[Federal Register Volume 62, Number 245 (Monday, December 22, 1997)]
[Rules and Regulations]
[Pages 66932-66966]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-33262]



[[Page 66931]]

_______________________________________________________________________

Part V

Department of the Treasury
Internal Revenue Service



26 CFR Part 54

Department of Labor
Pension Welfare Benefits Administration



29 CFR Part 2590

Department of Health and Human Services
Health Care Financing Administration



45 CFR Part 146



_______________________________________________________________________



Mental Health Parity; Interim Rules



HIPAA Mental Health Parity Act; Proposed Rule

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

[[Page 66932]]



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.

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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: <a href="http://www.irs.ustreas.gov/prod/tax__regs/
comments.html">http://www.irs.ustreas.gov/prod/tax__regs/
comments.html</a>.
    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

[[Page 66933]]

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:
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    \1\ 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 were added by 
the Health Insurance Portability and Accountability Act of 1996 
(HIPAA), Pub. L. 104-191.
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    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
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    \2\ However, 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.
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    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

[[Page 66934]]

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.<SUP>3</SUP>
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    \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 employer-provided 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.
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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:
    <bullet> The plan (or coverage) may comply by not including any 
aggregate lifetime dollar limit or annual dollar limit on mental health 
benefits.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.<SUP>4</SUP>
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    \4\ Section 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.
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    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) <SUP>5</SUP> 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.
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    \5\ Any 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.
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    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:
[GRAPHIC] [TIFF OMITTED] TR22DE97.000

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

[[Page 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

[[Page 66936]]

[GRAPHIC] [TIFF OMITTED] TR22DE97.001



BILLING CODE 4830-01-C; 4510-29-C; 4120-01-C

[[Page 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 one-percent 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 (Sec. 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

[[Page 66938]]

[GRAPHIC] [TIFF OMITTED] TR22DE97.002



BILLING CODE 4830-01-C; 4510-29-C; 4120-01-C

[[Page 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

[[Page 66940]]

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-for-service 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

[[Page 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 Point-of-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-
for-service with standard utilization review on typical medical 
services, fee-for-service with specialized mental health utilization 
review, PPO and POS plans with specialized mental health utilization 
review, and HMO and carve-out 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 one-percent 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 
self-insured 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

[[Page 66942]]

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 self-insured 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 MHPA-prohibited 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 one-third 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

[[Page 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 self-insured 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.

[[Page 66944]]

    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 in-house 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

[[Page 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 non-dollar 
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

[[Page 66946]]

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:
    <bullet> 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;
    <bullet> 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;
    <bullet> Enhance the quality, utility, and clarity of the 
information to be collected; and
    <bullet> 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 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 
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

[[Page 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:

----------------------------------------------------------------------------------------------------------------
                                                                   Average time                                 
                                     Total       Total responses   per response    Burden hours                 
             Year                 respondents        (range)          (range)         (range)      Cost (range) 
                                    (range)                          (minutes)                                  
----------------------------------------------------------------------------------------------------------------
1998..........................  ...............  ...............  ..............  ..............  ..............
1999..........................  5,612 to 25,446  813,505 to       2.............  6,324 to        $705,037 to   
                                                  3.8MM.                           29,605.         $3.3MM       
2000..........................  ...............  ...............  ..............  ..............  ..............
                               ---------------------------------------------------------------------------------
Totals........................  5,612 to 25,446  813,505 to       2.............  6,324 to        $705,037 to   
                                                  3.8MM.                           29,605.         $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:
    <bullet> 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;
    <bullet> 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;
    <bullet> Enhance the quality, utility, and clarity of the 
information to be collected; and
    <bullet> 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

[[Page 66948]]

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.

----------------------------------------------------------------------------------------------------------------
                                    Total          Total       Average time                                     
             Year                respondents     responses     per response   Burden hours      Cost (range)    
                                   (range)        (range)       (minutes)       (range)                         
----------------------------------------------------------------------------------------------------------------
1998.........................  ..............  .............  .............  .............  ....................
1999.........................  5,612 to        30,188 to      2............  235 to 1,101.  $26,163 to $121,690 
                                25,466.         140,412.                                                        
2000.........................  5,612 to        30,188 to      2............  235 to 1,101.  $26,163 to $121,690 
                                25,466.         140,412.                                                        
                              ----------------------------------------------------------------------------------
Totals.......................  5,612 to        60,377 to      2............  470 to 2,201.  $52,326 to $243,381 
                                25,466.         280.824.                                                        
----------------------------------------------------------------------------------------------------------------

    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

[[Page 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:
    <bullet> 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;
    <bullet> 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;
    <bullet> Enhance the quality, utility, and clarity of the 
information to be collected; and
    <bullet> 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 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 
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 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 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:

----------------------------------------------------------------------------------------------------------------
                                     Total                         Average time                                 
             Year                 respondents    Total responses   per response    Burden hours    Cost (range) 
                                    (range)          (range)         (minutes)        (range)                   
----------------------------------------------------------------------------------------------------------------
1998..........................  3,348 to 15,193  3,348 to 15,193  2.............  19 to 89......  $1,514 to     
                                                                                                   $6,910       
1999..........................  ...............  ...............  ..............  ..............  ..............
2000..........................  ...............  ...............  ..............  ..............  ..............
                               ---------------------------------------------------------------------------------

[[Page 66950]]

                                                                                                                
    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:
    <bullet> Whether the information collection is necessary and useful 
to carry out the proper functions of the agency;
    <bullet> The accuracy of the agency's estimate of the information 
collection burden;
    <bullet> The quality, utility, and clarity of the information to be 
collected; and
    <bullet> 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:

----------------------------------------------------------------------------------------------------------------
                                                                   Average time                                 
                                     Total       Total responses   per response    Burden hours                 
             Year                 respondents        (range)           range          (range)      Cost (range) 
                                    (range)                          (minutes)                                  
----------------------------------------------------------------------------------------------------------------
1998..........................  ...............  ...............  ..............  ..............  ..............
1999..........................  890 to 4,092...  261,000 to 1.2   2.............  2,133 to 9,975  $226,000 to   
                                                  MM.                                              $1.1 MM      
2000..........................  ...............  ...............  ..............  ..............  ..............
                               ---------------------------------------------------------------------------------
    Total.....................  890 to 4,092...  261,000 to 1.2   2.............  2,133 to 9,975  $226,000 to   
                                                  MM.                                              $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

[[Page 66951]]

administrative expenses attributable to complying with the parity 
requirements.
    Burden:

----------------------------------------------------------------------------------------------------------------
                                                                   Average time                                 
                                     Total       Total responses   per response    Burden hours                 
             Year                 respondents        (range)          (range)         (range)      Cost (range) 
                                    (range)                          (minutes)                                  
----------------------------------------------------------------------------------------------------------------
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        2.............  158 to 744....  $16,800 to    
                                                  90,600.                                          $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:

----------------------------------------------------------------------------------------------------------------
                                                                   Average time                                 
                                     Total       Total responses   per response    Burden hours                 
             Year                 respondents        (range)          (range)         (range)      Cost (range) 
                                    (range)                          (minutes)                                  
----------------------------------------------------------------------------------------------------------------
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 Sec. 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.

[[Page 66952]]

    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 Sec. 54.9801-1T, paragraph (a) is revised to read as 
follows:


Sec. 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:


Sec. 54.9801-2T  Definitions (temporary).

    Unless otherwise provided, the definitions in this section govern 
in applying the provisions of Secs. 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 
Sec. 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 Sec. 54.9831-1T(b)(2) 
are not treated as benefits consisting of medical care.
* * * * *
    Par. 4. In Sec. 54.9801-4T, paragraph (a)(2) is revised to read as 
follows:


Sec. 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 Sec. 54.9831-1T).
* * * * *
    Par. 5. In Sec. 54.9801-5T, the first sentence of paragraph 
(a)(3)(vi) is revised to read as follows:


Sec. 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 
Sec. 54.9831-1T. * * *
* * * * *


Sec. 54.9804-1T  [Redesignated as Sec. 54.9831-1T]

    Par. 6. Section 54.9804-1T is redesignated as Sec. 54.9831-1T and 
amended by revising paragraph (b)(1) to read as follows:


Sec. 54.9831-1T  Special rules relating to group health plans 
(temporary).

* * * * *
    (b) Excepted benefits--(1) In general. The requirements of 
Secs. 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).
* * * * *


Sec. 54.9806-1T  [Redesignated as Sec. 54.9833-1T]

    Par. 7. Section 54.9806-1T is redesignated as Sec. 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:


Sec. 54.9833-1T  Effective dates (temporary).

    (a) General effective dates--(1) Non-collectively-bargained plans. 
Except as otherwise provided in this section, Chapter 100 of Subtitle K 
and Secs. 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 Secs. 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:

[[Page 66953]]

Sec. 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 two-thirds 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 two-thirds 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

[[Page 66954]]

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 Sec. 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.

[[Page 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:
[GRAPHIC] [TIFF OMITTED] TR22DE97.005

    (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 self-funded 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 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

[[Page 66956]]

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);

[[Page 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:


Sec. 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 two-thirds 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

[[Page 66958]]

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 two-thirds 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

[[Page 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 Sec. 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:
[GRAPHIC] [TIFF OMITTED] TR22DE97.003

    (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

[[Page 66960]]

(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 self-funded 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 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 
Sec. 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

[[Page 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


Sec. 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

[[Page 66962]]

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 two-thirds 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 two-thirds 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

[[Page 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 
Sec. 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:

[[Page 66964]]

[GRAPHIC] [TIFF OMITTED] TR22DE97.004


    (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 self-funded 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

[[Page 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 
non-Federal 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

[[Page 66966]]

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