Cafeteria Plan Bills Under Consideration in Congress

Four bills are currently being discussed in Congress that could significantly improve the attractiveness of cafeteria plan benefits to employees, and would most likely increase participation levels. Two of these pieces of legislation (HR 63 and HR 167) propose eliminating or mitigating the "use-it-or-lose-it" rules contained in the cafeteria plan regulations, that stipulate that participants must forfeit, at the end of the plan year, any unused contributions in their accounts. The third bill being discussed (HR 253), would increase the amount participants would be able to contribute to a Dependent Care Spending Account. Specifically a maximum of $7,000, in instances of two or more dependent care qualifying individuals. A fourth bill under consideration (HR 831) would allow long-term care insurance premiums to be included as qualified benefit under cafeteria plans. Currently, long-term care insurance premiums cannot be purchased by an employee on a pre-tax basis.

HEALTH CARE SPENDING ACCOUNTS

H.R. 63

H.R. 63 would allow any unused contributions accumulated in a participant's flexible spending account would be distributed back to the employee as taxable income. Under the current rules these unused balances must be forfeited to the employer as a result of the "use-it-or-lose-it" stipulations contained in cafeteria plans. Should this amendment become law, it would become effective for taxable years beginning after December 31, 2000.

H.R. 167

H.R. 167, proposed to be effective for plan years beginning on or after January 1, 2002, contemplates giving participants a choice of what the participant wishes to do with any unused cafeteria plan account balances. End of plan year balances of up to $3,000 (indexed annually for inflation) could either be applied to the participant's following cafeteria plan year elections, or the unused funds could be distributed to the participant as taxable income. In addition, the participant may avoid being taxed on the distribution if the participant rolls the distribution into an Individual Retirement Account, 401 (k), 403 (b), 457 plan, Medical Savings Account, or an Education Individual Retirement Account.

Recent News from the White House

As part of the Fiscal Year 2002 budget submitted to Congress, the President has proposed that cafeteria plan participants be allowed to carryover, rollover, or cash out up to $500 of unused cafeteria plan contributions. The President's proposal contemplates allowing $500 to be carried forward to the next cafeteria plan year, be contributed to a 401 (k) or similar retirement fund, contributed to a Medical Savings Account , or cashed out as taxable income.

Regardless of which of these three proposals prevails (or any combination thereof), there appears to be strong sentiment among lawmakers to at least diminish, if not eliminate, the "use-it-or-lose-it " Internal Revenue Service cafeteria plan rule.

DEPENDENT CARE SPENDING ACCOUNTS

H.R. 253

H.R. 253 proposes an increase in the amount that a participant would be able to contribute to Dependent Care Spending Account to a total of $7,000, when the employee has two or more individuals who qualify for dependent care reimbursement. However, in cases where the employee only has one dependent for whom they are incurring dependent care expenses, the current limit of $5,000 would still apply. Although the dollar limit for the Dependent Care Tax Credit will also be increased to $3,600 for one dependent and $6,000 for two or more dependents, it appears that the Dependent Care Spending Account will remain a better benefit for most employees. This legislation has been presented with a proposed effective date of taxable years beginning January 1, 2001.

QUALIFIED BENEFITS

H.R. 831

H.R. 831 proposes to eliminate the prohibition against the inclusion of long-term care benefits in the offerings of a cafeteria plan. This current prohibition is based on Section 125 (d) which states "the term cafeteria plan does not include any plan which provides for deferred compensation." Long-term care plans are considered to be a benefit which will be paid for in one year and whose benefits will be derived in future years. The contemplated bill would allow long-term care premiums to be paid under a cafeteria plan on a pretax basis to the extent that these contributions do not exceed the eligible long-terms care premiums as follows contained in Section 213(d)(10):

If enacted, this legislation would take effect beginning for taxable years beginning after December 31, 2002.

Return to Top

Privacy Regulations May Face Modifications

A letter from the United States Senate Committee on Health, Education, Labor and Pensions regarding HIPAA's privacy regulations, was sent to Tommy Thompson, Secretary, US Department of Health and Human Services. This letter is signed by seven Senators, but was written by Senator Jeffords of Vermont. Basically, the Senator and his colleagues have concerns surrounding the HIPAA privacy regulations as written and have asked the Secretary to re-assess the HIPAA privacy / administrative simplification regulations in total to determine further their full impact on claims administration. They have also requested that Thompson reconsider the current proposed effective date.

In the letter, Senator Jeffords stated that their committee believes that "the final rule cannot be implemented without important revisions designed to prevent major operational problems in the health care system. There are real and legitimate concerns that the final rules, as drafted, will seriously inconvenience patients, create new paperwork requirements, and increase the cost of health care."

Specifically, Jeffords noted concerns with the issues of "prior written consent," "the minimum necessary standard," and the "implementation timeframe" and made the following comments related to each area, respectively:

Prior Written Consent

"Several operational problems have been identified with the prior consent requirement of the final regulation under which pharmacies, hospitals, doctors, and other health care providers must obtain written consent from the patient before using identifiable information for treatment, payment, or health care operations. According to providers, the prior consent rule ignores the realties of current medical practice and will unintentionally delay and impede critical health care operations. For example, when a patient is referred for surgery, the surgeon would not be able to review any of the patient's health information in preparation for surgery until the patient has made a special trip to sign a new consent form."

Minimum Necessary Standard

"The regulation states that covered entities must make reasonable efforts to limit the use of identifiable information to the 'minimum necessary' to accomplish the intended purpose. This may sound reasonable, but it will result in unintended consequences. As you know, the compete exchange of medical information is critical to assuring a patient receives the proper treatment at the right time. The recent institute of Medicine report, To Err is Human- Building a Safer Health System, indicates that medical errors are more likely when providers do not have timely access to complete patient information. Limiting the use of patient information could impede clinical decision making."

Implementation Timeframe

"We also urge you to reconsider the implementation timeframe for the privacy regulation consistent with the intent of Congress. The original intent of the HIPAA Administrative Simplification provisions was a two-year implementation time frame. As you know, the security regulations required under HIPAA remain outstanding. However, the current staggered release dates of the HIPAA administrative simplification regulations will require multiple computer system changes. We do not believe that the current staggered release of regulations, each with its own two year implementation requirement, is consistent with Congressional intent."

On April 12, the President announced that the privacy regulations would be implemented as scheduled, however, he left open the possibility that the rules designed by the Clinton administration could be significantly softened before they take effect. ProBusiness will keep you updated on events as they unfold.

Please contact ProBusiness for further information at:
20000 North Creek Parkway, Suite 200, Bothell, WA 98011
Phone: (425) 415-4000 Fax: (425) 417-4795
e-mail: bsa@probusiness.com

(ProBusiness does not make any representation or warranty that the information contained in this newsletter, when used in a specific and actual situation, meets applicable legal requirements. This newsletter should not be construed as legal advice. Your legal counsel should be consulted on all specific fact situations.)

Return to Top