C.B. 23 (health insurance premiums paid by conference of churches for ministers employed by churches within conference are excludible; conference obtained its revenue through assessments paid by member churches).
The §106 exclusion can apply to employer contributions made to fund benefits to be provided in the future. The IRS ruled that payments could be excluded that were made to an insurance company under an agency agreement to provide funds for retiree medical coverage.203 Another ruling indicated that an employer contribution to fund lifetime diagnostic benefits to settle employees' medical surveillance claims of an increased risk of cancer are excludible from participant gross incomes under §106.204 Yet, another took the view that the value of consumer cards entitling employees to discounts on medical services and products was excludible under  §106.205
203PLR 9219023.
204PLR 9046023.
205PLR 9814023.
The rule also applies to coverage of employee spouses and dependents before and after death, retired former employees,206 and employees on layoff.207
206Regs. §1.106-1; Rev. Rul. 82-196, 1982-2 C.B. 53. See PLR 9340054 (employer contributions to VEBA measured by unused sick and vacation days on termination of employment are excludible from income under §106 by retired or former employees). See also PLR 200520014 (contributions made to fund and disbursements made from fund for health care plan covering retired employees and their spouses and dependents is excludible from retirees' income under §106).
207Rev. Rul. 85-121, 1985-2 C.B. 57. See also PLR 9612008.
B. Who Is a Dependent?
A growing number of employers are extending health coverage to domestic partners of unmarried employees. The IRS has ruled that the provision of group medical coverage to the domestic partners of employees does not affect the general excludibility of coverage under §106, but the coverage of domestic partners who do not qualify as spouses under state law or as dependents under  §152 constitutes additional compensation to the employees taxable as wages.208 The coverage of domestic partners otherwise would not affect the excludibility under §106 of the amounts contributed by the employer for health insurance benefits for employees, their spouses, and dependents, as defined in  §152.209 Further, amounts received by or on behalf of a domestic partner as payment or reimbursement of benefits under the plan are not included in the income of the employee or domestic partner, to the extent that the coverage for the domestic partner was paid for by employee contributions or the fair market value of the coverage was included in the employee's gross income under  §104(a)(3).
208See PLRs 960311, 9431017, 9231062, 9109060, and 9034048; and FSA 199911012.
209The Working Families Tax Relief Act of 2004 (WFTRA), P.L. 108-311, §201, amended the definition of dependent in §152, effective for tax years beginning Jan. 1, 2005. However, the definitiion of dependent in §152, as amended by WFTRA, remains unchanged for purposes of §106. See Notice 2004-79, 2004-49 I.R.B. 898. Regs. §1.106-1 will be amended to clarify that the definition of dependent for purposes of §106 will be the same definition that applies to §105(b). Until revised Regs. §1.106-1 is issued, taxpayers can rely upon Notice 2004-79. Notice 2004-79, III.
A domestic partner may achieve dependent status under  §152(d)(2)(H) if the domestic partner resides in the household of the employee and receives over half of his or her support from the employee. However, under §152(f)(3), the relationship between the employee and the domestic partner must not violate local law.210
210Former §152(b)(5) was amended and redesignated as  §152(f)(3) by P.L. 108-311, §201, effective for tax years beginning Jan. 1, 2005. PLR 200339001.
Comment: Local law regulating sexual behavior of individuals, such as laws that make sexual relations between two individuals of the same sex illegal, and perhaps local law that would make cohabitation illegal, would be unconstitutional under Lawrence v. Texas.211
211539 U.S. 558  (2003) (Texas criminal sodomy statute invalidated as unconstitutional intrusion on private sexual behavior).
The Defense of Marriage Act,212 §3, defines spouse, for purposes of all federal laws, regulations and interpretations, as only a person of the opposite sex who is a husband or a wife. The IRS confirmed that this legislation displaced state law with respect to marital status for tax purposes.213
212P.L. 104-199.
213PLR 9850011.
Comment: It appears that marital status is not to be defined uniformly for state law purposes. For example, the Massachusetts Supreme Judicial Court held that the statute limiting marital rights to opposite sex couples violated the Massachusetts constitution.214
214Goodridge v. Dept. of Public Health, 798 N.E.2d 941 (Mass. 2003).
C. Taxability of Benefits
Part B of the federal Medicare program, providing voluntary supplementary health insurance, is treated as an accident or health plan for purposes of §106. Consequently, payments of Part B premiums are not taxable to employees who are over age 65 and eligible for Medicare.215 This treatment is consistent with inclusion of such premiums among medical insurance premiums deductible under §213(d)(1)(D). However, the IRS takes the position that Part A, the mandatory portion of Medicare financed through hospital insurance premiums, is not within the scope of §106. Thus, amounts withheld from employees' compensation under §3101(b) (FICA), may not be excluded from gross income as employer contributions to an accident or health plan.216
215Rev. Rul. 67-360, 1967-2 C.B. 71. The same is true for voluntary premiums for Part A hospital insurance paid by persons not eligible for Social Security benefits. Rev. Rul. 79-175, 1979-1 C.B. 117.
216Rev. Rul. 66-216, 1966-2 C.B. 100. Some doubt has been cast on the validity of this position by the IRS's defeat in Turecamo v. Comr., 554 F.2d 564 (2d Cir. 1977), acq., Rev. Rul. 79-173, 1979-1 C.B. 86, which held that Medicare Part A benefits must be disregarded in applying the support test for dependent status under §152, because Part A is analogous to a private medical insurance arrangement rather than to old age benefits under Social Security.
Note: Amounts required to be withheld from employees' compensation pursuant to a state disability statute are deductible under §164(a) as state taxes.217
217Rev. Ruls. 81-191, 1981-2 C.B. 49; 81-192, 1981-2 C.B. 50; 81-193, 1981-2 C.B. 52; 81-194, 1981-2 C.B. 54.
Sickness and injury benefits apparently has the same meaning in §106 as it has in §§104(a)(3) and 105.218 Benefits other than sickness or injury benefits that may be included in a plan are not within the scope of the §106 exclusion, so that contributions attributable to such other benefits are not excludible under §106.219
218Regs. §1.106-1.
219Id.
Example: Premiums paid by an employer to finance an insurance rider that would return to employees a portion of the health insurance premium paid on their behalf, less the value of claims made, is a benefit other than accident and health benefits and therefore cannot be excluded under §106.220
220PLR 8804010. For a discussion of the taxability of other fringe benefits, see 394 T.M., Employee Fringe Benefits.
In contrast to §105, which governs the taxability of employer-financed benefits, §106 requires the existence of a plan even if benefits are provided through insurance. Thus, it is possible that even though benefits received by an employee would be excludible under §105, employer contributions to fund those benefits would be currently taxable to the employee under §106. Section 105 requires a "plan for employees" only if benefits are not provided through insurance.221
221See III, A, above.
Any insurance arrangement likely will satisfy the  §106 requirement of a plan, but the plan might not be considered to be one for employees. Premiums paid by an employer for accident or health insurance for stockholder/employees -- without regard to their employment classification -- might includible by the insured stockholder/employees under §106.222 In fact, the premium payments could, under certain circumstances, be characterized as dividends.223 Any insurance benefits received by the stockholder/employees would, however, appear to be excludible under §105, except for self-employed individuals.224
222See III, E, 3, above, for an analysis of the requirement of §105(e) that a plan be for employees.
223See text in III, E, 3, above.
224§105(g). See discussion in III, A, above.
D. Reimbursements
Payments made directly to employees can be excludible under §106 if paid to reimburse them for accident or health insurance premiums. However, such payments are treated as contributions subject to §106 only if the employer requires -- as a condition of reimbursement -- proof of payment of premiums.225 In general, amounts are considered employer contributions only if employees have no right to use such amounts in a way that would result in current taxation.226
225Cf., Rev. Rul. 61-146, 1961-2 C.B. 25, with Rev. Rul. 75-241, 1975-1 C.B. 316. According to the court in Adkins v. U.S., 882 F.2d 1078 (6th Cir. 1989), the amendment of §106 to exclude employer-provided coverage instead of employer contributions, evidences a congressional intent to tax any payments made to employees in respect of premium payments. However, subsequent private letter rulings have confirmed that the IRS still follows Rev. Rul. 61-146. See, e.g., PLR 9019023.
226See Rev. Rul. 75-539, 1975-2 C.B. 45, where employees could elect to take accumulated sick leave amounts in cash or have them used to pay accident and health insurance premiums. See also Rev. Rul. 57-33, 1957-1 C.B. 303 (payments made by employers directly to employees for use in purchase of hospitalization and surgical insurance coverage are includible in income even if union assumes responsibility of making sure members spend amounts for such coverage); and PLR 9104050 (option which permits either future receipt of employer contributions as qualified plan distributions or immediate health care benefits makes employer contributions taxable).
Example: A statutory health insurance subsidy paid by the state for retired government employees qualifies for exclusion only if paid directly to the insurer. If the subsidy is paid to the retiree in his monthly pension check and without documentation of the amount of insurance premiums or whether insurance is in force, the retiree has complete control of the funds, and the subsidy does not qualify for exclusion under  §106.227
227See PLR 9242012.
It is not clear whether reimbursement can be excludible only for prior payment of insurance premiums. In a private letter ruling,228 the IRS held that periodic reimbursements during a year would be excludible if actual payment of premiums was verified at the end of the year. The level of verification required in the ruling was not onerous. The employees merely had to report the name of the carrier, the policy or group number, and the amounts and dates of premium payments.
228PLR 8401044; see also Rev. Rul. 61-146 and TAM 9347008.
Obviously, premiums can be reimbursed by an employer tax free only if the employee has paid the premiums. In Rev. Rul. 2002-3,229 In employee salaries were reduced and the employer applied the salary reduction to pay the group insurance policy premiums for the employees. In addition, the employer reimbursed the premium amounts that reduced the employees' after-tax pay so that the employees' salaries were the same as what they would have been without the salary reduction. The IRS concluded that the reimbursement payments for the premiums were includible in the gross income of the employees and were subject to FICA and FUTA taxes. When the employer applied the salary reduction to pay the premiums, those payments were excludible from the employees' gross income under §106 because they were paid by the employer, not the employees. Although the  §106 exclusion applies to the health insurance premiums paid by the employer, there is no employee paid premium for the employer to reimburse.
2292002-3 I.R.B. 316, amplified by Rev. Rul. 2002-80, 2002-49 I.R.B. 925.
Note: The IRS stated that if the premium payments had actually been paid by the employees out of their salaries, the salary amounts from which the payments were made would have been includible in the employees' gross income, but any payments by the employer to reimburse the employees for the premium payments would have been excludible under §106.
An important exception to the general principle under  §106 that election between taxable and nontaxable compensation results in taxation is for contributions under a cafeteria plan described in §125. A cafeteria plan gives participants a choice among one or more nontaxable benefits and one or more taxable benefits. Even though a participant may elect to receive his benefit in the form of cash, he incurs no tax if he instead elects to have the amount used to pay premiums for accident and health insurance which meets the requirements for excludibility under  §105(b) or §106. See 397 T.M., Cafeteria Plans.
Compare a cafeteria plan arrangement with a leave-sharing plan, such as a "leave bank" from which employees suffering medical emergencies receive additional leave donated from other employees. Amounts paid to an employee pursuant to such a plan are includible in the recipient's gross income under §61 as compensation for services rendered to the employer. However, an employee who surrenders leave to such a plan does not realize income and incurs no deductible expense upon surrender of the leave or its use by the recipient.230
230Rev. Rul. 90-29, 1990-1 C.B. 11, clarified by Ann. 92-16, 1992-5 I.R.B. 53. See PLR 9419025; compare PLR 9323006 (employer's payment of accumulated sick leave credit to current or retired employees as supplemental medical benefits, when such employees have no option to receive the credit in cash, is not a §451 taxable event to its employees).
E. Partners and S Corp. Shareholders
Unlike §105, §106 does not define employee to exclude a self-employed individual. However, the IRS has held that §106 does not apply to individuals who are self-employed, or who are treated as self-employed because they are 2% shareholders of S corporations.
Note: A partner can deduct a portion of medical insurance premiums he pays, and could enjoy tax-free coverage through a spouse who is a common law employee of the partnership. See V, A, 2, below, and III, A, above. Accident and health insurance premiums paid by a partnership on behalf of a partner, or by an S corporation on behalf of a 2% shareholder, are deductible by the partnership/corporation under §162 (subject to the capitalization rules of §263). They also are deductible by the partner/shareholder, but only to the extent allowed by §162(l).231
231Rev. Rul. 91-26, 1991-1 C.B. 184.
If the requirements for the exclusion as wages for FICA purposes under §3121(a)(2)(B) are satisfied, amounts paid by an S corporation for accident and health insurance covering a 2% shareholder-employee are not wages for FICA tax purposes, even though the amounts must be included in wages for income tax withholding purposes on the 2% shareholder-employee's Form W-2. However, if the requirements for an exclusion are not satisfied, such amounts must be included in wages for FICA purposes as well as for income tax withholding and reported appropriately on Form W-2.232
232Ann. 92-16, 1992-5 I.R.B. 53.
Comment: Oddly, the IRS ruled that amounts paid by partners for consumer cards entitling them to discounts on medical services and products were not deductible under §162(l) or under §213.233
233PLR 9814023.
V. Employer Deductions
A. General Rule
1.	Common Law Employees
Amounts paid by an employer to finance sickness and injury benefits for its employees generally constitute ordinary and necessary business expenses deductible under §162(a), provided they are used to pay accident and health insurance premiums or to pay or reimburse benefits directly.234 Deductible premiums include premiums paid to an employer's wholly-owned insurance subsidiary.235
234Regs. §1.162-10(a).
235Rev. Rul. 92-93, 1992-2 C.B. 505, as modified by Rev. Rul. 2001-31, 2001-26 I.R.B. 1348.
Note: Contributions to qualified pension, profit-sharing, and stock bonus plans are deductible only under §404, even if used to fund sickness or injury benefits.236 In addition, contributions to a black lung benefit trust described in §501(c)(21) are deductible only in accordance with §192.237
236§404(a).
237§192(a) and  (c)(5).
The timing of deductions is governed by the usual rules depending on whether the employer uses the cash or accrual method of accounting. In Rev. Rul. 78-116,238 the IRS ruled that an accrual basis employer could deduct sick leave for the year in which it was earned because sick leave once earned was nonforfeitable. However, if unused sick leave is accumulated and cashed out at termination of employment, it represents deferred compensation that is deductible, under §404(a)(5), only when paid.239 Certain employer expenditures for health care of its employees presumably would have to be capitalized, such as the cost of construction of a medical facility.
2381978-1 C.B. 143.
239Lundy Packing Co. v. U.S., 302 F. Supp. 182 (E.D.N.C. 1969); Regs. §1.162-10(a).
However, an employer using the accrual method of accounting cannot deduct an amount for covered medical expenses during its taxable year for which reimbursement claims have not been filed. All events necessary to fix the employer's liability are not considered to have occurred until a claim is filed.240
240U.S. v. General Dynamics Corp., 481 U.S. 239, 8 EBC 1489 (1987); see Regs. §1.461-1(a)(2).
Because sickness and injury benefits are in the nature of compensation, it is likely that deductibility is contingent upon the reasonableness of the amounts in each case. Regs. §1.162-10, which deals with deductibility of expenditures for sickness and injury benefits, does not refer to paragraph (1) of  §162(a), the statutory provision covering "a reasonable allowance for salaries or other compensation... ." However, the IRS has argued, and the Tax Court has held, that deduction of medical expense reimbursement payments may be denied on the grounds that the payments, together with other compensation, exceed a reasonable allowance.241
241Sanders & Sons, Inc. v. Comr., T.C. Memo 1967-142.
It is not necessary that employer payments be excludible by employees under §105 or  §106 in order to be deductible by the employer. However, ostensible sickness or disability benefits that are in the nature of dividends, rather than compensation, because they relate to ownership of stock rather than performance of services, are not deductible.242 Premiums are not deductible, however, if the proceeds of a disability insurance policy are payable to the employer rather than the employee. The policy proceeds would constitute exempt income to the company under §104(a)(3), and because the premiums paid by the corporation are allocable to such income, they are nondeductible under  §265(a)(1).243
242Bongiovanni v. Comr., T.C. Memo 1976-131.
243Rugby Productions, Ltd. v. Comr., 100 T.C. 531 (1993).
2.	Self-employed Individuals
Prior to 2003, a self-employed person, could deduct only a portion of the amount paid during the taxable year for health insurance coverage for him or herself, spouse, and dependents under  §162(l).244 The deductible portion was determined as follows.
244See §162(l).
  1999-2001                                                60%          
  2002                                                     70%          
  2003                                                     100%         

The balance paid for health insurance coverage was deductible to the extent allowed by §213.245 In order to be eligible for the  §162(l) deduction, the individual (and the individual's spouse, if applicable) must be not be eligible to participate in any other subsidized health plan maintained by any employer of the taxpayer or spouse.246
245See Rev. Rul. 58-90, 1958-1 C.B. 88.
246The determination as to eligibility for employer-paid health benefits is made on a monthly basis.  §162(l)(2)(B).
Note: This limit on deductibility could be avoided by a self-employed individual whose spouse is a bona fide common law employee in the business. Medical expense reimbursements to the spouse have been held to be deductible business expenses under  §162(a).247
247"Coordinated Issue--Deductibility For Self-Employed Individuals," Daily Tax Rep. (BNA) 4/21/99. See also TAM 9409006, and III, A, above, as to exclusion of benefits from gross income.
The §162(l) deduction also is available to any 2% shareholder of an S corporation (as defined in §1372(a)), but the individual's wages from the S corporation are treated as earned income for this purpose.248 Both a partnership (in the case of premiums paid for a partner) and an S corporation (in the case of premiums paid for a 2% shareholder) can deduct the amount of such premiums. The partner and 2% shareholder would then include the amount of the premium in income, but the §162(l) deduction would be available.249
248§162(l)(5).
249Rev. Rul. 91-26, 1991-1 C.B. 184; Announcement 92-16, 1992-5 C.B. 53.
The §162(l) deduction may not exceed the taxpayer's earned income (as defined in §401(c)) derived from the trade or business with respect to which the plan providing the medical coverage is established.250 The deduction does not reduce income for self-employment tax (SECA) purposes.251 Also, any amount deducted under  §162(l) may not be deducted under  §213(a) (deduction for medical care expenses in excess of 7.5% of adjusted gross income).252
250§162(l)(2)(A). See CCA 200524001, in which the IRS Chief Counsel's Office advised that a sole proprietor: (1) may deduct the cost of health insurance coverage for himself, his spouse and dependents under §162(l) even though the coverage was purchased in his own name; but (2) he may not add the net profits from all his trades and businesses to determine the deduction limit under §162(l)(2)(A). However, the Chief Counsel's Office added, a self-employed individual who has more than one trade or business may deduct his and his family's medical care insurance costs under each specific health insurance plan established under each specific business up to the net earnings of that specific trade or business. For a case in which the taxpayer was denied a deduction because he had no earned income from his business activities, see King v. Comr., T.C. Memo 1996-231.
251§162(l)(4).
252§162(l)(3).
B. Contributions to a Fund
Contributions to a "welfare benefit fund" are deductible under §419 rather than  §162. Section 419 limits the amount of deductible contributions that may be made to accumulate reserves for future years. Reserves are limited to the amount of claims incurred but unpaid as of the end of a taxable year, and related administrative expenses.253 In the case of medical benefits, the reserve required for this purpose can be determined actuarially. Otherwise, the maximum reserve is equal to 35% of the amount of benefits paid in the preceding taxable year.254
253§419A(c)(1).
254See  §419A(c)(5)(B)(ii).
An employer may not automatically claim 35% of its prior year's qualified direct costs as the amount of incurred but unpaid medical claims. The employer still must demonstrate that the estimate of its incurred but unpaid medical claims equal to up to 35% of its qualified direct costs is reasonable.255
255General Signal Corp. v. Comr., 103 T.C. 216, 18 EBC 1932 (1994), aff'd, 142 F.3d 546 (2d Cir. 1998).
Section 419A(c)(2) permits, in addition, a contribution to a reserve for retiree medical benefit costs. The amount that can be deducted each year is to be determined actuarially on a level basis, funded over the working lives of the covered employees. In order for contributions to a reserve under  §419A(c)(2) to be deductible within the account limit of §419A(b), those contributions must be intended actually to accumulate for the purpose of funding post-retirement benefits.256
256General Signal; Parker-Hannifin Corp. v. Comr., 139 F.3d 1090, 21 EBC 2973 (6th Cir. 1998). Section 139A, as added by P.L. 108-173, §1202(a), excludes from income any federal subsidy under §1860D-22 of the Social Security Act that an employer receives for sponsoring a qualified retiree prescription drug plan, effective for tax years ending after Dec. 8, 2003.
Note: It is not clear whether working lives includes the employee's past service at the time funding commences. However, the actuarial determination is subject to a significant statutory limitation. Retiree medical costs have to be projected on the basis of current medical costs.257
257See Wells Fargo & Co. v. Comr., 120 T.C. 69 (2003) (for purposes of  §419A(c)(2), "reserve funded over the working lives of the covered employees" means that assets necessary to satisfy the employer's liability may be accumulated no more rapidly than over the working lives of the covered employees, such that the reserve with respect to an employee can be fully funded no earlier than upon retirement of the employee; the maximum amount of the liability that can be satisfied by the reserve is the amount at the time with respect to which the reserve is computed that, together with future normal costs and interest, will be sufficient upon retirement of each employee to pay future medical claims of the employee when they become due, and that amount must be actuarially determined on a level basis).
The account limits in §419A do not apply to union-sponsored multiemployer plans or any other separate welfare benefit fund maintained pursuant to a collective bargaining agreement. In addition, §419A(f)(6) exempts certain multiple employer plans to which no employer normally makes more than 10% of the total employer contributions.
A welfare benefit fund includes, under  §419(e), a tax-exempt  §501(c)(9) trust or corporation and any taxable medical benefit trust. Many medical benefit insurance arrangements constitute welfare benefit funds as well. The policy is considered to be a fund if the employer has a right to a refund, credit, or additional benefits because of favorable claim experience, administrative cost, or investment expenses.258 For a discussion of these rules see 394 T.M., Employee Fringe Benefits, and 395 T.M., VEBAs and Other Self-Insured Arrangements.
258See  §419(e)(3)(C).
VI. Treatment of Long-Term Care Insurance as Provided Under an Accident and Health Plan
A. General
Section 7702B generally treats a qualified long-term care insurance contract as an accident and health insurance contract. As a result:

(1) an individual can deduct premiums he or she pays for the insurance (subject to the limits in §213(a)) and benefits paid are not taxable (see IV, C, above); 
(2) benefits are not taxable even if premiums are employer-financed (see IV, C, above); and
(3) premiums paid by the employer are not taxable (see IV, C, above).
Note: The excludibility of benefits and the deductibility of premiums are subject to dollar limitations described below.
B. Tax Attributes of a Qualified Long-Term Care Contract
Amounts other than policyholder dividends or premium refunds received under such a contract generally are excludible as amounts received for personal injuries and sickness.259 Per diem benefits are subject to a cap, which is adjusted annually for inflation.260 If total periodic payments under all qualified long-term care contracts exceed the dollar cap for the period, the excess is excludible only to the extent of the individual's costs that are not compensated by insurance or otherwise for long-term care during the period.261
259§7702B(a). See II, C, above.
260§7702B(d)(4) and (d)(5). The 2005 per diem cap is $240. Rev. Proc. 2004-71, 2004-50 I.R.B. 970, §3.36. The 2004 per diem cap was $230. Rev. Proc. 2003-85, 2003-49 I.R.B. 1184, §3.34.
261§7702B(d)(2).
Note: The cap is reduced by any pre-death benefits from a life insurance policy to an individual who is not terminally ill.262
262§7702B(d)(1)(B).
An employer's plan that provides coverage under a long-term care insurance contract generally is treated as an accident and health plan.263 COBRA health care continuation rules do not apply to coverage under a plan substantially all of the coverage under which is for qualified long-term care services.264 Employer-provided long-term care insurance coverage is not, however, excludible by an employee if provided through a cafeteria plan.265 Similarly, expenses for long-term care cannot be reimbursed tax free under a flexible spending account (FSA).266
263§7702B(a)(3). See III and IV, above.
264§4980B(g)(2).
265§125(f).
266§106(c).
Unreimbursed expenses for qualified long-term care services provided to the taxpayer or the taxpayer's spouse or dependents are treated as medical expenses for purposes of the itemized deduction for medical expenses. For this purpose, amounts received under a long-term care insurance contract (regardless of whether the contract reimburses expenses or pays benefits on a per diem or other periodic basis) are treated as reimbursement for expenses actually incurred for medical care.267
267§7702B(a)(2).
Long-term care insurance premiums that do not exceed specified dollar limits are treated as medical expenses for purposes of the itemized deduction for medical expenses.268 The maximum annual deductible amount increases as the insured's age increases. The dollar limits on the deduction are increased to reflect increases in the medical care component of the Consumer Price Index, using August 1996 as the base.269
268§213(d)(1)(D).
269§213(d)(10)(B)(ii). For 2005 limits, see Rev. Proc. 2004-71, §3.19. For 2004 limits, see Rev. Proc. 2003-85, §3.18.
Note: The Secretary of the Treasury has the authority, in consultation with the Secretary of Health and Human Services, to prescribe a different index for adjusting the maximum deductible amounts.
Because HIPAA treats payments of eligible long-term care insurance premiums in the same manner as medical insurance premiums, the self-employed health insurance deduction applies to such premiums.270
270§162(l)(2)(C).
C. Requirements for Qualified Status
Section 7702B defines a qualified long-term care insurance contract as an insurance contract that provides only coverage of qualified long-term care services and:

(1) is guaranteed renewable;
(2) does not provide for a cash surrender value or other money that can be paid, assigned, pledged or borrowed;
(3) under which refunds (other than refunds on the death of the insured or complete surrender or cancellation of the contract) and dividends may be used only to reduce future premiums or increase future benefits;
(4) generally does not pay or reimburse expenses reimbursible under Medicare (except where Medicare is a secondary payor); and 
(5) satisfies the prescribed consumer protection provisions.271
271See Regs.  §1.7702B-1.
However, a long-term care insurance contract can provide for payments on a per diem or other periodic basis without regard to expenses incurred during the period.272
272§7702B(b)(2)(A).

Note: A state long-term care plan also is treated as a qualified long-term care insurance contract if the terms of the arrangement would satisfy the requirements for a long-term care insurance contract under the Code, if the arrangement were an insurance contract.273
273§7702B(f).
"Qualified long-term care services" are defined as necessary diagnostic, preventive, therapeutic, curing, treating, mitigating and rehabilitative services, and maintenance or personal care services required by a chronically ill individual. The services must be provided pursuant to a plan of care prescribed by a licensed health care practitioner.274
274§7702B(c)(1).
Determination of whether an individual is chronically ill is made with reference to any of six specified activities of daily living. Inability to perform at least two of the activities of daily living for a period of at least 90 days due to a loss of functional capacity qualifies the individually as chronically ill for this purpose. An individual who requires substantial supervision because of severe cognitive impairment also is treated as chronically ill.275
275§7702B(c)(2). See Notice 97-31, 1997-1 C.B. 417, for guidance on the definition of a chronically ill individual.
D. Effective Date
The provisions defining long-term care insurance contracts and qualified long-term care services apply to contracts issued after December 31, 1996. Any contract issued before January 1, 1997, that met the long-term care insurance requirements in the state in which the policy was situated at the time it was issued is treated as a long-term care insurance contract, and services provided under or reimbursed by the contract are treated as qualified long-term care services.276
276See Regs.  §1.7702B-2.
E. Reporting Requirements
Any person who pays long-term care benefits or accelerated death benefits must file an information return on Form 1099-LTC and provide a payee statement to the recipient of the benefits. The information return must state the aggregate amount of benefits paid to any individual during the calendar year; whether or not such benefits are paid in whole or in part on a per diem or other periodic basis without regard to the expenses to which the payments relate; and the name, address and TIN of the individual and of the chronically or terminally ill person, if different from the payee.277 A payee statement must show the name of the person making the payment and the aggregate amount of long-term care benefits paid to the individual in the calendar year. The payee statement must be furnished on or before January 31 of the year following the calendar year for which the information return is filed.278
277§6050Q(a)(1). See also Announcement 97-10, 1997-10 I.R.B. 64, regarding when and where to file Form 1099-LTC.
278§6050Q(a)(2).
Failure to provide the information return or payee statement for reporting long-term care or accelerated death benefits is subject to the failure to file penalty.279 Following a merger or acquisition, the successor may agree to assume the predecessor's entire information reporting obligations for Form 1099-LTC.280
279See §6724(d)(1)(B)(ix) and  (d)(2)(Q).
280See Rev. Proc. 99-50, 1999-52 I.R.B. 757.
F. Consumer Protection Requirements
Qualified long-term care insurance contracts and issuers of those contracts are required to satisfy certain provisions of the Long-Term Care Insurance Model Act (Model Act) and Long-Term Care Insurance Model Regulation (Model Regulation) promulgated by the National Association of Insurance Commissioners (NAIC), as adopted as of January 1993.281 These requirements relate to guaranteed renewal or noncancellability, prohibitions on limitations and exclusions, extension of benefits, continuation or conversion of coverage, discontinuance and replacement of policies, unintentional lapse, disclosure, prohibitions against post-claims underwriting, minimum standards, inflation protection, prohibitions against pre-existing conditions exclusions and probationary periods, and prior hospitalization (§7702B(b)(1)(F) and  (g)), and to application forms and replacement coverage, reporting requirements, filing requirements for marketing, standards for marketing, appropriateness of recommended purchase, standard format outline of coverage, delivery of a shopper's guide, right to return, outline of coverage, certificates under group plans, policy summary, monthly reports on accelerated death benefits, and incontestability period (§4980C).
281Regs. §1.7702B-1(a).
If a state imposes a requirement that is more stringent than the analogous requirement imposed by §7702B(g) or §4980C, compliance with the more stringent requirement of state law is considered compliance with the parallel requirement of  §7702B(g) or §4980C.282 If a state imposes a requirement that is the same as the parallel requirement imposed by  §7702B(g) or §4980C, compliance with that requirement of state law is considered compliance with the parallel requirement of  §7702B(g) or §4980C, and failure to comply with that requirement of state law is considered failure to comply with the parallel requirement of §7702B(g) or §4980C.283 If a state has not adopted the Model Act, the Model Regulation, or a requirement that is the same as or more stringent than the analogous requirement imposed by §7702B(g) or §4980C, the language, caption, format, and content requirements imposed by  §§7702B(g) and 4980C with respect to contracts, applications, outlines of coverage, policy summaries, and notices will be considered satisfied for a contract subject to the law of that state if the language, caption, format, and content are substantially similar to those required under the parallel provision of the Model Act or Model Regulation.284
282§4980C(f); Regs. §1.7702B-1(b)(1).
283Regs.  §1.7702B-1(b)(2).
284Regs. §1.7702B-1(b)(3). Only nonsubstantive deviations are permitted in order for language, caption, format, and content to be considered substantially similar to the requirements of the Model Act or Model Regulation.
VII. Elective Continuation of Medical Coverage (COBRA)
Coverage of an employee and the employee's family under an employer's medical benefit plan typically terminates when employment ends, or when a covered spouse or dependent ceases to qualify as such. Many such plans provide for extended coverage for a person who is disabled when coverage would otherwise have terminated, and for conversion to an individual medical insurance policy at the employee's option.
The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)285 requires that certain covered persons be permitted to elect continued coverage, at their own expense, when certain events occur that result in loss of coverage. Like ERISA, the COBRA elective medical continuation rules constitute both positive law286 and a condition for avoiding federal tax sanctions.287
285P.L. 99-272, §10001(c).
286ERISA §601 et seq.
287§4980B; see also Regs. §54.4980B-1 through - 10 and Notice 98-12, 1998-5 I.R.B. 12.
A. Scope of COBRA
1.	Plans Affected
a.	Group Health Plans
Under §4980B(g)(2), COBRA applies to a broad range of "group health plans," defined in §5000(b)(1). These include all medical benefit plans that an employer sponsors or contributes to, whether insured or self-insured, funded or unfunded.288 A group health plan is a plan maintained by an employer or employee organization (i.e., a union) to provide health care289 to individuals who have an employment-related connection to the employer or employee organization or to the families of such individuals.290 Covered individuals include employees, former employees, the employer, and others associated or formerly associated with the employer or employee organization in a business relationship. The regulations generally refer to all individuals covered under a plan by virtue of the performance of services or by virtue of membership in an employee organization as employees.291 As discussed below, the term "employee" has a narrower meaning for purposes of the small-employer plan exception.
288Regs. §54.4980B-2, Q&A-1.
289Regs. §54.4908B-2, Q&A-1(b), provides that health care has the same meaning as medical care under §213(d). See III, B, 3, above.
290Regs. §54.4980B-2, Q&A-1(a).
291Id.
The "employer" is the person for whom an individual performs services.292 A plan is maintained by an employer or employee organization, even if the employer or employee organization does not directly or indirectly contribute to it, if coverage under the plan would not be available to an individual at the same cost if the individual did not have an employment-related connection to the employer or employee organization.293
292Regs. §54.4908B-2, Q&A-2(b), provides that "employer" includes any member of a controlled group including the employer, as well as any successor of the employer or of a member of the controlled group.
293Regs. §54.4980B-2, Q&A-1(a).
A plan generally is considered to provide health care whether it does so directly or through insurance, reimbursement, or other means and whether it does so through an on-site facility or a cafeteria or other flexible benefit arrangement.294 Insurance includes group insurance policies and one or more individual policies under an arrangement maintained by the employer or employee organization to provide health care to two or more employees. For cafeteria plans or other flexible benefit arrangements, the COBRA continuation coverage requirements apply only to the health care benefits under the cafeteria plan or other flexible benefit arrangement that an employee actually has chosen to receive.295
294Regs. §54.4980B-2, Q&A-1(a). See Notice 2002-45, 2002-28 I.R.B. 93, Part VII (health reimbursement arrangement is group health plan generally subject to COBRA continuation coverage requirements).
295Regs. §54.4980B-2, Q&A-8.
Example: Under the terms of a cafeteria plan, employees can choose among life insurance coverage, membership in a health maintenance organization (HMO), coverage for medical expenses under an indemnity arrangement, and cash compensation. Of these available choices, the HMO and the indemnity arrangement are the arrangements providing health care. The instruments governing the HMO and indemnity arrangements indicate that they are separate group health plans. These group health plans are subject to COBRA. The employer does not provide any group health plan outside of the cafeteria plan. B and C are unmarried employees. B has chosen the life insurance coverage, and C has chosen the indemnity arrangement. B does not have to be offered COBRA continuation coverage upon terminating employment, nor is a subsequent open enrollment period for active employees required to be made available to B. However, if C terminates employment and the termination constitutes a qualifying event, C must be offered an opportunity to elect COBRA continuation coverage under the indemnity arrangement. If C makes such an election and an open enrollment period for active employees occurs while C still is receiving the COBRA continuation coverage, C must be offered the opportunity to switch from the indemnity arrangement to the HMO (but not to the life insurance coverage because that does not constitute coverage provided under a group health plan).296
296Regs. §54.4980B-2, Q&A-8(a)(2), Ex.
A plan is not a group health plan if substantially all the coverage provided by the plan is for qualified long-term care services (as defined in §7702B(c)).297 In accordance with §106(b)(5), amounts contributed by an employer to a medical savings account (as defined in §7702B(c)) are not considered part of a group health plan for purposes of COBRA. However, a high-deductible health plan may be a group health plan even though it covers a holder of a medical savings account.298
297Regs. §54.4980B-2, Q&A-1(e).
298Regs. §54.4980B-2, Q&A-1(f).
Supplementary health benefits such as vision, dental, and prescription drug plans are included, because they involve medical care within the meaning of §213(d). However, spas, swimming pools, gymnasiums, or other exercise/fitness programs or facilities that normally are accessible to and used by employees for reasons other than relief of health and medical problems are not group health plans.299 Drug and alcohol treatment programs that are intended to relieve a physical condition or health problem are considered to be group health plans.300
299Regs. §54.4980B-2, Q&A-1(b).
300Id.
b.	Flexible Spending Account Exemption
Health care flexible spending accounts (FSAs) satisfy the definition of a group health plan in §5000(b)(1). To the extent a health FSA is obligated to make COBRA coverage available to a qualified beneficiary, all the general COBRA rules apply in the same way that they apply to coverage under other group health plans, including the rule on how plan limits on coverage apply to someone using COBRA.301 Section 125 permits pre-tax salary reduction amounts to be credited to a participant's FSA and used to reimburse, tax free, medical expenses incurred by the participant. Any amount credited during a year but not used to reimburse medical expenses incurred during the year is forfeited. A COBRA election would be a legitimate way to avoid forfeiture of contributions a participant makes before termination of employment.
301Regs. §54.4980B-2, Q&A-8(b). See 397 T.M., Cafeteria Plans, for a complete explanation of FSAs.
Example: If a cafeteria plan participant terminated employment on June 30, having contributed to his FSA for six months but not having incurred any reimbursable expenses, the participant could continue his contributions under COBRA, albeit on an after-tax basis, and obtain reimbursement for medical expenses incurred in the second half of the year. The regulations governing FSAs require that, to introduce an element of risk shifting, the employer must make available from the beginning of the plan year the full amount for reimbursement that the employee elected to contribute for the year. As a result, a participant can terminate employment having received reimbursements in excess of his payroll reduction contributions.
This ability to receive reimbursements from an FSA in excess of the employee's contributions would also make a COBRA election attractive. The only reason to continue COBRA coverage for an FSA beyond the year in which the qualifying event occurs would also be abusive. A participant could obtain reimbursement of the full annual contribution elected, but stop making monthly COBRA contributions before the end of the year. Presumably acknowledging this problem for employers, the regulations generally relieve an employer from offering COBRA as to an FSA after the year of the qualifying event.302 Moreover, the regulations afford some protection for the year of the qualifying event. If the employee's FSA account balance is no greater than the COBRA premiums that would be required for the remainder of the year, the employer is relieved from the obligation to offer COBRA as to the FSA.303
302Regs. §54.4980B-2, Q&A-8(d).
303Regs. §54.4980B-2, Q&A-8(e).
Comment: This provision of the regulations would prevent an employee who already had received reimbursements in excess of his contributions, but still had an unused FSA account balance, from cleaning out his account balance by making only one or two additional premium payments.
These exemptions apply if two conditions are met. The two conditions are that: (i) the health FSA is not subject to the HIPAA portability provisions in §§9831 and 9832 because the benefits provided under the health FSA are excepted benefits; and (ii) in the plan year of the qualifying event, the maximum amount that the health FSA could require to be paid for a full plan year of COBRA continuation coverage equals or exceeds the health FSA's maximum benefit available for the year.304
304Regs. §54.4980B-2, Q&A-8(c).
Comment: Under this test, it is not necessary to look at the amount an individual participant has contributed for the plan year. Therefore, a plan could be designed to ensure that the test is met.
Example: An employer provides major medical benefits and a health FSA, and the plan year for each plan is the calendar year. A qualifying event occurs in 2005. Under the health FSA, the maximum employee contribution for a full plan year is $1,200, and the employer contributes an additional amount to the account equal to the employee's salary reduction election for the year. Thus, the maximum amount available to an employee under the health FSA for a year is twice the amount of the employee's salary reduction election for the year.
The benefits provided under the health FSA are excepted benefits under HIPAA, because the maximum benefit payable for the employee under the health FSA for the year does not exceed two times the employee's salary reduction election under the health FSA for the year, and the employer provides major medical benefits under another group health plan.
The maximum amount the plan could charge for COBRA coverage is 102% of the applicable premium, and the employer determined that a reasonable estimate of the cost of providing coverage for similarly situated non-COBRA beneficiaries for 2005 under the health FSA is two times their salary reduction contribution election; therefore, this is the applicable premium for 2005. The maximum amount the plan could charge for a full year of COBRA coverage is $2,448 (102% × $2,400). Because the maximum amount that can be charged for a full plan year of COBRA coverage ($2,448) exceeds the maximum benefit available under the FSA for the plan year ($2,400), the health FSA qualifies for the exemption.305
The following example illustrates how a plan can be relieved from the obligation to offer COBRA not only for the year following the qualifying event, but also for the plan years in which the qualifying event occurs.
305Regs. §54.4980B-2, Q&A-8(f), Exs. (i) and (ii).
Example: During the 2005 plan year, a plan allows a maximum health FSA contribution of $1,200; therefore, the maximum benefit is $1,200. On May 5, 2005, a qualifying event occurs, and at this time, D has submitted reimbursable claims for $500 as of the date of the qualifying event. Whether the health FSA is obligated to make COBRA coverage available in 2005 to D depends on the maximum amount the plan could require to be paid for COBRA coverage for the remainder of 2005.
To determine this amount, the plan could use the following formula: 102% × 1/12 of the applicable premium for the year of the qualifying event × the number of months remaining in the year. Applying this formula, the plan could charge $714 for the remainder of the 2005 plan year (1.02 × $1,200 ÷ 12 = $102 × 7 remaining months in the plan year = $714).
The maximum benefit available for the remainder of the plan year is $700 ($1,200 maximum benefit - $500 reimbursed plans through the date of the qualifying event). The plan is not obligated to provide COBRA continuation coverage for the 2005 plan year, because the maximum amount D would be required to pay for such coverage exceeds the maximum benefit remaining for the year.306
306Regs. §54.4980B-2, Q&A-8(f), Ex. (iii).
c.	Small Employer Exemption
COBRA does not apply to a plan if each contributing employer normally employs fewer than 20 employees. The standard is satisfied for a calendar year only if each employer had fewer than 20 employees on a typical business day during the preceding calendar year.307 Thus, a small employer can determine before the beginning of each calendar year whether it has become subject to COBRA.
307ERISA §601(b); Code §4980B(d)(1); Regs. §54.4980B-2, Q&A-5.
The regulations interpret the reference to a typical business day to mean at least 50% of the employer's typical business days during the year. For this purpose, part-time employees are counted as fractional employees. The regulations set out an elaborate counting regime.308
308Regs. §54.4980B-2, Q&A-5(e).
Only common law employees are taken into account for purposes of the small employer plan exception. Self-employed individuals, independent contractors, and directors (in the case of a corporation) are not counted.309 
309Regs. §54.4980B-2, Q&A-5(c).
Section 414(t) provides that all employers under common control under §414(b) or  (c), or comprising an affiliated service group under  §414(m), are aggregated for this purpose. In addition, regulations under §414(o) are to apply. Thus, a U.S. subsidiary with fewer than 20 employees is subject to COBRA if its controlled group has 20 or more employees worldwide.
Example: Corporation S employs 12 employees, all of whom work and reside in the United States. S maintains a group health plan for its employees and their families. S is a wholly-owned subsidiary of P. In the previous calendar year, the controlled group of corporations including P and S employed more than 19 employees, although the only employees in the United States of the controlled group that includes P and S are the 12 employees of S. Under Regs. §1.414(b)-1, foreign corporations are not excluded from membership in a controlled group of corporations. Consequently, the group health plan maintained by S is not a small-employer plan during the current calendar year because the controlled group including S normally employed at least 20 employees in the preceding calendar year.310
310Regs. §54.4980B-2, Q&A-5(a), Exs. (i) and (ii).
Similarly, the small employer exemption will be lost in a stock transfer that combines the small employer with another business to form a single employer with more than 20 employees.311 Because the transfer of all the stock of another business causes the small employer and the other business to be part of a control group, they are treated as a single entity for COBRA purposes.312 Thus, the number of employees of both businesses during the previous year must be considered in applying the COBRA requirements. But Regs.  §54.4980B-9, Q&A-8(c) provides that where a small employer acquires substantially all of the assets of another business and continues the operations of the acquired business without interruption or substantial change, and the acquired business ceases to provide health coverage, the exemption will remain intact for at least the remainder of the calendar year. Although the small employer is considered a successor employer, this designation does not mean that the small employer and the other business are part of the same control group. In this case, the resulting entity remains exempt from COBRA until the beginning of the year following the first year in which it employees more than 20 employees. As a successor employer, the business may have the obligation to make COBRA continuation coverage available to certain beneficiaries who lose coverage due to the asset acquisition although the business is otherwise exempt from COBRA requirements.
311Rev. Rul. 2003-70, 2003-27 I.R.B. 3.
312See Regs. §54.4980B-9, Q&As-1 and 2.
In the case of a plan to which two or more small, related employers contribute, or a trade association or union-sponsored plan to which many small, unrelated employers contribute, it may be important to determine how many employers, and how many plans, are involved. See VII, A, 1, e, below.
A plan can be subject to COBRA for some years and exempt for other years, due to fluctuations in the employer's workforce. An individual's COBRA rights, however, are governed by the COBRA status of the plan at the time of the COBRA triggering event. Thus, a triggering event in a year in which the plan is subject to COBRA confers COBRA rights that continue even if the plan subsequently becomes exempt. Conversely, loss of the small employer exemption does not confer COBRA rights with respect to triggering events that occurred while the plan was exempt.
Example: An employer maintains a group health plan. The employer employed 20 employees on more than 50% of its working days during 2003. Thus, the plan is subject to COBRA during 2004. Employee E resigns and does not work for the employer after Jan. 31, 2004. Under the terms of the plan, E is no longer eligible for coverage upon the effective date of the resignation, that is, Feb. 1, 2004. The employer does not hire a replacement for E. E timely elects and pays for COBRA continuation coverage. The employer employs 19 employees for the remainder of 2004, consequently the plan is not subject to COBRA in 2005. The plan must continue to make COBRA continuation coverage available to E during 2005.313
313Regs. §54.4980B-2, Q&A-5(g), Ex. 1.
The COBRA status of a multiemployer (collectively bargained) plan can change during a calendar year. If an employer that does not qualify for the small employer exemption begins contributing to an exempt multiemployer plan, the plan immediately becomes subject to COBRA. Conversely, a multiemployer plan that is subject to COBRA could become exempt by reason of cessation of contributions by an employer that had 20 or more employees in the prior calendar year.314
314Regs. §54.4980B-2, Q&A-5(f).
Note: This intra-year rule does not apply to fluctuations in employment by contributing employers.
d.	Other Exemptions
Governmental plans and plans maintained by churches generally are exempt from COBRA under §4980B(d)(2) and  (3). These plans also are generally exempt from ERISA.315 COBRA does, however, apply to certain governmental plans. State and local governments, and their agencies and instrumentalities, that receive funds under the federal Public Health Service Act are subject to the same health care continuation requirements as are employers in the private sector.316
315See XII, below, and 372 T.M., Church and Governmental Plans.
31642 USC §300 bb-1-8; Regs. §54.4980B-2, Q&A-4(d).
e.	Identification of Multiple Plans
Medical health arrangements may be divided into multiple coverage elements, into multiple employer elements, and even into collective bargaining and nonbargaining elements. It is important to determine whether a medical benefit arrangement constitutes a single plan or multiple plans. For example, if an employer maintains two group health plans, one providing major medical benefits and the other providing prescription drug benefits, the plan must comply with COBRA by offering a choice of electing COBRA coverage under either plan or both plans. Conversely, an employer maintaining a single group health plan providing the same benefits could satisfy COBRA by offering a qualified beneficiary a choice of electing both major medical and prescription drug coverage or not receiving COBRA coverage under the plan.317
317Regs. §54.4980B-2, Q&A-6(d), Ex. 1.
An employer or employee organization generally is permitted to establish the separate identity and number of group health plans under which it provides health care benefits to employees. Thus, an employer or employee organization could aggregate benefits it provides into a single group health plan or disaggregate benefits into separate group health plans. The status of health care benefits as part of a single group health plan or as separate plans is determined by reference to the instruments governing those arrangements and the actual operation of the arrangements.318
318Regs. §54.4980B-2, Q&A-6(a).
The instruments governing an arrangement or arrangements to provide health care benefits may not make clear whether the benefits are provided under one plan or more than one plan, or the arrangement or arrangements may have no governing instruments. A default rule applies unless it is clear from the instruments governing an arrangement to provide health care benefits that the benefits are being provided under, and operated as, separate plans. The default rule provides that health care benefits, other than qualified long-term care, that are provided by one entity are treated as one plan.319
319Id.
Note: A multiemployer plan and a plan other than a multiemployer plan always are considered separate plans.320
320Regs. §54.4980B-2, Q&A-6(b).
f.	Plan Year
The plan year is the year designated as such in the plan documents.321 If the plan documents do not designate a plan year (or if there are no plan documents), the plan year is the deductible/limit year used by the plan.322 If the plan does not impose deductibles or limits on an annual basis, the plan year is the policy year.323 If the plan does not impose deductibles or limits on an annual basis and the plan is not insured -- or the insurance policy is not renewed annually -- the plan year is the taxable year of the employer.324 In any other case, the plan year is the calendar year.325
321Regs. §54.4980B-2, Q&A-7(a).
322Regs. §54.4980B-2, Q&A-7(b)(1).
323Regs. §54.4980B-2, Q&A-7(b)(2).
324Regs. §54.4980B-2, Q&A-7(b)(3).
325Regs. §54.4980B-2, Q&A-7(b)(4).
2.	Qualifying Events
a.	Statutory Categories
COBRA continuation coverage rights are triggered by certain "qualifying events" that cause a qualified beneficiary to lose group health plan coverage. The following are COBRA qualifying events:

• a covered employee's death;
• termination of a covered employee's employment (unless terminated for gross misconduct) or reduction in hours;
• a covered employee's divorce or legal separation from the covered employee's spouse;
• entitlement of the covered employee to Medicare benefits;
• a dependent child ceasing to qualify as such; or
• with respect to a retired employee, his former employer's proceeding in bankruptcy under Title 11 of the United States Code.326
326§4980B(f)(3); Regs. §54.4980B-4, Q&A-1(b). A legal separation is a qualifying event under §4980B(f)(3)(C) only upon the entry of a final court decree adjudicating the parties' legal rights and obligations but preserving the marriage bond. Simpson v. T.D. Williamson, Inc.,  414 F.3d 1203, 35 EBC 1417 (10th Cir. 2005) (employer's interpretation of divorce court interlocutory protective order pending divorce as a legal separation did not constitute a qualifying event).
Entitlement to Medicare benefits cannot cause loss of group health plan coverage for an active employee (see X, A, 1, below). However, a retiree's group health plan coverage may terminate upon entitlement to Medicare. Because Medicare entitlement also ends the period during which COBRA continuation coverage must be offered, this qualifying event would not give the retiree any rights. However, it would enable the retiree's spouse and any covered dependents to elect continuation coverage.
Note: Entitlement to Medicare means actual enrollment in either Part A or Part B. Consequently, merely becoming eligible for Medicare is not a qualifying event.327
327Regs. §54.4980B-7, Q&A-3(b).
b.	Loss of Coverage
An event is a "qualifying event" only if, under the terms of the group health plan, the event causes the covered employee, or the spouse or a dependent child of the covered employee, to lose coverage under the plan.328 To lose coverage for this purpose means to cease to be covered under the same terms and conditions as in effect immediately before the event. A loss of coverage includes an increase in an employee premium or contribution resulting from one of the events described above. In the case of a qualifying event that is an employer is bankruptcy, the term "to lose coverage" can also include a substantial elimination of coverage that occurs within 12 months before or after the date in which a bankruptcy proceeding begins.329
328Regs. §54.4980B-4, Q&A-1(c).
329Regs. §54.4980B-4, Q&A-1(c).
It is not necessary that loss of coverage coincide with the causal event. Any diminution in coverage during the maximum continuation period suffices under §4980B.330 Causality may not, however, be easy to determine. For example, an employer might terminate medical coverage at a facility before terminating operations there. An employee might drop spousal coverage in anticipation of a divorce proceeding. Moreover, some plans exclude from eligibility a spouse who no longer resides with the covered employee.
330Regs. §54.4980B-4, Q&A-1(c).
The regulations take the position that elimination of coverage in anticipation of an event is ineffective to defeat COBRA rights.331 Thus, the factual inquiry is whether the termination of coverage is in anticipation of a COBRA qualifying event. In Goodall v. The Gates Corp.,332 the court determined that an employer had not violated COBRA by terminating a spouse's coverage in anticipation of the qualifying event. The employer amended its plan to terminate coverage when the employee and the spouse no longer share a permanent residence. The court rejected the spouse's complaint that the employer impermissibly attempted to circumvent COBRA by terminating spouses before they became legally separated or divorced from the covered employees. The court may have been influenced, however, by the fact that the employer nevertheless offered Goodall continuing coverage identical to the coverage that plan participants received under COBRA.
331Id.
33239 F.3d 1191 (10th Cir. 1994).
c.	Termination or Reduction in Hours
A termination of employment or reduction in hours, whether voluntary or involuntary, can be a qualifying event. A strike or walkout is a termination of employment or reduction of hours that constitutes a qualifying event if the strike or lockout results in a loss of coverage.333
333Regs. §54.4980B-4, Q&A-2.
Comment: Thus, COBRA could materially change the economic ramifications of labor disputes, especially when the lengthy period for the initial premium payment by a qualified beneficiary is taken into account.334
334See Communications Workers of America v. Nynex Corp., 898 F.2d 887, 12 EBC 1049 (2d Cir. 1990) (employer required to continue medical benefits to striking workers).
A reduction of a covered employee's hours of employment includes any decrease in the number of hours that a covered employee works or is required to work that does not constitute a termination of employment. Thus, if a covered employee takes a leave of absence, is laid off, becomes disabled, or otherwise performs no hours of work during a period, the covered employee has experienced a reduction in hours that, if the other applicable requirements are satisfied, constitutes a qualifying event.335
335Regs. §54.4980B-4, Q&A-1(e).
d.	Gross Misconduct
COBRA coverage does not have to be offered if a covered employee is terminated for "gross misconduct"; however, the term is not defined in the statute or regulations. A number of cases have been decided on this issue providing guidance as to the types of misconduct that reach the threshold of "gross misconduct."
One court ruled that an employee's breach of the employer's confidentiality is not gross misconduct. In that case, the district court looked to California's definition of gross misconduct in the context of unemployment insurance, which required an "evil design" on the part of the employee.336 Another court ruled that employee theft is gross misconduct. In that case, the court looked to Illinois law, which stated explicitly that theft is grounds for denying unemployment benefits.337 The standard for gross misconduct is willful or intentional misconduct, or at the very least, grossly negligent conduct, but not ordinary negligence.338
336Paris v. F. Korbel & Brothers, Inc., 751 F. Supp. 834, 12 EBC 2489 (N.D. Cal. 1990).
337Burke v. American Stores Employee Benefit Plan, 818 F. Supp. 1131, 16 EBC 2485 (N.D. Ill. 1993).
338Lloynd v. Hanover Foods Corp., 72 F. Supp.2d 469, 23 EBC 2465 (D. Del. 1999) (former employee's failure to add onion powder to batch of ravioli was accidental and, therefore, not gross misconduct; court imposed penalties on former employer, in part, because former employer attempted to coerce plaintiff to re-characterize her termination as a resignation in exchange for COBRA benefits).
Gross misconduct is not limited to conviction of a crime.339 However, the plan administrator must have proof of misconduct; it is not sufficient that an employer have a good faith belief that an employee engaged in gross misconduct in order for the employer to avoid its COBRA obligations.340 Other courts have applied more rigorous standards, especially to managerial employees. For example, a bank's medical plan was held to be justified in denying COBRA coverage to a manager who used a corporate credit card personally and made a misrepresentation to a government agency.341 
339Conery v. Bath Associates, 803 F. Supp. 1388 (N.D. Ind. 1992).
340Kariotis v. Navistar Internat'l Transp. Corp., 131 F.3d 672, 21 EBC 2188 (7th Cir. 1997).
341Johnson v. Shawmut Nat'l. Corp., 1994 U.S. Dist. LEXIS 19437 (D. Mass. 1994).
Note: An interesting issue is whether COBRA coverage can be denied on the basis of information the employer learns after discharging the covered employee. One court held that post-dismissal information can be used to establish gross misconduct.342
342Mlsna v. Unitel Communications, 41 F.3d 1124 (7th Cir. 1994).
3.	Qualified Beneficiaries and Covered Employees
COBRA continuation rights are available to "qualified beneficiaries" who would otherwise lose health coverage due to a qualifying event.343 A qualified beneficiary is a covered employee's spouse or dependent child who is covered under the group health plan as of the day before the qualifying event.344 A qualified beneficiary also includes a child who is born to or placed for adoption with the covered employee during the period of continuation coverage.345
343§4980B(f)(1).
344§4980B(g)(1)(A). See Regs.  §54.4980B-3, Q&A-1(a)(1)(i).
345§4980B(g)(1)(A) (flush language). The qualifying event for a child born to or placed for adoption with a covered employee during a period of COBRA coverage is the qualifying event giving rise to the period of COBRA continuation coverage during which the child is born to or placed for adoption. Regs.  §54.4980B-4, Q&A-1(f). Therefore, if a second qualifying event occurs before the child is born or placed for adoption (for example, if the covered employee dies), the second qualifying event also applies to the newborn or adopted child. See VII C, 2, d, below, for a discussion of second qualifying events.
Other dependents acquired during COBRA coverage may be added to the coverage, but do not gain the status of qualified beneficiaries. An individual who marries a qualified beneficiary on or after the date of the qualifying event, or a newborn or adopted child of a qualified beneficiary (other than a covered employee) are not qualified beneficiaries by virtue of the marriage, birth, adoption or placement for adoption.346
346Regs. §54.4980B-3, Q&A-1(b) and (c).
Example: B is a single employee who voluntarily terminates employment and elects COBRA coverage under a group health plan. To comply with the requirements of §9801(f) and Regs. §54.9801-6(b), the plan permits a covered employee who marries to have the employee's spouse covered under the plan. One month after electing COBRA coverage, B marries and chooses to have B's spouse covered under the plan. B's spouse is not a qualified beneficiary. Thus, if B dies during the period of COBRA coverage, the plan does not have to offer B's surviving spouse an opportunity to elect COBRA coverage.
An individual ceases to be a qualified beneficiary if he or she does not elect COBRA coverage by the end of the COBRA election period (discussed in VII, B, 2, a, below).347 Therefore, if such a former qualified beneficiary is later added to a covered employee's coverage (e.g., during an open enrollment period) and another qualifying event occurs with respect to the covered employee, the former qualified beneficiary does not become a qualified beneficiary by reason of the second qualifying event. If a covered employee who is a qualified beneficiary does not elect COBRA coverage during the election period, then any child born to or placed for adoption with the covered employee on or after the date of the qualifying event is not a qualified beneficiary. An individual who elects COBRA coverage ceases to be a qualified beneficiary once the plan's obligation to provide COBRA coverage has ended.
347Regs. §54.4980B-3, Q&A-1(f).
Example: C is a married employee who terminates employment. C elects COBRA coverage for C but not C's spouse, and C's spouse declines to elect such coverage. C's spouse ceases to be a qualified beneficiary. At the next open enrollment period, C adds the spouse as a beneficiary under the plan. The addition of the spouse during the open enrollment period does not make the spouse a qualified beneficiary. Therefore, the plan does not have to offer the spouse an opportunity to elect COBRA coverage upon a later divorce from C or C's death.348
348Regs. §54.4980B-3, Q&A-1(h), Ex. 2.
For COBRA purposes, the term "covered employee" means an individual (including a self-employed person) who is (or was) provided group health coverage by virtue of the employee's performance of services for one or more persons maintaining the plan. Thus, retirees and former employees covered by a group health plan are covered employees if the coverage is provided in whole or in part because of the previous employment. Any individual who performs services for the employer maintaining the plan or who is a member of the employee organization maintaining the plan may be a covered employee. Thus, common law employees, self-employed individuals, independent contractors, and corporate directors can be covered employees.349
349§§4980B(f)(7) and 5000(b)(1); Regs. §54.4980B-3, Q&A-2(a)(1).
A covered employee whose employment terminates (except for gross misconduct), or whose hours are reduced, also is a qualified beneficiary.350 So is a retired covered employee whose former employer is the subject of a bankruptcy proceeding, and the surviving spouse of such a retiree.
350§4980B(g)(1)(B).
Nonresident aliens who receive no U.S. source income are excluded from COBRA protection. Their spouses and dependents similarly are excluded.351
351§4980B(g)(1)(C); Regs. §54.4980B-3, Q&A-1(e).
Generally, mere eligibility for coverage -- as opposed to actual coverage -- does not make an individual a qualified beneficiary. However, if an individual who otherwise would be a qualified beneficiary is denied coverage under a group health plan in violation of applicable law (including HIPAA), the individual is considered to have had the coverage that was wrongfully denied.352
352Regs. §54.4980B-3, Q&As-1(a)(3) and 2(b).
4.	Effect of Family and Medical Leave Act on COBRA Coverage
a.	In General
The federal Family and Medical Leave Act (FMLA)353 gives an eligible employee the choice of whether to continue health benefit coverage during leave under the act (see XIV, D, below). FMLA raises a number of COBRA issues.
353P.L. 103-3, 29 USC §2601 et seq.
b.	Occurrence of Qualifying Event
Perhaps the most critical question is when the qualifying event occurs if an employee fails to return to work from leave taken under FMLA. Because FMLA leave is temporary, and does not terminate the employee's right to employer-provided medical coverage, a qualifying event does not occur until the end of the leave.354 This is true even if the medical coverage is contributory, and the employee declines to makes the required contributions.355
354Regs. §54.4980B-10, Q&A-1(a).
355Regs. §54.4980B-10, Q&A-3.
Note: Even though the employer may recover premiums it pays to maintain coverage during an FMLA leave, COBRA continuation coverage cannot be conditioned upon the employee's reimbursement of the employer.
If the employee gives notice before the end of the FMLA leave that he will not be returning to work, the leave ends on the date of the notice. In that event, the qualifying event is accelerated to the same date.356
356Regs. §54.4980B-10, Q&A-2, Ex. 2.
State laws may entitle employees to leave in excess of the period required under FMLA. FMLA does not preempt such state law requirements. However, such state law requirements are disregarded for purposes of determining when a COBRA qualifying event occurs.357
357Regs. §54.4980B-10, Q&A-4.
c.	Other Rules
If the plan provides that a qualifying event occurs when coverage terminates, rather than when employment terminates (see VII, A, 2, c, above), that rule applies to FMLA leave as well. As a consequence, if coverage continues beyond the end of a leave, the qualifying event would not occur until coverage terminated.358
358Regs. §54.4980B-10, Q&A-2.
If an employee on leave elects to keep contributory coverage in force, but fails to pay premiums, the employer may voluntarily pay the employee's premiums and recover them from the employee. However, COBRA rights cannot be conditioned on the recovery of employee premiums advanced by the employer.359
359Regs. §54.4980B-10, Q&A-5.
B. Procedural Requirements
1.	Notices
a.	Notice to Employees and Spouses
A group health plan subject to COBRA must give written notice of the availability of continuation coverage at the time plan coverage commences.360 The notice must be given to each covered employee and spouse.
360§4980B(f)(6)(A). See the model notice in the appendix to DOL Regs. §2590.606-1, which is included in the working papers of this portfolio.
Employers are considered to have made a good faith effort at compliance with this requirement if a single notice is delivered to the covered employee's and spouse's last known address provided it is addressed to both spouses or the family.361 Separate deliveries are required if the employer or plan administrator determines that the spouse of a covered employee does not reside at the covered employee's last known address.362 The Labor Department interprets the reference in  §4980B(f)(6)(A) to the spouse of the employee as referring only to a covered spouse.363 However, if the spouse becomes covered under the plan as a beneficiary at a future time, such as during an annual open season election period, the employer must give the spouse a notice concerning COBRA coverage at that time.364
361DOL Regs. §2590.606-1(d), (f). Separate notice to a dependent child who resides with a covered employee or spouse to whom notice has been sent is not required.
362Id.
363DOL Advisory Opinion 94-17A (interpreting ERISA  §606(a)(1), which parallels Code §4980B(f)(6)(A)).
364Id.
Comment: The summary plan description (SPD) is the logical vehicle for this notice.365 The 90-day period after commencement of participation permitted by ERISA §104(b)(1) for distribution of the SPD also applies to the COBRA notice.366
365See DOL Regs. §2590.606-1(e).
366DOL Regs. §2590.606-1(b). However, the general notice may not be given later than the date the plan administrator must give notice of a right to elect coverage.
If eligibility for continuation coverage is triggered, the plan administrator must give notice of eligibility. This notice must be given within 14 days after the administrator learns of the qualifying event either from the employer or from the employee or his or her spouse. However, a multiemployer plan may provide for a longer notice period.367 If the employer also is the plan administrator, then notice must generally be provided within 44 days of the date the qualifying event occurred.368
367§4980B(f)(6)(D) (and flush language to §4980B(f)(6)); DOL Regs. §2590.606-4(b)(1), (3).
368DOL Regs. §2590.606-4(b)(2); Paris v. F. Korbel & Bros. Inc., 751 F. Supp. 834, 12 EBC 2489 (N.D. Cal. 1990). But see Powell v. Wilmington Plumbing Supply Co., 921 F. Supp. 1264 (D. Del. 1996) (applying 14-day notice period if the employer and plan administrator are one).
Note: "Plan administrator" is defined in Code §4980B(g)(3) by reference to ERISA §3(16)(A) rather than to Code §414(g).
This notice must be given to each qualified beneficiary eligible for continuation coverage. For this purpose, notice to the covered employee's spouse constitutes notice to all qualified beneficiaries residing with the spouse.369
369§4980B(f)(6) (flush language); DOL Regs. §2590.606-4(e). Notice of election rights of a child of an employee could be given to either parent who resides with the child.
Comment: If plan records show that the spouse does not reside with the employee, separate notice would have to be sent to the spouse. It would be prudent to request each employee to notify the plan if the employee's spouse does not reside with him or her.
The plan administrator's notice is to include comprehensive information about the rights of the qualified beneficiary. Among the items of information contemplated is that a parent or legal guardian may elect continuation coverage on behalf a minor child. The notice would have to explain the consequences of failing to elect continuation coverage, including loss of portability of group health coverage, guaranteed access to health coverage and special enrollment rights under HIPAA (see VIII, below). It also is to describe the rules in effect during the COBRA election period, including revocation of a waiver of continuation coverage. Rules concerning a second qualifying event are to be disclosed, as well as the rules governing extension of the maximum coverage period in the event of a disability determination. The notice also is to explain the importance of keeping the administrator informed of current addresses of all individuals covered under the plan, and a disclaimer that the notice does not contain all provisions of COBRA and referring the recipient to the SPD and the plan administrator.370
370DOL Regs. §2590.606-4(b)(4). See the model notice in the appendix to DOL Regs. §2590.606-4, which is included in the Worksheets of this portfolio.
In addition to delineating the rights of qualified beneficiaries to COBRA coverage, the plan administrator is required to give notice of the absence of COBRA rights as well.371 If the administrator receives a notice of qualifying event from a participant or beneficiary who is not eligible for COBRA coverage, the administrator must provide the claimant with an explanation. A similar explanation is required when coverage terminates before the end of the maximum COBRA continuation period.372
371DOL Regs. §2590.606-4(c).
372DOL Regs. §2590.606-4(d). At least one court has held that once a group health plan is terminated, there is no obligation under COBRA to provide continuation coverage or give notice thereof. Ayres v. Balousek, No. 04-CV-71802 (E.D. Mich. 8/22/05) (citing ERISA §602(2)(B), which provides that the period of COBRA coverage must extend for at least the period beginning on the date of the qualifying event and ending not earlier than the date on which the employer ceases to provide any group health plan to any employee).
Note: If the employer continues to provide coverage at its expense after termination of employment, the employer need not notify the plan administrator at the time of the qualifying event. See VII, B, 1, b, below.
An administrator must be careful in its representations to group health plan participants. In one case, a court awarded damages and attorneys fees to an employee who relied detrimentally on the employer's incorrect representations that the employee was entitled to continuation coverage. The court held that, even though the employee was not entitled to such coverage (he was covered under another group health plan at the time of his termination of employment), the employer was equitably estopped from denying the COBRA coverage because the misrepresentations curtailed the employee's search for other group health coverage.373 Similarly, if the SPD misrepresents or omits the length of the election period stated in the group health plan, an election period longer than that stated in the plan may apply to a beneficiary who relies on the SPD. The administrator also may have a duty to determine that the recipient of its notice is legally competent.374
373National Cos. Health Benefit Plan v. St. Joseph's Hosp., Inc., 929 F.2d 1558, 13 EBC 2041 (11th Cir. 1991).
374See VII, B, 2, c, below.
Notice 98-12375 provides information to help employees decide whether to elect COBRA continuation coverage. The notice attempts to help plan participants understand the interaction between COBRA and provisions enacted by HIPAA. An employer maintaining a group health plan is not required to provide this notice. Employers and plan administrators who decide to use the notice are permitted to modify its information to suit the specifics of their plans. However, the information in the notice is not a substitute for any of the notices required to be furnished under COBRA.
3751998-5 I.R.B. 12.
b.	Notice by Employer to Plan Administrator
The employer generally must notify the plan administrator of a qualifying event within 30 days of its occurrence.376 Exceptions to this are the events that the employer may not be aware of, i.e., divorce or legal separation, and a dependent child's ceasing to qualify as such.
376DOL Regs. §2590.606-2(b)(1).
A multiemployer plan may, however, provide for a longer period for employer notice.377 In certain types of multiemployer plans, such as construction trades, the plan administrator may be in a better position to monitor the participant's employment status than any contributing employer. Accordingly, a multiemployer plan may provide that the administrator determines whether a qualifying event has occurred by reason of termination of employment or reduction of hours.378
377§4980B(f)(6)(B); DOL Regs. §2590.606-2(b)(2).
378§4980B(f)(6); see DOL Regs. §2590.606-2(d).
A group health plan may provide for COBRA notice at the time employer-paid coverage terminates rather than at the time of the qualifying event.379 In the case of disability, many employers have a policy of continuing group medical plan coverage for several months after the onset of a disability. While the employer could give the COBRA notice when the employee becomes disabled, it might well prefer to wait until it considers employment terminated. The effect would be to postpone the qualifying event, and thereby the end of the COBRA continuation period.
379§4980B(f)(8).
c.	Notice by Employees/Qualified Beneficiaries
The covered employee or qualified beneficiary is responsible for notifying the plan administrator if a qualifying event occurs due to a divorce or legal separation of the covered employee from the employee's spouse or a dependent child ceases to qualify as such under the requirements of the plan. A limit of 60 days is imposed for the notification.380 The 60-day period begins on the date of the qualifying event, or the date the qualified beneficiary would lose coverage on account of the qualifying event if that is when COBRA coverage begins under the plan.381 Failure of the covered employee and all qualified beneficiaries to give the notice within 60 days after such a qualifying event waives continuation coverage for all qualified beneficiaries with respect to the event.382
380§4980B(f)(6)(C).
381DOL Regs. §2590.606-3(c)(1).
382Regs. §54.4980B-6, Q&A-2(a). See VII, B, 1, c, (1), below, for notice that must be given by disabled qualified beneficiaries.
In the case of the covered employee's divorce or legal separation, it is not necessary for each qualified beneficiary to notify the plan administrator. A single notice sent by or on behalf of the covered employee or any one of the qualified beneficiaries (that is, the spouse or a dependent child) satisfies the notice requirement for all those who become qualified beneficiaries as a result of the divorce or legal separation.383
383Regs. §54.4980B-6, Q&A-2(b). Under DOL Regs. §2590.606-3(e), any employee or representative could give the notice. Failure to provide timely notice to the plan administrator does not affect the plan's obligation to make continuation coverage available when the notice is received. See DOL Regs. §2590.606-3(g).
A plan must establish reasonable procedures to guide participants and beneficiaries in giving notice of qualifying events. The procedures must:

• be described in the plan's SPD;
• specify the individual or entity designated to receive such notices;
• explain how notice is to be given; and
• describe the information the plan considers necessary to provide continuation coverage rights, including determination of disability.384 
384DOL Regs. §2590.606-3(b)(2).
The notice procedures can require use of a specific form, so long as the form is easily available without cost.385 If a plan does not establish reasonable procedures, the participants have considerable leeway in giving an effective notice.386
385DOL Regs. §2590.606-3(b)(3).
386DOL Regs. §2590.606-3(b)(4).
If a notice fails to provide all information provided by the plan's notice procedure, it cannot be rejected by the plan if it provided certain basic information.387 The plan could then notify qualified beneficiaries to provide the missing information.
387DOL Regs. §2590.606-3(d).
d.	Notice by Disabled Qualified Beneficiaries
Qualified beneficiaries who are disabled may be eligible for an extra 11 months of continuation coverage in addition to the regular 18-month continuation coverage period. See VII, C, 2, b, below. To qualify for this extended period of COBRA coverage, a qualified beneficiary must notify the plan administrator of his or her disability status within 60 days of the disability determination under Title II or Title XVI of the Social Security Act.388 Such notice must be given no later than the end of the regular 18-month COBRA coverage period that applies whenever there is a change in employment status.389
388DOL Regs. §2590.606-3(c)(2)(i).
389§4980B(f)(2)(B)(i) (flush language), 4980B(f)(6)(C); ERISA §§602(2) and (3), 603(a)(3); Regs.  §54.4980B-7, Q&A-5(d); DOL Regs. §2590.606-3(c)(2)(ii).
If there is a subsequent determination that the disabled qualified beneficiary no longer is disabled, §4980B(f)(6)(C) obligates the individual, to notify the plan administrator within 30 days of such determination.390 The plan administrator then may terminate COBRA coverage at the beginning of the next month after the determination that a beneficiary is no longer disabled. See VII, C, 2, b, below.
390DOL Regs. §2590.606-3(c)(3).
e.	Method of Giving Notice
COBRA notices may be furnished to qualified beneficiaries by any method that reasonably calculated to ensure actual receipt of the notice by the qualified beneficiary.391 This includes electronic media. Thus, notice by mail to the qualified beneficiary's last known address is deemed sufficient.392 Consequently, an employer has an affirmative duty to record the current address of the covered employee and qualified beneficiaries.
391DOL Regs. §2590.606-1(f), 2590.606-4(f) cross-referencing DOL Regs. §2520.104b-1. See  ERISA §606(a)(4) (COBRA notice upon qualifying event does not have to be in writing; oral notice is sufficient); Swint v. Protective Life Ins. Co., 779 F. Supp. 532, 14 EBC 2200 (S.D. Ala. 1991). Compare to ERISA §606(a)(1) (when COBRA coverage commences under group plan required written notice).
392H.R. Rep. No. 453, 99th Cong., 1st Sess. 567 (1985). See Truesdale v. Pacific Holding Co./Hay Adams Div., 778 F. Supp. 77, 14 EBC 2093 (D.D.C. 1991) (COBRA imposes no requirement that employers confirm receipt of COBRA notices).
Mere posting by the employer of the notice does not comply with the notice requirements. Hand delivery presumably is adequate,393 but hand delivery at the workplace is not adequate notice for the employee's spouse.
393Dehner v. Kansas City S. Indus., Inc., 713 F. Supp. 1397 (D. Kan. 1989).
Comment: An employer or plan administrator would be well advised to obtain evidence of hand delivery, such as a signed receipt.
Courts have held that an administeator satisfies its obligation by giving notice by proper means even if the notice is not received.394 The plan administrator has the burden of proving that it gave the required COBRA notice.395
394Degruise v. Sprint Corporation, 279 F.3d 333 (5th Cir. 2002) employer met its obligation to notify a terminated employee of his COBRA rights by sending the COBRA notice by certified mail, even though the employer learned that the letter was never received.
395See  Stanton v. Larry Fowler Trucking, Inc., 52 F.3d 723, 19 EBC 1189 (8th Cir. 1995).
Note: Courts may decline to enforce COBRA notice deadlines against qualified beneficiaries who are incompetent.396
396Meadows v. Cagle's, Inc., 954 F.2d 686, 14 EBC 2513 (11th Cir. 1992) (plan must furnish SPD to representative of incapacitated qualified beneficiary).
2.	Election of Coverage Continuation
a.	Election Period
Each qualified beneficiary who would lose group health plan coverage as a result of one of the qualifying events must be given the opportunity to elect continuation coverage. Under  §4980B(f)(5)(A), a qualified beneficiary is entitled to a period of at least 60 days in which to make the election. This 60-day period begins on the date coverage would terminate due to a qualifying event, or on the date notice is given to the qualified beneficiary by the plan administrator, whichever is later. An election is considered made when it is sent to the plan administrator.397 However, certain extensions of time that can be granted by the Secretary of the Treasury may apply to the election to continue coverage.398
397Regs. §54.4980B-6, Q&A-1(b).
398See e.g., §7508A for postponement of employee plan deadlines for up to one year due to presidentially declared disasters, or terroristic or military actions; see Rev. Proc. 2005-27, 2005-20 I.R.B. 1050, for list of time-sensitive acts that may be postponed under §7508A.
Note: While a delay in giving a COBRA notice extends the election period, it does not extend the maximum coverage continuation period.399
399DiSabatino v. DiSabatino Brothers, Inc., 894 F. Supp. 810 (D. Del. 1995).
In Lifecare Hospitals, Inc. v. Health Plus of Louisiana, Inc., No. 04-30422 (5th Cir. 7/20/05), the Fifth Circuit held that a health care plan participant may elect to receive COBRA benefits after the 60-day statutory limit. The court noted that although a beneficiary must have a minimum election period of at least 60 days, the statute is silent with respect to the maximum length of an election period, suggesting that the parties to an ERISA plan can choose to have an election period of any length, as long as it is at least 60 days. In this case, the court found, the plan did not limit the COBRA election period in any way, and thus, because the statute left it to the contracting parties to limit the election period and the plan documents failed to do so, there was no maximum election period and no immediate deadline by which the participant had to elect COBRA coverage. The plan specified the maximum period that it would provide coverage to the employee or their dependents after the qualifying event, i.e., that its insurer was only responsible for a terminated employee's health care expenses for 18 months after termination, subject to certain limiting conditions. Thus, the court concluded that because neither the plan nor the statute limited the election period, the participant could have elected COBRA coverage anytime within the 18-month maximum period allotted for continuation coverage provided in the plan documents, citing Branch v. G. Bernd Co., 764 F. Supp. 1527, 13 EBC 2281 (M.D. Ga. 1991), aff'd, 955 F.2d 1574, 14 EBC 2817 (11th Cir. 1992). The court declined to address the insurer's contention that the court's ruling would effectively allow an infinite election period under the statute and characterized COBRA as "remedial legislation" which should be liberally construed to effectuate Congressional intent to protect employee participants in employee benefit plans. Furthermore, the court ruled that the benefits would apply retroactively because the participant applied for coverage in a timely manner and there was no gap between the employer-sponsored coverage and the COBRA coverage. Additionally, the court held that the insurer was obligated to pay for the participant's medical expenses, regardless of whether the participant was given adequate COBRA notification, because without proof that the employer's possibly inadequate notification harmed the insurer, the insurer would not be entitled to indemnification from the employer.
A qualifying event that gives rise to COBRA rights for multiple qualified beneficiaries does not necessarily mean multiple elections must be made. An election by the employee or spouse to continue coverage applies, under §4980B(f)(5)(B), to all the other qualified beneficiaries who would be eligible to receive continuation coverage as a result of the qualifying event, except to the extent the election specifies otherwise.
Section 4980B(f)(5)(B) does not, however, permit either the employee or his spouse to decline continuation coverage on behalf of any other covered beneficiary. A group health plan must offer each qualified beneficiary the opportunity to make an independent election to receive COBRA coverage and, during an open enrollment period, to choose among any options available to similarly situated active employees (see VII, C, 1, a, below, for the definition of this term). Thus, a child of a deceased employee may elect continuation coverage even if the surviving spouse does not.400
400Regs. §54.4980B-6, Q&A-6. This requirement also applies to any child born to or placed for adoption with a covered employee during a period of COBRA continuation coverage. An election for a minor child may be made by the child's parent or legal guardian.
The group health plan must provide COBRA coverage for the entire election period, unless the qualified beneficiary revokes a waiver.401 The date of the qualifying event (and thus, the beginning of the maximum coverage period) is not delayed merely because a plan provides coverage during the election period. Claims incurred by the qualified beneficiary during the election period do not have to be paid until COBRA continuation coverage is elected and any payment required for coverage is made.
401Regs. §54.4980B-6, Q&A-3(a). An employer or employee organization maintaining a group health plan using an indemnity or reimbursement arrangement can satisfy this requirement by continuing the qualified beneficiary's coverage during the election period or by discontinuing the coverage until the qualified beneficiary elects and pays for COBRA and then retroactively reinstating the qualified beneficiary's coverage. Regs.  §54.4980B-6, Q&A-3(b).
The regulations adopt the holding in Communications Workers of America v. NYNEX Corp.,402 regarding the responses that a group health plan must make with respect to the rights of a qualified beneficiary during a qualified beneficiary's election period. Specifically, the plan must make a complete response to any inquiry from a health care provider regarding the qualified beneficiary's right to coverage during the election period.403
402898 F.2d 887, 12 EBC 1049 (2d Cir. 1990).
403Regs. §54.4980B-6, Q&A-3(b). Thus, if the qualified beneficiary has not yet elected COBRA continuation coverage but remains covered under the plan during the election period (subject to retroactive cancellation if no election is made), the plan must inform the health care provider. Conversely, if the qualified beneficiary is not covered during the election period prior to her or his election, the plan must inform the health care provider that the qualified beneficiary does not have current coverage but will have retroactive coverage if the qualified beneficiary elects COBRA coverage. (Regs.  §54.4980B-8, Q&A-5(c) also includes similar requirements with respect to inquiries made by health care providers during the 30- and 45-day grace periods for paying for COBRA continuation coverage.)
A qualified beneficiary who waives COBRA continuation coverage during the election period can revoke the waiver before the end of the election period, but the group health plan is not required to provide coverage as of any date prior to the revocation.404
404Regs. §54.4980B-6, Q&A-4.
b.	Initial Premium
A qualified beneficiary who elects continuation coverage has 45 days from the date of the initial election to pay the premium for the period before the election.405 Apparently, any person may make the required payment on behalf of a qualified beneficiary, including a hospital or a new employer.406
405§4980B(f)(2)(C); Regs. §54.4980B-8, Q&A-5(b).
406The regulations refer to the payment requirement without identifying the person who makes the payment. Regs. §54.4980B-8, Q&A-1. See Preamble to regulations, 64 Fed. Reg. 5160, 5170 (2/3/99).
The initial premium may be applied by the plan to the period before the election, unless the plan permits a qualified beneficiary to waive coverage for a specified period.407 Thereafter, the qualified beneficiary must be given a grace period of at least 30 days for the payment of any other premium.408
407Regs. §54.4980B-8, Q&A-4.
408§4980B(f)(2)(B)(iii); Regs. §54.4980B-8, Q&A-5(a). But see VII, B, 2, c, below, as to the effect of an insured's mental incapacity on the grace period for paying a late COBRA premium.
Note: By delaying the election for the full 60 days, a qualified beneficiary could have at least 105 days to decide whether to pay the premium and obtain COBRA coverage retroactively. For a divorced spouse, the period could be more than five months if notice to the plan administrator were delayed for the full 60 days (see VII, B, 1, c, above).
If a payment is short by an insignificant amount, the plan may either treat the payment as being paid in full or notify the qualified beneficiary of the amount of the deficiency and give a reasonable time for the deficiency to be paid. Payments that are deficient by the lesser of $50 or 10% of the required amount are deemed to be short by an insignificant amount.409 The regulations indicate that 30 days is reasonable for this purpose.410
409Regs. §54.4980B-8, Q&A-5(d).
410Id.
If a qualified beneficiary elects continuation coverage, it must be effective retroactive to the date of loss of coverage. While such retroactivity does not present a problem for a self-insured group health plan, it may be awkward for an insured plan or an HMO. An employer with an insured plan is faced with the choice of continuing premium payments for a qualified beneficiary who may not elect COBRA coverage, or working out an arrangement for retroactive reinstatement under the policy for a qualified beneficiary who does elect COBRA coverage.
An HMO may require a qualified beneficiary to pay for health care services if the qualified beneficiary has not elected, and paid for, continuation coverage.411 Upon timely payment for the coverage, the expenses would be reimbursed. Alternatively, the HMO can treat the use of services as a constructive election of coverage, if it discloses that policy in advance. That would leave the HMO with the task of collecting the premium from the qualified beneficiary.
411Regs. §54.4980B-6, Q&A-3(c).
Qualified beneficiaries must be allowed to pay for COBRA coverage in monthly installments. The regulations include as examples weekly, quarterly, or semiannual payments to show that shorter or longer installment periods are permitted.412
412Regs. §54.4980B-8, Q&A-3.
For more information on premiums, see VII, C, 3, below.
c.	Incompetent Qualified Beneficiary
An election on behalf of a qualified beneficiary who is incapacitated or dies can be made by the legal representative of the qualified beneficiary or the qualified beneficiary's estate, as determined under applicable state law, or by the spouse of the qualified beneficiary.413
413Regs. §54.4980B-6, Q&A-6.
Courts have declined to enforce COBRA deadlines against qualified beneficiaries who are incapacitated. One court held that the deadline for electing COBRA coverage is extended until a personal representative is designated to make the election on behalf of an incapacitated qualified beneficiary.414 Another court relieved an incapacitated qualified beneficiary from a missed premium deadline.415
414Branch v. Bernd Co., 955 F.2d 1574, 14 EBC 2817 (11th Cir. 1992).
415Sirkin v. Phillips Colleges, Inc., 779 F. Supp. 751, 14 EBC 2193 (D.N.J. 1991). The court noted that while the statute contains no exceptions for failure to make payment, in situations such as this, a court must "fill in the gaps of the statutory scheme" and liberally construe ERISA in favor of protecting participants.
d.	Waiver of COBRA Rights
A qualified beneficiary may waive COBRA continuation coverage during the election period. Such a waiver can be revoked at any time before the end of the election period. However, if a qualified beneficiary revokes a previously made waiver, coverage need not be provided retroactively (i.e., from the date of loss of coverage until the waiver was revoked).416
416Regs. §54.4980B-6, Q&A-4.
A plan may not withhold anything to which a qualified beneficiary is otherwise entitled (by operation of law or other agreement) in order to compel payment for COBRA coverage or to coerce the qualified beneficiary to give up rights to COBRA coverage -- including the right to use the full election period to decide whether to elect such coverage. Any purported waiver obtained by means of such a withholding is invalid.417
417Regs. §54.4980B-6, Q&A-5.
C. Benefits Provided
1.	Type of Coverage
a.	Similarly Situated Non-COBRA Beneficiaries
Group health plan coverage provided to a qualifying beneficiary who elects coverage under COBRA must duplicate the coverage provided to active employees. Under §4980B(f)(2)(A), the continuation coverage must be identical to that provided contemporaneously to "similarly situated" persons covered under the plan who have not experienced a qualifying event. Any changes in coverage to active employees also must apply to COBRA coverage. Further, any rights granted to active employees also must be granted to qualified beneficiaries.418
418Regs. §54.4980B-5, Q&A-1(a).
Continuation coverage must include continued availability of any medical expense reimbursement account previously maintained for the qualified beneficiary.419 An employee who had experienced a qualifying event ordinarily would not accumulate any further credits to such an account, either through employer contributions or salary reduction contributions, but would be required to pay premiums based on the amounts contributed before the qualifying event (see VII, C, 3 below). Reimbursements from the account would have to be made available during the continuation period on the same basis as with respect to active employees.
419Regs. §54.4980B-2, Q&A-8(b).
Note: Credits to a reimbursement account that are attributable to salary reduction contributions under §125 must be used to pay expenses incurred during a benefit period of 12 months or less or be forfeited.420 This limitation would apply to qualified beneficiaries as well as active employees.
420Prop. Regs. §1.125-1, Q&A-17.
The coverage available during the continuation periods generally is limited to the coverage that was in effect for the qualified beneficiary immediately before the qualifying event. Changes of coverage must be permitted, however, under the same circumstances as for active employees. Further, coverage may not be conditioned upon, or discriminate on the basis of lack of, evidence of insurability.421
421§4980B(f)(2)(D); Regs. §54.4980B-5, Q&A-1(a). This provision now duplicates the broader prohibition against discrimination in HIPAA, described in VIII, E below.
An open enrollment period is a period during which an employee covered under a health plan may choose to be covered under another group health plan or to add or eliminate coverage as needed. If an employer permits active employees to change benefit coverage during an open enrollment period, it must extend the same opportunity to change benefit elections to each qualified beneficiary receiving COBRA coverage.422
422Regs. §54.4980B-6, Q&A-6.
If a qualified beneficiary participates in a region-specific benefit package -- such as an HMO or an on-site clinic--that will not service health needs in the area to which the qualified beneficiary is relocating (regardless of the reason for the relocation), the qualified beneficiary must be given an opportunity to elect alternative coverage that the employer or employee organization makes available to active employees.423 If the employer or employee organization does not make group health plan coverage available to similarly situated non-COBRA beneficiaries that can be extended in the relocation area, but has coverage for other employees that can be extended in that area, then the coverage made available to those other employees must be made available to the relocating qualified beneficiary.
423Regs. §54.4980B-5, Q&A-4(b).
Plan options, such as "conversion" features, must be offered to qualified beneficiaries if they are offered to similarly situated active employees. Conversion features generally enable terminating employees to convert their group health coverage to individual health coverage without regard to pre-existing conditions and without having to undergo a medical examination or otherwise demonstrating "proof of insurability."424 Under §4980B(f)(2)(E), conversion must be offered during the last six months of the continuation period.
424Where a conversion option exists, qualified beneficiaries must be notified within 180 days prior to the end of the continuation period that such an option is available. Regs.  §54.4980B-7, Q&A-8.
b.	Deductibles and Coinsurance; Benefit Limits
The §4980B(f)(2)(A) requirement of similar coverage also applies to deductibles and policy limits. Thus, deductibles and coinsurance amounts applicable to qualified beneficiaries cannot be any greater than those for active employees even though the employer may charge COBRA beneficiaries a higher premium. Any credit toward annual deductibles or annual benefit limits accumulated before the loss of coverage would be carried forward during the coverage continuation period.425
425Regs. §54.4980B-5, Q&As-2(a) and 3(a).
Example: An employee with individual coverage who incurred $150 in covered expenses toward his plan's $250 annual deductible before termination of employment is entitled to benefits after he incurs another $100 after termination but during the same annual deductible period. Conversely, if the employee had been hospitalized for 20 days during the annual benefit period, under a plan that pays for no more than 120 days during each benefit period, he would be entitled to an additional 100 days during the same benefit period after his loss of coverage.
A qualifying event may result in division of the family unit into two, as in the case of a divorce. In that event, it appears that the new COBRA family unit may be treated as if it were a separate family unit from the beginning of the benefit period in which COBRA coverage begins.
Example: A group health plan applies a separate $200 annual deductible to each individual it covers, except that each family member is treated as having satisfied the individual deductible once the family has incurred $500 of covered expenses during the year. The plan provides that upon the divorce of a covered employee, coverage will end immediately for the employee's spouse and any children who do not remain in the employee's custody. A covered employee with four dependent children is divorced, the spouse obtains custody of the two oldest children, and the spouse and those children all elect COBRA continuation coverage to begin immediately. The family accumulated $420 of covered expenses before the divorce, as follows: $70 by each parent, $200 by the oldest child, $80 by the youngest child, and none by the other two children. The resulting family consisting of the spouse and the two oldest children accumulated a total of $270 of covered expenses, and thus the remaining deductible for that family could be as high as $230 (because the plan would not have to count the incurred expenses of the covered employee and the youngest child). The remaining deductible for the resulting family consisting of the covered employee and the two youngest children is not subject to the rules for determining deductibles because their coverage is not COBRA continuation coverage.426
426Regs. §54.4980B-5, Q&A-2(f), Ex. 2.
In contrast, if the employee continues family coverage, claims incurred by the new family unit would apparently continue to be credited against family deductible limits and other limits. The regulations take the position that because the employee's coverage is not COBRA coverage, division of the family unit does not affect the employee's credit toward deductibles. After the qualifying event, only claims of the employee's family unit would be credited against deductibles for that family unit.427
427Regs. §54.4980B-5, Q&As-2(f), Ex. 2, and 3(b), Exs. 2 and 3.
c.	Multiemployer Plan Withdrawal
The withdrawal of a contributing employer from a multiemployer health and welfare fund is not a qualifying event under COBRA (see VII, A, 2, above). Therefore, employees who lose coverage because the contributing employer withdrew from the plan need not be offered COBRA coverage.428
428Regs. §54.4980B-9, Q&A 9.
When the employer withdraws, however, there may be existing COBRA qualified beneficiaries who formerly worked for the employer and are receiving benefits from the multiemployer plan. This raises the issue of whether the plan can terminate COBRA coverage for these qualified beneficiaries and transfer them to a new health plan of the withdrawing employer that covers employees who formerly were covered under the multiemployer plan. In a case of first impression, the Fifth Circuit held that a multiemployer medical plan was required to continue providing COBRA coverage to the former employees of a contributing employer after that employer ceased making contributions to that plan, even though the employer established a new health plan for its current active employees.429 The court looked to ERISA §601(a), which makes the plan sponsor responsible for providing continuation coverage under COBRA, and to ERISA §3(16)(B)(iii), which defines plan sponsor, in pertinent part, as "the association, committee, joint board of trustees, or other similar group of representatives of the parties who establish or maintain the plan." As a result, the multiemployer plan, not the employer, was responsible for providing continuation coverage.
429In re AppleTree Markets, Inc., 19 F.3d 969, 17 EBC 2681 (5th Cir. 1994).
Under the regulations, a multiemployer plan from which an employer withdraws retains the COBRA obligation with respect to former employees of the withdrawing employer only if the employer does not provide substitute medical benefit coverage to the bargaining unit. Thus, in a typical case in which the withdrawing employer begins contributing to a different multiemployer medical plan, or substitutes a single-employer medical plan for the bargaining unit, the COBRA obligations transfer to the successor group health plan.430
430Regs. §54.4980B-9, Q&A-10. This rule is contrary to the holding in In re AppleTree Markets, Inc.
Note: The result when an employer bargains into a multiemployer plan is consistent. Because existing COBRA beneficiaries are entitled to the same coverage as similarly situated active employees, existing COBRA beneficiaries would also have multiemployer plan coverage substituted for their single-employer plan coverage.
d.	Special Privileges
Though qualified beneficiaries generally are not entitled to better coverage than their counterparts who have not experienced a qualifying event, there is at least one respect in which qualified beneficiaries' rights are superior. A spouse or dependent child who elects continuation coverage is considered to be similarly situated, for purposes of COBRA, to an active employee. 
Example: A dependent child who loses coverage by reason of ceasing to qualify as such could elect continuation coverage and provide coverage for a newborn child, even though the employee's grandchild could not otherwise have been covered under the plan.431
431Regs. §54.4980B-5, Q&A-5.
e.	Business Reorganizations
Among the thorniest issues in COBRA administration has been the allocation of COBRA obligations upon sale of a business.
The regulations reflect the legislative intent to provide broad opportunity for continvation of group medical coverage. They enunciate the following principles:

• A sale of stock is not a qualifying event because it does not cause a termination of employment (see VII, A, 2, above).432
• The seller of a business and all members of its controlled group are considered a single employer, and a buyer of a business and all members of its controlled group are considered a single employer, for COBRA purposes.433
• If the selling group maintains any group medical plan after the divestiture, the selling group retains COBRA obligations for individuals whose qualifying events occurred before or at the time of the divestiture.434
• If the selling group ceases to maintain any group health plan in connection with the divestiture, the COBRA obligations pass to the buying group.435
• However, if the buying group in an asset sale does not continue the divested business without substantial change, the COBRA obligations remain with the selling group.436
• The regulations are not intended to restrict a buyer or a seller from assuming contractually COBRA obligations that are not imposed on it.437
432Regs. §54.4980B-9, Q&A-5.
433Regs. §54.4980B-9, Q&As-2 and 3.
434Regs. §54.4980B-9, Q&A-8(a).
435Regs. §54.4980B-9, Q&As-6(a), 8(b) and (c).
436Id.
437Regs. §54.4980B-9, Q&A-7.
As a result of these principles, many asset sales would be treated, for COBRA purposes, as if they were stock sales. Consequently, it is possible that a participant in a medical plan of the selling group could be left without medical coverage and without COBRA rights even if the selling group or the buying group maintains a group medical plan.
Note: The regulations specify that the same rule applies to assets purchased in a bankruptcy proceeding.438
438Regs. §54.4980B-9, Q&As-4, 8(c)(1).
Conversely, if the buying group did not continue the acquired business without interruption or substantial change, the buying group would not be a successor employer. In that event, the divestiture would constitute a qualifying event for participants who terminated employment with the selling group, and the basic rules assigning COBRA responsibility would apply.
The regulations make it clear that COBRA confers rights with respect to a divestiture only for employees associated with the divested unit and their family members. COBRA beneficiaries whose qualifying events preceded the divestiture are within the scope of the regulations only if their last employment with the selling group was with the divested business.439
439Regs. §54.4980B-9, Q&A-8(c)(1).
Comment: Because many divestitures would not constitute qualifying events, the regulations may have a larger impact on COBRA beneficiaries whose qualifying events preceded the divestiture than on employees who are directly affected by the divestiture.
After a divestiture of substantially all of its assets, a seller may continue to employ a few individuals temporarily to wrap up its affairs, and continue to provide them group medical coverage. If that coverage terminates a short time after the divestiture, it is considered to have terminated in connection with the divestiture. As a result, the seller's remaining employees would have COBRA rights under any group medical plan maintained by the buying group, if the buying group continues the business without interruption or substantial change.440
440Regs. §54.4980B-9, Q&A-8(d), Ex. 8.
2.	Duration of COBRA Coverage
a.	In General
The length of the period for which continuation coverage must be offered depends on the nature of the qualifying event. In the case of an employee who is terminated or whose hours are reduced, under  §4980B(f)(2)(B)(i)(I) the maximum period for continuation coverage is 18 months. The 18-month period is extended to 29 months in the case of a qualified beneficiary who is determined to be disabled441 (see VII, C, 2, b, below, for more discussion of disabled qualified beneficiaries). Continuation coverage must be provided for up to 36 months in all other cases.442
441§4980B(f)(2)(B)(i) (flush languge).
442§4980B(f)(2)(B)(i)(II) through  (V).
Note: The maximum required period of continuation coverage ends 36 months after the retiree's death if a former employer becomes insolvent.
Section 4980B(f)(2)(B) generally requires the continuation period to begin on the date of the qualifying event. Failure to give the qualified beneficiary the required notice443 does not extend the maximum continuation coverage period.444 Failure to give timely notice merely subjects the administrator or employer to sanctions for violation of the notice requirement (see VII, D, below). However, a plan may provide instead that the continuation coverage period begins with the date of the loss of coverage. This approach enables a plan administrator to wait until continued employer-paid coverage, for example to a disabled employee, terminates before giving the notice of qualifying event.445
443See VII, B, 1, above.
444DiSabatino v. DiSabatino Bros., 894 F. Supp. 810 (D. Del. 1995).
445See VII, B, 1, a, above.
Comment: Giving the COBRA notice at the time of the qualifying event enables an employer to count toward the maximum COBRA period any period during which the employer continues to provide coverage.
If a qualified beneficiary's COBRA coverage under a group health plan ends because the maximum coverage period expires, the group health plan must, during the 180-day period that ends on the expiration day, give the qualified beneficiary the option of enrolling under a conversion health plan if such an option otherwise generally is available to similarly situated non-COBRA beneficiaries.446
446Regs. §54.4980B-7, Q&A-8.
b.	For Disabled Qualified Beneficiaries
The maximum continuation coverage period is extended from 18 months to 29 months, if a qualified beneficiary is disabled (under Title II or XVI of the Social Security Act). Under  §4980B(f)(2)(B)(i), the extension applies only if the disability exists at any time during the first 60 days of COBRA coverage. The qualified beneficiary must notify the plan administrator of the disability determination within 60 days after the date of that determination. The qualified beneficiary also must notify the plan administrator within 30 days of any final determination that he or she is no longer disabled.447 Coverage may end with the month that begins no more than 30 days after the date of a final determination that the beneficiary is no longer disabled.448
447§4980B(f)(6)(C). See VII, B, 2, e, below.
448§4980B(f)(2)(B)(v).
Note: For a child born to or placed for adoption with a covered employee during the period of continuation coverage, the first 60 days of COBRA coverage is measured from the date of birth or placement for adoption.449
449Regs. §§54.4980B-7, Q&A-5(c). The definition of placement for adoption is contained in Regs. §54.4980B-3, Q&A-1(g).
The extension to 29 months applies not only to the disabled covered employee, but also to his covered dependents.450 Accordingly, the notice that must be given within 60 days after the qualifying event can be given by any of the participant's family members who are affected by the qualifying event.451
450§4980B(f)(2)(B)(i) (flush language).
451Regs. §54.4980B-7, Q&A-5(d).
Note: The plan may require payment equal to 150% of the applicable premium during the disability extension452 (see VII, C, 3, below).
452Regs. §54.4980B-8, Q&A-1(b).
c.	For Military
The Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA) gives certain members of the military reserves the right to up to 18 months of continuation coverage when they are called to active duty. USERRA coverage is alternative coverage.453 Thus, the periods of coverage under COBRA and USERRA run concurrently.
453Regs. §54.4980B-7, Q&A-7(a). See also DOL Prop. Regs. §1002. 164(a) (RIN 1293-AA09, 69 Fed. Reg. 56266 (9/20/04)).
d.	Extension Because of Second Qualifying Event
A second qualifying event, such as a death or divorce, can occur while continuation coverage is in effect--within 18 months of the first qualifying event (or 29 months for a disability extension). The maximum coverage period is extended to 36 months by a second qualifying event that gives rise to a 36-month maximum coverage period.454 The extension applies only to individuals who were qualified beneficiaries under the group health plan for the first qualifying event.
454§4980B(f)(2)(B)(i)(II); Regs. §54.4980B-7, Q&A-6(b).
Example: An employee terminates employment on Dec. 31, 2004 and elects family COBRA coverage. If the employee dies with coverage in effect, and his or her spouse and dependent children elected COBRA coverage before July 1, 2006, the spouse and dependent children are entitled to COBRA coverage through Dec. 31, 2007.455
455Regs. §54.4980B-7, Q&A-6(b).
Under  §4980B(f)(1)(B)(i)(II) the bankruptcy of the employer is not a second qualifying event that extends coverage.
An additional rule applies to rectify the potential inequity in the case of a qualifying event that occurs after an employee becomes entitled to Medicare. Such an employee's spouse and dependents ordinarily would be entitled to a maximum COBRA continuation period of 18 months. In contrast, if the employee retired shortly before age 65, or were covered as a retiree and lost coverage at age 65, his spouse and eligible dependents would be entitled to up to 36 months of COBRA coverage. The special Medicare rule in  §4980B(f)(1)(B)(i)(V) lengthens from 18 to 36 months the maximum period of COBRA coverage for the spouse and any covered dependents of an employee who retires within 18 months after becoming entitled to Medicare.456
456See e.g., Rev. Rul. 2004-22, 2004-10 I.R.B. 553 (employee becoming entitled to medicare benefits within 18-month COBRA contribution period was not second qualifying event that extended coverage period to 36 months).
e.	Trade Adjustment Assistance Election
An individual who becomes eligible for trade adjustment act assistance under the Trade Act of 2002457 may also be eligible to elect COBRA coverage (for himself and covered beneficiaries) after expiration of the regular 60-day election period. Section 605(b) of ERISA458 requires a second COBRA election period for an individual entitled to trade adjustment assistance who did not elect continuation coverage during the regular election period, commencing on the first day of the month in which he is determined to be a trade adjustment assistance eligible individual. However, the COBRA election cannot be made more than six months after the date of the loss of coverage.
457P.L. 107-210, effective Aug. 6, 2002.
458Added by P.L. 107-210, §203(e)(1)(A).
Any continuation coverage elected during the second election period begins with the second election period, and is not retroactive to the date the coverage lapsed.
f.	Early Termination
The period of continuation coverage can be terminated short of the maximum 36, 29, or 18 months, as the case may be. The plan may terminate coverage when:

• the employer no longer provides group health coverage to any of its employees;459
• the qualified beneficiary fails to make timely premium payments;460
• the qualified beneficiary becomes covered under another group health plan (subject to certain exceptions);461
• the qualified beneficiary becomes entitled to Medicare benefits;462
• the qualified beneficiary is determined to be no longer disabled during the disability extension period;463 or
• the qualified beneficiary engages in fraud or other conduct that justifies termination of active employee coverage under the plan.464
459§4980B(f)(2)(B)(ii); Regs. §54.4980B-7, Q&A-1(a)(3).
460§4980B(f)(2)(B)(iii); Regs. §§54.4980B-7, Q&A-1(a)(2), 54.4980B-8, Q&A-5.
461§4980B(f)(2)(B)(iv)(I); Regs. §54.4980B-7, Q&As-1(a)(5), (3).
462§4980B(f)(2)(B)(iv)(II); Regs.  §54.4980B-7, Q&As-1(a)(5), (3).
463§4980B(f)(2)(B)(v); Regs. §54.4980B-7, Q&As-1 and 3.
464Regs. §54.4980B-7, Q&A-1(b).
Section 4980B(f)(2)(B)(ii) makes it clear that termination of the group health plan furnishing coverage does not necessarily terminate the continuation period. An employer that terminated less than all of its plans would have to cover, under one of its other group health plans, the qualified beneficiaries of the terminated plan. Because modifications in coverage provided to active employees are to apply to similarly situated qualified beneficiaries (see VII, C, 1, above), the continuation coverage could be changed to conform to the other plan.
Note: Any group health plan of any other entity under common control with the employer would be treated as a plan maintained by the employer. See VII, A, 1, a, above.
One of the most controversial of COBRA's issues was whether alternative coverage a qualified beneficiary has at the time of the qualifying event cut off COBRA rights. The controversy centered around the interpretation of the language in §4980B(f)(2)(B)(iv) "the date on which the qualified beneficiary first becomes, after the date of the election - (I) covered under any other group health plan ...." Some courts declined to apply this language literally, being reluctant to extend COBRA rights to qualified beneficiaries who had recourse to equivalent pre-existing coverage through another plan.465
465E.g., Brock v. Primedica, Inc., 904 F.2d 295, 12 EBC 2118 (5th Cir. 1990).
However, the U.S. Supreme Court ended the controversy with its holding Geissal v. Moore Medical Corp.466 The Court held that the employer cannot terminate a former employee's medical coverage under COBRA simply because the former employee also was covered under a spouse's health plan at the time of the COBRA qualifying event. The court explained that under the plain meaning of  §4980B(f)(2)(B)(i), Geissal was continuously covered under his wife's health plan both before and after he made his COBRA election and, thus, did not first become covered under his wife's plan after the date of his election.
466524 U.S. 74, 22 EBC 1161 (1998). See Regs. §54.4980B-7, Q&A-2(a). See also Geissal v. Moore Medical Corp., 338 F.3d 926, 30 EBC 2692 (8th Cir. 2003), cert. denied, 124 S. Ct. 1419 (2004) (although decedent was wrongly denied continuation coverage, ERISA precludes decedent's estate from recovering medical expenses that were paid by decedent's spouse's health plan; however, case remanded for determination of whether decedent's employer remained liable under COBRA for medical expenses that had not been paid by decedent's spouse's health plan).
COBRA coverage also terminates when an individual with end stage renal disease (ESRD) becomes entitled to Medicare benefits. The court in Blue Cross and Blue Shield of Texas v. Shalala467 rejected the Department of Health and Human Services's contention that the Medicare-as-Secondary-Payer statute468 extends COBRA to include individuals with ESRD even though they are entitled to Medicare payments. According to the court, ESRD patients should be treated no differently than the aged or disabled in connection with the termination of their COBRA coverage as a result of entitlement to Medicare benefits.
467995 F.2d 70, 17 EBC 1370 (5th Cir. 1993).
46842 USC §1395(b). See X, B, below.
3.	Payment of Premiums
COBRA permits a group health plan to require a qualified beneficiary to pay the full cost of continuation coverage, whether or not the plan is contributory for active employees. The maximum cost generally is 102% of the applicable premium.469 The extra 2% is intended to defray the cost of administering continuation coverage.
469§4980B(f)(2)(C).
A special charge is permitted for coverage during the disability extension. The plan may charge 150% of the applicable premium for the period during which coverage is extended by reason of disability of a disabled qualified beneficiary.
Note: The limit is 102% if only nondisabled qualified beneficiaries are in the coverage group.470
470Regs. §54.4980B-8, Q&A-1(b).
a.	Applicable Premium
Section 4980B(f)(4)(A) defines the applicable premium as the cost to the plan of "regular" (i.e., noncontinuation) coverage for similarly situated persons. The cost includes any portion paid by employees. Just as changes in coverage for active employees must apply to qualified beneficiaries as well, any increase in the applicable premium during the continuation period could be imposed for continuation coverage, and any decrease must be reflected.471
471Regs. §54.4980B-8, Q&As-1 and 2.
b.	Special Rule for Self-Insured Plans
The applicable premium for any period of continuation coverage under a self-insured plan must be based on a reasonable estimate of the cost of providing coverage for the same period to similarly situated beneficiaries. The cost must be determined on an actuarial basis and must reflect factors prescribed in regulations promulgated by the Secretary of the Treasury or the Secretary of Labor.472
472§4980B(f)(4)(B)(i).
If there is no significant difference in the coverage, or the employees covered, under a self-insured plan, the plan's actual experience can be used. This approach requires that the premium be fixed before the beginning of each 12-month "determination period" selected by the administrator, on the basis of the plan's cost for the previous determination period. The previous period's cost is adjusted for inflation using the implicit price deflator of the gross national product published in the Survey of Current Business of the Department of Commerce.473
473§4980B(f)(4)(B)(ii).
Note: The requirement in  §4980B(f)(4)(C) that the determination of the applicable premium be made before the beginning of each determination period necessitates compilation and analysis of the experience for the prior determination period before it ends.
Comment: A single 12-month determination period would not be a reliable predictor in a small self-insured plan. Perhaps an average of several years' experience could qualify as a determination on an actuarial basis under §4980B(f)(4)(B)(i).
c.	Premium Based on Similarly Situated Beneficiaries
While §4980B(f)(4)(A) refers to similarly situated beneficiaries who have not experienced a qualifying event, §4980B(f)(4)(B) bases the applicable premium for a self-insured plan simply on similarly situated beneficiaries. Thus, it appears that the applicable premium for a self-insured plan may be based on the plan's experience with COBRA participants.
It is simple enough to relate the continuation coverage premium for a single former employee to the applicable premium for a single active employee, and the continuation coverage premium for a former employee and his or her family to the applicable premium for an active employee's family coverage. But it may not always be clear who is similarly situated to a qualified beneficiary under §4980B(f)(4)(A).
If both an employee and a spouse or dependent elect COBRA coverage, the plan may base its COBRA premium on its rate for family coverage.474 However, if only one of the qualified beneficiaries elects COBRA coverage, the COBRA premium must be based on the plan's cost of individual coverage.
474Rev. Rul. 96-8, 1996-1 C.B. 286.
Comment: Charging a family premium for COBRA coverage of an employee and spouse raises questions as to how the premium would be divided between the two (especially if they were divorced), and what the consequence would be of failure of one of them to pay premiums. Also, it is not clear how the COBRA premium should be determined if the employee continues to be covered as an active employee.
d.	Method of Payment
Under §4980B(f)(2)(C), the premium may be paid in monthly installments, but a plan may permit payment at other intervals. A grace period of at least 30 days must be permitted.475 Additional time must be allowed, however, if allowed for active employees to pay their share of premiums, or allowed for the employer to pay its premium.476 For the time limit for payment of the premium for the period before election of continuation coverage, see VII, B, 2, above.
475§4980B(f)(2)(B)(iii).
476Regs. §54.4980B-8, Q&A-5(a).
The regulations extend an additional protection to qualified beneficiaries. If a partial payment is made on time, the plan cannot terminate coverage if the payment is not short by more than 10% (or $50 if less). If terminating coverage for nonpayment, the plan must notify the qualified beneficiary of the shortfall and allow a reasonable period for payment of the deficiency. Thirty days is considered a reasonable period.477
477Regs. §54.4980B-8, Q&A-5(d). See Chaganti v. Sun Microsystems, No. C 03-05785 CRB (N.D. Cal. 11/23/04) (plan administrator did not wrongfully terminate COBRA Coverage when qualified beneficiary failed to make timely premium payments; nor did administrator violate COBRA for making qualified beneficiary pay retroactive premiums back to date of qualifying event).
In addition, a premium payment is considered to be made when it is sent to the plan.478 Consequently, a plan must in practice allow more than a 30-day grace period before terminating coverage.
478Regs. §54.4980B-8, Q&A-5(e). See Fink v. Dakotacare, 324 F.3d 685, 30 EBC 1289 (8th Cir. 2003) (beneficiary who did not enroll in former employer's new group health plan did not lose right to COBRA continuation coverage benefits because she continued to send COBRA premium payments to former insurer).
D. Penalties
1.	Excise Taxes
Failure to comply with COBRA's continuation coverage requirements can subject the person or persons responsible to excise taxes. The tax generally is $100 per day during the noncompliance period for each failure.479
479§4980B(b)(1); Regs. §54.4980B-2, Q&A-9.
a.	Determination of Amount
The excise tax imposed can be higher, or lower, than $100 per day per failure to comply. Multiple violations with respect to a single qualified beneficiary (e.g., charging an incorrect premium and offering the wrong coverage), do not increase the tax. However, the IRS may increase the tax for a failure that affects more than one qualified beneficiary. The maximum daily tax with respect to all qualified beneficiaries affected by the same qualifying event cannot exceed $200.480
480§4980B(c)(3).
The tax also may be increased if the failure is not corrected before the employer receives a notice of examination. In that event, the minimum tax with respect to a single qualified beneficiary is at least $2,500. The minimum increases to $15,000 if the violations are egregious enough so as not to be de minimis over the course of a year.481
481§4980B(b)(3).
Several factors also can mitigate the amount of tax. The noncompliance period, during which the daily tax liability accrues, ends six months after the maximum coverage continuation period or upon earlier correction of the failure.482 If the failure is corrected within 30 days, the tax is eliminated altogether, provided the failure was due to reasonable cause.483 The tax also can be avoided if none of the persons responsible for compliance under §4980B(e) knew of the failure or could have known in the exercise of reasonable diligence.484 Further, the Secretary can waive the tax, entirely or in part, if it is found to be excessive in view of the nature of the failure.485
482§4980B(b)(2).
483§4980B(c)(2).
484§4980B(c)(1).
485§4980B(c)(5).
An employer generally cannot be assessed for a taxable year more than 10% of the employer's total expenditure for group health plans in the prior taxable year, or $500,000, if less.486
486§4980B(c)(4)(A)(i).
Note: All members of a controlled group of employers under §414(b),  (c), or  (m) are treated as a single employer for purposes of COBRA.487 If members have different taxable years, the excise tax limit is allocated in accordance with  §1561.488
487§414(t).
488§4980B(c)(4)(A)(ii).
For a multiemployer plan, the ceiling for each taxable year of the trust is the same (10% of the amount paid or incurred by the trust fund during the trust's taxable year, or $500,000 if less).489 As discussed below, others responsible for administering or providing benefits under a plan can be liable for the tax. However, no such person can be assessed more than $2,000,000 for all its failures to comply during a single taxable year.490 These limits do not apply if the noncompliance is due to willful neglect.
489§4980B(c)(4)(B).
490§4980B(c)(4)(C).
b.	Persons Liable
An employer is liable for the tax imposed by  §4980B(a) with respect to all failures to comply with COBRA relating to the plans it sponsors. "Employer" also means a group of employers that are related in the ways described in §414.491 A multiemployer plan is itself liable for tax for its own noncompliance.492 For any other plan, the excise tax is imposed on the employer maintaining the plan. In certain circumstances, the excise tax can be imposed on other persons involved with the provision of benefits under the plan, such as an insurer providing benefits under the plan or a third-party administrator administering claims under the plan. However, liability does not extend to an individual in his or her capacity as an employee.493
491§414(t)(2).
492§4980B(e)(1)(A)(ii); Regs. §54.4980B-2 Q&A-10(a).
493Regs. §54.4980B-2, Q&As-9 and 10.
Comment: Because the employer or multiemployer plan remains liable as well, it should consider protecting itself from failures of others through an indemnification arrangement.
Liability can attach to a person that is not an employer or a multiemployer plan in two circumstances. The first is assumption of the responsibility with respect to which the failure occurred in a legally enforceable written agreement. The second is failure to make coverage available upon written request by an individual or entity that provides the same coverage under the plan to a similarly situated covered individual who has not experienced a qualifying event. The request can come from the employer or the plan administrator. In the case of divorce or a dependent ceasing to qualify as such, the request can come directly from a qualified beneficiary to the plan administrator.494
494§4980B(e)(2).
Comment: This rule concerning direct requests from qualified beneficiaries makes it clear that the person providing coverage referred to in §4980B(e)(2)(B) can be the administrator as well as an insurer or HMO.
Note: A person who is requested to make coverage available has a grace period of 45 days to do so without incurring tax.495 Coverage must be made available, however, for claims incurred during the grace period.
495§4980B(b) (flush language); Conf. Rep. No. 1104, 100th Cong., 2d Sess. 27 (1988).
c.	Correction of Violations
To end the noncompliance period, or prevent imposition of excise taxes, the responsible individual or entity must correct the failure to comply with COBRA. Correction must be retroactive, and the qualified beneficiary must be placed in as good a financial position as if the failure had not occurred.496
496§4980B(g)(4).
Comment: Such coverage could presumably be conditioned on payment of the applicable premium.
2.	Plan Administrator Fine
Failure to comply with the notice requirements also can subject the plan administrator to a fine of $100 per day. A court may, in its discretion, grant an aggrieved qualified beneficiary a penalty up to that amount for a violation of the administrator's duties under COBRA.497 Thus, an administrator could apparently be liable for both an excise tax and a fine for the same violation, though imposition of one might result in relief from the other.
497ERISA §502(c). Many courts have held that neither injury nor prejudice are prerequisites to recovery under this provision. See Moothart v. Bell, 21 F.3d 1499, 17 EBC 2825 (10th Cir. 1994); Gillis v. Hoechst Celanese Corp., 4 F.3d 1137, 17 EBC 1521 (3d Cir. 1993); Daughtry v. Honeywell, Inc., 3 F.3d 1488, 17 EBC 1731 (11th Cir. 1993); Godwin v. Sun Life Assurance Co. of Canada, 980 F.2d 323, 16 EBC 1341 (5th Cir. 1992); and Sage v. Automation, Inc. Pension Plan and Trust, 845 F.2d 885, 9 EBC 1898 (10th Cir. 1988). But see Wright v. Hanna Steel Corp., 270 F.3d 1336, 26 EBC 2737 (11th Cir. 2001) (when health plan administrator failed to give notice of plan participant's right to coverage under COBRA, federal court could assess plan administrator with penalty as to any "single participant").
3.	Other Sanctions
Because COBRA is incorporated into Part 6 of Title I of ERISA, in addition to the Code, any person denied COBRA rights has a cause of action under ERISA §502(a)(1). ERISA §502(c) also empowers a court to provide such other relief as it deems proper. Such relief could include reimbursement for medical expenses that could have been avoided had proper COBRA notice been given. Moreover, it is clear that a qualified beneficiary is entitled to equitable relief from violations of fiduciary duty under ERISA §502(a)(3).498 In fact, one court has held that a fiduciary has an affirmative duty to bring COBRA rights to the attention of a qualified beneficiary who the fiduciary has reason to know is ignorant of them.499
498Varity Corp. v. Howe, 516 U.S. 489, 19 EBC 2761 (1996). See also Calhoon v. Trans World Airlines Inc., 400 F.3d 593, 34 EBC 1745 (8th Cir. 2005), in which the court held that the reimbursement of medical expenses due to a plan administrator's fiduciary duty breach was not deemed appropriate equitable relief under ERISA §502(a)(3)(B). A former employee elected COBRA continuation coverage and made his first premium payment. Upon moving, the employee notified the plan administrator of his new address but did not receive additional payment coupons and did not make additional premium payments. As a result, his COBRA coverage was cancelled and he incurred substantial medical bills. Because the employer went bankrupt, the health plan terminated and the employee was no longer a plan member, the employee could not seek reinstatement under ERISA §502(a)(3)(A) and could not sue under ERISA §502(a)(1). Thus, he sued for relief under ERISA §502(a)(3)(B) for reimbursement for medical bills that would have been covered by COBRA if his participation was not terminated, less premiums he would have paid. Claiming that he would be made whole if he received benefits that would have been paid under the plan if not for the fiduciary duty breach, the employee relied on Strom v. Goldman & Co., 202 F.3d 138 (2d Cir. 1999), in which the court held that make-whole relief for fiduciary duty breaches could be considered equitable. However, Strom was decided before Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 27 EBC 1065 (2002), which precludes such claims. Under Great-West, monetary relief is considered equitable only if does not impose personal liability on the fiduciary and restores to the plaintiff particular funds or property wrongfully in the fiduciary's possession. Here, the court concluded, the requested monetary relief was in the nature of legal relief because the claim sought to impose personal liability on the fiduciary, was measured by the employee's loss, and did not involve traceable funds that belonged to the employee that were being unlawfully held by the plan.
499Bixler v. Central Pa. Teamsters Health and Welfare Fund, 12 F.3d 1292 (3d Cir. 1993). See also Swint v. Protective Life Ins. Co., 779 F. Supp. 532, 14 EBC 2200 (S.D. Ala. 1991) (upon being notified that child had reached age that would cause loss of dependent status unless he was full-time student, and had been in serious auto accident, insurer failed to inquire further in timely manner as to whether individual was no longer eligible for dependent coverage).
Note: The insurance company providing benefits is not liable for failure to provide coverage.500
500Allen v. Loyola Univ., 1996 U.S. Dist. LEXIS 2433 (E.D. La. 1996).
The Secretary of Labor has broad enforcement powers under ERISA §502(a)(2), (4), (5), (6), (8) and (9). Moreover, ERISA §502(l) provides for the addition of a penalty of up to 20% to any settlement of a fiduciary claim asserted by the Department of Labor.
E. State Statutes
The laws of a number of states impose obligations to provide continuation coverage under group health plans. For example, the Ohio statute mandating the provision of continuation coverage pertains to a broad range of public and private group sickness and accident policies, excluding health care corporations and health maintenance organizations (HMOs).501 Further, the requirement of continuation coverage applies only to hospital, surgical, or major medical benefits, not to such benefits as dental care, vision care, or prescription drug plans.502
501Ohio Rev. Code. Ann. §3923.38(A)(1) (2004).
502Id. at §3923.38(C)(1).
These state laws primarily regulate the terms of group health insurance policies. In some cases, however, they purport to apply to noninsured plans. To the extent they apply to noninsured plans subject to ERISA, they are preempted by federal law (see XII, E, below).503 State regulation of insurance policies used by employee plans is saved from preemption by ERISA §514(b)(2), and nothing in COBRA relieves the issuer of a group health insurance policy to a plan from compliance with state law.
503Duclos v. Gen'l Dynamics Corp., 12 EBC 2648 (D.R.I. 1990); Moffitt v. Blue Cross & Blue Shield, Inc., 722 F. Supp. 1391 (N.D. Miss. 1989).
VIII. HIPAA: Group Health Plan Portability, Access and Renewability Requirements
A. Background
1.	In General
The Health Insurance Portability and Accountability Act of 1996 (HIPAA)504 added §§9801 et seq. (Chapter 100). These sections combine to bar a wide range of eligibility restrictions in group health plans. Section 9801 limits the pre-existing condition exclusions group health plans may impose. Section 9802 prohibits group health plans from discriminating against individual participants or beneficiaries based on health status, medical history or certain other factors. Section 9803 prohibits multiemployer group health plans and multiple employer welfare arrangements ("MEWAs," discussed in XV, below) from denying employers continued access to coverage other than for certain administrative reasons.
504P.L. 104-191.
As with COBRA (see VII, above), HIPAA provisions that are part of the tax Code have counterparts in ERISA. These sections appear in ERISA §§701 et seq. (Title I, Part 7). As a result, ERISA's enforcement provisions generally are applicable to HIPAA requirements (see VIII, G, 2, below).
Section 4980D provides for penalty taxes on group health plans that fail to comply with the HIPAA requirements. Section 4980D is modeled in large part on §4980B, which imposes excise taxes for failure to comply with COBRA continuation coverage requirements.
2.	Regulations
The three federal agencies responsible for implementing HIPAA jointly issued interim regulations in 1997,505 interim and temporary regulations in 2001,506 and final rules in 2004.507 Along with the 2004 final rules, the agencies issued proposed rules that would provide an extension of time for individuals to exercise certain HIPAA portability provisions.508 The proposed rules would modify the 63-day break-in-coverage rules so that the beginning of the period that is used for determining whether a significant break in coverage has occurred (generally 63 days) is tolled if a certificate of creditable coverage is not provided on or before the day coverage ceases. In those cases, the significant break-in-coverage period would be tolled until a certificate is provided, but not beyond 44 days after the coverage ceases.509
50562 Fed. Reg. 16894 (4/8/97). These regulations implement amendments to ERISA enacted in HIPAA and the Newborns' and Mothers' Health Protection Act of 1996, P.L. 104-204 (see IX, A, below). The interim Treasury regulations were removed, but can be relied on until the final regulations apply. The final regulations, discussed below, apply for plan years beginning on or after July 1, 2005. The interim regulations appear at former Regs. §§54.9801-1T through -6T, former 54.9802-1T, former 54.9831-1T, and former 54.9833-1T. The interim Labor regulations appear at former DOL Regs. §§2590.701-1 through -7, 2590.702, former 2590.703, 2590.711-712, 2590.731 - .732, and 2590.736. The interim Health and Human Services regulations appear at former 45 CFR §§144.101 - .103, 146.101, 146.111, 146.113, 146.115, 146.117, 146.119, 146.121, 146.125, 146.143, 146.145, 146.150, 146.152, 146.160, 146.180 and 146.184.
506The 2001 interim Treasury regulations appear at former Regs. §§54.9802-1 and former 54.9802-1T. The interim Labor regulations appear at DOL Regs. §2590.702. The interim Health and Human Services regulations appear at 45 CFR §146.121. T.D. 8931, 66 Fed. Reg. 1377 (1/8/01).
507T.D. 9166, 69 Fed. Reg. 78720 (12/30/04). The 2004 final Treasury regulations appear at Regs. §§54.9801-1 through -6, 54.9831-1 and 54.9833-1. The 2004 final Labor regulations appear at DOL Regs. §§2590.701-1 through - 7, 2590.731 through .732 and 2590.736. The 2004 final HHS regulations appear at 45 CFR §§144.103, 146.111, 146.113, 146.115, 146.117, 146.119, 146.120, 146.143 and 146.145.
508REG-130370-04, 69 Fed. Reg. 78800 (12/30/04). The 2004 proposed Treasury regulations appear at Prop. Regs. §§54.9801-4 through -7 and 54.9831-1. The 2004 proposed Labor regulations appear at DOL Prop. Regs. §§2590.701-4 through -6, -8 and 2590.732. The 2004 proposed HHS regulations appear at 45 CFR Prop. §§146.113, 146.115, 146.117, 146.120 and 146.145.
509Prop. Regs. §§54.9801-4(b)(2) and 54.9801-6(a)(4); DOL Prop. Regs. §§2590.701-4(b)(2) and 2590.701-6(a)(4); 45 CFR Prop. §§146.113(b)(2) and 146.117(a)(4).
The HIPAA regulations detail the requirements for all health plans, insurance companies and employers for counting and certifying previous health coverage. HIPAA limits the period for which a group health plan can deny coverage for a pre-existing condition to 12 months for general enrollees (18 months for late enrollees) into a health plan. All plans and insurance issuers must abide by the provisions applicable to group health plans for certification of such coverage, including group plans maintained by employers and unions, and individual health plans.510
510See Regs. §54.9801-4 and  -5, 54.9801-3(a)(2)(ii) and 54.9801-22, respectively.
The final rules and proposed rules issued in 2004 contain two model forms that may be, but are not required to be, used by health plans, insurance companies and employers to certify coverage. In most cases, either the plan or the insurer can issue the certifications.511 This arrangement more or less preserves the status quo, so that large employers may choose to issue notices and certifications to their covered employees, while insurance companies can perform that duty for small employers. Also, in many cases, employers are spared the burden of verifying coverage for new enrollees because third-party administrators may take on the duty in keeping with the trend toward outsourcing.
511See 69 Fed. Reg. at 78725 and 78801 (12/30/04). Until the proposed regulations are finalized, the model forms in the 2004 final or proposed regulations may be used.
Industry-wide standards for electronic exchange of health data apply to health plans under final rules implemented over a two- and three-year period.512 The rules establish standard data content and formats for categories of electronic transactions made by health plans (including self-insured plans), hospitals, clearinghouses for submission of electronic claims, other administrative health transactions, and health care Web sites.
51245 CFR §162.900 through 1802, 65 Fed. Reg. 50311 (8/17/00) (generally effective Oct. 16, 2000). Small, self-administered health plans with annual receipts of $5 million or less had until Oct. 16, 2003, to comply with the rules; other health plans had until Oct. 16, 2002, to comply. For complaint procedures for noncompliance with HIPAA's nonprivacy administrative simplification provisions (which include the transaction rule discussed here, the national employer identifier number rule (67 Fed. Reg. 38009 (5/31/02)); the employer security rule (68 Fed. Reg. 8334 (2/20/03)); the national provider identifier rule (69 Fed. Reg. 3434 (1/23/04)); and the national plan identifier rule (currently under development)), see CMS-0014-N, 70 Fed. Reg. 15329 (3/25/05), effective Apr. 25, 2005. To enforce HIPAA's nonprivacy administrative simplification provisions, HHS issued proposed regulations (RIN 0991-AB29, 70 Fed. Reg. 20224 (4/18/05)) which would apply the enforcement provisions under HIPAA's privacy rule to these provisions (for a discussion of the enforcement provisions under HIPAA's privacy rule, see VIII, H, 4, below). The proposed regulations generally would impose civil money penalties for noncompliance (45 CFR Prop. §160.400 through .426), as well as establish procedures for investigating complaints (45 CFR Prop. §160.300 through .316) and conducting administrative hearings (45 CFR Prop. §160.500 through .552). The maximum penalties could be up to $100 per violation and up to $25,000 for identical violations in a calendar year. 45 CFR Prop. §160.404.
"Covered entities" subject to the rules are health care plans, clearinghouses (such as a billing system or community health management system), or providers that transmit electronically any information related to a health care transaction.513 The definition of "health care" is comprehensive, covering care that is preventative, diagnostic, therapeutic, rehabilitative, maintenance, or palliative (alleviating pain); counseling; sale or dispensing of prescription drugs or devices; or procurement or banking of blood, sperm, tissue, or organs.
51345 CFR §160.103. "Covered entities" also includes prescription drug card sponsors. HIPAA, P.L. 104-191, §1172(a), 42 USC 1320d-1(a), as amended by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, P.L. 108-173.
"Health information" also is broadly defined as any information (written or oral) that is created or received by a health care provider, health plan, public school authority, employer, life insurer, school, or health care clearinghouse. The information relates to the past, present, or future, physical or mental health or condition of an individual; health care treatment; or payment for treatment.514
51445 CFR §160.103.
The definition of "health plan" includes individuals or group plans that provide or pay for the cost of medical care. Group plans include employee welfare benefit plans that are insured or self-insured for purposes of the regulations. Also covered are health insurers, HMOs, Medicare, Medicaid, issuers of Medicare supplemental policies, issuers of long-term care policies (except for nursing home fixed-indemnity policies), MEWAs, military care, veteran's health care, civilian military employee's care, Indian health service, federal employee's programs, state child health plans, Medicare+Choice plans, (renamed Medicare Advantage MSAs) and any other group or individual plan that provides for or pays for the cost of health care.
The health care transactions affected by the rule include:

• health care claims;
• health care payment and remittance advice;
• coordination of benefits;
• health care claim status;
• enrollment and disenrollment in a health plan;
• eligibility for a health plan;
• health plan premium payments;
• referral certification and authorization;
• first report of injury;
• health claims attachments; and
• other transactions that may be included in future regulations.515
51545 CFR §§162.1201, 1301, 1401, 1501, 1601, 1701, 1801.
Covered entities that make any of the above transactions with another covered entity (or within the same covered entity), using electronic media, must conduct the transaction as a "standard" transaction.516 A transaction is standard if it meets the requirements set forth in the rule, such as using the correct medical data code sets, and relates to an inquiry from a health care provider to a health plan, or from one health plan to another health plan, to determine the eligibility, coverage, or benefits associated with a health plan for a subscriber. If an entity requests a health plan to conduct a transaction as a standard transaction, the health plan must do so.517 A health plan may not delay or reject a transaction, or attempt to adversely affect the other entity or the transaction, because the transaction is a standard transaction. In addition, a health plan may not reject a standard transaction because it contains data elements not needed or used by the health plan.
51645 CFR §162.925.
51745 CFR §162.925(a).
Organizations may request exceptions from the Secretary from the use of a standard in order to test a proposed modification to that standard.518
51845 CFR §162.940.
The privacy rule requires that plans and employers safeguard against the misuse of an individual's identifiable health information and limit sharing such information. Employers are covered by the privacy rule if they sponsor a self-insured health plan or engage in information processing that includes a health care services component. However, even employers that do not directly fit into those categories likely are covered by the rule to some extent. For more discussion of the privacy regulations, see VIII, H.[Footnotes 519 - 530 reserved]
B. Scope of Act
1.	Plans Affected
a.	Group Health Plans
HIPAA generally applies to "group health plans," the definition of which is found in §5000(b)(1).531 Thus, the term includes employer-sponsored health care plans regardless of whether such plans are insured or self-insured, funded or unfunded. HMOs and union-sponsored medical plans also are subject to HIPAA.
531See  §9832(a); see also Regs. §54.9831-1(a)(1); DOL Regs. §2590.732(a)(1); 45 CFR §146.145(a)(1).
Section 9832(c) illuminates the definition in §5000(b)(1). HIPAA does not apply to peripheral health care benefits if they are offered separately from the core hospital/medical/surgical coverage. These peripheral coverages are:

• dental or vision benefits that are provided under a separate policy, certificate or contract, or for which an electing participant must pay an additional premium or contribution; 
• long-term care benefits;
• coverages that are not coordinated with hospital/medical/surgical coverage, such as specific disease coverage or fixed dollar indemnity insurance; and
• supplemental coverage provided under a separate policy, certificate or contract such as Medigap or coverage supplemental to the military CHAMPUS.532
532Regs. §54.9831-1(c)(3) through (5); DOL Regs. §2590.732(c)(3) through (5); 45 CFR §146.145(c)(3) through (5).
Group health plans sponsored by partnerships are subject to HIPAA with respect to coverage for any partner under the plan.533
533Regs. §54.9831-1(d)(2); 69 Fed. Reg. at 78735 (preamble).
b.	Exemptions for Small Plans
Small plans are relieved from regulation by HIPAA in two ways. First, §9831(a)(2) exempts any group health plan for any plan year if, on the first day of such plan year, such plan has fewer than two participants who are current employees.534
534Regs. §54.9831-1(b); DOL Regs. §2590.732(b); 45 CFR §146.145(b).
Comment: Consequently, HIPAA (e.g., the nondiscrimination provisions in §9802) appears not to apply to a plan that covers only retirees.
Second, small employers are protected from excise tax penalties resulting from the terms of their group medical insurance contracts. Section 4980D(d)(1) exempts from HIPAA's penalty provisions small employers whose group health plans violate HIPAA solely because of the health insurance coverage535 offered by the health insurance issuer. For these purposes, the term "small employer" is defined as one that employed an average of at least two but not more than 50 employees on business days during the preceding calendar year, and employs at least two employees on the first day of the plan year.536 If an employer was not in existence in the preceding year, its "small employer" status is based on the average number of employees that it is reasonably expected to employ on business days in the current calendar year. For purposes of this small employer exemption, employer includes any predecessor of the employer.537
535The term "health insurance coverage" is defined by §9832(b)(1) as benefits (other than those listed under  §9832(c)(1)) consisting of medical care (provided directly, through insurance or reimbursement, or otherwise) under any hospital or medical service policy or certificate, hospital or medical service plan contract, or HMO offered by a health insurance issuer. See also Regs. §54.9801-2; DOL Regs. §2590.701-2; 45 CFR §144.103. The Treasury regulations also provide that benefits described in Regs. §54.9831-1(c)(2) are not treated as benefits consisting of medical care.
536§4980D(d)(2)(A). All entities treated as a single employer under §414(b),  (c),  (m), or  (o) are treated as one employer for these purposes.
537§4980D(d)(2)(C).
Note: The rationale for the small employer exemption is that a majority of states have already enacted laws designed, like HIPAA, to provide for greater availability and portability of health care coverage, at least in the small group market.538
538H.R. Rep. No. 496, 104th Cong., 2d Sess.
The §4980D(d)(1) small employer exemption has no counterpart in ERISA. Therefore, insured small employer plans must be mindful of HIPAA's substantive provisions subject to ERISA's enforcement provisions.539
539See VIII, G, 2, below.
c.	Other Exemptions
Section 9831(a) also exempts governmental plans from the requirements of HIPAA.
Note: In contrast, church plans, which are exempt from ERISA (see XIII, A, below), generally are not exempt from HIPAA. However, special rules apply to the application of §9802 (regarding discrimination by reason of health status) and  §4980D (regarding enforcement of HIPAA) to church plans (see VIII, E and G, respectively, below).
In addition, HIPAA does not apply to specified types of benefits enumerated in §9832(c)(1). Included in this list are: (1) accident or disability income insurance only; (2) liability insurance, including general liability insurance and automobile liability insurance and any supplement thereto; (3) worker's compensation or similar insurance; (4) automobile medical payment insurance; (5) credit-only insurance; (6) on-site medical clinics; and (7) other similar insurance coverage, specified in regulations, under which medical benefits are secondary or incidental to other insurance benefits.540
540See also Regs. §54.9831-1(c)(2); DOL Regs. §2590.732(c)(2); 45 CFR §146.145(c)(2).
Health flexible spending arrangements (FSAs) ordinarily are exempt from HIPAA. Benefits under a health FSA are excepted benefits if the maximum benefit payable by the employer under the health FSA for the year does not exceed two times the employee's salary reduction election under the health FSA for the year (or, if greater, the amount of the employee's salary reduction election under the health FSA for the year plus $500), the employee has other coverage available under a group health plan of the employer for the year, and the other coverage is not limited to benefits that are excepted benefits.541An FSA must meet the definition of a health FSA under §106(c)(2) in order to be considered an excepted benefit under HIPAA.
541ERISA Technical Release No. 97-01. See  Regs. §54.9831-1(c)(3)(v); DOL Regs. §2590.732(c)(3)(v); 45 CFR §146.145(c)(3)(v).
Health savings accounts (HSAs) also are not subject to HIPAA.542 While high-deductible health plans are considered group health plans for the purposes of HIPAA, the Labor Department has stated that HSAs are not considered to be employee welfare plans for purposes of ERISA.543 Thus, HIPAA's portability requirements do not apply is HSAs. In addition, HIPAA's special enrollment rights generally are not relevant to coverage through an HSA.543.1 Other excepted benefits from HIPAA's requirements include Medicare supplemental health insurance and hospital indemnity and other fixed-dollar indemnity insurance.
54269 Fed. Reg. at 78734 - 35 (preamble).
543DOL Field Assistance Bulletin 2004-01.
543.169 Fed. Reg. at 78734 - 35 (preamble).
d.	Self-employed Individuals
It is clear, under §5000(b)(1), that HIPAA applies to plans maintained by partnerships and sole proprietors, including plans that cover only partners in a partnership. HIPAA added §732(d) to ERISA in order to apply the HIPAA requirements to partner only plans, which would otherwise be exempt from ERISA (see XIII, E, 2, below).543.2
543.2See  Regs. §54.9831-1(d); DOL Regs. §2590.732(d); 45 CFR §146.145(d). For ERISA §732(d) to apply, a partner must be a bona fide partner to be considered an employee and the partnership is considered an employer only if the partner is a bona fide partner. Whether an individual is a bona fide partner is determined based on all the relevant facts and circumstances.
2.	Effective Dates
The 2004 final rules regarding pre-existing condition exclusions apply to plan years beginning on or after July 1, 2005.544
544The 2004 final rules finalized the 1997 interim rules. Until the final regulations become applicable to plans and issuers, the 1997 interim rules may be relied upon. T.D. 9166, 69 Fed. Reg. 78720 (12/30/04). See Regs. §54.9833-1; DOL Regs. §2590.736.
C. Pre-existing Condition Exclusion Limitations
1.	In General
Group health plans typically attempt to avoid covering illnesses or injuries that occur before enrollment. Section 9801 limits the ability of a group health plan to impose such pre-existing condition exclusions.545 The regulations broadly define a preexisting condition exclusion as any limitation or exclusion of benefits relating to a condition based on the fact that the condition was present before the effective date of coverage, whether or not any medical advice, diagnosis, care or treatment was recommended or received before that date. "Hidden" preexisting condition clauses are prohibited.
545See also Regs. §54.9801-3; DOL Regs. §2590.701-3; 45 CFR §146.111. A general notice explaining a plan's pre-existing condition exclusions must be provided as part of any written application materials distributed for enrollment, or at the least, provided to plan participants by the earliest date following a request for enrollment. Regs. §54.9801-3(c); DOL Regs. §2590.701-3(c); 45 CFR §146.111(c).
Under §9801(a), a pre-existing condition exclusion is permissible, with some exceptions (see VIII, C, 3, below), only if it satisfies three conditions:

(1) the exclusion applies to a condition for which medical advice, diagnosis, care, or treatment was recommended or received within the six-month period ending on the enrollment date by a person licensed to provide the services;546
(2) the exclusion extends for a period of not more than 12 months (or 18 months in the case of a late enrollee) after the enrollment date;547 and
(3) the period is reduced by the aggregate "creditable coverage" applicable to the participant or beneficiary as of the enrollment date.547.1
546Regs.  §54.9801-3(a)(2)(i); DOL Regs. §2590.701-3(a)(2)(i); 45 CFR §146.111(a)(2)(i). Plans may determine that an individual has a pre-existing condition through medical records, such as diagnosis codes on bills, a physician's notes of a visit or telephone call, pharmacy prescription records, HMO encounter date, or other records indicating that medical services were recommended or received during the six-month look-back period. The "prudent person" standard of some state laws, under which a condition is taken into account if a prudent person would have sought care whether or not care was received, no longer may be used to determine a pre-existing condition.
547Regs.  §54.9801-3(a)(2)(ii); DOL Regs. §2590.701-3(a)(2)(ii); 45 CFR §146.111(a)(2)(ii). For these purposes, the 12-month and 18-month periods after the enrollment date are determined by reference to the anniversary of the enrollment date.
547.1Regs.  §54.9801-3(a)(2)(iii); DOL Regs. §2590.701-3(a)(2)(iii); 45 CFR §146.111(a)(2)(iii).
The term "enrollment date" is defined as the date of enrollment or coverage of the individual in the plan or, if earlier, the first day of the waiting period for enrollment.548 Thus, any waiting period runs simultaneously with any pre-existing condition exclusion period. The same rule is intended to apply to any "affiliation period,"549 a similar concept that generally refers to HMOs. An affiliation period is a period that must expire before insurance coverage provided by an HMO becomes effective, and during which the HMO is not required to provide benefits.550
548Code §9801(b)(2); ERISA §701(b)(2); Regs. §54.9801-3(a)(3); DOL Regs. §2590.701-3(a)(3); 45 CFR §146.111(a)(3).
549General Explanation of Tax Legislation Enacted in the 104th Congress (Dec. 18, 1996) (the "Blue Book"), p. 357.
550Regs. §54.9801-2; DOL Regs. §2590.701-2; 45 CFR §144.103.
Note: A plan provision constitutes a pre-existing condition exclusion for purposes of §9801 even to the extent it applies to undiagnosed conditions. The term "pre-existing condition exclusion" is defined as a limitation or exclusion of benefits relating to a condition based on the fact that the condition was present before the date of enrollment for such coverage.551
551Code §9801(b)(1). Genetic information is not treated as a condition, for these purposes, in the absence of a diagnosis of the condition related to such information. Code §9801(b)(1)(B). See also Regs. §54.9801-2; DOL Regs. §2590.701-2; 45 CFR §144.103.
A pre-existing condition exclusion must apply uniformly to all similarly situated individuals552 and not be directed at individual participants or beneficiaries based on any health factor of the participants or beneficiaries, such as disability.553
552As described in Regs. §54.9802-1T(d); DOL Regs. §2590.702(d); 45 CFR §144.121(d).
553Regs.  §54.9802-1T(b)(3); DOL Regs. §2590.702(b)(3); 45 CFR §146.121(b)(3). For further discussion of health factors, see VIII, E, 1, below.
Example: A group health plan excludes coverage of conditions for which medical treatment was recommended or received within the six-months before an individual's enrollment date. The exclusion extends for 12 months, offset by creditable coverage. However, if an individual has no claims in the first six months following enrollment, the remainder of the exclusion period is waived. This exclusion does not apply uniformly because individuals who have medical claims during the first six months following enrollment are not treated the same as similarly situated individuals with no claims during that period.554
554Regs. §54.9802-1T(b)(3)(ii), Ex. 2; DOL Regs. §2590.702(b)(3)(ii), Ex. 2; 45 CFR §144.121(b)(3)(ii), Ex. 2.
A plan amendment adding a pre-existing condition exclusion is not considered under the nondiscrimination regulations under  §9802 to be directed at any individual participants or beneficiaries if it is applicable to all individuals in one or more groups of similarly situated individuals under the plan, and is effective no earlier than the first day of the first plan year after the amendment is adopted.555
555Regs.  §54.9802-1T(b)(3)(C); DOL Regs. §2590.702(b)(3)(C); 45 CFR §144.121(b)(3)(C). For more information on prohibitions against discrimination, see VIII, E, 1, below.
A general notice explaining the plan's preexisting condition exclusions must be provided as part of any written application materials distributed for enrollment, or at the least, provided to plan participants by the earliest date following a request for enrollment. The regulations contain sample language for such general notices.
2.	Creditable Coverage
a.	Definition
"Creditable coverage" under Code  §9801(c)(1) encompasses coverage of the individual under: (1) a group health plan; (2) health insurance coverage whether group, individual or neither; (3) Part A or Part B of Medicare;556 (4) Medicaid, other than coverage consisting solely of pediatric vaccine distribution benefits;557 (5) CHAMPUS;558 (6) a medical care program of the Indian Health Service or of a tribal organization; (7) a state health benefits risk pool; (8) a federal civil service health plan;559 (9) a public health plan (including health coverage established by foreign countries); (10) a health benefit plan under §5(e) of the Peace Corps Act;560 and (11) a State Children's Health Insurance Program (S-CHIP).560.1 Health insurance coverage for this purpose does not include benefits enumerated in Code §9832(c)(1).561 However, it does go well beyond the definition of group health plan (see VIII, B, 1, a, above) because it includes dental benefits, vision benefits and other peripheral coverages.
556Part A of Title XVIII of the Social Security Act relates to hospital insurance for the aged and disabled; Part B relates to physician treatment benefits for the aged and disabled.
557Title XIX of the Social Security Act governs federal grants to states for medical assistance programs. Section 1928 relates to the pediatric vaccine distribution program.
558Title 10, Chapter 55 provides for medical and dental care for members of the armed forces and certain other uniformed services.
559Title 5, Chapter 89 provides for health coverage for certain employees of the federal government.
560Section 5 of 22 USC §2504(e) provides for health coverage for Peace Corps volunteers.
560.1Regs. §54.9801-4(a)(1)(xi); DOL Regs. §2590.701-4(a)(1)(xi); 45 CFR §146.113(a)(1)(xi).
561ERISA §733(c). Health insurance coverage is defined at Regs. §54.9801-2; DOL Regs. §2590.701-2; 45 CFR §144.103.
However, certain coverage before a significant break in coverage is not counted as creditable coverage. Specifically, a period of creditable coverage before the enrollment date that was followed by a break in coverage of 63 consecutive days or more need not be credited against a pre-existing condition limitation.562 This "significant break in coverage" rule applies separately to each participant and beneficiary.
562Code §9801(c)(2); ERISA §701(c)(2). Regs.  §54.9801-4(b)(2)(iii); DOL Regs. §2590.701-4(b)(2)(iii); 45 CFR §146.113(b)(2)(iii). The 63-day break in coverage period would be tolled in cases in which a certificate of creditable coverage is not provided on or before the day coverage ceases. The break in coverage period would be tolled until a certificate is provided but not beyond 44 days after coverage ceases. See  Prop. Regs. §54.9801-4(b)(2)(iv); DOL Prop. Regs. §2590.701-4(b)(2)(iv); and 45 CFR Prop. §146.113(b)(2)(iv). Any period of time during which an individual does not have group health coverage while taking leave under the Family Medical Leave Act (FMLA) would not be taken into account in determining whether a significant break in coverage has occurred. Prop. Regs. §54.9801-7(b); DOL Prop. Regs. §2590.701-8(b); 45 CFR Prop. §146.120(b).
A plan must determine an individual's creditable coverage within a reasonable period of time after receiving information regarding prior coverage, and a plan cannot impose a time limit on when an individual must present a certificate of creditable coverage.
A preexisting condition cannot extend more than 12 months. The period of any preexisting condition exclusion must be reduced by the number of days of creditable coverage even if that coverage still is in effect. The regulations prohibit a preexisting condition exclusion for pregnancy, newborns or adopted children, and a condition based solely on genetic information.
Note: The IRS has issued guidance in question-and-answer format explaining how electing COBRA coverage can prevent the imposition of pre-existing condition restrictions.563
563Notice 98-12, 1998-5 I.R.B. 12.
b.	Method of Crediting Coverage
Section 9801(c)(3) provides two methods of crediting prior coverage for purposes of §9801(a). Under the "standard" method, the new group health plan would not take into consideration the types of benefits for which coverage was provided.564 Thus, the amount of creditable coverage would simply be determined by reference to the length of time the individual was covered under the prior plan.
564Code §9801(c)(3)(A); ERISA §701(c)(3)(A). Regs. §54.9801-4(b); DOL Regs. §2590.701-4(b); 45 CFR §146.113(b).
The second, or "alternative," method permits a group health plan to determine the amount of creditable coverage based on coverage of any benefits (at any level) within each of five categories of benefits.565 These categories are: (1) mental health coverage; (2) substance abuse treatment; (3) prescription drugs; (4) dental care; and (5) vision care.566 An election to utilize this alternative method must be made on a uniform basis for all participants and beneficiaries.567 Furthermore, a plan that makes this election must disclose prominently, in any communications concerning the plan, that such election has been made and the effects of such election, and disclose the same to each enrollee at the time of enrollment under the plan.568
565Code §9801(c)(3)(B); ERISA  §701(c)(3)(B). Regs.  §54.9801-4(c); DOL Regs. §2590.701-4(c); 45 CFR §146.113(c).
566Regs.  §54.9801-4(c)(3); DOL Regs. §2590.701-4(c)(3); 45 CFR §146.113(c)(3).
567Code §9801(c)(3)(B); ERISA §701(c)(3)(B). Regs. §54.9801-4(c)(2); DOL Regs. §2590.701-4(c)(2); 45 CFR §146.113(c)(2).
568Code §9801(c)(3)(C); ERISA §701(c)(3)(C). Regs. §54.9801-4(c)(4); DOL Regs. §2590.701-4(c)(4); 45 CFR §146.113(c)(4).
Comment: Given this statutory mandate, it is advisable to obtain written acknowledgment from enrollees that any such required disclosure has been made.
The regulations disregard the 63-day significant break in coverage provision in §9801(c)(2), and substitute a complicated 365-day determination period.569 Under this rule, any coverage in one of the five categories during the individual's last 365 days of creditable coverage must be applied to reduce the pre-existing condition exclusion period for that category of coverage.
569Regs.  §54.9801-4(c)(6)(ii); DOL Regs. §2590.701-4(c)(6)(ii); 45 CFR §146.113(c)(6)(ii).
Example: An individual is covered by employer V's plan for all of calendar year 1, and has an enrollment date in employer Y's plan of Feb. 1 of year 2. The individual had prescription drug coverage under employer V's plan only for the first three months of year 1. Under the alternative method, employer Y's plan can exclude the individual from its prescription drug coverage, but only for nine months. The maximum 12-month exclusion period must be reduced by the three months of prescription drug coverage the individual had under employer V's plan during the last 365 days of coverage under employer V's plan.570
570Regs. §54.9801-4(c)(6)(iii); DOL Regs. §2590.701-4(c)(6)(iii); 45 CFR §146.113(c)(6)(iii).
Note: Coverage under a flexible spending account or other reimbursement arrangement does not count as coverage in any of the five categories.571
571Regs. §54.9801-4(c)(6)(i); DOL Regs. §2590.701-4(c)(6)(i); 45 CFR §146.113(c)(6)(i)
c.	Certification of Creditable Coverage
In order to provide participants with evidence of creditable coverage, §9801(c)(4) requires that each group health plan provide written certification.572 However, that certification may be provided by telephone or other means in some circumstances if the parties agree to do so.573 The certification must include: (i) the period of creditable coverage of the individual under the plan and that plan's COBRA continuation coverage provisions (see VII, above); and (ii) the waiting period, if any, and affiliation period (if applicable) imposed with respect to the individual for any coverage under such plan.574
572See  Regs.  §54.9801-5; DOL Regs. §2590.701-5; 45 CFR §146.115.
573Regs. §54.9801-5(a)(3)(i)(B); DOL Regs. §2590.701-5(a)(3)(i)(B); 45 CFR §146.115(a)(3)(i)(B).
574Code §9801(e)(1)(B); ERISA §701(e)(1)(B). The certificate of creditable coverage must also include an "educational statement" that informs individuals of their HIPAA rights and protections. Regs. §54.9801-5(a)(3)(ii)(H); DOL Regs. §2590.701-5(a)(3)(ii)(H); 45 CFR §146.115(a)(3)(ii)(H). The regulations include model certificates. See  69 Fed. Reg. at 78726 and 78728 (12/30/04). The model certificates would be modified by the proposed rules to require disclosure about the FMLA. See  69 Fed. Reg. at 78802 and 78804 (12/30/04) and Prop. Regs. §54.9801-5(a)(3)(ii)(H)(5); DOL Prop. Regs. §2590.701-5(a)(3)(ii)(H)(5); 45 CFR Prop. §115(a)(3)(ii)(H)(5). Until the proposed regulations are finalized, the model forms in the final or proposed regulations may be used.
A certificate of creditable coverage must include "educational statements" intended to inform individuals of their HIPAA rights and protections. The regulations contain a model certificate of creditable coverage which obsoletes the model certificate published under the HIPAA interim rules.
Group health plans must have written procedures for individuals to request and receive a certificate and clarify that each eligible dependent is entitled to receive an individualized certificate. A plan may use a single, group certificate if all the information is the same.
A plan may be required to issue as many as three certificates with respect to a single termination of employment. The required certification must be furnished by a group health plan: (1) at the time an individual ceases to be covered under the plan or otherwise becomes covered under COBRA continuation coverage;575 (2) at the time an individual ceases to be covered under COBRA continuation coverage; and (3) on request of an individual made not later than 24 months after cessation of regular or COBRA continuation coverage.576
575This particular certification may be provided, to the extent practicable, at a time consistent with applicable COBRA notification provisions. Code §9801(e).
576Code §9801(e)(1); ERISA §701(e)(1). See  Regs.  §54.9801-5(a)(2); DOL Regs. §2590.701-5(a)(2); 45 CFR §146.115(a)(2). No certificate of creditable coverage is required for a health FSA the benefits under which are treated as excepted benefits. Regs. §54.9801-5(a)(3)(vi); DOL Regs. §2590.701-5(a)(3)(vi); 45 CFR §146.115(a)(3)(vi). A group health plan must have written procedures for individuals to request and receive a certificate of creditable coverage. Regs. §54.9801-5(a)(4); DOL Regs. §2590.701-5(a)(4); 45 CFR §146.115(a)(4). The proposed regulations would require that a certificate of creditable coverage must also be provided when an individual leaves a group health plan while taking FMLA leave. Prop. Regs. §54.9801-7(c); DOL Prop. Regs. §2590.701-8(c); 45 CFR Prop. §146.120(c).
Note: A certification is timely if it is provided no later than the time the plan must provide the notice of a COBRA qualifying event.577
577Regs.  §54.9801-5(a)(2)(ii)(A); DOL Regs. §2590.701-5(a)(2)(ii)(A); 45 CFR §146.115(a)(2)(ii)(A). For individuals who are not qualified beneficiaries under COBRA, a certificate is timely if it is provided within a reasonable time after coverage ceases. Regs. §54.9801-5(a)(2)(ii)(B); DOL Regs. §2590.701-5(a)(2)(ii)(B); 45 CFR §146.115(a)(2)(ii)(B). 
An entity issuing a required certification must comply "promptly" with the request of a plan that has elected the "alternative method" of crediting coverage (see VIII, C, b, above), to provide information on coverage of classes and categories of health benefits available under such entity's plan.578 The entity required to provide the information may charge the requesting plan the reasonable cost of disclosing such information.
578Code §9801(e)(2); ERISA §701(e)(2). See also Regs. §54.9801-5(b); DOL Regs. §2590.701-5(b); 45 CFR §146.115(b).

3.	Prohibition of Certain Pre-existing Condition Exclusions
The general limits on the pre-existing condition exclusion do not apply to certain situations involving birth or adoption. A group health plan may not impose any pre-existing condition exclusion relating to pregnancy.579
579Code §9801(d)(3); ERISA §701(d)(3). Regs. §54.9801-3(b)(5); DOL Regs. §2590.701-3(b)(5); 45 CFR §146.111(b)(5).
A pre-existing condition exclusion cannot be applied to any newborn child who, as of the 30th day after the date of birth, has any creditable coverage.580 In addition, a pre-existing condition exclusion cannot be applied to an adopted child placed for adoption before attaining 18 years of age who, as of the 30th day after the date of the adoption or placement for adoption, has creditable coverage.581 This does not apply to coverage before the date of such adoption or placement for adoption.
580Code §9801(d)(1); ERISA §701(d)(1). Regs.  §54.9801-3(b)(1); DOL Regs. §2590.701-3(b)(1); 45 CFR §146.111(b)(1).
581Code §9801(d)(2); ERISA §701(d)(2). Regs. §54.9801-3(b)(2); DOL Regs. §2590.701-3(b)(2); 45 CFR §146.111(b)(2).
Comment: The 30th day provision ties in with the period of up to 30 days for enrollment of a newborn or adopted child. See VIII, D, 2, below.
The exceptions for newborns and adopted children do not apply after the child has a break in coverage of 63 or more consecutive days.582
582Code §9801(d)(4); ERISA §701(d)(4). Regs.  §54.9801-3(b)(3); DOL Regs. §2590.701-3(b)(3); 45 CFR §146.111(b)(3).
D. Special Enrollment Periods
Another way in which HIPAA facilitates access to group health care benefits is by requiring special enrollment provisions for individuals who lose coverage. Before HIPAA, plans commonly restricted eligibility of employees or dependents who did not enroll at the first opportunity.
1.	Individuals Losing Other Coverage
Section 9801(f)(1) requires group health plans to provide special enrollment periods to certain employees and their dependents who are otherwise eligible for coverage but not yet enrolled. An individual who was covered under another group health plan, or had health insurance coverage, at the time coverage previously was offered to him or her qualifies for this special enrollment period if certain conditions are met.583 Such prior coverage must be either: (1) COBRA continuation coverage that has been exhausted; or (2) other coverage that was terminated as a result of loss of eligibility584 or cessation of employer contributions toward such coverage.585
583Regs. §54.9801-6(a)(2); DOL Regs. §2590.701-6(a)(2); 45 CFR §146.117(a)(2).
584Loss of eligibility for the prior coverage could have resulted from a variety of causes, including legal separation, divorce, death, termination of employment or reduction in hours. However, loss of eligibility does not include a loss due to failure of the individual or the participant to pay premiums on a timely basis or termination of coverage for cause (such as making a fraudulent claim or an intentional misrepresentation of a material fact in connection with the plan). Regs. §54.9801-6(a)(3)(i); DOL Regs. §2590.701-6(a)(3)(i); 45 CFR §146.117(a)(3)(i).
585Regs. §54.9801-6(a)(3)(ii); DOL Regs. §2590.701-6(a)(3)(ii); 45 CFR §146.117(a)(3)(ii). Employer contributions include contributions by any current or former employer that was contributing to coverage for the individual.
A plan can require that when the employee declines enrollment for the employee or the dependent, the employee state in writing that coverage under another group health plan or health insurance coverage is the reason for declining enrollment.586 However, this requirement applies only if the plan sponsor or health insurance issuer provides notice of the requirement to provide the statement at the time the employee declines enrollment. The employee must request the special enrollment not later than 30 days after the loss of the other coverage.587 Enrollment must become effective not later than the first day of the first calendar month beginning after the date the completed enrollment request is received.588
586Code §9801(f)(1)(B); ERISA §701(f)(1)(B). Regs. §54.9801-6(a)(3)(iv); DOL Regs. §2590.701-6(a)(3)(iv); 45 CFR §146.117(a)(3)(iv).
587Code §9801(f)(1)(D); ERISA  §701(f)(1)(D). Regs.  §54.9801-6(a)(4)(i); DOL Regs. §2590.701-6(a)(4)(i); 45 CFR §146.117(a)(4)(i).
588Regs.  §54.9801-6(a)(4)(ii); DOL Regs. §2590.701-6(a)(4)(ii); 45 CFR §146.117(a)(4)(ii).
The initial opportunity for enrollment is not the only time when an individual with other health coverage may decline coverage for purposes of satisfying the prerequisites to special enrollment upon a loss of other coverage. The regulations contain a list of situations in which an individual is considered to have lost eligibility for other coverage, for example, a child loses dependent status, HMO coverage ceases because the individual does not reside or work in the HMO service area, or the individual exceeded a lifetime benefit limit.588.1
588.1Regs.  §54.9801-6(a); DOL Regs. §2590.701-6(a); 45 CFR §146.117(a).
Group health plans must provide to individuals who decline coverage a notice of special enrollment rights at or before the time the individual initially is offered the opportunity to enroll in the plan. Special enrollees must be treated in the same manner as those who enroll for the first time under the plan.
2.	Dependent Beneficiaries
Section 9801(f)(2) requires that any group health plan that makes coverage available to dependent beneficiaries provide for a special enrollment period for an individual who becomes a dependent of a participant through marriage, birth, or adoption or placement for adoption. Upon the birth or adoption of a child, the spouse of the participant may also enroll (if otherwise eligible for coverage).
The dependent special enrollment period must be at least 30 days, and must begin on the later of the date the dependent coverage is made available or the date of the marriage, birth, adoption or placement for adoption.589 Such coverage is retroactive, if elected by the participant within the first 30 days of the dependent special enrollment period, to the date of birth, adoption or placement for adoption.590 Coverage must become effective, in the case of marriage, not later than the first day of the first month beginning after the completed request for enrollment is received by the plan.591
589Code §9801(f)(2)(B); ERISA  §701(f)(2)(B). Regs.  §54.9801-6(b)(3)(i); DOL Regs. §2590.701-6(b)(3)(i); 45 CFR §146.117(b)(3)(i).
590Code §9801(f)(2)(C)(ii) and  (iii); ERISA  §701(f)(2)(C)(ii) and (iii). Regs. §54.9801-6(b)(3)(iii)(B); DOL Regs. §2590.701-6(b)(3)(iii)(B); 45 CFR §146.117(b)(3)(iii)(B).
591Code §9801(f)(2)(C)(ii); ERISA  §701(f)(2)(C)(ii). Regs.  §54.9801-6(b)(3)(iii)(A); DOL Regs. §2590.701-6(b)(3)(iii)(A); 45 CFR §146.117(b)(3)(iii)(A).
E. Prohibition Against Discrimination
1.	Discrimination Based on Health Factors
Federal law generally does not require a group health plan to provide particular benefits, or benefits with respect to a specific procedure, treatment, or service, with the exception of certain mandatory types of benefits (see IX, below). Nor does federal law, in general, prevent a group health plan from establishing limits or restrictions on the amount, level, extent, or nature of the benefits or coverage for similarly situated individuals. However, federal employment discrimination laws do prohibit certain differentiation among individuals or classes (see XIV, below).
In addition, §9802(a)(1) generally prohibits group health plans and group health insurance issuers from restricting the eligibility of an employee or dependent based on a "health factor." A health factor is:

• health status;
• medical condition;
• claims experience;
• receipt of health care;
• medical history;
• genetic information;
• evidence of insurability, including conditions arising out of domestic violence and participation in such activities as motorcycling, snowmobiling, and skiing; and
• disability.592
592Regs. §54.9802-1(a)(1); DOL Regs. §2590.702(a)(1); 45 CFR §146.121(a)(1). 
These nondiscrimination prohibitions put an end to some common practices such as conditioning eligibility for a person who initially declined contributory coverage on evidence of good health, or deferring eligibility of an individual by reason of not being actively at work because of illness or injury or hospitalization. 
Section 9802(a)(2)(A) draws a distinction between the right to enroll in a group health plan, on the one hand, and the right to benefits for specific procedures, treatments or services, on the other. Plans are free to exclude particular benefits. Section 9802(a)(2)(B) explicitly permits limitations or restrictions on the amount, level, extent, or nature of the benefits or coverage for similarly situated individuals.
The regulations attempt to address the tension between the prohibition of discrimination and the freedom of plans to exclude certain benefits. The regulations permit restrictions that generally  are applicable, such as a special limit for treatment of temporal mandibular joint syndrome (TMJ), but prohibit limitations directed at particular participants, such as a special limit on treatment of those with congenital heart defects.593
593Regs. §54.9802-IT(b)(2)(i)(D), Exs. 4 and 5; DOL Regs. §2590.702(b)(2)(i)(D), Exs. 4 and 5; 45 CFR §146.121(b)(2)(i)(D), Exs. 4 and 5.
Note: Timing can be significant. Limitation on coverage for a particular disease can be implemented at the beginning of the plan year after adoption, but not during the plan year in response to a claim.594
594Regs.  §54.9802-1T(b)(2)(i)(C) and  (D), Ex. 2; DOL Regs. §702(b)(2)(i)(C) and (D), Ex. 2; 45 CFR §146.121(b)(2)(i)(C) and (D), Ex. 2.
The regulations also address a group health plan's ability to restrict coverage based on the cause of an injury. Plans may exclude coverage for injuries incurred in high risk activities, other than those protected activities described above.  However, the regulations prohibit restrictions on coverage for injuries resulting from an act of domestic violence, or a medical condition such as depression.595
595Regs. §54.9802-1T(b)(2)(iii); DOL Regs. §2590.702(b)(2)(iii); 45 CFR §146.121(b)(2)(iii).
[Footnote 596 is reserved.]
Section 9802(c) contains a "grandfather" rule permitting church plans to retain evidence of good health requirements for late enrollees. If on July 15, 1997, and at all times thereafter, a church plan required evidence of good health for coverage of a person who enrolls more than 90 days after initial eligibility, it may retain that provision. The grandfather rule applies only to employers with 10 or fewer employees and to self-employed individuals (presumably clergy).
Rules for eligibility include rules relating to enrollment, effective dates, waiting or affiliation periods, late and special enrollment, eligibility for benefit packages (including rules for individuals to change their selection among benefits), benefits (including covered benefits, benefit restrictions, and cost-sharing mechanisms), continued eligibility, and terminating coverage.597
597Regs.  §§54.9802-1(b)(1)(i) and 54.9802-1T(b)(1)(ii); DOL Regs. §2590.702(b)(1)(ii); 45 CFR §146.121(b)(1)(ii).
Of course, group health plans and issuers are not required to provide coverage for any particular benefit to any group of similarly situated individuals. However, benefits provided through group health insurance must be uniformly available to all similarly situated individuals.598 However, a plan or issuer may limit or exclude benefits for a specific disease and certain types of treatments or drugs.599 Also, plan limits or exclusions can be based on a determination that benefits are experimental or not medically necessary. Such limits or exclusions are permissible if they apply uniformly to all similarly situated individuals and are not directed at individual participants or beneficiaries based on any health factors of the participants or beneficiaries. Group health plans may not deny eligibility, or continued eligibility, for benefits based on a health factor that relates to an individual or the individual's dependent.600
598Regs.  §54.9802-1T(b)(2)(i)(B); DOL Regs. §2590.702(b)(2)(i)(B); 45 CFR §146.121(b)(2)(i)(B).
599Id.
600Regs.  §54.9802-1(b)(1)(i); DOL Regs. §2590.702(b)(1)(i); 45 CFR §146.121(b)(1)(i).
In addition, plans are barred from excluding individuals from enrollment for coverage or charging a higher premium because the individual participates in risky activities.601 However, a plan or issuer may exclude coverage for injuries that do not result from a medical condition or domestic violence, such as injuries sustained in high-risk activities. Nevertheless, if a plan generally provides benefits for a type of injury, the plan or issuer may not deny benefits otherwise provided for treatment of the injury if the injury results from an act of domestic violence or a medical condition, including physical and mental health conditions. For example, a plan that provides hospitalization benefits may not invoke its exclusion of hospital benefits for self-inflicted injuries against a participant injured in a suicide attempt that resulted from depression, a medical condition.602
601Regs. §§54.9802-1T(a)(2)(ii) and 54.9802-1T(b)(1)(iii), Ex. 3; DOL Regs. §2590.702(b)(1)(iii), Ex. 3; 45 CFR §146.121(b)(1)(iii), Ex. 3.
602Regs.  §54.9802-1T(b)(2)(iii)(B), Ex. 1; DOL Regs. §2590.702(b)(2)(iii)(B), Ex. 1; 45 CFR §146.121(b)(2)(iii)(B), Ex. 1.
The regulations provide guidance on defining groups of similarly situated individuals. Plans and issuers may base distinctions on bona fide employment-based classifications consistent with the employer's typical business practice.603 Examples of classifications that may be bona fide include full-time versus part-time status, different geographic location, membership in a collective bargaining unit, date of hire, length of service, current employee versus former employee status, and different occupations. In addition, plans and issuers may make distinctions between beneficiaries based on a bona fide employment-based classification of the participant through whom the beneficiary is receiving coverage, relationship to the participant (such as spouse or dependent child), marital status, age or student status of the participant's children, or any other factor that is not a health factor.604
603Regs.  §54.9802-1T(d)(1); DOL Regs. §2590.702(d)(1); and 45 CFR §146.121(d)(1).
604Regs. §54.9802-1T(d)(1); DOL Regs. §2590.702(d)(1); and 45 CFR §146.121(d)(2).
Moreover, a group health plan may not restrict an individual's eligibility, benefits, or the effective date of coverage based on the person's confinement in a hospital or health care facility, nor may a plan set a person's premium rate based on their confinement. Any reasonable interpretation or application of the statutory HIPAA nondiscrimination provisions prohibits a plan or issuer from imposing a nonconfinement clause.605
605Regs.  §54.9802-1T(e)(1)(i); DOL Regs. §2590.702(e)(1)(i), and 45 CFR §146.121(e)(1)(i).
Plans or issuers may not deny eligibility to enroll for health benefits or charge higher premiums through an "actively-at-work" clause. Such clauses typically stipulate that an individual may be denied benefits if the person is not actively-at-work on the day the individual otherwise would become eligible for benefits. However, such clauses are permissible if individuals who are absent from work due to any health factor are treated, for purposes of health coverage, as if they are actively-at-work.606 Nonetheless, a plan may require an individual to begin work before coverage becomes effective.607
606Regs.  §54.9802-1T(e)(2)(i)(A); DOL Regs. §2590.702(e)(2)(i)(A); and 45 CFR §146.121(e)(2)(i)(A).
607Id.
Plans also are permitted to distinguish between groups of similarly situated individuals, provided the distinction is not aimed at individual participants based on a health factor. For example, a plan or issuer may condition coverage on an individual's meeting the plan's requirement of working full-time.
Pre-existing condition exclusions are permissible if the plan complies with certain limitations and applies the exclusions uniformly to all similarly situated individuals and does not direct exclusions at individual participants and beneficiaries. For example, a group health plan may not impose a pre-existing condition exclusion period of 12 months and then, after six months, waive the exclusion for individuals who have not had any claims since enrollment.608
608Regs.  §54.9802-1T(b)(3)(ii), Ex. 2; DOL Regs. §2590.702(b)(3)(ii), Ex. 2; 45 CFR §146.121(b)(3)(ii), Ex. 2. For more information on pre-existing condition exclusions, see VIII, C, above.
Plans may require deductibles, copayments, coinsurance, or other cost-sharing mechanisms based on health factors that differentiate between similarly situated individuals, and, thus, are not applied uniformly, if they are based on a bona fide wellness program.609 Different deductibles or coinsurance requirements may be used for different services if the requirements are applied uniformly to all similarly situated individuals and not directed at individual participants or beneficiaries.610
609Regs. §54.9802-1(b)(2)(ii); DOL Regs. §2590.702(b)(2)(ii); 45 CFR §146.121(b)(2)(ii). See VIII, E, 3, below.
610See Regs. §54.9802-1T(b)(2)(i)(D), Ex. 7; DOL Regs. §2590.702(b)(2)(i)(D), Ex. 7; 45 CFR §146.121(b)(2)(i)(D), Ex. 7.
Similarly, plans and issuers may impose annual, lifetime, or other limits on benefits.611
611Regs. §54.9802-1T(b)(2)(i)(B); DOL Regs. §2590.702(b)(2)(i)(B); 45 CFR §146.121(b)(2)(i)(B).
Importantly, limits and exclusions are considered to be directed at any individual participants or beneficiaries if the limits are implemented through plan amendments made effective earlier than the first day of the first plan year after the amendment is adopted. For example, effective before the beginning of the next plan year, a plan is modified to impose a lifetime limit on benefits for the treatment of AIDS shortly after discussion at a board meeting of a participant's claim for AIDS treatment. The plan violates the regulations because the modification is considered under the regulations to be directed at the participant.612
612Regs.  §54.9802-1T(b)(2)(i)(D), Ex. 2; DOL Regs. §2590.702(b)(2)(i)(D), Ex. 2; 45 CFR §146.121(b)(2)(i)(D), Ex. 2.
Comment: Limits and exclusions must be carefully drafted in order to avoid the prohibitions of the regulations. For instance, the regulations permit lifetime limits on the treatment of particular health conditions, but do not permit provisions that would specifically limit or exclude coverage of an individual with a particular health condition. Moreover, certain permitted exclusions could have an adverse impact on certain individuals and still be permitted under the regulations.
Plans and issuers cannot circumvent these prohibitions by adjusting the cost of coverage. The regulations prohibit plans and issuers from requiring, as a condition of enrollment or continued enrollment, higher premiums or contributions than are required from other similarly situated individuals based on any health factor.613 Thus, an individual with a history of high claims cannot be charged more than similarly situated individuals based on claims experience. Discounts, rebates, payments in kind, and any other premium differential mechanisms are taken into account under the regulations in determining an individual's premium or contribution rate.614 However, a plan may use a premium or contribution differential in a bona fide wellness program (see VIII, E, 3, below).615
613Regs. §54.9802-1(c)(1)(i); DOL Regs. §2590.702(c)(1)(i); 45 CFR §146.121(c)(1)(i).
614Regs. §54.9802-1T(c)(1)(ii); DOL Regs. §2590.702(c)(1)(ii); 45 CFR §146.121(c)(1)(ii).
615Regs. §54.9802-1(c)(3); DOL Regs. §2590.702(c)(3); 45 CFR §146.121(c)(3).
Also, the regulations do not restrict the aggregate amount that an employer may be charged for coverage under a group health plan. It is permissible for an issuer to charge a higher premium to one group health plan than it charges to another group health plan comprised of fewer individuals with adverse health factors. For example, an issuer may quote a higher per-participant rate to a plan because of the claim experience of a particular participant.616 However, an issuer may not charge an employer a different premium for each individual within a group of similarly situated individuals based on each individual's health status.
616Regs.  §54.9802-1T(c)(2)(iii), Ex. 1; DOL Regs. §2590.702(c)(2)(iii), Ex. 1; 45 CFR §146.121(c)(2)(iii), Ex. 1.
Plans and issuers are not prevented from offering more favorable rules for eligibility for individuals with an adverse health factor, such as disability.617 For example, a plan that covers dependents only until age 25 may make an exception for disabled dependents. Also, issuers and plans can charge lower premiums than for other similarly situated individuals if the lower charge is based on an adverse health factor.618 This rule does not prevent a group health plan from establishing premium discounts or rebates, or modifying otherwise applicable copayments or deductibles, in return for adherence to a bona fide wellness program of health promotion or disease prevention.619
617Regs.  §54.9802-1T(g)(1)(i); DOL Regs. §2590.702(g)(1)(i); 45 CFR §146.121(g)(1)(i).
618Regs. §54.9802-1T(g)(2)(i); DOL Regs. §2590.702(g)(2)(i); 45 CFR §146.121(g)(2)(i).
619Code §9802(b)(2)(B); ERISA  §702(b)(2)(B). Regs.  §54.9802-1(b)(2)(ii); DOL Regs. §2590.702(b)(2) (ii); 45 CFR §121(b)(2)(ii).
An employee or dependent cannot be required to pass a physical examination as a condition of enrollment, even if the individual is a late enrollee.620
620See  Regs. §54.9801-3(a)(1); DOL Regs. §2590.701-3(a)(1); 45 CFR §146.111(a)(1). Although some plans may require physical examinations before coverage begins to identify preexisting conditions, passage of a physical examination is not a pre-condition for enrollment.
2.	Exception for Grandfathered Church Plans
Church plans that are group health plans generally are subject to the provisions in the Code relating to access, portability, and renewability. However, under §9802(c), church plans satisfying certain requirements continuously since July 15, 1997, may require evidence of good health for the coverage of certain individuals.
The grandfather rule in §9802(c) applies to a church plan for a plan year only if, on July 15, 1997, and at all times after that date before the beginning of the plan year, the church plan has provisions satisfying one of two alternative conditions in proposed regulations.
The first alternative condition is that the plan require evidence of good health from both (1) any employee of an employer with 10 or fewer employees and (2) any self-employed individual. The proposed regulations specify that this condition is not satisfied if the plan requires evidence of good health of only one of these sets of individuals. The proposed regulations also clarify that the plan provision for the first set of individuals must be exactly 10 or fewer. For example, a plan provision requiring evidence of good health for employees of an employer of fewer than 10, or of greater than 10, employees does not satisfy this condition.621
621Prop. Regs. §54.9802-2(b)(2).
The second alternative condition is that the plan contain provisions requiring evidence of good health of any individual who enrolls after the first 90 days of initial eligibility. The proposed regulations clarify that the period for these plan provisions must be exactly 90 days. Thus, a plan provision requiring evidence of good health of any individual who enrolls after the first 120 days of initial eligibility does not satisfy this condition.622
622Prop. Regs.  §54.9802-2(b)(3).
3.	Bona Fide Wellness Programs
The nondiscrimination rules do not prevent a plan from establishing premium discounts or rebartes, or modifying otherwise applicable copayments or deductibles, in return for adherence to programs of health promotion or diseases prevention.623 Proposed rules on bona fide wellness programs rewards to participants based on their ability to meet a standard related to a health factor. Such programs offer, for example, premium differentials between smokers and nonsmokers.
623Regs.  §54.9802-1(c)(3); DOL Regs. §2590.702(c)(3); 45 CFR §146.121(c)(3).
Wellness programs would have to comply with the following four requirements:

(1) The total reward given to the individual would have to be limited.624 
(2) The program must be reasonably designed to promote good health or prevent disease for individuals in the program.625
(3) The reward must be available to all similarly situated individuals.626 The program must permit any person for whom it is unreasonably difficult due to a medical condition to meet the wellness program standard, or for whom it is medically inadvisable to attempt to meet the standard, to satisfy a reasonable alternative standard. In the case of an addicted smoker, alternative standards might include attending educational classes or trying a nicotine patch.
(4) All plan materials explaining the terms of the program must note the availability of an alternative standard.627
624Prop. Regs.  §54.9802-1(f)(1)(i).
625Prop. Regs.  §54.9802-1(f)(1)(ii).
626Prop. Regs. §54.9802-1(f)(1)(iii).
627Prop. Regs. §54.9802-1(f)(1)(iv).
Until further guidance is issued, enforcement action will not be taken against a plan or issuer that complies with a good faith interpretation of the statutory provisions pertaining to wellness programs.
F. Guaranteed Renewability in Multiemployer Plans and MEWAs
In order to protect accessibility to coverage at the employer level, HIPAA also protects access of employers to multiemployer plans and multiple employer welfare arrangements (MEWAs) (see XV, below). Section 9803 generally prohibits group health plans that are multiemployer plans or MEWAs from denying an employer continued access to the same or different coverage.628
62845 CFR §146.152(a).
HIPAA excuses such issuers of coverage from the renewal requirement for the following causes: (1) nonpayment of contributions; (2) fraud or other intentional misrepresentation of material fact by the employer; (3) noncompliance with material plan provisions; (4) cessation of all coverage in a geographic area; (5) in the case of a plan that offers benefits through a network plan, because there is no longer any individual enrolled through the employer who lives, resides, or works in the service area of the network plan;629 or (6) failure to meet the terms of an applicable collective bargaining agreement, to renew a collective bargaining agreement or other agreement requiring or authorizing contributions to the plan, or to employ employees covered by such an agreement.630
629The plan must apply this provision uniformly without regard to the claims experience of the employer or any factor described in §9802(a)(1) in relation to such individuals or their dependents.
63045 CFR §146.152(b).
Of course, coverage may be discontinued if an employer drops out of the associations maintaining a MEWA. However, coverage must be terminated uniformly without regard to any health factor relating to any covered individual.631
63145 CFR §146.152(b)(6).
An issuer of coverage or plan may also cease to offer a particular type of group coverage in the small or large group market. In that event the issuer must, in accordance with applicable state law: (1) provide notice to plan sponsors, participants and beneficiaries of the discontinuation at least 90 days before the date the coverage will be discontinued; (2) give plan sponsors the chance to purchase all other coverages offered by the issuer in such market (for the large group market, any other coverages); and (3) apply the termination uniformly as to the claims experience of the sponsors or any health factor to any new or continuing participants or beneficiaries.632
63245 CFR §146.152(c).
An issuer may discontinue offering all health insurance coverage, but only if certain conditions are met. In accordance with applicable state law, the issuer must: (1) provide notice to the applicable state authority and to each plan sponsor of the discontinuation at least 180 days before the date the coverage will be discontinued; and (2) discontinue and not renew all health insurance policies issued or delivered for issuance in the state market.633 Moreover, the issuer may not offer coverage in the market and state involved for five years.634 Issuers are permitted to modify the health insurance coverage for a product offered to a group health plan in the large group market, and in the small group market if the modification was effective on a uniform basis among group health plans with that product.635
63345 CFR §146.152(d).
63445 CFR §146.152(e).
63545 CFR §146.152(f).
"Multiemployer plan" is defined in  §414(f) as a plan to which more than one employer is required to contribute, which is maintained pursuant to one or more collective bargaining agreements between one or more employee organizations and more than one employer, and which satisfies such other requirements as the Secretary of Labor may prescribe by regulation. Regs.  §1.414(f)-1 imposes two additional requirements for multiemployer plan status: (1) the amount of contributions made for the plan year by or on behalf of each employer is less than 50% (75% in the case of certain plans) of the total amount of contributions made by or on behalf of all employers; and (2) the plan provides that the amount of benefits payable with respect to each employee participating in the plan is determined without regard to whether or not his employer continues as a member of the plan.
G. Enforcement
1.	Excise Taxes
a.	Liability
Section 4980D imposes excise taxes for failures to comply with HIPAA. This section closely  resembles §4980B, which imposes excise taxes for COBRA continuation coverage violations.636 Section 4980D provides generally for a $100 per day tax for each day during the noncompliance period with respect to each individual to whom such failure relates. As discussed in VIII, B, 1, b, above, there is an exception in §4980D(d) for certain failures under insured small employer group health plans.
636See VII, D, 1, above.
b.	Determination of Amount
The $100 tax is the maximum daily sanction for a failure to meet the requirements of HIPAA. The penalty is assessed beginning on the day on which the failure occurs and ending on the day of its correction.637 Small employers, i.e., those with 50 or fewer employees during the preceding calendar year and at least two employees on the first day of the plan year, do not have to pay penalties for failures of coverage provided by a health insurance issuer.638
637§4980D(b).
638§4980D(d)(2)(A).
Note: Correction means to undo the failure retroactively to the extent possible, and to place the person to whom the failure relates in a financial position as good as if such failure had not occurred.639 Even if the violation is not corrected, the Secretary may waive all or part of the excise tax to the extent it would be excessive relative to the failure involved.640
639§4980D(f)(3).
640§4980D(c)(4).
There also are abatement provisions for reasonable unawareness of failure to comply, and prompt correction of inadvertent failure to comply.641 In the case of a church plan, the correction must be made before the end of the "correction period" of at least 270 days, as determined under  §414(e)(4)(C).642 Generally, a church plan is a plan established and maintained for its employees by a church, association of churches, or a church controlled organization, that is exempt from tax under §501.643
641§4980D(c)(2).
642Id.
643See  §414(e).
However, the abatement is limited if a violation is discovered after a notice of examination is sent to the employer. If correction of the failure occurs after the taxpayer has been notified of an income tax examination covering the year of the failure, the minimum penalty for a de minimis failure is the lesser of $2,500 or the $100 per day tax. The minimum penalty is the lesser of $15,000 or $100 per day for failures that are not de minimis.644 Violations by a church plan are not subject to the §4980D(b)(3) minimum tax provision.645
644§4980D(b)(3).
645§4980D(c)(2)(B).
Under §4980D(c)(3)(A), the maximum amount of tax that may be imposed on a single employer plan for all failures within a taxable year is 10% of the aggregate amount paid or incurred by the employer (or predecessor employer) for group health plans during the employer's preceding taxable year, but not more than $500,000. If members of the same controlled group646 have different taxable years, the determination of the appropriate "taxable year" for purposes of determining the maximum tax under  §4980D is to be made by reference to §1561.
646Presumably, in determining which employers are treated as a single employer, §414(b),  (c) and  (m) (concerning controlled groups of employers) apply in making this determination. Section 414(t) states that §4980B is such an "applicable section." While it does not appear that  §414(t) has been amended to include §4980D, the legislative intent behind the creation of §4980D was to model HIPAA's enforcement provisions after COBRA. H.R. No. 736, 104th Congress, 2d Sess.
For a group health plan that is a multiemployer plan or a MEWA, the maximum tax that may be imposed for failures during a taxable year of the trust forming part of the plan647 is 10% of the amount paid or accrued by such trust during such year to provide medical care648 directly or through insurance, reimbursement or otherwise, but not more than $500,000. If an employer is liable to pay the excise tax on behalf of such a plan, the maximum amount of tax is determined in the same manner as with respect to single-employer plans.649
647All plans of which the same trust form a part are treated as one plan. §4980D(c)(3)(B).
648Section 9832(d)(3) provides that the term "medical care" for these purposes has the meaning given such term under §213(d), determined without regard to paragraph (1)(C) thereof and so much of paragraph (1)(D) thereof as relates to qualified long-term care insurance. Thus, the meaning of "medical care" for these purposes is the amount paid: (1) for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body; (2) for transportation primarily for and essential to medical care referred to in (1), above; or (3) for insurance (including amounts paid as premiums under Part B of Title XVIII of the Social Security Act (i.e., supplementary physician treatment benefits for the aged and disabled)) covering medical care referred to in (1) and (2), above.
649§4980D(c)(3)(B).
c.	Persons Liable
The employer generally  is liable for the excise tax imposed by §4980D(a). However, in the case of a multiemployer plan, the plan is liable. Similarly, a failure of a MEWA to comply with the guaranteed renewability requirement under §9803 causes the excise tax to be imposed on the plan.650
650§4980D(e).
2.	ERISA Remedies
As discussed in VII, D, 2, above, ERISA has its own civil enforcement provisions. A plan fiduciary, which may include the employer, the plan administrator and/or the health insurance issuer, can be held liable under ERISA for violations of HIPAA. ERISA §502(a)(3) permits participants, beneficiaries or fiduciaries, among others, to enjoin any act or practice which violates any provision of ERISA Title 1 (which includes Part 7, the HIPAA provisions) or to obtain other appropriate equitable relief to redress such violations.
ERISA §512(c)(1)(A), which provides for civil penalties of up to $100 per day for violations of COBRA notice requirements, does not include violations of HIPAA. However, ERISA §512(c)(1)(B) appears to be applicable to certain types of violations of HIPAA. It provides that a plan administrator may be subject to a civil penalty of up to $100 per day for failure or refusal to comply with a request for any information that such administrator is required by Title I to furnish a participant or beneficiary.
H. Privacy
The Department of Health and Human Services (HHS)'s privacy rule651 provides comprehensive federal protection for the privacy of health information. The privacy rule requires "covered entities" to safeguard against the misuse of an individual's identifiable health information, referred to as "protected health information" (PHI), and limits the sharing of such information. The rule also gives individuals rights to access and amend their medical records and other files containing PHI and requires that covered entities notify individuals about their privacy rights. Generally, covered entities have the following obligations:
651The privacy rule, or Standards for Privacy of Individually Identifiable Health Information, is codified at 45 CFR Parts 160 and 164. The final rule was first issued in 2000 at 65 Fed. Reg. 82462 (12/28/00); see also 66 Fed. Reg. 12433 (2/26/01) with respect to a technical correction of effective and compliance dates as reflected in the final rule. Modifications of the rule were adopted in 2002 at 67 Fed. Reg. 53131 (8/14/02).

(1) Comply with administrative requirements,652 such as:
(a) develop and implement privacy policies and procedures;
(b) establish administrative, technical and physical safeguards (firewalls) against improper disclosure or use of PHI;
(c) train employees and other workforce members who handle PHI so they understand the privacy procedures;
(d) establish a complaint process;
(e) establish sanctions against employees or other workforce members who fail to comply with the privacy requirements;
(f) designate a privacy official to oversee compliance with privacy procedures and a contact person for receiving complaints and providing other information;
(g) refrain from intimidating or retaliatory acts against persons exercising their rights under the privacy rule;
(h) refrain from requiring individuals to waive their rights to file complaints as a condition to enrollment in a plan or eligibility for benefits; and
(i) document compliance with certain of the administrative requirements.
(2) Enter into agreements with contractors, subcontractors, and other business associates with whom they must share PHI so as to require their business associates to safeguard PHI.653
(3) Provide a privacy notice to individuals.654 
(4) Comply with recordkeeping requirements.655
65245 CFR §164.530.
65345 CFR §164.502(c)(2).
65445 CFR §164.520.
65545 CFR §164.530(j).
1.	Application to Health Care Plans
"Covered entities" that must comply with the privacy rule are health plans, health care clearinghouses, and health care providers that transmit PHI electronically. "Health plans" are individual or group plans that provide or pay the cost of medical care. They include health insurance issuers and health maintenance organizations (HMOs), and group health plans. "Group health plans" are insured and self-insured employee welfare benefit plans,656 to the extent that they provide medical care657 to employees or their dependents directly or through insurance, reimbursement, or otherwise. In order to be considered a group health plan, the plan must have at least 50 participants658 or must be administered by an entity other than the plan sponsor. Differentiating between a group health plan and another type of health plan can be important because the privacy rule requirements for certain group health plans may be less onerous for plan sponsors.
656The rule defines an "employee welfare benefit plan" by reference to §3(l) of ERISA.
657See §2791(a)(2) of the Public Health Service Act, 42 USC §300gg-9l(a)(2), for the definition of "medical care."
658See §3(7) of ERISA for the definition of "participant."
Note: Disability and life insurance plans are exempt from the privacy rule because they are not defined as health plans for purposes of the rule.659 Therefore, any information received by those plans is not considered to be PHI unless the information is received from a covered health plan or insurer.
659See definition of health plan at 45 CFR §160.103.
In order to make sense of the complex set of regulations embodied in the privacy rule, it may be helpful for a plan sponsor to categorize its various health plans at the outset so that it will know which requirements need to be met for each plan. The rule actually only applies to covered entities and not explicitly to plan sponsors or employers in their capacity as such. However, as plan sponsors/employers are often involved in day-to-day operation of their health plans, some provisions of the rule may apply to them. The more involved a plan sponsor or employer is with the plan and the greater the plan's involvement with PHI, the more extensive the range of provisions that the plan sponsor is responsible for, normally indirectly as the "workforce" of the plan.
The following categorization of employer-sponsored plans describes the progressive levels of involvement with the compliance required at each level.
a.	Group Health Plan with Benefits Provided Solely Through an Insurance Contract or Through an HMO; Plan Has Limited PHI and Discloses Limited PHI to Sponsor
If the group health plan (1) creates or receives no PHI except summary health information660 or information on plan enrollment, and (2) discloses no PHI to the plan sponsor except summary health information (but only for the purposes of obtaining premium bids from health plans or for modifying, amending or terminating the group health plan) or plan enrollment information, then the plan only has to comply with the basic group health plan requirements, namely:
660"Summary health information" is information that may be individually identifiable health information, but (1) that summarizes the claims history, claims expenses, or type of claims experienced by individuals for whom a plan sponsor has provided health benefits under a group health plan, and (2) from which identifying information has been deleted. Identifying information is: names; geographic subdivisions smaller than a state, including street address, city, county, precinct, zip code, and their equivalent geocodes (except that information may be aggregated by five digit zip codes; dates (except year) for dates directly related to an individual, including birth date, admission date, discharge date, date of death, all ages over 89 and all elements of dates (including year) indicative of such age, except that such ages and elements may be aggregated into a single category of age 90 or older; telephone numbers; fax numbers; electronic mail addresses; Social Security numbers; medical record numbers; health plan beneficiary numbers: account numbers; certificate/license numbers; vehicle identifiers and serial numbers, including license plate numbers; device identifiers and serial numbers; Web Universal Resource Locators (URLs)-1 Internet Protocol (1P) address numbers, biometric identifiers, including finger and voice prints; full face photographic images and comparable images; and any other unique identifying number, characteristic, or code. 45 CFR §§164.501, 164.514(b)(2)(i).

• the nonintimidation/nonretaliation requirement; and
• the nonwaiver of rights requirements.
There is no requirement that group health plans document the requirements listed above, but they may want to do so as evidence of compliance. There are no additional requirements for plan sponsors in these circumstances.
b.	Group Health Plan with Benefits Provided Solely Through an Insurance Contract or Through an HMO; Plan Has More Extensive PHI but Discloses Limited PHI to Sponsor
If the group health plan (1) creates or receives PHI that is more extensive than mere summary health information or plan enrollment information, but (2) discloses no PHI to the plan sponsor except summary health information (and only for the purposes of obtaining premium bids from health plans or for modifying, amending or terminating the group health plan) or plan enrollment information, then the plan has to:

• maintain (although not distribute) a privacy notice and produce it upon request;
• comply with the administrative requirements discussed above; and
• comply with the basic group health plan requirements listed above (nonintimidation/retaliation, nonwaiver of rights, and comply with rule for disclosure to other parties).
There are no additional requirements for plan sponsors in this circumstance.
c.	Group Health Plan with Benefits Provided Solely Through an Insurance Contract with Insurer or Through an HMO; Plan Has More Extensive PHI and Permits More Extensive Disclosure to Sponsor
If the group health plan (1) creates or receives PHI that is more extensive than mere summary health information or plan enrollment information, or (2) discloses, or permits the insurer or HMO to disclose, more extensive PHI to the plan sponsor or discloses summary health information for a purpose other than obtaining premium bids from health plans or for modifying, amending or terminating the group health plan, such as for the plan sponsor to engage in plan administration functions, then the plan has to:

• maintain (although not distribute) a privacy notice and produce it upon request;
• comply with the administrative requirements discussed above;
• comply with the basic group health plan requirements listed above (nonintimidation/retaliation, nonwaiver of rights, and comply with rule for disclosure to other parties); 
• amend group health plan documents:
(1) to establish permitted and required uses and disclosures of PHI by the plan sponsor; and
(2) to provide that the plan will disclose PHI to the plan sponsor only upon receipt of a sponsor certification that the amendment has been made and that the sponsor agrees to the disclosure standards and administrative requirements; and 
• document the plan amendments. 
d.	Group Health Plans with Benefits Self-Insured by the Plan Sponsor
Such a group plan must satisfy all the privacy requirements applicable to health plans in general, plus those that apply to all group plans, such as:

• distribute a privacy notice to health plan participants;
• comply with the administrative requirements; 
• comply with the basic group health plan requirements (nonintimidation/retaliation, nonwaiver of rights, and comply with rule for disclosure to other parties); and
• in order to disclose more extensive PHI to the plan sponsor or summary health information for a purpose other than obtaining premium bids or insurance contracting purposes, comply with the plan amendment requirements discussed above. 
e.	Types of Plans
As illustrated, the privacy rule requirements quickly start to multiply once a group health plan moves away from the fully insured/no PHI model. Therefore, it is important to identify and distinguish between the various types of plans to ensure that the appropriate requirements are met or to make sure that a plan does not inadvertently comply with more than is required. For example, if an employer sponsors a group health plan that is partially self-insured and partially "insured" through HMOs, then the plan does not provide benefits solely through insurance or HMOs, and the plan would have to comply with the full panoply of notice, administrative and group plan requirements.
Comment: As a practical matter, the HMO presumably would take responsibility for meeting the privacy requirements for the participants enrolled in the HMO, and the group health plan would be responsible for that portion of the plan that is self-insured. Also, plan sponsors should be aware that medical reimbursement plans, health care flexible spending account plans, and stand-alone vision, dental and employee assistance plans also are considered to be health plans subject to the privacy rule. Moreover, as these types of plans are often self-insured, they would fall into the category of plans requiring the most compliance.
2.	Obligations of Plan Sponsor
A covered entity is permitted to use or disclose PHI as follows:

• to the individual;
• for treatment, payment, or health care operations;661 
• incident to a permitted or required use or disclosure;662 
• in accordance with an authorization given by the individual that complies with the privacy rule's requirements for such authorizations;663 
• in accordance with an agreement or as disclosed to an individual in advance, with an opportunity for the individual to agree to or prohibit or restrict the use or disclosure;664 
• as permitted by 45 CFR §164.502 (setting forth the general rules on uses and disclosures), §164.512 (permitting use and disclosure, for example, as required by law or for public health activities), or §164.514(e), (f), or (g) (covering, for example, limited data sets).665
66145 CFR §164.502(a)(1)(ii). See 45 CFR §164.506 for the requirements as to such uses and disclosures. "Payment," "treatment" and "health care operations" are defined at 45 CFR §164.501.
66245 CFR §164.502(a)(1)(iii). 
66345 CFR §164.502(a)(1)(iv). See 45 CFR §164.508 for the requirements relating to authorizations. 
66445 CFR §164.502(a)(1)(v). See 45 CFR §164.510 for the requirements relating to such agreements.
66545 CFR §164.502(a)(1)(vi).
In fashioning the privacy rule, the HHS attempted to give enough leeway to covered entities to use or disclose PHI for proper purposes without causing inefficiencies in treatment, payment, and health care operations. Therefore, for many routine matters, covered entities such as health plans should be able to continue to use or disclose PHI without having to obtain the individual's authorization or agreement.
Comment: A group health plan requiring participants to provide consent to the plan's disclosure of PHI before the advent of HIPAA may continue to do so even if the privacy rule would not require it.
a.	Employment Records
Because the privacy rule does not, per se, apply to employers in their capacity as such or to the employment functions of covered entities, the definition of PHI expressly excludes employment records.666 In excluding employment records from the definition of PHI, the HHS declined to define the term because the same types of individually identifiable information may be contained in a covered entity's employment records as in, for example, its health plan records or health care files. Therefore, rather than focusing on the nature of the medical information, the HHS looks to the purpose for which a covered entity has obtained the information. Nonetheless, without regard to the privacy rule requirements, employers generally may obtain health information about employees as part of their routine employment activities such as hiring; compliance with requirements of other laws and agencies such as the Occupational Safety and Health Administration, the Family and Medical Leave Act, the Americans with Disabilities Act, workers' compensation laws, and alcohol and drug-free workplace laws; disability insurance and sick leave programs; and other employment-related purposes such as drug screening, workplace medical surveillance, and fitness-for-duty tests. In addition, the HHS does not consider health plan enrollment information to be PHI when held by a plan sponsor, regardless of whether it is actually held in the employment records, because a plan sponsor is not a covered entity simply by virtue of sponsoring a group health plan and by having such information. However, once the plan sponsor transmits the information to a group health plan, it becomes PHI with respect to the group health plan, which generally would be a covered entity.667 Consequently, although the plan sponsor could use individually identifiable medical information for purposes of its disability or life insurance programs without having to comply with the privacy rule, the same information could not be transmitted by the employer's group health plan to the disability or life insurance plan or to the plan sponsor except in compliance with of the privacy rule.
66645 CFR §164.501(2)(iii).
66767 Fed. Reg. 53183 (8/14/02). In response to public comments on its exclusion of "employment records" from the definition of PHI, the HHS noted that the following information is PHI when held by a fully insured group health plan and transmitted to an insurer or HMO: (a) the identity of an individual, including name, address, birth date, marital status, dependent information and Social Security number; (b) the individual's choice of plan; (c) the amount of premiums/contributions for coverage of the individual; (d) whether the individual is an active employee or retired; and (e) whether the individual is enrolled in Medicare.
b.	Administrative Requirements
Despite the employment record exclusion, unless an employer sponsors only fully insured health plans, some of its employees, as the workforce of the group health plan, will have to comply with the privacy rule with regard to handling PHI. As a result, the noninsured group health plan will have to follow the full administrative requirements of the privacy rule, including:

• developing policies and procedures for handling PHI; 
• designating the privacy official and formulating a process for individuals to file complaints regarding misuse of PHI, to gain access to their PHI, to request amendment of their PHI, and to request more information; 
• restricting access to PHI by employees who are not PHI-trained and who do not act as the workforce of the plan; 
• training employees who are group health plan workforce members in privacy policies and procedures; 
• distributing a privacy notice; 
• promulgating forms such as authorization forms to be signed by individuals permitting use or disclosure of PHI in accordance with the individual's wishes and disclosure logs; and 
• entering into agreements with business associates to prevent misuse or wrongful disclosure of PHI. 
The designated privacy official is responsible for the development and implementation of the privacy policies and procedures.668 The policies and procedures must be designed to comply with the requirements of the privacy rule. The rule requires that the policies and procedures be in written or electronic form and be "reasonably" designed, taking into account the size and type of activities that relate to PHI by a covered entity. In addition, the policies and procedures must be changed as necessary and appropriate to take into account changes in law and the privacy rule. If a covered entity makes a change in a privacy practice that has been described in the notice of privacy practices that it distributes to individuals, it may apply the changed practices to PHI that it obtained prior to the change if it reserved the right to do so in the notice. Otherwise, it appears that such changes could only be made prospectively, and a new notice would have to be distributed.669 The designation of the privacy official, the policies and procedures, and any changes in the policies and procedures must be documented.670
66845 CFR §164.530(a)(1)(i). 
66945 CFR §164.530(i) and (j). 
67045 CFR §164.530(a)(2) and (i).
A health plan must also designate a contact person or office that is responsible not only for providing information regarding the entity's privacy practices but also for receiving complaints regarding compliance with the privacy rule.671 Consequently, a plan is required to provide a process for complaints and must document all complaints received and their disposition.672 The plan must also document the designation of the contact person.673
67145 CFR §164.530(a)(1)(ii).
67245 CFR §164.530(d).
67345 CFR §164.530(a)(2). 
c.	Protection of Health Information
Health plans are required to safeguard PHI from intentional or unintentional use or disclosure that violates the privacy rule. The safeguards must include measures to ensure that any permitted or required use or disclosure does not violate the "minimally necessary" standard.674 The safeguards should encompass administrative, technical, and physical safeguards designed to protect the privacy of PHI.675 The types of systems that may need to be safeguarded include electronic information systems, file cabinets, desktops and desk drawers -- in short, any place where PHI may be handled or stored. Safeguards also include measures to prevent workforce members from verbally disclosing PHI to unauthorized persons. A covered entity must also establish and apply sanctions against members of its workforce who do not comply with the entity's policies and procedures or the privacy rule.
67445 CFR §164.530(c).
67545 CFR §164.530(c)(1). 
Note: The provision requiring sanctions does not apply to whistleblowers, workforce crime victims, or persons filing complaints with the HHS, assisting the HHS in compliance reviews and investigations, or opposing acts that would violate the privacy rule. The sanctions must be "appropriate;" consequently, it appears that an entity's sanctions may vary depending upon the severity of the noncompliance.676
67645 CFR §164.530(e)(1). 
A health plan must train its workforce members on its privacy policies and procedures. The training should be "as necessary and appropriate" for the workforce members to carry out their responsibilities and their handling of PHI.677 In addition, new workforce members must be trained within a reasonable period of time after they join the health plan's workforce. If a material change is made in the entity's privacy policies and procedures, those workforce members whose functions are affected by the change must be trained on the change within a reasonable period of time after the change becomes effective.
67745 CFR §164.530(b).
It is important to note that workforce members may include not only a covered entity's employees but also, for example, employees of a contractor who carry out functions relating to handling of PHI for a covered entity and who, thus, become, for purposes of the privacy rule, members of the covered entity's workforce. "Workforce" members include not only employees, but also volunteers, trainees, and other persons who are under the direct control of the entity, regardless of whether they are paid by the covered entity.678 Consequently, such workforce members are to be trained in the covered entity's privacy policies and procedures and are subject to appropriate disciplinary measures, such as a request by the covered entity to the contractor to have the workforce member transferred to another client of the contractor or otherwise taken outof of the covered entity's workforce. 
67845 CFR §160.103.
Comment: Health plans should ensure that their agreements with such contractors contain a covenant or other provision requiring the contractor's employees to comply with the covered entities' privacy policies and procedures and with the privacy rule and setting forth the consequences of noncompliance.
The IRS may obtain a taxpayer's PHI from a HIPAA - regulated entity if it uses one of the methods set forth in Chief Counsel Notice CC-2004-034. The notice provides detailed information on when and how the IRS may request and receive PHI in compliance with HIPAA. The methods the IRS may use to Sathr PHI are:
• written consent of the taxpayer;
• IRS summons pursuant to §7602(a)(2);
• request for a court order for production of documents pursuant to a court's discovery rules; and
• request for information pursuant to a court's discovery rules but without a request for a court order requiring production.
d.	Business Associates
In contrast, health plans may also enter into contracts with "business associates," who perform functions involving the use or disclosure of PHI but who are not considered to be workforce members of the health plan. Typical kinds of business associate arrangements include claims processing or administration, data analysis, processing or administration, quality assurance, and benefit management. Business associates may also include service providers, such as legal, actuarial, accounting, consulting, data aggregation, management, administrative, or financial services providers, to whom a health plan discloses PHI in the course of securing the provider's services.679 According to the HHS Office for Civil Rights, contractors whose services do not involve the use or disclosure of PHI and whose access to PHI is at most incidental and limited (for example, janitorial services who may be exposed to PHI when emptying trash) are not considered business associates under the rule.680 Business associates themselves are not required to comply with the privacy rule. However, if a health plan wants to disclose information to the business associate, the health plan must comply with provisions of the rule that regulate such disclosure to business associates. 
67945 CFR §160.103.
680See "Business Associates Frequently Asked Questions" on the HHS Office for Civil Rights (OCR) Privacy of Health Information website at www.hhs.gov/ocr/hipaa. 
Health plans are permitted to disclose PHI to business associates only to help the health plans carry out their health care functions. The health plan may not disclose the PHI to the business associate for the associate's own purposes, unless required for the proper management and administration of the business associate.681 The privacy rule requires that a health plan obtain satisfactory assurances from the business associate that it will safeguard the PHI it receives or creates on behalf of the health plan. The satisfactory assurances must be set out in a written contract or other agreement that includes:
681See the discussion of business associates on the HHS OCR Privacy of Health Information website at www.hhs.gov/ocr/hipaa.

• a description of the permitted and required uses of PHI by the business associate; 
• a prohibition against the business associate using or disclosing the PHI for any purpose other than as permitted or required by the agreement or as required by law; and 
• a requirement that the business associate implement appropriate safeguards to prevent unauthorized uses or disclosures of PHI. 
A business associate must report any unauthorized uses or disclosures of PHI. In addition, if a health plan knows of a material breach or violation by the business associate of the agreement, the health plan is required to take reasonable steps to cause the breach to be cured or the violation to end. If the health plan is unsuccessful, then it must terminate the business associate arrangement. If termination of the arrangement is not feasible, the health plan must report the problem to the HHS.682 In addition, the agreement must provide that the business associate will ensure that any agents, including subcontractors, to whom it provides PHI will agree to the same restrictions and conditions to which the business associate is subject with respect to the PHI. The business associate must provide to the health plan, or to an individual on behalf of the health plan, information for an accounting of disclosures, for review of PHI, for amendment of PHI, and for enforcement by the HHS of the privacy rule, and incorporate any required amendments to PHI. Finally, the business associate must return or destroy all PHI when no longer needed or, if not feasible, safeguard the information. 
682Id. See also 45 CFR §164.504(e).
Note: For convenience purposes only, the HHS has provided a sample business associate agreement, which is not a part of the privacy rule itself. Therefore, use of the sample may not be relied upon in itself as compliance with the privacy rule. In addition, the HHS sample business associate agreement is mostly a bare-bones recital of portions of the privacy rule and should be fashioned to reflect each particular business arrangement, including such provisions as indemnification.683
683The sample business associate agreement may be obtained from HHS's website at www.hhs.gov.
A notable exception to the requirement for a business associate agreement applies to plan sponsors of group health plans. A group health plan, or health insurance issuer or HMO that provides benefits for the group health plan, may disclose certain PHI to the plan sponsor if the plan's documents have been amended to limit the disclosure as provided at 45 CFR §164.504(f), or if one of the exceptions set out at §164.504(f) has otherwise been met. These exceptions permit the group health plan, or health insurance issuer or HMO for the plan, to disclose summary health information requested by the plan sponsor in order to obtain premium bids from health plans for providing coverage under the plan or for modifying, amending or terminating the plan. The group health plan, or health insurance issuer or HMO for the plan, may also disclose information to the plan sponsor as to whether an individual has enrolled or disenrolled in or is otherwise participating in the plan. Neither of those limited plan disclosure exceptions requires that the plan documents be amended to permit the disclosure.684
68445 CFR §164.504(f)(1).
However, if a group health plan otherwise wants to disclose PHI to the plan sponsor or provide for disclosure of PHI to the sponsor by the plan's insurer or HMO, then the plan documents must be amended to restrict uses and disclosures of the PHI by the plan sponsor. Such disclosure would be for the purpose of the plan sponsor providing administrative functions for the plan. In that context, the group health plan may disclose PHI to the plan sponsor only after receiving a certification by the plan sponsor that the plan documents have been amended to incorporate certain provisions and that the plan sponsor agrees to abide by them. Those provisions to be included in the plan documents are:

• prohibiting use or disclosure of PHI except as permitted or required by the plan documents or as required by law; 
• ensuring that any agents, including subcontractors to whom it provides PHI, agree to the same restrictions and conditions to which the plan sponsor is subject with respect to PHI; 
• not using or disclosing PHI for employment-related actions and decisions or in connection with any of the sponsor's other benefit plans; 
• reporting any unauthorized use or disclosure of PHI to the plan; 
• making available PHI for inspection and amendment by the individual and for amendment, incorporating required amendments, and making available information for an accounting of disclosures; 
• making available information to the HHS if required to determine the plan's compliance with the privacy rule; 
• returning or destroying PHI when no longer needed or, if not feasible, safeguarding it; and
• providing for adequate separation between the group health plan and the plan sponsor by specifying the employees or other persons to be given access to PHI, restricting access to and use of PHI by such employees or other persons to plan administration functions, and providing an effective mechanism for resolving issues of noncompliance by such employees or other persons.685
Note: Except for a sample business associate agreement, neither the privacy rule nor the HHS has provided forms or model policies and procedures to be used for compliance. However, the rule contains specific requirements, for example with respect to authorization forms and notices.686
68545 CFR §164.504(f).
686See 45 CFR §164.508 for the requirements relating to authorizations and 45 CFR §164.520 for the requirements relating to privacy notices.
3.	Rights of Participants
a.	Notice of Rights
The privacy rule requires health plans to draft and distribute a notice that informs individuals of their privacy rights with respect to PHI. However, the notice requirement does not apply to group health plans that provide benefits only through insurance contracts and/or HMOs if the plan does not create or receive PHI other than summary health information or disenrollment information.687 In that event, the insurer and/or HMO is required to develop and distribute the notice. If a group health plan is fully insured through an insurance contract or HMO but receives PHI in addition to summary health information or enrollment information, then the plan must develop a notice but is required to provide it only upon request. In that instance, the insurer and/or HMO must also develop a notice, which the insurer or HMO distributes to participants.688
68745 CFR §164.520(a)(2).
688Id.
HIPAA notices must contain information on:

• how the covered entity may use and disclose PHI; an individual's rights regarding PHI and how to exercise those rights, including making complaints; 
• the covered entity's legal duties regarding PHI, including a statement that the covered entity is required by law to maintain the privacy of PHI; and
• whom to contact for further information about the covered entity's privacy practices.689
68945 CFR §164.520(b).
The notice must include an effective date, and a revised notice must be distributed when a covered entity makes material changes to its privacy practices. Health plans are required to distribute the notice to the named insured only and do not have to distribute it individually to all of the insured's dependents.690 The distribution may be made via hard copy mailing or distribution or through electronic means that satisfies the requirements of 45 CFR §164.520(c)(3). The distribution may be combined with other communications, for example, with summary plan descriptions, but may not be accompanied by an authorization form.691 In addition to distribution of the notice, if a health plan maintains a website regarding benefits, the notice must be posted to the website.692
69045 CFR §164.520(c).
69145 CFR §164.520(c)(1), (c)(3), and 164.508(b)(3). See also the "Notice of Privacy Practices for Protected Health Information Frequently Asked Questions" on the OCR's website at www.hhs.gov/ocr/hipaa.
69245 CFR §164.520(c)(3).
Health plans must have provided the notice by the compliance date for the health plan (April 14, 2003 or, for small group health plans, April 14, 2004). After the initial distribution, plans must provide the notice to individuals at the time they enroll in the health plan. In addition, if material revisions are required to be made to the notice, then the health plan must distribute the revised notice to individuals enrolled in the plan within 60 days of the revisions. In addition, at least every three years health plans must notify individuals then enrolled in the plan of the existence of the notice and how to obtain it.693
69345 CFR §164.520(c)(2). 
b.	Protected Health Information
The privacy rule grants individuals certain rights with respect to their PHI as follows:

(1) An individual may request that the health plan restrict uses or disclosures of PHI about himself or herself to carry out treatment, payment, or health care operations and disclosures permitted under 45 CFR §164.510(b), pertaining to disclosures to family members, other relatives, close personal friends, or any person identified by the individual who is involved in the individual's health care or payment. A plan does not have to agree to such restrictions, but must document and abide by them if it does so agree.694 
(2) Individuals may request confidential communications from health plans pertaining to their PHI. An individual may request to receive communications of PHI by alternative means or at alternative locations if the individual "clearly" states that the disclosure of the information could endanger the individual. The health plan may require a representation that the disclosure of the PHI could endanger the individual. If such requests are reasonable, the health plan must accommodate them.695 
(3) Individuals generally have a right of access to inspect and obtain a copy of PHI contained in a "designated record set,"696 except for psychotherapy notes and information compiled in reasonable anticipation of, or for use in, legal proceedings.697 
(4) An individual also has the right to have a covered entity amend PHI in a designated record set. A covered entity must make the amendment unless: the PHI was not created by the covered entity and the originator of the PHI is still available to act on the requested amendment; the information is not part of a designated record set; the PHI is not subject to inspection under 45 CFR §164.524; or the PHI is accurate and complete as it stands.698 
(5) An individual has the right to request and receive an accounting of disclosures of PHI made by a covered entity, for the six years prior to the request, except for disclosures made: to carry out treatment, payment and health care operations; to the individuals themselves; incident to a use or disclosure otherwise permitted or required by the rule; in accordance with the individual's authorization; to persons involved in the individual's care; as part of a limited data set; or that occurred prior to the compliance date for the covered entity.699
69445 CFR §164.522(a).
69545 CFR §164.520(b).
696A "designated record set" is a group of records maintained by or for a covered entity that is, for health plans, the enrollment, payment, claims adjudication, and case or medical management record systems maintained by or for a health plan or that is used, in whole or in part, by or for the covered entity to make decisions about individuals. The term "record" means any item, collection, or grouping of information that includes protected health information and is maintained, collected, used, or disseminated by or for a covered entity. 45 CFR §164.501.
69745 CFR §164.524.
69845 CFR §164.526.
69945 CFR §164.528.
Covered entities may charge reasonable, cost-based fees for copying records requested by individuals exercising their individual rights, including supplies, labor, postage, and cost of preparing summaries of information if requested by the individual. If the covered entity charges for such costs, it must inform the individual that it will do so in its privacy notice.700 Covered entities may not charge for costs associated with searching for and retrieving the PHI.701
70045 CFR §164.520.
70145 CFR §164.524.
c.	Authorization
If a covered entity wants to disclose or use PHI in a manner that is not otherwise permitted or required under the privacy rule, it may do so only in accordance with an authorization signed by the individual. The specific requirements for a valid authorization are set out at 45 CFR §164.508. A covered entity may not condition treatment, payment, enrollment in a health plan, or eligibility for benefits on the individual's signing an authorization. However, a health plan may condition enrollment in the plan or eligibility for benefits on receipt of an individual's authorization if the authorization is for the health plan's eligibility or enrollment determinations relating to the individual, or for its underwriting or risk rating determinations so long the authorization is not for a use or disclosure of psychotherapy notes.702 A covered entity must document and retain signed authorizations.703
70245 CFR §164.508(a)(4).
70345 CFR §164.508(a)(6). 
For uses or disclosures of PHI that do not require an authorization, covered entities may, but are not required, to ask an individual to sign a consent form.
The privacy rule requires that authorizations, restrictions on use or disclosure of PHI, disclosure logs, policies and procedures (including revisions), personnel designations, training logs, complaints and their disposition, sanctions for unauthorized use or disclosure of PHI, business associate agreements, and certain communications, including individual rights communications, be documented (in hard copy or electronic means) and generally maintained for six years.704 In addition, PHI that is part of a designated record set must be maintained for six years.
70445 CFR §§164.502(e)(2), 164.508(a)(6), 164.520(e), 164.522(a)(3), 164.530(a)(2), (b)(2)(ii), (d)(2), (e)(2), and (j).
4.	Remedies
An individual who believes his privacy rights have been violated may file a complaint with HHS's Office for Civil Rights (OCR), or the HHS may initiate a proceeding if it believes that covered entities have not complied with the privacy rule. A person who believes a covered entity is not complying with the privacy rule must file a written complaint, either on paper or electronically, with the OCR within 180 days of when he or she knew, or should have known, that the act occurred. However, the HHS Secretary may waive the 180-day time limit for good cause.705 Civil penalties of $100 per day per violation may be imposed, with a cap of $25,000 per violation.706 However, one incident could result in a number of violations, in which case there is no cap on the number of violations that could be cited per incident, and for which penalties could be assessed. Criminal penalties also may be imposed against any person for violations of the privacy rule. The penalties could include a $50,000 fine and one year imprisonment for knowing violations and a $250,000 fine and 10 years imprisonment if violations were committed for gain or maliciously.707
70545 CFR §160.306 and §164.534.
70642 USC §1320d-5. The HHS enforces civil penalties; see HHS's enforcement rule at 45 CFR 160.500 through 575 (RIN 0938-AM63, 68 Fed. Reg. 18895 (4/17/05)) for procedural and substantive requirements for imposition of these civil monetary penalties. The final interim rule became effective May 19, 2003, and was to expire Sept. 16, 2004 (68 Fed. Reg. 22453 (4/28/03)), but was extended to Sept. 16, 2005 (69 Fed. Reg. 55515 (5/15/04)). The HHS issued proposed regulations that would apply HIPAA's privacy rule's enforcement provisions to HIPAA's nonprivacy administrative simplification provisions relating to the electronic exchange of certain health information in the health care industry (RIN 0991-AB29, 70 Fed. Reg. 20224 (4/18/05)). The proposed regulations, when finalized, would amend the existing enforcement provisions.
707HIPAA, P.L. 104-191, §262, 42 USC 1320d through 1320d-8. The Department of Justice (DOJ) enforces criminal penalties 42 USC 1320d-6.
5.	Effective Dates
Covered entities (other than small health plans) had to be in compliance with the privacy rule by April 14, 2003. Small health plans had until April 14, 2004, to come into compliance.708 As to business associate arrangements, if a covered entity entered into a written contract or other arrangement with a business associate before October 15, 2002, and the contract was not renewed or modified before the applicable compliance date, then it was deemed a compliant agreement until the earlier of (1) its subsequent renewal or modification, or (2) April 14, 2004.709 Consequently, all business associate agreements must have complied with the privacy rule requirements for such agreements by April 14, 2004, unless they were renewed or modified before that date.
70845 CFR §164.534(b).
70945 CFR §164.532(d).
IX. Federal Regulation of Medical Benefits
Federal law also regulates certain benefits provided by private sector medical benefit plans. The Newborns' and Mothers' Health Protection Act of 1996710 regulates lengths of hospital stays for childbirth and the Mental Health Parity Act of 1996711 prohibits lifetime and annual dollar limits on mental health coverage that are lower than limits that apply to other medical benefit coverage. A failure to comply with such provisions is subject to the excise tax applicable to failures to comply with the group health plan requirements of HIPAA.712
710P.L. 104-204, §601 et seq.; Code §9811, ERISA §711.
711P.L. 104-204, §601 et seq.; Code §9812, ERISA §712.
712See Code  §§9811 and 9812. See also, P.L. 105-34, §1531; H.R. Conf. Rep. No. 220, 105th Cong., 1st Sess. 753-54 (1997).
These federal mandates apply to "group health plans," the definition of which is found in ERISA §733(a).713 ERISA §733(a)(1) refers to the definition of "welfare benefit plan" under ERISA (see XIII, A, below). Though ERISA §§711 and 712 each states that it does not require a plan to provide any benefits of the type the section regulates, it would be difficult to find group health plans that do not provide some coverage of these benefits.
713See Code §9832(a). See VIII, B, 1, a, above.
Both ERISA §§711 and 712 regulate not only group health plans, but also "issuers" of health insurance coverage. Federal regulation of group insurance represents an even more dramatic break with historical practice than does federal regulation of benefits provided by a plan. ERISA §514 carves state insurance regulation from its broad preemption of state law (see XIII, E, below). However, under ERISA  §711(f), regulation of coverage of hospital length of stay for childbirth gives way to state insurance legislation on the subject under certain circumstances.714
714ERISA §711(f); Code §9811(e). Though ERISA generally preempts state law (see XIII, E, below), this provision allows state insurance law to preempt ERISA  §711.
Comment: This exception is significant because the majority of states have enacted minimum length of maternity stay laws.715
71563 Fed. Reg. 57551 (10/27/98).
In addition, the small employer exemption in ERISA §712(c)(1) (Code §9812(c)(1)) leaves to state regulation the issue of mental health coverage parity in the small group market.
A. Mandatory Minimum Hospital Length of Stay for Mothers and Newborns
1.	Federal Law Standard
Code §9811 was added to implement the Newborns' and Mothers' Health Protection Act of 1996 (NMHPA).716 Code §9811 generally limits the extent to which group health plans and health insurance issuers may restrict coverage for hospital stays following the birth of a child. Under Code §9811(a)(1), a plan that includes childbirth coverage must provide mother and newborn hospital coverage for at least 48 hours after a normal vaginal delivery, and at least 96 hours following a caesarean section. A group health plan may not require that authorization be obtained from the plan before a provider prescribes these required minimum hospital stays.717 However, an attending physician, in consultation with the mother, may discharge the mother or her newborn child before the end of the minimum stay.718
716P.L. 104-204, §601 et seq., effective for plan years beginning after Jan. 1, 1998. Sections 604 and 605 of the NMHPA amended in the same manner, provisions of the Public Health Services Act relating to the group health market and the individual market. See also ERISA  §711.
717ERISA §711(a)(1)(B); Code §9811(a)(1)(B); Regs. §54.9811-1T(a)(4); DOL Regs. §2590.711(a)(4); 45 CFR §§146.130(a)(4) and 148.170(a)(4).
718Code §9811(a)(2); ERISA §711(a)(2).
Comment: It is not clear how the term "hospital" is to be interpreted.
Note: Group health plans that do not provide benefits for childbirth are not subject to NMHPA.719
719Code §9811(c)(2); ERISA §711(c)(2). Regs. §54.9811-1T(c)(1) and (2); DOL Regs. §2590.711(c)(1) and (2); 45 CFR §146.130(c)(1) and (2) and §148.170(c)(1) and (2).
The Department of Labor regulations require disclosure of the above NMHPA provision in a plan's summary plan description.720
720DOL Regs. §2520.102-3(u); ERISA §711(d).
Group health plans are prohibited from engaging in specific activities that serve to undermine the minimum hospital stay rules.721 The list of prohibited activities include:
721Code §9811(b); ERISA §711(b); Regs.  §54.9811-1T(c)(2); DOL Regs. §2590.711(c)(2).

(1) denying to the mother or her newborn child eligibility to enroll or renew coverage under the terms of the plan for the purpose of avoiding the requirements of ERISA §711;722
(2) providing monetary payment or rebates to mothers to encourage them to accept less than the minimum protections;723
(3) penalizing or otherwise reducing or limiting the reimbursement of an attending provider because such provider gave the required care;724
(4) providing incentives to an attending provider to induce such provider to give care to an individual in a manner inconsistent with ERISA §711;725 and
(5) restricting benefits (with some limitations) described in ERISA §711(c)(3) for any portion of a period within a required hospital length of stay in a manner that is less favorable than the benefits provided for any preceding portion of such stay.726
722Regs. §54.9811-1T(b)(1)(i)(A); DOL Regs. §2590.711(b)(1)(i)(A).
723Regs.  §54.9811-1T(b)(1)(i)(B); DOL Regs. §2590.711(b)(1)(i)(B).
724Regs. §54.9811-1T(b)(3)(i); DOL Regs. §2590.711(b)(3)(i); and 45 CFR §§146.130(b)(3)(i) and 148.170(b)(3)(i). The regulations use the term "compensation" rather than "reimbursement," to clarify that all forms of remuneration to attending providers are included in the prohibition, and to avoid any confusion that otherwise could result from the term "reimbursement" having a narrower meaning in some insurance contexts.
725Regs. §54.9811-1T(b)(3)(ii); DOL Regs. §2590.711(b)(3)(ii).
726Regs.  §54.9811-1T(b)(2)(i); DOL Regs. §2590.711(b)(2)(i).
Group health plans and health insurance issuers may impose deductibles, coinsurance, or other cost-sharing programs. However, coinsurance or other cost-sharing for any part of a required hospital stay may not be greater than the coinsurance or other cost-sharing for any preceding portion of the stay.727 In addition, group health plans or health insurance issuers may negotiate the level and type of reimbursement with the provider of the required care.728
727Regs.  §54.9811-1T(c)(3)(i); DOL Regs. §2590.711(c)(3)(i); 45 CFR §§146.130(c)(3)(i) and 148.170(c)(3)(i).
728Code §9811(d); ERISA §711(e).
NMHPA can apply to a delivery that occurs outside a hospital, if the mother or newborn is admitted in connection with childbirth. If delivery occurs in a hospital, the hospital length of stay begins at the time of delivery (or in the case of multiple births, at the time of the last delivery). If delivery occurs outside a hospital, the hospital length of stay begins at the time the mother or newborn is admitted as a hospital inpatient in connection with childbirth. The determination of whether an admission is in connection with childbirth is a medical decision to be made by the attending provider.729 For this purpose, an attending provider is an individual who is licensed under applicable state law to provide maternity or pediatric care and who is directly responsible for providing maternity or pediatric care to a mother or newborn child.730
729Regs.  §54.9811-1T(a)(2); DOL Regs. §2590.711(a)(2); 45 CFR §§146.130(a)(2) and 148.170(a)(2).
730Regs. §54.9811-1T(a)(5)(iii); DOL Regs. §2590.711(a)(5) (iii); 45 CFR §§146.130(a)(5)(iii) and 148.170(a)(5)(iii).
2.	Preemption by State Law
NMHPA's requirements do not apply with respect to health insurance coverage offered in connection with a group health plan or issuer if there is a state law that requires:

(1) at least a 48-hour hospital stay following a vaginal delivery and at least a 96-hour hospital stay following a delivery by caesarean section;
(2) maternity and pediatric care in accordance with guidelines established by the American College of Obstetricians and Gynecologists, the American Academy of Pediatrics, or any other established professional medical association; or
(3) in connection with the coverage for maternity care, that the length of the hospital stay for such care is left to the decision of (or is required to be made by) the attending provider in consultation with the mother. 
State laws that require the decision be made by the attending provider with the consent of the mother satisfy the third requirement.731
731Regs.  §54.9811-1T(e)(1); DOL Regs. §2590.711(e)(1); 45 CFR §§146.130(e)(1) and 148.170(e)(1).
Nothing in ERISA §711 permits states to regulate self-insured group health plans (see XIII, E, below).732 For a group health plan or issuer that provides some benefits through health insurance coverage, if the state law regulating the health insurance coverage meets any of the above criteria, NMHPA applies only to the extent the plan provides benefits for hospital length of stay in connection with childbirth other than through health insurance coverage.733
732DOL Regs. §2590.711(e)(2)(ii).
733Regs.  §54.9811-1T(e)(2); DOL Regs. §2590.711(e)(2); 45 CFR §§146.130(e)(2) and 148.170(e)(2).
3.	Enforcement
Because the provisions of NMHPA appear both in ERISA and in the Code, they are enforced by both the Department of Labor (DOL) and the IRS. Though NMHPA applies to insurance carriers as well as plan sponsors, DOL and IRS regulate only plan sponsors.734 Enforcement against insurance carriers generally is left to plan participants and states. In addition, ERISA exempts church plans (see XIII, A, below).
734ERISA §502(b)(3).
Note: The exemption for small employer plans in Code §4980D(d) does not apply to NMHPA requirements.
Employers (including small employers) with group health plans that fail to comply with the maternity length-of-stay rules are subject to a $100 excise tax under Code §4980D for each day a failure occurs. The tax is assessed for each individual affected by the noncompliance.735 No penalty is imposed if the failure to comply is unintentional and is corrected within 30 days after it is discovered or should have been discovered.736 The penalty for an unintentional failure is limited to the lesser of: 10% of the group health plan's expenses for the prior year or $500,000 per tax year.737 For more information on penalties, see VIII, G, 1, above.
735Code §4980D(b)(1).
736Code  §4980D(c)(1), (2).
737Code  §4980D(c)(3)(A).
B. Parity in Mental Health Benefits
1.	Lifetime and Annual Limits
The Mental Health Parity Act of 1996 (MHPA)738 temporarily added §712 to ERISA. ERISA §712 generally prohibits lower lifetime and annual dollar limits for mental health benefits in a group health plan than for other medical benefits. See VIII, A, 1, a, above, for the definition of a group health plan, and XIII, A, below, for a discussion of plans exempt from ERISA. Code §9812 incorporated the provisions of the MHPA relating to group health plans.739
738P.L. 104-204, §701 et seq. Section 703 of MHPA also amended the Public Health Service Act relating to the group health insurance market. The MHPA has been extended to Dec. 31, 2005. See IX, B, 4, below.
739See P.L. 105-34, §1531. See also H.R. Conf. Rep. No. 220, 105th Cong., 1st Sess. 753-54 (1997).
The term "mental health benefits" means mental health service benefits as defined under the particular group health plan. Treatment for substance abuse or chemical dependency is excluded.740
740Code §9812(e)(4); ERISA §712(e)(4).
ERISA §712(a)(1), and corresponding Code §9812, generally prohibit an aggregate lifetime limit on mental health benefits by a group health plan that does not include an aggregate lifetime limit on substantially all other medical and surgical benefits. Group health plans with lifetime or annual spending limits for medical or surgical services must include mental health benefits in the limit or use a separate limit for mental health benefits that is no more restrictive than the limit placed on medical and surgical benefits. If medical/surgical benefits have varying limits, the permissible limit on the mental health benefits is a weighted average of the various aggregate lifetime limits applicable to the different types of other medical and surgical benefits provided.741
741Regs. §54.9812-1T(b)(6)(i)(B).
In the same manner, ERISA §712(a)(2) restricts the ability of a plan to impose annual limits on mental health benefits. If a group health plan offers more than one benefit package to participants or beneficiaries, then ERISA §712 is to be applied separately with respect to each benefit package.742
742Code §9812(d); ERISA §712(d).
MHPA is more prominent for what it does not regulate than for what it does regulate. Group health plans are not required to provide mental health benefits.743 The amount, duration or scope of mental health benefits, except for the above-mentioned annual and aggregate limitation restrictions, is not subject to federal regulation. Cost-sharing, limits on the number of visits or days of coverage, and the requirement as to medical necessity are not intended to be regulated.
743Code §9812(b)(1); ERISA §712(b)(1).
2.	Exemptions
a.	Small Employer Exemption
MHPA does not apply to group health plans of small employers.744 The definition of small employer is the same as in Code  §4980D(d)(2). Thus, to qualify for the exemption, an employer (including any predecessor employer) must have employed, during the preceding calendar year, an average of at least two but not more than 50 employees on business days. A "small employer" under this definition must have employed at least two employees on the first day of the plan year. The aggregation rules of Code §414(b),  (c),  (m) and  (o) apply to this determination. The status of an employer that was not in existence in the preceding calendar year is based on the average number of employees it reasonably expects to employ on business days in the current calendar year.
744Code §9812(c)(2); ERISA §712(c)(1); Regs.  §54.9812-1T(e).
b.	Increased Cost Exemption
Mental health parity also does not apply if it would result in an increase in the cost under the group health plan of at least 1%.745 Increased cost is measured by comparing incurred expenditures during a base period, reduced by claims incurred during the base period that would have been denied in the absence of MHPA required amendments and related administrative expenses.746 The base period must be at least six consecutive calendar months in duration, and could not begin prior to September 26, 1996. If the plan participated in a rating pool, the incurred expenditures for the pool would be attributed to each participating group health plan.
745Code §9812(c)(2); ERISA §712(c)(2).
746Regs.  §54.9812-1T(f)(2).
In order to be eligible for the increased cost exemption, the plan must notify participants and beneficiaries at least 30 days before the exemption can be effective.747 Once a plan becomes exempt because of the 1% increased cost provision, it remains exempt from MHPA.748 The notice must also be given to the Employee Benefits Security Administration (EBSA) of the Department of Labor.749
747Regs. §54.9812-1T(f)(3).
748Regs. §54.9812-1T(f)(1).
749Regs. §54.9812-1T(f)(3)(ii); DOL Regs. §2590.712(f)(3)(ii)(B).
3.	Penalties and Enforcement
Employers with group health plans that fail to comply with the mental health parity requirements are subject to a $100 per day penalty under Code §4980D for each day a failure occurs. The penalty is assessed for each individual affected by the failure to comply. No penalty is imposed if the lack of compliance was unintentional and was corrected within 30 days after it was discovered or should have been discovered. Penalties for unintentional failures are limited to the lesser of 10% of the group health plan's expenses for the prior year or $500,000 per tax year. For more information on penalties, see VIII, G, 1, above.
ERISA §712 applies to health insurance carriers as well as employer plans. Consequently, unless the plan underwritten by the carrier is exempt, the MHPA mandates can be enforced against the carrier.
4.	Effective and Sunset Dates
Code §9812 and corresponding ERISA §712 took effect for plan years beginning after January 1, 1998.750 The MHPA was originally intended to sunset on September 30, 2001, so that its provisions would not apply to benefits for services furnished on or after that date. However, the sunset dates of ERISA  §712 and Code  §9812(f) are extended to December 31, 2005.751
750P.L. 104-204, §702(c), P.L. 105-34, §1531(a)(4).
751ERISA §712(f); and Code  §9812(f), both as amended by the Working Families Tax Relief Act of 2004 (WFTRA), P.L. 108-311, §302(b) and (a), respectively. See interim final amendment to DOL Regs. §2590.712(f)(1), (g)(2) and (i), extending the MHPA to Dec. 31, 2005. 69 Fed. Reg. 75798 (12/17/04).
C. Reconstructive Surgery Following Mastectomy
All group health plans and health insurance issuers must provide reconstructive surgery following a mastectomy if the plans cover medical and surgical benefits for mastectomies.752 If a participant or beneficiary receives benefits in connection with a mastectomy and elects breast reconstruction, the plan must cover:
752ERISA §713, added by P.L. 105-277, §901, effective for plan years beginning on or after Oct. 21, 1998. P.L. 105-277, §902(c).

• reconstruction of the breast on which mastectomy was performed;
• surgery and reconstruction of the other breast for symmetry; and
• prostheses and physical complications, including lymphedemas.
 However, such coverage may be subject to annual deductibles and coinsurance.
Following the language of Code §9811(b) and ERISA §711(b) (see, IX, A, 1, above), ERISA §713(c) prohibits plans or insurers from denying eligibility or coverage to participants to avoid having to provide reconstructive surgery. In addition, providers cannot be penalized for authorizing such surgery or given incentives to fail to authorize the surgery.
1.	Covered Entities
Like ERISA §§711 and 712(c)(A)(B), the requirements of ERISA §713 are enforceable against health insurance carriers as well as group health plans. Because ERISA does not apply to church plans and governmental plans (see XIII, A, below), they are not subject to ERISA  §713. However, the Public Health Service Act imposes identical requirements on church plans and governmental plans.753
753Public Health Service Act §7806, 42 USC §300gg-6.
Note: The small employer exception from HIPAA requirements (see VIII, B, 1, b, above) does not apply to ERISA  §713.
However, it is not clear that federal law mandates can be enforced against state governments and their instrumentalities.754
754ERISA §713 does not preempt state laws in efffect as of Oct. 21, 1998, with benefit coverage that is at least as great as the requirements of ERISA §713. ERISA §713(e)(1). SeeNev. Dept. of Human Resources v. Hibbs, 538 U.S. 721 (2003).
2.	Notice to Covered Persons
Section 713(b) of ERISA requires written notice of the availability of the mandated mastectomy reconstruction benefits. The notice must be given upon enrollment and annually thereafter.
Comment: Congress was presumably thinking of the annual enrollment process that most employers use to enable eligible employees to select coverages. 
The following is an example of an annual model notice provided by the Department of Labor:
Did you know that your plan, as required by the Women's Health and Cancer Rights Act of 1998, provides benefits for mastectomy-related services including reconstruction and surgery to achieve symmetry between the breasts, prostheses, and complications resulting from a mastectomy (including lymphedema)? Call your Plan Administrator [insert telephone number] for more information.755
755See http://www.dol.gov/ebsa/publications/whcra.html; "Your Rights After a Mastectomy ... Women's Health & Cancer Rights of 1998, Frequently Asked Questions about WHCRA."
3.	Enforcement
For ERISA enforcement procedures, see XIII, B, 5, below. Because ERISA §713 has no counterpart in the Code, there is no excise tax sanction for violation.
X. Medicare Secondary Payer Rules
Medicare is a federally-funded health benefit program that primarily covers the elderly and the disabled. Medicare initially was the primary payer of benefits to those covered persons who were also covered under other types of insurance programs, with the exception of worker's compensation insurance. Thus, employer-provided group health plans could reduce the benefits they provided to Medicare eligible persons by those amounts paid by Medicare. However, the Medicare provisions of the Social Security Act were amended to make Medicare the secondary payer of medical benefits to certain persons covered under employer group health plans.756 Enacted as a cost cutting measure for the federal government, these rules have increased significantly the economic and regulatory burdens placed on employers that sponsor group health plans for their employees.
756P.L. 96-499, §953.
A. Basic Rules
1.	Working Aged
Section 1862(b)(1)(A) of the Social Security Act (SSA)757 prohibits group health plans from taking Medicare coverage into account in determining benefits of an individual age 65 or older who is covered under a group health plan by virtue of his or her current employment status. As a result, group health plans generally must act as "primary" payer and Medicare only acts as "secondary" payer. The definition of group health plan is borrowed from Code §5000(b)(1) (see VII, A, 1, a, above).
757Codified in 42 USC §1395(b)(1)(A).
There are certain exceptions to these rules. For example, §1862(b)(1)(A) of SSA exempts group health plans of small employers. This exemption applies to employers or employee organizations that do not have 20 or more employees for each working day in each of 20 or more calendar weeks in the current or preceding calendar year.758
75842 USC §1395y(b)(1)(A)(ii) and (iii).
The exemption can apply to a small employer even if it participates in a multiemployer health and welfare fund or a multiple employer welfare arrangement (MEWA). In that event, the plan must make an election to exempt participating small employers.759
75942 USC §1395y(b)(1)(iii).
Comment: Officials of the Centers for Medicare & Medicaid Services (CMS) have informally indicated that the election is made by notifying the affected covered persons, and by notifying the appropriate Medicare intermediary or carrier and providing it with the names, birthdates and Medicare claim numbers of the affected individuals.
Whereas the small employer exemption for a single employer is based on its number of employees, the exemption for small employers participating in a multiple employer group health plan is based on individuals' current employment status.760 Current employment status encompasses individuals other than active employees (see X, A, 2, below).
76042 CFR §411.172(b) does not acknowledge the distinction.
Another exemption applies to individuals who are entitled to Medicare benefits for end stage renal disease for a period of time greater than 30 months.761 However, a group health plan may not discriminate with respect to benefits provided to individuals with end stage renal disease.
761Entitlement to such benefits is determined under 42 USC §426-1. 42 USC §1395y(b)(1)(C).
Note: A plan does not have to provide COBRA continuation coverage to those individuals who become entitled to Medicare because they have end stage renal disease.762
762Blue Cross and Blue Shield of Texas v. Shalala, 995 F.2d 70 (5th Cir. 1993).
2.	Disability
The secondary payer provisions extend to individuals who qualify for Medicare by reason of disability.763 SSA  §1862(b)(1)(B)(i) accomplishes this by prohibiting "large group health plans" from taking into account that an individual (or a member of the individual's family) covered by virtue of his or her current employment status is entitled to Medicare benefits. This language parallels SSA §1862(b)(1)(A)(i), but omits the age 65 criterion.
763P.L. 97-35, §2146(a) and (c)(1).
Under Code §5000(b)(2), a group health plan is a large group health plan if the sponsoring (or contributing) employer normally has at least 100 employees on a typical business day during the previous calendar year. For this purpose, the controlled group rules of Code §52(a) and (b) apply, as do the affiliated service group rules of Code §414(m) and the leased employee rules of §414(n)(2). The same exception that applies to SSA §1862(b)(1)(A) for end stage renal disease applies to disabled individuals in large group health plans as well.764
76442 USC §1395y(b)(1)(B)(ii).
The determination of employment status for purposes of the Medicare Secondary Payer (MSP) rules is uniform.765 Section 1862(b)(1)(E)(ii) of SSA provides that an individual has "current employment status" with an employer if the individual is an employee, is the employer,766 or is associated with the employer in a business relationship.767
765P.L. 103-660, §13561.
766The term "employer" includes a self-employed person under 42 USC §1395y(b)(1)(E)(iii).
767Receipt of FICA-type payments by nonworking individual is not necessarily conclusive of "current employment status." 60 Fed. Reg. 45344, 45346 (8/31/95).
Note: For this purpose employee includes certain individuals not actively working.768
76842 CFR §411.104.
B. Enforcement
1.	Action by CMS
The Center for Medicare and Medicaid Services (CMS) enforces the MSP rules. Section 1862(b)(2) of the SSA mandates the reimbursement of amounts paid by Medicare that were paid or should have been paid by a group health plan under SSA §1862(b)(1).769 The reimbursement is payable when notice or other information is received that the required primary payment has been or could be made. Interest may be charged on amounts that should have been reimbursed, if reimbursement is not made within 60 days of the receipt of such notice or other information.770
769Similarly, 42 USC §1395(b)(2) requires reimbursement for amounts paid by Medicare that were paid or should be paid under a works' compensation law or plan, an automobile or liability insurance policy or plan (including a self-insured plan), or under no fault insurance.
77042 USC §1395y(b)(2)(B)(i). The rate of interest to be charged is to be determined in accordance with Treasury Regulations applicable to charges for late payments.
Section 1862(b)(2)(B)(ii) of SSA authorizes the federal government to bring an action for recovery against an entity required to make primary payment that fails to do so. Damages against a primary plan can be doubled. The government may also bring a private action for recovery against any other entity that received improper Medicare reimbursement, such as a physician or service provider. Also, the government may join or intervene in any action related to the events that gave rise to the need for the item or service. SSA §1862(b)(2)(B)(iii) gives the government subrogation rights (to the extent of payment made under Medicare for such an item or service) of an individual or any other entity to payment for such item or service under a primary plan.
2.	Excise Tax
Code §5000(a) imposes an excise tax on employers (including self-employed persons) or employee organizations that contribute to a "nonconforming group health plan." A nonconforming group health plan is a plan that does not comply with the MSP rules.771 The amount of tax imposed is 25% of the employer's or employee organization's expenses incurred during the calendar year for all group health plans.
771Specifically, violations of SSA §1862(b)(1)(A), (B) and (C) or §1862(b)(2) can trigger the excise tax.
Note: Group health plans of governmental entities, which also are subject to the MSP provisions, are exempt from this excise tax.772
772Code §5000(d).
3.	Other Enforcement Provisions
Section 1862(b)(3)(A) of SSA establishes a private cause of action for damages against a primary plan that fails to provide for primary payment or appropriate reimbursement under the MSP provisions. Damage awards are double the amount otherwise provided. For these purposes, a "primary plan" includes, under SSA §1862(b)(2)(A), certain workers' compensation laws or plans, automobile liability insurance policies or plan (including a self-insured plan) and no fault insurance.
SSA §1862(b)(3)(C), which prohibits employers or other entities from offering incentives not to enroll in a primary plan, provides for a civil penalty of up to $5,000 for violation. The Secretary of Labor may initiate a proceeding to determine whether to impose this civil penalty, but only as authorized by the Attorney General of the United States.773
773SSA §1862(b)(3)(C) references 42 USC §1320a-7a (other than subsections (a) and (b)) as the procedure for assessing such a civil penalty.
4.	CMS Regulations
Some of the regulations and policies promulgated by CMS under the MSP statute have come under attack in federal court. In Health Ins. Ass'n of America v. Shalala,774 the court held invalid a regulatory provision giving CMS a direct right of action against a third party administrator of a group health plan for failure to make primary payment. In the same case, the court also struck down a regulation permitting CMS to seek reimbursement from a group health plan even if a beneficiary fails to follow the claims filing requirements under the plan.
77423 F.3d 412 (D.C. Cir. 1994).
XI. Health Savings Accounts (HSAs)
A. In General
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003775 established another form of tax-favored savings vehicle to defray the cost of health care expenses, the health savings account (HSA).
775P.L. 108-173, §1201, adding Code §223 and redesignating former Code §223 as §224, effective for tax years beginning in 2004.
Comment: HSAs were intended to replace Archer medical savings accounts (MSAs). Though contributions still can be made to Archer MSAs, no employers may adopt Archer MSA programs after 2003. See, XII, below. HSAs are superior to Archer MSAs in all respects, including availability to large employers, and individuals in general, higher contribution limits, a wider range of permissible deductible amounts, eligibility for use in a cafeteria plan and greater overall flexibility.
Contributions to an HSA are deductible, within limits, if made by an "eligible individual."776 An "eligible individual" means any individual and his or her family covered under a high deductible health plan.777 This includes employees covered under an employer-sponsored high deductible health plan. HSA contributions are excludible from income if made by the employer of such an individual.778 Further, earnings on the assets of an HSA are not taxable,779 nor are distributions from an HSA that are used to pay qualified medical expenses.780 In general, an HSA is a trust or custodial account created exclusively for the benefit of the account holder781 and his or her spouse and dependents, and is subject to rules similar to those applicable to individual retirement arrangements (IRAs) under §408.782
776§223(a).
777§223(c)(1)(A)(i); see XI, B, below.
778§106(d).
779§223(e)(1).
780§223(f)(1).
781Account holder (or account beneficiary) is defined as the individual on whose behalf the HSA was established. §223(d)(3).
782Notice 2004-2, 2004-2 I.R.B. 269 (updated 8/9/04). Although amounts contributed by an employer to an HSA are not considered part of a group health plan subject to COBRA continuation, a high deductible health plan that covers an HSA account holder may be a group health plan and may be subject to COBRA continuation coverage requirements. Notice 2004-2, Q&A-35.
B. Eligible Individuals
HSAs are available to employees covered under a "high deductible" health plan (HDHP) of an employer and similarly situated self-employed individuals as well as any individual covered under as HDHP. Thus, individuals and their families, and employees not covered under an employer-sponsored HDHP, can establish HSAs as long as the requirements of  §223 are met.783 An individual is eligible to make HSA contributions (or have employer contributions made on his or her behalf), only if he or she is covered under an HDHP and not covered under any other health plan, other than one providing certain permitted coverage.784 Contributions can be made to an HSA either by the employee or by his or her employer.785 In addition, any family member can make contributions for another family member who is an eligible individual.786
783§223(c)(1)(A)(i); Notice 2004-50, 2004-33 I.R.B. 196 (revised and corrected 8/9/04), Q&A-1; Notice 2004-2, Q&A-2 (updated 8/9/04).
784§223(c)(1)(A)(ii). Coverage under an employee assistance program, disease management program, or wellness program does not make an employee ineligible to contribute to an HSA as long as the program does not provide significant benefits in the nature of medical care of treatment. Notice 2004-50, Q&A-10.
785Employer contributions must be reported on an employee's W-2. §6051(a)(12), added by P.L. 108-173, §1201(d)(3), effective for tax years beginning in 2004; Notice 2004-2, Q&A-34. See Ann. 2004-2, 2004-3 I.R.B. 322 (Code Win box 12 on Form W-2 is used for employer HSA contributions). An employer cannot recoup any portion of its contribution from an employee's HSA. Notice 2004-50, Q&A-82. Employers who contribute to an employee's HSA are responsible for determining if the employee is covered by an HDHP sponsored by the employer and the employee's age for catch-up contributions. Id. at Q&A-81.
786§223(a); see Notice 2004-2, Q&A-11. Any person can make HSA contributions on behalf of an eligible individual. Notice 2004-50, Q&A-28.
Comment: An HSA could be maintained by a married individual even if the individual's spouse is covered under a health care plan that is not an HDHP. In that event, the HSA could cover all family members except the spouse who is covered by the other plan.786.1
786.1See  Notice 2004-50, Q&A-31, and Rev. Rul. 2005-25, 2005-18 I.R.B. 971 (if one spouse has HDHP coverage and the other spouse has non-HDHP coverage, the spouse with the HDHP coverage is an eligible individual who can contribute to an HSA so long as the individual is not covered under the spouse's non-HDHP).
An individual with other coverage in addition to an HDHP still may contribute to an HSA if the other coverage consists of certain permitted insurance, or is coverage (through insurance of otherwise) for accidents, disability, dental care, vision care, or long-term care.787 Permitted insurance is: (1) Medicare supplemental insurance; (2) insurance if substantially all of the coverage relates to (a) liabilities incurred under workers' compensation laws, (b) tort liabilities, (c) liabilities relating to ownership or use of property (e.g., auto insurance), or (d) such other similar liabilities as the Secretary of Treasury may prescribe by regulations; (3) insurance for a specified disease or illness;788 and (4) insurance that provides a fixed payment for hospitalization.789
787§223(c)(1)(B); Notice 2004-2, Q&A-6.
788Principal health care coverage must be provided by HDHP when eligible individual also is covered by insurance for specific disease or illness. Notice 2004-50, Q&A-7.
789§223(c)(3). Benefits provided under permitted insurance must be from insurance contracts, rather than self-insured, unless benefits are statutorily provided (e.g., workers' compensation) and resulting medical care benefits are secondary or incidental to other benefits.
Prescription drug benefits are not permitted insurance or permitted coverage under §223(c)(1)(B). Because a plan that provides benefits for prescription drugs is considered to be a health plan, an individual who is covered by both an HDHP and by a prescription drug plan is not an eligible individual for HSA purposes unless the prescription drug coverage also is an HDHP (e.g., the prescription drug plan does not provide benefits unless the required minimum annual deductible under §223(c)(2)(A) for an HDHP has been satisfied).790
790Rev. Rul. 2004-38, 2004-15 I.R.B. 717; the result is the same if the prescription drug benefit is provided as a benefit under a health plan (and not separately) or as a benefit for the individual under a spouse's plan. Rev. Proc. 2004-22, 2004-15 I.R.B. 727, suspended Rev. Rul. 2004-38 until 2006. Thus, for months before Jan. 1, 2006, an individual who would otherwise be an eligible individual under §223(c)(1)(A), but is covered by both an HDHP that does not provide benefits for prescription drugs and by a separate health plan or rider that provides prescription drug benefits before the minimum annual deductible of the HDHP is met (e.g, the separate prescription drug plan is not an HDHP), will continue to be an eligible individual for HSA purposes. See also Notice 2004-50, Transition Relief.
However, some prescription drugs fall under the  §223(c)(2)(C) safe harbor for the preventive care deductible791 (discussed at XI, E, below).
791Notice 2004-50, Q&A-27.
Rev. Rul. 2004-45792 describes different situations (or a combination of these situations) in which an individual can contribute to an HSA while also being covered by a health flexible savings account (FSA) or a health reimbursement account (HRA). In the first instance, the individual's FSA and HRA pay or reimburse all  §213(d) medical expenses that are not covered by the HDHP. This individual is not an eligible individual under §223(c)(1)(A) because he is covered by an HDHP, an FSA and HRA that pay or reimburse medical expenses incurred before the minimum annual deductible under  §223(c)(2)(A)(i) has been satisfied. Furthermore, the FSA and HRA pay or reimburse medical expenses that are not limited to the exception for permitted insurance, permitted coverage or preventive care.
7922004-22 I.R.B. 971.
In the second situation, the FSA and HRA are limited-purpose arrangements that pay or reimburse only vision and dental expenses (whether or not the minimum annual deductible of the HDHP has been met). The FSA and HRA also pay or reimburse preventive care benefits as described in Notice 2004-23.793 This individual is eligible because the medical expenses paid or reimbursed by the FSA and HRA only include vision and dental benefits (which are permitted coverage under §223(c)(1)(B)), and preventive care. All of these benefits may provided as a separate health plan, a separate or optional rider, or as part of the HDHP, regardless of whether the minimum annual deductible under §223(c)(2)(A)(i) has been satisfied.
7932005-15 I.R.B. 725.
In the third case, the individual covered under an HRA elects, before the beginning of the HRA coverage period, to forgo payment or reimbursement of medical expenses incurred during that coverage period. This election does not apply to permitted insurance, permitted coverage and preventive care. Medical expenses incurred during the suspended HRA coverage period cannot be paid or reimbursed by the HRA currently or after the HRA suspension ends. This individual is eligible to make HSA contributions until the HRA suspension period ends.
In the fourth scenario, the FSA and HRA are post-deductible arrangements that only pay or reimburse medical expenses (including the individual's 20% coinsurance responsibility for expenses above the deductible) after the minimum annual deductible of the HDHP has been satisfied. The individual is eligible because the FSA and HRA pay or reimburse medical expenses (including the 20% coinsurance not otherwise covered by the HDHP) only after the HDHP's minimum annual deductible has been met.794
794See Notice 2004-50, Q&A-33, regarding HSA contribution limit in this situation.
In the final situation, the individual is covered by a retirement HRA that only reimburses those medical expenses incurred after retirement. The individual is eligible to make HSA contributions before retirement because the HRA will pay or reimburse only medical expenses incurred after retirement.
The revenue ruling pointed out that if the individual has available an HSA, a health FSA and an HRA that pay or reimburse the same medical expense, the health FSA or HRA may pay or reimburse the medical expense subject to the ordering rules in Notice 2002-45.795 The individual must certify that the expense has not been reimbursed and that the individual will not seek reimbursement under any other plan or arrangement covering that expense (including the HSA).
7952002-2 C.B. 93, Part V; see III, B, 2, d, above.
Individuals entitled to benefits under Medicare are not eligible individuals.796 Also, an individual who may be claimed as a dependent on another person's tax return is not an eligible individual.797
796§223(b)(7). Medicare-eligible individual must be enrolled in Medicare. Notice 2004-2, Q&A-2 (updated 8/9/04); individual must be eligible for Medicare and enrolled in Medicare in Part A or Part B, otherwise, Medicare-eligible individual who is not enrolled in Medicare can contribute to HSA. Notice 2004-50, Q&A-2.
797§223(b)(6); Notice 2004-2, Q&A-2 (updated 8/9/04).
C. Deductibility of HSA Contributions
Individual contributions made by or on behalf of an eligible individual to an HSA are deductible, within limits, above the line by that eligible individual.798 Alternatively, employer contributions are excludible from employee gross income within the same limits.799
798§62(a)(19), added by P.L. 108-173, §1201(b), effective for tax years beginning in 2004. The contributions are deductible whether or not the eligible individual itemizes deductions. However, the individual cannot also deduct the contributions as medical expense deductions under §213. Notice 2004-2, Q&As-17 and 18. Further, the deduction for a self-employed individual's HSA contribution is not taken into account in determining net earnings under §1402(a). Notice 2004-50, Q&A-84.
799§106(d)(1), added by P.L. 108-173, §1201(d)(1), effective for tax years beginning in 2004; Notice 2004-2, Q&A-19. Contributions by an employer to an HSA are not subject to the rules under  §419. Id. at Q&A-36. HSA contributions by partnerships and S corporations to partners and shareholders are not treated as excludible employer contributions under §106(d) but are treated as payments to partners and shareholders deductible under §62(a)(19). Notice 2005-8, 2005-4 I.R.B. 368.
Contributions to an HSA must be made in cash, and, thus, may not be made in the form of stock or other property800 except for rollover contributions from an Archer MSA or another HSA.801 HSA contributions may be made available as an option under a cafeteria plan.802 Contributions for a year can be made until the due date for the individual's federal income tax return for the year, excluding extensions.803
800§223(d)(1)(A)(i); Notice 2004-2, Q&A-16. Contributions of cash credits by provider of HDHPs and HSAs that acts as HSA trustee or custodian to an accountholder's HSA are not prohibited transactions under ERISA or the Code. DOL Adv. Op. 2004-09A.
801§223(d)(1)(A)(i) and (f)(5); rollovers from an IRA, HRA or health FSA are not permitted. Notice 2004-2, Q&A-23.
802125(d)(2)(D), added by P.L. 108-173, §1201(i), effective for tax years beginning in 2004. See Notice 2004-2, Q&A-33, and Notice 2004-50, Q&As-57 through 61. For a detailed discussion of cafeteria plans, see 397 T.M., Cafeteria Plans.
803§223(d)(4)(B) crossreferencing §219(f)(3); Notice 2004-2, Q&A-21.
The amount that can be deducted by an eligible individual cannot exceed the allowed annual contribution amount.804 The maximum annual contribution to an HSA for 2005 is equal to the annual deductible under the HDHP, but not more than $2,650 for individuals with single coverage and $5,250 for individuals with family coverage.805 These limits are applied on a prorated monthly basis806 and also are indexed for cost-of-living adjustments (COLAs).807 The contribution limit is reduced by any contribution to an Archer MSA.808 In addition, an individual who is at least age 55 but younger than 65 can make catch-up contributions.809 The limits on contributions do not apply to rollover contributions.810
804§223(b)(1).
805§223(b)(2); Notice 2004-2, Q&A-12 (updated 8/9/04); Rev. Proc. 2004-71, 2004-50 I.R.B. 970, §3.22(1). If family HDHP coverage includes embedded individual deductibles and an umbrella deductible, then the maximum annual contribution is the lesser of the statutory contribution limit for family coverage, the umbrella deductible, or the embedded individual deductible multiplied by the number of family members covered by the HDHP. Notice 2004-50, Q&A-30. The account holder is responsible for determining if the annual contribution limit has been exceeded and also for reporting any excess contributions to the HSA trustee or custodian. Id. at Q&A-74.
806§223(b)(2). The annual contribution limit is the sum of the limits determined separately for each month, based on the individual's status and health plan coverage as of the first day of the month.
807§223(g)(1). COLAs may be applied to the minimum annual deducible amounts or maximum annual out-of-pocket expenses under HDHP. Notice 2004-50, Q&A-86.
808§223(b)(4); Notice 2004-2, Q&A-12 (updated 8/9/04).
809§223(b)(3)(A). The 2004 catch-up amount is $500, increasing annually in $100 increments thereafter until it reaches $1,000 in 2009. §223(b)(3)(B); Notice 2004-2, Q&A-14 (updated 8/9/04). Medicare-eligible individual (e.g., age 65) who is not enrolled in Medicare can make catch-up contributions to HSA. Notice 2004-50, Q&A-3.
810§§223(f)(3)(B), 4973(g)(1).
With respect to a married couple, if either spouse has family coverage, both spouses are treated as having only such family coverage (and as having the family coverage with the lowest annual deductible if coverage is under different plans). The allowable deduction as so calculated is divided equally between them unless they agree on a different division.811
811§223(b)(5); Notice 2004-2, Q&A-15; Notice 2004-50, Q&A-32. However, if only one spouse under the family HDHP coverage is an eligible individual, only that spouse may contribute to the HSA. Notice 2004-50, Q&A-31. See Rev. Rul. 2005-25, 2005-18 I.R.B. 971 (notwithstanding the rule for married couples in §223(b)(5), if one spouse has HDHP coverage and the other spouse has non-HDHP coverage, the spouse with the HDHP coverage is an eligible individual who can contribute to an HSA up to the amount of the annual contribution limit so long as the individual is not covered under the spouse's non-HDHP; the maximum amount that the eligible individual can contribute depends on whether the individual has self-only or family HDHP coverage). Although eligible individuals can have more than one HSA, spouses cannot have joint HSAs. Notice 2004-50 at Q&As-64 and 63, respectively.
An excise tax of 6% for each tax year is imposed on the account holder for excess individual and employer contributions.812 If, however, the excess contributions for a tax year and the net income attributable to these excess contributions are paid to the account holder before the last day prescribed by law, including extensions, for filing the account holder's federal income tax return for the tax year, then: (1) the excise tax does not apply; (2) the distribution of the excess contributions is not taxed; and (3) the net income attributable to the excess contributions is included in the account holder's gross income for the tax year in which the distribution is made.813
812§4973(a)(5), added by P.L. 108-173, §1201(e)(1), effective for tax years beginning in 2004.
813§§223(f)(3)(A) and 4973(g), added by P.L. 108-173, §1201(e)(2). Note that employer contributions are included in an employee's gross income to the extent that they exceed the deductible amount limits or if they are made on behalf of an employee who is not an eligible individual. Notice 2004-2, Q&A-22. See also Notice 2004-50, Q&A-34.
D. Comparability Requirement
If an employer contributes to an HSA for any employee, the employer must make available a comparable contribution on behalf of all employees with comparable coverage during the same period.814 Contributions are comparable if they are either of the same amount or the same percentage of the deductible under the high deductible plan.815 The comparability rule applies separately to part-time employees (those who customarily work fewer than 30 hours per week). An employer's ability to offer other types of plans to different groups of employees is not restricted.816 In applying the comparability rule, employers under common control are aggregated.817
814§4980G(a), added by P.L. 108-173, §1201(d)(4)(A), effective for tax years beginning in 2004. See Notice 2004-2, Q&A-32; Notice 2004-50, Q&As-46, 48 and 50 through 54. The comparability rules do not apply to rollovers or contributions made through a cafeteria plan. Notice 2004-50, Q&As-47 and 49.
815§§4980G(b) and 4980E(d)(2)(A).
816§§4980G(b) and 4980E(d)(3).
817§§4980G(b) and 4980E(e).
The penalty for failure to comply with this requirement is the imposition of an excise tax for the calendar year of the violation equal to 35% of the aggregate amount contributed by the employer to HSAs of the employees for taxable years of such employees ending with or within such calendar year.818 The Secretary can waive part or all of the penalty tax if the failure was due to reasonable cause and not willful neglect to the extent that the payment of such tax would be excessive relative to the failure involved.819
818§§4890G(b) and 4980E(b).
819§§4980G(b) and 4980E(c).
The IRS issued proposed regulations outlining comparability rules relating to employer contributions to HSAs under §4980G. REG-138647-04, 70 Fed. Reg. 50233 (8/26/05). Prop. Regs. §§54.4980G-1 through -5 would incorporate, clarify and expand the guidance provided in Notices 2004-2 and 2004-50. The regulations are proposed to apply to employer contributions made on or after the date final regulations are published. However, taxpayers may rely on the proposed regulations for guidance pending the issuance of final regulations.
Prop. Regs. §54.4980G-1, Q&A-1, would incorporate Q&A-32 of Notice 2004-2, which provides that although an employer is not required to contribute to its employees' HSAs, if an employer does make contributions to any employee's HSA, the employer must make comparable contributions to the HSAs of all comparable participating employees. Comparable participating employees are eligible individuals (as defined under §223(c)(1)) who have the same category (self-only or family) of high deductible health plan (HDHP) coverage. Under Prop. Regs. §54.4980G-1, Q&A-4(a), if the employer fails the comparability rules, the employer would be subject to an excise tax equal to 35% of the aggregate amount contributed by the employer to the HSAs for that period.
According to Prop. Regs. §54.4980G-3, Q&As-1 through -3, contributions to the HSAs of independent contractors, sole proprietors, and partners in a partnership would not be taken into account under the comparability rules. Further, Prop. Regs. §54.4980G-2, Q&A-1, would provide that the comparability rules would not apply to rollovers from an employee's HSA or Archer Medical Savings Accounts. Under Prop. Regs. §54.4980G-5, Q&A-1, the comparability rules would not apply to HSA contributions that an employer makes through a cafeteria plan.
Prop. Regs. §54.4980G-3, Q&A-6(a), would incorporate the rule set forth in Notice 2004-50, Q&A-53, that if an employer limits HSA contributions to employees who are eligible individuals with coverage under an HDHP provided by the employer, the employer is not required to make comparable contributions to the HSAs of employees who are eligible individuals with coverage under an HDHP not provided by the employer. However, if the employer contributes to the HSAs of employees who are eligible individuals with coverage under any HDHP, in addition to the HDHPs provided by the employer, the employer is required to make comparable contributions to the HSAs of all comparable participating employees whether or not covered under employer's HDHP.
Prop. Regs. §54.4980G-4, Q&As-1 through -7, would set forth the procedures for making comparable contributions. According to Prop. Regs. §54.4980G-4, Q&A-12, if an employer determines that the comparability rules are not satisfied for a calendar year, the employer would not be able to recoup from an employee's HSA any portion of the employer's contribution to the employee's HSA because under §223(d)(1)(E), an accountholder's interest in an HSA is nonforfeitable. However, an employer would be able to make additional HSA contributions to satisfy the comparability rules. Prop. Regs. §54.4980G-5, Q&A-5, would provide that in the case of a failure which is due to reasonable cause and not to willful neglect, all or a portion of the excise tax imposed under §4980G may be waived to the extent that the payment of the tax would be excessive relative to the failure involved.
E. High Deductible Health Plan
A "high deductible" health plan (HDHP) is a health plan with an annual deductible of at least $1,000 for individual coverage, and at least $2,000 for family coverage.820 Also, the maximum out-of-pocket expenses with respect to allowed costs, including the deductible, must not exceed $5,100 for individual coverage and $10,200 for family coverage.821 These dollar amounts are indexed annually for inflation.822
820§223(c)(2)(A)(i). In the case of family coverage, a plan is an HDHP only if, under the terms of the plan and without regard to which family member or members incur expenses, no amounts are payable from the HDHP until the family has incurred annual covered medical expenses in excess of the minimum annual deductible. Notice 2004-2, Q&A-3, Ex. 1. An employer-sponsored self-insured medical reimbursement plan can be an HDHP. Id.  at Q&A-7. Family HDHP coverage is a health plan covering one eligible individual and at least one other individual, whether or not that individual is an eligible individual. Notice 2004-50, Q&A-12. A state high-risk health insurance plan can qualify as an HDHP if the plan does not pay benefits below the minimum HSA annual deductible. Id. at Q&A-13.
821§223(c)(2)(A)(ii); Rev. Proc. 2004-71, 2004-50 I.R.B. 970, §3.22(2). Out-of-pocket expenses do not include premiums. Notice 2004-2, Q&A-3; Notice 2004-50, Q&A-21. A plan with no express limit on out-of-pocket expenses is not an HDHP unless such limit is not necessary to prevent exceeding the out-of-pocket maximum. Notice 2004-50, Q&A-17; see also  Q&A-20. Also, an HDHP can impose reasonable limits on benefits and those amounts paid by the covered individual above the restrictions are not treated as out-of-pocket expenses. Id. at Q&As-14, 15, 16. Notice 2004-43, 2004-27 I.R.B. 10, provides transition relief for individuals who are not eligible to participate in HSAs because they live in states where HDHPs are not available. Thus, for months before Jan. 1, 2006, a health plan that would otherwise qualify as an HDHP under  §223(c)(2), except that it complies with state law requirements that certain benefits be provided without a deductible or below the minimum annual deductible, will be treated as an HDHP if the disqualifying benefits are required by state law in effect on Jan. 1, 2004. During this transition period, otherwise eligible individuals covered under these plans will be treated as eligible individuals for HSA purposes. See also Notice 2004-50, Transition Relief.
822§223(g)(1).
A plan does not fail to qualify as high deductible plan merely because it does not have a deductible for preventive care.823 Further, any increased deductible for use of a provider outside the plan's network is disregarded for purposes of out-of-pocket expense limits.824
823§223(c)(2)(C) (Note: Section 223(c)(2)(C) erroneously defines preventive care by reference to §1871 of the Social Security Act, a provision providing Medicare regulatory authority to the Department of Health and Human Services).  Notice 2004-23, 2005-15 I.R.B. 725, provides a safe harbor for preventive care benefits allowed under an HDHP. For purposes of §223(c)(2)(C), preventive care includes, but is not limited to: (1) periodic health evaluations, including tests and diagnostic procedures ordered in connection with routine examinations; (2) routine prenatal and well-child care; (3) immunizations; (4) tobacco cessation and obesity weight-loss programs; and (5) screening services for cancer, heart disease and other conditions. Preventive care generally does not include services or benefits intended to treat an existing illness, injury or condition. The determination of what care is preventive is determined under IRS guidance and not state mandated benefits law. See also Notice 2004-50, Q&A-26 (any treatment that is incidental or ancillary to preventive care service or screening described in Notice 2004-23 falls within the preventive care safe harbor of §223(c)(2)(C)), and Q&A-27 (the preventive care safe harbor also includes prescription drugs taken for a disease that has not yet manifested itself or not yet become clinically apparent or to prevent reoccurrence of a disease from which a person has recovered; for example, cholesterol-lowering drugs to prevent heart discase and angiotensin-coverting enzyme inhibitors, when used to help recovered heart attock or stroke victims prevent reoccurrence, constitute preventive care, as well as drugs or medications used as part of weight-loss or tobacco cessation programs, however, this does not include medications used to treat an existing illness, injury, or condition).
824§223(c)(2)(D); Notice 2004-2, Q&A-4.
F. Taxation of Distributions
Distributions from an HSA to pay the medical expenses of the individual and his or her spouse or dependents generally are excludible from income.825 Distributions that are not for qualified medical expenses are includible in income.826 Taxable distributions also are subject to an additional 10% tax unless the distribution was after becoming eligible for Medicare (age 65), or on account of death or disability.827
825§223(f)(1). In general, HSA amounts can be used for qualified medical expenses and will be excludible from income even if the individual is not current eligible to make HSA contributions. Notice 2004-2, Q&A-25. If the account beneficiary is no longer an eligible individual, distributions used exclusively for qualified medical expenses continue to be excludible from the account beneficiary's income. Id. at Q&A-28; Notice 2004-50, Q&A-36. However, if both spouses are covered by HSAs, the HSAs cannot reimburse the same expenses. Notice 2004-50, Q&A-38. An HSA distribution for reimbursement for medical expenses can be deferred to later tax years as long as the expenses were incurred after the HSA was established. Id. at Q&A-39. Debit, credit or stored-value cards can used to receive distributions from HSAs for qualified medical expenses. Notice 2004-2, Q&A-37.
826§223(f)(2). An HSA cannot restrict distributions to pay or reimburse only the account beneficiary's medical expenses but can restrict the frequency or minimum amount of distributions. Notice 2004-50, Q&As-79 and 80, respectively. For distributions to be excludible, the account holder must keep sufficient records of medical expenses. Id. at Q&A-39
827§223(f)(4). Effective Jan. 1, 2004, §26(b)(2)(S), added by the Working Families Tax Relief Act of 2004, P.L. 108-311, §401(a)(1), does not include the additional 10% tax under §223(f)(4) as a tax liability. Furthermore, distributions from an HSA (or an Archer MSA) are not considered for purposes of the health coverage tax credit under §35(a). §35(g)(3), as amended by P.L. 108-311, §401(a)(2), effective Jan. 1, 2004. If a distribution was made by reasonable mistake and the account beneficiary repays the mistaken distribution to the HSA, then no penalty is incurred. Notice 2004-50, Q&A-37. However, the HSA trustee or custodian does not have to allow the return of mistaken distributions. Id. at Q&A-76. HSA distributions are not subject to the §105(h) nondiscrimination rules. Id. at Q&A-83. The IRS provided further guidance on miscellaneous issues under the §35 health coverage tax credit in a question-and-answer format in Notice 2005-50, 2005-27 I.R.B. 14. For further discussion of the credit under §35, see 506 T.M., Tax Credits: Concepts and Calculation.
Qualified medical expenses are those expenses as defined under §213(d)828 and do not include insurance premiums other than for: (i) long-term care insurance;829 (ii) COBRA-type health care continuation coverage; (iii) health care coverage while an individual receives unemployment compensation; and (iv) Medicare Part A or B or employer-sponsored health care coverage after 65.830 However, for purposes of determining the §213 itemized deduction, any payment or distribution from an HAS for qualified medical expenses is not treated as an expense for medical care.831
828§223(d)(2)(A).
829Qualified long-term care insurance premiums can be paid by an HSA that is part of a cafeteria plan. Notice 2004-50, Q&A-40. The §213(d)(10) deduction limit for long-term care premiums applies to the amount of HSA distributions that can be excluded from income; thus, excess long-term care premium reimbursements will be includible in gross income. Id. at Q&A-41.
830§223(d)(2)(C); Notice 2004-2, Q&A-27; see also  Notice 2004-50, Q&As-43 and 45.
831§223(f)(6). Qualified medical expenses must be incurred after the HSA has been established. Notice 2004-2, Q&A-26. However, Q&A-26 was suspended until 2005 by Notice 2004-25, 2004-15 I.R.B. 727, which granted transition relief for calendar year 2004 eligible individuals who establish HSAs by Apr. 15, 2005. Thus, for 2004, an HSA established by an eligible individual by Apr. 15, 2005, may pay or reimburse on a tax-free basis an otherwise qualified medical expense if the expense was incurred on or after the later of Jan. 1, 2004, or the first day of the first month that the individual became an eligible individual under §223.
One tax-free rollover between HSAs is permitted by an account holder in any 12-month period if the rollover takes place within 60 days of distribution.832 An HSA may also accept rollover contributions from Archer MSAs.833 An individual's interest in an HSA may be transferred tax free to a spouse or former spouse under a separation or divorce instrument described in §71(b)(2)(A), and thereafter is considered the transferee's HSA.834
832§223(f)(5); Notice 2004-50, Q&A-55. This limit does not apply to direct trustee-to-trustee transfers. Id. at Q&A-56.
833§220(f)(5); Notice 2004-2, Q&A-23. An HSA cannot restrict the account beneficiary's ability to rollover amounts from his or her HSA. Notice 2004-50, Q&A-77. Although rollover contributions are allowed from HSAs or Archer MSAs, the HSA trustee or custodian does not have to accept them. Id. at Q&A-78.
834§223(f)(7).
If, upon death, the HSA passes to a named beneficiary other than the surviving spouse, it ceases to be an HSA as of the date of the decedent's death, and the beneficiary must include the fair market value of the HSA assets as of the date of death in gross income for the taxable year that includes the date of death.835 The amount includible in income is reduced by the amount in the HSA that is used, within one year of death, to pay qualified medical expenses incurred before death.836 In computing taxable income, the beneficiary may deduct under §691(c) that portion of the federal estate tax on the decedent's estate tax that was attributable to the amount of the HSA balance.837
835§223(f)(8)(B)(i); Notice 2004-2, Q&A-31. If the surviving spouse is the named beneficiary, the spouse is treated as the account holder. §223(f)(8)(A). Note that the spouse must be named as the beneficiary of the account; becoming entitled to the account proceeds by virtue of being the beneficiary of the estate is not enough to avoid taxation.
836§223(f)(8)(B)(ii)(I); Notice 2004-2, Q&A-31.
837§223(f)(8)(B)(ii)(II).
G. Establishing and Maintaining HSAs
1.	Institutional Trustee or Custodian
Eligible individuals can establish HSAs with a qualified HSA trustee or custodian in much the same way individuals establish individual retirement accounts (IRAs).838 However, because HSAs also differ from IRAs in a number of ways, the two types of accounts cannot be combined into a single account.839
838Notice 2004-2, Q&A-8. Model IRS forms may be used to establish HSAs. Notice 2004-50, Q&A-10. Any administration and account maintenance fees withdrawn from HSAs are not taxable distributions. Id.  at Q&A-69.
839Notice 2004-50, Q&A-66.
Any insurance company or bank (including a similar financial institution as defined in §408(n)) can be an HSA trustee or custodian.840 Any other persons already approved by the IRS to be trustees or custodians of IRAs or Archer MSAs are automatically approved to be HSA trustees or custodians. An eligible individual who is an employee may establish an HSA without any involvement of the employer.841
840Notice 2004-50, Q&A-72 (revised and corrected 8/9/04). Persons other than banks, insurance companies, or previously approved IRA trustees or custodians may request approval to be a trustee or custodian in accordance with the procedures set forth in Regs. §1.408-2(e). See Announcement 2004-72, 2004-41 I.R.B. 650, for a list of IRS approved nonbank custodians.
841Notice 2004-2, Q&A-8.
The institutional trustee or custodian need have investment direction.842 However, investment restrictions regarding prohibited transactions and pledging an account as security for a loan, similar to those that apply to IRAs under §408(c)(2) and (4), apply to HSAs.843 Thus, HSAs are subject to the excise tax on prohibited transactions except if the transaction causes the HAS to terminate.844 Any amount treated as distributed under such rules is included in the account holder's gross income.
842See  PLR 9821016. HSA funds can be invested in investments approved for IRAs. Notice 2004-50, Q&A-65.
843§223(e)(2).
844§4975(c)(6), added by P.L. 108-173, §1201(f)(1), effective for tax years beginning in 2004.
2.	Reporting by Trustees and Custodians
The information reporting requirements for HSAs are similar to those for Archer MSAs.845 Thus, HSA trustees may be required to report amounts with respect to contributions, distributions and other matters as required by the Secretary of Treasury.846 The failure to file such reports may result in a penalty of $50 per failure.847
845See Notice 2004-2, Q&A-34.
846§223(h). HSA trustee is responsible for filing required information returns and for tracking account beneficiary's age. Notice 2004-50, Q&As-74 and 75, respectively.
847§6693(a)(2)(C), added by P.L. 108-173, §1201(g), effective for tax years beginning in 2004.
XII. Medical Savings Accounts (Archer MSAs)
A. In General
Archer medical savings accounts (MSAs)848 are another form of a tax-favored savings vehicle to defray the cost of medical expenses.
848§220, as revised by HIPAA, P.L. 104-191, §301. MSAs were established as a pilot program in 1997 and were renamed Archer MSAs by the Community Renewal Tax Relief Act of 2000, P.L. 106-554, §202. The Archer MSA pilot program is extended through Dec. 31, 2005. §220(i)(2), as amended by P.L. 108-311, §322(a), effective Jan. 1, 2004.
Note: Archer MSAs have been superseded by health savings accounts (HSAs) (see XI, above). Although contributions can still be made to Archer MSAs, no employers can establish MSA programs after 2003 (see XII, G, below).
Contributions to an Archer MSA are deductible, within limits, if made by an "eligible individual"849 and such contributions are excludible from income if made by the employer of such an individual.850 Further, earnings on the assets of an Archer MSA are not currently taxable,851 nor are distributions from an Archer MSA that are used to pay qualified medical expenses.852 In general, an Archer MSA is a trust or custodial account created exclusively for the benefit of the account holder, and is subject to rules similar to those applicable to individual retirement arrangements under  §408.853
849§220(a).
850§106;  §220(b)(5).
851§220(e)(1).
852§220(f)(1).
853See Notice 96-53, 1996-2 C.B. 219, for guidance on Archer MSAs.
Note: Under §106(b)(5), amounts contributed by an employer to an Archer MSA are not considered part of a group health plan subject to COBRA. However, a high deductible health plan that covers an Archer MSA holder may be a group health plan and may be subject to the COBRA continuation coverage requirements.854
854Regs. §54.4980B-2, Q&A-1(f).
In general, no more than 750,000 taxpayers may benefit annually from an Archer MSA contribution.855 If this level is exceeded for a year (called a "cut-off" year) then, for succeding years during the 1997-2005 pilot period, only those individuals who: (1) made an Archer MSA contribution or had or employer Archer MSA contribution for the year or a preceeding year; or (2) are employed by a porticipating employer, would be eligible for an Archer MSA contribution.856
855§220(j)(2)(A). The numerical limitation does not apply for 2000 or 2003.  §220(j)(2)(C), as amended by the Working Familes Tax Relief Act of 2004 (WFTRA), P.L. 108-311, §322(b)(3), effective Jan. 1, 2004.
856§220(i)(1). For purposes of §220(i)(2) and  (j)(2), Feb. 1, 2005, is not a "cut-off" date and 2004 is not a "cut-off" year for the Archer MSA pilot project. Ann. 2005-12, 2005-7 I.R.B. 555.
B. Eligible Employees and Employers
Archer MSAs are available to employees covered under a "high deductible" plan of a small employer and similarly situated self-employed individuals.857 A small employer for this purpose is defined as one that employs, on average, no more than 50 employees during either the immediately preceding or the second preceding year. For this purpose, a preceding year is not taken into account unless the employer was in existence throughout that year. If the employer was not in existence through the first preceding year, the determination of its number of employees is based on the average number of employees that it reasonably expects to employ in the current year. In calculating the number of employees, employers under common control are treated as a single employer.858
857§220(c)(1).
858§220(c)(4)(D)(i).
An employee is eligible to make Archer MSA contributions (or have employer contributions made on his behalf), if he is covered under a "high deductible" health plan (HDHP) sponsored by an eligible employee and not covered under any other health plan, other than one providing certain permitted coverage.859 Contributions can be made to an Archer MSA either by the employee or by his employer. However, an individual cannot contribute to an Archer MSA for a year if any excludible employer contributions are made to an Archer MSA on his behalf or on behalf of his spouse for the year.860
859§220(c)(1).
860§220(b)(5).
Note: If the employee's spouse also is covered under the HDHP, any excludible employer contribution for the spouse also prevents the employee from contributing.
An individual with other coverage in addition to a high deductible plan still may contribute to an Archer MSA if the other coverage consists of certain permitted insurance, or is coverage (through insurance to otherwise) for accidents, disability, dental care, vision care, or long-term care.861 Permitted insurance is: (1) Medicare supplemental insurance; (2) insurance if substantially all of the coverage provided under such insurance relates to (a) liabilities incurred under workers' compensation laws, (b) tort liabilities, (c) liabilities relating to ownership or use of property (e.g., auto insurance), or (d) such other similar liabilities as the Secretary may prescribe by regulations; (3) insurance for a specified disease or illness; and (4) insurance that provides a fixed payment for hospitalization.862
861§220(c)(1)(B).
862§220(c)(3). See Notice 96-53, Q&A-7.
If a small employer with an Archer MSA plan ceases to be a small employer, then the employer and its employees can continue to contribute to Archer MSAs, including contributions for new employees and employees that did not previously have an Archer MSA, until the year after the first year in which the employer has more than 200 employees.863
863§220(c)(4)(C).
C. Deductibility of Archer MSA Contributions
Individual contributions to an Archer MSA are deductible, within limits, above the line.864 Alternatively, employer contributions are excludible from employee gross income within the same limits.865 In the case of an Archer MSA established by a self-employed individual, the account holder (the self-employed individual or the spouse, respectively) may contribute to the Archer MSA.866 Archer MSA contributions may not be made available as an option under a cafeteria plan.867 Contributions to an Archer MSA must be made in cash and, thus, may not be made in the form of stock or other property.868
864§62(a)(16). See Notice 96-53, Q&A-15.
865§106(b)(1); Notice 96-53, Q&A-16. However, if an employer makes a contribution to an Archer MSA for a given year, the account holder of that Archer MSA may not contribute to any Archer MSA for that year. Notice 96-53, Q&A-12.
866§220(c)(1)(A); Notice 96-53, Q&A-12.
867§125(f). While an HDHP can be provided as part of a cafeteria plan and can be used in conjunction with an Archer MSA, the Archer MSA must be established outside the cafeteria plan because a cafeteria plan is not permitted to provide for contributions to an Archer MSA. Outside of the cafeteria plan context, an employee will not be subject to taxation merely because the employee has a choice between employer contributions to an Archer MSA and other employer-provided accident or health coverage. §106(b)(2); Notice 96-53, Q&A-8.
868§220(d)(1)(A)(i); Notice 96-53, Q&A-14.
For self-employed individuals, the deduction cannot exceed the individual's earned income from the trade or business with respect to which the high deductible plan is established.869 For employees, the deduction cannot exceed the individual's compensation attributable to the employer sponsoring the high deductible plan in which he participates.870 These limits are to be determined without regard to community property laws.871
869§220(b)(4)(B).
870§220(b)(4)(A).
871§220(b)(4)(C).
The maximum annual contribution to an Archer MSA for a year is 65% of the deductible under the high deductible plan in the case of individual coverage, and 75% of the deductible in the case of family coverage.872 With respect to a married couple, if either spouse has family coverage, both spouses are treated as having only such family coverage (and as having the family coverage with the lowest annual deductible if coverage is under different plans), and the allowable deduction as so calculated is divided equally between them unless they agree on a different division.873 Contributions for a year can be made until the due date for the individual's tax return for the year, not including extensions.874
872§220(b)(1),  (2). The annual contribution limit is the sum of the limits determined separately for each month, based on the individual's status and health plan coverage as of the first day of the month.
873§220(b)(3).
874§220(d)(4)(B), crossreferencing  §219(f)(3).
An excise tax of 6% for each tax year is imposed on the account holder for excess individual and employer contributions.875 If, however, the excess contributions for a tax year and the net income attributable to these excess contributions are paid to the account holder before the last day prescribed by law, including extensions, for filing the account holder's tax return for the tax year, then: (1) the excise tax does not apply; (2) the distribution of the excess contributions is not taxed; and (3) the net income attributable to the excess contributions is included in the account holder's gross income for the tax year in which the distribution is made.876
875§4973.
876§§220(f)(3) and 4973(d) (flush language); Notice 96-53, Q&A-19.
D. Comparability Requirement
If an employer contributes to an Archer MSA for any employee, the employer must make available a comparable contribution on behalf of all employees with comparable coverage during the same period.877 Contributions are comparable if they are either of the same amount or the same percentage of the deductible under the high deductible plan.878 The comparability rule applies separately to part-time employees (those who customarily work fewer than 30 hours per week). An employer's ability to offer other types of plans to different groups of employees is not restricted.879 In applying the comparability rule, employers under common control are aggregated in the same manner as in determining whether the employer is a small employer.880
877§4980E(a),  (d).
878§4980E(d)(2)(A).
879§4980E(d)(3).
880§4980E(e).
The penalty for failure to comply with this requirement is the imposition of a tax for the calendar year of the violation equal to 35% of the aggregate amount contributed by the employer to Archer MSAs of employees for taxable years of such employees ending with or within such calendar year.881 The Secretary can waive part or all of the penalty tax if the failure was due to reasonable cause and not willful neglect to the extent that the payment of such tax would be excessive relative to the failure involved.882
881§4980E(b).
882§4980E(c).
E. High Deductible Plan
A "high deductible plan" is a health plan with an annual deductible of between $1,750 and $2,650 for individual coverage, and between $3,500 and $5,250 for family coverage. Also, the maximum out-of-pocket expenses with respect to allowed costs, including the deductible, must not exceed $3,500 for individual coverage and $6,450 for family coverage.883 These dollar amounts are indexed for inflation in $50 increments.884 A plan does not fail to qualify as a high deductible plan merely because it does not have a deductible for preventive care as required by state law.885
883§220(c)(2)(A)(i) through (iii); Rev. Proc. 2004-71, 2004-50 I.R.B. 970, §3.20. Out-of-pocket expenses do not include premiums. Notice 96-53, Q&A-4.
884§220(g). For 2004 tax years the adjusted amounts were: (1) an annual deductible between $1,700 and $2,600 for individual coverage, and between $3,450 and $5,150 for family coverage; (2) maximum out-of-pocket expenses were $3,450 for individual coverage and $6,300 for family coverage. Rev. Proc. 2003-85, 2003-49 I.R.B. 1184.
885§220(c)(2)(B)(ii).
F. Taxation of Distributions
Distributions from an Archer MSA to pay the medical expenses of the individual and his spouse or dependents generally are excludible from income. Distributions that are not for qualified medical expenses are includible in income.886 However, in any year for which a contribution is made to an Archer MSA (other than a rollover), withdrawals are excludible only if the individual for whom the expenses were incurred was eligible to make Archer MSA contributions when the expenses were incurred.887 Taxable distributions also are subject to an additional 15% tax unless made after becoming eligible for Medicare (age 65), or on account of death or disability.888
886§220(f)(1), (2). Qualified medical expenses are as defined under §213, but do not include expenses for insurance other than long-term care insurance, premiums for COBRA-type health care continuation coverage, or premiums for health care coverage while an individual receives unemployment compensation. See §220(d)(2); Notice 96-53, Q&A-22. However, for purposes of determining the  §213 deduction, any payment or distribution from an Archer MSA for qualified medical expenses is not treated as an expense for medical care. §220(f)(6).
887§220(d)(2)(C).
888Section 220(f)(4)(A) through  (C). §26(b)(2)(Q) does not include this additional tax as a tax liability.
One tax-free rollover between Archer MSAs or to an HSA is permitted by an account holder in any 12-month period, as in the case of an individual retirement account (IRA). Moreover, the amount withdrawn must be deposited in an Archer MSA within 60 days after receipt of the distribution.889 An individual's interest in an Archer MSA may be transferred tax free to a spouse or former spouse under a divorce or separation instrument described in §71(b)(2)(A), and thereafter considered the transferee's Archer MSA.890
889§220(f)(5).
890§220(f)(7).
If, upon death, the Archer MSA passes to a named beneficiary other than the surviving spouse, it ceases to be an Archer MSA as of the date of the decedent's death, and the beneficiary must include the fair market value of Archer MSA assets as of the date of death in gross income for the taxable year that includes the date of death.891 The amount includible in income is reduced by the amount in the Archer MSA that is used, within one year of death, to pay qualified medical expenses incurred before death.892 In computing taxable income, the beneficiary may deduct under  §691(c) that portion of the federal estate tax on the decedent's estate that was attributable to the amount of the Archer MSA balance.893
891§220(f)(8)(B). If the surviving spouse is the named beneficiary of the account, the spouse is treated as the account holder. §220(f)(8)(A). Note that the spouse must be named as the beneficiary of the account. Becoming entitled to the proceeds of the account by virtue of being the beneficiary of the estate is not enough to avoid taxation.
892§220(f)(8)(b)(ii)(I).
893§220(f)(8)(b)(ii)(II).
G. Establishing and Maintaining Archer MSAs
1.	Institutional Trustee or Custodian
Eligible individuals could establish an Archer MSA with a qualified Archer MSA trustee or custodian in much the same way individuals establish individual retirement accounts (IRAs). However, because Archer MSAs also differ from IRAs in a number of ways, the two types of accounts cannot be combined into a single account.894
894Notice 96-53, Q&As-9 & 11.
Any insurance company or any bank (including a similar financial institution as defined in §408(n)) could be an Archer MSA trustee or custodian. Any other persons already approved by the IRS to be trustees or custodians of IRAs were automatically approved to be Archer MSA trustees or custodians. An eligible individual who was an employee could establish an Archer MSA without any involvement of the employer.895
895Id. at Q&A-10.
The institutional trustee or custodian need not have investment discretion.896 However, investment restrictions regarding prohibited transactions and pledging an account as security for a loan, similar to those that apply to IRAs under §408(e)(2) and (4), apply to Archer MSAs. Any amount treated as distributed under such rules is included in the account holder's gross income.897
896See PLR 9821016.
897§220(e)(2). The account holder is defined as the individual on whose behalf the Archer MSA was established.  §220(d)(3).
2.	Reporting by Trustees and Custodians
Archer MSA custodians or trustees are required to report the number and types of Archer MSAs established on Form 8851, "Summary of Medical Savings Accounts." 898 Account custodians must report distributions. However, they are not required to compute the taxable amount of a distribution. The tax treatment of a distribution from an Archer MSA depends on how the taxpayer uses the distributed amount. Information reporting required for Archer MSAs is similar to information reporting for IRAs.899 Contributions to Archer MSAs are reported on Form 5498-MSA.900
898For Archer MSAs established between Jan. 1, 2004, and June 30, 2004, this information must be reported no later than Jan. 3, 2005. Ann. 2004-82, 2004-45 I.R.B. 834. §220(j)(4)(A), as amended by P.L. 108-311, §322(b)(2).
899See Notice 96-53.
900Effective for tax years beginning 2003, Forms 1099-MSA and 5498-MSA may be furnished electronically to recipients. Notice 2004-10, 2004-6 I.R.B. 433. See Rev. Proc. 99-50, 1999-52 I.R.B. 757, for alternative procedures for filing forms in the 1099 and 5498 series following a merger or acquisition.
H. Medicare Advantage MSAs
A Medicare Advantage medical savings account (MSA) is for Medicare enrollees.901 Enrollees may create tax-exempt MSAs to which the Secretary of Health and Human Services can transfer tax-free contributions from Medicare trust funds. The account may be a trust or a custodial account. The contributions to the MSA must be equal to the deductible amount under health coverage provided to the account owner by a Medicare Advantage Plan.
901§138, as amended by the Working Families Tax Relief Act of 2004, (WFTRA), P.L. 108-311, §408(a)(5), effective Oct. 4, 2004. Prior to Oct. 4, 2004, Medicare Advantage MSA was formerly known as Medicare+Choice MSA.
The account can be used by its owner to pay for qualifying medical expenses, with no tax imposed on withdrawals for such purposes.902 If an amount in the account is used for other purposes, it will be treated as taxable income to the account owner and may be subject to a penalty tax. The penalty tax, equal to 50% of the distribution, will apply to any withdrawal for nonmedical purposes to the extent that the withdrawals in a taxable year exceed the amount by which the value of the MSA as of December 31 of the preceding taxable year exceeds 60% of the deductible of the plan under which the individual is covered.903 Thus, the account owner is given an incentive to conserve funds in the account, because he or she may make penalty-free withdrawals for nonmedical purposes when the account balance exceeds 60% of the plan deductible. The penalty tax will not apply, however, to any withdrawal that occurs after the death or disability of the account owner.904
902§138(c)(1).
903§138(c)(2).
904Id.
An owner of a Medicare Advantage MSA may name a beneficiary who will receive the account at the owner's death. If the beneficiary is the owner's spouse, the account will retain its tax-free status but will be treated as a §220 Archer MSA of the spouse, rather than a Medicare Advantage MSA.905 If the beneficiary is not the owner's spouse, the account ceases to be an MSA and the account balance is includible in the beneficiary's income for the taxable year in which the death occurred. If there is no beneficiary of the account, the value of the account is included in the owner's income on his or her final income tax return. In all cases, the value of the account is includible in the owner's gross estate for estate tax purposes.906
905§138(d).
906H.R. Rep. No. 217, 105th Cong., 1st Sess. 655-658 (1997).
Distributions from Medicare Advantage MSAs are reported on Form 1099-MSA, "Distributions From an MSA or Medicare Advantage MSA." Contributions to such MSAs are reported on Form 5498-MSA, "MSA or Medicare Advantage MSA Information." Following a merger or acquisition, the successor may agree to assume the predecessor's entire information reporting obligations for these forms.907
907See Rev. Proc. 99-50, 1999-52 I.R.B. 757.
Operational instructions are provided by the Center for Medicare and Medicaid Services (CMS) for Medicare Advantage plans that decide not to renew their contracts.908 The instructions assist Medicare Advantage plans in the process of nonrenewing all or part of their contracts, a model notice of enrollment procedure, a list of organizations continuing to offer Medicare options in counties where a plan's contract will be terminated, a list of counties where only original Medicare is available to beneficiaries, and model beneficiary notices with Medigap information to help inform plan enrollees of their rights upon termination of the Medicare Advantage contract.
908Nonrenew operational instructions are available on the CMS website at http://www.cms.hhs.gov/healthplans/nonrenewal/2004instr.asp.
XIII. Compliance with ERISA
Despite its title, the Employee Retirement Income Security Act of 1974 (ERISA)909 applies to both employee pension benefit plans and employee welfare benefit plans. Such plans include any "plan, fund or program" providing "medical, surgical or hospital care or benefits, or benefits in the event of sickness, accident [or] disability... ."910
909P.L. 93-406; ERISA is codified in 29 USC §1001 et seq.
910ERISA §3(1).
A. Scope of Coverage
Employee welfare benefit plans are subject to portions of Title I of ERISA, which is within the jurisdiction of the Department of Labor (DOL). However, accident and health benefits that are included within, or paid from, qualified pension, profit-sharing, or stock bonus plans are covered by the more extensive rules that govern employee pension benefit plans in general.911
911See ERISA  §3(2). For further discussion, see, e.g., 351 T.M., Plan Qualification -- Pension and Profit-Sharing Plans.
Title I applies to plans maintained by an employer or by an employee organization (or by both) that is "engaged in commerce or in any industry or activity affecting commerce...."912 The "affecting commerce" standard has such a broad reach that even businesses whose activities are exclusively local in character come within the ambit of ERISA if products or supplies are obtained from out of state.913
912ERISA §4(a).
913See ERISA §3(11) and (12), and, e.g., NLRB v. Reliance Fuel Oil Corp., 371 U.S. 224 (1963).
Plans that cover only owners (and their families) generally are not within the ambit of ERISA. For this purpose, sole proprietors or partners are not considered employees.914 Plans that do not cover any employees are not considered within the definition of employee benefit plans. An owner may qualify as a plan participant in an owner-sponsored ERISA persion plan so long as the plan covers one or more employees other than the owner and his or her spouse.915
914DOL Regs. §2510.3(b) and (c). The DOL regulations relating to pension and welfare programs are in 29 CFR Parts 2500 et seq.
915Raymond B. Yates, M.D., P.L. Profit Sharing Plan v. Herdon, 124 S. Ct. 1330, 32 EBC 1097 (2004).
Note: One exception is the group health care plan requirements in Part 7 of Title I (see VIII, B, 1, a, above).
There are three relevant statutory exemptions from the coverage of Title I. The first is for plans maintained to comply solely with workers' compensation or disability insurance laws.916 The second is for governmental plans (comprising plans of the federal and state governments and their political subdivisions, agencies, and instrumentalities).917 The third exemption is for church plans.918 The elaborate definition in ERISA §3(33) provides that a church plan is one maintained for its employees by a church or association of churches, or an exempt organization controlled by or "associated with" a church or association of churches. The exemption does not extend to a plan that primarily covers persons employed in connection with unrelated trades or businesses.919
916ERISA §4(b)(3). The DOL has determined that a disability plan sponsored by an employer as an alternative to participation in a state unemployment disability plan, but which was administered in accordance with the state plan requirements, is not a plan covered by ERISA because it is excluded under ERISA §4(b)(3) as a plan maintained solely for the purpose of complying with applicable disability insurance laws. DOL Advisory Opinion 90-03A. But see District of Columbia v. Greater Washington Bd. of Trade, 506 U.S. 125, 16 EBC 1001 (1992), where the U.S. Supreme Court held that a state law that relates to a covered plan for ERISA §514(a) purposes is preempted by ERISA §514(b) even though the law also relates to an exempt plan such as a workers' compensation plan.
917ERISA §§4(b)(1) and 3(32). "Governmental plans" include plans established under the Railroad Retirement Act of 1935 or 1937 and plans of organizations that are tax exempt by reason of executive orders issued pursuant to the International Organizations Immunities Act, 22 USC §§288 et seq.
918ERISA §4(b)(2).
919ERISA §3(33)(B)(i).
In addition, the DOL has, by regulation, excluded certain sick pay and group insurance arrangements from the definition of employee benefit plan. A sick pay arrangement is not subject to ERISA if the employer simply continues an employee's regular compensation on an unfunded basis.920 A group insurance arrangement is excluded from coverage if neither an employer nor an employee organization contributes, requires participation, receives any consideration except reimbursement for expenses, or plays any role other than withholding and remittance of employee contributions.921
920DOL Regs. §2510.3-1(c).
921DOL Regs. §2510.3-1(j). See also DOL Adv. Op. 90-8A and 83-3A.
Note: Urging employees to participate, or characterizing a group insurance program as employer-sponsored, can be enough to make it an ERISA plan.922 However, at least one group insurance program fell within the exemption even though the employer recommended enrollment, characterized the arrangement as "a plan," and assisted with claim documentation.923
922DOL Adv. Op. 94-22A, 94-23A and 94-24A. See also Schneider v. UNUM Life Ins. Co., 149 F. Supp.2d 169, 26 EBC 1337 (E.D. Pa. 2001), in which a union created an ERISA plan when it encouraged its members to purchase long-term care insurance through a group policy issued by UNUM. The employee organizatoin endorsed the program when it permitted its logo to be included on the LTC policy's sales brochure in a manner that indicated that it expressly endorsed the program and identified the policy as a part of its employee benfits package. Thus, the policy failed to meet the safe harbor in DOL Regs. §2510.3-1(j).
923Johnson v. Watts Regulator Co., 63 F.3d 1129, 20 EBC 1150  (1st Cir. 1995).
B. Reporting and Disclosure
The "administrator" of a plan subject to Title I of ERISA is responsible for the submission of certain reports to the DOL and the furnishing of specified information to plan participants. If an administrator is not identified in the plan document, the plan sponsor ordinarily is the administrator.924
924ERISA §3(16). One court held that even though the employer's plans identified the plan administrator as the "employee benefits manager," the contract administrator was the administrator because it was responsible under its contract for collecting premiums, determining entitlement and benefits, issuing COBRA notices and dealing with inquiries about COBRA benefits. Vincent v. Wells Fargo Guard Services, Inc., 44 F. Supp.2d 1302, 23 EBC 1364 (S.D. Fla. 1999). 
Once a person becomes a participant in a plan, he remains a participant for ERISA disclosure purposes so long as he remains eligible for benefits.925 Thus, a person who has retired by reason of disability apparently remains a participant if he receives benefits under disability insurance.
925DOL Regs. §2510.3-3(d)(2)(i).
1.	Annual Report
An annual report, on Form 5500, must be filed within seven months after the end of each plan year.926 Exemptions from the annual report requirement are discussed in XIII, B, 6, below.
926DOL Regs. §§2520.104a-5 and 2520.103-1. The DOL has issued Prop. DOL Regs. §2520.104a-2 (and other conforming proposed regulations), providing that any Form 5500 filed for any plan year beginning on or after Jan. 1, 2007, must be filed electronically in accordance with instructions and such other guidance as DOL may provide. DOL will provide specific filing requirements and compliance instructions to filers in  advance of any due date for filing the Form 5500 under final regulations. The proposed rule would not apply to any reporting requirements imposed solely under the Code, i.e., not required under ERISA §104(a). Under the proposed rule, the requirement to file annual reports electronically would not affect record retention or disclosure obligations. Thus, the obligations to retain records for purposes of ERISA §§107 and 209 would not be altered by the requirement that the annual  report be filed electronically. Similarly, a  plan administrator's obligation to make the latest annual report available for examination and to furnish copies upon request, in accordance with ERISA §104(b)(2) and (4), would not be  affected by an electronic filing requirement. 70 Fed. Reg. 51542, 51546 (8/30/05).
Of the schedules that accompany Form 5500, only Schedule A, Insurance Information, is germane to a typical health, medical or disability benefit plan.927 A self-insured plan might have to file Schedule C, Service Provider and Trustee Information, Schedule G, Financial Transactions, and Schedule H or I, Financial Information. Annual reports are filed with the DOL.
927The filing of Schedule F for cafeteria plans has been suspended. Notice 2002-24, 2002-16 I.R.B. 785.
ERISA §3(39) defines a plan year as any calendar, policy or fiscal year selected for recordkeeping purposes.
Comment: The employer's taxable year ordinarily is the most convenient reporting period for plan contributions and insurance information. If a plan is funded through a group policy under which the insurer furnishes reports for a different period, that period might be more convenient, but it may be advantageous to adopt a uniform plan year for all of the employer's pension and welfare benefit plans that are subject to ERISA reporting.
Plans that must file annual reports (see, XIII, 6, below) are required to be audited by independent accountants if benefits are not provided exclusively from the employer's assets or insurance. Because contributory plans may have to hold employee contributions in trust (see, XIII, D, 2, below) such plans may be subject to the audit requirement.
Note: The trust requirement may apply even if only retirees are required to contribute. Pre-tax employee contributions under a cafeteria plan do not, however, subject an otherwise exempt plan to the audit requirement.928
928ERISA Technical Release No. 92-01; DOL Notice, 56 Fed. Reg. 45359 (8/27/93).
An insurer or bank that holds plan assets is to certify to the plan administrator the financial data needed to complete the annual report.929 The data included in the certification is not subject to the independent audit requirement applicable to financial statements in the Form 5500.930
929ERISA  §103(a)(2); DOL Regs. §2520.103-5.
930DOL Regs. §2520.103-8.
2.	Summary Annual Report
Each plan participant must be furnished with a summary annual report (SAR) within nine months after the end of each plan year.931 DOL regulations provide a format designed to convey in plain language the salient features of the financial statements contained in the annual report (such as plan assets and liabilities as well as receipts and disbursements made during the previous plan year). The plan administrator also must make the full annual report available for inspection by participants and furnish copies upon request.932
931DOL Regs. §2520.104b-10.
932ERISA §104(b)(2) and (b)(4). See DOL Regs. §2520.104b-1 regarding acceptable methods of disclosure, and DOL Regs. §2520.104b-30 concerning charges for copies of documents.
3.	Summary Plan Description
A plain language summary of the plan, known as a "summary plan description" (SPD), must be distributed to each participant within 90 days after he becomes a participant, or within 120 days after establishment of the plan, if later.933 SPDs no longer have to be filed with the DOL except upon request.934
933DOL Regs. §2520.104b-2.
934ERISA  §104(a)(1)(c), repealed by P.L. 105-34, §1503(c)(1).
DOL regulations require that an SPD of a group health plan describe the following:

• any cost-sharing provisions, including premiums, deductibles, coinsurance, and copayment amounts for which the participant and beneficiary will be responsible;
• any annual or life-time caps or other limits on benefits;
• the extent to which preventive services are covered under the plan;
• whether, and under what circumstances, existing and new drugs are covered under the plan;
• whether, and under what circumstances, coverage is provided for medical tests, devices, and procedures;
• provisions governing the use of network providers, the composition of the provider network and whether, and under what circumstances, coverage is provided for out-of-network services;
• any conditions or limits that apply to emergency medical care; and
• any provisions requiring pre-authorization or utilization review as a condition to obtaining a benefit or service under the plan.935
935DOL Regs. §2520.102-3(j)(3).
Plans with provider networks may furnish their participants and beneficiaries with a listing of providers in a separate document, but the SPD must contain a general description of the provider network and indicate that provider lists are furnished without charge.
Additional SPD requirements for health plans are:

(1) SPDs must contain a statement clearly identifying circumstances that may result in disqualification, ineligibility, or denial, loss, forfeiture, suspension, offset, reduction, or recovery (by exercise of subrogation or reimbursement rights). SPDs also must include information concerning the provisions of the plan that relate to plan termination and a description of plan provisions governing the authority of the plan sponsor or others to terminate the plan or eliminate benefits, in whole or in part. Also, the SPD must have a description of the circumstances under which the plan may be terminated or under which benefits may be amended or eliminated. The SPD also must provide a summary of any plan provisions governing the benefits, rights, and obligations of participants and beneficiaries on termination of the plan or amendment or elimination of benefits under the plan. Finally, the SPD must provide a summary of any plan provisions governing the allocation and disposition of assets of the plan on termination. This information may not be minimized, rendered obscure, or otherwise made to appear unimportant.936
(2) SPDs for plans subject to COBRA must contain information concerning COBRA rights and obligations of the plan as well as the rights and responsibilities of participants and qualified beneficiaries.937
(3) Health plan SPDs must indicate the name and address of the issuer, whether and to what extent benefits under the plan are guaranteed under an insurance policy or contract, and the nature of any administrative services provided by the issuer.938
(4) A statement of ERISA rights is required to be incorporated in an SPD.939
(5) SPDs are to explain beneficiaries' rights under the Newborns' and Mothers' Health Protection Act of 1996, codified at ERISA §711.940 See IX, A, above.
936DOL Regs. §2520.102-3(l).
937DOL Regs. §2520.102-3(o).
938DOL Regs. §2520.102-3(q).
939DOL Regs. §2520.102-3(t).
940DOL Regs. §2520.102-3(u).
For more information on SPD content requirements, see  361 T.M., Reporting and Disclosure Under ERISA.
Comment: For an insured plan, the carrier typically furnishes a printed benefit summary for employees. However, such summaries often need to be supplemented with plan data such as the employer's IRS identification number and the three-digit plan number. In addition, many summaries provided by insurance carriers fail to include a claim and appeal procedure and a disclosure of ERISA rights that satisfy the DOL requirements.941
941DOL Regs. §2520.102-3(c), (s) and (t).
4.	Summary of Material Modifications
When a plan is modified or amended in a material respect, the SPD must be revised so that the document furnished to new participants is not more than 120 days out of date.942 The revision may be made through a document known as a "summary of material modifications" (SMM). The SMM must be distributed to prior recipients of the SPD within 210 days after the end of the plan year in which the modification is adopted.943 However, if the plan modification is a material reduction in group health plan benefits, the disclosure requirement is accelerated. Under ERISA §104(b)(1) such a material modification must be communicated within 60 days after the modification is adopted.
942DOL Regs. §2520.102-3.
943DOL Regs. §2520.104b-3.
Note: The 60-day period is lengthened to 90 days if included in a periodic communication to participants that is published at regular intervals of not more than 90 days.944
944DOL Regs. §2520.104b-3(d)(2).
The standard for materiality is whether an average plan participant would consider the modification to constitute an important reduction. Reduction encompasses increase in premiums, deductibles, coinsurance or copayments, geographical restriction and preauthorization or other conditions to obtaining benefits.
ERISA §104(b)(1) requires general distribution of an updated SPD every fifth year, incorporating any intervening material modifications, and every tenth year whether or not the plan has been amended. The plan administrator also is responsible for making plan documents available to participants and to the Labor Department945 and for maintaining records for a period of at least six years.946
945ERISA  §104(b)(2) and (b)(4).
946ERISA §107.
5.	Access to Plan Documents
ERISA §104(b)(4) entitles plan participants and beneficiaries to obtain copies of plan documents. These include not only the plan itself but also the SPD and any collective bargaining agreement or trust agreement under which the plan is established or operates. The plan can impose a reasonable charge to cover the cost of furnishing copies, which cannot exceed $.25 per page.947
947DOL Regs. §2520.104b-30(b).
The scope of participants' rights to copies of documents has been litigated vigorously. Plan administrators have successfully resisted attempts to obtain the insurance carrier's nonbinding guidelines for determining the scope of medical coverage,948 and a mailing list of plan participants.949
948Doe v. Travelers Ins. Co., 167 F.3d 53, 22 EBC 2433 (1st Cir. 1999).
949Hughes Salaried Retirees Action Comm. v. Administrator of Hughes Non-Bargaining Retirement Plan, 72 F.3d 686 (9th Cir. 1995).
6.	Exemptions
Two types of welfare benefit plans are relieved from reporting and disclosure requirements. First, certain plans having fewer than 100 participants at the beginning of a plan year need not file an annual report (or distribute an SAR) for the plan year.950 This exemption is available to plans that are unfunded, or funded through insurance paid for by direct employer and/or employee contributions. It applies only if participants' contributions, and refunds to which participants are entitled, are forwarded within three months of receipt by the employer, and only if contributing participants are informed upon entry into the plan of the refund provisions.951
950DOL Regs. §2520.104-20(a).
951DOL Regs. §2520.104-20(b).
Note: Such plans, nevertheless, must furnish SPDs to participants and beneficiaries in the usual fashion, and make plan documents available to DOL upon request.952
952DOL Regs. §2520.104-20(c).
Comment: Whether a plan is unfunded may depend on whether employee contributions are required to be held in trust. Employee contributions, and any contributions made by retirees, presumably do. However, contributions made on a pre-tax basis under a cafeteria plan do not. See XIII, D, 2, below.
A second and more extensive exemption applies to certain plans maintained primarily for a select group of management or highly compensated employees. If such a plan is unfunded or insured, it is exempt from all reporting and disclosure requirements except the obligation to furnish documents to the DOL upon request.953
953DOL Regs. §2520.104-24.
Comment: Although the Labor Department has not developed guidelines for application of this "top hat" exemption, it is apparent that the intention, and the intention of the parallel statutory exemptions in ERISA §§201(2), 301(a)(3), and 401(a)(1), is to identify plans whose participants have sufficient sophistication and bargaining power to obviate their need for statutory protection.
The above exemptions do not apply to the employer reporting requirements for cafeteria and other plans under Code §6039D. However, until the IRS issues further guidance, employers will not be required to comply with the expanded plan reporting requirements for group health and other plans in Code §6039D.954
954Notice 90-24, 1990-1 C.B. 335, modified by and suspended by Notice 2002-24, 2002-16 I.R.B. 785 (suspending filing requirement under §6039D for fringe benefit plans). For a detailed discussion of Code §6039D reporting requirements, see 394 T.M., Employee Fringe Benefits; for additional discussion of ERISA reporting requirements applicable to welfare plans, see 361 T.M., Reporting and Disclosure Under ERISA.
7.	Enforcement
The reporting and disclosure requirements carry with them serious penalties for noncompliance. The DOL may impose a penalty of up to $1,100 per day by which an annual report is late or incomplete.955 Willful violation may result in criminal penalties under ERISA  §501, with the maximum penalties being a $5,000 fine and/or imprisonment for one year in the case of an individual, and a $100,000 fine in the case of a person not an individual. Any knowing misrepresentation or concealment of a fact required by ERISA to be disclosed may be punished by a fine of up to $10,000 or imprisonment for up to five years.956 In addition, there is a civil penalty of up to $110 per day for unreasonable failure to furnish plan disclosure documents requested by a participant within 30 days of the request.957
955ERISA §502(c)(2); DOL Regs. §2575.502c-2.
95618 USC §1027 (1982). See U.S. v. Harris, 185 F.3d 999, 23 EBC 1653 (9th Cir. 1999).
957ERISA §502(c)(1). DOL Regs. §2575.502c-1. See, e.g., Otero-Carrasquillo v. Pharmacia, No. 03-1651 (JAF) (D. P.R. 8/15/05). See Doe v. Travelers Ins. Co., 167 F.3d 53, 22 EBC 2433 (1st Cir. 1999) (medical plan administrator not subject to daily penalty for failing to provide participant copy of mental health guidelines used in claim denial because administrator was not bound by them nor did participant have legal rights under them, and documents required by ERISA to be furnished to participants are more reasonably those that describe plan and legally obligate administrator).
Employers are required to file SPDs or SMMs with the DOL only upon request. Other documents that plan administrators must provide upon request from the DOL also include any document included in ERISA  §104(b)(4) for which a participant has made a written request and which the plan administrator has failed or refused to furnish.958 The plan administrator is liable for civil penalties when there is a failure or refusal to furnish the DOL with these documents.959 The penalty is up to $100 a day and does not exceed $1,000 per request.960 The DOL may waive all or part of the penalty.961
958DOL Regs. §2520.104a-8(a)(1).
959DOL Regs. §2560.502c-6(a)(1).
960DOL Regs. §2560.502c-6(b).
961DOL Regs. §2560.502c-6(d).
ERISA also provides means for civil enforcement of participants' rights, not only for information, but for benefits as well. Actions may be maintained by a participant or beneficiary, any fiduciary, or the Secretary of Labor.962 A beneficiary of a health plan subject to ERISA may assign the right to receive benefits to a health care provider and thereby confer standing on the assignee to bring suit against the plan to recover those benefits.963
962ERISA §502(a).
963E.g., Hermann Hosp. v. MEBA Medical & Benefits Plan, 959 F.2d 569, 15 EBC 1241 (5th Cir. 1992).
An employee benefit plan may sue or be sued under Title I as an entity.964 State and federal courts have concurrent jurisdiction of actions by participants and beneficiaries for enforcement of rights to benefits, and federal district courts have exclusive jurisdiction in all other cases.965
964ERISA §502(d).
965ERISA §502(e)(1).
Note: An example of a case going beyond a benefit claim is a lawsuit under ERISA §502(a)(3) for equitable relief from a fiduciary violation is Varity Corp. v. Howe.966 For further discussion of ERISA litigation, see 374 T.M., Plan Disqualification and ERISA Litigation.
966516 U.S. 489, 19 EBC 2761 (1996) (medical benefits lost by employees who were induced by misstatements to transfer to insolvent subsidiary).
C. Fiduciary Standards
1.	Duties of Fiduciaries
Because the employer normally bears ultimate responsibility for plan administration, it is a fiduciary with respect to the plan.
Note: Though an employer does not ordinarily act in a fiduciary capacity in amending a plan, communications to employees relating to benefits can be fiduciary acts.967 However, the DOL's attempts to hold nonfiduciaries liable for participating in fiduciary breaches have not been successful.968 In addition, any other person having discretionary control over the operation of a plan, or control over the investment or disposition of plan assets, or who renders investment advice for compensation, likewise occupies a fiduciary position with respect to the plan.969
967Varity Corp. v. Howe, 516 U.S. 489, 19 EBC 2761 (1996). CompareFrahm v. Equitable Life Assurance Society, 137 F.3d 955, 21 EBC 2679 (7th Cir. 1998); Sprague v. Gen. Motors Corp., 133 F.3d 388, 21 EBC 2267 (6th Cir. 1998) (en banc).
968Mertens v. Hewitt Assocs., 508 U.S. 248 (1993). Cf., Harris Trust and Savings Bank v. Salomon Smith Barney Inc., 530 U.S. 238, 24 EBC 1654 (2000) (nonfiduciary party in interest to pension plan may be sued for equitable relief under ERISA §502(a)(3) for participating in ERISA prohibited transaction).
969ERISA §3(21)(A). See Drolet v. Healthsource, 968 F. Supp. 757, 20 EBC 2708 (D.N.H. 1997) (HMO and its parent corporation providing services to welfare plan are ERISA fiduciaries that may be enjoined from breaching their fiduciary duties because participant has sufficiently alleged that HMO has discretionary authority and control over plan, and because parent controls policies and practices of HMOs to extent that it also exercises control over plan's management); and Shea v. Esensten, 107 F.3d 625, 20 EBC 2561 (8th Cir. 1997) (ERISA §404(a) imposes fiduciary obligation on HMO to disclose all material facts to plan members affecting their health care interests, e.g., financial incentives that discourage treating doctor from providing essential health care referrals for conditions covered under plan benefit structure). But see Pegram v. Herdrich, 530 U.S. 211, 24 EBC 1641 (2000).
The general responsibility of each fiduciary prescribed by ERISA §404(a) is to discharge his or its duties with respect to the plan for the exclusive purpose of providing benefits to participants and their beneficiaries, with the care, skill, prudence, and diligence that a prudent man acting in a like capacity would use, and in accordance with the plan documents to the extent consistent with Title I.970 Abrogation of this duty can give rise to statutory liability for any resulting losses,971 despite any exculpatory language in the plan or trust agreement to the contrary.972
970See Wallace v. Reliance Standard Life Ins. Co., 318 F.3d 723, 29 EBC 2485 (7th Cir. 2003), cert. denied, 539 U.S. 943, 30 EBC 3048 (2003) (plan administrator of disability plan not required as fiduciary to obtain addional medical documentation to support participant's claim that he was disabled).
971ERISA §409(a).
972ERISA §410 voids any attempt to limit a fiduciary's statutory liability through exculpation, but permits insurance against such liability. For a discussion of ERISA's fiduciary duty rules, see 365 T.M., ERISA -- Fiduciary Responsibility and Prohibited Transactions.
While health maintenance organizations (HMOs) may be fiduciaries to the extent that they exercise discretionary authority to administer a plan, the decisions by HMO physicians that involve determining both a participant's eligibility for treatment and the appropriate treatment are not fiduciary acts under ERISA. In Pegram v. Herdrich,973 the U.S. Supreme Court reversed a Seventh Circuit decision that financial incentives given by HMOs to physicians to provide less medical care can result in a fiduciary breach. The Court noted two acts by HMO physicians: (1) "eligibility decisions" that turn on the plan's coverage of a particular condition or medical procedure for its treatment; and (2) "treatment decisions" that are choices about how to go about diagnosing and treating a patient's condition. These two acts are "inextricably mixed" in the decisions made by HMO physicians and such mixed eligibility decisions are not fiduciary decisions under ERISA, the U.S. Supreme Court determined. Otherwise, the Court reasoned, recovery under ERISA's fiduciary provisions would be warranted simply upon a showing that incentives to ration medical care generally would result in decisions in derogation of the fiduciary standard to act solely in the interest of the beneficiaries without the possibility of conflict.
973530 U.S. 211, 24 EBC 1641 (2000). See also Aetna Health Inc. v. Davila and CIGNA Healthcare of Texas v. Calad, 124 S. Ct. 2488, 32 EBC 2569 (2004) (Pegram applies only to treating physicians or their employers and not to HMOs' coverage decisions that are pure eligibility decisions).
2.	Prohibited Transactions
ERISA §406(a) prohibits a plan fiduciary from, among other things, causing a plan to engage in a sale, loan, or service transaction with a "party in interest." Persons connected with a plan, including employers and other fiduciaries, service providers, participants, and certain other officers, affiliates, and relatives, are considered parties in interest.974 ERISA  §406(b) prohibits self-dealing by fiduciaries with respect to plan assets, including acting on behalf of any party whose interests are adverse to those of the plan. A penalty equal to 5% of the amount involved may be imposed upon a party in interest who participates in a prohibited transaction, and the penalty becomes 100% of the amount involved if the transaction is not corrected within 90 days after notice from the Labor Department.975
974ERISA §3(14).
975ERISA §502(i).
ERISA §408(b) provides some narrowly circumscribed exemptions from the strictures contained in ERISA §406, and ERISA §408(a) empowers the DOL to grant additional exemptions. The approach adopted by the drafters of ERISA was to prohibit all types of transactions that have the potential for conflicts of interest, and leave creation of justifiable exceptions to the regulatory process.976
976For a discussion of the exemptions to the prohibited transaction rules, see 365 T.M., ERISA -- Fiduciary Responsibility and Prohibited Transactions.
3.	Fidelity Bonding
The fidelity bonding requirement in ERISA  §412 appears to be applicable to at least certain welfare benefit plans. Every person, other than a bank trustee, who "handles" plan assets must be bonded in the amount of 10% of the plan assets handled, subject to a minimum bond of $1,000 and a maximum of $500,000. The concept of handling includes any activity giving a person the ability to affect disposition of plan property.977
977DOL Regs. §2580.412-6. Deducted participant contributions do not constitute plan assets for bonding purposes until segregated from the employer's general assets. DOL Regs. §2580.412-5.
Example: If the plan is funded through a group insurance policy, and if the policy empowered the employer's officers to direct the time and manner of benefit payments, the employer and the officers might be considered to be handling plan funds.978
978DOL Regs. §2580.412-6(b)(7).
To allow for proper enforcement or recovery by those persons usually authorized to act for a plan in the case of a loss by reason of acts of fraud or dishonesty on the part of a plan administrator, officer, or employee of the employer, the plan must be the named insured with respect to the bond.979
979DOL Regs. §2580.412-18.
Comment: Plans ordinarily can be added as insureds to bonds already maintained by employers for other purposes, at little or no extra cost.
A single fidelity bond may insure more than one plan of an employer. However, the assets of all the plans covered by the bond must be aggregated to determine the minimum amount. In addition, a multiple plan bond must have specific provisions to insure that a plan that incurs a loss is not disadvantaged by a prior loss incurred by another plan.980
980DOL Regs. §2580.412-16.
D. Plan Requirements
1.	Documentation
The terms of every welfare benefit plan must be reduced to writing so that participants may readily discover their rights.981 In the case of a simple plan, the written plan might take the form of a resolution in the minutes of a board of directors meeting.
981ERISA §402(a)(1); H.R. Conf. Rep. No. 1280, 93d Cong., 2d Sess., 297 (1974), 1974-3 C.B. 458. See XIII, B, 3, above, for a discussion of document disclosure requirements.
As a result, a practice that varies from the written terms of the plan does not generally have the effect of changing the plan. For example, an employer's treatment of an ineligible individual as being eligible for coverage and paying part of his claims does not amend the plan's eligibility requirements.982
982Saret v. Triform Corp., 662 F. Supp. 312 (N.D. Ill. 1986). But see Golden v. Kelsey-Hayes Co., 954 F. Supp. 1173, 21 EBC 1025 (E.D. Mich. 1997) (retirees entitled to lifetime health care coverage under language in SPD, where plan is insurance supplement to collective bargaining agreement and not underlying insurance agreement between employer and insurance carrier, because there is no evidence that insurance supplement included valid reservation of rights language, because the court may rely on earlier appeals court ruling that language contained in SPDs govern over language in master plan, and because employer may agree to give up its general freedom to adopt, modify, or terminate welfare benefits).
Under ERISA §402(a), the written plan must identify a fiduciary responsible for operation and administration of the plan or specify a procedure for naming such a person. It must also indicate what part of the contributions are to come from the employer and what part from participants, the basis on which benefits are to be paid, how responsibilities are to be allocated among the respective fiduciaries, and how a funding policy is to be established and carried out.983 ERISA §402(c) identifies additional optional provisions that may be included.
983ERISA §402(b); H.R. Conf. Rep. No. 1280, 93d Cong., 2d Sess. 297 (1974), 1974-3 C.B. 458.
ERISA §402(b)(3) also requires a plan to provide how it is to be amended and by whom. Thus, a plan should provide explicitly for amendment of its terms. Identification of the employer as the person empowered to amend a plan is sufficiently precise to satisfy ERISA.984
984Curtiss-Wright Corp. v. Schoonejongen, 514 U.S. 73, 18 EBC 2841 (1995), on remand, 143 F.3d 120, 21 EBC 1073 (3d Cir. 1998).
Comment: Though it does not take an elaborate plan provision to satisfy ERISA §403(b)(3), it is critical that an amendment actually be adopted in accordance with whatever procedure the plan specifies. If the plan authorizes the employer to adopt amendments, such action must be taken by the employer's board of directors or other governing body, or by an officer who has authority under state corporate law to act for the corporation.
Absence of an amendment procedure does not necessarily mean that a plan cannot be amended.985 Moreover, failure to follow the procedure specified in the plan does not necessarily invalidate an amendment. However, if any plan participant could make a credible claim of having been prejudiced by failure to follow the amendment procedure, the amendment would be likely to be voidable at least as to that employee.986
985Biggers v. Wittek Industries, 4 F.3d 291, 17 EBC 1556 (4th Cir. 1993).
986Murphy v. Keystone Steel & Wire Co., 61 F.3d 560, 19 EBC 1388 (7th Cir. 1995).
Note: Termination of a plan has been held to constitute an amendment within the meaning of ERISA  §402(b)(3).987
987Ackerman v. Warnaco, Inc., 55 F.3d 117 (3d Cir. 1995).
2.	Trust Fund
Plan assets, if any exist, must be held in trust under ERISA §403, to be managed and invested for the benefit of participants and their beneficiaries. The trust requirement does not apply to insurance policies or plan assets held by an insurance company, however, so that not only unfunded but also insured plans may generally operate without creating any trust.988
988ERISA §403(b)(1) and (b)(2). For a noninsured funded plan, the question occasionally may arise whether only a security, or also the underlying assets represented by the security, constitute plan assets. DOL Regs. §2510.3-101 deals with this issue.
The DOL takes the position that participant contributions become plan assets at the earliest practical time after payroll deductions are made that they can be segregated from the employer's general assets and placed in trust.989 In any event, unless such contributions are remitted to an insurer or a trustee within 90 days of delivery of the paychecks from which they are deducted, the employer is considered to be holding plan assets. Consequently, noninsured contributory plans may have to be trusteed.
989DOL Regs. §2510.3-102(a) and (c).
Employee contributions to many plans are made on a pre-tax basis, pursuant to cafeteria plans under Code §125. Though employees' pre-tax premiums or contributions may be considered plan assets, the DOL has adopted a policy of nonenforcement of the ERISA trust requirement.990
990ERISA Tech. Rel. 92-01; DOL Notice, 56 Fed. Reg. 45359 (8/27/93).
Comment: The author understands that the DOL does not consider COBRA contributions alone to require a plan to be trusteed, even though they have to be made on an after-tax basis. However, if the noninsured plan covers retirees on a contributory basis, at least their contributions might have to be held in trust. The most onerous result of applicability of the trust requirement is likely to be that it triggers the independent audit requirement under ERISA §103(3) (see XIII, B, 1, above).
3.	Claims Procedure
ERISA §503 requires every plan to afford participants a procedure for adjudicating their benefit claims. A plan must provide written notice to participants of denial of claims for benefits and an opportunity for full and fair review of the denial. The Labor Department has implemented ERISA  §503 with the regulations specifying the characteristics of an acceptable claims procedure, including time limitations for rendering decisions initially and on review.991
991DOL Regs. §2560.503-1.
Note: Providing long-term care benefits will not cause a plan to be treated as a group health plan or a plan providing disability benefits.992
99265 Fed. Reg. at 70247 (11/21/00).
A plan does not necessarily meet the timing requirements for decisionmaking by meeting the applicable deadline. Delaying a decision until the end of the maximum period may not satisfy the reasonable period of time standard, or the as soon as possible standard for urgent care claims.993
993DOL Regs. §2560.503-1(f)(2)(i), (iii) and (3).
A grievance procedure in a collective bargaining agreement can constitute a claim procedure. If the grievance procedure specifies both how a benefit claim is filed and adjudicated, and how adverse determinations are arbitrated, it supplants the entire claim procedure. If it specifies only how adverse determinations are arbitrated, it supplants only the appeal phase of the claim procedure.994
994DOL Regs. §2560.503-1(b)(6).
Note: A grevance procedure cannot satisfy the claim and appeal procedure requirement in a multiemployes (Tax-Hartley) Plan.
a.	Disclosure Requirements
The claims procedures are not required to be established as part of the plan itself but must be included as part of a summary plan description (SPD).995 The claims procedures may not contain any provisions, or be administered in a way, that "unduly inhibits or hampers" claimants from initiating or processing claims.996 For example, requiring a fee or costs as a condition to making a claim or to appealing an adverse benefit determination would unduly inhibit claims for benefits, as would denying a claim for failure to obtain prior approval when following the prior approval process could seriously jeopardize the life or health of the claimant.
995DOL Regs. §2560.503-1(b)(2).
996DOL Regs. §2560.503-1(b)(3).
Plans must provide written or electronic responses to claims.997 The information in the notice of adverse determination includes the specific internal rule or protocol used to make the decision.998 If an adverse determination (at the initial level and on review) is based on medical necessity, experimental treatment, or other similar exclusion or limit, the notification must explain the scientific or clinical judgment of the plan, or offer to provide such a statement free of charge.999 Plans also may be required to disclose documents and other information pertaining to individual claims.1000
997DOL Regs. §2560.503-1(g)(1). InLacy v. Fulbright & Jaworski Limited Liability Partnership Long Term Disability Plan,  405 F.3d 254, 34 EBC 2002 (5th Cir. 2005), the court held that only "substantial" rather than "strict" compliance with ERISA's benefit denial notice requirements is all that is required. A plan participant filed an administrative appeal 20 months after receiving notice denying her claim for disability benefits, which the plan rejected as untimely. The participant sued claiming that the denial notice was insufficient because it was not in strict compliance with former DOL Regs. §2560.503-1(f) (now DOL Regs. §2560.503-1(g)(1)). The appeals court held that for purposes of triggering the appeal period under ERISA, an initial denial notice that is in substantial compliance with ERISA is sufficient even though it was "less than perfect." See also Burke v. Kodak Ret. Income Plan, 336 F.3d 103, 30 EBC 2345 (2d Cir. 2003), cert. denied, 540 U.S. 1105, 31 EBC 2759 (2004); White v. Aetna Life Ins. Co., 210 F.3d 412 (D.C. Cir. 2000); Counts v. Am. Gen. Life & Accident Ins. Co., 111 F.3d 105 (11th Cir. 1997); Kinkead v. Southwestern Bell Corp. Sickness & Accident Disability Benefit Plan, 111 F.3d 67 (8th Cir. 1997); Kent v. United of Omaha Life Ins. Co., 96 F.3d 803 (6th Cir. 1996); Sheppard & Enoch Pratt Hosp., Inc. v. Travelers Inc. Co., 32 F.3d 120, 18 EBC 2297 (4th Cir. 1994); Halpin v. W.W. Grainger, Inc., 962 F.2d 685, 15 EBC 1500 (7th Cir. 1992).
998DOL Regs. §2560.503-1(g)(1)(v)(A) and (j)(5)(i).
999DOL Regs. §2560.503-1(g)(1)(v)(B) and (j)(5)(ii).
1000DOL Regs. §2560.503-1(m)(8)(iii).
The claims procedure for group health and disability benefits must specify the steps that a participant or beneficiary should follow upon receipt of a denial of a claim for benefits. If the plan fails to follow the procedures, the claimant can assume that administrative remedies have been exhausted and can pursue the claim directly in court under ERISA §502(a).1001 The procedures must contain administrative processes and safeguards designed to ensure and to verify that claim determinations are made according to plan documents and that plan provisions are applied consistently to similarly situated claimants. However, inadvertent mistakes by plans in carrying out internal claims procedures are not justification for a claimant to go directly to court. Furthermore, claimants bear the burden of proving that the plan failed to establish or follow claims procedures consistent with these requirements.1002
1001DOL Regs. §2560.503-1(l).
1002See EBSA's "Frequently Asked Questions about the Benefit Claims Procedure Regulations," F-2.
A claims procedure is considered reasonable only if the following requirements are met: 
• Claimants are not required to file more than two appeals of an adverse benefit determination prior to bringing a civil action under ERISA §502(a).
• If a plan offers voluntary levels of appeal (except when required by state law), including voluntary arbitration or any other form of dispute resolution, the claims procedure provides that: (1) the plan waives any right to assert that a claimant failed to exhaust administrative remedies because the claimant did not use the voluntary appeal; (2) the plan agrees that any statute of limitations or other defense based on timeliness is tolled during the time that any voluntary appeal is pending; (3) a claimant may elect to submit a benefit dispute to a voluntary appeal only after exhaustion of appeals of an adverse benefit determination; (4) the plan provides, upon request, to the claimant sufficient information concerning the voluntary appeal to enable the claimant to make an informed judgment about whether to file a voluntary appeal; and (5) no fees are imposed on the claimant for the voluntary appeal.1003
1003DOL Regs. §2560.503-1(c)(2) and (3).
b.	Time Limits for Processing Claims
Separate time frames apply for responding to medical benefit and disability benefit claims.1004 These time frames are stated as outer limits, the general requirement being that claims be processed within a reasonable time.
1004DOL Regs. §2560.503-1(f)(2) and (3), respectively.
Note: In the case of "urgent claims" (see XIII, D, 3, b, (1), below), the plan's obligation is to act as soon as possible.
(1)	Medical Claims
The regulations distinguish between claims involving urgent medical care and all other group health care claims. Nonurgent care claims are further divided into "pre-service" claims and "post-service" claims. "Urgent care" is defined as medical care or treatment:

• with respect to which the application of the time periods for making nonurgent claims determinations could seriously jeopardize the life or heath of the claimant or the ability of the claimant to regain maximum function; or 
• involving a medical condition that would subject the claimant to severe pain in the opinion of a physician familiar with the claimant's medical condition that can be effectively managed only through the requested treatment.1005
1005DOL Regs. §2560.503-1(m)(1)(i).
A pre-service claim is any request for approval of a benefit for which the terms of the plan condition receipt of the benefit, in whole or in part, on approval in advance of obtaining medical care.1006 For example, a request for pre-approval under a utilization review program is a pre-service claim.1007 Post-service claims are all claims under a group health plan that are not pre-service claims.1008
1006DOL Regs. §2560.503-1(m)(2).
100765 Fed. Reg. at 70248 (11/21/00).
1008Id.
The regulation imposes time frames for plan decisionmaking. Not surprisingly, urgent care claims are subject to the shortest limits. Initial determinations must be communicated to the claimant within 72 hours of notification to the plan that urgent care is required.1009 The deadline for notification of the decision on appeal depends on whether the claim is for urgent care, a pre-service claim or a post-service claim. Final determinations on disputed claims for urgent care also must be made within 72 hours of notice to the plan that a participant challenges the initial claim denial.1010 Pre-service claims must be decided within no more than 15 days at the initial level, and 30 days on review of an adverse benefit determination.1011 Post-service claims are subject to a maximum time period of 30 days for the initial decision1012 and a maximum of 60 days on review.1013 A group health plan may extend decisionmaking on both pre- and post-service claims for 15 days if the plan administrator determines that an extension is necessary for reasons beyond the control of the plan.1014 No extensions of time are provided for claims involving urgent care.
1009DOL Regs. §2560.503-1(f)(2)(i).
1010DOL Regs. §2560.503-1(i)(2)(i).
1011DOL Regs. §2560.503-1(f)(2)(iii)(A).
1012DOL Regs. §2560.503-1(f)(2)(iii)(B).
1013DOL Regs. §2560.503-1(i)(2)(iii)(A).
1014DOL Regs. §2560.503-1(f)(2)(iii)(A) and (B).
If a group health plan has approved an ongoing course of treatment to be provided over a period of time, any urgent care claim that requests extension of a course of treatment beyond the initially prescribed period of time or number of treatments must be decided within an even shorter time frame. The decision must be communicated within 24 hours, provided that the claim is made at least 24 hours prior to the expiration of the initially prescribed period. The appeal process for such a claim is not similarly accelerated.1015 Any reduction or termination by the plan of an ongoing course of treatment (other than by plan amendment or termination) before the end of such period or number of treatments constitutes an adverse benefit determination. The plan administrator must notify the claimant of the adverse benefit determination sufficiently in advance of the reduction or termination to allow the claimant to appeal and obtain a determination on review of that adverse benefit determination before the benefit is reduced or terminated.1016
1015DOL Regs. §2560.503-1(f)(2)(ii)(B).
1016DOL Regs. §2560.503-1(f)(2)(ii)(A).
A plan may not ignore a pre-service claim on the ground that it fails to comply with the plan's claim procedures. A claimant or authorized representative must be notified within five days (24 hours for urgent care claims) of the claimant's failure to follow the plan's procedures for filing a pre-service claim and of the proper procedures to file a claim. Notification may be oral, unless written notification is requested by the claimant or representative. This requirement applies only to a communication by a claimant or representative that is received by a person or organizational unit customarily responsible for handling benefit matters, and the communication names a specific claimant, medical condition or symptom, and a specific treatment, service, or product for which approval is sought.1017
1017DOL Regs. §2560.503-1(c)(1)(i).
(2)	Disability Claims
Disability claims must be resolved, at the initial level, within 45 days of receipt. However, a plan providing disability benefits may extend the decisionmaking period a maximum of two times, each 30 days, when necessary for reasons beyond the control of the plan. Thus, a plan may take up to 105 days to resolve a disability claim at the initial claims stage. The plan must give notice to the claimant before expiration of the preceding period that details the reasons for the delay.1018
1018DOL Regs. §2560.503-1(f)(3).
As to appeals of adverse determinations of disability claims, a plan has no more than 45 days to complete its review.1019 Plans providing disability benefits may extend the decisionmaking time on review for an additional 45 days by giving notice as described above. Adverse benefit determinations include denials of eligibility to participate in the plan.1020
1019DOL Regs. §2560.503-1(i)(3)(i).
1020DOL Regs. §2560.503-1(m)(4).
The DOL takes the position that a disability benefit provided by a pension plan is subject to the disability benefit rules in the regulations.1021 A pension plan may avoid the more stringent procedures for disability benefits by providing that whether a participant is disabled is determined by a party other than the plan. For example, an independent determination could be made by the Social Security Administration or under the employer's long-term disability plan.1022
1021ESBA's "Frequently Asked Questions about the Benefit Claims Procedure Regulation," Q&A-9, at www.dol.gov/ebsa/FAQS/faq_claims_proc_reg.html. Whether a plan benefit is a disability benefit subject DOL Regs. §2560.503-1 depends on whether the claims adjudicator must make "a determination of disability" in order to decide a claim. For these purposes, "a determination of disability" involves a determination regarding an individual's ability to engage in gainful activity due to a physical or mental impairment. Because the decision on the claim for AD&D (accidental death or dismemberment) benefits does not relate to a claimant's ability to engage in gainful activity, AD&D benefits are not subject to the claim procedures for disability benefits. DOL Adv. Op. 2005-06A.
1022EBSA's "Frequently Asked Questions about the Benefit Claims Procedure Regulaions," Q&A-9.
A claim does not have to be complete in order to start the time periods for response by the plan. If the claim is made in accordance with reasonable plan procedures, it establishes the beginning of the period for determination of the claim even if additional information is needed. However, if additional information needed to process the claim is requested by the plan, the period for determining the claim is tolled until the information is provided.1023
1023DOL Regs. §2560.503-1(f)(4).
Disability plan claims have resulted in litigation relating to whether the beneficiary filed a claim for benefits or requested a review of a claim decision within the time limit specified in the plan and whether equitable tolling of that time period is appropriate, which may involve an evidentiary hearing to determine whether the beneficiary's condition affected his or her ability to satisfy the time limit. The Second Circuit declined to rule on whether equitable tolling applies to time limits specified in the plan's provisions.1023.1 Furthermore, according to the Second Circuit, even if equitable tolling were to apply to time limits that are specified in ERISA plan provisions, equitable tolling does not apply if the provision at issue affects the amount of benefits at issue, such as the retrospective period for which a beneficiary can claim benefits, but does not set forth a limitations period or other provision that procedurally bars the beneficiary's claim to benefits or to a review.1023.2
1023.1See Chapman v. Choicecare Long Island Term Disability Plan, 288 F.3d 506, 27 EBC 2505 (2d Cir.  2002); Ramos v. 1199 Health Care Employees Pension Fund, 35 EBC 1229 (2d Cir.  2005).
1023.2Ramos v. 1199 Health Care Employees Pension Fund, above (disability pension plan provision did not set forth statute of limitations but provided for payment commencement date of benefit as "the first day of the month in which the payment of the Participant's Social Security disability benefits commence(d), but no earlier than two (2) years prior to the date of the filing of the application for the Disability Pension Benefit with the Fund Office") and cases cited therein.
(3)	Appeal of Denied Claims
Group health plans and plans providing disability benefits must allow claimants at least 180 days following receipt of a notification of an adverse benefit determination within which to appeal the determination.1024 The appeal must be adjudicated by a designated plan fiduciary who is not the party who made the initial adverse benefit determination (or a subordinate of such a party). The review does not have to afford deference to the initial adverse benefit determination. When there is an adverse decision involving medical judgment, the designated named appeals fiduciary must consult with a health care professional who has experience in the field of medicine involved and who is independent of anyone who participated in the initial adverse decision.1025 The standards for "independence" of a health care professional consulted on a review require that the person must be different from, and not subordinate to, any individual who was consulted in connection with the initial decision.1026
1024DOL Regs. §2560.503-1(h)(3)(i). The doctrine of substantial compliance cannot be used to exclude a plan's failure to comply with ERISA's timing requirements under DOL Regs. §2560.503-1(i). For example, in Nichols v. Prudential Ins. Co. of America, 406 F.3d 98, 34 EBC 2185 (2d Cir. 2005), pursuant to former DOL Regs. §2560.503-1(h)(1)(i) (now DOL Regs. §2560.503-1(i)(1)(i)), a disability plan participant appealed a plan's termination of benefits, which requires that a benefits denial must be decided within 60 days (120 days if an extension applies) of a participant's appeal. The plan contacted the participant 67 days later informing her that it was reviewing the appeal and requested that she submit to an independent medical exam, which she refused to do. After 197 days after filing her appeal, the participant filed a lawsuit pursuant to former DOL Regs. §2560.503-1(h)(4) (now DOL Regs. §2560.503-1(l)). The lower court found that the plan was in substantial compliance with the regulation because while the plan did not comply with the letter of the regulation, it made good faith attempts to gather new evidence and resolve the appeal. The appeals court ruled that the doctrine of substantial compliance cannot be used to excuse a plan administrator's failure to comply with regulatory deadlines. Substantial compliance is a doctrine that forgives technical noncompliance for purposes of review of a plan administrator's discretionary decision. Here, application of the doctrine would delay accrual of a participant's right to sue and render the plain language of the regulations moot.
1025DOL Regs. §2560.503-1(h)(3) and (4). See Black and Decker Disability Plan v. Nord, 538 U.S. 822, 30 EBC 1577 (2003), cert. denied, 125 S. Ct. 62 (2004) (disability plan administrator is not required to accord special decerence to medical opinion of claimant's treating physician; so-called "treating physician" rule was developed by courts to control disability determinations under Social Security Act and not under ERISA plans); Smith v. Continental Casualty Co., 369 F.3d 412, 32 EBC 2695 (4th Cir. 2004) (what qualifies for disability for Social Security purposes does not necessarily qualify for disability for ERISA plan purposes). DOL Regs. §2560.503-1(m)(7) defines a health care professional as a physician or other health care professional who is licensed, accredited or certified to perform specified health services consistent with state law. In DOL Adv. Op. 2005-16A, the Labor Department advised (in response to a chiropractor's request) that the regulations do not require the consulting professional to be licensed, accredited or certified in the state where services were rendered or in the state where the claimant resides; rather, licensure, etc. in  any state is sufficient.
1026DOL Regs. §2560.503-1(h)(3)(ii) and (v).
Of particular note is the approach to arbitration. The regulation permits plans to require some forms of mandatory arbitration, provided certain conditions are met.1027 A plan may require arbitration as one, or both, of the permitted levels of review of a denied claim. However, arbitration cannot foreclose legal action by the claimant. Plans also may offer voluntary binding arbitration at no cost to the claimant.1028
1027DOL Regs. §2560.503-1(c)(4).
1028DOL Regs. §2560.503-1(b)(3).
(4)	State Law Claim Procedures
According to the DOL, the regulations do not supersede state law regulating insurance -- even when state law prescribes standards for claims processing and internal review of claims -- unless the state law prevents the application of a requirement of the regulation.1029 State insurance laws that establish review procedures to evaluate and resolve disputes involving adverse benefit determinations under group health plans are not preempted so long as the procedure is not conducted by the insurer, the plan, plan fiduciaries, the employer, or any employee or agent of any of the foregoing.
102965 Fed. Reg. at 70254 (11/21/00); DOL Regs. §2560.503-1(k).
Such state law procedures are not part of the claims procedures of ERISA §503. As a result, the DOL's position is that claimants cannot be required to submit their claims to such procedures in order to file suit under ERISA  §502(a). The DOL maintains that claimants are entitled to bring an action under ERISA  §502(a) after exhausting the plan's claims procedures, without regard to mandatory state law procedures.1030
103065 Fed. Reg. at 70254.
E. Preemption of State Law
1.	Scope
A significant change wrought by ERISA is prohibition of regulation by the states of employee benefit plans that are within the scope of the act. ERISA §514 invalidates state laws as they apply to such plans, with the exception of state laws governing insurance, banking, or securities, and criminal laws of general application.1030.1 In addition, the Hawaii Prepaid Health Care Act is partially exempt from preemption under ERISA §514(b)(5).
1030.1ERISA §514(b)(8) saves from preemption state laws authorizing Medicaid programs to obtain reimbursement from ERISA group health plans; thus, a plan that makes no provision for reimbursing a state Medicaid agency for items or services covered by the plan as required under ERISA §609(b)(3), would not be in compliance with ERISA. DOL Advisory Opinion 2005-05A.
Note: Certain domestic relations orders are also protected from preemption (see XIII, F, below).
In addition to prohibiting attempts by the states to determine the benefits provided by ERISA plans,1031 indirect regulation by way of taxes imposed on plan benefits,1032 and damages under state law theories1033 also are proscribed. ERISA does not, however, preempt malpractice claims against a managed care entity's treating physicians but does preempt such claims against HMOs.1034
1031Hewlett-Packard Co. v. Barnes, 571 F.2d 502, 1 EBC 1471 (9th Cir. 1978). Controversy exists as to the status of state age and sex discrimination laws under ERISA §514. See XIV, below, and 363 T.M., Age, Sex and Disability Discrimination in Employee Benefit Plans.
1032Note that if a state tax is imposed on a welfare benefit plan or its administrators or beneficiaries, it will likely be preempted by ERISA unless it is imposed on an insurance company on the basis of insurance premiums. Compare E-Systems, Inc., Group Hosp., Medical & Surgical Ins. Plan v. Pogue, 929 F.2d 1100, 13 EBC 2089 (5th Cir. 1991), and Nat'l Carriers' Conf. Comm. v. Heffernan, 454 F. Supp. 914, 1 EBC 1936 (D. Conn. 1978), with General Motors Corp. v. Cal. Bd. of Equalization, 815 F.2d 1305, 9 EBC 1159 (9th Cir. 1987), and General Motors Corp. v. Bennett, 485 U.S. 941, 9 EBC 1648 (1988). But see De Buono v. NYSA-ILA Medical and Clinical Services Fund, 520 U.S. 806, 21 EBC 1041 (1997).
1033Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 8 EBC 1409 (1987).
1034See Pegram v. Herdrich, 530 U.S. 211, 24 EBC 1641 (2000); Aetna Health Inc. v. Davila and CIGNA Healthcare of Texas Inc. v. Calad, 124 S. Ct. 2488, 32 EBC 2569 (2004); Dukes v. U.S. Healthcare, Inc., 57 F.3d 350, 19 EBC 1473 (3d Cir. 1995). See also Land v. CIGNA Healthcare of Fla., 381 F.3d 1274, 33 EBC 1783 (11th Cir. 2003) (in light of Davila, appeals court reversed itself and ruled that ERISA barred state law medical malpractice claim against HMO because claim was for denial of benefits under ERISA plan, thus, Pegram did not apply).
Note: While ERISA preemption is quite broad, state and federal courts have concurrent jurisdiction to determine whether a plan or fiduciary is subject to ERISA in the first place.1035
1035Int'l Ass'n of Entrepreneurs of America v. Angoff, No. 94-3810, 1995 U.S. App. LEXIS 16074 (8th Cir. 1995), citing MDPhysicians and Assocs. v. State Board of Insurance, 957 F.2d 178, 15 EBC 1007 (5th Cir. 1992) ("[w]e thus make no diversion to the path marked "possible ERISA preemption of state law" unless we first decide that [the plan in question] constitutes [a plan] within the meaning of ERISA"). For a thorough discussion of ERISA preemption, especially with regard to the "relate to" requirement of ERISA §514, see Miara v. First Allmerica Financial Life Ins. Co., 35 EBC 1337 (D. Mass.  2005) (ERISA does not preempt business owner's state law claims alleging insurer and insurance agents made misrepresentations in connection with establishment of defined benefit pension plan).
a.	State Health Care Reform
The failure of Congress to pass comprehensive health care reform legislation has added impetus to state health care reform legislation. The current breadth of ERISA preemption tends to thwart states' attempts to regulate employer-provided health care. Without the ability to do so, states must legislate cautiously in the area.
One solution that was considered was the grant of waivers to states attempting to pass their own health care reform laws. ERISA  §514(b)(5) provides a statutory waiver for the Hawaii Prepaid Health Care Act. The statutory waiver has certain limitations. For example, ERISA §514(b)(5)(B)(i) states that this exemption does not apply to any state tax law relating to employee benefit plans. Furthermore, ERISA §514(b)(5)(B)(iii) limits amendments to the Hawaii Prepaid Health Care Act that will be covered by the waiver to those amendments that provide for "effective administration of such Act." Other states also passed health care reform legislation, but were not able to convince Congress to grant them waivers.1036
1036See, e.g., Comments of Mrs. Murray, 140 Cong. Rec. S. 14220 (Oct. 5, 1994) (discussing Congress's objection to a bill that would have provided a waiver allowing the 1993 Washington Health Services Act to cover workers in self-insured companies) and  Pens. & Ben. Rep. (BNA), "Jeffords Asks GAO to Study Impact of ERISA Waivers on State Efforts" (1/13/95).
However, ERISA preemption does not apply to state laws that "affect employee benefit plans in too tenuous, remote, or peripheral a manner to warrant a finding that the law `relates to' a plan."1037 The U.S. Supreme Court in New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co.,1038 ruled that a New York State law imposing surcharges on hospital bills paid by third-party insurers to compensate hospitals for state-imposed rate limits and the cost of requiring indigent care is not preempted by ERISA. The statute exempted patients insured by a Blue Cross/Blue Shield plan, and also subjected certain HMOs to separate surcharges. Because the surcharge differentials made Blue Cross/Blue Shield coverage more attractive, the Court determined, they would have an indirect economic effect on choices made by insurance buyers, including ERISA plans. However, this indirect economic influence did not bind plan administrators to any particular choice or preclude uniform administrative practice or the provision of a uniform interstate benefit package, but merely affected benefit costs. Thus, the Court concluded, the surcharges did not bear the requisite connection with ERISA plans to trigger preemption. Likewise, assessments imposed by a state on health insurance companies under a health insurance risk sharing plan, to provide health coverage for those unable to obtain such coverage, are not preempted because they do not "relate to" an ERISA plan.1039
1037Shaw v. Delta Air Lines, 463 U.S. 85, 100, n.21, 4 EBC 1593 (1983).
1038514 U.S. 645, 19 EBC 1137 (1995), rev'g and rem'g Travelers Ins. Co. v. Cuomo, 14 F.3d 708, 17 EBC 1675 (2d Cir. 1994).
1039Safeco Life Ins. Co. v. Musser, 65 F.3d 647, 19 EBC 1828 (7th Cir. 1995).
The Supreme Court did not address the applicability of the New York surcharge to noninsured plans. Shortly after the Supreme Court released its decision, the Second Circuit Court of Appeals confirmed that the New York statute applied equally to noninsured and insured plans. The court found no proof that the surcharge system forced self-insured plans to buy insurance, that the surcharges directly depleted plan assets, or that the statute referred specifically to ERISA plans.1040
1040The Travelers Ins. Co. v. Pataki, 63 F.3d 89, 19 EBC 1702 (2d Cir. 1995). Seealso Connecticut Hospital Assoc. v. Weltman, 66 F.3d 413, 19 EBC 1928 (2d Cir. 1995) (ERISA does not preempt state statute that imposes surcharges on hospital bills ultimately paid by ERISA plans because employer did not show that act increased costs to ERISA plans, much less forced such plans to reduce their benefits).
The Supreme Court addressed another New York health care law in De Buono v. NYSA-ILA Medical and Clinical Services Fund.1041 The court held that ERISA does not preempt a tax on the gross receipts of health services provided by medical centers owned and operated by an employee welfare benefit plan, reasoning that the plan would have incurred the tax indirectly had it purchased services from an unrated provider.
1041520 U.S. 806, 21 EBC 1041 (1997).
Note: States are free to regulate welfare benefit plans that are outside the scope of ERISA, such as plans maintained solely for the purpose of complying with disability insurance laws.1042 However, a state may not require an employer to maintain medical benefit coverage while an employee is receiving workers' compensation benefits.1043
1042ERISA §4(b)(3); Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 4 EBC 1593 (1983), holding that this exception enabled New York to require an amendment to a disability benefit plan which was not subject to Title I.
1043District of Columbia v. Greater Washington Bd. of Trade, 506 U.S. 125, 16 EBC 1001 (1992).
b.	Insurance Exception
ERISA §514(b)(2)(A) is a "saving clause" that limits preemption by preserving state law that regulates insurance, banking, or securities. The "deemer clause" of ERISA §514(b)(2)(B) is an exception to the saving clause exception. State laws that purport to regulate insurance by "deeming" a plan to be an insurance company are outside the saving clause and are subject to preemption. The deemer clause exempts self-funded ERISA plans from state laws that regulate insurance within the meaning of the saving clause.1044 However, states may regulate insured plans indirectly by regulating insurers and their contracts.
1044FMC v. Holliday, 498 U.S. 52, 12 EBC 2689 (1990).
Note: State laws that fall within the saving clause nevertheless may be preempted if they conflict with a substantive provision of ERISA.1045
1045See Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 8 EBC 1409 (1987).
The scope of the saving clause has been litigated frequently. In Metropolitan Life Ins. Co. v. Mass.,1046 the U.S. Supreme Court used a preemption analysis that first asked whether, from a "common sense view of the matter," the contested law regulated insurance. Next, the court considered three factors to determine whether a particular practice constituted the "business of insurance" under the McCarran-Ferguson Act.1047 The three factors were whether the practice:
1046471 U.S. 724, 6 EBC 1545 (1985).
104715 USC §§1101 et seq.

• had the effect of transferring or spreading a policyholder's risk;
• was an integral part of the policy relationship between the insurer and the insured; and
• was limited to entities within the insurance industry.
The McCarran-Ferguson factors were considered "guideposts." A state law could fall within the saving clause even if it did not satisfy all three factors. Using these three factors, the court determined that a Massachusetts law that required minimum mental heath care benefits under a group insurance policy, although clearly related to a welfare benefit plan, in effect regulated the terms of an insurance contract and was exempt from preemption under the saving clause.
Following Metropolitan Life, the Seventh Circuit Court of Appeals upheld an Illinois law that required HMOs to provide independent reviews of challenged coverage decisions, because the law regulated insurance under a common sense view, and satisfied at least two of the McCarran-Ferguson factors.1048 The deemer clause did not apply because the ERISA plan involved was an insured plan, not a self-funded plan.
1048Moran v. Rush Prudential HMO, Inc., 230 F.3d 959 (7th Cir. 2000), aff'd, 536 U.S. 355, 27 EBC 2921 (2002).
In Unum Life Ins. Co. of Cal. v. Ward,1049 the U.S. Supreme Court held that California's notice-prejudice rule is not preempted by ERISA. The notice-prejudice rule requires insurance companies to show that they were prejudiced by a claimant's untimely submission of a claim before denying benefits because of the lateness of the claim. The court applied the three-factor test used in Metropolitan Life to find that the notice-prejudice rule specifically regulates insurance and, thus, falls within ERISA's savings clause.
1049526 U.S. 358, 22 EBC 2745 (1999).
The U.S. Supreme Court eventually concluded that its approach to the saving clause had been unsatisfactory, and announced a new standard.1050 State law is considered to regulate insurance under the saving clause if it satisfies two requirements. First, the state law must be specifically directed toward entities engaged in the business of insurance. Second, it must substantially affect the risk pooling arrangement between the insurer and the insured. The Court articulated the standard in upholding a state "any-willing-provider" law requiring an HMO to accept into its network any provider willing to satisfy the terms of the HMO's standard contract.
1050Kentucky Assoc. of Health Plans v. Miller, 538 U.S. 329, 30 EBC 1129 (2003).
Multiple employer welfare arrangements that are open to unrelated employers and are not collectively bargained are subject to state insurance laws, except to the extent the Secretary of Labor exempts them as employee welfare benefit plans.1051 State law applies, however, only to the extent not inconsistent with ERISA. See XV, below.
1051ERISA §§514(b)(6) and 3(40).
2.	Status of Business Owners
Benefit plans covering only partners are not ERISA plans, and plans covering only a sole owner and spouse, or spouses as co-owners, are not ERISA plans. Those owners are not considered to be "employees" for purposes of ERISA.1052 However, other types of ownership, such as solely by siblings or other family members, are not clear. Some courts that have considered whether majority or 50/50 owners of a corporation constitute employees have found that it was the intent of the regulations to exclude any controlling shareholder from the definition of employee.1053
1052DOL Regs. §2510.3(b) and (c).
1053SeeMadden v. Country Life Ins. Co., 835 F. Supp. 1081 (N.D. Ill. 1993); Kwatcher v. Mass. Service Employees Pension Fund, 879 F.2d 957, 11 EBC 1682 (1st Cir. 1989), abrogated by Raymond Yates, M.D., P.C. Profit Sharing Plan v. Herdon, 124 S. Ct. 1330, 32 EBC 1097 (2004).
The DOL, however, does not appear to share this expansive view of its regulation. The DOL has stated that a pension or profit-sharing plan covering only shareholders and their spouses would fall outside of ERISA's scope only if the corporation's stock was held by one shareholder (and, if applicable, spouse) and they were the only plan participants.1054 Several courts have adopted the same strict reading.1055 However, the U.S. Supreme Court has found that a plan covering owner-employees is an ERISA plan if it covers other nonowner employees as well.1056 Thus, a working business owner may qualify as a plan participant in an ownersponsored ERISA plan if the plan covers other employees besides the business owner and his or her spouse.
1054DOL Adv. Op. 76-67.
1055SeeLeckey v. Stefano, 263 F.3d 267, 26 EBC 1967 (3d Cir. 2001).
1056Raymond Yates, M.D. Profit Sharing Plan v. Hendon, 124 S. Ct. 1330, 32 EBC 1097 (2004).
Several courts have allowed lawsuits or declaratory judgment actions under ERISA to proceed holding that partners and shareholders of the employer (and their covered dependents) have standing as beneficiaries.1057
1057Harper v. American Chambers Life Ins. Co., 898 F.2d 1432, 12 EBC 1238 (9th Cir. 1990); Peterson v. American Life & Health Ins. Co., 48 F.3d 404, 19 EBC 1326 (9th Cir. 1995); Robinson v. Linomaz, 58 F.3d 365 (8th Cir. 1995); Prudential Ins. Co. of America v. Doe, 76 F.3d 206, 19 EBC 2660 (8th Cir. 1996).
For purposes of the group health care plan requirements enacted under HIPAA (see VIII, above), self-employed participants are covered by ERISA. ERISA §732(d) explicitly provides for treatment of covered partners and proprietors as participants.
For further discussion of ERISA preemption, see 374 T.M., Plan Disqualification and ERISA Litigation.
F. State Court Domestic Relations Orders
1.	Assignment of Benefits to Relative
ERISA preserves state law governance of family law matters by recognizing qualified domestic relations orders (QDROs). A QDRO is a state court order that awards benefits of plan participants to a spouse, former spouse or other family member. At the same time, it protects employer plans by establishing elaborate restrictions that QDROs must satisfy in order to be binding on a plan. These rules are set forth in ERISA  §206(d)(3) as an exception to ERISA's prohibition on alienation of pension benefits.
However, QDROs can apply to disability benefits as well. ERISA §514(b)(7) exempts QDROs from ERISA preemption. This provision has been interpreted by most courts to apply QDROs to welfare benefit plans as well as pension plans.1058
1058Metropolitan Life Ins. Co. v. Wheaton, 42 F.3d 1080, 18 EBC 2661 (7th Cir. 1994); Carland v. Metropolitan Life Ins. Co., 935 F.2d 1114 (10th Cir. 1991); Metropolitan Life Ins. Co. v. Woodham, 1995 U.S. Dist. Lexis 7620 (E.D. Mich. 1995). But see Equitable Life Assurance Society of the U.S. v. Crysler, 66 F.3d 944 (8th Cir. 1995), holding that state domestic relations orders should be recognized as a matter of federal common law, though the QDRO provision of ERISA does not apply to welfare benefits.
Note: While a QDRO could award all or a portion of a participant's disability benefit to a family member, it presumably could not award medical benefits, which are payable with respect to particular medical expenses incurred by the participant. By enacting the qualified medical child support order (QMSCO) provisions discussed below, Congress confirmed that medical benefits cannot be the subject of a QDRO.
Comment: Disability benefits awarded under a QDRO would, if taxable, remain taxable to the plan participant. While Code §402(e)(1) shifts the incidence of taxability of pension benefits awarded under a QDRO, there is apparently no Code provision that has that effect on disability benefits.
2.	Qualified Medical Child Support Orders
Congress expanded ERISA's zone of protection to children of a noncustodial parent who participates in an employer's health care plan by adding ERISA §609 to require group health plans to comply with qualified medical child support orders, or QMCSOs.1059 The same legislation added ERISA §514(b)(7) to exempt QMCSOs from ERISA's broad preemption scheme.
1059See DOL's web site at www.dol.gov/ebsa/publications/qmcso.html for a compliance guide for QMCSOs, which includes model notices. ERISA §609, added by P.L. 103-66, §4301(a). 
Subsequent legislation authorized issuance of QMCSOs by governmental agencies to obtain coverage for children by noncustodial parents. The process has been standardized by a mandate for a uniform National Medical Support Notice (NMSN) for use by governmental agencies.1060
1060P.L. 105-33, §§5611 through 5613; P.L. 105-200, §401(d) and (h).
a.	Characteristics
ERISA §609(a)(1) requires plans to provide benefits in accordance with the applicable requirements of any QMCSO. The QMCSO provisions were modeled in large part on the QDRO provisions of ERISA §206(d)(3). A QMCSO is defined as a medical child support order that creates or recognizes the existence of an alternate recipient's right to, or assigns to an alternate recipient the right to, receive benefits for which a participant or beneficiary is eligible under a group health plan.1061 A QMCSO may be issued wither by court or by a state child welfare agency. See XIII, F, 2, b, below.
1061ERISA  §609(a)(2)(A).
A medical child support order is qualified only if it provides the information a plan needs in order to implement the intent of the order. That information is:

(1) the name and last known mailing address (if any) of the participant and the name of each alternate recipient covered by the order;
(2) the mailing address of each alternate recipient or the name and mailing address of a government official;
(3) a reasonable description of the type of coverage to be provided by the plan to each such alternate recipient, or the manner in which such type of coverage is to be determined;
(4) the period to which such order applies; and
(5) each plan to which such order applies.1062 
1062ERISA §609(a)(3).
Furthermore, a QMCSO must not require a plan to provide any type or form of benefit, or any option, not otherwise provided under the plan, except to the extent necessary to meet the requirements of a law relating to medical child support described in §1908 of the Social Security Act1063 (see XIII, F, 2, b, below).
1063ERISA  §609(a)(4).
An alternate recipient can be any child of a participant who is recognized under a medical child support order as having a right to enrollment under a group health plan with respect to such participant.1064 The definition of child includes a child adopted by or placed for adoption with a plan participant.1065
1064ERISA  §609(a)(2)(C).
1065ERISA §609(a)(2)(D).
An individual who attains the status of "alternate recipient" is considered to be a beneficiary under the plan for purposes of ERISA, as well as a participant in the plan for purposes of its reporting and disclosure requirements1066 (see XIII, B, above).
1066ERISA  §609(a)(7).
b.	Required State Legislation
Nonjudicial medical child support order enforces a law relating to medical child support described in §1908 of the Social Security Act (SSA).1067 with respect to a group health plan. This section of the SSA requires states to enact laws that:
106742 USC §1396g-1.

(1) prohibit insurers (which include ERISA medical plans, as well as HMOs) from denying enrollment of a child under the health coverage of the child's parent on the ground that the child was born out of wedlock, was not claimed as a dependent on the parent's federal income tax return, or does not reside with the parent or in the insurer's service area;
(2) require insurers and employers to permit parents eligible for family health coverage and required by a court or administrative order to provide health coverage for a child (i) to enroll under such family coverage without regard to enrollment season restrictions or neglect to make application; and (ii) not to disenroll or eliminate coverage of any child unless the court or administrative order is no longer in effect, or the child is or will be provided with comparable health coverage, or (in the case of an employer) if the employer has eliminated family health coverage for all of its employees;
(3) require an employer to withhold (and pay over to the insurer) up to 100% of an employee's share (if any) of premiums for health coverage (within the limits prescribed by 15 USC §1673(b)) required by a court or administrative order;
(4) require an insurer to provide information to the custodial parent regarding benefit payments, as well as the submission of claims, for which payment may be made directly to the custodial parent without the approval of the noncustodial parent; and
(5) enable a state agency to garnish the wages and withhold state tax refunds for certain parents who fail to make required child medical care reimbursements with amounts received from a third party.
State agencies are required to use the National Medical Support Notice (NMSN) issued by the DOL as a nonjudicial QMCSO.1068
1068The notice is available on DOL's website at www.dol.gov/dol/ebsa/publications/qmcso.html.
An NMSN is deemed to provide a reasonable description of the type of coverage to be provided to the alternate recipient if it either identifies a specific type of coverage or applies to all available group health coverage. If an NMSN does not do either, the plan administrator is to assume that all available coverages are designated. The agency that issues the notice can select from multiple coverage options after the notice is qualified by the plan. If the agency fails to make a selection within 20 days, the plan is to enroll the child in the plan's default option.
c.	Notice Requirements
A plan administrator that receives a medical child support order is required to notify the participant and each alternate recipient promptly of the receipt of the order.1069 The plan notice also must include the procedures the plan is required to adopt for determining whether the medical child support order is a QMCSO. Such procedures must: (1) be in writing; (2) provide for the notification of each person specified in a medical child support order as eligible to receive benefits under the plan of such procedures promptly upon receipt by the plan of the order; and (3) permit an alternate recipient to designate a representative for receipt of copies of notices that are sent to the alternate recipient with respect to the order. The actual determination (and notification of such determination) as to whether a medical child support order is a QMCSO is to be made by the plan administrator within a reasonable time after the receipt of the order.
1069ERISA  §609(a)(5)(A).
If the QMCSO is a NMSN, the plan administrator has specified duties. It must notify the state welfare agency that issued the notice whether the coverage mandated is available under the terms of the plan. If so, the notice must indicate the effective date of the child's coverage or any steps that must be taken by the custodial parent or agency official to effectuate the coverage. Under ERISA  §609(a)(4)(C)(ii), notice must also be given to the custodial parent (or substituted agency official) of the coverage. In accordance with §1908 of the SSA, the NMSN includes a portion that is to be sent to the employer, in order to implement any payroll deductions necessary to pay for coverage under the QMCSO. The employer is to transfer a separate portion of the NMSN to the plan administrator for determination whether it meets the requirements for qualification.
d.	Impact on Plan
Presumably, payment of medical expenses may be made directly to the health care provider. However, payment of benefits under a medical child support order in reimbursement for expenses paid by an alternate recipient or an alternate recipient's custodial parent or legal guardian, must be made directly to the alternate recipient or the alternate recipient's custodial parent or legal guardian.1070 Noticeably absent from this list of reimbursable persons under these circumstances is the participant.
1070ERISA §609(a)(8).
G. Retiree Medical Benefits
There has been a wave of litigation involving the right of employers to eliminate or reduce retiree medical benefits. Several factors have contributed to this trend. First, the disproportionate escalation in health care costs has made these benefits too economically burdensome for many employers to subsidize completely. In addition, the number of individuals reaching or approaching retirement age is expanding and life expectancy is increasing.1071 Finally, financial accounting standards1072 have forced employers to confront retiree health benefit obligations sooner rather than later.
1071Life expectancy beyond age 65 is 14.4 years for males and 18.7 years for females, up from 11.9 and 13.2, respectively, since 1935. Steuerle, "The Retirement Age," 66 Tax Notes 259-60 (Jan. 9, 1995).
1072Employers must accrue postretirement nonpension benefit obligations on their financial statements. "Employers' Accounting for Postretirement Benefits Other than Pensions," Statement of Financial Accounting Standards No. 106 (Fin. Accounting Standards Bd. 1990).
1.	Analysis of Plan Documents
Unlike pension plans,1073 employee welfare plans are not subject to minimum vesting requirements. In the absence of federal legislation prohibiting employers from reducing medical benefits provided to their employees or former employees, cases involving retiree health benefits tend to turn on the interpretation of the applicable plan documents. The analysis is made with regard to the "federal common law of ERISA."1074
1073ERISA §203; Code §411.
1074Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 56 -57 (1987).
Some courts have at least considered evidence other than the plan documents, such as the conduct of the parties.1075 Other courts have disregarded evidence such as oral statements made on behalf of the employer.1076 The more ambiguous the plan documents, the more likely a court is to consider extrinsic evidence.
1075SeeTeamsters Industrial Employees Welfare Fund v. Rolls-Royce Motor Cars, Inc., 989 F.2d 132, 135 (3d Cir. 1993); Keffer v. H.K. Porter Company, Inc., 872 F.2d 60, 62 (4th Cir. 1989).
1076See In Re Unisys Corp. Retiree Medical Benefits ERISA Litigation, 58 F.3d 896, 19 EBC 1545 (3d. Cir. 1995); Moore v. Metropolitan Life Ins., 856 F.2d 488, 492 (2d Cir. 1988).
The determination as to what documents constitute "plan documents," for purposes of analyzing an employer's right to reduce or eliminate medical benefits, is left to the court. A distinction has become apparent between the analysis of plans that cover collectively bargained employees and plans that do not. Cases involving union-negotiated plans usually turn on the analysis of the governing collective bargaining agreement. Nonunion cases tend to involve an analysis of the summary plan description (SPD) (see XIII, B, 3, above).
2.	Collectively Bargained Plans
In the collective bargaining arena, the controversy normally is whether retiree health benefits are intended to survive the expiration of the collective bargaining agreement.1077 Thus, the collective bargaining agreement itself is the primary focus, and the interpretation of this contract is made pursuant to the federal common law of labor policy.1078 Extrinsic evidence is likely to be considered if the collective bargaining agreement is ambiguous.1079 Oral modifications to a collective bargaining agreement, however, cannot supersede contradictory terms of an ERISA plan document containing a reservation of rights clause that permits the employer to terminate or amend the welfare plan in question.1080
1077Keffer v. H.K. Porter Co., Inc., 872 F.2d 60 (4th Cir. 1989).
1078Id.; Bowen v. USPS, 459 U.S. 212, 220 (1983).
1079Armistead v. Vernitron Corp., 944 F.2d 1287, 1295, 14 EBC 1632 (6th Cir. 1991); Stewart v. KHD Deutz of America Corp., 980 F.2d 698, 702 (11th Cir. 1993). But see Bidlack v. Wheelabrator Corp., 993 F.2d 603, 608 (7th Cir. 1993) (extrinsic evidence permitted because collective bargaining agreement was vague on issue of duration of health benefits, but such evidence "should not be used to add terms to a contract that is plausibly complete without them").
1080United Paperworkers v. Jefferson Smurfit, Inc., 961 F.2d 1384, 15 EBC 1357 (8th Cir. 1992).
Courts may draw inferences of the parties' intentions with respect to continuing coverage by comparing the language employed in describing retiree medical benefits with other language in the collective bargaining agreement. For example, when collectively bargained employees were to receive group life insurance only "during the life of the agreement," but the retiree medical benefits under the same agreement were tied to Medicare eligibility, the employer was required to maintain the medical benefits beyond the expiration of the collective bargaining agreement.1081
1081Keffer v. H.K. Porter Co., Inc., 872 F.2d 60 (4th Cir. 1989); Int'l Union, United Auto., etc. v. Yard-Man, Inc., 716 F.2d 1476, 1481-2, 4 EBC 2108 (6th Cir. 1983) ("[T]he inclusion of specific durational limitations in other provisions of the current collective bargaining agreement suggests that retiree benefits, not so specifically limited, were intended to survive the expiration of successive agreements in the parties' contemplated long term relationship").
The Sixth Circuit is perhaps the most sympathetic to collective bargaining employees in the context of retiree health benefits. In International Union, United Auto., Etc. Workers v. Yard-Man, Inc.,1082 the Sixth Circuit referred to retiree benefits as "status" benefits, reasoning that a benefit that accrues upon the achievement of retiree status carries with it the inference that it was intended to last so long as the retiree remains a retiree. The court also justified its holding by pointing out that retiree benefits are a permissive, not mandatory, subject of bargaining, and, therefore, it would be unlikely that employees who bargained for this type of "delayed compensation" had left their realization to "the contingencies of future negotiations." This inference alone is not enough to enable challenging retirees to prevail.1083 Nonetheless, the Sixth Circuit has repeatedly used this "inference of vesting" analysis to support other post-Yard-Man rulings in favor of unionized retirees.1084
1082716 F.2d 1476, 4 EBC 2108 (6th Cir. 1983).
1083Id. The existence of durational limits in other parts of the collective bargaining agreement, discussed above, is one additional factor.
1084SeeSmith v. ABS Industries, Inc., 890 F.2d 841 (6th Cir. 1989); Armistead v. Vernitron Corp., 944 F.2d at 1300. Interestingly, the court in Armistead also upheld a cause of action for equitable estoppel against the employer, distinguishing welfare benefit plans, from which premium payments are typically made from the employer's general assets, from pension plans, where the rationale for denying equitable estoppel claims is stronger, as actuarial soundness in such plans would be jeopardized if the terms of a written plan could be modified orally. Black v. TIC Investment Corp., 900 F.2d 112 (7th Cir. 1990). Seealso United Rubber, Etc. Workers v. Pirelli Armstrong Tire Corp., 873 F. Supp. 1093 (M.D. Tenn. 1994).
3.	Noncollectively Bargained Plans
a.	Plan Documents
An unambiguous clause in the plan document that reserves the employer's right to modify or terminate a welfare benefit plan will normally be enforced by courts, and no extrinsic evidence will be allowed to show a contrary intent by the employer.1085 However, if a plan document also indicated that medical benefits will be provided until the participant dies, there may be enough of an ambiguity in the document to allow extrinsic evidence to prove that the employer intended to vest medical benefits upon retirement.1086
1085Gable v. Sweetheart Cup. Co., Inc., 35 F.3d 851, 857, 18 EBC 1897 (4th Cir. 1994).
1086Jensen v. Sipco, Inc., 38 F.3d 945, 952 n.19 (8th Cir. 1994), citing Aiken v. Policy Management Sys. Corp., 13 F.3d 138, 140-41 (4th Cir. 1993).
A reservation of rights clause that is "broad and unequivocal" will usually carry the day for employers. However, an employer whose conduct affirmatively misleads plan participants may be liable for breach of fiduciary duty under ERISA §502(a)(3)(B).1087
1087In re Unisys Corp. Retiree Medical Ben. ERISA Litigation, 58 F.3d 896, 19 EBC 1545 (3d Cir. 1995).
In Varity Corp. v. Howe,1088 for example, the U.S. Supreme Court found that Varity was acting in its fiduciary capacity (and breached such duty) when it promised employees who agreed to transfer employment to a newly-created subsidiary of Varity, that their benefits (including retiree medical coverage) would remain secure under the new subsidiary's plan. Varity could have simply terminated the retiree medical benefits, because it had reserved the right to do so in the appropriate plan documents. However, Varity was hoping to avoid the negative response that would have followed such an unpopular maneuver.
1088516 U.S. 489 (1996). The newly-created subsidiary was a grouping of all of the parent company's money-losing operations as well as certain debt. Varity was found by the district court to have misvalued the subsidiary's assets and liabilities in order to hide the fact that it had a negative net worth of over $40 million on the day it was formed. Varity is a significant case, not only because the U.S. Supreme Court endorsed the proposition that an employer can be liable as a fiduciary if it makes affirmatively misleading statements while in its capacity as fiduciary, but also because the Court determined that individuals, as opposed to the plan in question, may seek appropriate equitable relief under ERISA §502(a)(3).
In the nonunion setting, cases often involve interpretation of the SPD. Because the SPD is distributed to all participants, it normally is the document upon which they reasonably may rely to determine their rights. The SPD has been held to prevail if it conflicts with a provision in the plan document.1089
1089The SPD is considered part of the ERISA plan documents for this purpose. SeeJensen v. Sipco, Inc., 38 F.3d 945, 952 n.19, 18 EBC 2188 (8th Cir. 1994); Alday v. Container Corp. of America, 906 F.2d 660, 665, 12 EBC 2211 (11th Cir. 1990); Moore v. Metropolitan Life Ins. Co., 856 F.2d 488, 492, 9 EBC 2685 (2d Cir. 1988).
b.	Different Classes
Courts may be willing to make a distinction between different classes of retirees in determining whether retiree medical benefits have vested.1090 However, one appeals court has concluded that individual rather than class litigation is the best way to resolve person-specific contentions when the stakes are large enough to justify individual suits.1091
1090Jensen v. Sipco, Inc., 38 F.3d 945, 952 n.19 (8th Cir. 1994), citing Aiken v. Policy Management Sys. Corp., 13 F.3d 138, 140 -41 (4th Cir. 1993). See also Vallone v. CNA Financial Corp., 375 F.3d 623, 33 EBC 1001 (7th Cir. 2004), 33 EBC 1001 cert. denied, 125 S. Ct. 670, 33 EBC 3015 (2004) (lifetime health care benefits granted by early retirement package were not vested under ERISA; early retirement package was not separate and distinct from general retirement plan but was modification of general retirement plan, and, therefore, reservation of rights clauses in general retirement plan documents became part of early retirement package permitting employer to terminate lifetime health care benefits). But see Bland v. Fiatallis No. Am. Inc., 401 F.3d 779, 34 EBC 1875 (7th Cir. 2005) (retirees may be entitled to lifetime health benefits because health plan language was ambiguous and contained no reservation of rights clause).
1091Frahm v. Equitable Life Assurance Society, 137 F.3d 955, 21 EBC 2679 (7th Cir. 1998), citing Sprague v. Gen. Motors Corp., 133 F.3d 388, 21 EBC 2267 (6th Cir. 1998) (en banc), and In re Rhone-Poulenc Rorer, Inc., 51 F.3d 1293 (7th Cir. 1995).
XIV. Compliance with Other Laws
A. Age Discrimination
The federal Age Discrimination in Employment Act (ADEA)1092 generally prohibits discrimination in benefits of employment by reason of age with respect to an employee who is at least age 40. ADEA was strengthened in the area of medical and disability benefits by enactment of the Older Workers Benefit Protection Act (OWBPA).1093 OWBPA legislatively overturned the controversial U.S. Supreme Court ruling in Public Employees Retirement System of Ohio v. Betts1094 that ADEA's protections extended to benefit plans only to the extent they affect wages, hiring and dismissals.
1092P.L. 90-2021, as amended, 29 USC §§621-634. ADEA applies to private and state and local government employers engaged in an activity affecting commerce that have at least 20 employees on each working day during 20 weeks per year. 29 USC §630(b) and (h). ADEA is enforced by the Equal Employment Opportunity Commission (EEOC).
1093P.L. 101-433, as amended by P.L. 101-521.
1094492 U.S. 158 (1989).
ADEA recognizes that certain benefits are more expensive to provide to older employees. Thus, an accident or health plan may provide lesser benefits for older participants if the cost is equivalent for younger and older employees.1095 For purposes of comparing costs, age brackets of no greater than five years must be used.
1095EEOC Regs. §1625.10(d)(3).
Example: A plan may provide disability benefits lesser in amount or duration for participants who become disabled between the ages of 65 and 70 than for younger participants, provided the cost of those benefits is no less than the cost of benefits for participants who are between 60 and 65. Costs may be compared on a benefit-by-benefit basis, or by comparing costs for older and younger employees for the entire package of benefits provided by an employer.1096
1096EEOC Regs. §1625.10(d)(2).
Note: Health benefits are accorded special treatment. The benefit package approach may not be used to justify a reduction in health benefits greater than the reduction that can be justified on a benefit-by-benefit basis.1097
1097EEOC Regs. §1625.10(f)(2)(iii).
The Department of Labor (DOL) had worked out a specific age reduction formula for disability benefits. This formula permits cessation of disability benefits at age 65 if disability occurs before age 60, and requires benefits to continue for five years or less if disability occurs after 60.1098
1098EEOC Regs. §1625.10(f)(2)(ii).
OWBPA addressed specifically one area of uncertainty concerning long-term disability benefits. ADEA now permits offset of disability benefits by pension benefits (attributable to employer contributions), but only if the disabled individual voluntarily elects the pension benefits after the later of age 62 or normal retirement age.1099
109929 USC §623(l)(3).
OWBPA enacted numerous requirements for waivers of ADEA rights. It also shifted to the employer the burden of proof that a waiver is valid.1100
1100P.L. 101-433, §201. For further discussion, see 363 T.M., Age, Sex and Disability Discrimination in Employee Benefit Plans, and 398 T.M., Reductions in Force.
The Equal Employment Opportunity Commission (EEOC) regulations permit medical benefits to be offset by benefits available under the federal Medicare program.1101 However, the Medicare statute makes an employer plan the primary coverage for employees and their spouses. (See X, B, 1, above.)
110129 CFR §1625.10(e).
ADEA applies to retirees as well as active employees.1102 Consequently, it is unlawful to provide greater benefits for younger retirees than for older retirees. Retiree medical coverage could not be terminated, for example, at age 65 on the grounds that a retiree would then become eligible for Medicare.1103 As noted above, employer provided coverage could be reduced by the benefits available under Medicare Part A.
1102Erie County Retirees Ass'n v. County of Erie, 220 F.3d 193, 24 EBC 2390 (3d Cir. 2000), cert. denied, 532 U.S. 913, 25 EBC 2824 (2001), on remand, 140 F. Supp.2d 466 (W.D. Pa. 2001) (using Medicare eligibility as the central criterion for coverage under a retirees' health plan is age-based).
1103Id. In light of Erie, the EEOC proposed a rule that would allow an employer to reduce or end benefits when a retiree becomes eligible for Medicare or comparable state retiree health benefits without violating ADEA. EEOC Prop. Regs. §1625.32 (RIN 3046-AA72, 68 Fed. Reg. 41542 (7/14/03)). The proposed rule is not effective until published as final in the Federal Register. Although the EEOC approved the proposed rule as final Apr. 22, 2004, it has not yet been published in the Federal Register. See AARP v. EEOC, 34 EBC 2138 (E.D. Pa. 2005), in which the court ruled that EEOC Prop. Regs. §1625.32 violates the ADEA and, therefore, the EEOC is permanently enjoined from publishing the rule as final or implementing the rule.
For further discussion, see 363 T.M., Age, Sex and Disability Discrimination and Employee Benefit Plans.
B. Pregnancy Discrimination
In response to the U.S. Supreme Court's decision in General Electric Co. v. Gilbert1104 that exclusion of pregnancy-related disability from a disability benefit plan does not constitute discrimination by reason of sex, Congress enacted legislation dealing explicitly with the matter. The 1978 amendment to Title VII of the Civil Rights Act of 1964 made it clear that discrimination based on pregnancy constitutes unlawful sex discrimination.1105 Consequently, federal law requires that disability and medical expenses associated with pregnancy be treated the same as disability and medical expenses related to other medical conditions. In addition, a plan may not discriminate with respect to benefits on the basis of pregnancy even if part or all of the cost of coverage is paid by the participants.1106
1104429 U.S. 125 (1976).
1105 The Pregnancy Discrimination Act (PDA), as added by P.L. 95-555,  42 USC §2000e(k). Title VII of the Civil Rights Act applies to any private or governmental (other than federal) employer engaged in an activity affecting interstate commerce if it has at least 15 employees each day for 20 weeks per year. 42 USC §2000e(b) and (h).
1106EEOC, "Questions and Answers on the Pregnancy Discrimination Act," Q&A-23, 44 Fed. Reg. 23804 (4/20/79).
Note: Medical expenses for abortion are not required to be paid, unless medically necessary.1107 Medical complications from abortion are subject to the nondiscrimination rule.
110742 USC §2000e(k).
Most of the difficulties concerning pregnancy discrimination in accident and health plans involve discrepancies between female employees and the wives of male employees. It is unlawful to provide benefits for employees' wives but not to female employees,1108 and female employees cannot be required to purchase family coverage under a plan in order to obtain pregnancy benefits.1109 In Newport News Shipbuilding & Dry Dock Co. v. EEOC,1110 the U.S. Supreme Court determined that the PDA of 1978 requires employers to provide pregnancy-related benefits to spouses of its employees on the same basis as it provides other health benefits.
1108EEOC Regs. §1604.9(d).
1109EEOC, "Questions and Answers on the Pregnancy Discrimination Act," Q&A-24, 44 Fed. Reg. 23804.
1110462 U.S. 669, 4 EBC 1553 (1983).
For further discussion, see 363 T.M., Age, Sex and Disability Discrimination and Employee Benefit Plans.
C. Disability Discrimination
Because medical and disability benefits are so often provided through employment, the Americans with Disabilities Act (ADA)1111 has a widespread impact on these benefits. ADA generally prohibits discrimination on the basis of disability. Disability is defined broadly, to include not only "a physical or mental impairment that substantially limits one or more of the major life activities...," but also a record of such an impairment, or being regarded as having such an impairment.1112 The ADA encompasses both private employers and state and local governments, but excludes those that have fewer than 15 employees.1113
1111P.L. 101-336, as amended, 42 USC §§12101 et. seq.
111242 USC §12102.
111342 USC §12111(5). The EEOC enforces the ADA. 42 USC §12117.
The ADA excludes certain types of conditions from its protection. One is current use of illegal drugs.1114 Others are sexual behavior disorders and compulsive gambling.1115
111442 USC §12114.
111542 USC §12211.
The main impact of the ADA in the accident and health benefit arena is on exclusions from medical benefit coverage. In the view of the EEOC, exclusion of a particular type of disability from medical benefit coverage violates the ADA.1116 HIV/AIDS has been held to constitute a disability within the meaning of the ADA, and plans have generally abandoned exclusions or limitations on coverage of such treatment when challenged.1117
1116EEOC Interim Guidance on Application of Americans with Disabilities Act of 1990 to Employer-Provided Health Insurance, Part III, B (6/8/93) (hereinafter cited as "EEOC Interim Guidance"). See 363 T.M., Age, Sex and Disability Discrimination in Employee Benefit Plans.
1117Runnebaum v. NationsBank, N.A., 95 F.3d 1285, 20 EBC 1977 (4th Cir. 1996).
Note: Since 1996, federal law has prohibited discrimination by a group health plan by reason of health status. However, this prohibition does not prevent a plan from excluding coverage of particular medical conditions, so long as the exclusions are not aimed at specific employees. See VIII, E, above.
Other common coverage limitations have also been challenged under the ADA. For example, in Krauel v. Iowa Methodist Medical Center,1118 the court held that infertility is not a disability under the ADA. Although this holding has been superseded by Bragdon v. Abbott,1119 in which the U. S. Supreme Court held that inability to procreate is a disability protected under the ADA, the Krauel court raised the question of whether exclusions of certain types of disability violate the ADA at all. The ADA creates an exception for a bona fide benefit plan, provided it is not used as a subterfuge to evade the purposes of the ADA. The Supreme Court construed similar subterfuge language in the ADEA as prohibiting discriminatory plan provisions only if intended to have an effect on matters other than benefits, such as employment.1120 The Krauel court held that discrimination in plan provisions would be a subterfuge under the ADA only if intended to discriminate against disabled employees in some area extrinsic to the plan.
111895 F.3d 674, 20 EBC 1809 (8th Cir. 1996).
1119524 U.S. 624 (1998).
1120Public Employees Retirement System of Ohio v. Betts, 492 U.S. 158 (1989).
The EEOC, however, takes a different view of the bona fide benefit plan exception. Based on the legislative history,1121 the EEOC considers medical coverage limitations to constitute a disability-based subterfuge unless justified on the basis of actuarial cost calculations. A plan could do this by demonstrating that it could not accomplish the same financial result with a nondisability-based exclusion.1122
1121EEOC Interim Guidance, at III, B, at n.10.
1122Id. at III, C, 1, d.
Not every medical coverage exclusion that affects disabled plan participants is unlawful. Exclusions that apply to nondisabled as well as disabled participants are not considered to discriminate on the basis of disability.1123
1123Id. at III, B.
Example: The typical limitations on coverage for mental and nervous conditions would not be considered discriminatory. In contrast, a limitation on a specific disability, such as schizophrenia, would be unlawful.
The disability discrimination standards that apply to medical benefit coverage also apply to disability benefit coverage. However, participants who have qualified to receive disability benefits face an obstacle in asserting an ADA violation. The employment title of the ADA protects only disabled individuals who can still perform their jobs, at least with reasonable accommodation.1124
1124Parker v. Metropolitan Life Ins. Co., 121 F.3d 1006, 21 EBC 1369  (6th Cir. 1997) (en banc).
The scope of the ADA is a particularly important issue for individuals with mental disabilities. The Mental Health Parity Act1125 requires parity in the annual and lifetime limits of health insurance benefits but not disability benefits. See IX, B, above. The courts have held uniformly that the ADA was not intended to require equal benefits for mental and physical disabilities.1126
1125P.L. 104-204, §701 et seq.
1126See, e.g., Lewis v. Kmart Corp., 180 F.3d 166, 23 EBC 2982 (4th Cir. 1999) (noting that the plaintiff had not been denied benefits or excluded from participation in the long-term disability plan).
D. Family and Medical Leave Act
Under the Family and Medical Leave Act of 1993 (FMLA),1127 employers with 50 or more employees must make leave available to employees for up to 12 weeks in connection with the birth or adoption of a child, or to care for a close relative, or because of a serious health condition of the employee. During this leave, employers must maintain medical coverage in effect at the time leave was taken. The terms of the coverage must be the same as if no leave were taken.1128 For example, if a group health plan requires an employee contribution, the employee must pay the premium while on leave if he or she wishes to maintain coverage during leave.
1127P.L. 103-3, 29 USC §§2601 et seq. The FMLA is enforced by the Department of Labor (DOL).
112829 USC §2614(c).
Under the FMLA, the employer's obligation to maintain health benefits terminates when an employee informs the employer that he will not return from leave, or if the employee fails to return at the end of the leave period.1129 When the employee returns after leave, however, he must be entitled to be reinstated on the same terms as existed before taking the leave, without any qualifying period, physical examination, or exclusion of pre-existing conditions.
1129DOL Regs. §825.209(f).
Comment: As a result, an employer may have to continue the coverage regardless of the employee's election because its insurance company may not reinstate employees after they have terminated their coverage without imposing new conditions that would not satisfy FMLA.
Under DOL regulations, employers are required to give written notice that an absence will be considered FMLA leave1130 and if "the employer does not designate the leave as FMLA leave, the leave taken does not count against an employee's FMLA entitlement."1131
1130DOL Regs. §825.208.
1131DOL Regs. §825.700(a).
The U.S. Supreme Court struck down the DOL regulation providing that an employee's 12-week leave allotment under FMLA does not start to run until the employer notifies the employee that the time off will count as FMLA leave.1132 The Court found that the rule was incompatible with the FMLA's statutory liability and remedial provisions and exceeded the Secretary of Labor's authority to issue rules implementing the act. In this case, an employee took seven months of unpaid sick leave. The employer, however, did not inform the employee that this leave would count toward her FMLA leave. At the end of the seventh month, the employee requested additional leave and was terminated. The employee claimed that the seven months of leave should not count toward her 12-week FMLA allotment because the employer failed to notify her. The DOL rule was invalid because it, in effect, required the employer to provide more than 12-weeks of leave, in conflict with the act.
1132Ragsdale v. Wolverine World Wide, Inc., 535 U.S. 81, 27 EBC 1985 (2002), aff'g 218 F.3d 933, 24 EBC 2287 (8th Cir. 2000).
Comment: The Supreme Court noted that it did not decide whether the notice and designation requirements were valid or whether other means of enforcing them might be consistent with the act. Employers should still inform employees about their FMLA rights and tell them when their leave is being counted as FMLA allotment. This decision may result in added litigation and the overturning of other FMLA regulations.
E. Military Service
The Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA)1133 contains provisions protecting veterans' rights to retirement and other benefits that are not part of ERISA or the Code. These provisions apply to employees who perform duty on a voluntary or involuntary basis in a uniformed service, including active duty, active duty for training, initial active duty for training, inactive duty training, full-time National Guard duty, and absence from employment for an examination to determine fitness for such duty. The uniformed services include the Armed Forces, the Army National Guard and the Air National Guard when engaged in active duty for training, inactive duty training, or full-time National Guard duty, the commissioned corps of the Public Health Service, and any other category of persons designated by the president in time of war or emergency.1134
1133P.L. 103-353, 38 USC §4301 et seq. See generally DOL Prop. Regs. §1002.1 et. seq., implementing USERRA. RIN 1293-AA09, 69 Fed. Reg. 56266 (9/20/04), effective 30 days after publication of tiral rules in the Federal Register.
113438 USC §4303(13) and (16). See DOL Prop. Regs. §1002.6.
With respect to health insurance, USERRA provides that an exclusion or waiting period may not be imposed when a covered individual is re-employed, unless the condition was service-connected.1135 USERRA requires the health plan (if any) to offer continuous coverage for up to 18 months to persons who are absent due to military service.1136 The health plan may not require the person to pay more than the employee share for that coverage if the period of military service does not exceed 31 days. If the period extends beyond 31 days, the employee may be required to pay not more than 102% of the full premium under the plan.1137
113538 USC §4301(6)(1)(A) and (B). See DOL Prop. Regs. §1002.167.
1136See DOL Prop. Regs. §1002.164(a).
1137See DOL Prop. Regs. §1002.169.
In the case of a multiemployer plan, the plan may allocate the responsibility to pay for this coverage. If the plan does not, the last employer has the liability.1138
1138See DOL Prop. Regs. §1002.169.
Under USERRA, all persons (family members) who have coverage under the plan will not have an exclusion or waiting period upon re-employment.
F. Bankruptcy Code
The federal Bankruptcy Code generally prohibits a debtor in possession or a trustee from unilaterally modifying or terminating retirement benefits unless (1) the court orders modification or (2) the trustee and the authorized representative of the retired employees agree to the modification.1138.1 "Retiree benefits" refers to payments for the purpose of providing or reimbursing payments for retired employees and their spouses and  dependents for medical, surgical, or hospital care benefits, or benefits in the event of sickness, accident, disability, or death under any plan, fund or program (through the purchase of insurance or  otherwise) maintained or established in whole or in part by the debtor before filing a bankruptcy petition.1138.2 Before filing an application seeking court-imposed modification, the trustee must engage in good faith negotiations with the authorized representative of the trustee regarding the proposed modification and must provide the authorized representative with relevant information to allow for fair evaluation of the proposal. Only after these requirements have been met and such good-faith negotiations have occurred is the court empowered to grant the modification motion, if, among other things, modification is necessary to permit the reorganization of the debtor. A debtor in possession or the trustee must continue to pay retiree benefits unless the modification of the payments was ordered by the court or the trustee and the authorized representative of the retired employees has agreed to the modification.1138.3
1138.111 USC §1114.
1138.211 USC §1114(a).
1138.3See General DataComm Industries, Inc. v. Arcara, 34 EBC 2642 (3d Cir. 2005) (involuntary termination of employees on the verge of retirement does not deprive them of procedural protections of Bankruptcy Code §1114).
The  Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 adds a provision to Bankruptcy Code §1114 that requires retroactive reinstatement of any benefits modified by a debtor within the 180 days before the debtor filed for bankruptcy if the debtor was insolvent on the date of the modification, unless the bankruptcy court finds that the balance of the equities clearly favors such modification.1138.4  In this manner, pre-petition modifications to benefits of retired employees may be reversed if a bankruptcy filing is made within 180 days after such modification.
1138.4P.L. 109-8, §1403, enacting Bankruptcy Code §1114(l). Pursuant to Act §1406(b)(1), this provision is effective with respect to bankruptcy cases filed after Apr. 20, 2005.
G. State Laws
ERISA §514 generally preempts state laws governing age and sex discrimination with respect to sickness and disability benefits. State laws that provide additional enforcement mechanisms with respect to conduct that is unlawful under federal law are saved from preemption, however, by ERISA §514(d).1139
1139Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 4 EBC 1593 (1986).
For further discussion, see 363 T.M., Age, Sex and Disability Discrimination and Employee Benefit Plans.
XV. MEWAs
A. Purpose
Complicating ERISA's preemption scheme (see XIII, E, above) are special provisions in ERISA §514(b)(6) relating to multiple employer welfare arrangements, or MEWAs. ERISA §3(40) defines a MEWA as an employee welfare benefit plan, or any other arrangement, that offers or provides any benefit described in ERISA  §3(1) to the employees of two or more employers (including one or more self-employed individuals), or their beneficiaries.1140 However, a plan or other arrangement is not a MEWA if it is established or maintained: (1) under or pursuant to one or more agreements that the Secretary of Labor finds to be collective bargaining agreements; (2) by a rural electric cooperative; or (3) by a rural telephone cooperative association.
1140See EBSA Information Letter to Nicholas W. Ferrigno, Jr. (5/24/04) (status as an affiliated service group under Code §141(m) does not, in and of itself, mean that a group of two or more businesses are a single employer for purposes of ERISA §3(40)).
The MEWA provisions were intended to assist states in shutting down fraudulent benefit coverage arrangements. ERISA  §514(b)(6) makes it clear that promoters of such schemes cannot rely on ERISA preemption to avoid state regulation of insurance. However, the MEWA exemption from ERISA preemption has turned out to have little practical application, because few nonbargaining MEWAs constitute plans within the meaning of ERISA.
For further discussions of MEWAs, see 395 T.M., VEBAs and Other Self-Insured Arrangements.
B. Effect on State Regulation
1.	Application of State Law
In contrast to the expansive nature of ERISA's preemption blanket that covers single-employer welfare plans, Congress permitted states to regulate certain aspects of MEWAs. As a result, the degree of actual MEWA regulation varies from state to state.
The extent to which ERISA permits states to regulate MEWAs depends in part upon whether the MEWA is fully insured. Under ERISA §514(b)(6)(D), a MEWA is considered fully insured only if the Secretary of Labor determines that all of its benefits are guaranteed under a contract or policy of insurance issued by an insurance company, "insurance service, or insurance organization," qualified to conduct business in a state.
Note: Transfer of a noninsured MEWA's liability to one or more reinsurers may not be enough to make it fully insured.1141
1141See DOL Adv. Op. 94-07A. In this opinion, the MEWA trust (which was found not to be subject to ERISA) entered into a reinsurance agreement whereby the reinsurer agreed to pay 90% of the trust's benefit plan liabilities, up to a per claim limit of $10 million, with certain exclusions that apply, for example, if the MEWA trust is unable to collect from another reinsurer. The agreement also provided that the reinsurer would be responsible for the 10% portion of the liabilities retained by the trust under certain circumstances. Under a proposed amendment to the trust, if the reinsurer pays 100% of the liabilities, and the MEWA trust still is unable to fund the full amount of benefits, the reinsurer will pay the remaining claims directly to the plan participants. However, no contractual relationship between the plan participants and the reinsurer would exist. It is this lack of contractual relationship, in part, that caused the DOL to conclude that the arrangement was not fully insured, because there was a serious question as to whether a plan participant would be able to enforce the provisions of the amendment against the reinsurer. Additionally, the conditions upon which the reinsurer would be liable for the MEWA trust's 10% share of the liabilities was cause for concern.
If a MEWA is fully insured, a state may apply its insurance laws to the MEWA, but only to the extent of requiring the maintenance of specified levels of reserves and specified levels of contributions and provisions to enforce them. These requirements must be calculated to enable the MEWA to pay benefits in full when due under ERISA  §514(b)(6)(A)(i).
Note: The same rule applies to MEWAs that are not fully insured to the extent permitted by future regulations issued under ERISA §514(b)(6)(B).
The scope of state regulation of MEWAs that are not fully insured is somewhat different. Such a MEWA may be subjected to all state insurance laws, to the extent not inconsistent with ERISA.1142 Because such state insurance laws include a requirement to obtain a state license or a certificate of authority to engage in business, including related enforcement mechanisms, state law enforcement mechanism is not necessarily preempted merely because it is different from ERISA's enforcement regime.1142.1
1142ERISA §514(b)(6)(A)(ii). See Atlantic Healthcare Benefits Trust v. Googins, 2 F.3d 1 (2d Cir. 1993).
1142.1See DOL Adv. Op. 90-18A, advising that a state law regulating insurance would be inconsistent with ERISA to the extent that compliance with the state law would (1) abolish or abridge an affirmative protection or safeguard otherwise available to plan participants and beneficiaries under Title I of ERISA or (2) conflict with any provision of Title I of ERISA. According to DOL Adv. Op. 90-18A, a state insurance law will not be deemed inconsistent with the provisions of Title I if the law: (1) requires ERISA-covered plans constituting MEWAs to meet more stringent standards of conduct, provide more or greater protection to plan participants and beneficiaries than required by ERISA, meet standards requiring the maintenance of specified levels of reserves and specified levels of contributions, or obtain a license or certificate of authority as a condition precedent or otherwise to transacting insurance business; or (2) if the law subjects persons who fail to comply with such requirements to taxation, fines or other civil penalties, including injunctive relief. See also DOL Adv. Op. 2005-18A, in which the DOL concluded that the application of a premium tax and high-risk pool assessment provisions to self-funded MEWAs under the Washington State Insurance Code are not preempted by ERISA.
2.	Collective Bargaining Exemption
Unlike fully insured plans, which are, within limits, subject to state insurance laws, welfare plans that the Secretary of Labor finds to be established or maintained pursuant to one or more collective bargaining agreements avoid state regulation. ERISA §3(40)(A)(i) excludes such plans from the MEWA definition. A plan must satisfy the following criteria in order to qualify for the exemption:

• the plan must meet the requirements of the ERISA §3(40) definition of a MEWA;
• at least 80% of the participants in the plan must have a nexus to the bargaining relationships under which the plan is established or maintained; and 
• the collective bargaining agreement itself must be the product of a bona fide collective bargaining relationship and must: (i) identify the employers and employee organizations bound by it and the personnel, job classifications, and/or work jurisdiction covered by it; (ii) provide terms and conditions of employment in addition to the plan; and (iii) must not be unilaterally terminable or automatically terminated solely for nonpayment of benefits or contributions to the plan.1143
1143DOL Regs. §2510.3-40(b).
The rules are intended to be flexible. In addition to the above criteria, the DOL would consider a list of factors to determine if the parties have a bona fide collective bargaining relationship, such as whether the agreement provides for contributions to a Taft-Hartley trust fund. The rules establish a presumption that if at least four out of eight factors listed are met, a bona fide collective bargaining relationship exists. The presumption is intended to shift the burden to the party claiming that an arrangement is not the result of a bona fide collective bargaining relationship.1144
1144DOL Regs. §2510.3-40(b)(4).
Even though a welfare benefit plan meets the above criteria, a plan is not considered established or maintained under a collective bargaining agreement if it is a self-funded or partially self-funded plan that is marketed to employers or sole proprietors by an insurance producer or an individual who is paid on a commission-type basis. In addition, a plan is not considered established or maintained under a collective bargaining agreement if a principal intent of the agreement under which the plan is established is to evade compliance with state insurance laws and regulations or if fraud, forgery, or willful misrepresentation is used to demonstrate that the rules' criteria are satisfied.1145
1145DOL Regs. §2510.3-40(c).
A second set of rules sets forth procedures for administrative hearings concerning individualized determinations under ERISA  §3(40). An adjudicatory proceeding before an administrative law judge (ALJ) may be started only when the jurisdiction or law of a state has been asserted against a plan or other arrangement that contends it meets the exception for plans established or maintained pursuant to collective bargaining. Only an entity against whom the jurisdiction or law of a state has been asserted may initiate adjudicatory proceedings before an ALJ.1146 The petitioner has the ultimate burden of establishing each of the elements relating to whether the entity qualifies as an employee welfare benefit plan that satisfies the collective bargaining exception.1147
1146DOL Regs. §2570.151.
1147DOL Regs. §2570.157.
3.	Definition of ERISA Plan
The limits on state regulation in ERISA  §514(b)(6) only apply to MEWAs that constitute employee welfare benefit plans under  §3(1) of ERISA. States are free to regulate MEWAs that do not constitute ERISA plans in any way they choose.
In practice, few MEWAs have turned out to be ERISA plans. Plans sponsored by the California Building Contractors Trade Association,1148 the American Institute of Certified Public Accountants1149 and the National Appliance and Radio-TV Dealers Association1150 were held to be ERISA plans. None of the courts addressing those trade association medical benefit arrangements provided much analysis of the ERISA coverage issue, presumably because they were addressing the scope of state insurance law regulation, and did not perceive ERISA preemption to have much significance for that issue.
1148Kanne v. Conn. General Life Ins. Co., 867 F.2d 489, 10 EBC 1947 (9th Cir. 1988).
1149Fisher v. Prudential Ins. Co. of America, 842 F. Supp. 397, 17 EBC 2618 (N.D. Cal. 1993).
1150NARDA, Inc. v. Rhode Island Hospital Trust Nat'l Bank, 744 F. Supp. 685, 12 EBC 2551 (D. Md. 1990).
Note: The ERISA plan status of a MEWA determines whether ERISA reporting and disclosure obligations (see XIII, B, above) apply at the trade association level or at the individual participating employer level.
In contrast, numerous courts have held that arrangements maintained by entrepreneurs are not ERISA plans because they are not established or maintained by an employer. For example, Atlantic Health Care Benefits Trust v. Constance B. Foster1151 includes an analysis of the ERISA coverage issue as well as a good survey of the prior case law.
1151809 F. Supp. 365, 16 EBC 1503 (M.D. Pa. 1992).
The DOL has published an analysis of MEWAs that addresses ERISA plan status under ERISA §3(5).1152 This publication emphasizes certain factors that the DOL considers relevant. The most important factor appears to be the degree of control of the group or association by its employer members.
1152DOL's "Multiple Employee Welfare Arrangements under ERISA: A Guide to Federal and State Regulations," page 11 (revised Feb. 2003); http://www.dol.gov/ebsa/publications/mewas.html.
In addition, employer-members of the group or association that participate in the benefit program must, either directly or indirectly, exercise control over that program, both in form and in substance, in order to act as a bona fide employer group or association with respect to the benefit program. It should be noted that whether employer-members of a particular group or association exercise control in form and substance over a benefit program is an inherently factual issue on which the DOL generally will not rule.
Comment: The Atlantic Health Care Benefits Trust opinion subscribes to the DOL's view of the importance of employer control. Many of the other court cases emphasize the affinity of the participating employers in areas other than employee benefits. That emphasis on affinity appears to serve as an indicator to the courts as to whether the medical benefits program is being controlled by the employers or simply offered by a third party. However, it is clear that the DOL does not regard such an arrangement as an ERISA plan simply because it is organized by and for a trade group.
C. Special Reporting Requirement
Administrators of MEWAs are required to file a two-page Form M-1 (Annual Report for Multiple Employer Welfare Arrangements and Certain Entities Claiming Exception) to determine the extent of their compliance with ERISA Part 7.1153 Failure to file Form M-1 can result in civil penalties of up to $1,100 per day under ERISA §502(c)(5).1154 Any interested party can initiate proceedings in an administrative hearing to contest a noncompliance penalty.1155 For more information on MEWA filing requirements, see 361 T.M., Reporting and Disclosure Under ERISA.
1153DOL Regs. §2520.101-2.
1154DOL Regs. §§2560.502c-5 and 2575.502c-5.
1155DOL Regs. §2570.90-101.

WORKING PAPERS
Table of Worksheets
Worksheet 1		Model Medical Expense Reimbursement Plan.
Worksheet 2		Multiple Employer Welfare Arrangements Under ERISA: A Guide to Federal and State Regulation.
Worksheet 3		Model Notice of COBRA Continuation Rights.
Worksheet 4		Model COBRA Continuation Coverage Election Notice.
Worksheet 5		Kerby and Bilezerian, "Health Savings Account: A New Option for Consumer-Directed Health Plans," 32 Tax Mgmt. Compensation Plan. J. 53 (2/6/04).
Worksheet 6		Cowart and Cowart, "Choosing a New Health Plan Design? Differences Among HRAs, HSAs and FSAs Beyond the Basics and After the First Waves of Guidance," 32 Tax Mgmt. Compensation Plan. J. 187 (6/4/04).
Worksheet 7		Model Health Savings Account.
Worksheet 8		Model Health Reimbursement Account.

Worksheet 1
Model Medical Expense Reimbursement Plan
ARTICLE I -- PURPOSE

1.01 The purpose of this Plan is to help provide medical care for each participating employee and his or her spouse and eligible dependents. It is the intention of the XYZ Company, Inc. (the "Company") that this Plan qualify as an accident and health plan within the meaning of §105 of the Internal Revenue Code of 1986, as amended ("the Code"), and that the benefits payable under the Plan be eligible for exclusion from gross income under that section.
ARTICLE II -- PERMANENT PROGRAM OR ARRANGEMENT

2.01 The Company intends that this program be a permanent program or arrangement for the exclusive benefit of its employees and their families. Nothing herein, however, shall prevent the Company from amending or terminating this Plan, provided such amendment or termination shall not affect a claimant's rights to benefits hereunder with respect to reimbursable expenses that have been incurred prior to the date Company action is taken to terminate the Plan or the effective date of such termination, whichever occurs later.

2.02 The exclusive purpose of this Plan is to provide the medical benefits described herein for covered employees and their family members. No benefits payable under this Plan shall be applied for any other purpose.
ARTICLE III -- EFFECTIVE DATE

3.01 The effective date of this Plan shall be January 1, 20__. The records of the Plan shall be kept on a calendar year basis. The Plan Year shall be the calendar year.
ARTICLE IV -- ELIGIBILITY

4.01 All full-time employees of the Company shall be eligible to participate in this Plan except:

(a) members of a bargaining unit covered by a collective bargaining agreement, provided the Company has bargained in good faith on the subject of accident and health benefits; and

(b) nonresident aliens who receive no U.S.-source income from the Company for the Plan Year.

Full-time employees are those who customarily work both at least ______ hours per week and at least _____ months per year.

4.02 The Participant's spouse and dependents shall be eligible to participate in this Plan. Dependents are those who qualify as dependents under §152 of the Code.

4.03 A Participant's domestic partner shall be eligible to participate in this Plan. A domestic partner is an individual with respect to whom the Participant provides a certificate of domestic partnership in the form prescribed by the Plan Administrator.
ARTICLE V -- PARTICIPATION

5.01 Each employee who is eligible to participate in the Plan under Article IV (an "Eligible Employee") shall become a participant in the Plan (a "Participant") on the effective date of the Plan if on the effective date he or she is at least ____ years old and has completed at least ____ years of continuous employment with the Company. Each other Eligible Employee shall become a Participant on the first day of the month immediately following the month in which he or she has both attained age ____ and completed at least ____ years of continuous employment with the Company. Upon termination of a Participant's employment with the Company, all rights of such Participant (and/or an eligible dependent of the Participant) to receive benefits for claims incurred after the termination date shall be forfeited. Such Participant (and eligible dependent) shall, however, retain the right to be reimbursed hereunder for claims incurred prior to the termination of employment. For this purpose, a claim will be considered to be incurred when the services relating to such claim have been rendered.

5.02 The Plan shall provide benefits in accordance with the applicable requirements of any qualified medical child support order ("QMCSO") as defined in §609 of the Employee Retirement Security Act of 1974 ("ERISA") relating to a child of a Participant. Benefits payable under Article VI pursuant to a QMCSO shall be paid to the child's custodial parent or legal guardian, or a government agency, as directed by the QMCSO.
ARTICLE VI -- BENEFITS

6.01 The Company shall pay to each Participant such amounts as he or she has expended while a Participant for medical care for himself or herself and his or her spouse and dependents, subject to the limits described in Article 7, below.

6.02 For purposes of this Plan the following terms shall have the definitions set forth below:

(a) "Amounts expended for medical care" means amounts paid for:

(1) hospitalization, medical and dental services, prescription drugs and medical supplies that are eligible for tax-free reimbursement and corrective lenses and eyeglass frames; and

(2) transportation primarily for, and essential to, medical care.

(b) Dependent means a dependent as defined in §152 of the Code, or a child placed with the Participant for adoption.
ARTICLE VII -- LIMITATION ON BENEFITS PROVIDED

7. 01 No Participant shall be entitled to receive more than $________ in reimbursements under this Plan for any calendar year. For this purpose, amounts received that are attributable to reimbursements due the Participant's spouse or dependents shall be considered to have been received by the Participant.
ARTICLE VIII -- BENEFITS FROM ANOTHER SOURCE

8.01 Reimbursement under this Plan shall be made only in the event, and to the extent, that reimbursement for amounts expended, or payment, for medical care is not provided for under any insurance policy or under any other plan of the Company or another employer or under any federal or state law. If there is such a policy, plan or law in effect providing for such reimbursement or payment in whole or in part, then, to the extent of the coverage under such policy, plan or law, the Company shall be relieved of any and all liability hereunder.
ARTICLE IX -- CONTINUATION OF COVERAGE

9.01 An individual whose coverage is terminated because of any qualifying event enumerated below has the right to continue coverage under this Plan if covered for such benefits on the day immediately preceding the qualifying event. A child of the Participant who is born or placed for adoption during continuation of coverage also  is eligible. An individual who elects to continue coverage must pay the full cost of the coverage. The time period for which the continuation is available is indicated below in conjunction with the corresponding qualifying event.

If continuation of coverage is elected, coverage will continue as though termination of employment or loss of eligible status had not occurred. Any benefits paid prior to termination or loss of eligibility, which had been credited toward the maximum benefit of this Plan, will be retained. If any changes are made to the coverage for employees in active service, the coverage provided to individuals under this continuation provision will be changed similarly.

Qualifying Events. Continuation is available for up to eighteen (18) months to eligible individuals in the case of either of the following qualifying events.

• Termination of employment with the Company, for any reason except gross misconduct

• Reduced work hours

Continuation is available for up to twenty-nine (29) months to all covered family members in the event of the following qualifying event:

• Disability, per a determination under the Social Security Act, on or within 60 days after the Participant's termination of employment or reduction in work hours.

The disabled individual must provide the Plan Administrator with notice of the disability within sixty (60) days of the determination of the disability by Social Security and before the end of the original eighteen (18) month COBRA coverage period. The disabled individual must also notify the Company of a determination by Social Security that the individual is no longer disabled, within thirty (30) days of such determination.

Continuation is available for up to thirty-six (36) months to a covered dependent spouse and/or child in the event of any one of the following qualifying events.

• A Participant's death

• Divorce or legal separation from a Participant

• Loss of eligibility to participate due to age, marriage or a change in student status

• Loss of eligibility to participate due to the Participant becoming covered by Medicare as a result of total disability or choosing Medicare in place of this Plan at age sixty-five (65).

Individuals may experience multiple qualifying events, but in no case (except bankruptcy) will coverage be continued for more than thirty-six (36) months. If an employee becomes covered by Medicare, but no loss of coverage results for the employee or the covered dependents, and a subsequent qualifying event occurs, the duration of coverage for all qualified beneficiaries other than the covered employee must be at least thirty-six (36) months from the date on which the employee became covered by Medicare.

Election of Coverage. An individual has sixty (60) days from the qualifying event, or if later sixty (60) days from the date the Plan Administrator mails or otherwise provides the individual with a notification of rights with respect to the qualifying event, to elect coverage.

Each covered person is required to notify the Plan Administrator within sixty (60) days of any qualifying event of which it would not otherwise be aware, such as divorce, legal separation, or loss of dependent status by a dependent child. The covered person is also required to provide the Plan Administrator with all information needed to meet its obligation of providing notice and continuing coverage.

Cost of Continuation Coverage. The cost of continuation coverage for each individual is an amount equal to 102% of the Plan's average cost of benefits per covered person for the preceding year. However, a disabled individual must pay 150% of the Plan's cost after 18 months of continuation coverage.

Payment of the initial monthly contribution is not required until the forty-fifth (45th) day after the election. All subsequent payments for coverage are subject to a thirty (30) day grace period.

Termination of Continuation of Coverage. Continuation coverage is not available after whichever of the following dates is first to occur.

• The date the maximum continuation period expires for the corresponding qualifying event

• The date this Plan is terminated

• The date the individual fails to make the required contribution to continue coverage

• The date the individual becomes covered under any other group health plan without being subject to any exclusions or limitations with respect to a pre-existing condition

• The date the individual becomes covered by Medicare

• With respect to coverage in excess of 18 months by reason of disability, the end of the first month that begins after a final determination under the Social Security Act that the disabled individual is no longer disabled.

9.02 If a Participant takes a leave of absence under the federal Family and Medical Leave Act of 1993 ("FMLA"), benefits shall continue to be paid under Article VI as if the Participant remained in active employment. The Participant shall be considered to have terminated employment with the Company on the earliest to occur of: (1) the date the Participant notifies the Company of his intent not to return to employment; (2) the date the Participant fails to return to employment at the end of the leave of absence; or (3) the effective date of termination of the Plan. If a Participant who is a "key employee" as defined under the FMLA is notified by the Company that substantial or grievous economic injury will result from restoration of his employment, the key employee's entitlement to benefits under the Plan continues until the earliest of: (1) the date the key employee notifies the Company that he does not desire restoration of employment at the end of his leave of absence; (2) the date his leave entitlement is exhausted; or (3) the date restoration of employment is denied by the Company.
ARTICLE X -- CLAIMS AND CLAIMS REVIEW PROCEDURE

10.01 Claims for benefits under this Plan shall be made on forms maintained by the Company. To obtain reimbursement for medical expenses hereunder, a Participant must submit within 30 days after the end of each calendar quarter a request for reimbursement for medical expenses incurred by him or her during the preceding quarter, together with such evidence of payment of such expenses as shall be required by the Company in accordance with rules uniformly applied.

10.02 If any claim for benefits under this Plan is denied in whole or in part, the Plan Administrator shall furnish the claimant promptly with a written notice:

(a) setting forth the reason for the denial;

(b) citing the Plan provisions upon which such denial is based;

(c) describing any additional material or information from the claimant which is necessary in order for the claimant to perfect his or her claim and why; and

(d) explaining the claim review procedure set forth herein.

10.03 Failure by the Company to respond to a claim within 90 days shall be deemed a denial. Within 60 days after denial of any claim for benefits under this Plan, the claimant may request in writing a review of the denial by the Plan Administrator.

10.04 Any claimant seeking review hereunder is entitled to examine all pertinent documents, and to submit issues and comments in writing. The Plan Administrator shall render a decision on review of a claim not later than 60 days after receipt of a request for review hereunder. The decision of the Plan Administrator on review shall be in writing and shall state the reason for the decision, referring to the Plan provisions upon which it is based.

10.05 At the time an individual's coverage under the Plan terminates, the Company shall furnish a certificate of creditable coverage under the Plan in accordance with §9801 of the Code. In addition, the Company shall furnish a certificate of creditable coverage upon request of an individual made not later than 24 months after cessation of coverage under the Plan, and shall furnish to another group health plan upon request information on coverage of classes and categories of health benefits under the Plan.
ARTICLE XI -- ADMINISTRATION

11.01 The Plan Administrator of the Company shall have authority and responsibility to control and manage the operation and administration of this Plan. The Plan Administrator shall have discretion to interpret the terms of the Plan, and such interpretation shall be binding on all parties, subject to Article X. 
ARTICLE XII -- MISCELLANEOUS

12.01 All terms expressed herein shall be deemed to include the feminine and neuter genders and all references to the plural shall be deemed to include the singular and vice versa, all as proper construction shall dictate.

12.02 To the extent not preempted by ERISA, questions concerning the proper interpretation of the terms of this agreement shall be determined in accordance with the law of the State of _________, where the Company's principal business office is located.

12.03 The Plan Administrator shall keep a copy of this plan document and any other disclosure documents relating thereto (including, but not limited to, summary plan descriptions) that are in the public domain on file at his office where Participants may inspect them during the Company's regular business hours. Upon request, the Company shall provide a Participant or covered dependent with copies of such documents. When the Plan Administrator provides such documents, the Plan Administrator may charge the requesting party a reasonable charge for photocopying these materials.

12.04 This document contains all of the operative provisions of this Plan. Any conflict between the provisions of this document and any other Company document purporting to explain the rights, benefits, or obligations of the parties hereunder shall be resolved in favor of this Plan document. In the event that a tribunal of competent jurisdiction shall determine in a final judgment or decree that one or more of the provisions of this Plan is invalid due to the provisions of applicable law, this Plan shall be interpreted as if the offending language had been stricken from its provisions and the remainder of the Plan document shall continue in full force and effect.

In adoption of this Plan document, the responsible officer(s) of the corporation have set forth their signatures below, this ____ day of ___________, 20__.
Worksheet 2
Multiple Employer Welfare Arrangements Under ERISA: A Guide to Federal
 and State Regulation
Regulation of Multiple Employer Welfare Arrangements under ERISA

The U.S. Department of Labor, through the Employee Benefits Security Administration (EBSA), is responsible for the administration and enforcement of the provisions of Title I of ERISA (29 U.S.C. §1001 et seq.). In general, ERISA prescribes minimum participation, vesting and funding standards for privatesector pension benefit plans and reporting and disclosure, claims procedure, bonding and other requirements which apply to both private-sector pension plans and private-sector welfare benefit plans. ERISA also prescribes standards of fiduciary conduct which apply to persons responsible for the administration and management of the assets of employee benefit plans subject to ERISA.

ERISA covers only those plans, funds, or arrangements that constitute an "employee welfare benefit plan," as defined in ERISA Section 3(1), or an "employee pension benefit plan," as defined in ERISA Section 3(2). By definition, MEWAs do not provide pension benefits; therefore, only those MEWAs that constitute "employee welfare benefit plans" are subject to ERISA's provisions governing employee benefit plans.

Prior to 1983, if a MEWA was determined to be an ERISA-covered plan, State regulation of the arrangement would have been precluded by ERISA's preemption provisions. On the other hand, if the MEWA was not an ERISA-covered plan, which was generally the case, ERISA's preemption provisions did not apply and States were free to regulate the entity in accordance with applicable State law. As a result of the 1983 MEWA amendments to ERISA, discussed in detail later in this booklet, States are now free to regulate MEWAs whether or not the MEWA may also be an ERISA-covered employee welfare benefit plan.

Under current law, a MEWA that constitutes an ERISA-covered plan is required to comply with the provisions of Title I of ERISA applicable to employee welfare benefit plans, in addition to any State insurance laws that may be applicable to the MEWA. If a MEWA is determined not to be an ERISA-covered plan, the persons who operate or manage the MEWA may nonetheless be subject to ERISA's fiduciary responsibility provisions if such persons are responsible for, or exercise control over, the assets of ERISA-covered plans. In both situations, the Department of Labor would have concurrent jurisdiction with the State(s) over the MEWA.

The following discussion provides a general overview of the factors considered by the Department of Labor in determining whether an arrangement is an "employee welfare benefit plan" covered by ERISA, the requirements applicable to welfare plans under Title I of ERISA, and the regulation of persons who administer and operate MEWAs as fiduciaries to ERISA-covered welfare plans.
 What is an "employee welfare benefit plan"? 

The term "employee welfare benefit plan" (or welfare plan) is defined in Section 3(1) of ERISA, 29 U.S.C. §1002(1), as follows: 

any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services, or (B) any benefit described in section 302(c) of the Labor Management Relations Act, 1947 (other than pensions on retirement or death, and insurance to provide such pensions).

(Emphasis supplied.)

A determination as to whether a particular arrangement meets the statutory definition of "welfare plan," typically involves a two-step analysis. The first part of the analysis involves a determination as to whether the benefit being provided is a benefit described in Section 3(1). The second part of the analysis involves a determination as to whether the benefit arrangement is established or maintained by an "employer" or an "employee organization." Each of these steps is discussed below.
 Is there a plan, fund or program providing a benefit described in Section 3(1)?

A plan, fund or program will be considered an ERISA-covered welfare plan only to the extent it provides one or more of the benefits described in Section 3(1).

As reflected in the definition of "welfare plan," the benefits included as welfare plan benefits are broadly described and wide ranging in nature. By regulation, the Department of Labor has provided additional clarifications as to what are and are not benefits described in Section 3(1) (See: 29 CFR §2510.3-1). In most instances, however, it will be fairly clear from the facts whether a benefit described in Section 3(1) is being provided to participants.

For example, the provision of virtually any type of health, medical, sickness, or disability benefit will be the provision of a benefit described in Section 3(1). Where there is an employer or employee organization providing one or more of the described benefits, the Department has generally held that there is a "plan," regardless of whether the program of benefits is written or informal, funded (i.e., with benefits provided through a trust or insurance) or unfunded (i.e., with benefits provided from the general assets of the employer or employee organization), offered on a routine or ad hoc basis, or is limited to a single employee-participant.

If it is determined that a Section 3(1) benefit is being provided, a determination then must be made as to whether the benefit is being provided by a plan "established or maintained by an employer or by an employee organization, or by both." Under Section 3(1), a plan, even though it provides a benefit described in Section 3(1), will not be deemed to be an ERISA-covered employee welfare benefit plan unless it is established or maintained by an employer (as defined in ERISA Section 3(5)), or by an employee organization (as defined in ERISA Section 3(4)), or by both an employer and employee organization.

For example, MEWAs provide benefits described in Section 3(1) (e.g., medical and hospital benefits), but MEWAs generally are not established or maintained by either an employer or employee organization and, for that reason, do not constitute ERISA-covered plans.
 What is an "employer"?

The term "employer" is defined in Section 3(5) of ERISA, 29 U.S.C. §1002(5), to mean: 

any person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan; and includes a group or association of employers acting for an employer in such capacity.

Under the definition of "employer," an employee welfare benefit plan might be established by a single employer or by a group or association of employers acting on behalf of its employer-members with respect to the plan. "Employer" status is rarely an issue where only a single employer is involved in the provision of welfare benefits to employees. However, questions frequently are raised as to whether a particular group or association constitutes an "employer" for purposes of Section 3(5).

In order for a group or association to constitute an "employer" within the meaning of Section 3(5), there must be a bona fide group or association of employers acting in the interest of its employer-members to provide benefits for their employees. In this regard, the Department has expressed the view that where several unrelated employers merely execute identically worded trust agreements or similar documents as a means to fund or provide benefits, in the absence of any genuine organizational relationship between the employers, no employer group or association exists for purposes of Section 3(5). Similarly, where membership in a group or association is open to anyone engaged in a particular trade or profession regardless of their status as employers (i.e., the group or association members include persons who are not employers) or where control of the group or association is not vested solely in employer members, the group or association is not a bona fide group or association of employers for purposes of Section 3(5).

The following factors are considered in determining whether a bona fide group or association of employers exists for purposes of ERISA: how members are solicited; who is entitled to participate and who actually participates in the association; the process by which the association was formed; the purposes for which it was formed and what, if any, were the pre-existing relationships of its members; the powers, rights and privileges of employer-members; and who actually controls and directs the activities and operations of the benefit program. In addition, employer-members of the group or association that participate in the benefit program must, either directly or indirectly, exercise control over that program, both in form and in substance, in order to act as a bona fide employer group or association with respect to the benefit program. It should be noted that whether employer-members of a particular group or association exercise control in substance over a benefit program is an inherently factual issue on which the Department generally will not rule.

Where no bona fide group or association of employers exists, the benefit program sponsored by the group or association would not itself constitute an ERISA-covered welfare plan; however, the Department would view each of the employer-members that utilizes the group or association benefit program to provide welfare benefits to its employees as having established separate, single-employer welfare benefit plans subject to ERISA. In effect, the arrangement sponsored by the group or association would, under such circumstances, be viewed merely as a vehicle for funding the provision of benefits (like an insurance company) to a number of individual ERISA-covered plans.

If a benefit program is not maintained by an employer, the program may nonetheless be an ERISA-covered plan if it is maintained by an "employee organization."
 What is an "employee organization"?

The term "employee organization" is defined in Section 3(4) of ERISA, 29 U.S.C. §1002(4). There are two types of organizations included within the definition of "employee organization." The first part of the definition includes: 

any labor union or any organization of any kind, or any agency or employee representation committee, association, group or plan, in which employees participate and which exists for the purpose, in whole or in part, of dealing with employers concerning an employee benefit plan, or other matters incidental to employment relationships; ...

This part of the definition is generally limited to labor unions. In order for an organization to satisfy this part of the definition of "employee organization," employees must participate in the organization (i.e., as voting members) and the organization must exist, at least in part, for the purpose of dealing with employers concerning matters relating to employment.

The second part of the definition of "employee organization" includes:

... any employees' beneficiary association organized for the purpose in whole or in part, of establishing such a plan.

While the term "employees' beneficiary association" is not defined in Title I of ERISA, the Department of Labor applies the same criteria it utilized in construing that term under the Welfare and Pension Plans Disclosure Act, which preceded ERISA's enactment. Applying those criteria, an organization or association would, for purposes of ERISA Section 3(4), be an "employees' beneficiary association" only if: (1) membership in the association is conditioned on employment status (i.e., members must have a commonality of interest with respect to their employment relationships); (2) the association has a formal organization, with officers, by-laws, or other indications of formality; (3) the association generally does not deal with an employer (as distinguished from organizations described in the first part of the definition of "employee organization"); and (4) the association is organized for the purpose, in whole or in part, of establishing an employee benefit plan.

It should be noted that the term "employees' beneficiary association" used in Section 3(4) of ERISA is not synonymous with the term "voluntary employees' beneficiary association" used in Section 501(c)(9) of the Internal Revenue Code (the Code). Code Section 501(c)(9) provides a tax exemption for a "voluntary employees' beneficiary association" providing life, sickness, accident, or other benefits to its members or their dependents or beneficiaries. While many trusts established under ERISA-covered welfare plans obtain an exemption from Federal taxation by satisfying the requirements applicable to voluntary employees' beneficiary associations, satisfying such requirements under the Internal Revenue Code is not in and of itself indicative of whether the entity is an "employees' beneficiary association" for purposes of ERISA Section 3(4).
 What types of plans are excluded from coverage under Title I of ERISA?

There are certain arrangements that appear to meet the definition of an "employee welfare benefit plan" but which nonetheless are not subject to the provisions of Title I of ERISA.

Section 4(b) of ERISA, 29 U.S.C. §1003(b), specifically excludes from Title I coverage the following plans: (1) governmental plans (as defined in Section 3(32)); (2) church plans (as defined in Section 3(33)); (3) plans maintained solely to comply with workers' compensation, unemployment compensation, or disability insurance laws; and (4) certain plans maintained outside the United States.

In addition, the Department of Labor has issued regulations, 29 CFR §2510.3-1, which clarify the definition of "employee welfare benefit plan." Among other things, these regulations serve to distinguish certain "payroll practices" from what might otherwise appear to be ERISA-covered welfare plans (e.g., payments of normal compensation to employees out of the employer's general assets during periods of sickness or vacation).
 What requirements apply to an employee welfare benefit plan under Title I of ERISA?

In general, an employee welfare benefit plan covered by ERISA is subject to the reporting and disclosure requirements of Part 1 of Title I; the fiduciary responsibility provisions of Part 4 of Title I; the administration and enforcement provisions of Part 5 of Title I; the continuation coverage provisions of Part 6 of Title I of ERISA and the health care provisions of Part 7 of ERISA. It is important to note that, unlike ERISA-covered pension plans, welfare plans are not subject to the participation, vesting, or funding standards of Parts 2 and 3 of Title I of ERISA. It also is important to note that merely undertaking to comply with the provisions of ERISA, such as with the reporting and disclosure requirements, does not make an arrangement an ERISA-covered plan.

The following is a general overview of the various requirements applicable to welfare plans subject to ERISA.

Under Part 1 of Title I, 29 U.S.C. §§1021 - 1031, the administrator of an employee benefit plan is required to furnish participants and beneficiaries with a summary plan description (SPD), which describes, in understandable terms, their rights, benefits, and responsibilities under the plan. If there are material changes to the plan or changes in the information required to be contained in the summary plan description, summaries of these changes are also required to be furnished to participants.

The plan administrator also is required, under Part 1, to file with the Department an annual report (the Form 5500 Series) each year which contains financial and other information concerning the operation of the plan. The Form 5500 Series is a joint Department of Labor - Internal Revenue Service - Pension Benefit Guaranty Corporation annual report form series. The forms are filed with the Department of Labor, which processes the forms and furnishes the data to the Internal Revenue Service. Pursuant to regulations issued by the Department, welfare plans with fewer than 100 participants that are fully insured or unfunded (i.e., benefits are paid from the general assets of the employer) are not required to file annual reports with the Department of Labor. If a plan administrator is required to file an annual report, the administrator also generally is required to furnish participants and beneficiaries with a summary of the information contained in that annual report, i.e., a summary annual report.

The Department of Labor's regulations governing the application, content, and timing of the various reporting and disclosure requirements are set forth at 29 CFR §2520.101-1, et seq.

Part 4 of Title I, 29 U.S.C. §1101 - 1114, sets forth standards and rules governing the conduct of plan fiduciaries. In general, any person who exercises discretionary authority or control respecting the management of a plan or respecting management or disposition of the assets of a plan is a "fiduciary" for purposes of Title I of ERISA. Under ERISA, fiduciaries are required, among other things, to discharge their duties "solely in the interest of plan participants and beneficiaries and for the exclusive purpose of providing benefits and defraying reasonable expenses of administering the plan." In discharging their duties, fiduciaries must act prudently and in accordance with documents governing the plan, insofar as such documents are consistent with ERISA. (See: ERISA Section 404.) Part 4 also describes certain transactions involving a plan and certain parties, such as the plan fiduciaries, which, as a result of the inherent conflicts of interest present, are specifically prohibited (See: ERISA Section 406). In certain instances there may be a statutory exemption or an administrative exemption, granted by the Department, which permits the parties to engage in what would otherwise be a prohibited transaction, if the conditions specified in the exemption are satisfied (See: ERISA Section 408).

Part 5 of Title I, 29 U.S.C. §§1131 - 1145, contains the administration and enforcement provisions of ERISA. Among other things, these provisions describe the remedies available to participants and beneficiaries, as well as the Department, for violations of the provisions of ERISA (See: ERISA Sections 501 and 502). With regard to benefit claims, Part 5, at Section 503, requires that each employee benefit plan maintain procedures for the filing of benefit claims and for the appeal of claims that are denied in whole or in part (See also: 29 CFR §2560.503-1).

Part 5 also sets forth, at Section 514, ERISA's preemption provisions. In general, Section 514(a) provides that provisions of ERISA shall supersede any and all State laws insofar as they "relate to" any employee benefit plan. Section 514(b), however, saves certain State laws, as well as Federal laws, from ERISA preemption, including an exception for the State regulation of MEWAs. These provisions are discussed in detail later in this booklet.

Part 6 of Title I, 29 U.S.C. §§1161 - 1168, contains the "continuation coverage" provisions, also referred to as the "COBRA" provisions because they were enacted as part of the Consolidated Omnibus Budget Reconciliation Act of 1985. In general, the continuation coverage provisions require that participants and their covered dependents be afforded the option of maintaining coverage under their health benefit plan, at their own expense, upon the occurrence of certain events (referred to as "qualifying events") that would otherwise result in a loss of coverage under the plan. "Qualifying events" include, among other things: 

-- death of the covered employee, termination (other than by reason of an employee's gross misconduct), or reduction of hours of covered employment; 

-- divorce or legal separation of the covered employee from the employee's spouse; 

-- a dependent child ceasing to be a dependent under the generally applicable requirements of the plan.

Continuation coverage may be maintained for periods up to 18 months, 36 months, or even longer depending on the qualifying event and other circumstances.

It is important to note that while Title I of ERISA contains continuation coverage requirements and participants and beneficiaries may enforce their rights to continuation coverage in accordance with the remedies afforded them under Section 502 of Title I of ERISA, the Department of Labor has limited regulatory and interpretative jurisdiction with respect to the continuation coverage provisions. Specifically, the Department of Labor has responsibility for the COBRA notification and disclosure provisions, while the Internal Revenue Service has regulatory and interpretative responsibility for all the other provisions of COBRA under the Internal Revenue Code.

Part 7 of Title I of ERISA, 29 U.S.C.§1181 et seq., contains provisions setting forth specific benefit requirements applicable to group health plans and health insurance issuers under the Health Insurance Portability and Accountability Act (HIPAA), the Newborns' and Mothers' Health Protection Act (Newborn's Act), the Mental Health Parity Act (MHPA), and the Women's Health and Cancer Rights Act (WHCRA).

The HIPAA portability rules, at Section 701 of ERISA, place limitations on a group health plan's ability to impose pre-existing condition exclusions and provides special enrollment rights for certain individuals that lose other health coverage or who experience a life change. Section 702 contains HIPAA's nondiscrimination rules that prohibit plans or issuers from establishing rules for eligibility to enroll in the plan or charging individuals higher premium amounts based on a health factor. In addition, Section 703 of Part 7 sets forth provisions for guaranteed renewably in MEWAs and multiemployer plans.

The Newborns' Act (in Section 711 of ERISA) generally requires group health plans that offer maternity hospital benefits for mothers and newborns to pay for at least a 48-hour hospital stay for the mother and newborn following normal childbirth or a 96-hour hospital stay following a cesarean. MHPA, at Section 712, provides for parity in the application of annual and dollar limits on mental health benefits with annual lifetime dollar limits on medical/surgical benefits. WHCRA, at Section 713, provides protections for patients who elect breast reconstruction or certain other follow-up care in connection with a mastectomy.
 To what extent does ERISA govern the activities of MEWAs that are not "employee welfare benefit plans"?

Under ERISA, persons who exercise discretionary authority or control over the management of ERISA-covered plans or the assets of such plans are considered fiduciaries and, therefore, are subject to ERISA's fiduciary responsibility provisions. When the sponsor of an ERISA-covered plan purchases health care coverage for its employees from a MEWA, the assets of the MEWA generally are considered to include the assets of the plan (i.e., "plan assets"), unless the MEWA is a State-licensed insurance company. (See: 29 C.F.R. §§2510.3-101 and 2510.3-102 relating to the definition of "plan assets.") In exercising discretionary authority or control over plan assets, such as in the payment of administrative expenses and in the making of benefit claim determinations, the persons operating the MEWA would be performing fiduciary acts that are governed by ERISA's fiduciary provisions. Where a fiduciary breaches statutorily mandated duties under ERISA, or where a person knowingly participates in such breach, the U.S. Department of Labor may pursue civil sanctions.

Inasmuch as MEWAs typically are not ERISA-covered welfare plans and the Department of Labor does not have direct regulatory authority over the business of insurance, the Department's investigations of MEWAs necessarily focus on whether the persons operating MEWAs have breached their fiduciary duties under ERISA to employee plans that have purchased health coverage from the MEWA. Because of the factual and transactional nature of fiduciary breach determinations, investigations of possible fiduciary breaches tend to be more complex and time-consuming than investigations involving alleged violations of specific statutory requirements, such as the reporting, disclosure, and claims procedure requirements. For example, MEWA investigations typically require detailed reviews of the financial records and documents relating to the operation of the MEWA, the contracts between the MEWA and the service providers to the MEWA, participation or other agreements between the MEWA and ERISAcovered welfare plans, as well as the actual transactions engaged in by the MEWA, in order to determine whether there has been a violation of ERISA's fiduciary standards.

Accordingly, while the Department may pursue enforcement actions with respect to MEWAs, such action is considerably different from, and often more limited than, the remedies generally available to the States under their insurance laws. In this regard, it is important to note that, in many instances, States may be able to take immediate action with respect to a MEWA upon determining that the MEWA has failed to comply with licensing, contribution, or reserve requirements under State insurance laws, whereas investigating and substantiating a fiduciary breach under ERISA may take considerably longer.
Regulation of Multiple Employer Welfare Arrangements under State Insurance Laws 

As noted in the introduction, States, prior to 1983, were effectively precluded by ERISA's broad preemption provisions from regulating any employee benefit plan covered by Title I of ERISA. As a result, a State's ability to regulate MEWAs was often dependent on whether the particular MEWA was an ERISA-covered plan. In an effort to address this problem, the U.S. Congress amended ERISA in 1983 to establish a special exception to ERISA's preemption provisions for MEWAs. This exception, which is discussed in detail below, was intended to eliminate claims of ERISA-plan status and Federal preemption as an impediment to State regulation of MEWAs by permitting States to regulate MEWAs that are ERISA-covered employee welfare benefit plans.

The following discussion relating to ERISA's preemption provisions and the 1983 MEWA amendments is intended to clarify what is and what is not a "multiple employer welfare arrangement" within the meaning of ERISA Section 3(40), and the extent to which States may regulate MEWAs, as provided by ERISA Section 514(b)(6).
 What is the general scope of ERISA preemption?

Under the general preemption clause of ERISA Section 514(a), 29 U.S.C. §1144(a), ERISA preempts any and all State laws which "relate to" any employee benefit plan subject to Title I of ERISA. However, there are a number of exceptions to the broad preemptive effect of Section 514(a) set forth in ERISA Section 514(b), 29 U.S.C. §1144(b), referred to as the "savings clause." 

Section 514(a) of ERISA provides, in relevant part, that:

Except as provided in subsection (b) of this section [Section 514], the provisions of this title [title I] ... supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan ... .

In determining whether a State law may "relate to" an employee benefit plan, the U.S. Supreme Court has determined that the words "relate to" should be construed expansively. In Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 96-97 (1983), the Court held that "[a] law `relates to' an employee benefit plan, in the normal sense of the phrase, if it has a connection with or reference to such a plan." (See also: Metropolitan Life Insurance Co. v. Massachusetts, 471 U.S. 724 (1985).

As noted above, however, while a State law may be found to "relate to" an employee benefit plan, within the meaning of Section 514(a) of ERISA, the law may nonetheless be saved from ERISA preemption to the extent that an exception described in Section 514(b) applies.

With regard to the application of State insurance laws to ERISA-covered plans, Section 514(b)(2) contains two relevant exceptions. This section provides, in relevant part, that: 

(A) Except as provided in subparagraph  (B), nothing in this title [title I] shall be construed to exempt or relieve any person from any law of any State which regulates insurance....

(B) Neither an employee benefit plan..., nor any trust established under such a plan, shall be deemed to be an insurance company or other insurer... for purposes of any law of any State purporting to regulate insurance companies, insurance contracts,.... 

Section 514(b)(2)(A) referred to as the "savings clause" essentially preserves to the States the right to regulate the business of insurance and persons engaged in that business (See: Metropolitan Life Insurance Co. v. Massachusetts, cited above, for a discussion of the criteria applied by the U.S. Supreme Court in determining whether a State law is one that "regulates insurance.") However, while Section 514(b)(2)(A) saves from ERISA preemption State laws that regulate insurance, Section 514(b)(2)(B), referred to as the "deemer clause," makes clear that a State law that "purports to regulate insurance" cannot deem an employee benefit plan to be an insurance company.

While plans purchasing insurance are, as a practical matter, indirectly affected by State insurance laws (inasmuch as the insurance contracts purchased by the plans are subject to State insurance law requirements), the "deemer clause," prior to 1983, effectively prevented the direct application of State insurance laws to ERISA-covered employee benefit plans. In 1983, however, ERISA was amended, as part of Public Law 97-473 (January 14, 1983), to add Section 514(b)(6) to ERISA's preemption provisions.

In general, Section 514(b)(6) provides a special exception for the application of State insurance laws to ERISA-covered welfare plans that are "multiple employer welfare arrangements" (MEWAs). Because the application of Section 514(b)(6) is limited to benefit programs that are MEWAs, the following discussion first reviews what is and what is not a MEWA for purposes of the Section 514(b)(6) exception, followed by a detailed review of the exception and its effect on State regulation of MEWAs.
 What is a "multiple employer welfare arrangement"?

The term "multiple employer welfare arrangement" is defined in ERISA Section 3(40), 29 U.S.C. §1002(40). Section 3(40)(A) provides as follows: 

(A) The term "multiple employer welfare arrangement" means an employee welfare benefit plan, or any other arrangement (other than an employee welfare benefit plan) which is established or maintained for the purpose of offering or providing any benefit described in paragraph (1) [welfare plan benefits] to the employees of two or more employers (including one or more self-employed individuals), or to their beneficiaries, except that such term does not include any such plan or arrangement that is established or maintained - 

(i) under or pursuant to one or more agreements which the Secretary finds to be collective bargaining agreements; 

(ii)  by a rural electric cooperative; or 

(iii)  by a rural telephone cooperative association* (Emphasis supplied.)
*The Rural Telephone Cooperative Associations ERISA Amendments Act of 1991 (Public Law No. 102-89) amended the definition of "multiple employer welfare arrangement" to exclude ERISA-covered welfare plans established or maintained by "rural telephone cooperative associations," as defined in ERISA section 3(40)(B)(v), effective August 14, 1991, the date of enactment.

As reflected above, the definition of MEWA includes both ERISA-covered employee welfare benefit plans and other arrangements which offer or provide medical, surgical, hospital care or benefits, or benefits in the event of sickness, accident, disability, or any other benefit described in ERISA Section 3(1) (See: definition of "employee welfare benefit plan" on page 6 for a complete list of benefits). Therefore, whether a particular arrangement is or is not an employee welfare benefit plan subject to ERISA is irrelevant for purposes of determining whether the arrangement is a MEWA. In order to constitute a MEWA, however, a determination must be made that:

-- the arrangement offers or provides welfare benefits to the employees of two or more employers or to the beneficiaries of such employees (i.e., the arrangement is not a single employer plan); and 

-- the arrangement is not excepted from the definition of MEWA as established or maintained under or pursuant to one or more collective bargaining agreements, or by a rural electric cooperative, or by a rural telephone cooperative association.

Set forth below are a number of issues which should be considered in making a MEWA determination.
 Does the arrangement offer or provide benefits to the employees of two or more employers?

1. Plans maintained by one employer or a group of employers under common control 

If a plan is maintained by a single-employer for the exclusive purpose of providing benefits to that employer's employees, former employees (e.g., retirees), or beneficiaries (e.g., spouses, former spouses, dependents) of such employees, the plan will be considered a single employer plan and not a MEWA within the meaning of ERISA Section 3(40). For purposes of Section 3(40), certain groups of employers which have common ownership interests are treated as a single employer. In this regard, Section 3(40)(B)(i) provides that:

two or more trades or businesses, whether or not incorporated, shall be deemed a single employer if such trades or businesses are within the same control group.

In determining whether trades or businesses are within the "same control group," Section 3(40)(B)(ii) provides that the term "control group" means a group of trades or businesses under "common control." Pursuant to Section 3(40)(B)(iii), whether a trade or business is under "common control" is to be determined under regulations issued by the Secretary applying principles similar to those applied in determining whether there is "common control" under section 4001(b) of Title IV of ERISA, except that common control shall not be based on an interest of less than 25 percent. Accordingly, trades or businesses with less than a 25 percent ownership interest will not be considered under "common control" and, therefore, will not be viewed as a single employer for purposes of determining whether their plan provides benefits to the employees of two or more employers under Section 3(40).

With regard to situations where there is a 25 percent or more ownership interest, it should be noted that the Department has not adopted regulations under Section 3(40)(B)(iii). Section 4001(b) of Title IV of ERISA and 29 CFR §4001.3(a) provide, however, the PBGC will determine that trades or businesses (whether or not incorporated) are under common control if they are "two or more trades or businesses under common control" as defined in regulations prescribed under Section 414(c) of the Internal Revenue Code. The regulations issued under Section 414(c) of the Code, see 26 CFR §1.414(c)-2, provide that "common control" generally means, (i) in the case of a parent-subsidiary group, the entities are connected through at least an 80 percent ownership interest, or (ii) in the case of a brother-sister group: (a) five or fewer persons own at least an 80 percent interest in each entity, and (b) the same five or fewer persons together own a greater than 50 percent interest in each entity, taking into account the ownership of each person only to the extent such ownership is identical with respect to each organization.

2. Plans maintained by groups or associations of unrelated employers 

Questions have been raised as to whether a plan sponsored by a group or association acting on behalf of its employer-members, which are not part of a control group, constitutes a "single employer" for purposes of the MEWA definition. The question is premised on the fact that the term "employer" is defined in Section 3(5), 29 U.S.C. §1002(5), to mean "any person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan; and includes a group or association of employers acting for an employer in such capacity." As discussed earlier, the Department has taken the position that a bona fide group or association of employers would constitute an "employer" within the meaning of ERISA Section 3(5) for purposes of having established or maintained an employee benefit plan (See: page 8).

However, unlike the specified treatment of a control group of employers as a single employer, there is no indication in Section 3(40), or the legislative history accompanying the MEWA provisions, that Congress intended that such groups or associations be treated as "single employers" for purposes of determining the status of such arrangements as a MEWA. Moreover, while a bona fide group or association of employers may constitute an "employer" within the meaning of ERISA Section 3(5), the individuals typically covered by the group or association-sponsored plan are not "employed" by the group or association and, therefore, are not "employees" of the group or association. Rather, the covered individuals are "employees" of the employer-members of the group or association. Accordingly, to the extent that a plan sponsored by a group or association of employers provides benefits to the employees of two or more employer-members (and such employer-members are not part of a control group of employers), the plan would constitute a MEWA within the meaning of Section 3(40).

3. Plans maintained by employee leasing organizations 

When a health benefit plan is maintained by an employee leasing organization, there is often a factual question as to whether the individuals covered by the leasing organization's plan are employees of the leasing organization or employees of the client (often referred to as the "recipient") employers. If all the employees participating in the leasing organization's plan are determined to be employees of the leasing organization, the plan would constitute a "single employer" plan and not a MEWA. On the other hand, if the employees participating in the plan include employees of two or more recipient employers or employees of the leasing organization and at least one recipient employer, the plan would constitute a MEWA because it would be providing benefits to the employees of two or more employers.

Like a bona fide group or association of employers, an employee leasing organization may be an "employer" within the meaning of ERISA Section 3(5) to the extent it is acting directly or indirectly in the interest of an employer. However, as with bona fide groups or associations of employers, "employer" status under Section 3(5) does not in and of itself mean the individuals covered by the leasing organization plan are "employees" of the leasing organization. As discussed below, in order for an individual to be considered an "employee" of an "employer" for purposes of the MEWA provisions, an employer-employee relationship must exist between the employer and the individual covered by the plan. In this regard, the payment of wages, the payment of Federal, State and local employment taxes, and the providing of health and/or pension benefits are not solely determinative of an employer-employee relationship. Moreover, a contract purporting to create an employer-employee relationship will not be determinative where the facts and circumstances establish that the relationship does not exist.

4. Determinations as to who is an "employee" of an employer 

As discussed above, the term "employer" is defined to encompass not only persons with respect to which there exists an employer-employee relationship between the employer and individuals covered by the plan (i.e., persons acting directly as an employer), but also certain persons, groups and associations, which, while acting indirectly in the interest of or for an employer in relation to an employee benefit plan, have no direct employer-employee relationship with the individuals covered under an employee benefit plan. Therefore, merely establishing that a plan is maintained by a person, group or association constituting an "employer" within the meaning of ERISA Section 3(5) is not in and of itself determinative that the plan is a single-employer plan, rather than a plan that provides benefits to the employees of two or more employers (i.e., a MEWA). A determination must be made as to the party or parties with whom the individuals covered by the plan maintain an employer-employee relationship.

The term "employee" is defined in Section 3(6) of ERISA, 29 U.S.C. §1002(6), to mean "any individual employed by an employer." (Emphasis supplied.) The Department has taken the position that an individual is "employed" by an employer, for purposes of Section 3(6), when an employer-employee relationship exists. While in most instances the existence, or absence, of an employer-employee relationship will be clear, there may be situations when the relationship is not entirely free from doubt.

In general, whether an employer-employee relationship exists is a question that must be determined on the basis of the facts and circumstances involved. It is the position of the Department that, for purposes of Section 3(6), such determinations must be made by applying common law of agency principles.* In applying common law principles, consideration must be given to, among other things, whether the person for whom services are being performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which the result is to be accomplished; whether the person for whom services are being performed has the right to discharge the individual performing the services; whether the individual performing the services is as a matter of economic reality dependent upon the business to which he or she renders service, etc. In this regard, it should be noted that a contract purporting to create an employer-employee relationship will not control where common law factors (as applied to the facts and circumstances) establish that the relationship does not exist. (See: Advisory Opinion No. 92-05, Appendix A.) 
*While common law of agency factors typically have been applied in determining whether a person is an employee or independent contractor, common law principles are equally applicable to determining by whom an individual is employed. See: Professional & Executive Leasing, Inc. v. Commissioner, 89 TC No. 19 (1987). Also see: Nationwide Mutual Insurance Co. et al. v. Darden, 503 U.S., 318, 112 S. Ct. 1344(1992).

Finally, pursuant to regulations issued by the Department of Labor, certain individuals are deemed not be "employees" for purposes of Title I of ERISA. Under the regulations, an individual and his or her spouse are deemed not be "employees" with respect to a trade or business which is wholly owned by the individual or the individual and his or her spouse. Also under the regulations, a partner in a partnership and his or her spouse are deemed not to be "employees" with respect to the partnership. (See: 29 CFR §2510.3-3(b) and (c).) 
 Is MEWA status conditioned upon the plan being established or maintained by an employer(s)?

While the definition of MEWA refers to arrangements that offer or provide benefits to the employees of two or more employers, the definition of MEWA is not limited to arrangements established or maintained by an employer. In fact, Section 3(40) does not condition MEWA status on the arrangement being established or maintained by any particular party. Accordingly, the MEWA status of an arrangement is not affected by the absence of any connection or nexus between the arrangement and the employers whose employees are covered by the arrangement. For example, in Advisory Opinion No. 88-05, the Department of Labor concluded that an arrangement established by an association to provide health benefits to its members, who were full-time ministers and other full-time employees of certain schools and churches, constituted a MEWA even though there was no employer involvement with the association's plan.
 Is the arrangement excluded from the definition of MEWA?

Once it has been determined that an ERISA-covered welfare plan provides benefits to the employees of two or more employers, a determination must be made as to whether any of the exclusions from MEWA status apply to the arrangement. Pursuant to ERISA Section 3(40)(A), three types of arrangements are specifically excluded from the definition of "multiple employer welfare arrangement," even though such arrangements may provide benefits to the employees of two or more employers. Each of these types of arrangements is discussed in general terms below.

1. Plans maintained pursuant to collective bargaining agreements 

Section 3(40)(A)(i) of ERISA specifically excludes from the MEWA definition any plan or other arrangement that is established or maintained "under or pursuant to one or more agreements which the Secretary finds to be collective bargaining agreements." The Department has concluded that the exception under Section 3(40)(A)(i) should be limited to plans providing coverage primarily to those individuals covered under collective bargaining agreements. Criteria for what constitutes a plan established or maintained under or pursuant to collective bargaining is set forth in the Department's regulation at 29 CFR §2510.3-40(b). (See Appendix C). The criteria are intended to ensure that the statutory exception is only available to plans whose participant base is predominantly comprised of the bargaining unit employees on whose behalf such benefits were negotiated and other individuals with a close nexus to the bargaining unit or the employer(s) of the bargaining unit employees.

The regulation provides that an entity will be treated as established or maintained under or pursuant to collective bargaining for purposes of the exception in Section 3(40)(A)(i) if it meets three affirmative requirements and does not fall within three exclusions. The affirmative requirements are: 

-- the arrangement itself is an employee welfare benefit plan within the meaning of Section 3(1) of ERISA; 

-- at least 85 percent of the participants in the plan who are employed under one or more collective bargaining agreements meeting the requirements of the regulation or who otherwise fall within one of the other categories of persons identified in the regulation as having a "nexus"  to the bargaining unit or employers of the bargaining unit employees; and 

-- the plan is incorporated or referenced in a written agreement between one or more employers and one or more employee organizations, which agreement, itself or together with other agreements among the same parties, is the product of a bona fide collective bargaining relationship between the employer(s) and the employee organization(s) and contains certain terms that ordinarily are in collective bargaining agreements.

The regulation sets forth eight factors indicative of bona fide collective bargaining. The regulation provides that if four of the eight factors are met, there is a rebuttable presumption that the bargaining was bona fide. In addition, the regulation lists a variety of factors that may be examined to rebut the presumption regarding a plan that meets four of the eight factors, or to prove a plan is in fact collectively bargained despite its failure to meet four of eight factors.

The regulation provides, however, that a plan will be deemed to be a MEWA even if it ostensibly meets the affirmative criteria described above, if: (1) the plan is self-funded or partially self-funded and is marketed to employers or sole proprietors; (2) the principal intent of the purported collective bargaining agreement is to evade compliance with state law and regulations applicable to insurance; or (3) there is fraud, forgery, or willful misrepresentation that the plan satisfies the affirmative criteria in the regulation.

The Department also has promulgated regulations at 29 CFR part 2570, subpart H, providing for administrative hearings to obtain a determination by the Secretary of Labor as to whether a particular entity is an employee welfare benefit plan established or maintained under or pursuant to one or more collective bargaining agreements for purposes of Section 3(40) of ERISA. The hearing procedure is available only in situations where the jurisdiction or law of a state has been asserted against a plan or other arrangement that contends it meets the exception in section 3(40)(A)(i) for collectively bargained plans. A petition for a hearing may be initiated only by the plan or other arrangement. The regulations specifically provide that filing a petition for a hearing is not intended to provide a basis for delaying or staying a state proceeding against the plan or arrangement.

2. Rural Electric Cooperatives 

Section 3(40)(A)(ii) specifically excludes from the definition of MEWA any plan or other arrangement that is established or maintained by a "rural electric cooperative." 

Section 3(40)(B)(iv) defines the term "rural electric cooperative" to mean: 

(I) any organization which is exempt from tax under Section 501(a) of the Internal Revenue Code of 1986 and which is engaged primarily in providing electric service on a mutual or cooperative basis, and 

(II) any organization described in paragraph (4) or (6) of Section 501(c) of the Internal Revenue Code of 1986 which is exempt from tax under Section 501(a) of such Code and at least 80 percent of the members of which are organizations described in subclause  (I).

3. Rural Telephone Cooperative Associations 

Section 3(40)(A)(iii) specifically excludes from the definition of MEWA any plan or other arrangement that is established or maintained by a "rural telephone cooperative association." This exception to MEWA status for rural telephone cooperative associations became effective on August 14, 1991, the enactment date of the Rural Telephone Cooperative Associations ERISA Amendments Act of 1991 (Public Law No. 102-89).

Section 3(40)(B)(v), also added to ERISA by Public Law No. 102-89, defines the term "rural telephone cooperative association" to mean an organization described in paragraph (4) or (6) of Section 501(c) of the Internal Revenue Code of 1986 which is exempt from tax under Section 501(a) and at least 80 percent of the members of which are organizations engaged primarily in providing telephone service to rural areas of the United States on a mutual, cooperative, or other basis.

To restate the definition of MEWA somewhat differently, a MEWA, within the meaning of Section 3(40), includes any ERISA-covered employee welfare benefit plan which is not: 

(1) a single employer plan (which includes employers within the same control group); 

(2) a plan established or maintained under or pursuant to a collective bargaining agreement; 

(3) a plan established or maintained by a rural electric cooperative; or 

(4) a plan established or maintained by a rural telephone cooperative association.

If an ERISA-covered employee welfare benefit plan is a MEWA, States may, as discussed below, apply and enforce State insurance laws with respect to the plan in accordance with the exception to ERISA preemption under Section 514(b)(6).
 To what extent may States regulate ERISA-covered welfare plans that are MEWAs?

If an ERISA-covered welfare plan is a MEWA, States may apply and enforce their State insurance laws with respect to the plan to the extent provided by ERISA Section 514(b)(6)(A), 29 U.S.C. §1144(b)(6)(A). In general, Section 514(b)(6)(A) provides an exception to ERISA's broad preemption provisions for the application and enforcement of State insurance laws with respect to any employee welfare benefit plan that is a MEWA within the meaning of ERISA Section 3(40).

In effect, Section 514(b)(6)(A) serves to provide an exception to the "deemer clause" of Section 514(b)(2)(B), which otherwise precludes States from deeming an ERISA-covered plan to be an insurance company for purposes of State insurance laws, by permitting States to treat certain ERISA-covered plans (i.e., MEWAs) as insurance companies, subject to a few limitations. While the range of State insurance law permitted under Section 514(b)(6)(A) is subject to certain limitations, the Department of Labor believes that these limitations should have little, if any, practical affect on the ability of States to regulate MEWAs under their insurance laws.

There is nothing in Section 514(b)(6)(A) that limits the applicability of State insurance laws to only those insurance laws which specifically or otherwise reference "multiple employer welfare arrangements" or "MEWAs." Similarly, while the specific application of a particular insurance law to a particular MEWA is a matter within the jurisdiction of the State, there is nothing in Section 514(b)(6) that would preclude the application of the same insurance laws that apply to any insurer to ERISA-covered plans which constitute MEWAs, subject only to the limitations set forth in Section 514(b)(6)(A).

Under Section 514(b)(6)(A), the extent to which State insurance laws may be applied to a MEWA that is an ERISA-covered plan is dependent on whether or not the plan is fully insured.
 What State insurance laws may be applied to a fully insured plan?

Section 514(b)(6)(A)(i) provides:

in the case of an employee welfare benefit plan which is a multiple employer welfare arrangement and is fully insured (or which is a multiple employer welfare arrangement subject to an exemption under sub-paragraph (B)), any law of any State which regulates insurance may apply to such arrangement to the extent such law provides -

i standards, requiring the maintenance of specified levels of reserves and specified levels of contributions,  which any such plan, or any trust established under such a plan, must meet in order to be considered under such law able to pay benefits in full when due, and 

ii provisions to enforce such standards... (Emphasis supplied.) 

Under Section 514(b)(6)(A)(i), it is clear that, in the case of fully insured MEWAs, States may apply and enforce any State insurance law requiring the maintenance of specific reserves or contributions designed to ensure that the MEWA will be able to satisfy its benefit obligations in a timely fashion. Moreover, it is the view of the Department of Labor that 514(b)(6)(A)(i) clearly enables States to subject MEWAs to licensing, registration, certification, financial reporting, examination, audit and any other requirement of State insurance law necessary to ensure compliance with the State insurance reserves, contributions and funding requirements.
 What is a "fully insured" MEWA?

Section 514(b)(6)(D) provides that, for purposes of Section 514(b)(6)(A), "a multiple employer welfare arrangement shall be considered fully insured only if the terms of the arrangement provide for benefits the amount of all of which the Secretary determines are guaranteed under a contract, or policy of insurance, issued by an insurance company, insurance service, or insurance organization, qualified to conduct business in a State." In this regard, a determination by the Department of Labor as to whether a particular MEWA is "fully insured" is not required in order for a State to treat a MEWA as "fully insured" for purposes of applying State insurance law in accordance with Section 514(b)(6).
 What State insurance laws may be applied to a plan that is not fully insured?

Section 514(b)(6)(A)(ii) provides: 

in the case of any other employee welfare benefit plan which is a multiple employer welfare arrangement, in addition to this title [title I], any law of any State which regulates insurance may apply to the extent not inconsistent with the preceding sections of this title [Title I]. (Emphasis supplied)

Accordingly, if a MEWA is not "fully insured," the only limitation on the applicability of State insurance laws to the MEWA is that the law not be inconsistent with Title I of ERISA.
 Under what circumstances might a State insurance law be "inconsistent" with Title I of ERISA?

In general, a State law would be inconsistent with the provisions of Title I to the extent that compliance with such law would abolish or abridge an affirmative protection or safeguard otherwise available to plan participants and beneficiaries under Title I or would conflict with any provision of Title I, making compliance with ERISA impossible. For example, any State insurance law which would adversely affect a participant's or beneficiary's right to request or receive documents described in Title I of ERISA, or to pursue claims procedures established in accordance with Section 503 of ERISA, or to obtain and maintain continuation health coverage in accordance with Part 6 of ERISA would be viewed as inconsistent with the provisions of Title I. Similarly, a State insurance law that would require an ERISA-covered plan to make imprudent investments would be inconsistent with the provisions of Title I.

On the other hand, a State insurance law generally will not be deemed "inconsistent" with the provisions of Title I if it requires ERISA-covered plans constituting MEWAs to meet more stringent standards of conduct, or to provide more or greater protection to plan participants and beneficiaries than required by ERISA. The Department has expressed the view that any State insurance law which sets standards requiring the maintenance of specified levels of reserves and specified levels of contributions in order for a MEWA to be considered, under such law, able to pay benefits will generally not be "inconsistent" with the provisions of Title I for purposes of Section 514(b)(6)(A)(ii). The Department also has expressed the view that a State law regulating insurance which requires a license or certificate of authority as a condition precedent or otherwise to transacting insurance business or which subjects persons who fail to comply with such requirements to taxation, fines and other civil penalties, including injunctive relief, would not in and of itself be "inconsistent" with the provisions of title I for purposes of Section 514(b)(6)(A)(ii). (See: Advisory Opinion 90-18, Appendix A).
 Has the Department of Labor granted any exemptions from State regulation for MEWAs which are not fully insured?

Pursuant to Section 514(b)(6)(B), the Secretary of Labor may, under regulations, exempt from Section 514(b)(6)(A)(ii) MEWAs which are not fully insured. Such exemptions may be granted on an individual or class basis. While the Department has the authority to grant exemptions from the requirements of Section 514(b)(6)(A)(ii), such authority does not extend to the requirements of Section 514(b)(6)(A)(i) relating to the maintenance of specified levels of reserves and specified levels of contributions under State insurance laws.

The Department has neither prescribed regulations for such exemptions nor granted any such exemptions since the enactment of the MEWA provisions in 1983.
Form M-1 Filing Requirement for MEWAs 

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) established a filing requirement for MEWAs. The purpose of the Form M-1 filing requirement is to provide EBSA with information concerning compliance by MEWAs with the requirements of Part 7 of ERISA (including the provisions of HIPAA, the Mental Health Parity Act, the Newborns and Mothers' Health Protection Act, and the Women's Health and Cancer Rights Act).

Under the new reporting requirement, the one-page Form M-1 is generally required to be filed once a year, due on March 1; however, plan administrators can request a 60-day extension.

To help filers, EBSA has published a guide for completing the Form M-1, which is available by calling the EBSA toll-free line at 1-866-444-EBSA (3272) and on the Internet at www.dol.gov/ebsa. Plan administrators may also contact us with any questions or for assistance in completing the Form M-1 by calling the EBSA Help Desk at 202-693-3860.
ERISA ADVISORY OPINIONS 

Advisory opinions relating to Title I of ERISA are issued by the Employee Benefits Security Administration and represent the official views of the U.S. Department of Labor on the interpretation and application of the provisions of ERISA. Advisory opinions are issued pursuant to ERISA Procedure 76-1, which, among other things, describes the circumstances under which the Department will and will not rule on particular matters and the effect of advisory opinions generally. A copy of ERISA Procedure 76-1 is reprinted as Appendix B. Pursuant to Section 12 of ERISA Procedure 76-1, advisory opinions, as well as advisory opinion requests, accompanying documentation, and related correspondence are available to the general public.

It should be noted that the advisory opinion process is not a fact-finding process. Advisory opinions are generally based solely on the facts and representations submitted to the Department by the party or parties requesting the opinion. Therefore, advisory opinions should not be viewed as determinations by the Department as to the accuracy of any of the facts and representations provided by the requesting party and cited in such opinions.
 Is an advisory opinion on the MEWA status of an arrangement necessary in order for a State to exercise jurisdiction over the arrangement?

No. First, there is nothing in ERISA Section 3(40) which conditions MEWA status on the obtaining of an opinion from the Department. Second, in most instances, the question of whether a particular arrangement is a MEWA will require factual, rather than interpretative, determinations. That is, if the arrangement meets the definition of a MEWA - because it is providing health or similar benefits to the employees of more than one employer (i.e., the arrangement is not a singleemployer plan) and the arrangement is not established or maintained under or pursuant to a collective bargaining agreement or by a rural electric cooperative, or by a rural telephone cooperative association - the arrangement is, by definition, a MEWA, whether or not the Department rules on the matter.
 Is it necessary to determine by advisory opinion whether a MEWA is an ERISA-covered employee benefit plan?

In most cases, no. While the MEWA exception to ERISA's preemption provisions does impose a few limitations on the ability of States to regulate MEWAs that are ERISA-covered plans, these limitations, as discussed earlier and in Advisory Opinion No. 90-18 (See: Appendix A), should not, as a practical matter, have any significant effect on a State's application and enforcement of its insurance laws with respect to a MEWA which is an ERISA-covered plan. Accordingly, a determination as to whether or not a MEWA is an ERISA- covered plan is not necessary in most instances.
 If it is determined that an advisory opinion is necessary, what information is required in order for the Department to issue a ruling?

If a MEWA determination is needed, the advisory opinion request should include sufficient facts and representations to conclude whether the arrangement is providing benefits described in Section 3(1) of ERISA (See: pages 5-6) whether benefits are being provided to the employees of two or more employers, whether the employers of covered employees are members of the same control group of employers, and whether the arrangement is established or maintained pursuant to or under a collective bargaining agreement or by a rural electric cooperative or rural telephone cooperative association.

If an ERISA-coverage determination is needed, the advisory opinion request should also include sufficient information to determine whether the arrangement is established or maintained by an employer, employee organization, or by both (See: pages 6-10). An advisory opinion request for such a determination should include copies of plan and trust documents, constitutions and by-laws, if any, administrative agreements, employer-participation agreements, collective bargaining agreements, if applicable, and any other documents or correspondence that might have a bearing on the status of the arrangement for ERISA purposes.
 Where should advisory opinion requests be sent?

Requests for advisory opinions involving MEWAs should be sent to the following address: 

Office of Regulations and Interpretations

Employee Benefits Security Administration 

U.S. Department of Labor 

Room N-5669

200 Constitution Avenue, NW 

Washington, DC 20210 
ERISA ENFORCEMENT 

Enforcement of the provisions of Title I of ERISA is carried out by the Employee Benefits Security Administration's Office of Enforcement. The Office of Enforcement consists of a national office and 15 field offices located throughout the United States. The national office provides policy direction and technical and management support for the field offices, in addition to conducting investigations in selected sensitive areas. Most, if not all, MEWA-related investigations are conducted by the field offices under the supervision of an area or district director, with oversight and coordination provided by the national office.

In an effort to facilitate State and Federal enforcement efforts in the MEWA area, EBSA's field offices have established, or are in the process of pursuing, cooperative arrangements with the States in their jurisdiction pursuant to which the offices will share and discuss cases opened and closed by EBSA involving MEWAs. In addition, field offices will, in accordance with such agreements, make available documents obtained through voluntary production or pursuant to a civil subpoena. In order to ensure proper coordination of MEWA-related initiatives, State officials should direct information and/or inquiries (other than advisory opinion requests) to the director of the EBSA area office responsible for their particular State.

For more information for the field office near you, contact EBSA's Participant and Compliance Assistance toll-free number - 1-866-444-EBSA (3272) - or view it on the agency's Web site.

View this and other free EBSA publications at www.dol.gov/ebsa.
Worksheet 3
Model Notice of COBRA Continuation Rights

[Editor's Note: An employer must provide a written notice describing COBRA continuation coverage rights to each employee who enrolls in the employer's health plan. The Department of Labor issued the following model notice with final regulations that are effective as of the first day of the first plan year that occurs on or after November 25, 2004. RIN 1210-AA60, 69 Fed. Reg. 30083 (5/26/04), Appendix to Regs. §2590.606-1.]
**CONTINUATION COVERAGE RIGHTS UNDER COBRA**
Introduction

You are receiving this notice because you have recently become covered under a group health plan (the Plan). This notice contains important information about your right to COBRA continuation coverage, which is a temporary extension of coverage under the Plan. This notice generally explains COBRA continuation coverage, when it may become available to you and your family, and what you need to do to protect the right to receive it.

The right to COBRA continuation coverage was created by a federal law, the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA). COBRA continuation coverage can become available to you when you would otherwise lose your group health coverage. It can also become available to other members of your family who are covered under the Plan when they would otherwise lose their group health coverage. For additional information about your rights and obligations under the Plan and under federal law, you should review the Plan's Summary Plan Description or contact the Plan Administrator.
What is COBRA Continuation Coverage?

COBRA continuation coverage is a continuation of Plan coverage when coverage would otherwise end because of a life event known as a "qualifying event." Specific qualifying events are listed later in this notice. After a qualifying event, COBRA continuation coverage must be offered to each person who is a "qualified beneficiary." You, your spouse, and your dependent children could become qualified beneficiaries if coverage under the Plan is lost because of the qualifying event. Under the Plan, qualified beneficiaries who elect COBRA continuation coverage [choose and enter appropriate information: must pay or  are not required to pay] for COBRA continuation coverage.

If you are an employee, you will become a qualified beneficiary if you lose your coverage under the Plan because either one of the following qualifying events happens:

•  Your hours of employment are reduced, or

•  Your employment ends for any reason other than your gross misconduct.

If you are the spouse of an employee, you will become a qualified beneficiary if you lose your coverage under the Plan because any of the following qualifying events happens:

•  Your spouse dies;

•  Your spouse's hours of employment are reduced;

•  Your spouse's employment ends for any reason other than his or her gross misconduct;

•  Your spouse becomes entitled to Medicare benefits (under Part A, Part B, or both); or

•  You become divorced or legally separated from your spouse.

Your dependent children will become qualified beneficiaries if they lose coverage under the Plan because any of the following qualifying events happens:

•  The parent-employee dies;

•  The parent-employee's hours of employment are reduced;

•  The parent-employee's employment ends for any reason other than his or her gross misconduct;

•  The parent-employee becomes entitled to Medicare benefits (Part A, Part B, or both);

•  The parents become divorced or legally separated; or

•  The child stops being eligible for coverage under the plan as a "dependent child." 

[If the Plan provides retiree health coverage, add the following paragraph:]

Sometimes, filing a proceeding in bankruptcy under title 11 of the United States Code can be a qualifying event. If a proceeding in bankruptcy is filed with respect to [enter name of employer sponsoring the plan], and that bankruptcy results in the loss of coverage of any retired employee covered under the Plan, the retired employee will become a qualified beneficiary with respect to the bankruptcy. The retired employee's spouse, surviving spouse, and dependent children will also become qualified beneficiaries if bankruptcy results in the loss of their coverage under the Plan.
When is COBRA Coverage Available?

The Plan will offer COBRA continuation coverage to qualified beneficiaries only after the Plan Administrator has been notified that a qualifying event has occurred. When the qualifying event is the end of employment or reduction of hours of employment, death of the employee, [add if Plan provides retiree health coverage: commencement of a proceeding in bankruptcy with respect to the employer,] or the employee's becoming entitled to Medicare benefits (under Part A, Part B, or both), the employer must notify the Plan Administrator of the qualifying event.
You Must Give Notice of Some Qualifying Events

For the other qualifying events (divorce or legal separation of the employee and spouse or a dependent child's losing eligibility for coverage as a dependent child), you must notify the Plan Administrator within 60 days [or enter longer period permitted under the terms of the Plan] after the qualifying event occurs. You must provide this notice to: [Enter name of appropriate party]. [Add description of any additional Plan procedures for this notice, including a description of any required information or documentation.]
How is COBRA Coverage Provided?

Once the Plan Administrator receives notice that a qualifying event has occurred, COBRA continuation coverage will be offered to each of the qualified beneficiaries. Each qualified beneficiary will have an independent right to elect COBRA continuation coverage. Covered employees may elect COBRA continuation coverage on behalf of their spouses, and parents may elect COBRA continuation coverage on behalf of their children.

COBRA continuation coverage is a temporary continuation of coverage. When the qualifying event is the death of the employee, the employee's becoming entitled to Medicare benefits (under Part A, Part B, or both), your divorce or legal separation, or a dependent child's losing eligibility as a dependent child, COBRA continuation coverage lasts for up to a total of 36 months. When the qualifying event is the end of employment or reduction of the employee's hours of employment, and the employee became entitled to Medicare benefits less than 18 months before the qualifying event, COBRA continuation coverage for qualified beneficiaries other than the employee lasts until 36 months after the date of Medicare entitlement. For example, if a covered employee becomes entitled to Medicare 8 months before the date on which his employment terminates, COBRA continuation coverage for his spouse and children can last up to 36 months after the date of Medicare entitlement, which is equal to 28 months after the date of the qualifying event (36 months minus 8 months). Otherwise, when the qualifying event is the end of employment or reduction of the employee's hours of employment, COBRA continuation coverage generally lasts for only up to a total of 18 months. There are two ways in which this 18-month period of COBRA continuation coverage can be extended.
Disability extension of 18-month period of continuation coverage

If you or anyone in your family covered under the Plan is determined by the Social Security Administration to be disabled and you notify the Plan Administrator in a timely fashion, you and your entire family may be entitled to receive up to an additional 11 months of COBRA continuation coverage, for a total maximum of 29 months. The disability would have to have started at some time before the 60th day of COBRA continuation coverage and must last at least until the end of the 18-month period of continuation coverage. [Add description of any additional Plan procedures for this notice, including a description of any required information or documentation, the name of the appropriate party to whom notice must be sent, and the time period for giving notice].
Second qualifying event extension of 18-month period of continuation coverage

If your family experiences another qualifying event while receiving 18 months of COBRA continuation coverage, the spouse and dependent children in your family can get up to 18 additional months of COBRA continuation coverage, for a maximum of 36 months, if notice of the second qualifying event is properly given to the Plan. This extension may be available to the spouse and any dependent children receiving continuation coverage if the employee or former employee dies, becomes entitled to Medicare benefits (under Part A, Part B, or both), or gets divorced or legally separated, or if the dependent child stops being eligible under the Plan as a dependent child, but only if the event would have caused the spouse or dependent child to lose coverage under the Plan had the first qualifying event not occurred.
If You Have Questions

Questions concerning your Plan or your COBRA continuation coverage rights should be addressed to the contact or contacts identified below. For more information about your rights under ERISA, including COBRA, the Health Insurance Portability and Accountability Act (HIPAA), and other laws affecting group health plans, contact the nearest Regional or District Office of the U.S. Department of Labor's Employee Benefits Security Administration (EBSA) in your area or visit the EBSA website at www.dol.gov/ebsa. (Addresses and phone numbers of Regional and District EBSA Offices are available through EBSA's website.)
Keep Your Plan Informed of Address Changes

In order to protect your family's rights, you should keep the Plan Administrator informed of any changes in the addresses of family members. You should also keep a copy, for your records, of any notices you send to the Plan Administrator.
Plan Contact Information

[Enter name of group health plan and name (or position), address and phone number of party or parties from whom information about the plan and COBRA continuation coverage can be obtained on request.]
Worksheet 4
Model COBRA Continuation Coverage Election Notice

[Editor's Note: The Department of Labor issued a model COBRA continuation coverage election notice in conjunction with final COBRA regulations. See RIN 1210-AA60, 69 Fed. Reg. 30083 (5/26/04), Appendix to Regs. §2590.606-4. Under the regulations, employers would be required -- effective as of the first day of the first plan year that occurs on or after November 25, 2004 -- to provide to employees the election notice in addition to the required COBRA notice regarding coverage rights (see Worksheet 7).]

[Enter date of notice]

Dear: [Identify the qualified beneficiary(ies), by name or status]

This notice contains important information about your right to continue your health care coverage in the [enter name of group health plan] (the Plan). Please read the information contained in this notice very carefully.

To elect COBRA continuation coverage, follow the instructions on the next page to complete the enclosed Election Form and submit it to us.

If you do not elect COBRA continuation coverage, your coverage under the Plan will end on [enter date] due to [check appropriate box]:
   End of employment                     Reduction in hours of employment  
   Death of employee                     Divorce or legal separation       
   Entitlement to Medicare               Loss of dependent child status    

Each person ("qualified beneficiary") in the category(ies) checked below is entitled to elect COBRA continuation coverage, which will continue group health care coverage under the Plan for up to __ months [enter 18 or  36, as appropriate and check appropriate box or boxes; names may be added]:

 Employee or former employee

 Spouse or former spouse

 Dependent child(ren) covered under the Plan on the day before the event that caused the loss of coverage

 Child who is losing coverage under the Plan because he or she is no longer a dependent under the Plan

If elected, COBRA continuation coverage will begin on [enter date] and can last until [enter date]. [Add, if appropriate: You may elect any of the following options for COBRA continuation coverage: [list available coverage options].

COBRA continuation coverage will cost: [enter amount each qualified beneficiary will be required to pay for each option per month of coverage and any other permitted coverage periods.] You do not have to send any payment with the Election Form. Important additional information about payment for COBRA continuation coverage is included in the pages following the Election Form.

If you have any questions about this notice or your rights to COBRA continuation coverage, you should contact [enter name of party responsible for COBRA administration for the Plan, with telephone number and address].
COBRA CONTINUATION COVERAGE ELECTION FORM

INSTRUCTIONS: To elect COBRA continuation coverage, complete this Election Form and return it to us. Under federal law, you must have 60 days after the date of this notice to decide whether you want to elect COBRA continuation coverage under the Plan.

Send completed Election Form to: [Enter Name and Address]

This Election Form must be completed and returned by mail [or describe other means of submission and due date]. If mailed, it must be post-marked no later than [enter date]. 

If you do not submit a completed Election Form by the due date shown above, you will lose your right to elect COBRA continuation coverage. If you reject COBRA continuation coverage before the due date, yon may change your mind as long as you furnish a completed Election Form before the due date. However, if you change your mind after first rejecting COBRA continuation coverage, your COBRA continuation coverage will begin on the date you furnish the completed Election Form. 

Read the important information about your rights included in the pages after the Election Form. 

I (We) elect COBRA continuation coverage in the [enter name of plan] (the Plan) as indicated below:
  Name         Date of Birth     Relationship to       SSN (or other      
                                 Employee              identifier)        

a. 

    [Add if appropriate: Coverage option elected: ]

b. 

    [Add if appropriate: Coverage option elected: ]

c. 

    [Add if appropriate: Coverage option elected: ]
  __________________________________   __________________________________
  __                                   __                                
  Signature                            Date                              
  __________________________________   __________________________________
  __                                   __                                
  Print Name                           Relationship to individual(s)     
                                       listed above                      
  __________________________________                                     
  __                                                                     
  __________________________________                                     
  __                                                                     
  __________________________________   __________________________________
  __                                   __                                
  Print Address                        Telephone number                  

IMPORTANT INFORMATION
  ABOUT YOUR COBRA CONTINUATION COVERAGE RIGHTS
What is continuation coverage?

Federal law requires that most group health plans (including this Plan) give employees and their families the opportunity to continue their health care coverage when there is a "qualifying event" that would result in a loss of coverage under an employer's plan. Depending on the type of qualifying event, "qualified beneficiaries" can include the employee (or retired employee) covered under the group health plan, the covered employee's spouse, and the dependent children of the covered employee.

Continuation coverage is the same coverage that the Plan gives to other participants or beneficiaries under the Plan who are not receiving continuation coverage. Each qualified beneficiary who elects continuation coverage will have the same rights under the Plan as other participants or beneficiaries covered under the Plan, including [add if applicable: open enrollment and] special enrollment fights.
How long will continuation coverage last?

In the case of a loss of coverage due to end of employment or reduction in hours of employment, coverage generally may be continued only for up to a total of 18 months. In the case of losses of coverage due to an employee's death, divorce or legal separation, the employee's becoming entitled to Medicare benefits or a dependent child ceasing to be a dependent under the terms of the plan, coverage may be continued for up to a total of 36 months. When the qualifying event is the end of employment or reduction of the employee's hours of employment, and the employee became entitled to Medicare benefits less than 18 months before the qualifying event, COBRA continuation coverage for qualified beneficiaries other than the employee lasts until 36 months after the date of Medicare entitlement. This notice shows the maximum period of continuation coverage available to the qualified beneficiaries.

Continuation coverage will be terminated before the end of the maximum period if:

•  any required premium is not paid in full on time,

•  a qualified beneficiary becomes covered, after electing continuation coverage, under another group health plan that does not impose any pre-existing condition exclusion for a pre-existing condition of the qualified beneficiary,

•  a covered employee becomes entitled to Medicare benefits (under Part A, Part B, or both) after electing continuation coverage, or

•  the employer ceases to provide any group health plan for its employees.

Continuation coverage may also be terminated for any reason the Plan would terminate coverage of a participant or beneficiary not receiving continuation coverage (such as fraud).

[If the maximum period shown on page 1 of this notice is less than 36 months, add the following three paragraphs:]
How can you extend the length of COBRA continuation coverage?

If you elect continuation coverage, an extension of the maximum period of coverage may be available if a qualified beneficiary is disabled or a second qualifying event occurs. You must notify [enter name of party responsible for COBRA administration] of a disability or a second qualifying event in order to extend the period of continuation coverage. Failure to provide notice of a disability or second qualifying event may affect the right to extend the period of continuation coverage.
Disability

An 11-month extension of coverage may be available if any of the qualified beneficiaries is determined by the Social Security Administration (SSA) to be disabled. The disability has to have started at some time before the 60th day of COBRA continuation coverage and must last at least until the end of the 18-month period of continuation coverage. [Describe Plan provisions for requiring notice of disability determination, including time frames and procedures.] Each qualified beneficiary who has elected continuation coverage will be entitled to the 11-month disability extension if one of them qualifies. If the qualified beneficiary is determined by SSA to no longer be disabled, you must notify the Plan of that fact within 30 days after SSA's determination.
Second Qualifying Event

An 18-month extension of coverage will be available to spouses and dependent children who elect continuation coverage if a second qualifying event occurs during the first 18 months of continuation coverage. The maximum amount of continuation coverage available when a second qualifying event occurs is 36 months. Such second qualifying events may include the death of a covered employee, divorce or separation from the covered employee, the covered employee's becoming entitled to Medicare benefits (under Part A, Part B, or both), or a dependent child's ceasing to be eligible for coverage as a dependent under the Plan. These events can be a second qualifying event only if they would have caused the qualified beneficiary to lose coverage under the Plan if the first qualifying event had not occurred. You must notify the Plan within 60 days after a second qualifying event occurs if you want to extend your continuation coverage.
How can you elect COBRA continuation coverage?

To elect continuation coverage, you must complete the Election Form and furnish it according to the directions on the form. Each qualified beneficiary has a separate right to elect continuation coverage. For example, the employee's spouse may elect continuation coverage even if the employee does not. Continuation coverage may be elected for only one, several, or for all dependent children who are qualified beneficiaries. A parent may elect to continue coverage on behalf of any dependent children. The employee or the employee's spouse can elect continuation coverage on behalf of all of the qualified beneficiaries.

In considering whether to elect continuation coverage, you should take into account that a failure to continue your group health coverage will affect your future rights under federal law. First, you can lose the right to avoid having pre-existing condition exclusions applied to you by other group health plans if you have more than a 63-day gap in health coverage, and election of continuation coverage may help you not have such a gap. Second, you will lose the guaranteed right to purchase individual health insurance policies that do not impose such pre-existing condition exclusions if you do not get continuation coverage for the maximum time available to you. Finally, you should take into account that you have special enrollment rights under federal law. You have the right to request special enrollment in another group health plan for which you are otherwise eligible (such as a plan sponsored by your spouse's employer) within 30 days after your group health coverage ends because of the qualifying event listed above. You will also have the same special enrollment right at the end of continuation coverage if you get continuation coverage for the maximum time available to you.
How much does COBRA continuation coverage cost?

Generally, each qualified beneficiary may be required to pay the entire cost of continuation coverage. The amount a qualified beneficiary may be required to pay may not exceed 102 percent (or, in the case of an extension of continuation coverage due to a disability, 150 percent) of the cost to the group health plan (including both employer and employee contributions) for coverage of a similarly situated plan participant or beneficiary who is not receiving continuation coverage. The required payment for each continuation coverage period for each option is described in this notice.

[If employees might be eligible for trade adjustment assistance, the following information may be added: The Trade Act of 2002 created a new tax credit for certain individuals who become eligible for trade adjustment assistance and for certain retired employees who are receiving pension payments from the Pension Benefit Guaranty Corporation (PBGC) (eligible individuals). Under the new tax provisions, eligible individuals can either take a tax credit or get advance payment of 65% of premiums paid for qualified health insurance, including continuation coverage. If you have questions about these new tax provisions, you may call the Health Coverage Tax Credit Customer Contact Center toll-free at 1-866-628-4282. TTD/TTY callers may call toll-free at 1-866-626-4282. More information about the Trade Act is also available at www.doleta.gov/tradeact/2002act_index.asp.
When and how must payment for COBRA continuation coverage be made?
First payment for continuation coverage

If you elect continuation coverage, you do not have to send any payment with the Election Form. However, you must make your first payment for continuation coverage not later than 45 days after the date of your election. (This is the date the Election Notice is post-marked, if mailed.) If you do not make your first payment for continuation coverage in full not later than 45 days after the date of your election, you will lose all continuation coverage rights under the Plan. You are responsible for making sure that the amount of your first payment is correct. You may contact [enter appropriate contact information, e.g., the Plan Administrator or other party responsible for COBRA administration under the Plan] to confirm the correct amount of your first payment.
Periodic payments for continuation coverage

After you make your first payment for continuation coverage, you will be required to make periodic payments for each subsequent coverage period. The amount due for each coverage period for each qualified beneficiary is shown in this notice. The periodic payments can be made on a monthly basis. Under the Plan, each of these periodic payments for continuation coverage is due on the [enter due day for each monthly payment] for that coverage period. [If Plan offers other payment schedules, enter with appropriate dates: You may instead make payments for continuation coverage for the following coverage periods, due on the following dates:]. If you make a periodic payment on or before the first day of the coverage period to which it applies, your coverage under the Plan will continue for that coverage period without any break. The Plan [select one: will or  will not] send periodic notices of payments due for these coverage periods.
Grace periods for periodic payments

Although periodic payments are due on the dates shown above, you will be given a grace period of 30 days after the first day of the coverage period [or enter longer period permitted by Plan] to make each periodic payment. Your continuation coverage will be provided for each coverage period as long as payment for that coverage period is made before the end of the grace period for that payment. [If Plan suspends coverage during grace period for nonpayment, enter and modify as necessary: However, if you pay a periodic payment later than the first day of the coverage period to which it applies, but before the end of the grace period for the coverage period, your coverage under the Plan will be suspended as of the first day of the coverage period and then retroactively reinstated (going back to the first day of the coverage period) when the periodic payment is received. This means that any claim you submit for benefits while your coverage is suspended may be denied and may have to be resubmitted once your coverage is reinstated.]

If you fail to make a periodic payment before the end of the grace period for that coverage period, you will lose all rights to continuation coverage under the Plan.

Your first payment and all periodic payments for continuation coverage should be sent to:

[enter appropriate payment address]
For more information

This notice does not fully describe continuation coverage or other rights under the Plan. More information about continuation coverage and your rights under the Plan is available in your summary plan description or from the Plan Administrator.

If you have any questions concerning the information in this notice, your rights to coverage, or if you want a copy of your summary plan description, you should contact [enter name of party responsible for COBRA administration for the Plan, with telephone number and address].

For more information about your rights under ERISA, including COBRA, the Health Insurance Portability and Accountability Act (HIPAA), and other laws affecting group health plans, contact the U.S. Department of Labor's Employee Benefits Security Administration (EBSA) in your area or visit the EBSA website at www.dol.gov/ebsa. (Addresses and phone numbers of Regional and District EBSA Offices are available through EBSA's website.)
Keep Your Plan Informed of Address Changes

In order to protect your and your family's rights, you should keep the Plan Administrator informed of any changes in your address and the addresses of family members. You should also keep a copy, for your records, of any notices you send to the Plan Administrator.
Worksheet 5
Health Savings Accounts: A New Option for Consumer-Directed Health Plans

by Charles K. Kerby III, Esq.
 and Keith D. Bilezerian, Esq.1
1Chip Kerby and Keith Bilezerian are partners in McDermott, Will & Emery's Employee Benefits Department, resident in the firm's Washington, DC, and Boston, MA, offices, respectively.
I. INTRODUCTION

On December 8, 2003, President George W. Bush signed the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 2 (the "Act") into law.  In addition to making sweeping changes to the Medicare program, the Act creates Health Savings Accounts ("HSAs"), effective January 1, 2004.3 The tax advantages conferred upon HSAs are significant -- contributions to an HSA are not taxed (subject to limits), HSA earnings are exempt from tax, and HSA distributions used to pay for qualified medical expenses are tax-free.  In addition, HSAs are fully portable and effectively travel with an individual regardless of job status.  Because of these advantageous tax attributes, HSAs are likely to provide a distinct boost to consumer-directed health plans offered by employers and insurance carriers.
2P.L. 108-173.
3Among other changes, §1201 of the Act adds new §223 to the Internal Revenue Code of 1986, as amended (the Code).

This article offers an initial look at HSAs, focusing on several key design considerations.  First, the article describes the statutory requirements that apply to HSAs.  Next is outlined how HSAs compare to other types of tax-favored individual account health plans, such as health flexible spending arrangements ("Health FSAs") and health reimbursement arrangements ("HRAs").  Finally, the article examines several legal and administrative issues that employers will face when integrating HSAs into their existing health plan designs.  Although the Internal Revenue Service (IRS) recently published helpful HSA guidance, that guidance does not address many of the open issues surrounding the design and operation of HSAs.4 
4See  Notice 2004-2, 2004-2 I.R.B. 269.
II. HSA REQUIREMENTS

An HSA is a trust or custodial account created or organized in the United States exclusively for the purpose of paying qualified medical expenses of the account beneficiary.5 HSAs are similar in concept to Archer medical savings accounts ("Archer MSAs") and provide similar tax advantages.  The following discussion takes a closer look at the tax attributes of HSAs and the requirements for achieving favorable tax treatment.  
5Code §223(d)(1).
A. Overview of HSA Tax Attributes

An HSA provides tax-favored treatment for contributions, earnings and distributions, assuming that a series of specific requirements are satisfied.  Contributions to an HSA made by an eligible individual are deductible as an "above-the-line" deduction on the individual's tax return.6 Contributions to an eligible individual's HSA made by an employer are excluded from the individual's income and wages.7 Earnings on amounts contributed to an HSA grow tax-free because an HSA is exempt from federal income tax.8 Distributions from an HSA used to pay for qualified medical expenses are excluded from an individual's gross income, while distributions not used to pay for qualified medical expenses are included in an individual's gross income and generally subject to an additional 10% tax.9 
6Code §§223(a) and 62(a).
7Code §106(d).  The Act provides pllel exclusions for purposes of the railroad retirement tax, federal unemployment tax, and federal income tax withholding.  See Code §§3231(e)(11), 3306(b)(18) and 3401(a)(22), respectively.  The Act did not provide a similar exclusion for FICA purposes, but this oversight is likely to be corrected as part of technical corrections legislation.  The IRS has indicated that employer contributions to an HSA are not subject to FICA withholding.  Notice 2004-2, Q&A-19.
8Code §223(e)(1).
9Code §223(f)(1), (f)(2) and (f)(4)(A).  
B. Eligible Individuals

The favorable tax treatment for HSA contributions applies only to eligible individuals who establish an HSA.  An "eligible individual" is any person who, as of the first day of any month, is covered under a high deductible health plan ("HDHP") and not covered under a non-high deductible health plan ("non-HDHP") that provides coverage for a benefit covered under the HDHP.10 An individual does not violate the non-HDHP requirement if he or she has one or more types of permitted coverage in addition to the HDHP coverage.  For this purpose, "permitted coverage" includes insurance coverage for workers' compensation benefits, tort and property liability, insurance for a specified disease or illness, and insurance that pays a fixed amount per day (or other period) for hospitalization.11 In addition, "permitted coverage" includes insured or self-insured coverage for accident, disability, dental care, vision care or long-term care.12 
10Code §223(c)(1)(A).
11Code §223(c)(1)(B)(i) and (c)(3).
12Code §223(c)(1)(B)(ii).  As used in this article, the term "permitted coverage" includes both permitted insurance described in Code §223(c)(1)(B)(i) and excepted coverage described in Code §223(c)(1)(B)(ii). 
C. High Deductible Health Plan 

An HDHP is an insured or self-insured health plan with a minimum annual deductible (at least $1,000 for single coverage and $2,000 for family coverage) and a maximum out-of-pocket limit (no more than $5,000 for single coverage or $10,000 for family coverage).13 Both the minimum annual deductible and the maximum out-of-pocket limits are increased annually for cost-of-living adjustments.14 The minimum annual deductibles apply to all medical expenses covered under the plan.  For example, a health plan will not satisfy the $1,000 single deductible minimum if it reimburses prescription drugs after a $10 co-payment.15 In addition, the minimum annual deductibles cannot be embedded.  For example, a health plan does not satisfy a $2,000 family deductible minimum if it pays benefits to any family member before the family incurs at least $2,000 in claims.16 A health plan will qualify as an HDHP even if it does not apply a deductible for preventive care 17 and, in the case of network plans, even if the annual deductible and out-of-pocket limit for out-of-network services exceed the statutory limits.18
13Code §223(c)(2)(A).  The statute indicates that the HDHP maximum out-of-pocket limit applies only to "expenses required to be paid under the plan (other than for premiums) for covered benefits." This suggests that a health plan can satisfy the HDHP maximum out-of-pocket limit even if it covers less than "all" of a participant's medical expenses, either by type or dollar amount. For example, it does not appear that a health plan will fail to satisfy the HDHP maximum out-of-pocket limit merely because: (a) it does not provide coverage for certain treatments or conditions (i.e., noncovered benefits by type); (b) it imposes an annual or lifetime dollar limit on some or all of the covered benefits (i.e., noncovered benefits by dollar amount); and/or (c) it does not require an individual to pay expenses greater than the annual deductible (i.e., no additional expenses are required to be paid "under the plan."). IRS guidance on this issue would be useful. 
14Code §223(g).
15Thus, a health plan that carves out prescription drug benefits (i.e., covers prescription drugs subject to septe low-dollar co-payment or co-insurance requirements) generally will not be treated as an HDHP.  Of course, it may still be possible to maintain a low-deductible prescription drug carve-out by excluding drug coverage from the HDHP and treating the prescription drug carve-out as a septe health plan. In this case, the prescription drug carve-out plan would cover a benefit not covered by the HDHP and should not compromise an individual's HSA eligibility. IRS guidance on this issue would be useful.
16Notice 2004-2, Q&A-3.
17Code §223(c)(2)(C).  The statute defines "preventive care" by cross-reference to §1871 of the Social Security Act (a provision providing general Medicare regulatory authority to the Department of Health and Human Services).  This is an apparent error, and the IRS has asked for comments about this definition.
18Code §223(c)(2)(D).
D. Contribution Limits

Contributions to an HSA by or on behalf of an eligible individual receive favorable tax treatment for any month if the contributions do not exceed specified limits.  The maximum amount that can be excluded (or deducted) for any month is 1/12 of the lesser of the HDHP's annual deductible or a specified dollar amount, increased each year for cost-of-living adjustments.19  For 2004, the specified dollar amounts are $2,600 for single coverage and $5,150 for family coverage.20 These limits are reduced by any amount contributed to the HSA by the individual's employer and are further reduced by any amount contributed to an Archer MSA for the individual.21
19See footnote 14.
20Code §223(b)(2). Any coverage tier other than single coverage is treated as family coverage. Code §223(c)(4).
21Code §223(b)(4).  Thus, the combined individual and employer contributions are subject to the same overall limit.

Contributions for any year must be made no later than the due date for the individual's tax return for that year (not including filing extensions).22 All contributions to an HSA, except for rollover contributions, must be made in cash.23 However, no HSA contributions can be made for any month during a year in which an individual may be claimed as a dependent on another person's tax return, or beginning with the first month an individual is eligible for Medicare.24 
22Code §223(d)(4)(B).
23Code §223(d)(1)(A)(i).
24Code §223(b)(6) and (b)(7). 

Additional HSA contributions may be made for eligible individuals who attain age 55 before the end of the year for which contributions are made.  For 2004, the maximum additional "catch-up" contribution amount is $500 per eligible individual (pro-rated by months of HSA eligibility).  The permitted level of "catch-up" contributions is increased in $100 increments each year until it reaches $1,000 in 2009.25 
25Code §223(b)(3).

A special rule applies for determining the contribution limit for married individuals.  First, if either spouse has family coverage under an HDHP, both spouses are treated as having only family coverage.  Second, if the spouses are covered under septe HDHPs with different family deductibles, both spouses are treated as having the family coverage with the lowest annual deductible.26 Finally, the applicable family deductible limit -- for 2004, the lesser of $5,150 or the lowest HDHP family deductible -- is divided equally between the spouses, unless they agree on a different division.27 This rule prevents married individuals from taking advantage of the higher contribution limits for family coverage merely by having both spouses elect family coverage under a HDHP.  Notwithstanding this special rule, both spouses may still take advantage of "catch-up" contributions available for individuals age 55 and over if otherwise eligible to do so.28
26Code §223(b)(5)(A).  This family coverage limit is reduced further by any contributions to Archer MSAs.
27Code §223(b)(5)(B)(ii).
28Id.

If contributions to an HSA exceed the maximum contribution limits, then the individual is subject to a six percent excise tax on the excess contributions.29 This excise tax may be avoided if the HSA distributes the excess contributions (including earnings) to the individual before the individual's income tax filing deadline (including extensions).30
29Code §4973(a)(5).
30Code §§223(f)(3) and 4973(g)(2) (flush language).  If an excess contribution (plus attributable earnings) is distributed to an individual before the individual's tax filing deadline (without extensions), then the individual may not deduct the excess contribution from gross income, and any earnings on the excess contributions are included in the individual's gross income.  See Code §223(f)(3)(A) (flush language).
E. Trust Requirements and Tax Exemption

An HSA is a trust created or organized in the United States, governed by a written trust instrument that satisfies certain requirements.31 For example, an HSA trust instrument must provide that it will accept only cash contributions (except for rollover contributions), will not accept contributions in excess of the annual contribution limits, will not be invested in life insurance contracts, will not commingle assets except in a common trust or investment fund, and will provide that the individual's interest in the balance in his or her account is nonforfeitable.32
31Code §223(d)(1) (flush language).
32Code §223(d)(1)(A), (C), (D) and (E).

The trustee of an HSA trust must be an entity that is either a bank, an insurance company, or another person that demonstrates to the IRS that it will administer the trust consistent with the rules governing HSAs.33 The IRS has indicated that nonbank trustees for HSAs will be determined by applying the same rules that apply to IRA nonbank trustees.34 In addition, the IRS has confirmed that any persons already approved as trustees or custodians of IRAs or Archer MSAs are automatically approved as HSA trustees or custodians.35
33Code §223(d)(1)(B).  
34 See Notice 2004-2, Q&A-9.  The IRA nonbank trustee requirements are described in Regs. §1.408-2(e).
35Id. The current IRS list of approved nonbank trustees may be found in Announcement 2003-54, 2003-40 I.R.B. 761.

An HSA trust that satisfies these requirements is exempt from federal income tax but may be subject to unrelated business income tax.36 An HSA trust will lose its tax-exempt status if the account holder engages in a prohibited transaction with the HSA, and the account is treated as distributed and not used to pay qualified medical expenses.37 In addition, any portion of an HSA pledged as security for a loan is treated as distributed to the account holder and not used to pay qualified medical expenses.38 
36Code §223(e)(1).
37Code §§223(e)(2) and 408(e)(2).
38Code §§223(e)(2) and 408(e)(4).
F. Distributions

Distributions from an HSA (including contributions and earnings) that are used to pay qualified medical expenses are excludible from an individual's gross income.39 For this purpose, a "qualified medical expense" generally includes any amount paid for medical care, within the meaning of Code §213(d), for the HSA account owner and his or her spouse and dependents.40 However, the exclusion from gross income does not apply if HSA distributions are used to pay premiums for health insurance coverage, except for COBRA premiums, long-term care insurance premiums, health plan premiums paid while an individual is receiving unemployment compensation and premiums paid while an individual is eligible for Medicare (except for Medigap premiums).41
39Code §223(f)(1).
40Code §223(d)(2)(A).  Qualified medical expenses cannot be reimbursed tax-free unless incurred after the HSA is established.  See Notice 2004-2, Q&A-26.
41Code §223(d)(2)(B) and (C).  Although the last exception permits Medicare-eligible retirees to pay for employer-sponsored retiree health coverage with HSA funds, it does not provide similar relief for pre-Medicare eligible retirees.  Thus, a 60-year old retiree could not use HSA funds to pay for retiree health coverage.

HSA distributions that are not used to pay for qualified medical expenses are includible in the HSA account holder's income and are subject to an additional 10% tax.42 This additional tax does not apply if the distribution occurs after the HSA account holder dies, becomes disabled or becomes eligible for Medicare.43 HSA distributions are not included in income or subject to the additional tax if they are rolled over to another HSA within 60 days, provided that an individual is entitled to only one tax-free rollover during the one-year period ending on the date the HSA distribution is received.44 Also, the transfer of an individual's interest in an HSA to a spouse or former spouse under a divorce or seption agreement is not treated as a taxable transfer for either spouse.45
42Code §223(f)(2) and (4)(A).
43Code §223(f)(4)(B), (C) 
44Code §223(f)(5)(A) and (B).  Note that an HSA may accept rollover contributions from either an Archer MSA or from another HSA.  See Code §220(f)(5)(A) (permitting rollovers from an Archer MSA to an HSA) and Code §223(f)(5)(A) (permitting rollovers from one HSA to another HSA).  
45Code §223(f)(7).

If the beneficiary of a deceased HSA account holder is the account holder's spouse, then the surviving spouse essentially steps in the shoes of the account holder and is treated as the HSA owner.46 If the beneficiary of a deceased HSA account holder is an individual other than the account holder's spouse or estate, then the HSA ceases to be an HSA upon the account holder's death, and the fair market value of the HSA account balance is taxable to the beneficiary in the year in which the HSA account holder dies.47 If the beneficiary of a deceased HSA account holder is the account holder's estate, then the HSA ceases to be an HSA upon the account holder's death, and the fair market value of the HSA account balance is taxable to the account holder on his or her final income tax return.48
46Code §223(f)(8)(A).  
47Code §223(f)(8)(B)(i)(II). The amount included in income by a non-spouse beneficiary (other than the account holder's estate) is reduced by any qualified medical expenses incurred by the HSA account holder before death and paid by the non-spouse beneficiary within one year after the account holder's death.  See Code §223(f)(8)(B)(ii)(I).
48Id.
G. Cafeteria Plans

If an employer maintains a cafeteria plan qualified under Code §125, the employer may amend its cafeteria plan to permit employees to make pre-tax salary reduction contributions to an HSA.  How is this possible? First, employer-provided HSA coverage is a qualified benefit under Code §106, so the cafeteria plan rules treat employee salary reduction contributions to an HSA as employer-provided HSA coverage.49 Second, a cafeteria plan won't violate the Code §125 prohibition against deferred compensation merely because it permits employees to make pre-tax contributions to an HSA.50 The result is that employee pre-tax salary reduction contributions to an HSA made under a cafeteria plan are now excluded from the employee's income and wages.51 
49Code §§106(d)(1) and 125(f).
50Code §125(d)(2)(D).
51As discussed below, there are several unresolved issues about how the cafeteria plan rules apply to employee pre-tax contributions made to HSAs.
H. Requirements for Employer Contributions

An employer has no obligation to contribute to an employee's HSA.  However, if an employer chooses to make contributions to any employee's HSA, then the employer must make compble contributions on behalf of all compble participating employees (i.e., HSA-eligible employees with single or family coverage under the employer's HDHP) during the same period.52 Contributions are compble if they are either the same dollar amount or the same percentage of the annual deductible under the HDHP covering the employees.53 The compbility rule is applied septely to part-time employees, who are employees who work less than 30 hours per week.54 Significantly, the compbility rule does not apply to contributions made through a cafeteria plan or to amounts rolled over from an Archer MSA or another HSA.55 
52Code §4980G, which cross-references to the requirements of Code §4980E. 
53 Code §4980E(d)(2)(A). It is not clear whether other contribution strategies, such as matching contributions or age-based contributions, would also be considered "compble." IRS guidance on this issue would be useful. 
54Code §4980E(d)(2)(B) and (d)(4).  Presumably, this rule permits an employer to make lower or no contributions for part-time employees.  Note that short-service employees may be excluded if they do not participate in the employer's HDHP.  
55See Notice 2004-2, Q&A-32.  Presumably, this exception applies to all contributions made through a cafeteria plan, including pre-tax salary reduction contributions and cashable flex credits. 

If an employer's HSA contributions fail to satisfy the compbility rule, the employer is subject to an excise tax equal to 35% of the total contributions made by the employer to the HSAs of all employees during the year.56 This penalty may not be imposed if the failure to satisfy the compbility rule is due to reasonable cause and not to willful neglect.57
56Code §4980E(b).  The employer must report the 35% excise tax on IRS Form 5330.  See IRS Pub. 969 (Rev. 2003), Medical Savings Accounts, at page 5.
57Code §4980E(c).
I. Reporting and Substantiation

The statute provides the IRS with explicit authority to impose reporting requirements on HSA account holders, HSA trustees, persons sponsoring HDHPs and employers that make HSA contributions.58 IRS guidance indicates that employers will be required to report HSA contributions on an employee's Form W-2 and that information reporting for HSAs will be similar to information reporting for Archer MSAs.59
58Code §223(h).
59 Notice 2004-2, Q&A-34.  The information reporting requirements for Archer MSAs include three components: (1) Archer MSA account holders must report contributions, deductions and distributions on Form 8853, and report excess Archer MSA contributions on Form 5329; (2) Archer MSA trustees must report contributions on Form 5498-MSA, and report distributions and earnings on excess contributions on Form 1099-MSA; and (3) employers must report Archer MSA contributions in box 12 of Form W-2.  But the information reporting requirements for Archer MSAs do not currently require persons sponsoring HDHPs to file information returns.  The IRS has just begun to issue specific reporting requirements for HSAs.  For example, the instructions to the 2004 Form W-2 indicate that employers must report HSA contributions in box 12 (with Code W), and indicate further that HSA account holders will need to file new Form 8889, Health Savings Accounts.

The IRS guidance also provides that neither employers nor HSA trustees or custodians are required to substantiate whether HSA distributions are used exclusively for qualified medical expenses.  Instead, individuals with HSAs are required to maintain records sufficient to show that distributions from their HSAs have been made exclusively for qualified medical expenses.60 An individual may even use debit, credit or stored-value cards to pay for qualified medical expenses from an HSA without his or her employer becoming subject to the substantiation requirements imposed when these cards are used to fund other health plan arrangements.61
60Notice 2004-2, Q&As-29 and -30.
61Notice 2004-2, Q&A-37.  The IRS guidance does not discuss whether or how the substantiation requirements imposed on the use of debit, credit or stored-value cards under Rev. Rul. 2003-43, 2003-21 I.R.B. 814 apply in the HSA context.  Given the general IRS perspective on substantiation of HSA expenses, however, it is unlikely that those substantiation requirements will apply to HSAs.
J. COBRA

An HSA is not subject to the COBRA continuation coverage requirements imposed under the Code.62 However, there is no similar exception from the COBRA requirements imposed under the Employee Retirement Income Security Act (ERISA) and the Public Health Service Act (PHSA).  While this may be unintentional, the absence of a similar exception makes those COBRA requirements potentially applicable to an HSA governed by ERISA or the PHSA.
62Code §106(d)(2), referring to Code §106(b)(5).
III. COMPARING HSAs TO HEALTH FSAs AND HRAs

There are a number of similarities and differences between HSAs and other types of individual account health plans such as Health FSAs and HRAs.  The following discussion summarizes the key requirements applicable to these other arrangements and then examines how they compare to the HSA requirements.
A. Health FSAs

Health FSAs are a type of tax-favored, employer-sponsored accident or health plan, typically used to reimburse medical expenses up to specified coverage limits (e.g., $5,000 per year).  Under proposed IRS regulations, an accident or health plan is treated as a Health FSA if the maximum amount of coverage is less than 500% of the total contributions or premiums paid for the coverage.63 If an employer-provided accident or health plan is treated as a Health FSA, amounts paid or reimbursed by the Health FSA are excluded from an employee's income only if the Health FSA satisfies certain rules.  For example, a Health FSA must provide uniform coverage throughout a defined 12-month period of coverage (the "uniform coverage rule"), it must require the employee to forfeit any unused amounts at the end of the period of coverage (the "use-it-or-lose-it rule"), it may reimburse only qualified medical expenses that are substantiated (the "claims substantiation rule"), and it must not reimburse health insurance premiums.64 In most cases, a Health FSA is not a funded arrangement but is merely an unfunded account. Typically, Health FSAs are offered as a benefit option under a cafeteria plan and are financed with employee pre-tax salary reduction contributions.
63Prop. Treas. Regs. §1.125-2, Q&A-7(c).
64Prop. Treas. Regs. §1.125-2, Q&A-7(a)
B. HRAs

HRAs are another type of tax-favored, employer-sponsored accident or health plan.  Like a Health FSA, an HRA is used to reimburse medical expenses up to specified coverage limits, is typically established as an unfunded account credited with employer contributions, and may reimburse only qualified medical expenses that are substantiated,  but that is where the similarities end.  An HRA may not be offered as a benefit option under a cafeteria plan, and employees may not contribute to an HRA either on an pre-tax or after-tax basis.65 Also, HRAs are not subject to the use-it-or-lose-it rule, so unused HRA amounts may be carried over from one year to the next, and employers may permit employees to continue to access unused HRA amounts at termination of employment or retirement.  In addition, HRAs are not subject to the uniform coverage rule, so employers may credit contributions ratably over a calendar year and limit reimbursements at any point in time to the amounts that have been credited to the account.66 Finally, unlike a Health FSA, an HRA can be used to reimburse health insurance premiums.67
65Notice 2002-45, 2002-28 I.R.B. 93.
66Id.
67Id.
C. How Do HSAs Compare? 

Put simply, HSAs are more consumer-friendly vehicles for individuals to use to reimburse qualified medical expenses than either Health FSAs or HRAs.  One key difference is that HSAs do not require an employer's involvement.  An HSA can be established by any eligible individual, regardless of that person's status as a common law employee, a self-employed individual or even an unemployed individual.  A second key difference is that HSA contributions belong to the individual and are always fully vested.  An eligible individual may establish an HSA at an early age, make contributions when permissible, and use the account to reimburse medical expenses throughout his or her lifetime.  A third key difference is that HSA distributions are not subject to claims substantiation requirements.  Although the individual must maintain records sufficient to justify the favorable tax treatment of HSA distributions, no third-party claims substantiation is required.  The following table illustrates several comptive differences between HSAs, Health FSAs and HRAs:
                                                                            
        Comptive Differences Between Individual Account Health Plans        
                                                                            
                               HSAs         Health FSAs          HRAs       
                                                                            
  Is employer             No               Yes              Yes             
  involvement required?                                                     
                                                                            
  Can account carry       Yes              No               Yes             
  over unused funds?                                                        
                                                                            
  Is account              Yes              No               Not typically   
  nonforfeitable?                                                           
                                                                            
  Is account funded?      Yes              Not typically    Not typically   
                                                                            
  Can account reimburse   Yes              Yes              Yes             
  medical expenses?                                                         
                                                                            
  Can account reimburse   No (only in      No               Yes             
  health insurance        limited                                           
  premiums?               situations)                                       
                                                                            
  Do employee             Yes              Yes              N/A (employee   
  contributions receive                                     contributions   
  favorable tax                                             not permitted)  
  treatment?                                                                
                                                                            
  Do employer             Yes              Yes              Yes             
  contributions receive                                                     
  favorable tax                                                             
  treatment?                                                                
                                                                            
  Is high-deductible      Yes              No               No (although    
  coverage required?                                        some employers  
                                                            may require     
                                                            such coverage)  
                                                                            
  Are contributions       Yes              No (although     No              
  subject to annual                        many employers                   
  limits?                                  impose annual                    
                                           limits)                          
                                                                            
  Are rollover            Yes              No               No              
  contributions                                                             
  permitted?                                                                
                                                                            
  Are distributions for   Yes              No               No              
  non-medical reasons                                                       
  permitted?                                                                
                                                                            
  Is substantiation       No (although     Yes              Yes             
  required?               individuals                                       
                          must be                                           
                          prepared to                                       
                          substantiate)                                     
                                                                            
  Is account available    Yes              No               No              
  to self-employed                                                          
  individuals?                                                              
                                                                            
  Do COBRA requirements   No (although     Yes              Yes             
  apply?                  clarification                                     
                          needed)                                           
                                                                            
  Can contributions be    Yes              Yes              No              
  made through a                                                            
  cafeteria plan?                                                           
                                                                            
  Does "use-it-or-lose-   No               Yes               No (although   
  it" rule apply?                                           plan could      
                                                            require         
                                                            forfeiture of   
                                                            unused amounts  
                                                            upon            
                                                            termination of  
                                                            employment)     
                                                                            
  Does "uniform           No               Yes              No              
  coverage" rule apply?                                                     
                                                                            
  Is individual tax       Yes              No               No              
  reporting required?                                                       
                                                                            
  Is employer tax         Yes              No               No              
  reporting required?                                                       
                                                                             
IV. DESIGN ISSUES FOR HSAs 

As with all newly created benefit arrangements, there are myriad unanswered design issues surrounding HSAs.  Most of these issues involve the establishment and operation of HSAs and the integration of HSAs with an employer's existing health plan arrangements.
A. Establishing an HSA

A fundamental question is how to establish an HSA.  The statute is fairly clear on this point -- any individual may establish an HSA provided that the individual is an "eligible individual." There is no requirement that the individual be an employee or that he or she have compensation.  The only requirement is that the individual participate in an HDHP and not participate in any other non-HDHP that covers the same benefits as the HDHP, except for permitted coverage.68
68Notice 2004-2, Q&A-2.

Because an individual is responsible for establishing an HSA, employers have begun to ask whether and how they may establish HSAs for their employees.  If an employer were establishing an HRA or Health FSA for employees, the employer would simply adopt a written plan, issue appropriate communication materials to employees and commence plan operations.69 Similarly, if an employer were establishing IRAs for employees, the employer would establish a trust that satisfies the IRA requirements, communicate the arrangement to employees and begin operations.70
69See Code §§105(b) and 125, Treas. Regs. §1.105-5(a), and Prop. Treas. Regs. §1.125-2, Q&A-7.
70See Code §408(c) and Treas. Regs. §1.408-2(c).

For HSAs, however, neither process seems appropriate.  The statute does not require employers to adopt a written HSA plan document, nor does it contemplate that employers might consider "sponsoring" HSAs for employees.  To the contrary, no employer involvement is required to establish an HSA.71 Indeed, it appears that the greatest level of employer involvement contemplated by the statute is that employers may contribute to an employee's HSA.
71Notice 2004-2, Q&A-8.
B. HSA Trustees

An HSA trustee must be a (1) bank, (2) insurance company, or (3) another person who demonstrates to the satisfaction of the Secretary of the Treasury that the manner in which such person will administer the HSA trust will be consistent with the HSA requirements.72 The IRS has indicated that persons other than banks and insurance companies may request approval to be an HSA trustee or custodian under the same procedures that apply to IRA nonbank trustees.73 Under those procedures, an applicant must show that it satisfies a number of requirements, including its ability to act as a fiduciary, its fitness to handle retirement funds, and a minimum net worth.74
72Code §223(d)(1)(B).
73Notice 2004-2, Q&A-9.
74See Treas. Regs. §1.408-2(e)(2), (4) and (5)(ii).  

Although an employer might consider serving as an HSA nonbank trustee, it is not clear that most employers will have either the resources or the desire to serve in this capacity.  The requirements for qualifying and serving as a nonbank trustee are significant, and employers are not likely to consider this a necessary part of their involvement with HSAs.  The IRS has indicated that persons already approved to serve as trustees or custodians of IRAs or Archer MSAs are automatically approved to be HSA trustees or custodians.75 Thus, many employers considering HDHP designs are likely to look first to the marketplace for qualified HSA trustees rather than consider taking on this role themselves.
75Notice 2004-2, Q&A-9.
C. Employer Involvement with HSAs

Although employers may choose not to serve as HSA trustees, they are still likely to be intimately involved in the growth and development of employee HSAs.  Employer involvement may take one of several forms, including the following options:

• Option 1 - Sponsor an HDHP and do not arrange for employee HSAs: An employer may offer an insured or self-insured HDHP design as its exclusive health plan option, or as one of several health plan options offered to employees.  The employer may choose not to take an active role in helping employees establish HSAs, relying instead on employees to establish HSAs on their own.

• Option 2 - Sponsor an HDHP and arrange for employee HSAs: Same as option 1, except that the employer may instead take an active role in helping employees establish HSAs by contracting with one or more HSA trustees to offer HSA products and services to employees. 

• Option 3 - Offer an HSA cafeteria plan option: In addition to (or in lieu of ) options 1 and 2, an employer may amend its cafeteria plan to permit employees to make contributions to their HSAs with pre-tax salary reduction contributions.

• Option 4 - Contribute to employee HSAs: In addition to (or in lieu of) options 1, 2 and 3, an employer may choose to make direct cash contributions to employee HSAs. As discussed in more detail below, each of these options raises potential issues for employers concerning the design and administration of their existing health and cafeteria plans, as well as potential traps for the unwary.
D. Designing the HDHP

The statute provides little detail regarding the design and operation of an HDHP.  The only specified design pmeters involve requirements regarding minimum annual deductibles and maximum out-of-pocket limitations.  The statute does not require an HDHP to cover specific benefits, to provide coverage for specific healthcare providers, or to deliver health care through a specific delivery mechanism.76 As a result, there is nothing to preclude most insured and self-insured health plan designs (including indemnity, preferred or exclusive provider organizations, point of service, and HMOs) from satisfying the standards for an HDHP as long as the design satisfies the minimum annual deductible and maximum out-of-pocket requirements.
76Of course, an insured HDHP must satisfy state law insurance requirements regarding benefit and healthcare provider mandates.  A few states may not permit insured plans with deductibles as high as those required by the statutory definition of an HDHP. 

Nor does the statute address the extent to which an HDHP may be coordinated with an individual's HSA.  For example, there is nothing that requires an individual to contribute to or withdraw funds from an HSA before presenting claims to an HDHP.  Although an HDHP can require an individual to submit claims sufficient to satisfy the HDHP's minimum annual deductibles, it is not clear whether an HDHP can require an individual to make contributions to an HSA or withdraw amounts from an HSA to pay those deductibles.  For example, may an employer condition its HSA contributions on a requirement that employees actually use the contributions to pay for medical expenses counted against the HDHP's annual deductible? Some employers may be reluctant to contribute to employee HSAs without some assurance that their contributions actually will be used to pay for medical expenses that count against the HDHP's annual deductible.77 
77IRS guidance on this issue would be useful.
E. Coordinating HSAs with Health FSAs and HRAs

A primary HSA eligibility requirement is that an individual must be covered by an HDHP but may not be covered by any other health plan that is not an HDHP and which provides coverage for a benefit covered under the HDHP, except for permitted coverage.78 As a reminder, permitted coverage includes accident, disability, dental care, vision care, and long-term care coverage and certain other permitted insurance coverage.79 This requirement raises a fundamental question -- under what circumstances will an individual with Health FSA or HRA coverage also be eligible for an HSA?
78Code §223(c)(1)(A).
79Code §223(c)(1)(B).

The "typical" Health FSA and HRA will not qualify as an HDHP because neither arrangement imposes minimum annual deductibles or maximum out-of-pocket limits.  Thus, most existing Health FSAs and HRAs will not be HDHPs.  In addition, the typical Health FSA and HRA will provide coverage for virtually any medical expense described in Code §213(d).  Thus, most existing Health FSAs and HRAs will duplicate coverage provided under an HDHP.  As a result, an individual that is covered by a typical Health FSA or HRA will not be eligible for an HSA -- even if the individual is covered by an HDHP, the individual will simultaneously be covered by a health plan that is not an HDHP providing coverage for a benefit covered under the HDHP.80
80This should not be the case, however, if an individual is covered by both an HDHP and a "retiree HRA," i.e., an HRA designed to provide coverage only after  an individual retires. Because the HDHP and the retiree HRA provide coverage at different times, the individual is not simultaneously covered by a health plan that is not an HDHP. IRS guidance on this issue would be useful.

This is an especially vexing problem with respect to Health FSA coverage.  Most existing Health FSAs do not require an employee to elect single or family Health FSA coverage.  Instead, a Health FSA typically provides coverage for an employee, spouse and dependents.  For example, an employer may adopt an HDHP and not offer a Health FSA, anticipating that employees will be eligible for HSAs,  but many of the employer's employees may be covered under a spouse's Health FSA and will not be eligible for HSAs.  Given the widespread availability of Health FSAs, this may significantly reduce the number of employees eligible for HSAs.

Notwithstanding these issues, it is clear that HSAs can co-exist with Health FSAs and HRAs.  To accomplish this result, however, an employer must consider fairly radical design changes to its existing Health FSA and/or HRA plans.  For example, an employer could design its Health FSA or HRA to reimburse only expenses for permitted coverage, such as dental coverage or dental and vision coverage only.  In addition, a Health FSA or HRA could be designed to reimburse categories of expenses not covered under an HDHP.  These categories might include, for instance, co-payments and co-insurance not covered by the HDHP,81 amounts exceeding various HDHP plan limits (e.g., annual and lifetime limits, "usual, customary and reasonable" limits, and maximum stay and visit limits), and/or benefits not covered by the HDHP (e.g., LASIK, nonprescription drugs and drugs not covered under the HDHP's formulary).
81It is not clear that a Health FSA or HRA may reimburse the HDHP minimum deductibles, principally because the statute appears to contemplate that only an HSA may reimburse those deductibles.  IRS guidance on this issue would be useful. 

An additional design change could be considered for HRAs.  As noted, most typical HRAs do not incorporate a minimum annual deductible,  but an employer could add minimum annual deductibles to an HRA, possibly converting it into an HDHP.82  If the HRA qualifies as an HDHP, then an individual's HRA coverage will not cause the individual to lose HSA eligibility.  For example, an employer could consider a three-tier plan design for single employees -- an HSA to fund claims up to $1,000, an HRA with a $1,000 annual deductible to fund claims between $1,000 and $2,000, and a comprehensive health plan with an annual deductible of $2,000 to fund claims over $2,000.  In this situation, the HRA and the comprehensive health plans might both be considered HDHPs, and the employee would remain eligible for an HSA.83
82This approach assumes that an HRA providing limited dollar amounts of coverage can satisfy the HDHP maximum out-of-pocket limit.  As noted in footnote 13, however, the application of the HDHP maximum out-of-pocket limit is not entirely clear. 
83This illustration also raises the question of how the HSA contribution limits are applied when an HSA-eligible individual is covered under two or more HDHPs.  The statute does not preclude coverage under more than one HDHP, but neither does it address how the contribution limits apply in that context.  One possible approach would be to apply a rule similar to the rule that applies to married individuals with family coverage and fix the contribution limit at the lowest annual deductible available under any HDHP covering the HSA-eligible individual.  IRS guidance on this issue would be useful.

Of course, nothing precludes an employer from offering multiple plan design options to its employees.  Thus, an employer could offer an HDHP and let employees choose between different types of Health FSAs -- a "full-scale" Health FSA that precludes HSA eligibility or a "limited scope" Health FSA that does not preclude HSA eligibility.  From a practical perspective, it appears unlikely that employers and their employees will give up on Health FSAs.  Despite the many tax advantages available for HSAs, the HSA contribution limits are still relatively low and will not provide employees with sufficient pre-tax opportunities to finance more expensive medical expenses such as laser-vision surgery and orthodontic treatment.
F. HRA Transition Issues

Employers with HRAs may wish to consider transitioning to an HSA arrangement.  Unfortunately, the statute precludes direct rollovers from an HRA to an HSA and does not provide any exceptions to the annual contribution limits or the compble contribution requirements for amounts "transferred" to an HSA from an HRA.  Thus, the statute does not provide any explicit relief for employers that might wish to make employees "whole" by transferring existing HRA account balances to HSAs.84
84An employer might be able to avoid the compble contributions requirement by converting existing HRA account balances to cashable "flex" credits and allowing employees to allocate the credits to an HSA.  See the discussion regarding Cafeteria Plan Issues in IV. G., below.  The HSA annual contribution limits will still limit the amount of HRA funds that could be converted in this manner. 

Of course, an employer could terminate its HRA plan as of a specific date, forfeit existing HRA account balances, and substitute an HSA arrangement going forward. However, any attempt to allow employees to spend down existing HRA account balances is problematic -- the availability of ongoing HRA coverage is non-HDHP coverage that will preclude HSA eligibility.85 Because these HRA transition issues were not considered by Congress, it is unclear that the IRS will be able to address these issues through administrative guidance.
85One possible solution to this problem is to convert the HRA into an HDHP as suggested in the above text accompanying footnote 82.
G. Cafeteria Plan Issues

The statute permits HSAs to be financed with contributions under an employer-sponsored cafeteria plan.  Thus, employees may finance an HSA with pre-tax salary reduction contributions, and employers may allow employees to allocate cashable "flex" credits to an HSA.  The IRS has clarified that cafeteria plan contributions are not subject to the compble contributions requirement.86 However, a more significant issue is how the requirements applicable to cafeteria plans and Health FSAs will or will not apply to HSA benefits offered under a cafeteria plan.
86Notice 2004-2, Q&A-32.

Among other things, the cafeteria plan rules (1) require that elections be made before taxable benefits become currently available,87 (2) prohibit a plan participant from changing elections during a period of coverage unless he or she experiences a change in status,88 and (3) generally prohibit carryovers of unused elective contributions or plan benefits from one plan year to another (the "use-it-or-lose-it" rule).89 However, the cafeteria plan rules include a number of exceptions and, in some cases, specifically allow for the deferral of compensation.  For example, an employee may elect to make pre-tax contributions to a §401(k) plan through a cafeteria plan and, in this case, the cafeteria plan rules regarding revocation of election changes are not applicable to the §401(k) plan.90 The cafeteria plan rules impose additional requirements on Health FSAs, including a 12-month period of coverage rule, a uniform coverage rule, a claims substantiation requirement, and a rule regarding experience gains.91 The question is which of these cafeteria plan and Health FSA rules, if any, should apply to HSA benefits made under a cafeteria plan?
87See Prop. Treas. Regs. §1.125-1, Q&A-15.
88See Prop. Treas. Regs. §1.125-2, Q&A-6 and Treas. Regs. §1.125-4.
89See Code §125(d)(2); Prop. Treas. Regs. §1.125-2 Q&A-5(a).
90See Code §125(d)(2)(B); Prop. Treas. Regs. §1.125-2 Q&A-5(b) and Treas. Regs. §1.125-4(h).  Note that the §401(k) deferred compensation exception also protects employer matching contributions made under a §401(k) plan with respect to employee pre-tax or after-tax contributions.  
91See Prop. Treas. Regs. §1.125-2, Q&A-7(b).

The statutory provisions suggest that, for purposes of the cafeteria plan rules, HSAs should be handled in a manner similar to §401(k) plans.  Recognizing that contributions to an HSA may be carried over from one year to the next, Congress added a new exception to the rule that prohibits a cafeteria plan from deferring compensation or benefits to a subsequent plan year.92 This exception, like the exception for §401(k) plans, permits a cafeteria plan to include an HSA benefit without violating the prohibition on deferred compensation.93 Thus, it is logical to conclude that HSA benefits offered under a cafeteria plan should be subject to the general cafeteria plan election rules and should be treated like §401(k) plan elections for purposes of the election change rules and the rules prohibiting the deferral of compensation.  
92Code §125(d)(2)(D). 
93The same logic should also protect employer matching contributions made with respect to employee pre-tax HSA contributions.

It is also logical to conclude that an HSA benefit offered under a cafeteria plan should not be subject to the special cafeteria plan rules that apply to Health FSAs.  Those rules force Health FSAs to operate in a manner similar to an "insurance-type" accident or health plan under Code §105,  but the special Health FSA rules do not apply to cafeteria plan benefits that are subject to provisions of the Code other than Code §105.  For example, the special Health FSA rules do not apply to cafeteria plan benefits such as dependent care benefits, adoption assistance benefits and §401(k) plan benefits, which are subject to the septe requirements of Code §§129, 137 and 401(k), respectively.  Although an HSA provides health benefits, it is not an employer-sponsored accident or health plan subject to the requirements of Code §105.  Instead, an HSA is subject to the septe requirements of Code §223.94 For this reason, an HSA benefit offered under a cafeteria plan should not be subject to the special rules that apply to Health FSAs.
94For example, the exclusion from gross income for amounts distributed from an HSA is not determined by Code §105(b) but instead is determined by Code §223(f).
H. Application of ERISA 

Neither the Act nor its legislative history address whether, or under what circumstances, ERISA applies to HSAs.  If ERISA applies, an HSA could be subject to reporting, disclosure and fiduciary requirements, as well as a variety of requirements imposed on group health plans.95 Accordingly, it is necessary to consider the appropriate analysis for determining whether an HSA is subject to ERISA.
95The ERISA requirements for group health plans include, among other things, requirements relating to continuation coverage, preexisting conditions, special enrollment, certificates of coverage, health nondiscrimination, mental health parity, mandated maternity stays and reconstructive surgery following mastectomies.  See ERISA §§601-609 and §§701-734. 

Under ERISA, an "employee welfare benefit plan" is defined as any plan, fund or program established or maintained by an employer for the purpose of providing medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment to participants and beneficiaries.96 An HSA clearly provides benefits of the type described by this definition, so the real question is whether an HSA is "established or maintained by an employer."
96ERISA §3(1).

For example, assume one employer amends its cafeteria plan to add an HSA benefit under which employee pre-tax salary reduction contributions are transmitted to an HSA trustee, and that another employer makes direct contributions to employee HSAs.  Should these employers be treated as "maintaining" an HSA? Or, assume that one employer obtains bids from HSA trustees, reviews those bids, and selects one or more HSA trustees to be offered to employees, and that another employer advises employees to invest HSA assets in a particular investment vehicle? Should these employers be treated as "establishing" an HSA? 

The conservative answer is that each of these employers has taken steps that may cause the Department of Labor (DOL) and the courts to conclude that the HSAs are employee welfare benefit plans.  The existing DOL regulations suggest that even extremely limited levels of employer involvement may be sufficient to cause an arrangement to be treated as an employee welfare benefit plan.  For example, the regulations indicate that group and group-type health and welfare insurance programs are not subject to ERISA only if: (1) no contributions are made by an employer; (2) employee participation is completely voluntary; (3) the employer's sole involvement, without endorsing the program, is to permit the insurer to publicize the program and to collect premiums through payroll deduction and remit them to the insurer; and (4) the employer receives no compensation, other than reasonable compensation for administrative services rendered in connection with the program.97 
97DOL Regs. §2510.3-1(j).

The DOL has been more liberal in crafting exemptions from the ERISA definition of an employee pension benefit plan for IRAs and §403(b) annuities.  While the IRA exception is similar to the exception for group insurance programs,98 DOL has also issued interpretive guidance indicating that an employer does not "endorse" a particular IRA program by communicating certain IRA information to employees or by limiting the number of IRA trustees to which it will remit employee contributions.99 The exception for §403(b) annuities is even broader, permitting employers to make pre-tax contributions to §403(b) annuities pursuant to a salary reduction agreement and to perform other administrative functions, including limiting the §403(b) funding options available to employees.100
98DOL Regs. §2510.3-2(d).
99DOL Interpretive Bulletin 99-1, reprinted at DOL Regs. §2509.99-1.
100DOL Regs. §2510.3-2(f).

There appear to be sufficient similarities between HSAs and §403(b) annuities to justify a similar regulatory exemption for HSAs.  As with §403(b) annuities, HSAs are owned by individuals, and the employer's role in many cases will be similarly limited to remitting pre-tax salary reduction contributions to an HSA trustee and/or to perform various administrative functions, such as limiting the number and selection of HSA sponsors and HSA investment funding options.  Without an ERISA exemption or clarification of the manner in which ERISA applies, employers may be reluctant to participate in even minimal activities associated with facilitating employee HSAs.101
101As this article went to press, DOL was considering some type of regulatory exemption for certain HSAs. In addition to a regulatory exemption, DOL might consider relief for some or all ERISA-covered HSAs by: (1) developing specific exemptions from ERISA's reporting and disclosure requirements; and (2) in conjunction with the Treasury Department and the Department of Health and Human Services, exercising the agencies' statutory authority to create specific exemptions from the group health plan requirements of ERISA, the Code and the PHSA. 
V. CONCLUSION

Many employers have adopted or are considering adopting consumer-directed health plans that rely on the combination of a high-deductible health plan and an individual health account, typically an HRA financed exclusively by an employer.  But HSAs offer an interesting alternative to HRAs -- an HSA account is truly portable, includes carryover features and may be funded exclusively with employee pre-tax salary reduction contributions.  In addition, the ability to offer an HSA benefit under a cafeteria plan presents employers with potential FICA tax savings opportunities.  It remains to be seen how comfortably employees will adapt to HSAs as a component part of an employer-sponsored consumer-directed health plan. 

Integrating HSAs into existing health benefit programs will be a challenging exercise, requiring employers to reconsider their benefit design strategies.  Employers that wish to utilize HDHPs in conjunction with employee HSAs and/or offer an HSA benefit option under a cafeteria plan must reconsider the role of their Health FSA and/or HRA plans and consider how best to communicate the new HDHP/HSA features.  Additional HSA guidance is expected from the IRS and the DOL later this year, and hopefully, that guidance will address many of the open issues discussed herein.  At a minimum, employers will want to review their consumer-directed health care strategies with their advisors and consider whether HSAs provide a more flexible and attractive alternative to HRAs.
Worksheet 6
Choosing a New Health Plan Design? Differences Among HRAs, HSAs and FSAs Beyond the Basics and After the First Waves of Guidance

by Greta E. Cowart, Esq.,
Haynes and Boone, LLP
Dallas, Texas 
and T. David Cowart, Esq.
Jenkins & Gilchrist, P.C.
Dallas, Texas

This chart summarizes some of the differences between: (1) a health reimbursement account under Rev. Rul. 2002-41, 2002-2 C.B. 75, and Notice 2002-45, 2002-2 C.B. 93 ("HRA"); (2) a health savings account under §223 of the Internal Revenue Code of 1986, as amended ("Code") and Notice 2004-2, 2004-2 I.R.B. 269 ("HSA"); and (3) a health plan that is a flexible spending arrangement under §§105 and 106 of the Code and Proposed Treasury Regulation §1.125-2, Q&A-7.  No one should rely on this chart as legal advice.  In every situation, the application of the rules requires careful analysis by counsel who is familiar with your particular situation.

This chart summarizes some of the guidance issued through April 26, 2004, and related issues.  It is not intended to cover all issues but only to consider how other laws may interact with the various arrangements. © 2004 Haynes and Boone, LLP and T. David Cowart. All rights reserved. 
Click to view the following graphic illustration:

"Choosing a New Healthplan Design"
Worksheet 7
Model Health Savings Account
(Under §223 of the Internal Revenue Code)  

                                                                            
  Name of Depositor        Date of Birth of         Identifying Number      
                           Depositor                                        
                                                                            
  Address of Depositor                                                      
                                                                            
  Name of Custodian        Address of Principal Place of Business of        
                           Custodian                                        

The depositor named above is establishing a health savings account ("HSA") under §223 to provide health care benefits for the depositor and eligible spouse and dependents.

The depositor has paid to the custodial account $_________ in cash.

The depositor and the custodian make the following agreement.
ARTICLE I

1.  Except in the case of a rollover contribution described in §223(f)(5) or §220(f)(5) of the Internal Revenue Code of 1986, as amended (the "Code"), the custodian will accept only cash contributions up to $216.67 per month in the case of a depositor with self-only medical coverage and $429.17 per month in the case of a depositor with family medical coverage. For tax years after 2004, the above limits will be increased to reflect a cost-of-living adjustment ("COLA"), if any.

2.  For individuals who have reached the age of 50, but not the age of 65, before the close of the tax year, the contribution limit is increased by $41.67 per month in calendar year 2004. This amount is increased in annual increments of $8.33 in calendar years 2005 through 2009.

3.  In the case of eligible individuals under Article II who are married to each other, if either spouse has family coverage, both spouses shall be treated as having only such family coverage. If such spouses each have family coverage under different plans, they shall be treated as having the family coverage with the lower annual deductible. The monthly limitation under paragraph 1 above, after the application of this paragraph 3 and without regard to any additional contributions under paragraph 2, shall be reduced by the aggregate amount paid to Archer medical savings accounts of such spouses for the taxable year, and after such reduction shall be divided equally between them unless they agree on a different division.

4.  The dollar limitation under this Article I for any month with respect to an individual shall not be greater than 1/12 of the applicable annual deductible under the high deductible health plan referred to in Article II, and shall be zero for the first month the individual is entitled to benefits under Title XVIII of the Social Security Act ("SSA") and for each month thereafter.
ARTICLE II

1.  Contributions to the custodial account may be made for a month only for one or more individuals covered under a high deductible health plan as of the first day of such month, and not covered under any other health plan that (a) is not a high deductible health plan and (b) provides coverage for any benefit that is covered under the high deductible health plan. A high deductible health plan is a health plan that has an annual deductible of at least $1,000 for self-only coverage and at least twice that amount for family coverage, and an annual out-of-pocket expense limit of no more than $5,000 for self-only coverage and no more than twice that amount for family coverage. For tax years after 2004, the above limits are increased for COLAs, if any. A plan is not a high deductible health plan if substantially all of the coverage consists of coverage(s) described in paragraph 3 of this Article II.

2.  A plan shall not fail to be treated as a high deductible health plan by reason of failing to have a deductible for preventive care. A plan shall not fail to be treated as a high deductible health plan by reason of having an out-of-pocket limitation for services provided outside the plan's network of providers that exceeds the applicable limitation under paragraph 1. The plan's annual deductible for services provided outside of such network shall not be taken into account for purposes of the dollar limits in Article I.

3.  An individual shall not be ineligible under this Article by reason of coverage for any benefit provided for permitted insurance, or coverage (whether through insurance or otherwise) for accidents, disability, dental care, vision care, or long-term care, that does not comply with paragraph 1 of this Article II, so long as substantially all of such coverage does not consist of coverage described in this paragraph 3. Permitted insurance is insurance (a) if substantially all of the coverage provided under such insurance relates to: (i) liabilities incurred under workers' compensation laws; (ii) tort liabilities; (iii) liabilities relating to ownership or use of property; and (iv) such other similar liabilities as the Secretary of the Treasury may specify by regulations, (b) for a specified disease or illness, or (c) paying a fixed amount per day (or other period) of hospitalization.
ARTICLE III

The depositor's interest in the balance of the custodial account is nonforfeitable.
ARTICLE IV

1.  No part of the custodial account funds may be invested in life insurance contracts, nor may the assets of the custodial account be commingled with other property except in a common trust fund or common investment fund.

2.  No payment for insurance may be made from the custodial account, except for coverage under (a) a health plan during any period of continuation coverage required under any federal law, (b) a qualified long-term care insurance contract (as defined in §7702B(b) of the Code), (c) a health plan during a period in which the individual is receiving unemployment compensation under any federal or state law, or (d) in the case of a depositor who has attained the age specified in §1811 of the SSA, any health insurance other than a medicare supplemental policy (as defined in §1882 of the SSA).
ARTICLE V

1.  The depositor agrees to provide the custodian with all information necessary to prepare any report required by §223(h) of the Code and regulations thereunder.

2.  The custodian agrees to submit to the Internal Revenue Service ("IRS") and depositor the reports prescribed by the IRS.
ARTICLE VI

Notwithstanding any other articles that may be added or incorporated, the provisions of Articles I through IV and this sentence shall be controlling. Any additional articles inconsistent with §223 and the related regulations shall be invalid.
ARTICLE VII

This Agreement shall be amended as necessary to comply with the provisions of the Code and the related regulations. Other amendments may be made with the consent of the persons whose signatures appear below.
  ___________________________          _____________________             
  Depositor's Signature                Date                              
  ___________________________          _____________________             
  Custodian's Signature                Date                              

Worksheet 8
Model Health Reimbursement Account
ARTICLE I -- PURPOSE

1.01 The purpose of this Plan is to help provide medical care for each participating employee and his or her spouse and eligible dependents. It is the intention of the XYZ Company, Inc. (the "Company") that this Plan qualify as a health reimbursement arrangement ("HRA") within the meaning of Notice 2002-45, 2002-28 I.R.B. 93, and an accident and health plan within the meaning of §105 of the Internal Revenue Code of 1986, as amended (the "Code"), and that the benefits payable under the Plan be eligible for exclusion from gross income under that section.
ARTICLE II -- PERMANENT PROGRAM OR ARRANGEMENT

2.01 The Company intends that this program be a permanent program or arrangement for the exclusive benefit of its employees and their families. Nothing herein, however, shall prevent the Company from amending or terminating this Plan, provided such amendment or termination shall not affect a claimant's rights to benefits hereunder with respect to reimbursable expenses that have been incurred prior to the date Company action is taken to terminate the Plan or the effective date of such termination, whichever occurs later.

2.02 The exclusive purpose of this Plan is to provide the medical benefits described herein for covered employees and their family members. No benefits payable under this Plan shall be applied for any other purpose.
ARTICLE III -- EFFECTIVE DATE

3.01 The effective date of this Plan shall be January 1, 20___. The records of the Plan shall be kept on a calendar year basis. The Plan Year shall be the calendar year.
ARTICLE IV -- ELIGIBILITY

4.01 All full-time employees of the Company shall be eligible to participate in this Plan except:

(a) members of a bargaining unit covered by a collective bargaining agreement, provided the Company has bargained in good faith on the subject of accident and health benefits; and

(b) nonresident aliens who receive no U.S.-source income from the Company for the Plan Year.

Full-time employees are those who customarily work both at least ______ hours per week and at least _____ months per year.

4.02 The Participant's spouse and dependents shall be eligible to participate in this Plan. Dependents are those who qualify as dependents under §152 of the Code.

4.03 A Participant's domestic partner shall be eligible to participate in this Plan. A domestic partner is an individual with respect to whom the Participant provides a certificate of domestic partnership in the form prescribed by the Plan Administrator.
ARTICLE V -- PARTICIPATION

5.01 Each employee who is eligible to participate in the Plan under Article IV (an "Eligible Employee") shall become a participant in the Plan (a "Participant") on the effective date of the Plan if on the effective date he or she is at least ____ years old and has completed at least ____ years of continuous employment with the Company. Each other Eligible Employee shall become a Participant on the first day of the month immediately following the month in which he or she has both attained age ____ and completed at least ____ years of continuous employment with the Company. Upon termination of a Participant's employment with the Company, all rights of such Participant (and/or an eligible dependent of the Participant) to receive benefits for claims incurred after the termination date shall be forfeited. Such Participant (and eligible dependent) shall, however, retain the right to be reimbursed hereunder for claims incurred prior to the termination of employment. For this purpose, a claim will be considered to be incurred when the services relating to such claim have been rendered.

5.02 The Plan shall provide benefits in accordance with the applicable requirements of any qualified medical child support order ("QMCSO") as defined in §609 of the Employee Retirement Security Act of 1974 ("ERISA") relating to a child of a Participant. Benefits payable under Article VI pursuant to a QMCSO shall be paid to the child's custodial parent or legal guardian, or a government agency, as directed by the QMCSO.
ARTICLE VI -- BENEFITS

6.01 The Company shall pay to each Participant such amounts as he or she has expended while a Participant for medical care for himself or herself and his or her spouse and dependents, subject to the limits described in Article 7, below.

6.02 For purposes of this Plan the following terms shall have the definitions set forth below:

(a) "Amounts expended for medical care" means amounts paid for:

(1) hospitalization, medical and dental services, prescription drugs and medical supplies that are eligible for tax-free reimbursement and corrective lenses and eyeglass frames; and

(2) transportation primarily for, and essential to, medical care.

(b) Dependent means a dependent as defined in §152 of the Code, or a child placed with the Participant for adoption.

6.03 If the Participant has made salary reduction contributions to a flexible spending account ("FSA") during a Plan Year, reimbursement shall first be made from the FSA, and only when the FSA is exhausted shall reimbursement be made under this Plan.
ARTICLE VII -- LIMITATION ON BENEFITS PROVIDED

7.01 No Participant shall be entitled to receive more than $________ in reimbursements under this Plan times the number of full calendar months as a Participant. For this purpose, amounts received that are attributable to reimbursements due the Participant's spouse or dependents shall be considered to have been received by the Participant.
ARTICLE VIII -- BENEFITS FROM ANOTHER SOURCE

8.01 Reimbursement under this Plan shall be made only in the event, and to the extent, that reimbursement for amounts expended, or payment, for medical care is not provided for under any insurance policy or under any other plan of the Company or another employer or under any federal or state law. If there is such a policy, plan or law in effect providing for such reimbursement or payment in whole or in part, then, to the extent of the coverage under such policy, plan or law, the Company shall be relieved of any and all liability hereunder.
ARTICLE IX -- CONTINUATION OF COVERAGE

9.01 Rights to Continuation. An individual whose coverage is terminated because of any qualifying event enumerated below has the right to continue coverage under this Plan if covered for such benefits on the day immediately preceding the qualifying event. A child of the Participant who is born or placed for adoption during continuation of coverage also is eligible. An individual who elects to continue coverage must pay the full cost of the coverage. The time period for which the continuation is available is indicated below in conjunction with the corresponding qualifying event.

If continuation of coverage is elected, coverage will continue as though termination of employment or loss of eligible status had not occurred. Any benefits paid prior to termination or loss of eligibility, which had been credited toward the maximum benefit of this Plan, will be retained. If any changes are made to the coverage for employees in active service, the coverage provided to individuals under this continuation provision will be changed similarly.

9.02 Qualifying Events. Continuation is available for up to eighteen (18) months to eligible individuals in the case of either of the following qualifying events.

• Termination of employment with the Company, for any reason except gross misconduct

• Reduced work hours

Continuation is available for up to twenty-nine (29) months to all covered family members in the event of the following qualifying event:

• Disability, per a determination under the Social Security Act, on or within 60 days after the Participant's termination of employment or reduction in work hours.

The disabled individual must provide the Plan Administrator with notice of the disability within sixty (60) days of the determination of the disability by Social Security and before the end of the original eighteen (18) month COBRA coverage period. The disabled individual must also notify the Company of a determination by Social Security that the individual is no longer disabled, within thirty (30) days of such determination.

Continuation is available for up to thirty-six (36) months to a covered dependent spouse and/or child in the event of any one of the following qualifying events.

• A Participant's death

• Divorce or legal separation from a Participant

• Loss of eligibility to participate due to age, marriage or a change in student status

• Loss of eligibility to participate due to the Participant becoming covered by Medicare as a result of total disability or choosing Medicare in place of this Plan at age sixty-five (65).

Individuals may experience multiple qualifying events, but in no case (except bankruptcy) will coverage be continued for more than thirty-six (36) months. If an employee becomes covered by Medicare, but no loss of coverage results for the employee or the covered dependents, and a subsequent qualifying event occurs, the duration of coverage for all qualified beneficiaries other than the covered employee must be at least thirty-six (36) months from the date on which the employee became covered by Medicare.

9.03 Election of Coverage. An individual has sixty (60) days from the qualifying event, or if later sixty (60) days from the date the Plan Administrator mails or otherwise provides the individual with a notification of rights with respect to the qualifying event, to elect coverage.

Each covered person is required to notify the Plan Administrator within sixty (60) days of any qualifying event of which it would not otherwise be aware, such as divorce, legal separation, or loss of dependent status by a dependent child. The covered person is also required to provide the Plan Administrator with all information needed to meet its obligation of providing notice and continuing coverage.

9.04 Cost of Continuation Coverage. The cost of continuation coverage for each individual is an amount equal to 102% of the Plan's average cost of benefits per covered person for the preceding year. However, a disabled individual must pay 150% of the Plan's cost after 18 months of continuation coverage.

Payment of the initial monthly contribution is not required until the forty-fifth (45th) day after the election. All subsequent payments for coverage are subject to a thirty (30) day grace period.

9.05 Termination of Continuation of Coverage. Continuation coverage is not available after whichever of the following dates is first to occur.

• The date the maximum continuation period expires for the corresponding qualifying event

• The date this Plan is terminated

• The date the individual fails to make the required contribution to continue coverage

• The date the individual becomes covered under any other group health plan without being subject to any exclusions or limitations with respect to a pre-existing condition

• The date the individual becomes covered by Medicare

• With respect to coverage in excess of 18 months by reason of disability, the end of the first month that begins after a final determination under the Social Security Act that the disabled individual is no longer disabled.

9.06 If a Participant takes a leave of absence under the federal Family and Medical Leave Act of 1993 ("FMLA"), benefits shall continue to be paid under Article VI as if the Participant remained in active employment. The Participant shall be considered to have terminated employment with the Company on the earliest to occur of: (1) the date the Participant notifies the Company of his intent not to return to employment; (2) the date the Participant fails to return to employment at the end of the leave of absence; or (3) the effective date of termination of the Plan. If a Participant who is a "key employee" as defined under the FMLA is notified by the Company that substantial or grievous economic injury will result from restoration of his employment, the key employee's entitlement to benefits under the Plan continues until the earliest of: (1) the date the key employee notifies the Company that he does not desire restoration of employment at the end of his leave of absence; (2) the date his leave entitlement is exhausted; or (3) the date restoration of employment is denied by the Company.
ARTICLE X -- CLAIMS AND CLAIMS REVIEW PROCEDURE

10.01 Claims for benefits under this Plan shall be made on forms maintained by the Company. To obtain reimbursement for medical expenses hereunder, a Participant must submit within 30 days after the end of each calendar quarter a request for reimbursement for medical expenses incurred by him or her during the preceding quarter, together with such evidence of payment of such expenses as shall be required by the Company in accordance with rules uniformly applied.

10.02 If any claim for benefits under this Plan is denied in whole or in part, the Plan Administrator shall furnish the claimant promptly with a written notice:

(a) setting forth the reason for the denial;

(b) citing the Plan provisions upon which such denial is based;

(c) describing any additional material or information from the claimant which is necessary in order for the claimant to perfect his or her claim and why; and

(d) explaining the claim review procedure set forth herein.

10.03 Failure by the Company to respond to a claim within 90 days shall be deemed a denial. Within 60 days after denial of any claim for benefits under this Plan, the claimant may request in writing a review of the denial by the Plan Administrator.

10.04 Any claimant seeking review hereunder is entitled to examine all pertinent documents, and to submit issues and comments in writing. The Plan Administrator shall render a decision on review of a claim not later than 60 days after receipt of a request for review hereunder. The decision of the Plan Administrator on review shall be in writing and shall state the reason for the decision, referring to the Plan provisions upon which it is based.

10.05 At the time an individual's coverage under the Plan terminates, the Company shall furnish a certificate of creditable coverage under the Plan in accordance with §9801 of the Code. In addition, the Company shall furnish a certificate of creditable coverage upon request of an individual made not later than 24 months after cessation of coverage under the Plan, and shall furnish to another group health plan upon request information on coverage of classes and categories of health benefits under the Plan.
ARTICLE XI -- ADMINISTRATION

11.01 The Plan Administrator of the Company shall have authority and responsibility to control and manage the operation and administration of this Plan. The Plan Administrator shall have discretion to interpret the terms of the Plan, and such interpretation shall be binding on all parties, subject to Article X. 
ARTICLE XII -- MISCELLANEOUS

12.01 All terms expressed herein shall be deemed to include the feminine and neuter genders and all references to the plural shall be deemed to include the singular and vice versa, all as proper construction shall dictate.

12.02 To the extent not preempted by ERISA, questions concerning the proper interpretation of the terms of this agreement shall be determined in accordance with the law of the State of _________, where the Company's principal business office is located.

12.03 The Plan Administrator shall keep a copy of this plan document and any other disclosure documents relating thereto (including, but not limited to, summary plan descriptions) that are in the public domain on file at his office where Participants may inspect them during the Company's regular business hours. Upon request, the Company shall provide a Participant or covered dependent with copies of such documents. When the Plan Administrator provides such documents, the Plan Administrator may charge the requesting party a reasonable charge for photocopying these materials.

12.04 This document contains all of the operative provisions of this Plan. Any conflict between the provisions of this document and any other Company document purporting to explain the rights, benefits, or obligations of the parties hereunder shall be resolved in favor of this Plan document. In the event that a tribunal of competent jurisdiction shall determine in a final judgment or decree that one or more of the provisions of this Plan is invalid due to the provisions of applicable law, this Plan shall be interpreted as if the offending language had been stricken from its provisions and the remainder of the Plan document shall continue in full force and effect.

In adoption of this Plan document, the responsible officer(s) of the corporation have set forth their signatures below, this ____ day of ___________, 20___.

BIBLIOGRAPHY
OFFICIAL
Statutes:
Primary: Internal Revenue Code of 1986, as amended: §§104-106, 4980B.
Secondary: IRC §§22, 72, 125, 151, 152, 162, 165, 192, 213, 401, 402, 404, 414, 419, 419A, 501, 505, 511, 512, 691, 1341, 1402, 1561, 3101, 3402, 7703.
5 U.S.C. §8102 (1982).
10 U.S.C. §§1401-1403 (1986).
18 U.S.C. §1027 (1982).
Age Discrimination in Employment Act, 29 U.S.C. §§623, 630, 631 (1986 Supp.).
Age Discrimination in Employment Amendments of 1986, P.L. 99-592.
Employee Retirement Income Security Act of 1974, P.L. 93-406.
Social Security Act Amendments of 1983, P.L. 98-21.
Tax Reform Act of 1984, P.L. 98-369.
Tax Reform Act of 1986, P.L. 99-514.
Technical and Miscellaneous Revenue Act of 1988, P.L. 100-647.
Regulations:
See Treasury Regulations under the Internal Revenue Code sections listed above and other regulations promulgated under the above-referenced statutes.
Treasury Rulings:
Rev. Proc. 99-50, 1999-52 I.R.B. 757.
Rev. Proc. 2001-3, 2000-1 I.R.B. 111.
Rev. Proc. 2002-70, 2002-46 I.R.B. 845
Rev. Proc. 2003-85, 2003-49 I.R.B. 1184.
Rev. Proc. 2004-13, 2004-4 I.R.B. 335.
Rev. Proc. 2004-22, 2004-15 I.R.B. 727.
Rev. Proc. 2004-71, 2004-50 I.R.B. 970.
Rev. Rul. 55-264, 1955-1 C.B. 11.
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Rev. Rul. 56-400, 1956-2 C.B. 116.
Rev. Rul. 57-33, 1957-1 C.B. 303.
Rev. Rul. 57-399, 1957-2 C.B. 101.
Rev. Rul. 58-90, 1958-1 C.B. 88.
Rev. Rul. 58-418, 1958-2 C.B. 18.
Rev. Rul. 58-602, 1958-2 C.B. 109.
Rev. Rul. 59-64, 1959-1 C.B. 31.
Rev. Rul. 59-158, 1959-1 C.B. 34.
Rev. Rul. 61-146, 1961-2 C.B. 25.
Rev. Rul. 61-164, 1961-2 C.B. 99.
Rev. Rul. 62-199, 1962-2 C.B. 38.
Rev. Rul. 63-181, 1963-2 C.B. 74.
Rev. Rul. 65-29, 1965-1 C.B. 59.
Rev. Rul. 66-216, 1966-2 C.B. 100.
Rev. Rul. 67-360, 1967-2 C.B. 71.
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Rev. Rul. 68-212, 1968-1 C.B. 109.
Rev. Rul. 69-141, 1969-1 C.B. 48.
Rev. Rul. 70-179, 1970-1 C.B. 23.
Rev. Rul. 70-341, 1970-2 C.B. 31.
Rev. Rul. 71-403, 1971-2 C.B. 91.
Rev. Rul. 71-588, 1971-2 C.B. 91.
Rev. Rul. 72-45, 1972-1 C.B. 34.
Rev. Rul. 72-191, 1972-1 C.B. 45.
Rev. Rul. 72-291, 1972-1 C.B. 36.
Rev. Rul. 72-400, 1972-2 C.B. 75.
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Rev. Rul. 73-346, 1973-2 C.B. 24.
Rev. Rul. 73-347, 1973-2 C.B. 25.
Rev. Rul. 74-18, 1974-1 C.B. 139.
Rev. Rul. 74-77, 1974-1 C.B. 33.
Rev. Rul. 74-603, 1974-2 C.B. 35.
Rev. Rul. 75-45, 1975-1 C.B. 47.
Rev. Rul. 75-230, 1975-1 C.B. 93.
Rev. Rul. 75-241, 1975-1 C.B. 316.
Rev. Rul. 75-479, 1975-2 C.B. 44.
Rev. Rul. 75-499, 1975-2 C.B. 43.
Rev. Rul. 75-539, 1975-2 C.B. 45.
Rev. Rul. 77-123, 1977-1 C.B. 28.
Rev. Rul. 77-235, 1977-2 C.B. 45.
Rev. Rul. 77-318, 1977-2 C.B. 45.
Rev. Rul. 78-46, 1978-1 C.B. 22.
Rev. Rul. 78-116, 1978-1 C.B. 143.
Rev. Rul. 78-161, 1978-1 C.B. 31.
Rev. Rul. 78-416, 1978-2 C.B. 103.
Rev. Rul. 79-173, 1979-1 C.B. 86.
Rev. Rul. 79-175, 1979-1 C.B. 117.
Rev. Rul. 79-220, 1979-2 C.B. 74.
Rev. Rul. 79-427, 1979-2 C.B. 120.
Rev. Rul. 80-9, 1980-1 C.B. 11.
Rev. Rul. 80-14, 1980-1 C.B. 33.
Rev. Rul. 80-44, 1980-1 C.B. 34.
Rev. Rul. 80-84, 1980-1 C.B. 35.
Rev. Rul. 81-47, 1981-1 C.B. 55.
Rev. Rul. 81-191, 1981-2 C.B. 49.
Rev. Rul. 81-192, 1981-2 C.B. 50.
Rev. Rul. 81-193, 1981-2 C.B. 52.
Rev. Rul. 81-194, 1981-2 C.B. 54.
Rev. Rul. 82-196, 1982-2 C.B. 53.
Rev. Rul. 83-91, 1983-1 C.B. 38.
Rev. Rul. 84-108, 1984-2 C.B. 32.
Rev. Rul. 85-97, 1985-2 C.B. 50.
Rev. Rul. 85-98, 1985-2 C.B. 51.
Rev. Rul. 85-104, 1985-2 C.B. 52.
Rev. Rul. 85-121, 1985-2 C.B. 57.
Rev. Rul. 85-143, 1985-2 C.B. 55.
Rev. Rul. 90-29, 1990-1 C.B. 11.
Rev. Rul. 91-26, 1991-1 C.B. 184.
Rev. Rul. 92-93, 1992-2 C.B. 505.
Rev. Rul. 96-8, 1996-1 C.B. 286.
Rev. Rul. 98-37, 1998-32 I.R.B. 5.
Rev. Rul. 2001-31, 2001-26 I.R.B. 1348.
Rev. Rul. 2002-3, 2002-3 I.R.B. 316.
Rev. Rul. 2002-41, 2002-28 I.R.B. 75.
Rev. Rul. 2002-58, 2002-38 I.R.B. 541.
Rev. Rul. 2002-80, 2002-49 I.R.B. 925.
Rev. Rul. 2003-43, 2003-21 I.R.B. 935.
Rev. Rul. 2003-57, 2003-22 I.R.B. 959.
Rev. Rul. 2003-70, 2003-27 I.R.B. 3.
Rev. Rul. 2003-102, 2003-38 I.R.B. 559.
Rev. Rul. 2004-22, 2004-10 I.R.B. 553.
Rev. Rul. 2004-38, 2004-15 I.R.B. 717.
Rev. Rul. 2004-45, 2004-22 I.R.B. 971.
Rev. Rul. 2004-55, 2004-26 I.R.B. 1081.
Rev. Rul. 2004-65, 2004-27 I.R.B. 1.
Cases:
Ackerman v. Warnaco, Inc., 55 F.3d 117 (3d Cir. 1995).
Adkins v. U.S., 882 F.2d 1078, 89-2 USTC ¶9489, 64 AFTR 2d 89-5424 (6th Cir. 1989).
Aetna Health Inc. v. Davila and CIGNA Healthcare of Texas v. Calad, 124 S. Ct. 2488, 32 EBC 2569 (2004).
Aiken v. Policy Management Sys. Corp., 13 F.3d 138 (4th Cir. 1993).
Alday v. Container Corp. of America, 906 F.2d 660 (11th Cir. 1990).
Allen v. Loyola Univ., 1996 U.S. Dist. LEXIS 2433 (E.D. La. 1996).
American Family Mutual Ins. Co. v. U.S., 815 F. Supp. 1206 (W.D. Wis. 1992), recon. denied, 93-1 USTC ¶50,158 (1993).
American Foundry v. Comr., 59 T.C. 231 (1972), aff'd and rev'd in part, 536 F.2d 289 (9th Cir. 1976).
Anderson v. Comr., T.C. Memo 1997-309.
AppleTree Markets, Inc., In re, 19 F.3d 969, 17 EBC 2681 (5th Cir. 1994).
Armistead v. Vernitron Corp., 944 F.2d 1287, 14 EBC 1632  (6th Cir. 1991).
Atlantic Health Care Benefits Trust v. Constance B. Foster, 809 F. Supp. 365, 16 EBC 1503 (M.D. Pa. 1992).
Atlantic Healthcare Benefits Trust v. Googins, 2 F.3d 1 (2d Cir. 1993).
Barnes v. Comr., T.C. Memo 1997-25.
Beisler v. Comr., 49 T.C.M. 534, 6 EBC 1260 (1985), aff'd, 787 F.2d 1325, 7 EBC 1625 (9th Cir. 1986), reh'g en banc, 814 F.2d 1304 (9th Cir. 1987).
Bent v. Comr., 87 T.C. 236 (1986), aff'd, 835 F.2d 67 (3d Cir. 1987).
Berger v. Comr., 76 T.C. 687 (1981).
Bidlack v. Wheelabrator Corp., 993 F.2d 603 (7th Cir. 1993).
Biggers v. Wittek Industries, 4 F.3d 291, 17 EBC 1556  (4th Cir. 1993).
Bixler v. Central Pennsylvania Teamsters Health & Welfare Fund, 12 F.3d 1292, 17 EBC 1934 (3d Cir. 1993).
Black v. TIC Investment Corp., 900 F.2d 112 (7th Cir. 1990).
Black and Decker Disability Plan v. Nord, 538 U.S. 822, 30 EBC 1577 (2003), cert. denied, 125 S. Ct. 62 (2004).
Blackburn v. Comr., 15 T.C. 336 (1950).
Blue Cross and Blue Shield of Texas v. Shalala, 995 F.2d 70, 17 EBC 1370 (5th Cir. 1993).
Bogene, Inc. v. Comr., T.C. Memo 1968-147.
Bongiovanni v. Comr., 35 T.C.M. 586 (1976).
Bouquett v. Comr., T.C. Memo 1994-212.
Bowen v. USPS, 459 U.S. 212 (1983).
Bragdon v. Abbott, 524 U.S. 624 (1998).
Branch v. Bernd Co., 955 F.2d 1574, 14 EBC 2817 (11th Cir. 1992), aff'g 764 F. Supp. 1527, 13 EBC 2281 (M.D. Ga. 1991).
Brock v. Primedica, Inc., 904 F.2d 295, 12 EBC 2118 (5th Cir. 1990).
Burke v. American Stores Employee Benefit Plan, 818 F. Supp. 1131, 16 EBC 2485 (5th Cir. 1993).
Caplin v. U.S., 83-1 USTC ¶9167 (D.N.Y. 1983), aff'd, 718 F.2d 544, 4 EBC 2142 (2d Cir. 1983).
Carland v. Metropolitan Life Ins. Co., 935 F.2d 1114 (10th Cir. 1991).
Carlton v. U.S., 782 F.2d 173, 6 EBC 2721 (Fed. Cir. 1986).
Chaganti v. Sun Microsystems, No. C 03-05785 (N.D. Cal. 11/23/04).
Charlie Sturgill Motor Co. v. Comr., 32 T.C.M. 1336 (1973), app. dism'd nolle pros. (6th Cir. 1974).
Communications Workers of America v. Nynex Corp., 898 F.2d 887, 12 EBC 1049 (2d Cir. 1990).
Conery v. Bath Associates, 803 F. Supp. 1388 (N.D. Ind. 1992).
Connecticut Hospital Assoc. v. Weltman, 66 F.3d 413, 19 EBC 1928 (2d Cir. 1995).
Curtiss-Wright Corp. v. Schoonejongen, 514 U.S. 73, 18 EBC 2841 (1995), on remand, 143 F.3d 120, 21 EBC 1073 (3d Cir. 1998).
Daughtry v. Honeywell, Inc., 3 F.3d 1488, 17 EBC 1731 (11th Cir. 1993).
De Buono v. NYSA-ILA Medical Clinical Services Fund, 520 U.S. 806, 21 EBC 1041 (1997).
Degruise v. Sprint Corporation, 279 F.3d 333 (5th Cir. 2002).
Dehner v. Kansas City S. Indus., Inc., 713 F. Supp. 1397 (D. Kan. 1989).
DiSabatino v. DiSabatino Brothers, Inc., 894 F. Supp. 810 (D. Del. 1995).
District of Columbia v. Greater Wash. Bd. of Trade, 506 U.S. 125, 113 S. Ct. 580, 16 EBC 1001 (1992).
Doe v. Travelers Ins. Co., 167 F.3d 53, 22 EBC 2433 (1st Cir. 1999).
Dotson v. U.S., 87 F.3d 682, 20 EBC 1484 (5th Cir. 1996).
Drolet v. Healthsource, 968 F. Supp. 757, 20 EBC 2708 (D.N.H. 1997).
Duclos v. Gen'l Dynamics Corp., 12 EBC 2648 (D.R.I. 1990).
Dukes v. U.S. Health Care, Inc., 57 F.3d 350, 19 EBC 1473 (3d Cir. 1995).
Dyer v. Comr., 71 T.C. 560 (1979), acq., 1979-2 C.B. 1.
E-Systems, Inc. v. Pogue, 929 F.2d 1100, 13 EBC 2089, reh'g en banc denied, 935 F.2d 1293, 13 EBC 2089, cert. denied sub nom. Barnes v. E-Systems, Inc., 502 U.S. 981, 14 EBC 2008 (1991).
Epstein v. Comr., T.C. Memo 1972-53.
Equitable Life Assurance Society of the U.S. v. Crysler, 66 F.3d 944 (8th Cir. 1995).
Erie County Retirees Ass'n v. County of Erie, 220 F.3d 193, 24 EBC 2390 (3d Cir. 2000), cert. denied, 532 U.S. 913, 25 EBC 2824 (2001), on remand, 140 F. Supp.2d 466 (W.D. Pa. 2001).
Fabry v. Comr., 223 F.3d 1261 (11th Cir. 2000).
Fink v. Dakotacare, 324 F.3d 685, 30 EBC 1289 (8th Cir. 2003).
Fisher v. Comr., 2 F.3d 1148, 93-2 USTC ¶50,500 (1st Cir. 1993).
Fisher v. Prudential Ins. Co. of America, 842 F. Supp. 397, 17 EBC 2618 (N.D. Cal. 1993).
FMC Corp. v. Holliday, 498 U.S. 52, 12 EBC 2689 (1990).
Frahm v. Equitable Life Assurance Society, 137 F.3d 955, 21 EBC 2679 (7th Cir. 1998).
Gable v. Sweetheart Cup. Co., Inc., 35 F.3d 851 (4th Cir. 1994).
Geissal v. Moore Medical Corp., 338 F.3d 926, 30 EBC 2692 (8th Cir. 2003), cert. denied, 124 S. Ct. 1419 (2004).
General Dynamics Corp., U.S. v., 84-2 USTC ¶9783 (Cl. Ct. 1984), aff'd, 773 F.2d 1224, 6 EBC 2388 (Fed. Cir. 1985), rev'd, 481 U.S. 239, 8 EBC 1489 (1987).
General Electric Co. v. Gilbert, 429 U.S. 125, 1 EBC 1046 (1976).
General Motors Corp. v. Bennett, 485 U.S. 941, 9 EBC 1648 (1988).
General Motors Corp. v. Calif. State Bd. of Equalization, 815 F.2d 1305, 9 EBC 1159 (9th Cir. 1987).
General Signal Corp. v. Comr., 103 T.C. 216, 18 EBC 1932 (1994), aff'd, 142 F.3d 546 (2d Cir. 1998).
Gerbec v. U.S., 164 F.3d 1015, 22 EBC 2297 (6th Cir. 1999).
Gillis v. Hoechst Celanese Corp., 4 F.3d 1137, 17 EBC 1521 (3d Cir. 1993).
Givens v. Comr., 90 T.C. 1145 (1988), nonacq., 1989-1 C.B. 1.
Godwin v. Sun Life Assurance Co. of Canada, 980 F.2d 323, 16 EBC 1341 (5th Cir. 1992).
Golden v. Comr., T.C. Memo 1971-162.
Golden v. Kelsey-Hayes Co., 954 F. Supp. 1173, 21 EBC 1025 (E.D. Mich. 1997).
Goodall v. The Gates Corp., 39 F.3d 1191 (10th Cir. 1994).
Goodridge v. Dept. of Public Health, 798 N.E.2d 941 (Mass. 2003).
Gordon v. Comr., 88 T.C. 630, 8 EBC 1336 (1987).
Green v. Comr., T.C. Memo 1994-264.
Greer v. Comr., 70 T.C. 294 (1978), acq., 1979-1 C.B. 1, aff'd, 634 F.2d 1044 (6th Cir. 1980).
Haar v. Comr., 78 T.C. 864 (1982), aff'd per curiam, 709 F.2d 1206 (8th Cir. 1983).
Hall Est. v. Comr., T.C. Memo 1996-93.
Harper v. American Chambers Life Ins. Co., 898 F.2d 1432, 12 EBC 1238 (9th Cir. 1990).
Harris, U.S. v., 185 F.3d 999, 23 EBC 1653 (9th Cir. 1999).
Harris Trust and Savings Bank v. Salomon Smith Barney Inc., 530 U.S. 238, 24 EBC 1654 (2000).
Health Ins. Ass'n of America v. Shalala, 23 F.3d 412 (D.C. Cir. 1994).
Hemelt v. U.S., 122 F.3d 204 (4th Cir. 1997).
Hermann Hosp. v. MEBA Medical & Benefits Plan, 959 F.2d 569, 15 EBC 1241 (5th Cir. 1992).
Hernandez v. Comr., 72 T.C. 1234 (1979).
Hewlett-Packard Co. v. Barnes, 571 F.2d 502, 1 EBC 1471  (9th Cir. 1978), cert. denied, 439 U.S. 831 (1978).
Hines v. Comr., 72 T.C. 715 (1979).
Hughes Salaried Retirees Action Comm. v. Administrator of Hughes Non-Bargaining Retirement Plan, 72 F.3d 686 (9th Cir. 1995).
International Ass'n of Entrepreneurs of America v. Angoff, No. 94-3810, 1995 U.S. App. LEXIS 16074 (8th Cir. 1995).
International Union, United Auto., etc. v. Yard-Man, Inc., 716 F.2d 1476 (6th Cir. 1983).
Jensen v. Sipco, Inc., 38 F.3d 945 (8th Cir. 1994).
Johnson v. Shawmut Nat'l Corp., 1994 U.S. Dist. LEXIS 19437 (D. Mass. 1994).
Johnson v. Watts Regulator Co., 63 F.3d 1129, 20 EBC 1150  (1st Cir. 1995).
Kane v. U.S., 43 F.3d 1446 (Fed. Cir. 1994).
Kanne v. Conn. General Life Ins. Co., 867 F.2d 489, 10 EBC 1947 (9th Cir. 1988).
Kariotis v. Navistar International Transp. Corp., 131 F.3d 672, 21 EBC 2188 (7th Cir. 1997).
Keffer v. H.K. Porter Company, Inc., 872 F.2d 60 (4th Cir. 1989).
Kennedy v. Comr., T.C. Memo 1977-210.
Kentucky Assoc. of Health Plans v. Miller, 538 U.S. 329, 30 EBC 1129 (2003).
King v. Comr., T.C. Memo 1996-231.
Krauel v. Iowa Methodist Medical Center, 95 F.3d 674, 20 EBC 1809 (8th Cir. 1996).
Kwatcher v. Massachusetts Serv. Employees Pension Fund, 879 F.2d 957, 1 EBC 1682 (1st Cir. 1989).
Land v. CIGNA Healthcare of Fla., 339 F.3d 1286 (11th Cir. 2004).
Lang v. Comr., 41 T.C. 352 (1963).
Larkin v. Comr., 48 T.C. 629 (1967), aff'd, 394 F.2d 494 (1st Cir. 1968).
Lawrence v. Texas, 539 U.S. 558 (2003).
Leckey v. Stefano, 263 F.3d 267, 26 EBC 1967 (3d Cir. 2001).
Lewis v. Kmart Corp., 180 F.3d 166, 23 EBC 2982 (4th Cir. 1999).
Levine v. Comr., 50 T.C. 422 (1968).
Lloynd v. Hanover Foods Corp., 72 F. Supp.2d 469, 23 EBC 2465 (D. Del. 1999).
Lundy Packing Co. v. U.S., 302 F. Supp. 182 (E.D.N.C. 1969), aff'd, 421 F.2d 850 (4th Cir. 1970).
Madden v. Country Life Ins. Co., 835 F. Supp. 1081 (N.D. Ill. 1993).
Masterson v. U.S., 478 F. Supp. 454 (N.D. Ill. 1979).
Mayberry v. U.S., 151 F.3d 855, 22 EBC 1513 (8th Cir. 1998).
MDPhysicians and Assocs. v. State Board of Insurance, 957 F.2d 178, 15 EBC 1007 (5th Cir. 1992).
Meadows v. Cagle's, Inc., 954 F.2d 686, 14 EBC 2513 (11th Cir. 1992).
Mertens v. Hewitt Assoc., 508 U.S. 248 (1993).
Metropolitan Life Ins. Co. v. Mass., 471 U.S. 724, 6 EBC 1545 (1985).
Metropolitan Life Ins. Co. v. Wheaton, 42 F.3d 1080 (7th Cir. 1994).
Metropolitan Life Ins. Co. v. Woodham, 1995 U.S. Dist. Lexis 7620 (E.D. Mich. 1995).
Mlsna v. Unitel Communications, 41 F.3d 1124 (7th Cir. 1994).
Moffitt v. Blue Cross & Blue Shield, Inc., 722 F. Supp. 1391 (N.D. Miss. 1989).
Moore v. Metropolitan Life Ins., 856 F.2d 488 (2d Cir. 1988).
Moran v. Rush Prudential HMO, Inc., 230 F.3d 959 (7th Cir. 2000), aff'd, 536 U.S. 355, 27 EBC 2921 (2000).
Moothart v. Bell, 21 F.3d 1499, 17 EBC 2825 (10th Cir. 1994).
Murphy v. Keystone Steel & Wire Co., 61 F.3d 560, 19 EBC 1388 (7th Cir. 1995).
NARDA, Inc. v. Rhode Island Hospital Trust Nat'l Bank, 744 F. Supp. 685, 12 EBC 2551 (D. Md. 1990).
Nat'l Carriers' Conf. Comm. v. Heffernan, 454 F. Supp. 914, 1 EBC 1936 (D. Conn. 1978).
National Cos. Health Benefit Plan v. St. Joseph's Hospital, 929 F.2d 1558, 13 EBC 2041 (11th Cir. 1991).
Nev. Dept. of Human Resouces v. Hibbs, 538 U.S. 721 (2003).
Newport News Shipbuilding & Dry Dock Co. v. EEOC, 462 U.S. 669, 4 EBC 1553 (1983).
New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 19 EBC 1137 (1995).
NLRB v. Reliance Fuel Oil Corp., 371 U.S. 224 (1963).
O'Gilvie v. U.S., 519 U.S. 79  (1996), aff'g 66 F.3d 1550 (10th Cir. 1995).
Pagliarulo v. Comr., T.C. Memo 1994-506.
Palm v. U.S., 904 F. Supp. 1312 (M.D. Ala. 1995).
Paris v. F. Korbel & Brothers, Inc., 751 F. Supp. 834, 12 EBC 2489 (N.D. Cal. 1990).
Parker v. Metropolitan Life Ins. Co., 121 F.3d 1006, 21 EBC 1369 (6th Cir. 1997).
Parker-Hannifin Corp. v. Comr., 139 F.3d 1090, 21 EBC 2973 (6th Cir. 1998).
Parks v. Comr., 38 T.C.M. 759 (1979).
Pegram v. Herdrich, 530 U.S. 211, 24 EBC 1641 (2000).
Peterson v. American Life & Health Ins. Co., 48 F.3d 404, 19 EBC 1326 (1995).
Picard v. Comr., T.C. Memo 1997-320.
Picard v. Comr., 165 F.3d 744, 22 EBC 2317 (9th Cir. 1999).
Pickle v. Comr., T.C. Memo 1971-304.
Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 8 EBC 1409 (1987).
Powell v. Wilmington Plumbing Supply Co., 921 F. Supp. 1264 (D. Del. 1996).
Profit Sharing Plan v. Herndon, 124 S. Ct. 1330, 32 EBC 1097 (2004).
Prudential Ins. Co. of America v. Doe, 76 F.3d 206, 19 EBC 2660 (8th Cir. 1996).
Public Employees Retirement System of Ohio v. Betts, 492 U.S. 158 (1989).
Ragsdale v. Wolverine World Wide, Inc., 535 U.S. 81, 27 EBC 1985 (2002), aff'g 218 F.3d 933, 24 EBC 2287 (8th Cir. 2000).
Raymond Yates, M.D., P.C. Profit Sharing Plan v. Herdon, 1245 S. Ct. 1330, 32 EBC 1097 (2004).
Rhone-Poulenc Rorer, Inc., In re, 51 F.3d 1293 (7th Cir. 1995).
Robinson v. Linomaz, 58 F.3d 365 (8th Cir. 1995).
Roemer v. Comr., 79 T.C. 398 (1982), rev'd, 716 F.2d 693 (9th Cir. 1983).
Roosevelt v. Comr., 43 T.C. 77 (1964).
Rugby Productions, Ltd. v. Comr., 100 T.C. 531 (1993).
Runnebaum v. NationsBank, N.A., 95 F.3d 1285, 20 EBC 1977 (4th Cir. 1996).
Rutter v. Comr., 48 T.C.M. 1269 (1984), aff'd per curiam, 760 F.2d 466 (2d Cir. 1985), cert. denied, 474 U.S. 848 (1985).
Safeco Life Ins. Co. v. Musser, 65 F.3d 647, 19 EBC 1828 (7th Cir. 1995).
Sage v. Automation, Inc. Pension Plan and Trust, 845 F.2d 885, 9 EBC 1898 (10th Cir. 1988).
St. Clair v. U.S., 778 F. Supp. 894 (E.D. Va. 1991).
Sanders & Sons, Inc. v. Comr., 26 T.C.M. 671 (1967), app. dism'd nolle pros. (10th Cir. 1968).
Saret v. Triform Corp., 662 F. Supp. 312 (N.D. Ill. 1986).
Schleier, Comr. v., 515 U.S. 323  (1995).
Schneider v. UNUM Life Ins. Co., 149 F. Supp.2d 169, 26 EBC 1337 (E.D. Pa. 2001).
Seay v. Comr., 58 T.C. 32 (1972).
Seidel v. Comr., T.C. Memo 1971-238.
Shaw v. Delta Air Lines, 463 U.S. 85, 4 EBC 1593 (1983).
Shea v. Esenten, 107 F.3d 625, 20 EBC 2561 (8th Cir. 1997).
Sirkin v. Phillips Colleges, 779 F. Supp. 751, 14 EBC 2193 (D.N.J. 1991).
Smelley v. U.S., 806 F. Supp. 932 (N.D. Ala. 1992), aff'd by per curiam, 3 F.3d 389 (11th Cir 1993).
Smith v. ABS Industries, Inc., 890 F.2d 841 (6th Cir. 1989).
Smith v. Comr., T.C. Memo 1970-243.
Smith v. Continental Casualty Co., 369 F.3d 412, 32 EBC 2695 (4th Cir. 2004).
Smithback Plumbing, Inc. v. U.S., 76-1 USTC ¶9139 (Ct. Cl. 1976).
Sprague v. Gen. Motors Corp., 133 F.3d 388, 21 EBC 2267 (6th Cir. 1998).
Stanton v. Larry Fowler Trucking, Inc., 52 F.3d 723, 19 EBC 1189 (8th Cir. 1995).
Starrels v. Comr., 35 T.C. 646 (1961), aff'd, 304 F.2d 574 (9th Cir. 1962).
Stewart v. KHD Deutz of America Corp., 980 F.2d 698 (11th Cir. 1993).
Stewart v. U.S., 313 F. Supp. 195 (W.D. Pa. 1970).
Sullivan v. U.S., 46 Fed. Cl. 480 (2000).
Swint v. Protective Life Ins. Co., 779 F. Supp. 532, 14 EBC 2200 (S.D. Ala. 1991).
Taggi v. U.S., 835 F. Supp. 744 (S.D.N.Y. 1993), aff'd, 35 F.3d 93 (2d Cir. 1994).
Teamsters Industrial Employees Welfare Fund v. Rolls-Royce Motor Cars, Inc., 989 F.2d 132 (3d Cir. 1993).
Threlkeld v. Comr., 87 T.C. 1294 (1986), aff'd, 848 F.2d 81 (6th Cir. 1988).
Trappey v. Comr., 34 T.C. 407 (1960).
Travelers Insurance Co. v. Cuomo, 813 F. Supp. 996, 14 EBC 2200, (S.D.N.Y. 1993), aff'd in part and rev'd in part, 14 F.3d 708, 17 EBC 1675 (2d Cir. 1994), petition for cert. filed, 62 USLW 3625 (U.S. 3/9/94).
Travelers Insurance Co. v. Pataki, 63 F.3d 89, 19 EBC 1702 (2d Cir. 1995).
Truesdale v. Pacific Holding Co./Hay Adams Div., 778 F. Supp. 77, 14 EBC 2093 (D.D.C. 1991).
Tuka v. Comr., 120 T.C. 1 (2003).
Turecamo v. Comr., 64 T.C. 720 (1975), aff'd, 554 F.2d 564 (2d Cir. 1977).
Turner v. U.S., 95-2 USTC ¶50,381 (E.D. Cal. 1995).
Unisys Corp. Retiree Medical Benefits ERISA Litigation, In re, 58 F.3d 896, 19 EBC 1545 (3d Cir. 1995).
United Paperworkers v. Jefferson Smurfit, Inc., 961 F.2d 1384 (8th Cir. 1992).
United Rubber, Etc. Workers v. Pirelli Armstrong Tire Corp., 873 F. Supp. 1093 (M.D. Tenn. 1994).
Unum Life Ins. Co. of Cal. v. Ward, 526 U.S. 358, 22 EBC 2745 (1999).
Varity Corp. v. Howe, 516 U.S. 489, 19 EBC 2761 (1996).
Vincent v. Wells Fargo Guard Services, Inc., 44 F. Supp.2d 1302, 23 EBC 1364 (S.D. Fla. 1999).
Wallace v. Reliance Standard Life Ins. Co., 318 F.3d 723, 29 EBC 2485 (7th Cir. 2003), cert. denied, 539 U.S. 943, 30 EBC 3048 (2003).
Wells Fargo & Co. v. Comr., 120 T.C. 69 (2003).
West v. Corm., T.C. Memo 1992-617.
Wiedmaier v. Comr., 48 T.C.M. 1350 (1984), aff'd, 774 F.2d 109, 6 EBC 2351 (6th Cir. 1985).
Wollenburg v. U.S., 75 F. Supp.2d 1032 (D. Neb. 1999).
Wong Wing Non Est. v. Comr., 18 T.C. 205 (1952).
Wood v. U.S., 76-1 USTC ¶9381 (D. Cal. 1976), aff'd, 590 F.2d 321 (9th Cir. 1979).
Wright v. Hanna Steel Corp., 270 F.3d 1336, 26 EBC 2737 (11th Cir. 2001).
UNOFFICIAL
Periodicals:
1983
Doan, "Medical Expense Reimbursement Explained," 37 C.L.U.J. 72.
Maldonado, "Using Medical Plans to Ease Nondiscrimination Rules of Medical Expense Reimbursement Plans," 11 Tax'n for Law. 360.
1984
Zalutsky, "Medical Reimbursement, Group-Term Life Insurance and Cafeteria Plans (Other Than Deferred Compensation)," 42 N.Y.U. Inst. on Fed. Tax'n 37.
1985
Burke and Friel, "Recent Developments in the Income Taxation of Individuals: Compensation for Personal Injuries and Sickness: Limiting the §104(a)(2) Exclusion," 9 Rev. of Tax'n 292.
Weihs, "Insured Medical Reimbursement Plans (MRP): July 1984," 3 B.U.J. of Tax Law 91.
1986
Birmingham, "Tax Topics: COBRA Strikes at Group Health Plans, PBGC Rates, and Plan Terminations," 3 Comp. & Ben. Mmgt. 425.
Evanich and Purcell, "Payments for Sickness and Injury are not Always Excludable from a Taxpayer's Income," 36 Tax'n Acct. 280.
1987
Patterson, "Planning Strategies That Will Keep Personal Injury Damages Excluded From Income," 38 Tax'n Acct. 38.
1988
Bick, "COBRA Revisited: IRS Proposed Regulations Shed New Light on COBRA Requirements," 67 Mich. B.J. 40.
Clubb, "Beisler v. Commissioner: Is §105(c)'s `Nature of the Injury' Provision a Separate Requirement or Obsolete Surplusage?" 7 Va. Tax Rev. 535.
Jaffe and Spacapan, "COBRA: Continuation of Health Benefits for Employees: Snake-in-the-Grass to Employers," 14 J. Pension Plan. & Compliance 197.
1989
Harris, "Tax-Free Distributions of Plan Benefits Paid on Account of Disability," 20 Tax Adviser 18.
1990
Orlaske, "Law Changes Affecting Employers' Health Care Continuation Obligations," 69 Mich. Bar J. 1158.
Turner, "Pension Plans with Disability Benefits Can Provide Advantages to Employers and Employees," 44 Tax'n Acct. 346.
Wiersig, "Using the Code to Help Retiree Medical Costs," 4 Prac. Tax Law. 23.
1991
Casper-Watson, "COBRA Health Continuation Benefits," 15 ali-aba Course Materials J. 75.
Harris, "Health Benefits Continuation Coverage Under COBRA," 5 Prob. & Prop. 10.
Mamorsky, "Legal Issues: Disability Benefits May Not Be Excludible from Gross Income," 7 J. Compensation & Benefits 52.
1992
Burman and Rodgers, "Tax Preferences and Employment-Based Health Insurance," 45 Nat'l Tax J. 331.
Kolling, "Self-Insured Medical Plans Can Provide Benefits for Owners," 49 Tax'n Acct. 332.
Pingree, "Funding Retiree Welfare Benefits," 33 Tax Mgmt. Memo. 269.
Rubin, "Issues in Funded Post-Retirement Health Benefits," 8 Tax Mgmt. Fin. Plan. J. 351.
1993
Dougherty, "Tax-Effective Ways to Cut Retiree's Health Care Costs," 50 Tax'n Acct. 132, 21 Tax'n Law. 337.
Fuchs, "COBRA--Continuation of Health Benefits--Litigation Update," 51 N.Y.U. Conf. Employee Benefits Tax'n 3.
Gardner and Willey, "Taxation of Back Pay Awards Is Still Uncertain," 21 Tax'n Law. 224.
Gulino and Fernstrom, "Getting a Head Start on Health Care Reform," 21 Tax Mgmt. Comp. Plan. J. 195.
Pingree, "Confronting Retirees' Health Benefits Costs: Current Litigation Trends," 21 Tax Mgmt. Comp. Plan. J. 107.
Simone and Gaines, "Employer-Provided Retiree Medical Benefits: The Issue for the 1990s and Beyond," 51 N.Y.U. Conf. Employee Benefits Tax'n 1.
1994
Barrios, "Growing Pains in the Workplace: Tax Consequences of Health Plans for Domestic Partners," 47 Tax Law. 845.
Case and Coleman, "Employee-Funded Retiree Medical Accounts--Tax Sheltering the Profit-Sharing Nest Egg," 22 Tax Mgmt. Comp. Plan. J. 111.
Macauley and Raish, "Health Care Reform Tax Rx: Bitter Medicine for Employers and Employees," 52 N.Y.U. Inst. on Fed. Tax'n 28.
1995
Palumbo, "COBRA vs. Medicare Coverage Creates Costly Dilemma for Employers," 3 J. Tax'n Employee Benefits 124.
1996
Bauserman & Conaway, "The Taxation of Retirees Under Retiree Health Premium Arrangements," 24 Tax Mgmt. Comp. Plan. J. 51.
Brown, "What the Heck is a QMCSO and How Do You Get One?" 22 J. Pension Plan. & Compliance 48.
Cowart, "QMCSOs: Health Care Benefits for Children of Divorce," 10 Prob. & Prop. 56.
Golub, "Multiemployer Group Health Plans and COBRA," 21 J. Pension Plan. & Compliance 1.
King, "Enforcing Conventional Morality Through Taxation? Determining the Excludability of Employer-Provided Domestic Partner Health Benefits under §105(b) and 106 of the Internal Revenue Code," 53 Wash. & Lee L. Rev. 301.
1997
Reeder, "Washington Update: Congress Enacts a Host of Employee Benefits Provisions as Part of the Small Business Job Protection and Health Insurance Portability and Accountability Acts," 22  J. Pension Plan. & Compliance 87.
Sharara, "The Camel's Nose Under the Tent: New Group Health Care Rules for the Private Sector," 25  Tax Mgmt. Compensation Plan. J. 171.
1998
Hamburger, "COBRA's `Other Coverage' Rule -- The Law of Unintended Consequences," 26  Tax Mgmt. Comp. Plan. J. 107.
Maydew, "Contributing Sick Leave to Retirement Plans--A New Fringe Benefit?" 76  Taxes 39.
Shultz, "The Mental Health Parity Act: An Overview of New Group Health Plan Participant Protections," 26  Tax Mgmt. Comp. Plan. J. 155.
1999
Collins, "A Primer on the Self-Insured Health Plan Nondiscrimination Rules," 25  J. Pension Plan. & Compliance 1.
Landy, "Preserving the Tax Advantages of Medical Savings Accounts," 93  J. Tax'n 161.
Lerner, "Final COBRA Regulations Provide Helpful Guidance to Employers," 11  J. Tax'n Exempt Orgs. 39.
Miller, "IRS Finally Issues New COBRA Regulations," 6  J. Tax'n Employee Benefits 250.
Pellinen, "Employee Benefits and Acquisitions," 25  J. Pension Plan. & Compliance 41.
Rinker, "Section 104 Does Not Apply to Disability Payments Made Pursuant to Labor Agreements:  Wallace v. United States," 52  Tax Law. 637.
Schneider, "Final Regs. Under COBRA -- Long-Overdue Clarifications on Group Health Plan Coverage," 91  J. Tax'n 102 & 172.
Stoffer, "COBRA: Take Two -- Key Provisions of the Final and Proposed Regulations," 7  J. Tax'n Employee Benefits 16.
Williams, "Recalculation of Disability Retirement Benefits Based on Date of Hire Does Not Alter Section 104(a)(1) Tax-Exemption Treatment:  Picard v. Commissioner," 53  Tax Law. 311.
2000
Hyun, "Compensation and Fringe Benefits: The COBRA Obligations of Parties to a Corporate Transaction," 27  J. Corp. Tax'n 70.
Scandlen, "MSAs Can Be a Windfall for the Rest of Us, Too," 49  Cath. U. L. Rev. 679.
Spelfogel, "Retiree Class Actions and Related Health Plan Litigation," 26  J. Pension Plan. & Compliance 23.
2001
Abbott, "Implementing Domestic Partners Benefits: A Primer," 17  J. Compensation & Benefits 50.
Bauman and Gruber, "First Do No Harm: Designing Tax Incentives for Health Insurance," 54  Nat'l Tax J. 473.
Schneider, "COBRA Regulations Are Complete At Last as IRS Finally Fills In the Blanks," 95  J. Tax'n 285.
2002
Baum, "Health Reimbursement Arrangements--Who Will Benefit From the Service's Newest Healthcare Plan?" 97  J. Tax'n 162.
Bianchi, "Rush Prudential HMO Inc. v. Moran and the Future of ERISA Preemption," 30  Tax Mgmt. Comp. Plan. J. 279.
Luscombe, "Tax Trends: Health Reimbursement Arrangements--Too Much of a Good Thing?" 80  Taxes 3.
Sharara and Condeluci, "Cutting Back or Terminating Your Retiree Medical Benefits Program? A Cook-Book of How to Avoid Potential Liability," 30  Tax Mgmt. Comp. Plan. J. 87.
Shelley and Murphy, "The Effect of Rush Prudential v. Moran: A Review of Three State External Review Laws," 29  Pens. & Ben. Rep. (BNA) 2982 (11/12/02).
2003
Bennett, "Defined Contribution Health Plans," 44  Tax Mgmt. Memo. 3.
Bianchi, "An Employer's Guide to the Protection of Medical Information Under the HIPAA Privacy Rules," 31  Tax Mgmt. Comp. Plan. J. 275.
2004
Bianchi, "Medicare Reform, Health Savings Accounts, and Future of Consumer Directed Health Care," 45  Tax Mgmt. Memo. 12.
Cowart, "Choosing a New Health Plan Design? Differences Among HRAs, HSAs and FSAs Beyond the Basics and After the First Waves of Guidance," 32  Tax Mgmt. Comp. Plan. J. 187.
Cowart, "Where Does Your Health Plan Fit in HIPAA's Privacy Regulation Requirements?" 32  Tax Mgmt. Comp. Plan. J. 3.
Kerby, Bilezerian, "IRS and DOL Release Additional Guidance on Health Savings Accounts," 32  Tax Mgmt. Comp. Plan. J. 160.
Stember, "DOL Finalizes COBRA Regulations," 32 Tax Mgmt. Compensation Plan. J. 351.
2005
Cowart, "Employer-Sponsored Group Health Plan Changes in the Medicare Prescription Drug Improvement and Modernization Act of 2003," 33 Tax Mgmt. Compensation Plan. J. 118.
Leeds and McCarthy, "Changes to the Internal Revenue Code's Definition of Dependent," 33 Tax Mgmt. Compensation Plan. J. 166.
Stamer, "Privacy & Securities Standards -- A Brief Nutshell," 33 Tax Mgmt. Compensation Plan. J. 58.
Stember, "Group Health Plan Portability -- Final and Proposed Regulations," 33 Tax Mgmt. Compensation Plan. J. 111.