66932 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 54

[T.D. 8741]

RIN 1545–AV53

DEPARTMENT OF LABOR

Pension and Welfare Benefits

Administration

29 CFR Part 2590

RIN 1210–AA62

DEPARTMENT OF HEALTH AND

HUMAN SERVICES

Health Care Financing Administration

45 CFR Part 146

RIN 0938–AI05

Interim Rules for Mental Health Parity

AGENCIES: Internal Revenue Service,

Department of the Treasury; Pension

and Welfare Benefits Administration,

Department of Labor; Health Care

Financing Administration, Department

of Health and Human Services.

ACTION: Interim rules with request for

comments.

SUMMARY: This document contains

interim rules governing parity between

medical/surgical benefits and mental

health benefits in group health plans

and health insurance coverage offered

by issuers in connection with a group

health plan. The rules contained in this

document implement changes made to

certain provisions of the Internal

Revenue Code of 1986 (Code), the

Employee Retirement Income Security

Act of 1974 (ERISA or Act), and the

Public Health Service Act (PHS Act)

enacted as part of the Mental Health

Parity Act of 1996 (MHPA) and the

Taxpayer Relief Act of 1997. Interested

persons are invited to submit comments

on the interim rules for consideration by

the Department of the Treasury, the

Department of Labor, and the

Department of Health and Human

Services (Departments) in developing

final rules. The rules contained in this

document are being adopted on an

interim basis to ensure that sponsors

and administrators of group health

plans, participants and beneficiaries,

States, and issuers of group health

insurance coverage have timely

guidance concerning compliance with

the requirements of MHPA.

DATES: Effective date. The interim rules

are effective January 1, 1998.

Applicability dates. The requirements

of MHPA and the interim rules apply to

group health plans and health insurance

issuers offering health insurance

coverage in connection with a group

health plan for plan years beginning on

or after January 1, 1998. MHPA includes

a sunset provision under which the

MHPA requirements do not apply to

benefits for services furnished on or

after September 30, 2001.

Information collection. Affected

parties are not required to comply with

the information collection requirements

in these interim rules until the

Departments publish in the Federal

Register the control numbers assigned

to these information collection

requirements by the Office of

Management and Budget (OMB).

Publication of the control numbers

notifies the public that OMB has

approved these information collection

requirements under the Paperwork

Reduction Act of 1995. The

Departments have submitted a copy of

this rule to OMB for its review of the

information collections. Interested

persons are invited to send comments

regarding these burdens or any other

aspect of these collections of

information on or before February 20,

1998.

Comments. Written comments on

these interim rules are invited and must

be received by the Departments on or

before March 23, 1998.

ADDRESSES: Comments on the

information collection requirements

should be sent directly to:

Office of Information and Regulatory

Affairs, Office of Management and

Budget, Room 10235, New Executive

Office Building, Washington, DC

20503, Attention: HCFA Desk Officer.

Health Care Financing Administration,

Office of Financial and Human

Resources, Management Planning and

Analysis Staff, Room C2–26–17, 7500

Security Boulevard, Baltimore, MD

21244–1850; Attention: John Burke

Written comments on other aspects of

the interim rules should be submitted

with a signed original and three copies

(except for electronic submissions sent

to the Internal Revenue Service (IRS)) to

any of the addresses specified below.

For convenience, comments may be

addressed to any of the Departments.

Comments addressed to any Department

will be shared with the other

Departments.

Comments to the IRS can be

addressed to: CC:DOM:CORP:R (REG–

109704–97), Room 5228, Internal

Revenue Service, POB 7604, Ben

Franklin Station, Washington, DC

20044.

In the alternative, comments may be

hand-delivered between the hours of 8

a.m. and 5 p.m. to: CC:DOM:CORP:R

(REG–109704–97), Courier’s Desk,

Internal Revenue Service, 1111

Constitution Avenue, NW., Washington,

DC 20224.

Alternatively, taxpayers may transmit

comments electronically via the IRS

Internet site at: http://

www.irs.ustreas.gov/prod/taxlregs/

comments.html.

Comments to the Department of Labor

can be addressed to: U.S. Department of

Labor, Pension and Welfare Benefits

Administration, 200 Constitution

Avenue, NW., Room N–5669,

Washington, DC 20210; Attention:

MHPA Comments.

Alternatively, comments may be

hand-delivered between the hours of 9

a.m. and 5 p.m. to the same address.

Comments to the Department of

Health and Human Services can be

addressed to: Health Care Financing

Administration, Department of Health

and Human Services, Attention: HCFA–

2891–IFC, P.O. Box 26688, Baltimore,

MD 21207.

In the alternative, comments may be

hand-delivered between the hours of

8:30 a.m. and 5:00 p.m. to either:

Room 309–G, Hubert Humphrey

Building, 200 Independence Avenue,

SW., Washington, DC 20201

or

Room C5–09–26, 7500 Security

Boulevard, Baltimore, MD 21244–

1850

All submissions to the Internal

Revenue Service will be open to public

inspection and copying in Room 1621,

1111 Constitution Avenue, NW,

Washington, DC from 9:00 a.m. to 4:00

p.m.

All submissions to the Department of

Labor will be open to public inspection

and copying in the Public Documents

Room, Pension and Welfare Benefits

Administration, U.S. Department of

Labor, Room N–5638, 200 Constitution

Avenue, NW, Washington, DC from 8:30

a.m. to 5:30 p.m.

All submissions to the Department of

Health and Human Services will be

open to public inspection and copying

in Room 309–G of the Department of

Health and Human Services offices at

200 Independence Avenue, SW,

Washington, DC from 8:30 a.m. to 5:00

p.m.

FOR FURTHER INFORMATION CONTACT:

Terese Klitenic, Health Care Financing

Administration, Department of Health

and Human Services, at (410) 786–1565;

Mark Connor, Pension and Welfare

Benefits Administration, Department of

Labor, at (202) 219–4377; or Russ
Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations 66933

1Chapter 100 of Subtitle K of the Code, Part 7 of

Subtitle B of Title I of ERISA, and Title XXVII of

the PHS Act were added by the Health Insurance

Portability and Accountability Act of 1996 (HIPAA),

Pub. L. 104–191.

2However, the preemption is broader for the

statutory requirements of section 701 of ERISA and

section 2701 of the PHS Act that limit the

application of preexisting condition exclusions.

Under these broader provisions, State laws cannot

‘‘differ’’ from the preexisting condition exclusion

requirements of section 701 of ERISA or section

2701 of the PHS Act except as specifically

permitted by section 731(b)(2) of ERISA and section

2723(b)(2) of the PHS Act. These provisions permit

a State to impose on health insurance issuers

certain stricter limitations relating to preexisting

condition exclusions.

Weinheimer, Internal Revenue Service,

Department of the Treasury, at (202)

622–4695.

Customer service information.

Individuals interested in obtaining a

copy of the Department of Labor’s

booklet entitled ‘‘Questions and

Answers: Recent Changes in Health Care

Law,’’ which includes information on

MHPA, may call the following toll-free

number: 1–800–998–7542.

SUPPLEMENTARY INFORMATION:

A. Background

The Mental Health Parity Act of 1996

(MHPA) was enacted on September 26,

1996 (Pub. L. 104–204, 110 Stat. 2944).

MHPA amended the Employee

Retirement Income Security Act of 1974

(ERISA) and the Public Health Service

Act (PHS Act) to provide for parity in

the application of certain dollar limits

on mental health benefits with dollar

limits on medical/surgical benefits.

Provisions implementing MHPA were

later added to the Internal Revenue

Code of 1986 (Code) under the Taxpayer

Relief Act of 1997 (Pub. L. 105–34).

1. Regulatory Responsibility

The provisions of MHPA are set forth

in Chapter 100 of Subtitle K of the Code,

Part 7 of Subtitle B of Title I of ERISA,

and Title XXVII of the PHS Act.1 The

Secretaries of the Treasury, Labor, and

Health and Human Services share

jurisdiction over the MHPA provisions.

These provisions are substantially

similar, except as follows:

• The MHPA provisions in the Code

generally apply to all group health plans

other than governmental plans, but they

do not apply to health insurance issuers.

A taxpayer that fails to comply with

these provisions may be subject to an

excise tax under section 4980D of the

Code.

• The MHPA provisions in ERISA

generally apply to all group health plans

other than governmental plans, church

plans, and certain other plans. These

provisions also apply to health

insurance issuers that offer health

insurance coverage in connection with

such group health plans. Generally, the

Secretary of Labor enforces the MHPA

provisions in ERISA, except that no

enforcement action may be taken by the

Secretary against issuers. However,

individuals may generally pursue

actions against issuers under ERISA

and, in some circumstances, under State

law.

• The MHPA provisions in the PHS

Act generally apply to health insurance

issuers that offer health insurance

coverage in connection with group

health plans and to certain State and

local governmental plans. States, in the

first instance, enforce the PHS Act with

respect to issuers. Only if a State does

not substantially enforce any provisions

under its insurance laws will the

Department of Health and Human

Services enforce the provisions, through

the imposition of civil money penalties.

Moreover, no enforcement action may

be taken by the Secretary of Health and

Human Services against any group

health plan except certain State and

local governmental plans.

The interim rules being issued today

by the Secretaries of the Treasury,

Labor, and Health and Human Services

have been developed on a coordinated

basis by the Departments. In addition,

these interim rules take into account

comments received by the Departments

in response to the request for public

comments on MHPA published in the

Federal Register on June 26, 1997 (62

FR 34604). Except to the extent needed

to reflect the statutory differences

described above, the interim rules of

each Department are substantively

identical. However, there are certain

non-substantive differences. The interim

rules reflect certain stylistic differences

in language and structure to conform to

conventions used by a particular

Department. These differences have

been minimized and any differences in

wording are not intended to create any

substantive difference.

2. Preemption of State Laws

The McCarran-Ferguson Act of 1945

(Pub. L. 79–15) exempts the business of

insurance from federal antitrust

regulation to the extent that it is

regulated by the States and indicates

that no federal law should be

interpreted as overriding State

insurance regulation unless it does so

explicitly. Section 514(a) of ERISA

preempts State laws relating to

employee benefit plans (including group

health plans). Section 731 of ERISA and

section 2723 of the PHS Act provide

that Part 7 of Subtitle B of Title I of

ERISA and Part A of Title XXVII of the

PHS Act (including the MHPA

provisions) do not in any way affect or

modify section 514 of ERISA with

respect to group health plans.

Section 514(b)(2) of ERISA saves from

preemption any State law that regulates

insurance. However, section 731(a) of

ERISA and section 2723(a) of the PHS

Act preempt State insurance laws

relating to health insurance issuers in

connection with group health insurance

coverage to the extent such laws

‘‘prevent the application of’’ Part 7 of

Subtitle B of Title I of ERISA or Part A

of Title XXVII of the PHS Act, including

the MHPA provisions. (There is no

corresponding provision in the Code.) In

this regard, the conference report to

HIPAA states that the conferees

generally intended the narrowest

preemption of State laws with regard to

health insurance issuers (not group

health plans) with respect to the

provisions of Part 7 of Subtitle B of Title

I of ERISA and Part A of Title XXVII of

the PHS Act.2 Consequently, the

conference report to HIPAA states that

State laws with regard to health

insurance issuers that are broader than

federal requirements in certain areas

would not ‘‘prevent the application of’’

the provisions of Part 7 of Subtitle B of

Title I of ERISA or Part A of Title XXVII

of the PHS Act. Further, the conference

report to MHPA states that the

application of these preemption

provisions should permit the operation

of any State law or provision that

requires more favorable treatment of

mental health benefits under health

insurance coverage than that required

under the MHPA provisions.

Thus, generally, a State law that

requires more favorable treatment of

mental health benefits under health

insurance coverage offered by issuers

would not be preempted by the

provisions of MHPA and the interim

rules.

B. Overview of MHPA and the Interim

Rules

The MHPA provisions are set forth in

section 9812 of the Code, section 712 of

ERISA, and section 2705 of the PHS Act.

MHPA and the interim rules apply to a

group health plan (or health insurance

coverage offered by issuers in

connection with a group health plan)

that provides both medical/surgical

benefits and mental health benefits.

The MHPA provisions provide for

parity in the application of aggregate

lifetime dollar limits, and annual dollar

limits, between mental health benefits

and medical/surgical benefits. If a group

health plan offers two or more benefit

packages under the plan, the
66934 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations

3 In response to the Departments’ request for

public comments on MHPA published in the

Federal Register (62 FR 34604), the Equal

Employment Opportunity Commission (EEOC)

noted that the Americans with Disabilities Act

(ADA) prohibits disability-based distinctions

(including such distinctions relating to the

provision of mental health benefits) in employerprovided health insurance plans unless the plan

otherwise falls within the protections of section

501(c) of the ADA. The ADA is within the

regulatory jurisdiction of the EEOC.

4Section 9831(a) of the Code, section 732(a) of

ERISA, and section 2721(a) of the PHS Act provide

an exception that applies under the MHPA

provisions as well as under provisions added by

HIPAA and the Newborns’ and Mothers’ Health

Protection Act of 1996. The exception applies to

any group health plan (and health insurance

coverage offered in connection with a group health

plan) for any plan year if, on the first day of the

plan year, the plan has fewer than 2 participants

who are current employees.

5Any reference to a particular paragraph in this

preamble to the interim rules is a reference to the

corresponding paragraphs in each of the

Departments’ interim rules.

requirements of MHPA and the interim

rules apply separately to each package.

The interim rules make clear that the

MHPA requirements apply regardless of

whether the mental health benefits are

administered separately under the plan.

In addition, the interim rules make clear

that the MHPA requirements in ERISA

and the PHS Act apply both to group

health plans and to health insurance

issuers offering coverage in connection

with a group health plan.

MHPA and the interim rules do not

require a group health plan (or health

insurance coverage offered in

connection with a group health plan) to

provide mental health benefits. In

addition, MHPA and the interim rules

do not affect the terms and conditions

(including cost sharing, limits on the

number of visits or days of coverage,

requirements relating to medical

necessity, requirements that patients or

providers obtain prior authorization for

treatment, and requirements relating to

primary care physicians’ referrals for

treatment) relating to the amount,

duration, or scope of mental health

benefits under a plan (or coverage)

except as specifically provided in regard

to parity of aggregate lifetime dollar

limits and annual dollar limits.3

1. Aggregate Lifetime Limits and Annual

Limits

Under MHPA and the interim rules, a

group health plan (or health insurance

coverage offered in connection with a

group health plan) providing both

medical/surgical benefits and mental

health benefits may comply with the

MHPA parity requirements in any of the

following general ways:

• The plan (or coverage) may comply

by not including any aggregate lifetime

dollar limit or annual dollar limit on

mental health benefits.

• The plan (or coverage) may comply

by imposing a single aggregate lifetime

or annual dollar limit on both medical/

surgical benefits and mental health

benefits in a way that does not

distinguish between the two.

• The plan (or coverage) may comply

by imposing an aggregate lifetime dollar

limit or annual dollar limit on mental

health benefits that is not less than the

aggregate lifetime dollar limit or annual

dollar limit on medical/surgical

benefits.

• In the case of a plan (or coverage)

under which aggregate lifetime dollar

limits or annual dollar limits differ for

categories of medical/surgical benefits,

the plan (or coverage) may comply by

calculating a weighted average aggregate

lifetime dollar limit or weighted average

annual dollar limit for mental health

benefits. The weighted average must be

based on a formula in the interim rules

that takes into account the limits on

different categories of medical/surgical

benefits.

In addition, under MHPA and the

interim rules, benefits for treatment of

substance abuse or chemical

dependency may not be counted in

applying an aggregate lifetime or annual

dollar limit that applies separately to

mental health benefits.

2. Exemptions from the Requirements of

MHPA

(a) Small Employer Exemption

The parity requirements under MHPA

and the interim rules do not apply to

any group health plan (or health

insurance coverage offered in

connection with a group health plan) for

any plan year of a small employer. The

term ‘‘small employer’’ is defined as an

employer who employed an average of

at least 2 but not more than 50

employees on business days during the

preceding calendar year and who

employs at least 2 employees on the first

day of the plan year.4

For purposes of the small employer

exemption, all persons treated as a

single employer under subsections (b),

(c), (m), and (o) of section 414 of the

Code (26 U.S.C. 414) are treated as one

employer. In addition, if an employer

was not in existence throughout the

preceding calendar year, whether the

employer is a small employer is

determined on the average number of

employees the employer reasonably

expects to employ on business days

during the current calendar year.

Finally, any reference to an employer in

the small employer exemption includes

a reference to a predecessor of the

employer.

(b) Increased Cost Exemption

The second exemption from the

MHPA requirements applies to group

health plans (or health insurance

coverage offered in connection with a

group health plan) if the application of

the MHPA parity requirements

described in paragraph (b)(1)(i) 5 results

in an increase in the cost under the plan

(or coverage) of at least one percent.

This exemption is available only if the

requirements of paragraph (f) are met. If

a plan offers more than one benefit

package, the exemption is applied

separately to each benefit package.

Except as provided in the transition

period described in paragraph (h), a

plan must implement the parity

requirements for the first plan year

beginning on or after January 1, 1998,

and must continue to comply with the

parity requirements until September 30,

2001 (the sunset date in paragraph (i))

unless the plan satisfies the exemption

described in paragraph (f). However, the

exemption is not effective until 30 days

after the notice requirements in

paragraph (f)(3) are satisfied.

The interim rules, in paragraph (f)(2),

describe the ratio of two terms used to

determine if a plan (or coverage) has

experienced a cost increase of one

percent or more. The first term is the

total cost incurred under parity

(including both mental health costs and

medical/surgical costs). The second

term is the total cost incurred under

parity reduced by the costs required

solely to comply with parity. Costs

required solely to comply with parity

include mental health claims that would

have been denied absent amendments

required to comply with parity, the

administrative costs related to those

claims, and other administrative costs

attributable to complying with the

parity requirements. Premium payments

are not considered in this calculation.

The ratio is expressed by the following

formula:

IE

IE CE AE − +

≥

( )

1 01000 .

IE represents the incurred expenditures

during the base period. CE represents

the claims incurred during the base

period that would have been denied

under the terms of the plan absent plan

amendments required to comply with

the parity requirements of paragraph

(b)(1)(i). AE represents administrative

costs related to claims in CE and other

administrative costs attributable to
Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations 66935

complying with the parity requirements

of paragraph (b)(1)(i).

Examples illustrate how the rule is

applied in the case of a self-funded

plan, a fully insured plan, and a

partially insured plan. Moreover, in the

case of a partially insured plan in which

the partially insured portion is pooled

for rating purposes, the costs of the pool

should be allocated proportionally

among the pool members by reasonable

methods, including proportional

enrollment. Additional provisions in

paragraph (f) describe the baseline for

determining those costs that are

attributable solely to compliance with

the parity requirements, the base period

used to calculate whether a plan may

claim the exemption, and how long the

exemption applies once it is claimed.

The base period must begin on the first

day in any plan year that the plan

complies with the requirements of

paragraph (b)(1)(i) of this section and

must extend for a period of at least six

consecutive calendar months. However,

in no event may the base period begin

prior to September 26, 1996 (the date of

enactment of the Mental Health Parity

Act (Pub. L. 104–204, 110 Stat. 2944)).

Before a group health plan may claim

the one-percent increased cost

exemption, it must furnish participants

and beneficiaries with a notice of the

plan’s exemption from the parity

requirements that includes the

information described in paragraph

(f)(3)(i). A plan may satisfy this

requirement by providing participants

and beneficiaries with a summary of

material reductions in covered services

or benefits, under 29 CFR 2520.104b–

3(d), if it includes all the information

required by paragraph (f)(3)(i). However,

this exemption under MHPA is not

effective until at least 30 days after the

notice is sent to the participants and

beneficiaries and the appropriate federal

agency even if the notice is incorporated

into a summary of material reductions

in covered services or benefits.

A group health plan that is not subject

to Part 7 of Subtitle B of Title I of

ERISA, and a plan subject to Part 7 of

Subtitle B of Title I of ERISA that

chooses not to incorporate the

information in paragraph (f)(3)(i) into a

summary of material reductions in

covered services or benefits (which

must be furnished to participants and

beneficiaries and the appropriate federal

agency), may use the following model to

satisfy the notice requirement under

paragraph (f)(3) of the interim rules:

BILLING CODE 4830–01–P; 4510–29–P; 4120–01–P
66936 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations

BILLING CODE 4830–01–C; 4510–29–C; 4120–01–C
Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations 66937

To claim the one-percent increased

cost exemption, a group health plan that

is a church plan (as defined in section

414(e) of the Code) also must furnish to

the Department of the Treasury a copy

of the notice sent to participants and

beneficiaries that satisfies the

requirements of paragraph (f)(3)(i). To

claim the one percent increased cost

exemption, a group health plan subject

to Part 7 of Subtitle B of Title I of ERISA

also must furnish to the Department of

Labor a copy of the notice sent to

participants and beneficiaries that

satisfies the requirements of paragraph

(f)(3)(i). To claim the one percent

increased cost exemption, a group

health plan that is a nonfederal

governmental plan also must furnish to

the Department of Health and Human

Services a copy of the notice sent to

participants and beneficiaries that

satisfies the requirements of paragraph

(f)(3)(i). In all cases, the exemption is

not effective until 30 days after notice

has been sent both to participants and

beneficiaries and to the appropriate

federal agency. Any notice submitted to

the Department of Labor or Health and

Human Services will be available for

public inspection.

The Secretaries have designated the

following addresses for delivery of these

notices:

For notices to the Department of the

Treasury, church plans should mail the

notice to: Office of the Assistant

Commissioner, Examination,

Examination Programs CP:EX:E, 1111

Constitution Avenue, NW., Washington,

DC 20224; Attention: MHPA onepercent cost exemption notice.

For notices to the Department of

Labor, plans should mail the notice to:

Public Documents Room, Pension and

Welfare Benefits Administration, U.S.

Department of Labor, Room N–5638,

200 Constitution Avenue, NW.,

Washington, DC 20210; Attention:

MHPA one-percent cost exemption

notice.

For notices to the Department of

Health and Human Services, plans

should mail the notice to: Health Care

Financing Administration, 7500

Security Boulevard, Baltimore, MD

21244–1850; Attention: Insurance

Standards: Exemptions.

Finally, to claim the one percent

increased cost exemption, a plan (or

issuer) must make available to

participants and beneficiaries (or their

representatives), on request and at no

charge, a summary of the information

described in paragraph (f)(4). An

individual who is not a participant or

beneficiary and who presents a notice

described in paragraph (f)(3)(i) is

considered to be a representative. For

this purpose, individually identifiable

information in the notice may be

redacted. The summary of information

must include the incurred expenditures,

the base period, the dollar amount of

claims incurred during the base period

that would have been denied under the

terms of the plan absent amendments

required to comply with parity, and the

administrative expenses attributable to

complying with the parity requirements.

In no event should a summary of

information include individually

identifiable information.

Civil money penalties as described in

regulations at 45 CFR 146.184(d) apply

to an issuer or nonfederal governmental

plan that fails to satisfy the

requirements of paragraph (f).

3. MHPA’s Effective Date and Sunset

Provision

The MHPA provisions are generally

effective for group health plans (and

health insurance issuers offering health

insurance coverage in connection with a

group health plan) for plan years

beginning on or after January 1, 1998.

MHPA includes a sunset provision

under which the MHPA requirements

do not apply to benefits for services

furnished on or after September 30,

2001.

However, for requirements of this

section other than the one-percent

increased cost exemption, the interim

rules provide a limitation on

enforcement actions in paragraph (h)(2).

Under that paragraph, no enforcement

action can be taken by any of the

Secretaries against a group health plan

(or issuer) that has sought to comply in

good faith with the requirements of

section 9812 of the Code, section 712 of

ERISA, and section 2705 of the PHS Act

with respect to a violation that occurs

before the earlier of the first day of the

first plan year beginning on or after

April 1, 1998, or January 1, 1999.

Compliance with the requirements of

the interim rules is deemed to be good

faith compliance with the requirements

of section 9812 of the Code, section 712

of ERISA, and section 2705 of the PHS

Act.

With respect to the increased cost

exemption, the interim rules provide in

paragraph (h)(3) a transition period for

compliance with the requirements of

paragraph (f). Under paragraph (h)(3),

no enforcement action will be taken

against a group health plan (or issuer)

that is subject to the MHPA

requirements prior to April 1, 1998

solely because the plan has claimed the

increased cost exemption under section

9812(c)(2) of the Code, section 712(c)(2)

of ERISA, or section 2705(c)(2) of the

PHS Act based on assumptions

inconsistent with the rules under

paragraph (f) of the interim rules,

provided that the plan is amended to

comply with the parity requirements no

later than March 31, 1998 and the plan

complies with the notice requirements

in paragraph (h)(3)(ii).

A group health plan satisfies this

transition period notice requirement

only if the plan provides notice to the

applicable federal agency and posts

such notice at the location(s) where

documents must be made available for

examination under section 104(b)(2) of

ERISA and the regulations thereunder

(§ 2520.104b–1(b)(3)). The notice must

indicate the plan’s intent to use the

transition period by 30 days after the

first day of the plan year beginning on

or after January 1, 1998, but in no event

later than March 31, 1998. For a group

health plan that is a church plan, the

applicable federal agency is the

Department of the Treasury. For a group

health plan that is subject to Part 7 of

Subtitle B of Title I of ERISA, the

applicable federal agency is the

Department of Labor. For a group health

plan that is a nonfederal governmental

plan, the applicable federal agency is

the Department of Health and Human

Services. In all cases, the notice must

include the date; the name of the plan

and the plan number; the name,

address, and telephone number of the

plan sponsor or plan administrator; the

employer identification number (in the

case of single-employer plans only); the

individual to contact for further

information; the signature of the plan

administrator; and the date signed. In

addition, the notice must be provided at

no charge to participants and

beneficiaries (or their representatives)

within 15 days after receipt of a written

or oral request for such notification, but

in no event does the notice have to be

provided before it has been sent to the

applicable federal agency. For this

purpose, plans may use the following

model:

BILLING CODE 4830–01–P; 4510–29–P; 4210–01–P
66938 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations

BILLING CODE 4830–01–C; 4510–29–C; 4120–01–C
Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations 66939

The Secretaries have designated the

following addresses for delivery of the

notices: For notices to the Department of

the Treasury, plans should mail the

notice to: Office of the Assistant

Commissioner, Examination,

Examination Programs CP:EX:E, 1111

Constitution Avenue, NW., Washington,

DC 20224; Attention: MHPA transition

period notice.

For notices to the Department of

Labor, plans should mail the notice to:

Public Documents Room, Pension and

Welfare Benefits Administration, U.S.

Department of Labor, Room N–5638,

200 Constitution Avenue, NW.,

Washington, DC 20210; Attention:

MHPA transition period notice.

For notices to the Department of

Health and Human Services, plans

should mail the notice to: Health Care

Financing Administration, 7500

Security Boulevard, Baltimore, MD

21244–1850; Attention: Insurance

Standards: Exemptions.

C. Interim Rules and Request for

Comments

Section 9833 of the Code (formerly

section 9806), section 734 of ERISA

(formerly section 707), and section 2792

of the PHS Act provide, in part, that the

Secretaries of the Treasury, Labor, and

Health and Human Services may

promulgate any interim final rules as

they determine are appropriate to carry

out the provisions of Chapter 100 of

Subtitle K of the Code, Part 7 of Subtitle

B of Title I of ERISA, and Part A of Title

XXVII of the PHS Act, including the

MHPA provisions.

Under Section 553(b) of the

Administrative Procedure Act (5 U.S.C.

551 et seq.) a general notice of proposed

rulemaking is not required when an

agency, for good cause, finds that notice

and public comment thereon are

impracticable, unnecessary, or contrary

to the public interest.

These rules are being adopted on an

interim final basis because the

Secretaries have determined that

without prompt guidance some

members of the regulated community

may not know what steps to take to

comply with the MHPA requirements,

which may result in an adverse impact

on participants and beneficiaries with

regard to their mental health benefits

under group health plans and the

protections provided under MHPA.

Moreover, MHPA’s requirements will

affect the regulated community in the

immediate future.

MHPA’s requirements are effective for

all group health plans and for health

insurance issuers offering coverage in

connection with such plans for plan

years beginning on or after January 1,

1998. Plan administrators and sponsors,

issuers, and participants and

beneficiaries, will need guidance on the

new statutory provisions before MHPA’s

effective date. As noted earlier, these

interim rules take into account

comments received by the Departments

in response to the request for public

comments on MHPA published in the

Federal Register on June 26, 1997 (62

FR 34604). For the foregoing reasons,

the Departments find that the

publication of a proposed regulation, for

the purpose of notice and public

comment thereon, would be

impracticable, unnecessary, and

contrary to the public interest.

D. Regulatory Flexibility Act

The Regulatory Flexibility Act (5

U.S.C. 601 et. seq.) (RFA) requires an

agency to publish a regulatory flexibility

analysis describing the impact of a

proposed rule which the agency

determines would have a significant

impact on a substantial number of small

entities. The RFA requires that the

agency present an initial regulatory

flexibility analysis and seek public

comment on its analysis when the

agency publishes a general notice of

proposed rulemaking (NPRM) under

section 553 of the Administrative

Procedures Act (5 U.S.C. 553 et seq.)

(APA). Under the RFA, small entities

include small businesses, non-profit

organizations and governmental

agencies. For our purposes, under the

RFA, States and individuals are not

considered small entities. However,

small employers and small group health

plans are considered small entities.

Since these rules are issued as interim

final rules, and not as an NPRM, a

formal regulatory flexibility analysis has

not been prepared. Nonetheless, in the

discussion below on the rule’s impact

on the regulated community, the

Departments present an analysis

addressing many of the same issues

otherwise required by the RFA,

including the likely impact of the

interim rule on small entities, and a

discussion of regulatory alternatives

considered in crafting the rule. The

Departments invite interested persons to

submit comments for consideration in

the development of the final rules

implementing the MHPA. Consistent

with the RFA, the Departments

encourage the public to submit

comments that accomplish the stated

purpose of the MHPA and minimize the

impact on small entities. Specifically,

we welcome comments addressing the

impact of the MHPA’s 1 percent cost

exemption for plans and issuers that can

demonstrate that implementation of the

parity rules would raise their

expenditures by more than one percent.

We also welcome comments addressing

the operation of the MHPA provision

requiring that plans using differential

aggregate lifetime or annual limits for

various categories of benefits use a

weighted average of such differential

limits to calculate the overall aggregate

lifetime and annual limits for the plan.

E. Executive Order 12866—

Departments of Labor and Health and

Human Services

The Office of Management and Budget

has determined this rule to be a major

rule, as well as an economically

significant regulatory action under

Section 3(f) of Executive Order 12866.

The following analysis fulfills the

requirement under the Executive Order

to assess the economic impact of major

and economically significant regulatory

actions.

Executive Order 12866 requires

agencies to assess the costs and benefits

of available regulatory alternatives, and

when regulation is necessary, to select

regulatory approaches that maximize

net benefits (including potential

economic, environmental, public health

and safety effects; distributive impacts;

and equity). Section 3(f) of the

Executive Order 12866 requires agencies

to prepare a regulatory impact analysis

for any rule which is deemed a

‘‘significant regulatory action’’

according to specified criteria, including

whether the rule may have an annual

effect on the economy of $100 million

or more or certain other specified

effects; or whether the rules raise novel

legal or policy issues arising out of the

President’s priorities.

This analysis was conducted by the

Departments of Labor and Health and

Human Services. It discusses the

economic impact of the MHPA, which

this rule implements, with special

emphasis on the one percent cost

exemption. It quantifies the number of

plans and individuals who might be

affected by the exemption rule,

illustrating the exemption’s effect in the

context of other statutory MHPA

provisions. It separately considers the

impact of regulatory discretion

exercised by the Departments in

connection with this rule.

a. Overall Impact of the MHPA

In general, the MHPA may have both

direct and indirect effects on group

health plans, plan sponsors, and plan

participants. Direct effects may include

broader coverage of mental health

treatments and associated increases in

mental health benefit payments. Indirect

effects may include the steps employers

who sponsor plans may take to reduce
66940 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations

or offset their expenditures attributable

to compliance with the MHPA, such as

amending, curtailing or dropping

mental health benefits or other

components of compensation, as well as

participants’ responses to any

expenditure increases that are passed to

them.

Direct Effects

The most direct effect of the MHPA is

broader health insurance coverage for

mental health treatment. In many health

plans, mental health coverage is more

restrictive than medical/surgical

coverage due to lower annual and/or

lifetime dollar limits, more restrictive

limits on visits and stays, and other plan

provisions. For example, a recent survey

of employee benefit plans by Hay/

Huggins illustrates the differences in

plan terms and lower dollar limits of

mental health services and medical/

surgical services. The survey reported

that indemnity plans typically impose a

lifetime limit of $50,000 for mental

health benefits. On the other hand,

medical/surgical benefits of a typical

indemnity plan provide a lifetime limit

of $1,000,000.

Requiring fuller coverage of mental

health treatment will increase mental

health benefit payments and associated

plan expenditures. Some of this increase

will be paid by plan sponsors, and some

will be paid by participants in the form

of increased premiums and/or

reductions in other compensation.

Aside from any increased administrative

costs involved, these plan expenditure

increases generally represent one side of

transfer payments rather than erosion in

overall social welfare. In other words,

additional plan expenditures arising

from the MHPA are balanced by

additional benefits paid for mental

health services. One result will be that

some money that would have been

spent on other goods or services will be

spent instead on mental health services.

The direct effects of the MHPA will in

turn cause other effects due to

subsequent responses by affected

employers (in their capacity as plans

sponsors) and participants.

Indirect Effects of the MHPA

There are numerous ways in which

plan sponsors affected by the MHPA

might react. Some might take no action

other than to remove or increase dollar

limits on mental health benefits. Others

might make other changes to their

mental health benefits in order to

reduce or offset expenditure increases

from compliance with MHPA. The

statute explicitly preserves plan

sponsors’ right to provide no mental

health benefits, or to set the ‘‘terms and

conditions (including cost sharing,

limits on numbers of visits or days of

coverage, and requirements relating to

medical necessity) relating to the

amount, duration, or scope of mental

health benefits,’’ except with respect to

annual or lifetime dollar limits. Some

plan design options would be associated

with lower plan expenditure increases

from compliance with the MHPA. The

statute also provides an ‘‘increased cost

exemption’’ under which the statute

‘‘shall not apply’’ if its application

‘‘results in an increase in the cost . . .

of at least 1 percent’’ (ERISA Section

712(c)(2)). Plan sponsors’ responses to

the MHPA may lessen their

expenditures associated with

compliance; that is, their responses may

reduce the amount of transfers arising

from the MHPA.

For example, many mental health

plans currently have non-dollar limits.

According to the U.S. Bureau of Labor

Statistics, among full-time participants

at private establishments with 100 or

more employees in 1993, 55 percent

were subject to separate day limits for

inpatient mental health treatment, and

43 percent were subject to separate visit

limits for outpatient mental health

treatment (U.S. Bureau of Labor

Statistics, Employee Benefits in Medium

and Large Private Establishments, 1993).

Plans that impose non-dollar limits on

mental health benefits may face smaller

expenditures increases from the MHPA.

Many plans currently subject mental

health benefits to separate cost sharing

provisions. Among full-time

participants in medium and large

private establishments in 1993, 15

percent were subject to separate

coinsurance rates and 4 percent were

subject to separate copayment rates for

inpatient mental health care, while 53

percent and 18 percent were

respectively subject to separate

coinsurance and copayment rates for

outpatient mental health care. Cost

sharing generally affects plan

expenditures in two ways. First, by

shifting some payments for services to

participants, cost sharing directly

reduces the expenditures borne by

plans. Second, by increasing the price of

services faced by participants, cost

sharing reduces the quantity of services

that participants demand. Because of

both of these mechanisms, plans that

have more cost sharing for mental

health benefits will not be impacted as

much by the MHPA as plans that have

parity in cost sharing.

Many plans use HMO-style

management techniques to control

mental health benefit expenditures.

Plans that have HMO-style mental

health ‘‘carve-outs’’ but no mental

health limits are likely to pay less for

mental health benefits than fee-forservice plans with low dollar limits that

are impermissible under the MHPA. For

example, a FFS plan with utilization

review and an annual mental health

limit of $10,000 averages $6.51 per

member per month, while an unlimited

‘‘carve out’’ plan pays $6.12, according

to a Price Waterhouse LLP actuarial

model developed for the Departments

based on the same data as above.

There are a number of reasons why

the permissible plan designs outlined

here should have little negative effect on

existing mental health coverage. First,

the modest expenditure increases

necessitated by the MHPA would be

unlikely to prompt many major design

changes. As noted below, approximately

10 percent of affected plans will face

increased expenditures under the

MHPA of at least one percent, according

to the Price Waterhouse, LLP analysis

conducted for the Departments. Only 4

percent of affected plans are expected to

be faced with increases from the MHPA

of 1.5 percent or more, according to the

same analysis. Second, the largest

expenditure increases and therefore the

most aggressive responses will be

associated with plans that have the

tightest dollar caps today—that is, with

plans that would have provided the

most restrictive coverage anyway.

Other effects resulting from the

MHPA may include plan sponsors

dropping mental health coverage

altogether, or dropping or curtailing

other health benefits or components of

compensation. Such curtailments could

include shifting some of the cost of

benefits to employees, for example in

the form of increased participant

premium contributions for health

benefits. Participants, in turn, might

respond to premium increases by

dropping their health benefits or

electing less expensive plans. As with

plan sponsor amendments to mental

health benefits, such responses by plan

sponsors and participants are expected

to be modest and/or rare, given the

generally small direct effects of the

MHPA on plan expenditures.

b. Review of Quantitative Estimates

The Congressional Budget Office

(CBO) estimated that the MHPA’s direct

effect would be to increase health plan

expenditures by 0.4 percent on

aggregate. (See Congressional Budget

Office, ‘‘CBOs Estimates of the Mental

Health Parity Amendments to the VA/

HUD Appropriation Bill, as Passed in

the Senate,’’ September 10, 1996.) This

assumes that plan sponsors make no

changes to their plans other than to raise

or eliminate dollar limits on mental
Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations 66941

health benefits consistent with the

MHPA’s parity requirements. However,

some plan sponsors may make other

changes to their plans in order to reduce

or offset the impact of the MHPA on

their expenditures. For example, some

plan sponsors might amend, curtail, or

drop mental health benefits or health

benefits in general. Taking into account

the likely incidence of such plan

sponsor responses to the MHPA, CBO

estimated that the true aggregate

increase in health plan expenditures

attributable to the MHPA would only be

0.16 percent.

Combining these figures with those

from an earlier CBO analysis, the

Departments calculate that, in dollar

terms, the total annual direct impact of

the MHPA would be to increase

aggregate health plan expenditures by

$1.16 billion, not accounting for plan

sponsor responses to reduce that

impact. Accounting for those responses,

the actual increase in annual aggregate

health plan expenditures would be $464

million. It should be noted that these

figures do not account for the MHPA’s

increased cost exemption, its exemption

of firms with 50 or fewer employees, the

incidence of managed care plans whose

added cost under the MHPA would be

smaller than those of managed fee for

service plans, or for plans that are

separately subject to state requirements

equal or greater than the MHPA’s. The

Departments’ estimates, reported below,

incorporate these adjustments.

CBO also reports the Joint Committee

on Taxation’s estimate that the MHPA

will reduce federal revenues by $560

million over six years. CBO explains

that most of the 0.16 percent increase in

plan expenditures would be shifted

back to employees as lower pay, thus

eroding the income and payroll tax

bases. On an annual basis, the MHPA

would increase expenditures for federal

annuitants’ health benefits by $30

million, CBO reports. Finally, the

MHPA’s impact on nonfederal

governmental entities would amount to

$50 million, while its impact on the

private sector would probably exceed

$100 million, according to CBO.

The CBO estimates were based on a

typical fee-for-service indemnity plan

with customary management techniques

to control expenditures, and not on

plans with other types of delivery

systems, such as Health Maintenance

Organizations (HMOs), Preferred

Provider Organizations (PPOs), or Pointof-Service (POS) plans. In fact, plans

using different delivery systems will

face different expenditure increases

under the MHPA. For example, HMOs,

which typically contract with health

care providers at discounted rates and

tightly manage utilization, will face

smaller increases under the MHPA.

Coopers & Lybrand (C&L) also

estimated the impact of the MHPA

(Ronald E. Bachman, ‘‘An Actuarial

Analysis of S. 2031, The Mental Health

Parity Act of 1996,’’ prepared for the

American Psychological Association.

Coopers & Lybrand LLP, September

1996). C&L estimated that the MHPA

would increase plan expenditures by

0.12 percent per plan on average before

taking into account any responses by

plan sponsors. Taking plans sponsors’

responses into account and using the

same response assumption as CBO, C&L

estimated that plan expenditures would

increase by less than 0.05 percent. In

dollar terms, these increases would

amount to $348 million and $139

million respectively.

Unlike CBO, C&L considered four

different delivery systems: fee-forservice with standard utilization review

on typical medical services, fee-forservice with specialized mental health

utilization review, PPO and POS plans

with specialized mental health

utilization review, and HMO and carveout mental health plans. Under each

delivery system, C&L also considered a

variety of annual dollar limits ranging

from $10,000 to unlimited amounts,

rather than assuming that all plans in

the delivery system provided the same

level of benefits.

The Departments performed

additional quantitative analysis,

generally analogous to CBO’s, in the

course of assessing the impact of the

regulatory discretion reflected in this

rule. The additional analysis suggests

that the direct impact of the MHPA, not

accounting for plan sponsors’ responses,

would be to increase annual aggregate

health plans expenditures by 0.29

percent or $653 million. Under CBO’s

assumption regarding plan sponsor

responses to reduce the added

expenditure, actual added expenditures

would amount to $261 million. The

Departments did not attempt to

independently quantify such responses.

However, the Departments estimate that

if all plans eligible for the one percent

cost exemption exercise it, the increase

in plan expenditures would be reduced

from 0.29 percent to 0.14 percent or

$310 million. The Departments’ analysis

is detailed below.

c. Exercise of Regulatory Discretion

One Percent Cost Exemption

The main area in which the agencies

exercised regulatory discretion is in

connection with the one percent cost

increase exemption. Alternative

regulatory interpretations can impact

the outcome of the number of plans,

firms, policyholders, and covered lives

that would be exempted from the

MHPA.

The Departments considered options

concerning the interpretation of the onepercent cost exemption and how it

should be implemented. In general, they

considered (1) whether the eligibility for

the exemption should be determined

retrospectively or prospectively, and

what, if any, rules should be established

with respect to how eligibility should be

determined, (2) whether eligibility

should be contingent on affirmative

approval from an enforcement agency or

simply subject to possible review by

such an agency, and (3) whether plan

sponsors electing exemptions should be

required to notify participants and/or

enforcement agencies of this action and/

or to disclose to these parties evidence

documenting eligibility for the

exemption. They also considered the

administrability of each option, seeking

to balance the costs and benefits to

plans and participants, as well as the

benefits and burdens of the regulatory

scheme on the federal government.

Retro/prospective Determination

The options considered ranged from a

purely retrospective interpretation to a

purely prospective one, and included

intermediate interpretations that blend

these two approaches.

Under a purely retrospective

interpretation, the one percent increased

cost exemption would be based on

actually incurred expenditures

increases, measured retrospectively after

implementation of the statute. In other

words, all plans must comply and

provide parity of annual and/or lifetime

dollar limits of mental health and

medical services for the first year

beginning with the start of a plan year

on or after January 1, 1998. If during the

first year, a plan experiences increases

in expenditures equal to one percent or

more as a result of complying with the

statute, that plan would then be eligible

to exercise an exemption from the

MHPA for subsequent plan years.

The calculation for determining the

percent increase would be based on the

ratio of the increase in plan

expenditures to the total plan

expenditures, that is, both medical and

mental health expenditures. For selfinsured plans, the numerator would be

the actual value of mental health claims

paid in excess of the previous plan

limits. For example, if the annual

mental health limit were $10,000 and

the medical/surgical were $1,000,000,

then the sum of all mental health claims

paid in excess of $10,000 would be

included in the numerator of the ratio
66942 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations

used for that plan in calculations related

to the one percent exemption. The

denominator for self-insured plans

would be the total value of medical and

mental health claims excluding mental

health claims in excess of $10,000. If the

result is an increase of one or more

percent, the plan would be exempt from

complying with the statute in any other

year until the statute sunsets in 2001.

Because there is a lag between the time

that claims are incurred and the time

they are reported, complete data needed

for the calculation might not be

available until three or six months after

the end of the first plan year under the

MHPA. With respect to fully insured

plans, the calculation would be slightly

different. To the extent that different

plans’ experiences are pooled for

purposes of setting premiums, their

eligibility for the exemption would

depend on their pooled experience

under MHPA, rather than on each plan’s

individual experience.

The purely retrospective

interpretation would minimize the

availability of the exemption, and

therefore might result in both the

greatest incidence of parity in lifetime

and annual dollar limits and the greatest

incidence of other plan actions to

reduce or offset the increase in

expenditures arising from the MHPA. It

would also assure that all plan elections

to exercise the one percent increased

cost exemption are based on actual

experience under the MHPA’s parity

requirements and not on projections or

estimates of such experience.

Under a purely prospective

interpretation, a plan would be eligible

for the exemption prospectively if its

expected additional expenditures from

the MHPA act equaled or exceeded one

percent of its expected total

expenditures absent the MHPA. A selfinsured plan would project these

figures, relying on available data and

actuarial projection methods. A fully

insured plan would compare legitimate

premium quotes with and without the

exemption to determine if the difference

equals or exceeds one percent. The

purely prospective interpretation would

maximize the availability of the

exemption, and therefore might result in

both the least incidence of parity in

lifetime and annual dollar limits and the

least incidence of other plan actions to

reduce or offset expenditure increases

arising from the MHPA.

Other interpretations were also

considered, some closer to a purely

retrospective interpretation and others

closer to a purely prospective one. For

example, one interpretation might allow

plans to prospectively determine their

eligibility and exercise the exemption,

but only based upon a narrowly

constrained analysis of their own prior

experience, taking into account only the

potential added expenditure from the

MHPA associated with participants

whose past mental health claims

reached or nearly reached MHPAprohibited dollar limits. Interpretations

closer to the purely retrospective view

would lessen the availability of the

exemption, and therefore might result in

both greater incidence of parity in

lifetime and annual dollar limits and

lesser incidence of other plan actions to

reduce or offset expenditure increases

arising from the MHPA; those closer to

the purely prospective view would do

the opposite.

The approach adopted under this

rule, referenced above, can be

characterized as modified retrospective

approach, based on a relatively brief

base period. It is intended to assure the

accurate measurement of increased costs

while minimizing the burden on plan

sponsors who wish to exercise the

exemption as soon as accurate

measurements can be made. It also

assures that all plan elections to

exercise the one percent increased cost

exemption are based on actual

experience under the MHPA’s parity

requirements and not on projections or

estimates of such experience. The rule

eases compliance burdens by providing

a transition period under which certain

plans whose plan years begin during the

first quarter of 1998 can exercise the

exemption until April 1, 1998.

Exemption Authority

This rule provides that plans may

determine their own eligibility for the

exemption and, if eligible, exercise the

exemption, without affirmative approval

from any enforcement agency.

Notification and Disclosure

The Departments also exercised

discretion in requiring notice and

disclosure in connection with the one

percent increased cost exemption. The

rule requires plans exercising the one

percent increased cost exemption

during all or part of the first quarter of

1998 under the rule’s transition

provisions to notify the federal

government, and to post a copy of this

notice at the workplace. It further

requires plans otherwise exercising the

exemption to notify participants and the

federal government, and to disclose on

request to these parties summary

documentation of the plans’ eligibility

for the exemption.

Notifications and disclosures will be

of benefit to participants. They will help

assure plans’ compliance with the

MHPA, and will promote participants’

understanding of their and their plans’

status under the MHPA. Moreover, by

promoting participants’ understanding,

notifications and disclosures will

inform participants’ choices among

plans and their feedback to plan

sponsors, thereby fostering more

vigorous competition among plan

sponsors and issuers to provide benefits

attractive to participants at competitive

prices. The cost of these notifications

and disclosures is outlined below.

Weighted Average Limits

The Departments also exercised

discretion in developing rules that

specify when plans may impose

separate dollar limits on mental health

benefits equal to the weighted average of

limits imposed on other benefit

categories, and in how this weighted

average may be calculated. In general,

the rules provide that such mental

health limits may be imposed if the

benefit categories to which separate

limits apply account for at least onethird of total plan expenditures and are

comparable in scope to mental health

benefits. The average is calculated by

weighting each applicable limit to

reflect its share of total plan

expenditures. Any unlimited categories

are figured into the average by using in

place of a limit a reasonable estimate of

the maximum plan expenditure that

could possibly be incurred in

connection with all such categories, and

weighting this estimate to reflect the

proportion of total plan expenditures

attributable to all such categories.

Alternative rules might have

permitted more, fewer, or different

plans to impose such limits on mental

health benefits, and/or resulted in

calculated averages that were higher or

lower. For example, if unlimited

categories were treated as having

infinite limits, then the weighted

average of category limits would equal

infinity and the option of imposing a

weighted average limit on mental health

benefits effectively would be foreclosed.

In contrast, if limits applicable to

benefit categories narrower in scope

than mental health benefits could be

averaged to arrive at the permissible

mental health limit, plans might be able

to impose very low limits on very

narrow benefit categories, with little

effect on coverage of these categories but

with the result of a lower permissible

mental health benefit limit.

d. Impact of Regulatory Discretion

Because the Departments exercised

regulatory discretion in connection with

the one percent cost exemption, it is

necessary to quantify the number of

plans eligible for the exemption. This
Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations 66943

requires both estimates of the affected

universe and estimates of the

distribution of impacts within that

universe. CBO reported universe

estimates but did not estimate the

distribution of impacts. C&L provided a

distribution but not universe estimates.

Thus, neither source provides the

necessary basis for estimating the reach

of the one percent cost exemption. To

address this gap, the Departments,

assisted by Price Waterhouse LLP,

combined the CBO and C&L analyses

with other data to produce relevant

national estimates, as follows.

First, the Departments estimated the

relevant universe at 3.0 million plans

sponsored by 2.8 million employers

covering 145 million individuals. To

derive these estimates, we tallied the

number of group health plan

policyholders and dependents by firm

size from the Census Bureau’s March

1996 Current Population Survey. Census

enterprise data provided average firm

sizes in each size category, allowing us

to estimate the number of employers

covering these individuals. KPMG Peat

Marwick’s 1997 survey provided the

average number of plans per firm in

each size group, supporting estimates of

the number of plans. Data from the

Bureau of Labor Statistics’ Employee

Benefits Survey and the Health and

Retirement Study provided a

proportionate breakdown of plans and

individuals in each firm size group

across plan types (HMO, PPO, and fee

for service). Likewise, data from KPMG

and Foster Higgins surveys were used to

divide insured from self-insured plans.

Second, the Departments narrowed

the focus to plans affected by the

MHPA. Approximately 296,000 plans,

sponsored by 136,000 employers and

covering 113 million individuals, would

be directly affected by the MHPA. This

excludes firms with fewer than 50

employees (which are exempt under

ERISA Section 712 (c)(1)), plans already

covered by state mandates to provide

parity in annual and lifetime dollar

limits (based on C&L and Hay Huggins

reports of the incidence of differential

limits—roughly 29,000 plans were

excluded here), and insured plans in 13

states that, independent of the MHPA,

as of January 1, 1998 will require parity

equivalent to or surpassing that required

by the MHPA. (Those 13 states are:

Indiana, Maryland, Minnesota,

Montana, Arkansas, Colorado,

Connecticut, Maine, Missouri, New

Hampshire, North Carolina, Rhode

Island, and Texas.) Some of the plans

identified here as affected may not be

affected. The MHPA permits selfinsured nonfederal governmental plans

to opt out of compliance. This includes

roughly 22,000 plans covering about 18

million individuals. It also exempts

plans whose costs increase by one

percent or more, as enumerated below.

Third, the Departments estimated the

overall impact of the MHPA as follows:

affected plans’ potential increases in

mental health expenditures under the

MHPA equal $653 million, or 0.29

percent of affected plans’ $226 billion in

total expenditures. (The 0.29 percent

figure is benchmarked to CBO’s estimate

that the average cost increase for

indemnity plans would be 0.4 percent,

but it is adjusted to reflect C&L’s

assessment of the relative magnitude of

cost increases for different plan types.

The $226 billion figure is benchmarked

to CBO’s $290 billion universe, but

reduced proportionately to reflect the

Department’s estimate of the proportion

of the total universe that is affected by

the MHPA.) Under CBO’s assumption

regarding plan sponsor actions to reduce

the added expenditure, actual added

expenditures would amount to $261

million. Expenditures could be smaller

still as a result of self-insured

nonfederal governmental plans’ right to

opt out of compliance and the MHPA’s

one percent increased cost exemption,

which are not accounted for in the

foregoing estimates. Recall also that

these expenditures represent transfer

payments and not social costs.

One Percent Cost Exemption

The effect of this rule will be to

prohibit all covered plans from

imposing annual or lifetime dollar

limits on mental health benefits that are

lower than limits imposed on medical

and surgical benefits during at least

seven months of the first plan year

beginning on or after January 1, 1998.

Specifically, after six months, the rule

permits plans to exercise an exemption

as soon as they document a cost

increase of one percent or more and

provide 30 days notice to participants

and the federal government.

Exactly when a given plan will

become eligible to elect the one percent

increased cost exemption will depend

on the timing of its increased costs and

its documentation of those costs. In

many cases, plans’ increased costs

under the MHPA will not equal or

exceed one percent until more than the

initial six months have elapsed. For

example, added costs from the MHPA’s

provision restricting the use of annual

dollar limits on mental health benefits

would likely be concentrated late in the

plans year, when some participants

would otherwise have reached these

limits. In addition, plans that utilize this

rule’ transition period may not be

affected by the MHPA’s provisions until

after the first three months of the plan

year have elapsed. Therefore, these may

be less likely to incur added costs of one

percent or more until later in the plan

year, or until a subsequent plan year (in

which they would be affected by the

MHPA beginning on the first day of the

plan year).

Whether eligible plans wishing to

reduce the direct impact of the MHPA

will opt to pursue the exemption or opt

for alternative responses will depend on

each plan’s particular circumstances

and priorities.

The Departments estimated the

number of affected plans with potential

increases of at least one percent.

Roughly 30,000 plans, or about 10

percent of a plans affected by MHPA,

potentially would be eligible for the

one-percent increased cost exemption.

That is, all else being equal, complying

with the MHPA would increase 30,000

plans’ expenditures by at least one

percent. These plans cover about 5

million policyholders and 11 million

individuals. This is the universe

potentially affected by the provisions of

this rule that address the one percent

increased cost exemption.

In assessing the impact of this rule,

the Departments considered the

economic consequences of its

provisions implementing the one

percent cost exemption. Several factors

are likely to affect the magnitude of

those consequences.

First, under any interpretation, only

10 percent of MHPA-affected plans (or

30,000 plans) could become eligible for

the exemption, and only some of those

would elect to exercise it. The estimated

30,000 plans that would become eligible

for the one-percent cost exemption

represents the upper limit of the number

of plans that would actually exercise the

exemption. Many of the potentially

eligible plans are likely to forego the

exemption in favor of other permitted

actions. A survey of 300 large firms

conducted by William M. Mercer, Inc.,

found that fewer than 2 percent

intended to pursue the one percent

increased cost exemption. Extrapolated

to the Departments’ estimated plan

universe, this suggests that 6,000 plans,

or 22 percent of the 30,000 that are

potentially eligible, would pursue the

exemption.

Second, expenditure increases from

the MHPA will generally be modest,

even for plans potentially eligible for

the one percent cost exemption. Their

potential expenditure increase would be

$332 million on a base of $23 billion in

total expenditures, or 1.47 percent

overall.
66944 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations

Third, as noted above, plans can be

designed in ways that lessen these

expenditure increases.

Fourth, the 2,215 self-insured

nonfederal governmental plans that

might become eligible for the one

percent cost exemption are separately

permitted to opt out of the MHPA

entirely, thereby exercising an

alternative exemption with equivalent

effect. These plans cover 1.8 million

individuals, or 16 percent of individuals

in potentially eligible plans.

Fifth, the estimates presented in this

analysis are conservative; actual

expenditures arising from compliance

with the MHPA are likely to be less than

reported here. In particular, the

estimates may understate the reach and

cost-effectiveness of managed mental

health programs that will exist during

the years that the MHPA is in effect (See

Roland Sturm, ‘‘How Expensive is

Unlimited Mental Health Care Coverage

Under Managed Care?’’ JAMA, Nov. 12,

1997—Vol. 278 No. 18).

Sixth, because plan expenditure

increases under the MHPA (aside from

increases in administrative expenses)

are transfers, the availability and use of

the exemption does not change

aggregate social welfare. However, the

availability and use of the exemption

does affect the size and incidence of

transfers across affected parties.

Finally, this rule preserves the

availability of most of this savings under

the one percent exemption—certain

eligible plans are permitted to exercise

the exemption after seven months,

thereby operating under the exemption

for up to 38 of the 45 months during

which the MHPA is in effect.

This rule also requires certain notices

and disclosures by plans exercising the

one percent increased cost exemption.

The Departments undertook to estimate

the paperwork burdens associated with

these provisions, as well as the burden

associated with determining whether a

plan is eligible for the exemption. These

estimates are summarized below.

The estimates reported immediately

below are for all plans affected by the

notice and disclosure provisions of this

rule. The Paperwork Reduction Act

(PRA) analysis that follows is presented

separately for affected private-sector

plans and for plans sponsored by

nonfederal governmental employers,

which are under the jurisdictions of the

Departments of Labor and of Health and

Human Services, respectively.

With respect to the notice to

participants and beneficiaries and to the

federal government by plans exercising

the one percent cost exemption, the

maximum possible number of such

notices is approximately 5.0 million

(reflecting all plans potentially eligible

to elect the exemption), while a more

likely figure is 1.1 million (reflecting the

Mercer survey cited above). Assuming

each notice requires 2 minutes of labor

at $11 per hour, plus $0.50 for postage

and materials, total costs would amount

to up to $4.3 million or more probably

$931,000. (These assumptions reflect

plans’ ability to satisfy this notice

requirement through the provisions of a

separately required summary of material

modifications, as well as availability of

a model notice to the government,

which together essentially eliminate

separate preparation burdens under this

requirement and help minimize ongoing

burdens.)

With respect to requirement for group

health plans to notify the federal

government of use of the transition

period, and to post these notices in the

workplace, only those plans whose plan

years begin during the first three months

on 1998 and who are potentially eligible

for the one percent cost exemption are

potentially affected by this provision.

These notices would be filed and posted

within 30 days or less of the beginning

of the plan year, so all would be filed

in 1998. Based on annual reports filed

with the Department of Labor, the

Departments estimate that 60 percent of

all eligible plans, accounting for 72

percent of participants in such plans,

begin their plan years during these

months. This amounts to 18,000 plans,

representing the maximum number of

notices that would be filed.

Extrapolating from the Mercer survey

cited above, about 4,000 of these plans

might intend to pursue the exemption,

representing a more probable number of

notices to be filed. Applying the same

per unit cost assumptions as above to

the filing and posting of these notices,

the cost of these notices would be no

more than $8,000 and more likely

$2,000. These assumptions reflect the

availability of a model notice, the use of

which eliminates preparation costs and

helps minimize ongoing burdens.

With respect to the requirement for

plans to disclose on request summary

information documenting the plan’s

eligibility for the one percent increased

cost exemption, the number of such

disclosures will depend on the volume

of requests. One might expect requests

to arise most commonly when

participants are at or near plans’ dollar

limits. Hay Huggins estimates for the

Congressional Research Service (See

Roland Sturm, ‘‘How Expensive is

Unlimited Mental Health Care Coverage

Under Managed Care?’’ JAMA, Nov. 12,

1997—Vol. 278 No. 18) suggest that 0.73

percent of participants on average incur

mental health claims of more than

$10,000—a typical annual limit—in a

given year. The Departments adjusted

this figure to reflect the estimated

relationship between increased

expenditures under the MHPA for plans

eligible for the one percent increased

cost exemption and increased

expenditures under the MHPA for all

affected plans, concluding that 3.74

percent of participants in plans eligible

for the one percent increased cost

exemption incur claims of more than

$10,000 in a given year. Assuming that

this proportion of participants in plans

electing the exemption request

disclosures, the maximum number of

such disclosure requests would be

186,000, while a more probable figure

would be 40,000. Given the same per

unit cost assumptions as above, the

associated costs would be $161,000 and

$35,000, respectively.

Finally, with respect to plan

determinations of eligibility for the one

percent increased cost exemption, the

Departments expect that plans wishing

to exercise the one percent increased

cost exemption or their service

providers will revise their automated

claim record systems to facilitate

calculation of the plans’ increased costs

attributable to the MHPA. The number

of plans performing such functions inhouse that might wish to exercise the

exemption is estimated to be no more

than 5,346 and more probably 1,142.

The number of service providers

(including health insurance issuers and

third party administrators) that will

perform this function for plans that

wish to exercise the exemption is

estimated to be 1,770 (including 400

third party administrators, 650 health

insurers, 645 HMOs, and 75 Blue Cross

Blue Shield organizations). Assuming a

start up cost of $5,000 per affected

entity, the total start-up cost associated

with determining plans’ eligibility to

exercise the exemption amounts to

$14.6 million to $35.6 million, to be

amortized over 10 years beginning in

1998.

The estimates of the numbers and

costs of notices, disclosures and

calculations reported above, and below

in connection with the Paperwork

Reduction Act, may be high with

respect to nonfederal governmental

plans. An estimated 2,215 self-insured

nonfederal governmental plans might

become eligible for the one percent cost

exemption. These plans are separately

permitted to opt out of the MHPA

entirely, thereby exercising an

alternative exemption with equivalent

effect, and without becoming subject to

the calculation, notice, and disclosure

requirements. These plans cover 1.8
Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations 66945

million individuals, or 16 percent of

individuals in potentially eligible plans.

Weighted Average

The economic impact of the

Departments’ exercise of discretion in

the weighted average rule is also

expected to be modest.

First, separate limits for benefit

categories other than mental health are

not very common. For example, among

full-time employees at establishments

with 100 or more employees

participating in non-HMO group health

plans in 1993, only a fraction were

subject to separate limits for many major

benefit categories. For example, just 14

percent were subject to separate limits

for inpatient surgery, just 13 percent

were subject to such limits for

outpatient surgery, and only about one

in four were subject to separate limits

for both inpatient and office physician

visits (U.S. Bureau of Labor Statistics,

Employee Benefits in Medium and

Large Private Establishments, 1993).

‘‘Separate limits’’ in this context include

not only dollar limits, but also nondollar limits, such as inpatient day or

outpatient visit limits, as well as

differential coinsurance rates,

copayments, or deductibles. Therefore,

the proportion with separate dollar

limits that would permit imposition of

a weighted average limit on mental

health benefits would be even smaller.

In addition, such separate limits are

even less common in HMOs.

Second, discretion exercised in the

weighted average rule affects plans’

ability to impose weighted average

limits on mental health benefits only at

the margin. In other words, compared

with the approach set forth in the rule,

alternative approaches would have

increased or decreased the proportion of

plans that are able to impose weighted

average limits and the dollar level of

calculated averages by only a small

amount.

Third, not all plans that are permitted

to impose weighted average limits on

mental health benefits will elect to do

so.

Fourth, some plans that under the

rule are not permitted to impose

weighted average limits on mental

health benefits, under an alternative

approach, might have been permitted to

impose only a relatively high limit. As

such, their expenditure increases from

the MHPA might have been nearly the

same with a weighted average limit on

mental health benefits as with no

separate limit on such benefits.

Consider a plan with a $500,000 annual

cap on all inpatient care and a $250,000

annual cap on all outpatient care, and

a $25,000 annual cap on mental health

benefits. Under the interim rules, such

a plan could not impose a weighted

average limit on mental health benefits.

Any separate limit on mental health

care would have to be at least $750,000,

or at least $500,000 for inpatient care

and at least $250,000 for outpatient care.

Had the plan been permitted to impose

a weighted average cap, however, it still

would have been required to increase its

mental health cap from $25,000 to some

amount between $250,000 and

$500,000, depending on the weights.

Finally, as with the one percent cost

exemption and with the MHPA

generally, the impact of regulatory

discretion in the weighted average rule

will be reduced because self-insured

nonfederal governmental plans can opt

out, the MHPA’s added expenditure is

modest, plans can be designed in ways

that lessen the MHPA’s added

expenditure, and the estimates

presented here are conservative.

F. Unfunded Mandates Reform Act of

1995

The Unfunded Mandates Reform Act

of 1995 (P.L. 104–4) requires agencies to

prepare several analytic statements

before proposing any rules that may

result in annual expenditures of $100

million by state, local and tribal

governments or the private sector. These

rules are not subject to the Unfunded

Mandates Reform Act because they are

interim final rules. However, consistent

with the policy embodied in the

Unfunded Mandates Reform Act, the

regulation has been designed to be the

least burdensome alternative for state,

local and tribal governments, and the

private sector, while achieving the

objectives of the MHPA.

G. Small Business Regulatory

Enforcement and Fairness Act of 1995

The Administrator of the Office of

Information and Regulatory Affairs of

the Office of Management and Budget

has determined that this is a major rule

for purposes of the Small Business

Regulatory Enforcement Fairness Act of

1996 (5 U.S.C. Section 801 et. seq.)

(SBREFA).

The Secretaries have determined that

the effective date of these interim final

rules is January 1, 1998. Pursuant to

Section 808(2) of SBREFA, the

Secretaries find, for good cause, that

notice and public procedure thereon are

impracticable, unnecessary and contrary

to the public interest.

These rules are adopted on an interim

final basis because the Secretaries have

determined that without prompt

guidance some members of the

regulated community may have

difficulty complying with the MHPA

requirements, which may result in an

adverse impact on participants and

beneficiaries with regard to their mental

health benefits under group health plans

and the protections provided under

MHPA. Moreover, MHPA’s

requirements will affect the regulated

community in the immediate future.

MHPA’s requirements are effective for

all group health plans, and for health

insurance issuers offering coverage in

connection with such plans for plan

years beginning on or after January 1,

1998. Plan administrators and sponsors,

issuers and participants and

beneficiaries will need guidance on the

new statutory provisions before MHPA’s

effective date. As noted earlier, these

interim rules take into account

comments received by the Departments,

in response to the request for public

comments on MHPA published in the

Federal Register on June 26, 1997. 62

FR 34604. For the foregoing reasons, the

Departments find that notice and public

comment would be impracticable,

unnecessary and contrary to the public

interest.

H. Paperwork Reduction Act—The

Department of Labor and the

Department of the Treasury

The Department of Labor and the

Department of the Treasury have

submitted this emergency processing

public information collection request

(ICR), consisting of three distinct ICRs to

the Office of Management and Budget

(OMB) for review and clearance under

the Paperwork Reduction Act of 1995

(Pub. L. 104–13, 44 U.S.C. Chapter 35).

The Departments have asked for OMB

clearance as soon as possible, and OMB

approval is anticipated by the

applicable effective date.

These regulations contain three

distinct ICRs. The first ICR is a notice

to participants and beneficiaries and to

the federal government of the plan’s

election of the exemption from the

MHPA’s provisions due to an increase

in cost under the plan of at least one

percent attributable to compliance with

these provisions. A plan may satisfy this

requirement by providing participants

and beneficiaries with a notice of

material reductions in covered service

or benefits, under the Department of

Labor’s regulations at 29 CFR section

2520.104b–3(d), that includes the

information in paragraph (f)(3)(i) of this

interim final rule regarding issuing a

notice to participants and beneficiaries

of the plan’s exemption from these

parity requirements. Before the one

percent increased cost exemption is

effective, the plan must also notify the

federal government. For this purpose,

the group health plan may either send
66946 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations

the Department of Labor a copy of the

summary of material reductions in

covered services or benefits sent to

participants and beneficiaries,

containing the plan number and the

plan sponsor’s employer identification

number, or the plan (or coverage) may

use the Departments’ model notice in

this interim final rule which has been

developed for this purpose.

The second ICR is a summary of the

information used to calculate the plan’s

increased costs under the MHPA for

purposes of electing the one percent

increased cost exemption, which the

plan must make available to participants

and beneficiaries, on request at no

charge.

The third ICR is a notice of a group

health plan’s use of the transition

period. The rule requires plans

exercising the one percent increased

cost exemption during all or part of the

first quarter of 1998 under the rule’s

transition provisions to notify the

federal government, and to post a copy

of this notice at the workplace.

1. Notice to Participants and

Beneficiaries and the Federal

Government of Electing One Percent

Increased Cost Exemption

i. Department of Labor

The Department of Labor, as part of its

continuing effort to reduce paperwork

and respondent burden, conducts a

preclearance consultation program to

provide the general public and Federal

agencies with an opportunity to

comment on proposed and/or

continuing collections of information in

accordance with the Paperwork

Reduction Act of 1995 (Pub. L. 104–13,

44 U.S.C. Chapter 35) and 5 CFR

1320.11. This program helps to ensure

that requested data can be provided in

the desired format, reporting burden

(time and financial resources) is

minimized, collection instruments are

clearly understood, and the impact of

collection requirements on respondents

can be properly assessed. Currently, the

Pension and Welfare Benefits

Administration is soliciting comments

concerning the proposed collection of

information, Notice to Participants and

Beneficiaries and the Federal

Government of Electing One Percent

Increased Cost Exemption. A copy of the

proposed ICR can be obtained by

contacting the employee listed below in

the contact section of the notice.

Information collection: affected

parties are not required to comply with

the ICRs in these rules until the

Department of Labor publishes in the

Federal Register the control numbers

assigned to these ICRs by OMB. The

publication of the control numbers

notifies the public that OMB has

approved these ICRs under the

Paperwork Reduction Act of 1995. The

Department has asked for OMB

clearance as soon as possible, and OMB

approval is anticipated by the

applicable effective date.

Dates: Written comments must be

submitted to the office listed in the

addressee section below on or before

February 20, 1998. The Department of

Labor is particularly interested in

comments which:

• Evaluate whether the proposed

collection of information is necessary

for the proper performance of the

functions of the agency, including

whether the information will have

practical utility;

• Evaluate the accuracy of the

agency’s estimate of the burden of the

proposed collection of information,

including the validity of the

methodology and assumptions used;

• Enhance the quality, utility, and

clarity of the information to be

collected; and

• Minimize the burden of the

collection of information on those who

are to respond, including through the

use of appropriate automated,

electronic, mechanical, or other

technological collection techniques or

other forms of information technology,

e.g., permitting electronic submissions

of responses.

Addressee: Gerald B. Lindrew, Office

of Policy and Research, U.S. Department

of Labor, Pension and Welfare Benefits

Administration, 200 Constitution

Avenue, Room N–5647, Washington,

D.C. 20210. Telephone: 202–219–4782

(this is not a toll-free number). Fax: 202-

219–4745.

ii. Department of the Treasury

The collection of information is in

54.9812–1T. This information is

required by the interim final rules so

that participants will be informed about

their rights under MHPA, and so that

participants and beneficiaries, and the

federal government, will receive notice

of a plan’s election of the one percent

increased cost exemption. The likely

respondents are business or other forprofit institutions, non-profit

institutions, small businesses or

organizations, and Taft-Hartley trusts.

Responses to this collection of

information are required to obtain the

benefit of the exemption.

Books or records relating to a

collection of information must be

retained as long as their contents may

become material in the administration

of any internal revenue law. Generally,

tax returns and tax return information

are confidential, as required by 26

U.S.C. 6103.

Comments on the collection of

information should be sent to the Office

of Management and Budget, Attn: Desk

Officer for the Department of the

Treasury, Office of Information and

Regulatory Affairs, Washington, DC

20503, with copies to the Internal

Revenue Service, Attn: IRS Reports

Clearance Officer, T:FP, Washington, DC

20224. Comments on the collection of

information should be received on or

before February 20, 1998. In light of the

request for OMB clearance by the

effective date of the MHPA, submission

of comments within the first 30 days is

encouraged to ensure their

consideration. Comments are

specifically requested concerning:

Whether the proposed collection of

information is necessary for the proper

performance of the functions of the

Internal Revenue Service, including

whether the information will have

practical utility;

The accuracy of the estimated burden

associated with the proposed collection

of information;

How to enhance the quality, utility,

and clarity of the information to be

collected;

How to minimize the burden of

complying with the proposed collection

of information, including the

application of automated collection

techniques or other forms of information

technology; and

Estimates of capital or start up costs

and costs of operation, maintenance,

and purchase of services to provide

information.

I. Background

MHPA generally requires that group

health plans provide parity in the

application of dollar limits to mental

health and medical/surgical benefits.

The statute exempts plans from this

requirement if its application results in

an increase in the cost under the plan

or coverage of at least one percent. This

regulation requires a plan electing this

exemption to notify participants and

beneficiaries and the federal

government of the plan’s election of the

exemption. This ICR covers this

notification requirement.

II. Current Actions

Under 29 CFR 2590.712(f)(3) (i) and

(ii), and 26 CFR 54.9812–1T a group

health plan electing the one percent

exemption is obligated to provide a

written notice of that election to

participants and beneficiaries and to the

federal government of the plan’s

election of the exemption. A plan may

satisfy this requirement by providing
Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations 66947

participants and beneficiaries with a

notice of material reductions in covered

service or benefits, under the

Department of Labor’s regulations at 29

CFR section 2520.104b–3(d), that

includes the information in paragraph

(f)(3)(i) of this interim final rule

regarding issuing a notice to

participants and beneficiaries of the

plan’s exemption from these parity

requirements. To satisfy the requirement

to notify the federal government, a

group health plan may either send the

Department a copy of the summary of

material reductions in covered services

or benefits sent to participants and

beneficiaries, containing the plan

number and the plan sponsor’s

employer identification number, or the

plan may use the Department’s model

notice in this interim final rule which

has been developed for this purpose.

Based on past experience, the staff

believes that most of the materials

required to be issued under this notice

procedure will be prepared by contract

service providers such as insurance

companies and third-party

administrators.

Type of Review: New.

Agencies: U.S. Department of Labor,

Pension and Welfare Benefits

Administration; U.S. Department of the

Treasury, Internal Revenue Service.

Title: Notice to Participants and

Beneficiaries and the Federal

Government of Electing One Percent

Increased Cost Exemption.

OMB Number: XXXXXXX

Affected Public: Individuals or

households; Business or other for-profit;

Not-for-profit institutions; Group health

plans.

Frequency: On occasion.

Burden:

Year

Total respondents

(range)

Total responses

(range)

Average

time per

response

(range)

(minutes)

Burden

hours

(range)

Cost

(range)

1998 .................................................................................................................... .................. .................. .................. ..................

1999 .................................................................................................................... 5,612 to

25,446.

813,505 to

3.8MM.

2 .............. 6,324 to

29,605.

$705,037

to

$3.3MM

2000 .................................................................................................................... .................. .................. .................. ..................

Totals .................................................................................................................. 5,612 to

25,446.

813,505 to

3.8MM.

2 .............. 6,324 to

29,605.

$705,037

to

$3.3MM

Comments submitted in response to

this notice will be summarized and/or

included in the request for OMB

approval of the ICRs; they will also

become a matter of public record.

2. Calculation and Disclosure of

Documentation of Eligibility for

Exemption

i. Department of Labor

The Department of Labor, as part of its

continuing effort to reduce paperwork

and respondent burden, conducts a

preclearance consultation program to

provide the general public and Federal

agencies with an opportunity to

comment on proposed and/or

continuing collections of information in

accordance with the Paperwork

Reduction Act of 1995 (Pub. L. 104–13,

44 U.S.C. Chapter 35) and 5 CFR

1320.11. This program helps to ensure

that requested data can be provided in

the desired format, reporting burden

(time and financial resources) is

minimized, collection instruments are

clearly understood, and the impact of

collection requirements on respondents

can be properly assessed. Currently, the

Pension and Welfare Benefits

Administration is soliciting comments

concerning the proposed collection of

information, Disclosure of

Documentation of Eligibility for

Exemption. A copy of the proposed ICR

can be obtained by contacting the

employee listed below in the contact

section of the notice.

Information collection: Affected

parties are not required to comply with

the ICRs in these rules until the

Department of Labor publishes in the

Federal Register the control numbers

assigned to these ICRs by OMB. The

publication of the control numbers

notifies the public that OMB has

approved these ICRs under the

Paperwork Reduction Act of 1995. The

Department has asked for OMB

clearance as soon as possible, and OMB

approval is anticipated by the

applicable effective date.

Dates: Written comments must be

submitted to the office listed in the

addressee section below on or before

February 20, 1998. The Department of

Labor is particularly interested in

comments which:

• Evaluate whether the proposed

collection of information is necessary

for the proper performance of the

functions of the agency, including

whether the information will have

practical utility;

• Evaluate the accuracy of the

agency’s estimate of the burden of the

proposed collection of information,

including the validity of the

methodology and assumptions used;

• Enhance the quality, utility, and

clarity of the information to be

collected; and

• Minimize the burden of the

collection of information on those who

are to respond, including through the

use of appropriate automated,

electronic, mechanical, or other

technological collection techniques or

other forms of information technology,

e.g., permitting electronic submissions

of responses.

Addressee: Gerald B. Lindrew, Office

of Policy and Research, U.S. Department

of Labor, Pension and Welfare Benefits

Administration, 200 Constitution

Avenue, Room N–5647, Washington,

D.C. 20210. Telephone: 202–219–4782

(this is not a toll-free number). Fax: 202-

219–4745.

ii. Department of the Treasury

The collection of information is in

Section 54.9812–1T. This information is

required by the interim final rules so

that participants will be informed about

their rights under MHPA, and so that

participants and beneficiaries may

receive a summary of the information

upon which the plan based its election

of the one percent increased cost

exemption. The likely respondents are

business or other for-profit institutions,

non-profit institutions, small businesses

or organizations, and Taft-Hartley trusts.

Responses to this collection of

information are required to obtain the

benefit of the exemption.

Books or records relating to a

collection of information must be
66948 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations

retained as long as their contents may

become material in the administration

of any internal revenue law. Generally,

tax returns and tax return information

are confidential, as required by 26

U.S.C. 6103.

Comments on the collection of

information should be sent to the Office

of Management and Budget, Attn: Desk

Officer for the Department of the

Treasury, Office of Information and

Regulatory Affairs, Washington, DC

20503, with copies to the Internal

Revenue Service, Attn: IRS Reports

Clearance Officer, T:FP, Washington, DC

20224. Comments on the collection of

information should be received on or

before February 20, 1998. In light of the

request for OMB clearance by the

effective date of the MHPA, submission

of comments within the first 30 days is

encouraged to ensure their

consideration. Comments are

specifically requested concerning:

Whether the proposed collection of

information is necessary for the proper

performance of the functions of the

Internal Revenue Service, including

whether the information will have

practical utility;

The accuracy of the estimated burden

associated with the proposed collection

of information;

How to enhance the quality, utility,

and clarity of the information to be

collected;

How to minimize the burden of

complying with the proposed collection

of information, including the

application of automated collection

techniques or other forms of information

technology; and

Estimates of capital or start up costs

and costs of operation, maintenance,

and purchase of services to provide

information.

I. Background

MHPA generally requires that group

health plans provide parity in the

application of dollar limits to mental

health and medical/surgical benefits.

The statute exempts plans from this

requirement if its application results in

an increase in the cost under the plan

or coverage of at least one percent. This

regulation requires plans wishing to

elect this exemption to calculate their

increased costs according to certain

rules. It further requires plans electing

this exemption to disclose to

participants and beneficiaries (or their

representatives), on request, and at no

charge, a summary of the information

upon which the exemption was based.

This ICR covers this disclosure

requirement.

II. Current Actions:

Under 29 CFR 2590.712(f)(2) and 26

CFR 54.9812–1T, a group health plan

wishing to elect the one percent

exemption must calculate their

increased costs according to certain

rules. Under 29 CFR 2590.712(f)(4) and

26 CFR 54.9812–1T, a group health plan

electing the one percent exemption is

obligated to disclose to participants and

beneficiaries (or their representatives),

on request and at no charge, a summary

of the information on which the

exemption was based.

Type of Review: New.

Agencies: U.S. Department of Labor,

Pension and Welfare Benefits

Administration; U.S. Department of the

Treasury, Internal Revenue Service.

Title: Calculation and Disclosure of

Documentation of Eligibility for

Exemption.

OMB Number: XXXXXXX.

Affected Public: Individuals or

households; Business or other for-profit;

Not-for-profit institutions; Group Health

Plans.

Frequency: On occasion.

Calculation burden: It is expected that

plans wishing to exercise the one

percent increased cost exemption or

their service providers will revise their

automated claim record systems to

facilitate calculation of the plans’

increased costs attributable to the

MHPA. The number of plans performing

such functions in-house that might wish

to exercise the exemption is estimated

to be no more than 4,489 and probably

958. The number of service providers

(including health insurance issuers and

third party administrators) that will

perform this function for plans using

service providers that wish to exercise

the exemption is estimated to be 1,770.

Assuming a cost of $5,000 per affected

entity, the total cost associated with

determining plans’ eligibility to exercise

the exemption amounts to $12.5 million

to $30.1 million, to be amortized over 10

years beginning in 1998.

Disclosure burden: In addition to the

calculation burden, plans wishing to

elect the one percent increased cost

exemption will incur a burden in

connection with disclosure requests

from participants, as detailed below.

Year

Total respondents

(range)

Total responses

(range)

Average

time per

response

(minutes)

Burden

hours

(range)

Cost (range)

1998 ........................................................................................................... .................. .................. .................. ..................

1999 ........................................................................................................... 5,612 to

25,466.

30,188 to

140,412.

2 .............. 235 to

1,101.

$26,163 to

$121,690

2000 ........................................................................................................... 5,612 to

25,466.

30,188 to

140,412.

2 .............. 235 to

1,101.

$26,163 to

$121,690

Totals ......................................................................................................... 5,612 to

25,466.

60,377 to

280.824.

2 .............. 470 to

2,201.

$52,326 to

$243,381

Comments submitted in response to

this notice will be summarized and/or

included in the request for OMB

approval of the ICRs; they will also

become a matter of public record.

3. Notice of Group Health Plan’s Use of

Transition Period, and Posting Thereof

i. Department of Labor

The Department of Labor, as part of its

continuing effort to reduce paperwork

and respondent burden, conducts a

preclearance consultation program to

provide the general public and Federal

agencies with an opportunity to

comment on proposed and/or

continuing collections of information in

accordance with the Paperwork

Reduction Act of 1995 (Pub. L. 104–13,

44 U.S.C. Chapter 35) and 5 CFR

1320.11. This program helps to ensure

that requested data can be provided in

the desired format, reporting burden

(time and financial resources) is

minimized, collection instruments are

clearly understood, and the impact of

collection requirements on respondents

can be properly assessed. Currently, the

Pension and Welfare Benefits

Administration is soliciting comments

concerning the proposed collection of

information, Notice of Group Health

Plan’s Use of Transition Period. A copy
Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations 66949

of the proposed ICR can be obtained by

contacting the employee listed below in

the contact section of the notice.

Information collection: affected

parties are not required to comply with

the ICRs in these rules until the

Department of Labor publishes in the

Federal Register the control numbers

assigned to these ICRs by OMB. The

publication of the control numbers

notifies the public that OMB has

approved these ICRs under the

Paperwork Reduction Act of 1995. The

Department has asked for OMB

clearance as soon as possible, and OMB

approval is anticipated by the

applicable effective date.

Dates: Written comments must be

submitted to the office listed in the

addressee section below on or before

February 20, 1998. The Department of

Labor is particularly interested in

comments which:

• Evaluate whether the proposed

collection of information is necessary

for the proper performance of the

functions of the agency, including

whether the information will have

practical utility;

• Evaluate the accuracy of the

agency’s estimate of the burden of the

proposed collection of information,

including the validity of the

methodology and assumptions used;

• Enhance the quality, utility, and

clarity of the information to be

collected; and

• Minimize the burden of the

collection of information on those who

are to respond, including through the

use of appropriate automated,

electronic, mechanical, or other

technological collection techniques or

other forms of information technology,

e.g., permitting electronic submissions

of responses.

Addressee: Gerald B. Lindrew, Office

of Policy and Research, U.S. Department

of Labor, Pension and Welfare Benefits

Administration, 200 Constitution

Avenue, Room N–5647, Washington,

D.C. 20210. Telephone: 202–219–4782

(this is not a toll-free number). Fax:

202–219–4745.

ii. Department of the Treasury

The collection of information is in

Section 54.9812–1T. This information is

required by the interim final rules so

that participants will be informed about

their rights under MHPA, and so that

plans electing the one percent increased

cost exemption during all or part of the

first quarter of 1998 under the rules’

transition provisions will notify the

federal government and post the notice

in the workplace. The likely

respondents are business or other forprofit institutions, non-profit

institutions, small businesses or

organizations, and Taft-Hartley trusts.

Responses to this collection of

information are required to obtain the

benefit of the exemption.

Books or records relating to a

collection of information must be

retained as long as their contents may

become material in the administration

of any internal revenue law. Generally,

tax returns and tax return information

are confidential, as required by 26

U.S.C. 6103.

Comments on the collection of

information should be sent to the Office

of Management and Budget, Attn: Desk

Officer for the Department of the

Treasury, Office of Information and

Regulatory Affairs, Washington, DC

20503, with copies to the Internal

Revenue Service, Attn: IRS Reports

Clearance Officer, T:FP, Washington, DC

20224. Comments on the collection of

information should be received on or

before February 20, 1998. In light of the

request for OMB clearance by the

effective date of the MHPA, submission

of comments within the first 30 days is

encouraged to ensure their

consideration. Comments are

specifically requested concerning:

Whether the proposed collection of

information is necessary for the proper

performance of the functions of the

Internal Revenue Service, including

whether the information will have

practical utility;

The accuracy of the estimated burden

associated with the proposed collection

of information;

How to enhance the quality, utility,

and clarity of the information to be

collected;

How to minimize the burden of

complying with the proposed collection

of information, including the

application of automated collection

techniques or other forms of information

technology; and

Estimates of capital or start up costs

and costs of operation, maintenance,

and purchase of services to provide

information.

I. Background

MHPA generally requires that group

health plans provide parity in the

application of dollar limits to mental

health and medical/surgical benefits.

The statute exempts plans from this

requirement if its application results in

an increase in the cost under the plan

or coverage of at least one percent. This

regulation requires a notice of group

health plan’s use of transition period,

under which plans electing the one

percent increased cost exemption

during all or part of the first quarter of

1998 under the rule’s transition

provisions must notify the federal

government and to post a copy of the

notice in the workplace. This ICR covers

this notification requirement.

II. Current Actions

Under 29 CFR 2590.712(h)(3)(ii) and

26 CFR 54.9812–1T, group health plans

electing the one percent increased cost

exemption during all or part of the first

quarter of 1998 under the rule’s

transition provisions must notify the

federal government. Based on past

experience, the staff believes that most

of the materials required to be issued

under this notice procedure will be

prepared by contract service providers

such as insurance companies and thirdparty administrators.

Type of Review: New.

Agencies: U.S. Department of Labor,

Pension and Welfare Benefits

Administration; U.S. Department of the

Treasury, Internal Revenue Service.

Title: Notice of Group Health Plan’s

Use of Transition Period.

OMB Number:

Affected Public: Individuals or

households; Business or other for-profit;

Not-for-profit institutions; Group Health

Plans.

Frequency: On occasion.

Burden:

Year

Total respondents

(range)

Total responses

(range)

Average

time per

response

(minutes)

Burden

hours

(range)

Cost

(range)

1998 .................................................................................................................... 3,348 to

15,193.

3,348 to

15,193.

2 .............. 19 to 89 ... $1,514 to

$6,910

1999 .................................................................................................................... .................. .................. .................. ..................

2000 .................................................................................................................... .................. .................. .................. ..................
66950 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations

Year

Total respondents

(range)

Total responses

(range)

Average

time per

response

(minutes)

Burden

hours

(range)

Cost

(range)

Totals ........................................................................................................... 3,348 to

15,193.

3,348 to

15,193.

2 .............. 19 to 89 ... $1,514 to

$6,910

Comments submitted in response to

this notice will be summarized and/or

included in the request for OMB

approval of the ICRs; they will also

become a matter of public record.

I. Paperwork Reduction Act—

Department of Health and Human

Services

Under the Paperwork Reduction Act

of 1995 (PRA), agencies are required to

provide a 60-day notice in the Federal

Register and solicit public comment

before a collection of information

requirement is submitted to the Office of

Management and Budget (OMB) for

review and approval. In order to fairly

evaluate whether an information

collection should be approved by OMB,

section 3506(c)(2)(A) of the PRA

requires that we solicit comment on the

following issues:

• Whether the information collection

is necessary and useful to carry out the

proper functions of the agency;

• The accuracy of the agency’s

estimate of the information collection

burden;

• The quality, utility, and clarity of

the information to be collected; and

• Recommendations to minimize the

information collection burden on the

affected public, including automated

collection techniques.

Therefore, we are soliciting public

comment on each of these issues for the

information collection requirements

discussed below.

Section 146.136 of this document

contains three distinct information

collection requirements, as summarized

below:

Type of Information Request: New

collection.

Title of Information Collection:

Mental Health Parity Act of 1996;

Information Collection Requirements

Contained in 45 CFR 146.136; HCFA–

2891–IFC.

Form Number: HCFA–R–223 (OMB

approval #: 0938–XXXX).

Use: The information collection

requirements contained in this interim

final rule will help ensure that sponsors

and administrators of group health

plans notify the required individuals/

entities of a plan’s exemption from the

MHPA parity requirements and make

the data used to calculate the exemption

available to affected individuals and

entities.

Frequency: On occasion.

Affected Public: States, businesses or

other for profit, not-for-profit

institutions, Federal Government,

individuals or households.

Notification Requirements:

Nonfederal governmental plans, not

exempt from the parity requirements by

reason of an opt out under regulations

at 45 CFR 146.180, must furnish

participants and beneficiaries with a

notice of the plan’s exemption from the

parity requirements based on increased

costs. A plan may satisfy this

requirement by providing participants

and beneficiaries with a notice of

material reductions in covered services

or benefits, under 29 CFR 2520.104b–

3(d), that includes the information in

paragraph (f)(3)(i). Even though a plan

generally is not required to furnish a

material reduction in covered services

or benefits for 60 days, in no case will

the exemption be effective until 30 days

after the notice is sent to participants

and beneficiaries. For this purpose, a

plan that does not furnish the summary

of material reductions in covered

services or benefits may satisfy its

notice requirements by using the model

exemption notice described above in

this preamble.

In addition, the nonfederal

governmental plan (or issuer providing

coverage to such a plan) must also

furnish to the Department of Health and

Human Services a notice similar to the

notice sent to participants and

beneficiaries before the exemption is

effective. For this purpose, the plan may

either send the Department the

summary of material reductions in

covered services or benefits sent to

participants and beneficiaries, or the

plan (or issuer) may use the model

described above. In all cases, the

exemption is not effective until 30 days

after notice has been sent.

Burden:

Year

Total respondents

(range)

Total responses

(range)

Average

time per

response

range

(minutes)

Burden

hours

(range)

Cost

(range)

1998 .................................................................................................................... .................. .................. .................. ..................

1999 .................................................................................................................... 890 to

4,092.

261,000 to

1.2 MM.

2 .............. 2,133 to

9,975.

$226,000

to $1.1

MM

2000 .................................................................................................................... .................. .................. .................. ..................

Total ............................................................................................................. 890 to

4,092.

261,000 to

1.2 MM.

2 .............. 2,133 to

9,975.

$226,000

to $1.1

MM

Availability of documentation:

Nonfederal governmental plans that take

the exemption, or issuers that provide

coverage for such plans, must make

available to participants and

beneficiaries, on request and at no

charge, a summary of the data used to

calculate the exemption of this section.

The summary of data must include the

incurred expenditures (including

identification of the portion of the total

representing claims and the portion of

the total representing administrative

expenses), the base period, the claims

incurred during the base period that

would have been denied under the

terms of the plan absent amendments

required to comply with parity, and the
Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations 66951

administrative expenses attributable to

complying with the parity requirements.

Burden:

Year

Total respondents

(range)

Total responses

(range)

Average

time per

response

(range)

(minutes)

Burden

hours

(range)

Cost

(range)

1998 .................................................................................................................... .................. .................. .................. ..................

1999 .................................................................................................................... 890 to

4,092.

9,700 to

45,300.

2 .............. 79 to 372 $8,400 to

$39,300

2000 .................................................................................................................... 890 to

4,092.

9,700 to

45,300.

2 .............. 79 to 372 $8,400 to

$39,300

Total ............................................................................................................. 890 to

4,092.

19,400 to

90,600.

2 .............. 158 to 744 $16,800 to

$78,600

Plans that take the exemption will

incur start up costs for preparing to

issue the information they must

disclose. We estimate the start up costs

for nonfederal governmental plans that

take this exemption to range from $2.1

million to $5.5 million.

Notice of Use of Transition Period:

With respect to the increased cost

exemption, the interim rules provide in

paragraph (g)(3) a transition period for

compliance with the requirements of

paragraph (f). Under paragraph (g)(3), no

enforcement action shall be taken

against a nonfederal governmental plan

that is subject to the MHPA

requirements prior to April 1, 1998

solely because the plan claims the

increased cost exemption under section

2705(c)(2) of the PHS Act based on

assumptions inconsistent with the rules

under paragraph (f), provided that the

plan is amended to comply with the

parity requirements no later than March

31, 1998 and the plan complies with

certain notice requirements. A

nonfederal governmental plan satisfies

the notice requirements only if such

plan provides notice to the Department

of Health and Human Services of the

plan’s intent to use the transition period

by 30 days after the first day of the plan

year beginning on or after January 1,

1998, but in no event can the notice be

provided later than March 31, 1998.

Such notice shall include the name of

the plan; the name, address, and

telephone number of the plan sponsor

or plan administrator; the employer

identification number; and the plan

number. In addition, such notice must

be provided at no charge to participants

within 30 days after receipt of a written

request for such notification.

Burden:

Year

Total respondents

(range)

Total responses

(range)

Average

time per

response

(range)

(minutes)

Burden

hours

(range)

Cost

(range)

1998 .................................................................................................................... 531 to

2,441.

531 to

2,441.

2 .............. 4 to 17 ..... $250 to

$1,151

1999 .................................................................................................................... — ............. — ............. — ............. — ............. —

2000 .................................................................................................................... — ............. — ............. — ............. — ............. —

Total ............................................................................................................. 531 to

2,441.

531 to

2,441.

2 .............. 4 to 17 ..... $250 to

$1,151

We have submitted a copy of this

proposed rule to OMB for its review of

the information collection requirements

in § 146.136. These requirements are not

effective until they have been approved

by OMB.

If you comment on any of these

information collection and

recordkeeping requirements, please mail

copies directly to the following: Health

Care Financing Administration, Office

of Information Services, information

Technology Investment Management

Group, Division of HCFA Enterprise

Standards, Room C2–26–17, 7500

Security Boulevard, Baltimore, MD

21244–1850. ATTN: John Burke HCFA–

2891–IFC.

We have submitted a copy of this rule

to OMB for its review of these

information collections. A notice will be

published in the Federal Register when

approval is obtained. Interested persons

are invited to send comments regarding

this burden or any other aspect of these

collections of information. If you

comment on these information

collection and recordkeeping

requirements, please mail copies

directly to the following addresses:

Office of Information and Regulatory

Affairs, Office of Management and

Budget, Room 10235, New Executive

Office Building, Washington, DC

20530, Attn: Allison Herron Eydt,

HCFA Desk Officer. DATED:

Gerald B. Lindrew, Deputy Director,

Pension and Welfare Benefits

Administration, Office of Policy and

Research

Statutory Authority

The Department of the Treasury

temporary rule is adopted pursuant to

the authority contained in sections 7805

and 9833 of the Code (26 U.S.C. 7805,

9833), as amended by HIPAA (Pub. L.

104–191, 110 Stat. 1936) and the

Taxpayer Relief Act of 1997 (Pub. L.

105–34, 111 Stat. 788).

The Department of Labor interim final

rule is adopted pursuant to the authority

contained in sections 107, 209, 505,

701–703, 711, 712, and 731–734 of

ERISA (29 U.S.C. 1027, 1059, 1135,

1171–1173, 1181, 1182, and 1191–

1194), as amended by HIPAA (Pub. L.

104–191, 110 Stat. 1936) and MHPA

(Pub. L. 104–204, 110 Stat. 2944), and

Secretary of Labor’s Order No. 1–87, 52

FR 13139, April 21, 1987.
66952 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations

The Department of Health and Human

Services interim final rule is adopted

pursuant to the authority contained in

sections 2701, 2702, 2705, 2711, 2712,

2713, 2721, 2722, 2723, and 2792 of the

PHS Act (42 U.S.C. 300gg, 300gg–1,

300gg–5, 300gg–11, 300gg–12, 300gg–

13, 300gg–21, 300gg–22, 300gg–23, and

300gg–92), as established by HIPAA

(Pub. L. 104–191, 110 Stat. 1936) and

MHPA (Pub. L. 104–204, 110 Stat.

2944).

List of Subjects

26 CFR Part 54

Excise taxes, Health insurance,

Pensions, Reporting and recordkeeping

requirements.

29 CFR Part 2590

Employee benefit plans, Employee

Retirement Income Security Act, Health

care, Health insurance, Reporting and

recordkeeping requirements.

45 CFR Part 146

Health care, Health insurance,

Reporting and recordkeeping

requirements, State regulation of health

insurance.

Adoption of Amendments to the

Regulations

Internal Revenue Service

26 CFR Chapter I

Accordingly, 26 CFR Part 54 is

amended as follows:

PART 54—PENSION EXCISE TAXES

Paragraph 1. The authority citation

for part 54 is amended by revising the

entries for sections 54.9801–1T through

54.9801–6T and 54.9802–1T, by

removing the entries for sections

54.9804–1T, and 54.9806–1T, and by

adding entries for sections 54.9812–1T,

54.9831–1T, and 54.9833–1T to read in

part as follows:

Authority: 26 U.S.C. 7805 * * *

Section 54.9801–1T also issued under 26

U.S.C. 9833.

Section 54.9801–2T also issued under 26

U.S.C. 9833.

Section 54.9801–3T also issued under 26

U.S.C. 9833.

Section 54.9801–4T also issued under 26

U.S.C. 9833.

Section 54.9801–5T also issued under 26

U.S.C. 9801(c)(4), 9801(e)(3), and 9833.

Section 54.9801–6T also issued under 26

U.S.C. 9833.

Section 54.9802–1T also issued under 26

U.S.C. 9833.

Section 54.9812–1T also issued under 26

U.S.C. 9833.

Section 54.9831–1T also issued under 26

U.S.C. 9833.

Section 54.9833–1T also issued under 26

U.S.C. 9833.

Par. 2. In § 54.9801–1T, paragraph (a)

is revised to read as follows:

§ 54.9801–1T Basis and scope

(temporary).

(a) Statutory basis. Sections 54.9801–

1T through 54.9801–6T, 54.9802–1T,

54.9812–1T, 54.9831–1T and 54.9833–

1T (portability sections) implement

Chapter 100 of Subtitle K of the Internal

Revenue Code of 1986.

* * * * *

Par. 3. Section 54.9801–2T is

amended by:

1. Revising the introductory text.

2. Revising the definition of excepted

benefits.

3. Revising the definition of health

insurance coverage.

The revisions read as follows:

§ 54.9801–2T Definitions (temporary).

Unless otherwise provided, the

definitions in this section govern in

applying the provisions of §§ 54.9801–

1T through 54.9801–6T, 54.9802–1T,

54.9812–1T, 54.9831–1T, and 54.9833–

1T.

* * * * *

Excepted benefits means the benefits

described as excepted in § 54.9831–

1T(b).

* * * * *

Health insurance coverage means

benefits 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 contract offered

by a health insurance issuer. However,

benefits described in § 54.9831–1T(b)(2)

are not treated as benefits consisting of

medical care.

* * * * *

Par. 4. In § 54.9801–4T, paragraph

(a)(2) is revised to read as follows:

§ 54.9801–4T Rules relating to creditable

coverage (temporary).

(a) * * *

(2) Excluded coverage. Creditable

coverage does not include coverage

consisting solely of coverage of excepted

benefits (described in § 54.9831–1T).

* * * * *

Par. 5. In § 54.9801–5T, the first

sentence of paragraph (a)(3)(vi) is

revised to read as follows:

§ 54.9801–5T Certification and disclosure

of previous coverage (temporary).

(a) * * *

(3) * * *

(vi) Excepted benefits; categories of

benefits. No certificate is required to be

furnished with respect to excepted

benefits described in § 54.9831–

1T. * * *

* * * * *

§ 54.9804–1T [Redesignated as § 54.9831–

1T]

Par. 6. Section 54.9804–1T is

redesignated as § 54.9831–1T and

amended by revising paragraph (b)(1) to

read as follows:

§ 54.9831–1T Special rules relating to

group health plans (temporary).

* * * * *

(b) Excepted benefits—(1) In general.

The requirements of §§ 54.9801–1T

through 54.9801–6T, 54.9802–1T, and

54.9812–1T do not apply to any group

health plan in relation to its provision

of the benefits described in paragraph

(b) (2), (3), (4), or (5) of this section (or

any combination of these benefits).

* * * * *

§ 54.9806–1T [Redesignated as § 54.9833–

1T]

Par. 7. Section 54.9806–1T is

redesignated as § 54.9833–1T and

amended by:

1. Revising paragraph (a)(1).

2. Revising the first sentence of

paragraph (a)(2).

The revisions read as follows:

§ 54.9833–1T Effective dates (temporary).

(a) General effective dates—(1) Noncollectively-bargained plans. Except as

otherwise provided in this section,

Chapter 100 of Subtitle K and

§§ 54.9801–1T through 54.9806–1T,

54.9802–1T, and 54.9831–1T apply with

respect to group health plans for plan

years beginning after June 30, 1997.

(2) Collectively bargained plans.

Except as otherwise provided in this

section (other than paragraph (a)(1) of

this section), in the case of a group

health plan maintained pursuant to one

or more collective bargaining

agreements between employee

representatives and one or more

employers ratified before August 21,

1996, Chapter 100 of Subtitle K and

§§ 54.9801–1T through 54.9801–6T,

54.9802–1T, and 54.9831–1T do not

apply to plan years beginning before the

later of July 1, 1997, or the date on

which the last of the collective

bargaining agreements relating to the

plan terminates (determined without

regard to any extension thereof agreed to

after August 21, 1996).* * *

* * * * *

Par. 8. Section 54.9812–1T is added

to read as follows:
Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations 66953

§ 54.9812–1T Parity in the application of

certain limits to mental health benefits

(temporary).

(a) Definitions. For purposes of this

section, except where the context

clearly indicates otherwise, the

following definitions apply:

Aggregate lifetime limit means a

dollar limitation on the total amount of

specified benefits that may be paid

under a group health plan for an

individual (or for a group of individuals

considered a single unit in applying this

dollar limitation, such as a family or an

employee plus spouse).

Annual limit means a dollar

limitation on the total amount of

specified benefits that may be paid in a

12-month period under a plan for an

individual (or for a group of individuals

considered a single unit in applying this

dollar limitation, such as a family or an

employee plus spouse).

Medical/surgical benefits means

benefits for medical or surgical services,

as defined under the terms of the plan,

but does not include mental health

benefits.

Mental health benefits means benefits

for mental health services, as defined

under the terms of the plan, but does

not include benefits for treatment of

substance abuse or chemical

dependency.

(b) Requirements regarding limits on

benefits—(1) In general—(i) General

parity requirement. A group health plan

that provides both medical/surgical

benefits and mental health benefits must

comply with paragraph (b) (2), (3), or (6)

of this section.

(ii) Exception. The rule in paragraph

(b)(1)(i) of this section does not apply if

a plan satisfies the requirements of

paragraph (e) or (f) of this section.

(2) Plan with no limit or limits on less

than one-third of all medical/surgical

benefits. If a plan does not include an

aggregate lifetime or annual limit on any

medical/surgical benefits or includes

aggregate lifetime or annual limits that

apply to less than one-third of all

medical/surgical benefits, it may not

impose an aggregate lifetime or annual

limit, respectively, on mental health

benefits.

(3) Plan with a limit on at least twothirds of all medical/surgical benefits. If

a plan includes an aggregate lifetime or

annual limit on at least two-thirds of all

medical/surgical benefits, it must

either—

(i) Apply the aggregate lifetime or

annual limit both to the medical/

surgical benefits to which the limit

would otherwise apply and to mental

health benefits in a manner that does

not distinguish between the medical/

surgical and mental health benefits; or

(ii) Not include an aggregate lifetime

or annual limit on mental health

benefits that is less than the aggregate

lifetime or annual limit, respectively, on

the medical/surgical benefits.

(4) Examples. The rules of paragraphs

(b)(2) and (3) of this section are

illustrated by the following examples:

Example 1. (i) Prior to the effective date of

the mental health parity provisions, a group

health plan had no annual limit on medical/

surgical benefits and had a $10,000 annual

limit on mental health benefits. To comply

with the parity requirements of this

paragraph (b), the plan sponsor is

considering each of the following options:

(A) Eliminating the plan’s annual limit on

mental health benefits;

(B) Replacing the plan’s previous annual

limit on mental health benefits with a

$500,000 annual limit on all benefits

(including medical/surgical and mental

health benefits); and

(C) Replacing the plan’s previous annual

limit on mental health benefits with a

$250,000 annual limit on medical/surgical

benefits and a $250,000 annual limit on

mental health benefits.

(ii) In this Example 1, each of the three

options being considered by the plan sponsor

would comply with the requirements of this

section because they offer parity in the dollar

limits placed on medical/surgical and mental

health benefits.

Example 2. (i) Prior to the effective date of

the mental health parity provisions, a group

health plan had a $100,000 annual limit on

medical/surgical inpatient benefits, a $50,000

annual limit on medical/surgical outpatient

benefits, and a $100,000 annual limit on all

mental health benefits. To comply with the

parity requirements of this paragraph (b), the

plan sponsor is considering each of the

following options:

(A) Replacing the plan’s previous annual

limit on mental health benefits with a

$150,000 annual limit on mental health

benefits; and

(B) Replacing the plan’s previous annual

limit on mental health benefits with a

$100,000 annual limit on mental health

inpatient benefits and a $50,000 annual limit

on mental health outpatient benefits.

(ii) In this Example 2, each option under

consideration by the plan sponsor would

comply with the requirements of this section

because they offer parity in the dollar limits

placed on medical/surgical and mental

health benefits.

Example 3. (i) A group health plan that is

subject to the requirements of this section has

no aggregate lifetime or annual limit for

either medical/surgical benefits or mental

health benefits. While the plan provides

medical/surgical benefits with respect to both

network and out-of-network providers, it

does not provide mental health benefits with

respect to out-of-network providers.

(ii) In this Example 3, the plan complies

with the requirements of this section because

they offer parity in the dollar limits placed

on medical/surgical and mental health

benefits.

Example 4. (i) Prior to the effective date of

the mental health parity provisions, a group

health plan had an annual limit on medical/

surgical benefits and a separate but identical

annual limit on mental health benefits. The

plan included benefits for treatment of

substance abuse and chemical dependency in

its definition of mental health benefits.

Accordingly, claims paid for treatment of

substance abuse and chemical dependency

were counted in applying the annual limit on

mental health benefits. To comply with the

parity requirements of this paragraph (b), the

plan sponsor is considering each of the

following options:

(A) Making no change in the plan so that

claims paid for treatment of substance abuse

and chemical dependency continue to count

in applying the annual limit on mental health

benefits;

(B) Amending the plan to count claims

paid for treatment of substance abuse and

chemical dependency in applying the annual

limit on medical/surgical benefits (rather

than counting those claims in applying the

annual limit on mental health benefits);

(C) Amending the plan to provide a new

category of benefits for treatment of chemical

dependency and substance abuse that is

subject to a separate, lower limit and under

which claims paid for treatment of substance

abuse and chemical dependency are counted

only in applying the annual limit on this

separate category; and

(D) Amending the plan to eliminate

distinctions between medical/surgical

benefits and mental health benefits and

establishing an overall limit on benefits

offered under the plan under which claims

paid for treatment of substance abuse and

chemical dependency are counted with

medical/surgical benefits and mental health

benefits in applying the overall limit.

(ii) In this Example 4, the group health

plan is described in paragraph (b)(3) of this

section. Because mental health benefits are

defined in paragraph (a) of this section as

excluding benefits for treatment of substance

abuse and chemical dependency, the

inclusion of benefits for treatment of

substance abuse and chemical dependency in

applying an aggregate lifetime limit or annual

limit on mental health benefits under option

(A) of this Example 4 would not comply with

the requirements of paragraph (b)(3) of this

section. However, options (B), (C), and (D) of

this Example 4 would comply with the

requirements of paragraph (b)(3) of this

section because they offer parity in the dollar

limits placed on medical/surgical and mental

health benefits.

(5) Determining one-third and twothirds of all medical/surgical benefits.

For purposes of this paragraph (b), the

determination of whether the portion of

medical/surgical benefits subject to a

limit represents one-third or two-thirds

of all medical/surgical benefits is based

on the dollar amount of all plan

payments for medical/surgical benefits

expected to be paid under the plan for

the plan year (or for the portion of the

plan year after a change in plan benefits

that affects the applicability of the

aggregate lifetime or annual limits). Any

reasonable method may be used to
66954 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations

determine whether the dollar amounts

expected to be paid under the plan will

constitute one-third or two-thirds of the

dollar amount of all plan payments for

medical/surgical benefits.

(6) Plan not described in paragraph

(b)(2) or (3) of this section—(i) In

general. A group health plan that is not

described in paragraph (b)(2) or (3) of

this section, must either—

(A) Impose no aggregate lifetime or

annual limit, as appropriate, on mental

health benefits; or

(B) Impose an aggregate lifetime or

annual limit on mental health benefits

that is no less than an average limit for

medical/surgical benefits calculated in

the following manner. The average limit

is calculated by taking into account the

weighted average of the aggregate

lifetime or annual limits, as appropriate,

that are applicable to the categories of

medical/surgical benefits. Limits based

on delivery systems, such as inpatient/

outpatient treatment or normal

treatment of common, low-cost

conditions (such as treatment of normal

births), do not constitute categories for

purposes of this paragraph (b)(6)(i)(B).

In addition, for purposes of determining

weighted averages, any benefits that are

not within a category that is subject to

a separately-designated limit under the

plan are taken into account as a single

separate category by using an estimate

of the upper limit on the dollar amount

that a plan may reasonably be expected

to incur with respect to such benefits,

taking into account any other applicable

restrictions under the plan.

(ii) Weighting. For purposes of this

paragraph (b)(6), the weighting

applicable to any category of medical/

surgical benefits is determined in the

manner set forth in paragraph (b)(5) of

this section for determining one-third or

two-thirds of all medical/surgical

benefits.

(iii) Example. The rules of this

paragraph (b)(6) are illustrated by the

following example:

Example. (i) A group health plan that is

subject to the requirements of this section

includes a $100,000 annual limit on medical/

surgical benefits related to cardio-pulmonary

diseases. The plan does not include an

annual limit on any other category of

medical/surgical benefits. The plan

determines that 40% of the dollar amount of

plan payments for medical/surgical benefits

are related to cardio-pulmonary diseases. The

plan determines that $1,000,000 is a

reasonable estimate of the upper limit on the

dollar amount that the plan may incur with

respect to the other 60% of payments for

medical/surgical benefits.

(ii) In this Example, the plan is not

described in paragraph (b)(3) of this section

because there is not one annual limit that

applies to at least two-thirds of all medical/

surgical benefits. Further, the plan is not

described in paragraph (b)(2) of this section

because more than one-third of all medical/

surgical benefits are subject to an annual

limit. Under this paragraph (b)(6), the plan

sponsor can choose either to include no

annual limit on mental health benefits, or to

include an annual limit on mental health

benefits that is not less than the weighted

average of the annual limits applicable to

each category of medical/surgical benefits. In

this example, the minimum weighted average

annual limit that can be applied to mental

health benefits is $640,000 (40% x $100,000

+ 60% x $1,000,000 = $640,000).

(c) Rule in the case of separate benefit

packages. If a group health plan offers

two or more benefit packages, the

requirements of this section, including

the exemption provisions in paragraph

(f) of this section, apply separately to

each benefit package. Examples of a

group health plan that offers two or

more benefit packages include a group

health plan that offers employees a

choice between indemnity coverage or

HMO coverage, and a group health plan

that provides one benefit package for

retirees and a different benefit package

for current employees.

(d) Applicability—(1) Group health

plans. The requirements of this section

apply to a group health plan offering

both medical/surgical benefits and

mental health benefits regardless of

whether the mental health benefits are

administered separately under the plan.

(2) Health insurance issuers. See 29

CFR 2590.712(d)(2) and 45 CFR

146.136(d)(2), which provide that health

insurance issuers offering health

insurance coverage for both medical/

surgical benefits and mental health

benefits in connection with a group

health plan are subject to rules similar

to those applicable to group health

plans under this section.

(3) Scope. This section does not—

(i) Require a group health plan to

provide any mental health benefits; or

(ii) Affect the terms and conditions

(including cost sharing, limits on the

number of visits or days of coverage,

requirements relating to medical

necessity, requiring prior authorization

for treatment, or requiring primary care

physicians’ referrals for treatment)

relating to the amount, duration, or

scope of the mental health benefits

under the plan except as specifically

provided in paragraph (b) of this

section.

(e) Small employer exemption—(1) In

general. The requirements of this

section do not apply to a group health

plan for a plan year of a small employer.

For purposes of this paragraph (e), the

term small employer means, in

connection with a group health plan

with respect to a calendar year and a

plan year, an employer who employed

an average of at least two but not more

than 50 employees on business days

during the preceding calendar year and

who employs at least two employees on

the first day of the plan year. See section

9831(a) and § 54.9831–1T(a), which

provide that this section (and certain

other sections) does not apply to any

group health plan for any plan year if,

on the first day of the plan year, the

plan has fewer than two participants

who are current employees.

(2) Rules in determining employer

size. For purposes of paragraph (e)(1) of

this section—

(i) All persons treated as a single

employer under subsections (b), (c), (m),

and (o) of section 414 are treated as one

employer;

(ii) If an employer was not in

existence throughout the preceding

calendar year, whether it is a small

employer is determined based on the

average number of employees the

employer reasonably expects to employ

on business days during the current

calendar year; and

(iii) Any reference to an employer for

purposes of the small employer

exemption includes a reference to a

predecessor of the employer.

(f) Increased cost exemption—(1) In

general. A group health plan is not

subject to the requirements of this

section if the requirements of this

paragraph (f) are satisfied. If a plan

offers more than one benefit package,

this paragraph (f) applies separately to

each benefit package. Except as

provided in paragraph (h) of this

section, a plan must comply with the

requirements of paragraph (b)(1)(i) of

this section for the first plan year

beginning on or after January 1, 1998,

and must continue to comply with the

requirements of paragraph (b)(1)(i) of

this section until the plan satisfies the

requirements in this paragraph (f). In no

event is the exemption of this paragraph

(f) effective until 30 days after the notice

requirements in paragraph (f)(3) of this

section are satisfied. If the requirements

of this paragraph (f) are satisfied with

respect to a plan, the exemption

continues in effect (at the plan’s

discretion) until September 30, 2001,

even if the plan subsequently purchases

a different policy from the same or a

different issuer and regardless of any

other changes to the plan’s benefit

structure.

(2) Calculation of the one-percent

increase—(i) Ratio. A group health plan

satisfies the requirements of this

paragraph (f)(2) if the application of

paragraph (b)(1)(i) of this section to the

plan results in an increase in the cost

under the plan of at least one percent.
Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations 66955

The application of paragraph (b)(1)(i) of

this section results in an increased cost

of at least one percent under a group

health plan only if the ratio below

equals or exceeds 1.01000. The ratio is

determined as follows:

(A) The incurred expenditures during

the base period, divided by,

(B) The incurred expenditures during

the base period, reduced by——

(1) The claims incurred during the

base period that would have been

denied under the terms of the plan

absent plan amendments required to

comply with this section; and

(2) Administrative expenses

attributable to complying with the

requirements of this section.

(ii) Formula. The ratio of paragraph

(f)(2)(i) of this section is expressed

mathematically as follows:

IE

IE CE AE − +

≥

( )

1 01000 .

(A) IE means the incurred

expenditures during the base period.

(B) CE means the claims incurred

during the base period that would have

been denied under the terms of the plan

absent plan amendments required to

comply with this section

(C) AE means administrative costs

related to claims in CE and other

administrative costs attributable to

complying with the requirements of this

section.

(iii) Incurred expenditures. Incurred

expenditures means actual claims

incurred during the base period and

reported within two months following

the base period, and administrative

costs for all benefits under the group

health plan, including mental health

benefits and medical/surgical benefits,

during the base period. Incurred

expenditures do not include premiums.

(iv) Base period. Base period means

the period used to calculate whether the

plan may claim the one-percent

increased cost exemption in this

paragraph (f). The base period must

begin on the first day in any plan year

that the plan complies with the

requirements of paragraph (b)(1)(i) of

this section and must extend for a

period of at least six consecutive

calendar months. However, in no event

may the base period begin prior to

September 26, 1996 (the date of

enactment of the Mental Health Parity

Act (Pub. L. 104–204, 110 Stat. 2944)).

(v) Rating pools. For plans that are

combined in a pool for rating purposes,

the calculation under this paragraph

(f)(2) for each plan in the pool for the

base period is based on the incurred

expenditures of the pool, whether or not

all the plans in the pool have

participated in the pool for the entire

base period. (However, only the plans

that have complied with paragraph

(b)(1)(i) of this section for at least six

months as a member of the pool satisfy

the requirements of this paragraph

(f)(2).) Otherwise, the calculation under

this paragraph (f)(2) for each plan is

calculated by the plan administrator

based on the incurred expenditures of

the plan.

(vi) Examples. The rules of this

paragraph (f)(2) are illustrated by the

following examples:

Example 1. (i) A group health plan has a

plan year that is the calendar year. The plan

satisfies the requirements of paragraph

(b)(1)(i) of this section as of January 1, 1998.

On September 15, 1998, the plan determines

that $1,000,000 in claims have been incurred

during the period between January 1, 1998

and June 30, 1998 and reported by August 30,

1998. The plan also determines that $100,000

in administrative costs have been incurred

for all benefits under the group health plan,

including mental health benefits. Thus, the

plan determines that its incurred

expenditures for the base period are

$1,100,000. The plan also determines that the

claims incurred during the base period that

would have been denied under the terms of

the plan absent plan amendments required to

comply with this section are $40,000 and that

administrative expenses attributable to

complying with the requirements of this

section are $10,000. Thus, the total amount

of expenditures for the base period had the

plan not been amended to comply with the

requirements of paragraph (b)(1)(i) of this

section are $1,050,000 ($1,100,000—($40,000

+ $10,000) = $1,050,000).

(ii) In this Example 1, the plan satisfies the

requirements of this paragraph (f)(2) because

the application of this section results in an

increased cost of at least one percent under

the terms of the plan ($1,100,000/$1,050,000

= 1.04762).

Example 2. (i) A health insurance issuer

sells a group health insurance policy that is

rated on a pooled basis and is sold to 30

group health plans. One of the group health

plans inquires whether it qualifies for the

one-percent increased cost exemption. The

issuer performs the calculation for the pool

as a whole and determines that the

application of this section results in an

increased cost of 0.500 percent (for a ratio

under this paragraph (f)(2) of 1.00500) for the

pool. The issuer informs the requesting plan

and the other plans in the pool of the

calculation.

(ii) In this Example 2, none of the plans

satisfy the requirements of this paragraph

(f)(2) and a plan that purchases a policy not

complying with the requirements of

paragraph (b)(1)(i) of this section violates the

requirements of this section.

Example 3. (i) A partially insured plan is

collecting the information to determine

whether it qualifies for the exemption. The

plan administrator determines the incurred

expenses for the base period for the selffunded portion of the plan to be $2,000,000

and the administrative expenses for the base

period for the self-funded portion to be

$200,000. For the insured portion of the plan,

the plan administrator requests data from the

insurer. For the insured portion of the plan,

the plan’s own incurred expenses for the base

period are $1,000,000 and the administrative

expenses for the base period are $100,000.

The plan administrator determines that

under the self-funded portion of the plan, the

claims incurred for the base period that

would have been denied under the terms of

the plan absent the amendment are $0

because the self-funded portion does not

cover mental health benefits and the plan’s

administrative costs attributable to

complying with the requirements of this

section are $1,000. The issuer determines

that under the insured portion of the plan,

the claims incurred for the base period that

would have been denied under the terms of

the plan absent the amendment are $25,000

and the administrative costs attributable to

complying with the requirements of this

section are $1,000. Thus, the total incurred

expenditures for the plan for the base period

are $3,300,000 ($2,000,000 + $200,000 +

$1,000,000 + $100,000 = $3,300,000) and the

total amount of expenditures for the base

period had the plan not been amended to

comply with the requirements of paragraph

(b)(1)(i) of this section are $3,273,000

($3,300,000¥($0 + $1,000 + $25,000 +

$1,000) = $3,273,000).

(ii) In this Example 3, the plan does not

satisfy the requirements of this paragraph

(f)(2) because the application of this section

does not result in an increased cost of at least

one percent under the terms of the plan

($3,300,000/$3,273,000 = 1.00825).

(3) Notice of exemption—(i)

Participants and beneficiaries—(A) In

general. A group health plan must

notify participants and beneficiaries of

the plan’s decision to claim the onepercent increased cost exemption. The

notice must include the following

information:

(1) A statement that the plan is

exempt from the requirements of this

section and a description of the basis for

the exemption;

(2) The name and telephone number

of the individual to contact for further

information;

(3) The plan name and plan number

(PN);

(4) The plan administrator’s name,

address, and telephone number;

(5) For single-employer plans, the

plan sponsor’s name, address, and

telephone number (if different from

paragraph (f)(3)(i)(A)(3) of this section)

and the plan sponsor’s employer

identification number (EIN);

(6) The effective date of the

exemption;

(7) The ability of participants and

beneficiaries to contact the plan

administrator to see how benefits may

be affected as a result of the plan’s claim

of the exemption; and

(8) The availability, upon request and

free of charge, of a summary of the
66956 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations

information required under paragraph

(f)(4) of this section.

(B) Use of summary of material

reductions in covered services or

benefits. A plan may satisfy the

requirements of paragraph (f)(3)(i)(A) of

this section by providing participants

and beneficiaries (in accordance with

paragraph (f)(3)(i)(C) of this section)

with a summary of material reductions

in covered services or benefits required

under 29 CFR 2520.104b–3(d) that also

includes the information of this

paragraph (f)(3)(i). However, in all cases,

the exemption is not effective until 30

days after notice has been sent.

(C) Delivery. The notice described in

this paragraph (f)(3)(i) is required to be

provided to all participants and

beneficiaries. The notice may be

furnished by any method of delivery

that satisfies the requirements of section

104(b)(1) of the Employee Retirement

Income Security Act of 1974 (29 U.S.C.

1024(b)(1)) (e.g., first-class mail). If the

notice is provided to the participant at

the participant’s last known address,

then the requirements of this paragraph

(f)(3)(i) are satisfied with respect to the

participant and all beneficiaries residing

at that address. If a beneficiary’s last

known address is different from the

participant’s last known address, a

separate notice is required to be

provided to the beneficiary at the

beneficiary’s last known address.

(D) Example. The rules of this

paragraph (f)(3)(i) are illustrated by the

following example:

Example. (i) A group health plan has a

plan year that is the calendar year and has

an open enrollment period every November

1 through November 30. The plan determines

on September 15 that it satisfies the

requirements of paragraph (f)(2) of this

section. As part of its open enrollment

materials, the plan mails, on October 15, to

all participants and beneficiaries a notice

satisfying the requirements of this paragraph

(f)(3)(i).

(ii) In this Example, the plan has sent the

notice in a manner that complies with this

paragraph (f)(3)(i).

(ii) Federal agencies. A group health

plan that is a church plan (as defined in

section 414(e)) claiming the exemption

of this paragraph (f) for any benefit

package must provide notice in

accordance with the requirement of this

paragraph (f)(3)(ii). This requirement is

satisfied if the plan sends a copy, to the

address designated by the Secretary in

generally applicable guidance, of the

notice described in paragraph (f)(3)(i) of

this section identifying the benefit

package to which the exemption

applies. For any other group health

plan, see 29 CFR 2590.712(f)(3)(ii)(B).

(4) Availability of documentation. The

plan must make available to participants

and beneficiaries (or their

representatives), on request and at no

charge, a summary of the information on

which the exemption was based. An

individual who is not a participant or

beneficiary and who presents a notice

described in paragraph (f)(3)(i) of this

section is considered to be a

representative. A representative may

request the summary of information by

providing the plan a copy of the notice

provided to the participant under

paragraph (f)(3)(i) of this section with

any individually identifiable

information redacted. The summary of

information must include the incurred

expenditures, the base period, the dollar

amount of claims incurred during the

base period that would have been

denied under the terms of the plan

absent amendments required to comply

with paragraph (b)(1)(i) of this section,

the administrative costs related to those

claims, and other administrative costs

attributable to complying with the

requirements of this section. In no event

should the summary of information

include any individually identifiable

information.

(g) Special rules for group health

insurance coverage—(1) Sale of

nonparity policies. See 29 CFR

2590.712(g)(1) and 45 CFR 146.136(g)(1)

for rules limiting the right of an issuer

to sell a policy without parity (as

described in 29 CFR 2590.712(b) and 45

CFR 146.136(b)) to a plan that meets the

requirements of 29 CFR 2590.712 (e) or

(f) and 45 CFR 146.136 (e) or (f)).

(2) Duration of exemption. After a

plan meets the requirements of

paragraph (f) of this section, the plan

may change issuers without having to

meet the requirements of paragraph (f)

of this section again before September

30, 2001.

(h) Effective dates—(1) In general. The

requirements of this section are

applicable for plan years beginning on

or after January 1, 1998.

(2) Limitation on actions. (i) Except as

provided in paragraph (h)(3) of this

section, no enforcement action is to be

taken by the Secretary against a group

health plan that has sought to comply in

good faith with the requirements of

section 9812, with respect to a violation

that occurs before the earlier of—

(A) The first day of the first plan year

beginning on or after April 1, 1998; or

(B) January 1, 1999.

(ii) Compliance with the requirements

of this section is deemed to be good

faith compliance with the requirements

of section 9812.

(iii) The rules of this paragraph (h)(2)

are illustrated by the following

examples:

Example 1. (i) A group health plan has a

plan year that is the calendar year. The plan

complies with section 9812 in good faith

using assumptions inconsistent with

paragraph (b)(6) of this section relating to

weighted averages for categories of benefits.

(ii) In this Example 1, no enforcement

action may be taken against the plan with

respect to a violation resulting solely from

those assumptions and occurring before

January 1, 1999.

Example 2. (i) A group health plan has a

plan year that is the calendar year. For the

entire 1998 plan year, the plan applies a

$1,000,000 annual limit on medical/surgical

benefits and a $100,000 annual limit on

mental health benefits.

(ii) In this Example 2, the plan has not

sought to comply with the requirements of

section 9812 in good faith, and this

paragraph (h)(2) does not apply.

(3) Transition period for increased

cost exemption—(i) In general. No

enforcement action will be taken against

a group health plan that is subject to the

requirements of this section based on a

violation of this section that occurs

before April 1, 1998 solely because the

plan claims the increased cost

exemption under section 9812(c)(2)

based on assumptions inconsistent with

the rules under paragraph (f) of this

section, provided that a plan

amendment that complies with the

requirements of paragraph (b)(1)(i) of

this section is adopted and effective no

later than March 31, 1998 and the plan

complies with the notice requirements

in paragraph (h)(3)(ii) of this section.

(ii) Notice of plan’s use of transition

period. (A) A group health plan satisfies

the requirements of this paragraph

(h)(3)(ii) only if the plan provides notice

to the applicable federal agency and

posts the notice at the location(s) where

documents must be made available for

examination by participants and

beneficiaries under section 104(b)(2) of

the Employee Retirement Income

Security Act of 1974, and the

regulations thereunder (29 CFR

2520.104b–1(b)(3)). The notice must

indicate the plan’s decision to use the

transition period in paragraph (h)(3)(i)

of this section by 30 days after the first

day of the plan year beginning on or

after January 1, 1998, but in no event

later than March 31, 1998. For a group

health plan that is a church plan (as

defined in section 414(e)), the

applicable federal agency is the

Department of the Treasury. For a group

health plan that is not a church plan,

see 29 CFR 2590.712(h)(3)(ii). The

notice must include—

(1) The name of the plan and the plan

number (PN);
Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations 66957

(2) The name, address, and telephone

number of the plan administrator;

(3) For single-employer plans, the

name, address, and telephone number of

the plan sponsor (if different from the

plan administrator) and the plan

sponsor’s employer identification

number (EIN);

(4) The name and telephone number

of the individual to contact for further

information; and

(5) The signature of the plan

administrator and the date of the

signature.

(B) The notice must be provided at no

charge to participants or their

representative within 15 days after

receipt of a written or oral request for

such notification, but in no event before

the notice has been sent to the

applicable federal agency.

(i) Sunset. This section does not apply

to benefits for services furnished on or

after September 30, 2001.

Dated: December 16, 1997.

Michael P. Dolan,

Deputy Commissioner of Internal Revenue.

Approved: December 16, 1997.

Donald C. Lubick,

Acting Assistant Secretary of the Treasury.

Pension and Welfare Benefits

Administration

29 CFR Chapter XXV

29 CFR Part 2590 is amended as

follows:

PART 2590—RULES AND

REGULATIONS FOR HEALTH

INSURANCE PORTABILITY AND

RENEWABILITY FOR GROUP HEALTH

PLANS

1. The authority citation for Part 2590

is revised to read as follows:

Authority: Secs. 107, 209, 505, 701–703,

711, 712, and 731–734 of ERISA (29 U.S.C.

1027, 1059, 1135, 1171–1173, 1181, 1182,

and 1191–1194), as amended by Pub. L. 104–

191, 110 Stat. 1936 and Pub. L. 104–204, 110

Stat. 2944; and Secretary of Labor’s Order No.

1–87, 52 FR 13139, April 21, 1987.

Subpart B—Other Requirements

2. Section 2590.712 is revised to read

as follows:

§ 2590.712 Parity in the application of

certain limits to mental health benefits.

(a) Definitions. For purposes of this

section, except where the context

clearly indicates otherwise, the

following definitions apply:

Aggregate lifetime limit means a

dollar limitation on the total amount of

specified benefits that may be paid

under a group health plan (or group

health insurance coverage offered in

connection with such a plan) for an

individual (or for a group of individuals

considered a single unit in applying this

dollar limitation, such as a family or an

employee plus spouse).

Annual limit means a dollar

limitation on the total amount of

specified benefits that may be paid in a

12-month period under a plan (or group

health insurance coverage offered in

connection with such a plan) for an

individual (or for a group of individuals

considered a single unit in applying this

dollar limitation, such as a family or an

employee plus spouse).

Medical/surgical benefits means

benefits for medical or surgical services,

as defined under the terms of the plan

or group health insurance coverage, but

does not include mental health benefits.

Mental health benefits means benefits

for mental health services, as defined

under the terms of the plan or group

health insurance coverage, but does not

include benefits for treatment of

substance abuse or chemical

dependency.

(b) Requirements regarding limits on

benefits—(1)—general—(i) General

parity requirement. A group health plan

(or health insurance coverage offered by

an issuer in connection with a group

health plan) that provides both medical/

surgical benefits and mental health

benefits must comply with paragraph

(b)(2), (3), or (6) of this section.

(ii) Exception. The rule in paragraph

(b)(1)(i) of this section does not apply if

a plan, or coverage, satisfies the

requirements of paragraph (e) or (f) of

this section.

(2) Plan with no limit or limits on less

than one-third of all medical/surgical

benefits. If a plan (or group health

insurance coverage) does not include an

aggregate lifetime or annual limit on any

medical/surgical benefits or includes

aggregate lifetime or annual limits that

apply to less than one-third of all

medical/surgical benefits, it may not

impose an aggregate lifetime or annual

limit, respectively, on mental health

benefits.

(3) Plan with a limit on at least twothirds of all medical/surgical benefits. If

a plan (or group health insurance

coverage) includes an aggregate lifetime

or annual limit on at least two-thirds of

all medical/surgical benefits, it must

either—

(i) Apply the aggregate lifetime or

annual limit both to the medical/

surgical benefits to which the limit

would otherwise apply and to mental

health benefits in a manner that does

not distinguish between the medical/

surgical and mental health benefits; or

(ii) Not include an aggregate lifetime

or annual limit on mental health

benefits that is less than the aggregate

lifetime or annual limit, respectively, on

the medical/surgical benefits.

(4) Examples. The rules of paragraphs

(b)(2) and (3) of this section are

illustrated by the following examples:

Example 1. (i) Prior to the effective date of

the mental health parity provisions, a group

health plan had no annual limit on medical/

surgical benefits and had a $10,000 annual

limit on mental health benefits. To comply

with the parity requirements of this

paragraph (b), the plan sponsor is

considering each of the following options:

(A) Eliminating the plan’s annual limit on

mental health benefits;

(B) Replacing the plan’s previous annual

limit on mental health benefits with a

$500,000 annual limit on all benefits

(including medical/surgical and mental

health benefits); and

(C) Replacing the plan’s previous annual

limit on mental health benefits with a

$250,000 annual limit on medical/surgical

benefits and a $250,000 annual limit on

mental health benefits.

(ii) In this Example 1, each of the three

options being considered by the plan sponsor

would comply with the requirements of this

section because they offer parity in the dollar

limits placed on medical/surgical and mental

health benefits.

Example 2. (i) Prior to the effective date of

the mental health parity provisions, a group

health plan had a $100,000 annual limit on

medical/surgical inpatient benefits, a $50,000

annual limit on medical/surgical outpatient

benefits, and a $100,000 annual limit on all

mental health benefits. To comply with the

parity requirements of this paragraph (b), the

plan sponsor is considering each of the

following options:

(A) Replacing the plan’s previous annual

limit on mental health benefits with a

$150,000 annual limit on mental health

benefits; and

(B) Replacing the plan’s previous annual

limit on mental health benefits with a

$100,000 annual limit on mental health

inpatient benefits and a $50,000 annual limit

on mental health outpatient benefits.

(ii) In this Example 2, each option under

consideration by the plan sponsor would

comply with the requirements of this section

because they offer parity in the dollar limits

placed on medical/surgical and mental

health benefits.

Example 3. (i) A group health plan that is

subject to the requirements of this section has

no aggregate lifetime or annual limit for

either medical/surgical benefits or mental

health benefits. While the plan provides

medical/surgical benefits with respect to both

network and out-of-network providers, it

does not provide mental health benefits with

respect to out-of-network providers.

(ii) In this Example 3, the plan complies

with the requirements of this section because

they offer parity in the dollar limits placed

on medical/surgical and mental health

benefits.

Example 4. (i) Prior to the effective date of

the mental health parity provisions, a group

health plan had an annual limit on medical/

surgical benefits and a separate but identical
66958 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations

annual limit on mental health benefits. The

plan included benefits for treatment of

substance abuse and chemical dependency in

its definition of mental health benefits.

Accordingly, claims paid for treatment of

substance abuse and chemical dependency

were counted in applying the annual limit on

mental health benefits. To comply with the

parity requirements of this paragraph (b), the

plan sponsor is considering each of the

following options:

(A) Making no change in the plan so that

claims paid for treatment of substance abuse

and chemical dependency continue to count

in applying the annual limit on mental health

benefits;

(B) Amending the plan to count claims

paid for treatment of substance abuse and

chemical dependency in applying the annual

limit on medical/surgical benefits (rather

than counting those claims in applying the

annual limit on mental health benefits);

(C) Amending the plan to provide a new

category of benefits for treatment of chemical

dependency and substance abuse that is

subject to a separate, lower limit and under

which claims paid for treatment of substance

abuse and chemical dependency are counted

only in applying the annual limit on this

separate category; and

(D) Amending the plan to eliminate

distinctions between medical/surgical

benefits and mental health benefits and

establishing an overall limit on benefits

offered under the plan under which claims

paid for treatment of substance abuse and

chemical dependency are counted with

medical/surgical benefits and mental health

benefits in applying the overall limit.

(ii) In this Example 4, the group health

plan is described in paragraph (b)(3) of this

section. Because mental health benefits are

defined in paragraph (a) of this section as

excluding benefits for treatment of substance

abuse and chemical dependency, the

inclusion of benefits for treatment of

substance abuse and chemical dependency in

applying an aggregate lifetime limit or annual

limit on mental health benefits under option

(A) of this Example 4 would not comply with

the requirements of paragraph (b)(3) of this

section. However, options (B), (C), and (D) of

this Example 4 would comply with the

requirements of paragraph (b)(3) of this

section because they offer parity in the dollar

limits placed on medical/surgical and mental

health benefits.

(5) Determining one-third and twothirds of all medical/surgical benefits.

For purposes of this paragraph (b), the

determination of whether the portion of

medical/surgical benefits subject to a

limit represents one-third or two-thirds

of all medical/surgical benefits is based

on the dollar amount of all plan

payments for medical/surgical benefits

expected to be paid under the plan for

the plan year (or for the portion of the

plan year after a change in plan benefits

that affects the applicability of the

aggregate lifetime or annual limits). Any

reasonable method may be used to

determine whether the dollar amounts

expected to be paid under the plan will

constitute one-third or two-thirds of the

dollar amount of all plan payments for

medical/surgical benefits.

(6) Plan not described in paragraph

(b)(2) or (3) of this section—(i) In

general. A group health plan (or group

health insurance coverage) that is not

described in paragraph (b)(2) or (3) of

this section, must either—

(A) Impose no aggregate lifetime or

annual limit, as appropriate, on mental

health benefits; or

(B) Impose an aggregate lifetime or

annual limit on mental health benefits

that is no less than an average limit

calculated for medical/surgical benefits

in the following manner. The average

limit is calculated by taking into

account the weighted average of the

aggregate lifetime or annual limits, as

appropriate, that are applicable to the

categories of medical/surgical benefits.

Limits based on delivery systems, such

as inpatient/outpatient treatment or

normal treatment of common, low-cost

conditions (such as treatment of normal

births), do not constitute categories for

purposes of this paragraph (b)(6)(i)(B).

In addition, for purposes of determining

weighted averages, any benefits that are

not within a category that is subject to

a separately-designated limit under the

plan are taken into account as a single

separate category by using an estimate

of the upper limit on the dollar amount

that a plan may reasonably be expected

to incur with respect to such benefits,

taking into account any other applicable

restrictions under the plan.

(ii) Weighting. For purposes of this

paragraph (b)(6), the weighting

applicable to any category of medical/

surgical benefits is determined in the

manner set forth in paragraph (b)(5) of

this section for determining one-third or

two-thirds of all medical/surgical

benefits.

(iii) Example. The rules of this

paragraph (b)(6) are illustrated by the

following example:

Example. (i) A group health plan that is

subject to the requirements of this section

includes a $100,000 annual limit on medical/

surgical benefits related to cardio-pulmonary

diseases. The plan does not include an

annual limit on any other category of

medical/surgical benefits. The plan

determines that 40% of the dollar amount of

plan payments for medical/surgical benefits

are related to cardio-pulmonary diseases. The

plan determines that $1,000,000 is a

reasonable estimate of the upper limit on the

dollar amount that the plan may incur with

respect to the other 60% of payments for

medical/surgical benefits.

(ii) In this Example, the plan is not

described in paragraph (b)(3) of this section

because there is not one annual limit that

applies to at least two-thirds of all medical/

surgical benefits. Further, the plan is not

described in paragraph (b)(2) of this section

because more than one-third of all medical/

surgical benefits are subject to an annual

limit. Under this paragraph (b)(6), the plan

sponsor can choose either to include no

annual limit on mental health benefits, or to

include an annual limit on mental health

benefits that is not less than the weighted

average of the annual limits applicable to

each category of medical/surgical benefits. In

this example, the minimum weighted average

annual limit that can be applied to mental

health benefits is $640,000 (40% x $100,000

+ 60% x $1,000,000 = $640,000).

(c) Rule in the case of separate benefit

packages. If a group health plan offers

two or more benefit packages, the

requirements of this section, including

the exemption provisions in paragraph

(f) of this section, apply separately to

each benefit package. Examples of a

group health plan that offers two or

more benefit packages include a group

health plan that offers employees a

choice between indemnity coverage or

HMO coverage, and a group health plan

that provides one benefit package for

retirees and a different benefit package

for current employees.

(d) Applicability—(1) Group health

plans. The requirements of this section

apply to a group health plan offering

both medical/surgical benefits and

mental health benefits regardless of

whether the mental health benefits are

administered separately under the plan.

(2) Health insurance issuers. The

requirements of this section apply to a

health insurance issuer offering health

insurance coverage for both medical/

surgical benefits and mental health

benefits in connection with a group

health plan.

(3) Scope. This section does not—

(i) Require a group health plan (or

health insurance issuer offering

coverage in connection with a group

health plan) to provide any mental

health benefits; or

(ii) Affect the terms and conditions

(including cost sharing, limits on the

number of visits or days of coverage,

requirements relating to medical

necessity, requiring prior authorization

for treatment, or requiring primary care

physicians’ referrals for treatment)

relating to the amount, duration, or

scope of the mental health benefits

under the plan (or coverage) except as

specifically provided in paragraph (b) of

this section.

(e) Small employer exemption—(1) In

general. The requirements of this

section do not apply to a group health

plan (or health insurance issuer offering

coverage in connection with a group

health plan) for a plan year of a small

employer. For purposes of this

paragraph (e), the term small employer

means, in connection with a group
Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations 66959

health plan with respect to a calendar

year and a plan year, an employer who

employed an average of at least two but

not more than 50 employees on business

days during the preceding calendar year

and who employs at least two

employees on the first day of the plan

year. See section 732(a) of the Act and

§ 2590.732(a), which provide that this

section (and certain other sections) does

not apply to any group health plan (and

health insurance issuer offering

coverage in connection with a group

health plan) for any plan year if, on the

first day of the plan year, the plan has

fewer than two participants who are

current employees.

(2) Rules in determining employer

size. For purposes of paragraph (e)(1) of

this section—

(i) All persons treated as a single

employer under subsections (b), (c), (m),

and (o) of section 414 of the Internal

Revenue Code of 1986 (26 U.S.C. 414)

are treated as one employer;

(ii) If an employer was not in

existence throughout the preceding

calendar year, whether it is a small

employer is determined based on the

average number of employees the

employer reasonably expects to employ

on business days during the current

calendar year; and

(iii) Any reference to an employer for

purposes of the small employer

exemption includes a reference to a

predecessor of the employer.

(f) Increased cost exemption—(1) In

general. A group health plan (or health

insurance coverage offered in

connection with a group health plan) is

not subject to the requirements of this

section if the requirements of this

paragraph (f) are satisfied. If a plan

offers more than one benefit package,

this paragraph (f) applies separately to

each benefit package. Except as

provided in paragraph (h) of this

section, a plan must comply with the

requirements of paragraph (b)(1)(i) of

this section for the first plan year

beginning on or after January 1, 1998,

and must continue to comply with the

requirements of paragraph (b)(1)(i) of

this section until the plan satisfies the

requirements in this paragraph (f). In no

event is the exemption of this paragraph

(f) effective until 30 days after the notice

requirements in paragraph (f)(3) of this

section are satisfied. If the requirements

of this paragraph (f) are satisfied with

respect to a plan, the exemption

continues in effect (at the plan’s

discretion) until September 30, 2001,

even if the plan subsequently purchases

a different policy from the same or a

different issuer and regardless of any

other changes to the plan’s benefit

structure.

(2) Calculation of the one-percent

increase—(i) Ratio. A group health plan

(or group health insurance coverage)

satisfies the requirements of this

paragraph (f)(2) if the application of

paragraph (b)(1)(i) of this section to the

plan (or to such coverage) results in an

increase in the cost under the plan (or

for such coverage) of at least one

percent. The application of paragraph

(b)(1)(i) of this section results in an

increased cost of at least one percent

under a group health plan (or for such

coverage) only if the ratio below equals

or exceeds 1.01000. The ratio is

determined as follows:

(A) The incurred expenditures during

the base period, divided by,

(B) The incurred expenditures during

the base period, reduced by—

(1) The claims incurred during the

base period that would have been

denied under the terms of the plan

absent plan amendments required to

comply with this section; and

(2) Administrative expenses

attributable to complying with the

requirements of this section.

(ii) Formula. The ratio of paragraph

(f)(2)(i) of this section is expressed

mathematically as follows:

IE

IE CE AE − +

≥

( )

1 01000 .

(A) IE means the incurred

expenditures during the base period.

(B) CE means the claims incurred

during the base period that would have

been denied under the terms of the plan

absent plan amendments required to

comply with this section

(C) AE means administrative costs

related to claims in CE and other

administrative costs attributable to

complying with the requirements of this

section.

(iii) Incurred expenditures. Incurred

expenditures means actual claims

incurred during the base period and

reported within two months following

the base period, and administrative

costs for all benefits under the group

health plan, including mental health

benefits and medical/surgical benefits,

during the base period. Incurred

expenditures do not include premiums.

(iv) Base period. Base period means

the period used to calculate whether the

plan may claim the one-percent

increased cost exemption in this

paragraph (f). The base period must

begin on the first day in any plan year

that the plan complies with the

requirements of paragraph (b)(1)(i) of

this section and must extend for a

period of at least six consecutive

calendar months. However, in no event

may the base period begin prior to

September 26, 1996 (the date of

enactment of the Mental Health Parity

Act (Pub. L. 104–204, 110 Stat. 2944)).

(v) Rating pools. For plans that are

combined in a pool for rating purposes,

the calculation under this paragraph

(f)(2) for each plan in the pool for the

base period is based on the incurred

expenditures of the pool, whether or not

all the plans in the pool have

participated in the pool for the entire

base period. (However, only the plans

that have complied with paragraph

(b)(1)(i) of this section for at least six

months as a member of the pool satisfy

the requirements of this paragraph

(f)(2).) Otherwise, the calculation under

this paragraph (f)(2) for each plan is

calculated by the plan administrator (or

issuer) based on the incurred

expenditures of the plan.

(vi) Examples. The rules of this

paragraph (f)(2) are illustrated by the

following examples:

EXAMPLE 1. (i) A group health plan has a

plan year that is the calendar year. The plan

satisfies the requirements of paragraph

(b)(1)(i) of this section as of January 1, 1998.

On September 15, 1998, the plan determines

that $1,000,000 in claims have been incurred

during the period between January 1, 1998

and June 30, 1998 and reported by August 30,

1998. The plan also determines that $100,000

in administrative costs have been incurred

for all benefits under the group health plan,

including mental health benefits. Thus, the

plan determines that its incurred

expenditures for the base period are

$1,100,000. The plan also determines that the

claims incurred during the base period that

would have been denied under the terms of

the plan absent plan amendments required to

comply with this section are $40,000 and that

administrative expenses attributable to

complying with the requirements of this

section are $10,000. Thus, the total amount

of expenditures for the base period had the

plan not been amended to comply with the

requirements of paragraph (b)(1)(i) of this

section are $1,050,000 ($1,100,000 ¥

($40,000 + $10,000) = $1,050,000).

(ii) In this Example 1, the plan satisfies the

requirements of this paragraph (f)(2) because

the application of this section results in an

increased cost of at least one percent under

the terms of the plan ($1,100,000/

$1,050,000 = 1.04762).

EXAMPLE 2. (i) A health insurance issuer

sells a group health insurance policy that is

rated on a pooled basis and is sold to 30

group health plans. One of the group health

plans inquires whether it qualifies for the

one-percent increased cost exemption. The

issuer performs the calculation for the pool

as a whole and determines that the

application of this section results in an

increased cost of 0.500 percent (for a ratio

under this paragraph (f)(2) of 1.00500) for the

pool. The issuer informs the requesting plan

and the other plans in the pool of the

calculation.

(ii) In this Example 2, none of the plans

satisfy the requirements of this paragraph
66960 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations

(f)(2) and a plan that purchases a policy not

complying with the requirements of

paragraph (b)(1)(i) of this section violates the

requirements of this section. In addition, an

issuer that issues to any of the plans in the

pool a policy not complying with the

requirements of paragraph (b)(1)(i) of this

section violates the requirements of this

section.

EXAMPLE 3. (i) A partially insured plan is

collecting the information to determine

whether it qualifies for the exemption. The

plan administrator determines the incurred

expenses for the base period for the selffunded portion of the plan to be $2,000,000

and the administrative expenses for the base

period for the self-funded portion to be

$200,000. For the insured portion of the plan,

the plan administrator requests data from the

insurer. For the insured portion of the plan,

the plan’s own incurred expenses for the base

period are $1,000,000 and the administrative

expenses for the base period are $100,000.

The plan administrator determines that

under the self-funded portion of the plan, the

claims incurred for the base period that

would have been denied under the terms of

the plan absent the amendment are $0

because the self-funded portion does not

cover mental health benefits and the plan’s

administrative costs attributable to

complying with the requirements of this

section are $1,000. The issuer determines

that under the insured portion of the plan,

the claims incurred for the base period that

would have been denied under the terms of

the plan absent the amendment are $25,000

and the administrative costs attributable to

complying with the requirements of this

section are $1,000. Thus, the total incurred

expenditures for the plan for the base period

are $3,300,000 ($2,000,000 + $200,000 +

$1,000,000 + $100,000 = $3,300,000) and the

total amount of expenditures for the base

period had the plan not been amended to

comply with the requirements of paragraph

(b)(1)(i) of this section are $3,273,000

($3,300,000¥($0 + $1,000 + $25,000 +

$1,000) = $3,273,000).

(ii) In this Example 3, the plan does not

satisfy the requirements of this paragraph

(f)(2) because the application of this section

does not result in an increased cost of at least

one percent under the terms of the plan

($3,300,000/$3,273,000 = 1.00825).

(3) Notice of exemption—(i)

Participants and beneficiaries—(A) In

general. A group health plan must

notify participants and beneficiaries of

the plan’s decision to claim the onepercent increased cost exemption. The

notice must include the following

information:

(1) A statement that the plan is

exempt from the requirements of this

section and a description of the basis for

the exemption;

(2) The name and telephone number

of the individual to contact for further

information;

(3) The plan name and plan number

(PN);

(4) The plan administrator’s name,

address, and telephone number;

(5) For single-employer plans, the

plan sponsor’s name, address, and

telephone number (if different from

paragraph (f)(3)(i)(A)(3) of this section)

and the plan sponsor’s employer

identification number (EIN);

(6) The effective date of the

exemption;

(7) The ability of participants and

beneficiaries to contact the plan

administrator to see how benefits may

be affected as a result of the plan’s claim

of the exemption; and

(8) The availability, upon request and

free of charge, of a summary of the

information required under paragraph

(f)(4) of this section.

(B) Use of summary of material

reductions in covered services or

benefits. A plan may satisfy the

requirements of paragraph (f)(3)(i)(A) of

this section by providing participants

and beneficiaries (in accordance with

paragraph (f)(3)(i)(C) of this section)

with a summary of material reductions

in covered services or benefits required

under § 2520.104b–3(d) that also

includes the information of this

paragraph (f)(3)(i). However, in all cases,

the exemption is not effective until 30

days after notice has been sent.

(C) Delivery. The notice described in

this paragraph (f)(3)(i) is required to be

provided to all participants and

beneficiaries. The notice may be

furnished by any method of delivery

that satisfies the requirements of section

104(b)(1) of ERISA (e.g., first-class mail).

If the notice is provided to the

participant at the participant’s last

known address, then the requirements

of this paragraph (f)(3)(i) are satisfied

with respect to the participant and all

beneficiaries residing at that address. If

a beneficiary’s last known address is

different from the participant’s last

known address, a separate notice is

required to be provided to the

beneficiary at the beneficiary’s last

known address.

(D) Example. The rules of this

paragraph (f)(3)(i) are illustrated by the

following example:

Example. (i) A group health plan has a

plan year that is the calendar year and has

an open enrollment period every November

1 through November 30. The plan determines

on September 15 that it satisfies the

requirements of paragraph (f)(2) of this

section. As part of its open enrollment

materials, the plan mails, on October 15, to

all participants and beneficiaries a notice

satisfying the requirements of this paragraph

(f)(3)(i).

(ii) In this Example, the plan has sent the

notice in a manner that complies with this

paragraph (f)(3)(i).

(ii) Federal agencies—(A) Church

plans. A church plan (as defined in

section 414(e) of the Internal Revenue

Code) claiming the exemption of this

paragraph (f) for any benefit package

must provide notice to the Department

of the Treasury. This requirement is

satisfied if the plan sends a copy, to the

address designated by the Secretary in

generally applicable guidance, of the

notice described in paragraph (f)(3)(i) of

this section identifying the benefit

package to which the exemption

applies.

(B) Group health plans subject to Part

7 of Subtitle B of Title I of ERISA. A

group health plan subject to Part 7 of

Subtitle B of Title I of ERISA, and

claiming the exemption of this

paragraph (f) for any benefit package,

must provide notice to the Department

of Labor. This requirement is satisfied if

the plan sends a copy, to the address

designated by the Secretary in generally

applicable guidance, of the notice

described in paragraph (f)(3)(i) of this

section identifying the benefit package

to which the exemption applies.

(C) Nonfederal governmental plans. A

group health plan that is a nonfederal

governmental plan claiming the

exemption of this paragraph (f) for any

benefit package must provide notice to

the Department of Health and Human

Services (HHS). This requirement is

satisfied if the plan sends a copy, to the

address designated by the Secretary in

generally applicable guidance, of the

notice described in paragraph (f)(3)(i) of

this section identifying the benefit

package to which the exemption

applies.

(4) Availability of documentation. The

plan (or issuer) must make available to

participants and beneficiaries (or their

representatives), on request and at no

charge, a summary of the information on

which the exemption was based. An

individual who is not a participant or

beneficiary and who presents a notice

described in paragraph (f)(3)(i) of this

section is considered to be a

representative. A representative may

request the summary of information by

providing the plan a copy of the notice

provided to the participant under

paragraph (f)(3)(i) of this section with

any individually identifiable

information redacted. The summary of

information must include the incurred

expenditures, the base period, the dollar

amount of claims incurred during the

base period that would have been

denied under the terms of the plan

absent amendments required to comply

with paragraph (b)(1)(i) of this section,

the administrative costs related to those

claims, and other administrative costs

attributable to complying with the

requirements of this section. In no event

should the summary of information
Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations 66961

include any individually identifiable

information.

(g) Special rules for group health

insurance coverage—(1) Sale of

nonparity policies. An issuer may sell a

policy without parity (as described in

paragraph (b) of this section) only to a

plan that meets the requirements of

paragraphs (e) or (f) of this section.

(2) Duration of exemption. After a

plan meets the requirements of

paragraph (f) of this section, the plan

may change issuers without having to

meet the requirements of paragraph (f)

of this section again before September

30, 2001.

(h) Effective dates—(1) In general. The

requirements of this section are

applicable for plan years beginning on

or after January 1, 1998.

(2) Limitation on actions. (i) Except as

provided in paragraph (h)(3) of this

section, no enforcement action is to be

taken by the Secretary against a group

health plan that has sought to comply in

good faith with the requirements of

section 712 of the Act, with respect to

a violation that occurs before the earlier

of—

(A) The first day of the first plan year

beginning on or after April 1, 1998; or

(B) January 1, 1999.

(ii) Compliance with the requirements

of this section is deemed to be good

faith compliance with the requirements

of section 712 of Part 7 of Subtitle B of

Title I of ERISA.

(iii) The rules of this paragraph (h)(2)

are illustrated by the following

examples:

Example 1. (i) A group health plan has a

plan year that is the calendar year. The plan

complies with section 712 of Part 7 of

Subtitle B of Title I of ERISA in good faith

using assumptions inconsistent with

paragraph (b)(6) of this section relating to

weighted averages for categories of benefits.

(ii) In this Example 1, no enforcement

action may be taken against the plan with

respect to a violation resulting solely from

those assumptions and occurring before

January 1, 1999.

Example 2. (i) A group health plan has a

plan year that is the calendar year. For the

entire 1998 plan year, the plan applies a

$1,000,000 annual limit on medical/surgical

benefits and a $100,000 annual limit on

mental health benefits.

(ii) In this Example 2, the plan has not

sought to comply with the requirements of

section 712 of the Act in good faith and this

paragraph (h)(2) does not apply.

(3) Transition period for increased

cost exemption—(i) In general. No

enforcement action will be taken against

a group health plan that is subject to the

requirements of this section based on a

violation of this section that occurs

before April 1, 1998 solely because the

plan claims the increased cost

exemption under section 712(c)(2) of

Part 7 of Subtitle B of Title I of ERISA

based on assumptions inconsistent with

the rules under paragraph (f) of this

section, provided that a plan

amendment that complies with the

requirements of paragraph (b)(1)(i) of

this section is adopted and effective no

later than March 31, 1998 and the plan

complies with the notice requirements

in paragraph (h)(3)(ii) of this section.

(ii) Notice of plan’s use of transition

period. (A) A group health plan satisfies

the requirements of this paragraph

(h)(3)(ii) only if the plan provides notice

to the applicable federal agency and

posts such notice at the location(s)

where documents must be made

available for examination by

participants and beneficiaries under

section 104(b)(2) of ERISA and the

regulations thereunder (29 CFR

2520.104b–1(b)(3)). The notice must

indicate the plan’s decision to use the

transition period in paragraph (h)(3)(i)

of this section by 30 days after the first

day of the plan year beginning on or

after January 1, 1998, but in no event

later than March 31, 1998. For a group

health plan that is a church plan, the

applicable federal agency is the

Department of the Treasury. For a group

health plan that is subject to Part 7 of

Subtitle B of Title I of ERISA, the

applicable federal agency is the

Department of Labor. For a group health

plan that is a nonfederal governmental

plan, the applicable federal agency is

the Department of Health and Human

Services. The notice must include—

(1) The name of the plan and the plan

number (PN);

(2) The name, address, and telephone

number of the plan administrator;

(3) For single-employer plans, the

name, address, and telephone number of

the plan sponsor (if different from the

plan administrator) and the plan

sponsor’s employer identification

number (EIN);

(4) The name and telephone number

of the individual to contact for further

information; and

(5) The signature of the plan

administrator and the date of the

signature.

(B) The notice must be provided at no

charge to participants or their

representative within 15 days after

receipt of a written or oral request for

such notification, but in no event before

the notice has been sent to the

applicable federal agency.

(i) Sunset. This section does not apply

to benefits for services furnished on or

after September 30, 2001.

Signed at Washington, DC, this 16th day of

December, 1997.

Olena Berg,

Assistant Secretary, Pension Welfare Benefits

Administration, U.S. Department of Labor.

Health Care Financing Administration

45 CFR Subtitle A, Subchapter B

45 CFR Part 146 is amended as

follows:

PART 146—REQUIREMENTS FOR THE

GROUP HEALTH INSURANCE

MARKET

1. The authority citation for Part 146

is revised to read as follows:

Authority: Secs. 2701 through 2763, 2791,

and 2792 of the PHS Act (42 U.S.C. 300gg

through 300gg–63, 300gg–91, and 300gg–92).

2. A new Subpart C is added to Part

146 to read as follows:

Subpart C—Requirements Related to

Benefits

§ 146.136 Parity in the application of

certain limits to mental health benefits.

(a) Definitions. For purposes of this

section, except where the context

clearly indicates otherwise, the

following definitions apply:

Aggregate lifetime limit means a

dollar limitation on the total amount of

specified benefits that may be paid

under a group health plan (or group

health insurance coverage offered in

connection with such plan) for an

individual (or for a group of individuals

considered a single unit in applying this

dollar limitation, such as a family or an

employee plus spouse).

Annual limit means a dollar

limitation on the total amount of

specified benefits that may be paid in a

12-month period under a plan (or group

health insurance coverage offered in

connection with such plan) for an

individual (or for a group of individuals

considered a single unit in applying this

dollar limitation, such as a family or an

employee plus spouse).

Medical/surgical benefits means

benefits for medical or surgical services,

as defined under the terms of the plan

or group health insurance coverage, but

does not include mental health benefits.

Mental health benefits means benefits

for mental health services, as defined

under the terms of the plan or group

health insurance coverage, but does not

include benefits for treatment of

substance abuse or chemical

dependency.

(b) Requirements regarding limits on

benefits—(1) In general—(i) General

parity requirement. A group health plan

(or health insurance coverage offered by

an issuer in connection with a group
66962 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations

health plan) that provides both medical/

surgical benefits and mental health

benefits must comply with paragraph

(b)(2), paragraph (b)(3), or paragraph

(b)(6) of this section.

(ii) Exception. The rule in paragraph

(b)(1)(i) of this section does not apply if

a plan, or coverage, satisfies the

requirements of paragraph (e) or

paragraph (f) of this section.

(2) Plan with no limit or limits on less

than one-third of all medical/surgical

benefits. If a plan (or group health

insurance coverage) does not include an

aggregate lifetime or annual limit on any

medical/surgical benefits or includes

aggregate lifetime or annual limits that

apply to less than one-third of all

medical/surgical benefits, it may not

impose an aggregate lifetime or annual

limit, respectively, on mental health

benefits.

(3) Plan with a limit on at least twothirds of all medical/surgical benefits. If

a plan (or group health insurance

coverage) includes an aggregate lifetime

or annual limit on at least two-thirds of

all medical/surgical benefits, it must

either—

(i) Apply the aggregate lifetime or

annual limit both to the medical/

surgical benefits to which the limit

would otherwise apply and to mental

health benefits in a manner that does

not distinguish between the medical/

surgical and mental health benefits; or

(ii) Not include an aggregate lifetime

or annual limit on mental health

benefits that is less than the aggregate

lifetime or annual limit, respectively, on

the medical/surgical benefits.

(4) Examples. The rules of paragraphs

(b) (2) and (3) of this section are

illustrated by the following examples:

Example 1. (i) Prior to the effective date of

the mental health parity provisions, a group

health plan had no annual limit on medical/

surgical benefits and had a $10,000 annual

limit on mental health benefits. To comply

with the parity requirements of this

paragraph (b), the plan sponsor is

considering each of the following options:

(A) Eliminating the plan’s annual limit on

mental health benefits;

(B) Replacing the plan’s previous annual

limit on mental health benefits with a

$500,000 annual limit on all benefits

(including medical/surgical and mental

health benefits); and

(C) Replacing the plan’s previous annual

limit on mental health benefits with a

$250,000 annual limit on medical/surgical

benefits and a $250,000 annual limit on

mental health benefits.

(ii) In this Example 1, each of the three

options being considered by the plan sponsor

would comply with the requirements of this

section because they offer parity in the dollar

limits placed on medical/surgical and mental

health benefits.

Example 2. (i) Prior to the effective date of

the mental health parity provisions, a group

health plan had a $100,000 annual limit on

medical/surgical inpatient benefits, a $50,000

annual limit on medical/surgical outpatient

benefits, and a $100,000 annual limit on all

mental health benefits. To comply with the

parity requirements of this paragraph (b), the

plan sponsor is considering each of the

following options:

(A) Replacing the plan’s previous annual

limit on mental health benefits with a

$150,000 annual limit on mental health

benefits; and

(B) Replacing the plan’s previous annual

limit on mental health benefits with a

$100,000 annual limit on mental health

inpatient benefits and a $50,000 annual limit

on mental health outpatient benefits.

(ii) In this Example 2, each option under

consideration by the plan sponsor would

comply with the requirements of this section

because they offer parity in the dollar limits

placed on medical/surgical and mental

health benefits.

Example 3. (i) A group health plan that is

subject to the requirements of this section has

no aggregate lifetime or annual limit for

either medical/surgical benefits or mental

health benefits. While the plan provides

medical/surgical benefits with respect to both

network and out-of-network providers, it

does not provide mental health benefits with

respect to out-of-network providers.

(ii) In this Example 3, the plan complies

with the requirements of this section because

they offer parity in the dollar limits placed

on medical/surgical and mental health

benefits.

Example 4. (i) Prior to the effective date of

the mental health parity provisions, a group

health plan had an annual limit on medical/

surgical benefits and a separate but identical

annual limit on mental health benefits. The

plan included benefits for treatment of

substance abuse and chemical dependency in

its definition of mental health benefits.

Accordingly, claims paid for treatment of

substance abuse and chemical dependency

were counted in applying the annual limit on

mental health benefits. To comply with the

parity requirements of this paragraph (b), the

plan sponsor is considering each of the

following options:

(A) Making no change in the plan so that

claims paid for treatment of substance abuse

and chemical dependency continue to count

in applying the annual limit on mental health

benefits;

(B) Amending the plan to count claims

paid for treatment of substance abuse and

chemical dependency in applying the annual

limit on medical/surgical benefits (rather

than counting those claims in applying the

annual limit on mental health benefits);

(C) Amending the plan to provide a new

category of benefits for treatment of chemical

dependency and substance abuse that is

subject to a separate, lower limit and under

which claims paid for treatment of substance

abuse and chemical dependency are counted

only in applying the annual limit on this

separate category; and

(D) Amending the plan to eliminate

distinctions between medical/surgical

benefits and mental health benefits and

establishing an overall limit on benefits

offered under the plan under which claims

paid for treatment of substance abuse and

chemical dependency are counted with

medical/surgical benefits and mental health

benefits in applying the overall limit.

(ii) In this Example 4, the group health

plan is described in paragraph (b)(3) of this

section. Because mental health benefits are

defined in paragraph (a) of this section as

excluding benefits for treatment of substance

abuse and chemical dependency, the

inclusion of benefits for treatment of

substance abuse and chemical dependency in

applying an aggregate lifetime limit or annual

limit on mental health benefits under option

(A) of this Example 4 would not comply with

the requirements of paragraph (b)(3) of this

section. However, options (B), (C), and (D) of

this Example 4 would comply with the

requirements of paragraph (b)(3) of this

section because they offer parity in the dollar

limits placed on medical/surgical and mental

health benefits.

(5) Determining one-third and twothirds of all medical/surgical benefits.

For purposes of this paragraph (b), the

determination of whether the portion of

medical/surgical benefits subject to a

limit represents one-third or two-thirds

of all medical/surgical benefits is based

on the dollar amount of all plan

payments for medical/surgical benefits

expected to be paid under the plan for

the plan year (or for the portion of the

plan year after a change in plan benefits

that affects the applicability of the

aggregate lifetime or annual limits). Any

reasonable method may be used to

determine whether the dollar amounts

expected to be paid under the plan will

constitute one-third or two-thirds of the

dollar amount of all plan payments for

medical/surgical benefits.

(6) Plan not described in paragraph

(b)(2) or paragraph (b)(3) of this

section—(i) In general. A group health

plan (or group health insurance

coverage) that is not described in

paragraph (b)(2) or paragraph (b)(3) of

this section, must either impose—

(A) No aggregate lifetime or annual

limit, as appropriate, on mental health

benefits; or

(B) An aggregate lifetime or annual

limit on mental health benefits that is

no less than an average limit for

medical/surgical benefits calculated in

the following manner. The average limit

is calculated by taking into account the

weighted average of the aggregate

lifetime or annual limits, as appropriate,

that are applicable to the categories of

medical/surgical benefits. Limits based

on delivery systems, such as inpatient/

outpatient treatment, or normal

treatment of common, low-cost

conditions (such as treatment of normal

births), do not constitute categories for

purposes of this paragraph (b)(6)(i)(B).

In addition, for purposes of determining
Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations 66963

weighted averages, any benefits that are

not within a category that is subject to

a separately-designated limit under the

plan are taken into account as a single

separate category by using an estimate

of the upper limit on the dollar amount

that a plan may reasonably be expected

to incur with respect to such benefits,

taking into account any other applicable

restrictions under the plan.

(ii) Weighting. For purposes of this

paragraph (b)(6), the weighting

applicable to any category of medical/

surgical benefits is determined in the

manner set forth in paragraph (b)(5) of

this section for determining one-third or

two-thirds of all medical/surgical

benefits.

(iii) Examples. The rules of this

paragraph (b)(6) are illustrated by the

following example:

Example. (i) A group health plan that is

subject to the requirements of this section

includes a $100,000 annual limit on medical/

surgical benefits related to cardio-pulmonary

diseases. The plan does not include an

annual limit on any other category of

medical/surgical benefits. The plan

determines that 40% of the dollar amount of

plan payments for medical/surgical benefits

are related to cardio-pulmonary diseases. The

plan determines that $1,000,000 is a

reasonable estimate of the upper limit on the

dollar amount that the plan may incur with

respect to the other 60% of payments for

medical/surgical benefits.

(ii) In this Example, the plan is not

described in paragraph (b)(3) of this section

because there is not one annual limit that

applies to at least two-thirds of all medical/

surgical benefits. Further, the plan is not

described in paragraph (b)(2) of this section

because more than one-third of all medical/

surgical benefits are subject to an annual

limit. Under this paragraph (b)(6), the plan

sponsor can choose either to include no

annual limit on mental health benefits, or to

include an annual limit on mental health

benefits that is not less than the weighted

average of the annual limits applicable to

each category of medical/surgical benefits. In

this example, the minimum weighted average

annual limit that can be applied to mental

health benefits is $640,000 (40% ‘‘ $100,000

+ 60% ‘‘ $1,000,000 = $640,000).

(c) Rule in the case of separate benefit

packages. If a group health plan offers

two or more benefit packages, the

requirements of this section, including

the exemption provisions in paragraph

(f) of this section, apply separately to

each benefit package. Examples of a

group health plan that offers two or

more benefit packages include a group

health plan that offers employees a

choice between indemnity coverage or

HMO coverage, and a group health plan

that provides one benefit package for

retirees and a different benefit package

for current employees.

(d) Applicability—(1) Group health

plans. The requirements of this section

apply to a group health plan offering

both medical/surgical benefits and

mental health benefits regardless of

whether the mental health benefits are

administered separately under the plan.

(2) Health insurance issuers. The

requirements of this section apply to a

health insurance issuer offering health

insurance coverage for both medical/

surgical benefits and mental health

benefits in connection with a group

health plan.

(3) Scope. This section does not—

(i) Require a group health plan (or

health insurance issuer offering

coverage in connection with a group

health plan) to provide any mental

health benefits; or

(ii) Affect the terms and conditions

(including cost sharing, limits on the

number of visits or days of coverage,

requirements relating to medical

necessity, requiring prior authorization

for treatment, or requiring primary care

physicians’ referrals for treatment)

relating to the amount, duration, or

scope of the mental health benefits

under the plan (or coverage) except as

specifically provided in paragraph (b) of

this section.

(e) Small employer exemption—(1) In

general. The requirements of this

section do not apply to a group health

plan (or health insurance issuer offering

coverage in connection with a group

health plan) for a plan year of a small

employer. For purposes of this

paragraph (e), the term small employer

means, in connection with a group

health plan with respect to a calendar

year and a plan year, an employer who

employed an average of at least two but

not more than 50 employees on business

days during the preceding calendar year

and who employs at least two

employees on the first day of the plan

year. See regulations at § 146.145(a),

which provide that this section (and

certain other sections) does not apply to

any group health plan (and health

insurance issuer offering coverage in

connection with a group health plan) for

any plan year if, on the first day of the

plan year, the plan has fewer than two

participants who are current employees.

(2) Rules in determining employer

size. For purposes of paragraph (e)(1) of

this section—

(i) All persons treated as a single

employer under subsections (b), (c), (m),

and (o) of section 414 of the Internal

Revenue Code of 1986 (26 U.S.C. 414)

are treated as one employer;

(ii) If an employer was not in

existence throughout the preceding

calendar year, whether it is a small

employer is determined based on the

average number of employees the

employer reasonably expects to employ

on business days during the current

calendar year; and

(iii) Any reference to an employer for

purposes of the small employer

exemption includes a reference to a

predecessor of the employer.

(f) Increased cost exemption—(1) In

general. A group health plan (or health

insurance coverage offered in

connection with a group health plan) is

not subject to the requirements of this

section if the requirements of this

paragraph (f) are satisfied. If a plan

offers more than one benefit package,

this paragraph (f) applies separately to

each benefit package. Except as

provided in paragraph (h) of this

section, a plan must comply with the

requirements of paragraph (b)(1)(i) of

this section for the first plan year

beginning on or after January 1, 1998,

and must continue to comply with the

requirements of paragraph (b)(1)(i) of

this section until the plan satisfies the

requirements in this paragraph (f). In no

event is the exemption of this paragraph

(f) effective until 30 days after the notice

requirements in paragraph (f)(3) of this

section are satisfied. If the requirements

of this paragraph (f) are satisfied with

respect to a plan, the exemption

continues in effect (at the plan’s

discretion) until September 30, 2001,

even if the plan subsequently purchases

a different policy from the same or a

different issuer and regardless of any

other changes to the plan’s benefit

structure.

(2) Calculation of the one-percent

increase—(i) Ratio. A group health plan

(or group health insurance coverage)

satisfies the requirements of this

paragraph (f)(2) if the application of

paragraph (b)(1)(i) of this section to the

plan (or to such coverage) results in an

increase in the cost under the plan (or

for such coverage) of at least one

percent. The application of paragraph

(b)(1)(i) of this section results in an

increased cost of at least one percent

under a group health plan (or for such

coverage) only if the ratio below equals

or exceeds 1.01000. The ratio is

determined as follows:

(A) The incurred expenditures during

the base period, divided by,

(B) The incurred expenditures during

the base period, reduced by—

(1) The claims incurred during the

base period that would have been

denied under the terms of the plan

absent plan amendments required to

comply with this section, and

(2) Administrative expenses

attributable to complying with the

requirements of this section.

(ii) Formula. The ratio of paragraph

(f)(2)(i) is expressed mathematically as

follows:
66964 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations

IE

IE CE AE − +

≥

( )

1 01000 .

(A) IE means the incurred

expenditures during the base period.

(B) CE means the claims incurred

during the base period that would have

been denied under the terms of the plan

absent plan amendments required to

comply with this section.

(C) AE means administrative costs

related to claims in CE and other

administrative costs attributable to

complying with the requirements of this

section.

(iii) Incurred expenditures. Incurred

expenditures means actual claims

incurred during the base period and

reported within two months following

the base period, and administrative

costs for all benefits under the group

health plan, including mental health

benefits and medical/surgical benefits,

during the base period. Incurred

expenditures do not include premiums.

(iv) Base period. Base period means

the period used to calculate whether the

plan may claim the one-percent

increased cost exemption in this

paragraph (f). The base period must

begin on the first day in any plan year

that the plan complies with the

requirements of paragraph (b)(1)(i) of

this section and must extend for a

period of at least six consecutive

calendar months. However, in no event

may the base period begin prior to

September 26, 1996 (the date of

enactment of the Mental Health Parity

Act (Pub. L. 104–204, 110 Stat. 2944)).

(v) Rating pools. For plans that are

combined in a pool for rating purposes,

the calculation under this paragraph

(f)(2) for each plan in the pool for the

base period is based on the incurred

expenditures of the pool, whether or not

all the plans in the pool have

participated in the pool for the entire

base period. (However, only the plans

that have complied with paragraph

(b)(1)(i) of this section for at least six

months as a member of the pool satisfy

the requirements of this paragraph

(f)(2).) Otherwise, the calculation under

this paragraph (f)(2) for each plan is

calculated by the plan administrator (or

issuer) based on the incurred

expenditures of the plan.

(vi) Examples. The rules of this

paragraph (f)(2) are illustrated by the

following examples:

Example 1. (i) A group health plan has a

plan year that is the calendar year. The plan

satisfies the requirements of paragraph

(b)(1)(i) of this section as of January 1, 1998.

On September 15, 1998, the plan determines

that $1,000,000 in claims have been incurred

during the period between January 1, 1998

and June 30, 1998 and reported by August 30,

1998. The plan also determines that $100,000

in administrative costs have been incurred

for all benefits under the group health plan,

including mental health benefits. Thus, the

plan determines that its incurred

expenditures for the base period are

$1,100,000. The plan also determines that the

claims incurred during the base period that

would have been denied under the terms of

the plan absent plan amendments required to

comply with this section are $40,000 and that

administrative expenses attributable to

complying with the requirements of this

section are $10,000. Thus, the total amount

of expenditures for the base period had the

plan not been amended to comply with the

requirements of paragraph (b)(1)(i) of this

section are $1,050,000 ($1,100,000—($40,000

+ $10,000) = $1,050,000).

(ii) In this Example 1, the plan satisfies the

requirements of this paragraph (f)(2) because

the application of this section results in an

increased cost of at least one percent under

the terms of the plan ($1,100,000/$1,050,000

= 1.04762).

Example 2. (i) A health insurance issuer

sells a group health insurance policy that is

rated on a pooled-basis and is sold to 30

group health plans. One of the group health

plans inquires whether it qualifies for the one

percent increased cost exemption. The issuer

performs the calculation for the pool as a

whole and determines that the application of

this section results in an increased cost of

0.500 percent (for a ratio under this

paragraph (f)(2) of 1.00500) for the pool. The

issuer informs the requesting plan and the

other plans in the pool of the calculation.

(ii) In this Example 2, none of the plans

satisfy the requirements of this paragraph

(f)(2) and a plan that purchases a policy not

complying with the requirements of

paragraph (b)(1)(i) of this section violates the

requirements of this section. In addition, an

issuer that issues to any of the plans in the

pool a policy not complying with the

requirements of paragraph (b)(1)(i) of this

section violates the requirements of this

section.

Example 3. (i) A partially-insured plan is

collecting the information to determine

whether it qualifies for the exemption. The

plan administrator determines the incurred

expenses for the base period for the selffunded portion of the plan to be $2,000,000

and the administrative expenses for the base

period for the self-funded portion to be

$200,000. For the insured portion of the plan,

the plan administrator requests data from the

insurer. For the insured portion of the plan,

the plan’s own incurred expenses for the base

period are $1,000,000 and the administrative

expenses for the base period are $100,000.

The plan administrator determines that

under the self-funded portion of the plan, the

claims incurred for the base period that

would have been denied under the terms of

the plan absent the amendment are $0

because the self-funded portion does not

cover mental health benefits and the plan’s

administrative costs attributable to

complying with the requirements of this

section are $1,000. The issuer determines

that under the insured portion of the plan,

the claims incurred for the base period that

would have been denied under the terms of

the plan absent the amendment are $25,000

and the administrative costs attributable to

complying with the requirements of this

section are $1,000. Thus, the total incurred

expenditures for the plan for the base period

are $3,300,000 ($2,000,000 + $200,000 +

$1,000,000 + $100,000 = $3,300,000) and the

total amount of expenditures for the base

period had the plan not been amended to

comply with the requirements of paragraph

(b)(1)(i) of this section are $3,273,000

($3,300,000 ¥ ($0 + $1,000 + $25,000 +

$1,000) = $3,273,000).

(ii) In this Example 3, the plan does not

satisfy the requirements of this paragraph

(f)(2) because the application of this section

does not result in an increased cost of at least

one percent under the terms of the plan

($3,300,000/$3,273,000 = 1.00825).

(3) Notice of exemption—(i)

Participants and beneficiaries—(A) In

general. A group health plan must

notify participants and beneficiaries of

the plan’s decision to claim the one

percent increased cost exemption. The

notice must include the following

information:

(1) A statement that the plan is

exempt from the requirements of this

section and a description of the basis for

the exemption.

(2) The name and telephone number

of the individual to contact for further

information.

(3) The plan name and plan number

(PN).

(4) The plan administrator’s name,

address, and telephone number.

(5) For single-employer plans, the

plan sponsor’s name, address, and

telephone number (if different from

paragraph (f)(3)(i)(A)(3) of this section)

and the plan sponsor’s employer

identification number (EIN).

(6) The effective date of such

exemption.

(7) The ability of participants and

beneficiaries to contact the plan

administrator to see how benefits may

be affected as a result of the plan’s

election of the exemption.

(8) The availability, upon request and

free of charge, of a summary of the

information required under paragraph

(f)(4) of this section.

(B) Use of summary of material

reductions in covered services or

benefits. A plan may satisfy the

requirements of paragraph (f)(3)(i)(A) by

providing participants and beneficiaries

(in accordance with paragraph

(f)(3)(i)(C)) with a summary of material

reductions in covered services or

benefits consistent with Department of

Labor regulations at 29 CFR 2520.104b–

3(d) that also includes the information

of this paragraph (f)(3)(i). However, in

all cases, the exemption is not effective

until 30 days after notice has been sent.

(C) Delivery. The notice described in

this paragraph (f)(3)(i) is required to be
Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations 66965

provided to all participants and

beneficiaries. The notice may be

furnished by any method of delivery

that satisfies the requirements of section

104(b)(1) of ERISA (29 U.S.C.

1024(b)(1)) (e.g., first-class mail). If the

notice is provided to the participant at

the participant’s last known address,

then the requirements of this paragraph

(f)(3)(i) are satisfied with respect to the

participant and all beneficiaries residing

at that address. If a beneficiary’s last

known address is different from the

participant’s last known address, a

separate notice is required to be

provided to the beneficiary at the

beneficiary’s last known address.

(D) Example. The rules of this

paragraph (f)(3)(i) are illustrated by the

following example:

Example. (i) A group health plan has a

plan year that is the calendar year and has

an open enrollment period every November

1 through November 30. The plan determines

on September 15 that it satisfies the

requirements of paragraph (f)(2) of this

section. As part of its open enrollment

materials, the plan mails, on October 15, to

all participants and beneficiaries a notice

satisfying the requirements of this paragraph

(f)(3)(i).

(ii) In this Example, the plan has sent the

notice in a manner that complies with this

paragraph (f)(3)(i).

(ii) Federal agencies—(A) Church

plans. A church plan (as defined in

section 414(e) of the Internal Revenue

Code) claiming the exemption of this

paragraph (f) for any benefit package

must provide notice to the Department

of the Treasury. This requirement is

satisfied if the plan sends a copy, to the

address designated by the Secretary in

generally applicable guidance, of the

notice described in paragraph (f)(3)(i) of

this section identifying the benefit

package to which the exemption

applies.

(B) Group health plans subject to Part

7 of Subtitle B of Title I of ERISA. A

group health plan subject to Part 7 of

Subtitle B of Title I of ERISA, and

claiming the exemption of this

paragraph (f) for any benefit package,

must provide notice to the Department

of Labor. This requirement is satisfied if

the plan sends a copy, to the address

designated by the Secretary in generally

applicable guidance, of the notice

described in paragraph (f)(3)(i) of this

section identifying the benefit package

to which the exemption applies.

(C) Non-Federal governmental plans.

A group health plan that is a nonFederal governmental plan claiming the

exemption of this paragraph (f) for any

benefit package must provide notice to

the Department of Health and Human

Services (HHS). This requirement is

satisfied if the plan sends a copy, to the

address designated by the Secretary in

generally applicable guidance, of the

notice described in paragraph (f)(3)(i) of

this section identifying the benefit

package to which the exemption

applies.

(4) Availability of documentation. The

plan (or issuer) must make available to

participants and beneficiaries (or their

representatives), on request and at no

charge, a summary of the information on

which the exemption was based. An

individual who is not a participant or

beneficiary and who presents a notice

described in paragraph (f)(3)(i) of this

section is considered to be a

representative. A representative may

request the summary of information by

providing the plan a copy of the notice

provided to the participant under

paragraph (f)(3)(i) of this section with

any individually identifiable

information redacted. The summary of

information must include the incurred

expenditures, the base period, the dollar

amount of claims incurred during the

base period that would have been

denied under the terms of the plan

absent amendments required to comply

with paragraph (b)(1)(i) of this section,

the administrative costs related to those

claims, and other administrative costs

attributable to complying with the

requirements for the exemption. In no

event should the summary of

information include any individually

identifiable information.

(g) Special rules for group health

insurance coverage—(1) Sale of

nonparity policies. An issuer may sell a

policy without parity (as described in

paragraph (b) of this section) only to a

plan that meets the requirements of

paragraph (e) or paragraph (f) of this

section.

(2) Duration of exemption. After a

plan meets the requirements of

paragraph (f) of this section, the plan

may change issuers without having to

meet the requirements of paragraph (f)

of this section again before September

30, 2001.

(h) Effective dates—(1) In general. The

requirements of this section are

applicable for plan years beginning on

or after January 1, 1998.

(2) Limitation on actions. (i) Except as

provided in paragraph (h)(3) of this

section, no enforcement action is to be

taken by the Secretary against a group

health plan that has sought to comply in

good faith with the requirements of

section 2705 of the PHS Act, with

respect to a violation that occurs before

the earlier of—

(A) The first day of the first plan year

beginning on or after April 1, 1998; or

(B) January 1, 1999.

(ii) Compliance with the requirements

of this section is deemed to be good

faith compliance with the requirements

of section 2705 of the PHS Act.

(iii) The rules of this paragraph (h)(2)

are illustrated by the following

examples:

Example 1. (i) A group health plan has a

plan year that is the calendar year. The plan

complies with section 2705 of the PHS Act

in good faith using assumptions inconsistent

with paragraph (b)(6) of this section relating

to weighted averages for categories of

benefits.

(ii) In this Example 1, no enforcement

action may be taken against the plan with

respect to a violation resulting solely from

those assumptions and occurring before

January 1, 1999.

Example 2. (i) A group health plan has a

plan year that is the calendar year. For the

entire 1998 plan year, the plan applies a

$1,000,000 annual limit on medical/surgical

benefits and a $100,000 annual limit on

mental health benefits.

(ii) In this Example 2, the plan has not

sought to comply with the requirements of

section 2705 of the PHS Act in good faith and

this paragraph (h)(2) does not apply.

(3) Transition period for increased

cost exemption—(i) In general. No

enforcement action will be taken against

a group health plan that is subject to the

requirements of this section based on a

violation of this section that occurs

before April 1, 1998 solely because the

plan claims the increased cost

exemption under section 2705(c)(2) of

the PHS Act based on assumptions

inconsistent with the rules under

paragraph (f) of this section, provided

that a plan amendment that complies

with the requirements of paragraph

(b)(1)(i) of this section is adopted and

effective no later than March 31, 1998

and the plan complies with the notice

requirements in paragraph (h)(3)(ii) of

this section.

(ii) Notice of plan’s use of transition

period. (A) A group health plan satisfies

the requirements of this paragraph

(h)(3)(ii) only if the plan provides notice

to the applicable federal agency and

posts the notice at the location(s) where

documents must be made available for

examination by participants and

beneficiaries under section 104(b)(2) of

ERISA and the regulations thereunder

(29 CFR 2520.104b–1(b)(3)). The notice

must indicate the plan’s decision to use

the transition period in paragraph

(h)(3)(i) of this section by 30 days after

the first day of the plan year beginning

on or after January 1, 1998, but in no

event later than March 31, 1998. For a

group health plan that is a church plan,

the applicable federal agency is the

Department of the Treasury. For a group
66966 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations

health plan that is subject to Part 7 of

Subtitle B of Title I of ERISA, the

applicable federal agency is the

Department of Labor. For a group health

plan that is a nonfederal governmental

plan, the applicable federal agency is

the Department of Health and Human

Services. The notice must include—

(1) The name of the plan and the plan

number (PN);

(2) The name, address, and telephone

number of the plan administrator;

(3) For single-employer plans, the

name, address, and telephone number of

the plan sponsor (if different from the

plan administrator) and the plan

sponsor’s employer identification

number (EIN);

(4) The name and telephone number

of the individual to contact for further

information; and

(5) The signature of the plan

administrator and the date of the

signature.

(B) The notice must be provided at no

charge to participants or their

representative within 15 days after

receipt of a written or oral request for

such notification, but in no event before

the notice has been sent to the

applicable federal agency.

(i) Sunset. This section does not apply

to benefits for services furnished on or

after September 30, 2001.

Dated: December 16, 1997.

Nancy-Ann Min DeParle,

Administrator, Health Care Financing

Administration.

Dated: December 16, 1997.

Donna E. Shalala,

Secretary, Department of Health and Human

Services.

[FR Doc. 97–33262 Filed 12–19–97; 8:45 am]

BILLING CODE 4830–01–P; 4510–29–P; 4120–01–P