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HomeMy WebLinkAboutDocumentation_Pension General_Tab 18_11/28/2005~ABRIEL, ROEDER, SMITH & COMPANY onsultants & Actuaries One Towne Square • Suite 800 • Southfield, Michigan 48076 • 248-799-9000 •800-521-0498 • fax 248-799-9020 September 12, 2005 The enclosed News Scan and Research Memo were developed by Gabriel, Roeder, Smith & Company to inform our clients and other benefit professionals about important events in the benefits industry. We hope you find our information clearly written and useful in your professional activities. To receive our News Scans and other publications electronically, send an email to web.admin cr.fzabrielroeder com with the message "SUBSCRIBE NEWS SCAN" in the subject line. To stop receiving our publications via email, send the message "UNSUBSCRIBE NEWS SCAN" in the same way. Please turn to our web site at www.~;abrielroeder.com for other ublications rela p ted to pensions and benefits. Sincerely, `~o..s~~ Paul Zorn Director of Governmental Research Enclosures • • September 2005* The following news summaries were developed by Gabriel, Roeder, Smith & Company to inform clients and other benefit professionals of news in the benefits industry. Our thanks to Mary Ann Vitale for her diligent work on this issue. To receive this publication electronically, send an email to web.adnunCa~gabrielroeder.com with the message "SUBSCRIBE NEWS SCAN" in the subject line. To stop receiving this publication electronically, send the message "UNSUBSCRIBE NEWS SCAN' in the same manner. Copies of this and other benefit-related publications are available on the GRS web site at www.eabrielroeder.com. Massachusetts Governor Proposes Compulsory Health .Insurance Plan On June 21, 2005, Massachusetts Governor Mitt Romney introduced legislation (H. 2923 and H. 2924) requiring all state residents to obtain health insurance or pay tax and wage penalties for health care costs. The plan, known as an individual mandate, would require uninsured residents who do not qualify for the state's low-income programs to either buy state-subsidized health insurance or risk tax penalties and wage garnishment. Under the proposal, state-subsidized health insurance would be available at a cost of 1.3 percent -• to 5.8 percent of income. Residents who choose not to participate would be ineligible for a personal tax exemption and a portion of any tax refund. Residents at the lowest income levels would pay $2.30 per week for coverage with a state subsidy of $66.93 per week. Those at the highest income levels would pay $32.31 per week with a state subsidy of $36.92. According to Romney, the plan would require no new revenues, but instead be funded with the $1 billion currently spent on health care for uninsured individuals. However, according to a Blue Cross and Blue Shield of Massachusetts Foundation report, the state would need to spend an additional $1 billion for universal coverage. Source: Bureau of National Affairs, Pension & Benefits Reporter, July 5, 2005. Illinois Governor Signs Legislation to Fill Gap in'1ledicare Part D Cc-verage On June 29, 2005, Illinois Governor Rod Blagojevich signed legislation (SB 973) establishing the Illinois Seniors and Disabled Drug Coverage Program to cover the gap in the Medicare Part D prescription drug benefit. The gap occurs because a provision of Part D requires participants to pay 100 percent of their prescription drug costs between $2,250 and $5,100 (often referred to as the "donut hole"). For lower-income retirees, the new state law provides wrap-around coverage for the donut hole, helping to fill it in with state funds. To be eligible for the new program, a person must be (1) at least age 65 or disabled, (2) enrolled in a Medicare Part D prescription drug plan, if eligible, and (3) have less than a specified amount of household income depending on household size. The new program will take effect when Medicare Part D begins on January 1, 2006. • 'The authors of these news summaries are not attorneys and the statements made are not intended as legal advice or opinion. Qualified legal counsel should be consulted to ensure plan provisions comply with applicable laws and regulations. 9/8/2005 '~ 2005 -Gabriel, Roeder, Smith & Compan~~ Page 1 The text of the legislation is available at: http://www.ilga. ov/legislation/publicacts/fulltext.asp?Name=094-0086. .House Committee Passes Pension Protection Act On June 30, 2005, the Pension Protection Act (H.R. 2830) passed the House Education and the Workforce Committee. Representative John Boehner (R-OH) introduced the comprehensive pension reform bill to increase funding requirements for single-employer and multi-employer defined benefit pension plans and shorten the period for eliminating funding shortfalls. Generally, the new legislation would require pension plans to fully fund their current liability, comply with new reporting and disclosure requirements, restrict benefit payments and new benefit accruals in underfunded plans, and pay increased Pension Benefit Guaranty Corporation (PBGC) premiums. Specifically, the Act would: • Permanently replace the funding interest rate with three rates based on a modified yield curve; • Require employers to make sufficient contributions to meet a 100 percent funding target phased in over five years; • Require employers to make additional contributions to eliminate funding shortfalls over seven years; • Prohibit the use of credit balances for severely underfunded plans (i.e., less than 80 percent funded); • Phase in PBGC premium increases over five years; • Provide new reporting and disclosure requirements related to funding status; and • Allow employers to provide workers with access to investment advice, provided any potential conflicts of interest are disclosed. The modified yield curve would replace the single corporate bond interest rate that expires at the end of 2005. ~Jnder the modified yield curve approach, employers would calculate their required contributions based on ee interest rates corresponding to average corporate bond yields maturing when future pension liabilities are due: (i) within five years, (ii) between five and 20 years, and (iii) after 20 years. Each rate would be developed and published monthly by the Treasury Department using athree-year average of corporate bond yields weighted 50 percent for the most recent plan year, 35 percent for the previous year, and 15 percent for the year prior to the previous year. The modified yield curve would be phased in over three years. Currently, under 1RC § 417(e)(3), lump sum distributions from a defined benefit plan are calculated using the 30-year Treasury rate. Under H.R. 2830, the modified yield curve would replace the 30-year Tressury rate for calculating lump sum distributions. Additionally, the bill would require plans to use the RP-2000 Combined Mortality Table, but a substitute mortality table could be-used to measure both liability and lump surn distributions. A special effective date would apply for changes to be phased in over five years beginning in 2006. While governmental plans are not subject to the lump sum rules under IRC § 417(e)(3), proposed IRS regulations require govenunental plans to use the 417(e)(3) rates for certain benefit limitation calculations under IRC § 415. The bill has been sent to the House Ways and Means Committee for review. Co-author and Committee Chairman William Thomas (R-CA) revealed his plans to incorporate this bill into his Social Security reform plan. The bill's text can be found at: http://www.thomas.loc.gov/ by searching for H.R. 2830. Senate Finance Committee Approves Pension .Reform Bill On July 26, 2005, the Senate Finance Committee unanimously approved a modified chairman's mark of the National Employee Savings Trust and Equity Guarantee (NESTEG) Act of 2005 (S. 219). The proposed mprehensive pension reform bill contains provisions for single- and multi-employer defined benefit plans ~th some provisions applicable to governmental plans. The NESTEG proposals have common features with 9/8/?005 ©2005 -Gabriel, Roeder, Smith & Companti• Page 2 the House Committee's Pension Protection Act (H.R. 2830) approved on June 30, 2005. However, the House version would only be applicable to private plans. • Some of the major NESTEG provisions applicable to private plans would include: - Requiring plans to use a yield curve to value liabilities and calculate lump sum distributions. - Requiring plans to use current market values for plan assets. - Prohibiting benefit increases for plans funded at 80 percent or less. - Prohibiting lump sums or other accelerated benefit forms for plans funded at 60 percent or less. - Requiring plans to amortize unfunded liabilities over seven yeazs. - Eliminating the practice of "smoothing" pension liabilities. - Requiring a new accounting standard for pension funds when a plan sponsor's credit rating is reduced to junk bond status. NESTEG provisions applicable to governmental plans include: - Purchase of permissive service credit. The legislation would amend IRC § 415(n) to allow participants to purchase additional credit for service already earned under the plan (i.e., "buy-up" the benefit), and to purchase credit for periods regardless of whether service is performed. In addition, for service credit purchased with transfers from 403(b) annuities or 457 governmental plans, the restrictions on purchasing nonqualified service would not apply. These restrictions limit the amount of nonqualified service purchased to a maximum of five years and only allow the purchase after the member has at least five yeazs of participation in the plan. - Minimum distribution rules. The Treasury would be directed to issue regulations under which a governmental plan would be treated as complying with the minimum distribution rules of § 401(a)(9) if the plan follows a reasonable, good faith interpretation of the statutory requirements. .~ - Waiver of 10 percent early withdrawal tax on certain distributions. Any distributions from a qualified defined benefit pension plan made to a public safety employee who sepazates from service after age 50 (age 55 under current law) would be exempt from the 10 percent early withdrawal tax. - Extension of moratorium on the application of the nondiscrimination rules. All governmental plans would continue to be exempt from the nondiscrimination rules under § 401(a)(4) and minimum participation rules under § 401(a)(26). - Withholding on distributions from governmental 457 plans. The legislation would allow the pre- EGTRRA wage withholding rules to be applied to distributions from a governmental 457 plan beginning before January 1, 2002, if the distributions are payable over a period of less than 10 years. Before EGTRRA, distributions from a 457 plan were subject to the income tax withholding rules for wages rather than for qualified retirement plans. EGTRRA changed the withholding rules for 457 plans to conform with qualified retirement plans. As a result, after 2001, governmenta1457 plans are required to withhold income taxes at a 20 percent rate for distributions paid over less than 10 years, even if they began before the effective date of the EGTRRA changes. The proposed legislation would allow the pre-EGTRRA rules to be applied to such distributions. - Indian tribal government. The term "governmental plan" would include defined benefit plans established or maintained for employees by an Indian tribal government, a subdivision or agency of an Indian tribal government, or an entity established and owned by an Indian tribal government. The Joint Committee on Taxation (JCT) description of the Chairman's Mark of the NESTEG bill is available at: http:Ihvww.house.gov/tct/x-56-OS.pdf and JCT modifications to the Chairman's Mark are available at: http://www.house. gov/jct/x-57-OS.pdf. CRS Report Compares Proposed Pension Reform Legislation • On July 15, 2005, the Congressional Reseazch Service (CRS) released its report, Defined Benefit Pension Reform for Single-Employer Plans, providing an overview of proposed pension reform legislation. The report describes the current laws applicable to defined benefit pension plans, the Administration's pension reform 9/8;2005 ~ 2005 -Gabriel, Roeder, Smith S: Company- Page 3 proposal, and other recently introduced Congressional bills. The major proposed pension reform bills analyzed were: the National Employee Savings and Trust Equity Guazantee Act of 2005 (NESTEG), Pension Preservation and Savings Expansion Act of 2005 (PPSE) and Pension Protection Act of 2005. full copy of the report is available at: http•//opencrs.cdt.org/rpts/RL32991 20050714.ndf IRS Private Letter Ruling on Governmental Plan Contributions by Indian Tribal Police Department On Apri18, 2005, the IRS released a private letter ruling (PLR 200514024, dated 1/11/2005) concluding that contributions made by a federally recognized Indian tribe to a governmental plan on behalf of its uniformed police officers are in compliance with Code § 414(d). Under 414(d), a "governmental plan" is defined as a plan established and maintained for its employees by the governrrrent of the United States, a State or political subdivision, or any agency or instrumentality of the foregoing. Citing Revenue Ruling 89-49, the letter ruling describes factors to consider in determining if a plan is considered a govennmental plan, with one of the most important being the degree of control the governmental entity has over the organization's daily operations. Other factors include: 1) specific legislation creating the organization, 2) source of funds, 3) selection process for trustees or operating boazd, and 4) whether the governmental unit considers the organization's employees to be employees of the applicable governmental unit. In this letter ruling, the IRS concluded that the contributions made by the employer, a tribal police department, aze considered contributions by an agency or instrumentality of the state as provided in 414(d) based on the following considerations: • The employer performed law enforcement functions on behalf of the state and surrounding local governments; and • The state exercised considerable control over the daily activities of the employer through extensive standards governing the qualifications and licensing of the police officers. Moreover, state law also ;~ governed the duties, liabilities, and data practices of the police officers. The 1R.S also ruled that participation of the police officers in the plan would not adversely affect the plan's governmental status under 414(d). This ruling was consistent with two previous rulings (PLR 200405015 and PLR 200404059). A copy of the private letter ruling is available at: http•//www irs gov/pubs/irs-wd/0514024.pdf !Minnesota Court Affirms Age=Based Earyy° t2etirement Ylan Violated ADEN On July 7, 2005, the U.S. District Court for the District of Minnesota ruled that a Minnesota school district violated the Age Discrimination in Employment Act (AREA) when it determined early retirement benefits based solely on an individual's age. The school district's early retirement incentive plan provided a cash incentive to full-time teachers who retired after age 52 with at least 15 years of service. Those retiring between the ages of 52 and 58 received 100 percent of the cash incentive, while only 90 percent was paid to those retiring at age 59, and only 80 percent was paid to those retiring at age 60, etc. After age 66, the retiring teachers did not receive any of the incentive benefit. See: EEOC v. Independent School District No. 2174 of Pine River, Minn., No. 04-4087. Source: Bureau of National Affairs, Pension & Benefits Reporter, July 19, 2005. ti.5. health Care Spending IIibher Due to Costs for Prescription Drugs and Physician Visits n July 12, 2005, Health Affairs journal published a study entitled "Higher Prices, Not Defensive Medicine Waiting Lists, Explain Why U.S. Health Care Spending is So High." According to the study, U.S. citizens spent $5,267 per capita for health caze in 2002 which was 53 percent higher that any other industrialized 918/2005 ~ 2005 -Gabriel, Roeder, Smith & Compan~~ Page 4 country. The two major reasons cited for higher U.S. spending were (1) higher incomes and (2) higher medical care prices for prescription drugs, physician visits and hospital stays. • One of the .misconceptions dispelled by the research was that malpractice claims caused higher health care spending. The study found that the cost of defending U.S. malpractice claims was estimated to be $6.5 billion, only 0.46 percent of total health care spending in 2001. In the U.S., malpractice awards accounted for $16 per capita in 2001 .compared to $12 in the United Kingdom and $10 in Australia. In 2001, the average U.S. malpractice claim was $265,103. This was higher than in Australia, but 14 percent less than in Canada and 36 percent less than in the United Kingdom. More information on the study is available on Health Affairs website at: htro://www.healthaffairs.org(press/julyaua0501.htm h~iedicare Enrollees with High Drug Costs lviay Expect Elevated Out-of-Pocket Expenses In its July/August 2005 issue, Health Affairs journal released the findings of a Medicare study titled,"Riding the Rollercoaster: The Ups and Downs in Out-of-Pocket Spending Under the Standard Medicare Drug Benefit " According to the study, participants in Part D will pay. out-of-pocket costs averaging about 44 percent of their total prescription drug costs over the first three years of the program. "High spenders," those with annual drug costs above $2,250, could pay up to 67 percent of the total. This difference is due to a provision in Part D whereby participants pay 100 percent of their prescription drug costs between $2,250 and $5,100 (also known as the "donut hole''). Participants in the donut hole pay all drug costs out-of-pocket until they reach $5,100, after which Part D's catastrophic coverage provision pays 95 percent of additional drug costs. - . , The study estimated about 38 percent of enrollees will reach the donut hole in 2006, and 14 percent will exceed the catastrophic threshold. Over the three years from 2006 to 2008, projected out-of-pocket drug costs for high spenders are estimated to be about $11,000. For participants reaching the catastrophic coverage threshold, out of pocket costs are estimated to be nearly $12,300. The research team, led by Bruce Stuart of the University of Maryland in Baltimore, suggested restructuring the drug benefit to meet the needs of all beneficiaries by creating a uniform rate of coinsurance or capping the proportion of income paid for out-of- pocket drug costs. The study is available to Health Affairs subscribers at: http://www.healthaffairs.org AARP Ur;es CMS to Use Clear Language in hedicare Part ll Beneficiary Documents On July 8, 2005, AARP Associate Executive Director Christopher Hansen urged the Centers for Medicare & Medicaid Services (CMS) to provide Medicare beneficiaries with clear and concise documents to explain the Part D prescription drug benefit, scheduled to begin January 1, 2006. In a letter to CMS, Hansen warned that the success of the Part D program would depend on the extent to which potential participants understood the benefits provided. He suggested that the beneficiary-related plan documents (including the Summary of Benefits, Explanation of Benefits, and Evidence of Coverage) be written at a reading level no higher than the sixth grade and tested using focus groups. He also recommended that CMS ban unsolicited telephone calls to seniors to protect them from telemarketing scams. Source: Bureau of National Affairs, Pension & Benefits Reporter, July 19, 2005. Social Security Bill to .Establish Individual accounts and Beneft Offsets On July 15, 2005, Representative Jim McCrery (R-LA) introduced the Growing Real Ownership for Workers • ("GROW") Act of 2005 (H.R. 3304) as a means to reform Social Security. The bill would establish voluntary individual accounts (known as "GROW" accounts) funded with general revenues equal to the surplus Social Security tax revenues. The individual accounts would be invested in marketable U.S. Treasury securities. 9/8/2005 ~ 2005 - Gabriel, Roeder, Smith & Company- Page 5 could offer to pay the Part D premiums for enrollees, as well as a portion of out-of-pocket expenses. The employer would not receive the 28 percent subsidy, but Medicare would become the primary payer and • the employer could structure this to lower long-term costs. Additionally, cost trends attributable to prescription drug costs could be excluded from the OPEB valuation thereby lowering the reported liability. A disadvantage of this approach is that employer payments for out-of-pocket costs do not advance the member towazd Medicare's catastrophic prescription drug coverage. As discussed earlier, to be eligible for Medicaze's 95 percent catastrophic prescription drug coverage, the $3,600 must first be paid out-of- pocket. Medicare Part D Implementation CMS continues to issue guidance for plan sponsors and several key dates are approaching that require decisions and actions by employers. The most significant upcoming deadlines include: October 31, 2005 -Employers must submit applications for the federal subsidy for calendaz yeaz 2006, including required actuarial attestations, to CMS by October 31, 2005. November 15, 2005 -Employers that provide prescription drug plans must notify active and retired employees (and their spouses and dependents) about the plan's creditable coverage. Moreover, employers also need to inform plan participants that are entitled to Medicare benefits whether or not the plan provides creditable coverage. This notice requirement is applicable whether or not the employer applies for the federal subsidy. Medicare Part D Implementation Timeline for 2006 Coverage • :: Re uirement - Due.Date' ~:- ~- ins communications to retirees about Part D CMS be October 1, 2005 Application for subsidy (for all plan sponsors whether operating on a plan or calendar ear October 31, 2005 O en Enrollment be ins creditable covera a certification re uired November 15, 2005 Retiree dru subsid ro am be ins Janu 1, 2006 It is likely that most state and local government-sponsored retiree prescription drug plans are actuarially equivalent to the Part D benefit. Therefore, they would be eligible for the 28 percent subsidy after obtaining certification that their prescription drug benefit is actuarially equivalent. If the government is unable to certify actuarial equivalence this year, the option is still open for future years. Additional Resources Guidance on the Part D subsidy is available on the CMS website at: http://rds.cros.hhs. ov Guidance on creditable coverage and model language for creditable coverage disclosure notice is at: http•//www cros hhs gov/medicarereforn~/credcovr~.asp Basic questions and answers about Medicare Prescription Drug Coverage are at: http•/hvww cros hhs govbartnerships/news/mma/gsandas.pdf • r 9/12/2005 ®Gabriel, Roeder, Smith & Company Page 6 Gabriel, Roeder, Smith & Company GRS RESEARCH MEMORANDUM Consultants & Actuaries RE: Medicare Part D Prescription Drug Benefits and Subsidies for Employer-Sponsored Retiree Drug Coverage FROM: Mary Ann Vitale and Paul Zorn, Director of Governmental Research DATE: September 12, 2005 Overall, Medicaze covers 42 million people, including 35.4 million seniors and 6.3 million disabled people under age 65. Participation in Medicaze is expected to grow to 61 million by 2020 and 78 million by 2030. In 2005, Medicaze benefit payments totaled $325 billion (about $7,800 per participant), accounting for 13 percent of the federal budget. Forty percent of Medicare participants report being in very good to excellent health, 50 percent report being in good to fair health, and 10 percent report being in poor health.t Most Medicaze participants have modest incomes: 50 percent have incomes below 200 percent of poverty.Z Prior to the Medicaze Prescription Drug, Improvement, and Modernization Act of 2003 (which becomes effective January 1, 2006), Medicare did not cover outpatient prescription drugs. In 2003, total outpatient prescription drug spending for Medicare beneficiaries (including out-of-pocket spending) amounted to $95 billion and averaged about $2,300 per beneficiary.3 Total annual outpatient drug spending was distributed among Medicare beneficiaries as follows: ~~ • 61 percent spent less than $2,000 (totaling 19 percent of total prescription drug spending for Medicaze beneficiaries); • 28 percent spent between $2,000 and $5,000 (totaling 39 percent of drug spending); and • 11 percent spent over $5,000 (totaling 42 percent of drug spending).° Since Medicare did not provide outpatient drug coverage in 2003, prescription drug spending was paid through employer-provided retiree health insurance, other private coverage (e.g., Medigap), or paid out- of-pocket by the retirees. According to the 2000 Medicare Current Beneficiary Survey, prescription drug expenditures for Medicare beneficiaries age 65 and older were paid through the following sources: • 42 percent was paid out-of-pocket; • 36 percent was paid through private insurance; • 13 percent was paid through Medicaid and other public sources; and • 9 percent was paid from other sources. The authors of this memorandum are not attorneys and the statements made are not intended as legal advice or opinion. ~ MedPAC analysis of the Medicare Current Beneficiary Survey, 2001. • Z Ibid. 3 Kaiser Family Foundation, Medicare and Prescription Drug Spending Chartpack, June 2003. ° Ibid. 9/12/2005 ©Gabriel, Roeder, Smith & Company Page 1 Medicare Part D Coverage • On December 8, 2003, President Bush signed into law the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (also referred to as the Medicare Modernization Act or MMA). Starting in 2006, the Act provides a new prescription drug benefit for Medicaze enrollees under Medicare Part D. Additionally, the Act provides new federal subsidies for employers that continue to provide drug coverage to retirees, as long as the coverage is at least actuarially equivalent to coverage under Medicaze Part D. Beginning January 1, 2006, Medicare eligible/enrolled individuals may voluntarily enroll in Medicaze Part D standazd coverage, provided through private, risk-bearing, stand-alone plans referred to as Prescription Drug Plans (PDPs). For coverage in 2006, enrollees would pay a monthly premium of about $30 and an annual deductible of $250.5 In return, Medicare would pay: 75% of the enrollee's outpatient prescription drug costs between $250 and $2,250; None of the enrollee's outpatient prescription drug costs between $2,250 and $5,100 (also known as the "donut hole"); and 95% of the enrollee's out-of-pocket prescription drug costs over $5,100 (i.e., catastrophic coverage}. i. This is illustrated in the following graph: • Catastrophic Coverage -for costs over $5,100 No Coverage -for costs between $2,250 and $5,100 Initial Coverage - for costs between $250 and $2,250 ~; - -- 5% ~95% Enrollee Pays 100% (up to $2,850) (a.k.a. "Donut Hole") 25% (up to $500) Z5% (up to $1,500) $250 Annual Deductible $360 Annual Premium ($30/month) Enrollee Pays Medicare Pays (Shading is not proportionate) 5 Centers for Medicare & Medicaid Services, Medicare Fact Sheet, August 9, 2005. CMS originally estimated the .Medicare Part D premium would be $35 per month. On August 29, 2005, it announced that premiums charged by drug plan providers would likely range from $20 to $30 per month, as a result of competition among the Part D plan providers. 9/12/2005 ®Gabriel, Roeder, Smith & Company Page 2 True Out-of-Pocket Costs • Under Medicaze Part D, catastrophic coverage does not begin in a given yeaz until the enrollee's "true out-of-pocket costs" exceed $3,600. This is the sum of: • the annual deductible ($250); • the enrollee's portion of the initial coverage (i.e., $S00 or 25% x [$2,250 - $250]), and • the enrollee's portion of the donut hole (i.e., $2,850 or 100% x [$5,100 - $2,250]). Thus, Medicaze begins paying 95 percent of prescription drug costs only after the enrollee's total prescription drug costs reach $5,100 - of which $3,600 has been paid by the enrollee and $1,500 has been paid by Medicaze Part D. In order for the enrollee's $3,600 to count towazd catastrophic coverage, the payments must meet the definition of "true out-of-pocket" costs (TrOOP). Part D defines TrOOP costs as only those paid ;by the enrollee, another individual (e.g., a family member), a charity, or a State Pharmaceutical Assistance Program. Payments made by the employer or an insurance plan do not count as TrOOP costs and therefore, do not count towazd catastrophic coverage. For example, if the employer paid the $250 annual deductible, it would increase the dollar amount at which catastrophic coverage could begin for the enrollee to $5,350 ($5,100 + $250). However, since payments for monthly premiums aze not included in the definition of TrOOP costs, an employer can pay the enrollee's Part D premiums without increasing the dollaz amount at which catastrophic coverage begins. Employer Options for Retiree Drug Coverage .~ In responding to the new Part D program, employers have the following options for providing prescription drug coverage to Medicare-eligible retirees: 1) Provide an "actuarially equivalent" prescription drug plan and receive atax-free federal subsidy; 2) Provide separate drug coverage that supplements or "wraps around".Medicare Part D; 3) Coordinate drug coverage through Medicare Prescription Drug Plans (PDPs); 4) Sponsor an employer PDP through a waiver process with the Center for Medicare and Medicaid Services (CMS); 5) Offer a Medicare Advantage Prescription Drug Plan (MA-PDP); or 6) Drop drug coverage and possibly offer to pay retirees' monthly Medicare Part D premiums. The remainder of this memorandum discusses employer subsidies under Medicare Part D and employer supplemental ("wrap-around") coverage. Employer Subsidies Under Part D The MMA does not prevent employers or other health care plan sponsors from providing prescription drug coverage that is at least actuarially equivalent to Part D. In analyzing eazlier versions of the legislation, the Congressional Budget Office (CBO) estimated approximately one-third of Medicare beneficiaries would lose employer-sponsored drug coverage as a result of Part D. Consequently, Congress added federal subsidies to encourage employers to continue providing prescription drug coverage for retirees. • To be eligible for the subsidy, an employer must provide an actuarial certification that its plan's prescription drug coverage is "actuarially equivalent" to the standard Part D benefit. In return, Medicaze 9/12/2005 ®Gabriel, Roeder, Smith & Company Page 3 f will pay 28 percent of the employer's incurred "allowable costs" for outpatient prescription drugs between $250 and $5,000 per "qualified individual." A "qualified individual" must be eligible for Part D • coverage, but have elected to receive his or her drug benefit through the employer instead. The maximum subsidy is $1,330 per member (i.e., 28% x [$5,000 - $250]), and is indexed for certain future cost increases. According to CMS, the subsidy is expected to average about $668 per qualified individual. The subsidy is not taxable income for the employer. Moreover, private-sector employers can take a tax deduction for the -cost of providing the prescription drug plan. State and local governments that sponsor retiree health Gaze plans aze eligible for the subsidy, but do not benefit from the tax deduction, since they are already tax-exempt entities. Allowable Costs Allowable costs aze actual incurred drug costs under a qualified plan by a qualified individual that is paid either by the plan sponsor (e.g., the employer) or plan member. These costs must be for drugs covered~by Medicaze Part D and include dispensing fees, but exclude administrative costs, discounts, rebates, etc. It is important to note that the employer ~ can receive a subsidy for allowable costs paid by members. However, a plan where members pay most or all of the costs would not be "actuarially equivalent" to the Part D benefit. Actuarial Equivalence Determining actuarial equivalence involves atwo-part test to ensure that both the gross and net value of the plan sponsor's retiree prescription drug benefit is at least equal to the Part D standard benefit. The first part is the "gross value" test which measures whether the expected value of prescription drug `, benefits for Medicare-eligible individuals under the employer's prescription drug program is at least equal to the expected value of the standard Part D benefit. The gross value test is used to determine whether the plan provides "creditable coverage" (that is, whether the drug coverage that is expected to be paid out will, on average, be at least equal to the standard Medicare prescription drug coverage). In order to meet certain disclosure requirements under Part D, employers that provide prescription drug coverage to Medicare-eligible individuals must perform this test whether or not they apply for the subsidy. (See the Creditable Coverage Notice section, later in this memorandum.) The second part is the "net value" test which measures whether the expected value of plan benefits minus retiree contributions for prescription drug coverage is at least equal to the expected value of the standard Part D benefit minus the Part D premium adjusted for supplemental coverage. Requirements for Receiving the Subsidy The following five steps are required for employers to receive the prescription drug subsidy: 1) Submission of an annual application for the employer subsidy. For the retiree drug subsidy beginning January 1, 2006, an application must be submitted to CMS by October 31, 2005.6 In subsequent years, calendar year plans must submit applications by September 30 and non- calendar year plans must submit applications 90 days prior to the beginning of each plan year. 2) Provide attestation of actuarial equivalence. CMS requires certification by a member of the American Academy of Actuaries that the plan meets the actuarial equivalence standazds. For •6 The deadline for applying for the Part D subsidy was originally September 30, 2005. However, on September 2, 2005, CMS announced the deadline's extension to October 31, 2005. 9/ 12/2005 ©Gabriel, Roeder, Smith & Company Page 4 each plan, an actuary's attestation must be provided with the application by the applicable deadlines. • 3) Certify disclosure of creditable coverage status. Employers must disclose to plan participants and CMS whether or not each plan provides creditable coverage. CMS has issued creditable coverage guidance with sample disclosure language that can be incorporated into other plan communications. (See the Additional Resources section at the end of this memo for links to CMS guidance on creditable coverage.) 4) Electronically submit and periodically update enrollment information. Employers must provide enrollment information about retirees and dependents to CMS to be updated periodically. 5) Electronically submit incurred drug cost data. Employers must provide aggregate data on incurred drug costs and reconcile cost data at year-end to CMS. Creditable Coverage Notice The MMA requires every plan sponsor that offers prescription drug coverage to provide a notice tq CMS of the plan's creditable coverage status annually and upon any change in creditable coverage status. This notice is due by September 30, regardless of whether the plan offers "creditable" or "noncreditable" coverage. In addition, plan sponsors must notify Part D eligible participants of the plan's creditable coverage status at the following times: • Annually prior to November 15; • Before the initial enrollment period for Part D; • Before the effective date of enrollment in the employer's drug plan; :~ • When drug coverage ends or the status of creditable coverage changes; and • Upon the beneficiary's request. A simplified creditable coverage test may be used if an employer is not applying for the Part D subsidy. Under the simplified test, the prescription drug plan must satisfy several requirements such as providing at least 60 percent of participants' prescription drug expenses, on average. Advantages and Disadvantages of the Employer Subsidy The main advantage of the Part D subsidy for employers is the tax-free reimbursement for 28 percent of allowable costs incurred for outpatient prescription drug benefits. This has been estimated to save approximately 20 percent of the employer's allowable drug spending annually. Another advantage is that, by continuing the current plan, there will be less disruption in benefits provided to members and therefore less of a need to communicate benefit changes. The disadvantages include the required annual certification of the plan for actuarial equivalence, as well as additional plan administration and reporting requirements related to applying for the subsidy, and processing subsidy payments. Employer Supplemental ("Wrap-Around") Coverage Instead of offering prescription drug coverage, employers could require Medicare eligible plan members to select the Part D benefit, but also offer coverage that supplements Part D. For example, the employer • ~ As noted in an earlier footnote, CMS extended the application deadline for the Part D subsidy from September 30, 2005, to October 31, 2005. At this writing, it is unclear whether that extension also applies to the deadline for submitting creditable coverage notices to CMS. 9/12/2005 ©Gabriel, Roeder, Smith & Company Page 5 Eligible workers born on or after January 1, 1950, would be automatically enrolled but would have the option to disenroll. The proposal also includes a benefit offset that would reduce the individual's guaranteed Social Security benefit by the individual account balances. .According to Social Security Administration's (SSA) chief actuary, Stephen Goss, the plan would reduce Social Security's long-term liabilities by an estimated 0.24 percent of taxable payroll, from an estimated actuarial deficit of 1.92 percent of payroll under present law to 1.68 percent of payroll under the proposed law. The bill has been referred to the House Committee on Ways and Means and is expected to be included in a broader retirement policy proposal being drafted by Committee Chairman William Thomas (R-CA). The legislation is available at: http://thomas.loc.gov/ by searching for H.R. 3304. A copy of the SSA actuary's memorandum on GROW accounts is available at: http•//www.ssa.gov/OACT/solvency/McCrery 20050715.ndf HSA Premiums Decrease in Earle 2005 On July 27, 2005, eHealthInsurance released its report, Health Savings Accounts: The First Six Months of 2005, indicating that HSA premiums decreased by an average of $348 over the last year. Overall, annual HSA premiums fell 15 percent from $2,471 in 2004 to $2,122 in 2005. The largest decrease occurred among individual plans, with annual premiums falling 19.1 percent from $1,655 in 2004 to $1,339 in 2005. Family plan premiums decreased 4.8 percent from $3,329 in 2004 to $3,169 in 2005. Of all age groups, premiums for the age 45-64 cohort decreased the most, falling 17 percent from $2,701 in 2004 to $2,245 in 2005. HSAs were established by Congress to allow consumers to pay for qualified medical expenses with pre-tax dollars, beginning January 1, 2004. To be tax-advantaged, HSAs must be combined with high-deductible health plans that include: - Minimum annual deductibles of $1,000 for individuals and $2,000 for families, and - Maximum annual out-of-pocket expenses limited to $5,100 for individuals and $10,200 for families. The eHealthInsurance report indicates that affordable HSA programs have provide many of the benefits offered by comprehensive health insurance plans: including emergency room services, hospitalization, and lab/X-ray services. Nearly 80 percent of the HSA plans purchased in early 2005 also have prescription drug coverage with half paying the entire cost after the deductible is met. . The study also found that, during 2005, a transition toward younger buyers occurred with the age 21-29 group increasing from 18.3 percent of total buyers in 2004 to 24.2 percent in 2005. Also, a larger portion of individuals (as compared with families) purchased HSAs, increasing from 51.3 percent in 2004 to 57.1 percent in 2005. The report is based on data from the Kaiser Family Foundation and Health Research and Educational Trust. eHealthInsurance is a major source of health insurance and represents over 140 health insurance companies. A copy of the report is available at: http•//image ehealthinsurance com/ehealthinsurance/ReportNew/072705HSA6mosReportFinal.pdf • 9/8/2005 cO 2005 -Gabriel, Roeder, Smith & Company- Page 6