These synopses are intended only as aids to the reader in

Agency decision

Ask Donna

What actually matters in this document.

Text

Internal Revenue

bulletin

Bulletin No. 1998–3

January 20, 1998

HIGHLIGHTS

OF THIS ISSUE

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

relied upon as authoritative interpretations.

EMPLOYEE PLANS

Notice 98–1, page 42.

Nondiscrimination testing; section 401(k) and section

401(m). This notice describes nondiscrimination testing with

respect to cash or deferred arrangements under section

401(k) as well as employer matching and employee contributions under section 401(m) of the Code.

EXCISE TAX

T.D. 8740, page 4.

REG–102894–97, page 59.

Temporary and proposed regulations under section 6302 of

the Code relate to the availability of the safe harbor deposit

rule based on look-back quarter liability and affect persons

required to make deposits of excise taxes.

state in 1998. For this purpose, “state” includes the District of

Columbia and the possessions of the United States.

Notice 98–3, page 48.

Elections under section 7704(g). This notice provides the

requirements for making and revoking an election under section 7704(g) of the Code. This election allows grandfathered

publicly traded partnerships to avoid being treated as corporations for federal tax purposes.

Notice 98–5, page 49.

Foreign tax credit abuse. Treasury and the Service expect to

issue regulations that will disallow foreign tax credits for foreign

taxes paid or accrued in connection with certain abusive transactions.

Notice 98–6, page 52.

T.D. 8741, page 6.

REG–109704–97, page 60.

Notice on section 685. Guidance is provided on Qualified

Funeral Trust (QFT) eligibility requirements, election procedures,

and simplified reporting requirements.

Temporary and proposed regulations under section 9812 of

the Code relate to mental health parity requirements imposed on group health plans.

Notice 98–7, page 54.

ADMINISTRATIVE

Rev. Proc. 98–9, page 56.

This procedure sets forth the maximum face amount of

Qualified Zone Academy Bonds that may be issued for each

Finding Lists begin on page 63.

Department of the Treasury

Internal Revenue Service

Information reporting; interest on education loans. Payees of interest that may be deductible by the payor as qualified

education loan interest are informed of their information reporting requirements for 1998 under section 6050S of the Code,

as added by the Taxpayer Relief Act of 1997.

Mission of the Service

ucts and services; and perform in a manner warranting

the highest degree of public confidence in our integrity, efficiency, and fairness.

The purpose of the Internal Revenue Service is to collect

the proper amount of tax revenue at the least cost; serve

the public by continually improving the quality of our prod-

Statement of Principles

of Internal Revenue

Tax Administration

The Service also has the responsibility of applying and

administering the law in a reasonable, practical manner.

Issues should only be raised by examining officers when

they have merit, never arbitrarily or for trading purposes.

At the same time, the examining officer should never hesitate to raise a meritorious issue. It is also important that

care be exercised not to raise an issue or to ask a court to

adopt a position inconsistent with an established Service

position.

The function of the Internal Revenue Service is to administer the Internal Revenue Code. Tax policy for raising revenue

is determined by Congress.

With this in mind, it is the duty of the Service to carry out that

policy by correctly applying the laws enacted by Congress;

to determine the reasonable meaning of various Code provisions in light of the Congressional purpose in enacting them;

and to perform this work in a fair and impartial manner, with

neither a government nor a taxpayer point of view.

Administration should be both reasonable and vigorous. It

should be conducted with as little delay as possible and

with great courtesy and considerateness. It should never

try to overreach, and should be reasonable within the

bounds of law and sound administration. It should, however, be vigorous in requiring compliance with law and it

should be relentless in its attack on unreal tax devices and

fraud.

At the heart of administration is interpretation of the Code. It

is the responsibility of each person in the Service, charged

with the duty of interpreting the law, to try to find the true

meaning of the statutory provision and not to adopt a

strained construction in the belief that he or she is “protecting the revenue.” The revenue is properly protected only

when we ascertain and apply the true meaning of the statute.

Introduction

The Internal Revenue Bulletin is the authoritative instrument

of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service

and for publishing Treasury Decisions, Executive Orders, Tax

Conventions, legislation, court decisions, and other items of

general interest. It is published weekly and may be obtained

from the Superintendent of Documents on a subscription

basis. Bulletin contents of a permanent nature are consolidated semiannually into Cumulative Bulletins, which are sold

on a single-copy basis.

dures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances

are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on provisions

of the Internal Revenue Code of 1986.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application

of the tax laws, including all rulings that supersede, revoke,

modify, or amend any of those previously published in the

Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements

of internal practices and procedures that affect the rights

and duties of taxpayers are published.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A,

Tax Conventions, and Subpart B, Legislation and Related

Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to

these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings

are issued by the Department of the Treasury’s Office of the

Assistant Secretary (Enforcement).

Revenue rulings represent the conclusions of the Service on

the application of the law to the pivotal facts stated in the

revenue ruling. In those based on positions taken in rulings

to taxpayers or technical advice to Service field offices,

identifying details and information of a confidential nature

are deleted to prevent unwarranted invasions of privacy and

to comply with statutory requirements.

Part IV.—Items of General Interest.

With the exception of the Notice of Proposed Rulemaking

and the disbarment and suspension list included in this part,

none of these announcements are consolidated in the Cumulative Bulletins.

Rulings and procedures reported in the Bulletin do not have

the force and effect of Treasury Department Regulations,

but they may be used as precedents. Unpublished rulings

will not be relied on, used, or cited as precedents by Service

personnel in the disposition of other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations, court decisions, rulings, and proce-

The first Bulletin for each month includes a cumulative index

for the matters published during the preceding months.

These monthly indexes are cumulated on a quarterly and

semiannual basis, and are published in the first Bulletin of the

succeeding quarterly and semiannual period, respectively.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Section 901.—Taxes of Foreign

Countries and of Possessions of

United States

Guidance is provided as to whether a foreign tax

credit is allowed with respect to foreign taxes paid

or accrued in connection with certain abusive transactions. See Notice 98–5, page 49.

Section 1397E.—Credit to

Holders of Qualified Zone

Academy Bonds

What is the 1998 qualified zone academy bond

national limitation for each State, the District of Columbia, and the possessions of the United States?

See Rev. Proc. 98–9, page 56.

Section 6011.—General

Requirement of Return,

Statement, or List

26 CFR 301.6011–2T: Required use of magnetic

media (temporary).

What information reporting requirements apply

to payees of education loan interest for 1998 under

§ 6050S of the Code, as added by the Taxpayer Relief Act of 1997. See Notice 98–7, page 54.

Section 6050H.—Returns

Relating to Mortgage Interest

Received in Trade or Business

From Individuals

26 CFR 1.6050H–1: Information reporting of

mortgage interest received in a trade or business

from an individual.

What information reporting requirements apply

to payees of education loan interest for 1998 (including those secured by real property) under

§ 6050S of the Code, as added by the Taxpayer Relief Act of 1997. See Notice 98–7, page 54.

Section 6302.—Mode or Time

of Collection

26 CFR 40.6302(c)–1T: Use of government

depositaries (temporary).

Deposits of Excise Taxes

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Temporary regulations.

SUMMARY: This document contains

temporary regulations relating to the

availability of the safe harbor deposit rule

based on look-back quarter liability and

affects persons required to make deposits

of excise taxes. This document also contains temporary regulations relating to

floor stocks taxes and affects persons liable for those taxes. The regulations implement certain changes made by the

Small Business Job Protection Act of

1996 (the 1996 Act) and the Airport and

Airway Trust Fund Tax Reinstatement

Act of 1997 (the 1997 Act). The text of

these regulations also serves as the text of

REG–102894–97, page 59.

DATES: These regulations are effective

December 29, 1997. For dates of applicability, see §§40.6302(c)–1T and

40.6302(c)–2T.

FOR FURTHER INFORMATION CONTACT: Ruth Hoffman (202) 622-3130

(not a toll-free call).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments to

the Excise Tax Procedural Regulations

(26 CFR part 40) that implement certain

changes made by the 1996 Act and the

1997 Act.

The aviation excise taxes that expired

on December 31, 1995, were reinstated by

the 1996 Act for the period from August

27 through December 31, 1996, by the

1997 Act for the period from March 7

through September 30, 1997, and were

extended, with modifications, for the period from October 1, 1997, through September 30, 2007.

obligations for a calendar quarter by depositing an amount equal to the person’s

excise tax liability reported on the return

for the second preceding quarter (the

look-back quarter). For this purpose, the

tax liability for the look-back quarter

must be modified to take into account any

increase in rates in the current quarter, but

the safe harbor does not specifically address the effect of the enactment of a new

tax or the reinstatement of an expired tax.

Notice 97–15, 1997–8 I.R.B. 23, and section 2(f) of the 1997 Act provide that the

look-back safe harbor shall not apply with

respect to any tax unless the tax was imposed throughout the look-back period.

The temporary regulations modify the

look-back safe harbor rules to reflect this

change. Under the temporary regulations,

the general look-back safe harbor of

§40.6302(c)–1(c)(2) is modified for a

class of tax that includes a tax that was

not in effect at all times during the lookback quarter (or, in the case of an alternative method tax, that was not in effect at

all times during the look-back quarter and

the month preceding the look-back quarter). The safe harbor does not apply to

that class of tax unless, for each semimonthly period, the deposit is not less

than the greater of (1) 1/6 of the net tax liability reported for the class of tax for the

look-back quarter, or (2) the sum of (i) 95

percent of the net tax liability incurred

with respect to new or reinstated taxes

during the semimonthly period, and (ii)

1/6 of the net tax liability reported for all

other taxes in the class for the look-back

quarter. Also, the section 4681 tax

(ozone-depleting chemicals) look-back

safe harbor provided under §40.6302(c)–

2(b)(2) is modified in a similar manner if

the tax liability for the quarter includes liability for any chemical that was not subject to tax at all times during the lookback quarter.

The new rules apply to liabilities for

new or reinstated taxes incurred after February 28, 1997.

Fuel Floor Stocks Taxes

T.D. 8740

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 40

January 20, 1998

Deposit Safe Harbor Rules

Sections 40.6302(c)–1(c)(2) and

40.6302(c)–2(b)(2) (relating to deposit

safe harbors) currently provide, generally,

that a person can satisfy excise tax deposit

Section 1609(h) of the 1996 Act imposes a floor stocks tax on aviation fuel

(other than gasoline) on which tax was imposed by section 4091 before August 27,

1996, and that is held on the first moment

1998–3 I.R.B.

of that date by any person. Section 2(d) of

the 1997 Act imposes a floor stocks tax on

aviation gasoline and aviation fuel (other

than gasoline) on which tax was imposed

by section 4081 or 4091 before March 7,

1997, and that is held on the first moment

of that date by any person.

The temporary regulations provide that

the rules set forth in 26 CFR part 40 (relating to administrative provisions for certain excise taxes, including the excise

taxes on aviation fuels) also apply to related floor stocks taxes. Thus, persons liable for floor stocks taxes on aviation

fuels must file returns reporting those

taxes in accordance with the provisions of

26 CFR part 40.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory

action as defined in EO 12866. Therefore,

a regulatory assessment is not required. It

also has been determined that section

553(b) of the Administrative Procedure

Act (5 U.S.C. chapter 5) does not apply to

these regulations and, because these regulations do not impose on small entities a

collection of information requirement, the

Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Therefore, a Regulatory Flexibility Analysis is not required.

Pursuant to section 7805(f) of the Internal

Revenue Code, these temporary regulations will be submitted to the Chief Counsel for Advocacy of the Small Business

Administration for comment on their impact on small business.

Drafting Information

The principal author of these regulations is Ruth Hoffman, Office of Assistant

Chief Counsel (Passthroughs and Special

Industries). However, other personnel

from the IRS and Treasury Department

participated in their development.

* * * * *

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR part 40 is

amended as follows:

PART 40—EXCISE TAX

PROCEDURAL REGULATIONS

Paragraph 1. The authority citation for

part 40 continues to read in part as follows:

1998–3 I.R.B

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

Par. 2. Section 40.0–1T is added to

read as follows:

§40.0–1T Introduction (temporary).

(a) through (f). [Reserved]

(g) Applicability to floor stocks taxes.

The regulations in this part 40 also apply

with respect to floor stocks taxes imposed

on articles subject to a tax described in

§40.0–1(a), beginning April 1, 1991.

Par. 3. Section 40.6011(a)–1T is added

to read as follows:

§40.6011(a)–1T Returns (temporary).

(a)(1) through (a)(2)(ii). [Reserved]

(a)(2)(iii) Floor stocks tax return. A return reporting liability for a floor stocks

tax described in §40.0–1T(g) is a return

for the calendar quarter in which the tax

payment is due and not for the calendar

quarter in which the liability for tax is incurred, beginning April 1, 1991.

Par. 4. Section 40.6302(c)–1T is added

to read as follows:

§40.6302(c)–1T Use of Government

depositaries (temporary).

(a) through (c)(2)(iii). [Reserved]

(c)(2)(iv) Modification for new or reinstated taxes—(A) Applicability. The safe

harbor rule of §40.6302(c)–1(c)(2)(i) is

modified for any calendar quarter in

which a person’s liability for a class of tax

includes liability for any new or reinstated

tax. For this purpose, a new or reinstated

tax is—

(1) Any tax (including an alternative

method tax) that was not in effect at all

times during the look-back quarter; and

(2) Any alternative method tax that was

not in effect at all times during the month

preceding the look-back quarter.

(B) Modification. The safe harbor rule

of §40.6302(c)–1(c)(2)(i) does not apply

to a class of tax unless the deposit of taxes

in that class for each semimonthly period

in the calendar quarter is not less than the

greater of—

(1) 1/6 of the net tax liability reported

for the class of tax for the look-back quarter; or

(2) The sum of—

(i) 95 percent of the net tax liability incurred with respect to new or reinstated

taxes during the semimonthly period; and

(ii) 1/6 of the net tax liability reported

for all other taxes in the class for the lookback quarter.

(c)(2)(iv) applies to tax liabilities for new

or reinstated taxes incurred after February

28, 1997, except that paragraph (c)(2)(iv)(A)(2) of this section applies only for calendar quarters beginning after December

31, 1997.

(c)(3) through (f)(4). [Reserved]

(f)(5) Taxes excluded; floor stocks

taxes. No deposit is required in the case

of any floor stocks tax described in

§40.0–1T(g), beginning April 1, 1991.

Par. 5. Section 40.6302(c)-2T is added

to read as follows:

§40.6302(c)–2T Special rule for use of

Government depositaries under section

4681 (temporary).

(a) through (b)(2)(ii). [Reserved]

(b)(2)(iii) Modification for new chemicals—(A) Applicability. The safe harbor

rule of §40.6302(c)–2(b)(2)(i) is modified

for any calendar quarter in which a person’s liability for section 4681 tax includes

liability with respect to any new chemical.

For this purpose, a new chemical is any

chemical that was not subject to tax at all

times during the look-back quarter.

(B) Modification. The safe harbor rule

of §40.6302(c)–2(b)(2)(i) does not apply

unless the deposit of section 4681 taxes for

each semimonthly period in the calendar

quarter is not less than the greater of—

(1) 1/6 of the net tax liability reported

under section 4681 for the look-back

quarter; or

(2) The sum of—

(i) 95 percent of the net tax liability incurred under section 4681 with respect to

the new chemical during the semimonthly

period; and

(ii) 1/6 of the net tax liability reported

under section 4681 with respect to all

other chemicals for the look-back quarter.

(b)(2)(iii) applies to tax liabilities for new

chemicals incurred after February 28,

1997.

Michael P. Dolan,

Acting Commissioner of

Internal Revenue.

Approved November 6, 1997.

Donald C. Lubick,

Acting Assistant Secretary of

the Treasury.

January 20, 1998

(Filed by the Office of the Federal Register on December 24, 1997, 8:45 a.m., and published in the

issue of the Federal Register for December 29, 1997,

62 F.R. 67568)

Section 6721.—Failure to File

Correct Information Returns

26 CFR 301.6721–1: Failure to file correct

information returns.

What information reporting requirements apply

to payees of education loan interest for 1998 under

§ 6050S of the Code, as added by the Taxpayer Relief Act in 1997. See Notice 98–7, page 54.

Section 6722.—Failure to

Furnish Correct Payee

Statements

26 CFR 301.6722–1: Failure to furnish correct

payee statements.

What information reporting requirements apply

to payees of education loan interest for 1998 under

§ 6050S of the Code, as added by the Taxpayer Relief Act of 1997. See Notice 98–7, page 54.

Section 9812.—Parity in

Application of Certain Limits to

Mental Health Benefits

26 CFR 54.9812–1T: Parity in the application of

certain limits to mental health benefits (temporary).

T.D. 8741

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 54

DEPARTMENT OF LABOR

Pension and Welfare Benefits

Administration

29 CFR Part 2590

DEPARTMENT OF HEALTH AND

HUMAN SERVICES

Health Care Financing

Administration

45 CFR Part 146

Interim Rules for Mental Health

Parity

AGENCIES: Internal Revenue Service,

Department of the Treasury; Pension and

Welfare Benefits Administration, Depart-

January 20, 1998

ment of Labor; Health Care Financing

Administration, Department of Health

and Human Services.

ACTION: Interim rules with request for

comments.

SUMMARY: This document contains

interim rules governing parity between

medical/surgical benefits and mental

health benefits in group health plans and

health insurance coverage offered by

issuers in connection with a group health

plan. The rules contained in this document implement changes made to certain

provisions of the Internal Revenue Code

of 1986 (Code), the Employee Retirement

Income Security Act of 1974 (ERISA or

Act), and the Public Health Service Act

(PHS Act) enacted as part of the Mental

Health Parity Act of 1996 (MHPA) and

the Taxpayer Relief Act of 1997.

Interested persons are invited to submit

comments on the interim rules for consideration by the Department of the Treasury,

the Department of Labor, and the Department of Health and Human Services

(Departments) in developing final rules.

The rules contained in this document are

being adopted on an interim basis to

ensure that sponsors and administrators of

group health plans, participants and beneficiaries, States, and issuers of group

health insurance coverage have timely

guidance concerning compliance with the

requirements of MHPA.

DATES: Effective date. The interim

rules are effective January 1,1998.

Applicability dates. The requirements

of MHPA and the interim rules apply to

group health plans and health insurance

issuers offering health insurance coverage in connection with a group health

plan for plan years beginning on or after

January 1, 1998. MHPA includes a sunset provision under which the MHPA requirements do not apply to benefits for

services furnished on or after September

30, 2001.

Information collection. Affected parties

are not required to comply with the information collection requirements in these

interim rules until the Departments publish in the Federal Register the control

numbers assigned to these information

collection requirements by the Office of

Management and Budget (OMB). Publication of the control numbers notifies the

public that OMB has approved these information collection requirements under

the Paperwork Reduction Act of 1995.

The Departments have submitted a copy

of this rule to OMB for its review of the

information collections. Interested persons are invited to send comments regarding these burdens or any other aspect of

these collections of information on or before February 23, 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

1998–3 I.R.B.

1111 Constitution Avenue, NW

Washington DC 20224

Alternatively, taxpayers may transmit

comments electronically via the IRS Internet site at: http://www.irs.ustreas.gov/

prod/tax_regs/comments.html

Comments to the Department of Labor

can be addressed to:

U.S. Department of Labor

Pension and Welfare Benefits

Administration

200 Constitution Avenue, NW

Room N-5669

Washington, DC 20210

Attention: MHPA Comments

Alternatively, comments may be hand-delivered between the hours of 9 a.m. and 5

p.m. to the same address.

Comments to the Department of Health

and Human Services can be addressed to:

Health Care Financing Administration

Department of Health and Human

Services

Attention: HCFA-2891-IFC

P.O. Box 26688

Baltimore, MD 21207

In the alternative, comments may be

hand-delivered between the hours of 8:30

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

Room 309-G

Hubert Humphrey Building

200 Independence Avenue, SW

Washington, DC 20201

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

1998–3 I.R.B

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) 7861565; Mark Connor, Pension and Welfare

Benefits Administration, Department of

Labor, at (202) 219-4377; or Russ Weinheimer, Internal Revenue Service, Department of the Treasury, at (202) 622-4695.

Customer service information. Individuals interested in obtaining a copy of the

Department of Labor’s booklet entitled

“Questions and Answers: Recent Changes

in Health Care Law,” which includes information on MHPA, may call the following toll-free number: 1-800-998-7542.

SUPPLEMENTARY

INFORMATION:

A. Background

The Mental Health Parity Act of 1996

(MHPA) was enacted on September 26,

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

MHPA amended the Employee Retirement Income Security Act of 1974

(ERISA) and the Public Health Service

Act (PHS Act) to provide for parity in the

application of certain dollar limits on

mental health benefits with dollar limits

on medical/surgical benefits. Provisions

implementing MHPA were later added to

the Internal Revenue Code of 1986

(Code) under the Taxpayer Relief Act of

1997 (Pub. L. 105–34).

1. Regulatory Responsibility

The provisions of MHPA are set forth

in Chapter 100 of Subtitle K of the Code,

Part 7 of Subtitle B of Title I of ERISA,

and Title XXVII of the PHS Act.1 The

Secretaries of the Treasury, Labor, and

Health and Human Services share jurisdiction over the MHPA provisions. These

provisions are substantially similar, except as follows:

• The MHPA provisions in the Code generally apply to all group health plans other

than governmental plans, but they do not

1Chapter 100 of Subtitle K of the Code, Part

7 of

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

the PHS Act were added by the Health Insurance

Portability and Accountability Act of 1996 (HIPAA),

Pub. L. 104–191.

apply to health insurance issuers. A taxpayer that fails to comply with these provisions may be subject to an excise tax

under section 4980D of the Code.

• The MHPA provisions in ERISA generally apply to all group health plans

other than governmental plans, church

plans, and certain other plans. These

provisions also apply to health insurance issuers that offer health insurance

coverage in connection with such

group health plans. Generally, the Secretary of Labor enforces the MHPA

provisions in ERISA, except that no

enforcement action may be taken by

the Secretary against issuers. However, individuals may generally pursue

actions against issuers under ERISA

and, in some circumstances, under

State law.

• The MHPA provisions in the PHS Act

generally apply to health insurance issuers that offer health insurance coverage in connection with group health

plans and to certain State and local

governmental plans. States, in the first

instance, enforce the PHS Act with respect to issuers. Only if a State does

not substantially enforce any provisions under its insurance laws will the

Department of Health and Human Services enforce the provisions, through

the imposition of civil money penalties.

Moreover, no enforcement action may

be taken by the Secretary of Health and

Human Services against any group

health plan except certain State and

local governmental plans.

The interim rules being issued today by

the Secretaries of the Treasury, Labor, and

Health and Human Services have been

developed on a coordinated basis by the

Departments. In addition, these interim

rules take into account comments received by the Departments in response to

the request for public comments on

MHPA published in the Federal Register

on June 26, 1997 (62 FR 34604). Except

to the extent needed to reflect the statutory differences described above, the interim rules of each Department are substantively identical. However, there are

certain non-substantive differences. The

interim rules reflect certain stylistic differences in language and structure to conform to conventions used by a particular

Department. These differences have been

minimized and any differences in word-

January 20, 1998

ing 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

2However, the preemption is broader for the statuto-

ry 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 721(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.

January 20, 1998

of the PHS Act. Further, the conference

report to MHPA states that the application

of these preemption provisions should

permit the operation of any State law or

provision that requires more favorable

treatment of mental health benefits under

health insurance coverage than that required under the MHPA provisions.

Thus, generally, a State law that requires more favorable treatment of mental

health benefits under health insurance

coverage offered by issuers would not be

preempted by the provisions of MHPA

and the interim rules.

B. Overview of MHPA and the Interim

Rules

The MHPA provisions are set forth in

section 9812 of the Code, section 712 of

ERISA, and section 2705 of the PHS Act.

MHPA and the interim rules apply to a

group health plan (or health insurance

coverage offered by issuers in connection

with a group health plan) that provides

both medical/surgical benefits and mental

health benefits.

The MHPA provisions provide for parity in the application of aggregate lifetime

dollar limits, and annual dollar limits, between mental health benefits and medical/surgical benefits. If a group health

plan offers two or more benefit packages

under the plan, the 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, dura-

tion, or scope of mental health benefits

under a plan (or coverage) except as

specifically provided in regard to parity of

aggregate lifetime dollar limits and annual dollar limits.3

1. Aggregate Lifetime Limits and Annual

Limits

Under MHPA and the interim rules, a

group health plan (or health insurance

coverage offered in connection with a

group health plan) providing both medical/surgical benefits and mental health

benefits may comply with the MHPA parity requirements in any of the following

general ways:

• The plan (or coverage) may comply by

not including any aggregate lifetime

dollar limit or annual dollar limit on

mental health benefits.

• The plan (or coverage) may comply by

imposing a single aggregate lifetime or

annual dollar limit on both medical/surgical benefits and mental health benefits in a way that does not distinguish

between the two.

• The plan (or coverage) may comply by

imposing an aggregate lifetime dollar

limit or annual dollar limit on mental

health benefits that is not less than the

aggregate lifetime dollar limit or annual

dollar limit on medical/surgical benefits.

• In the case of a plan (or coverage) under

which aggregate lifetime dollar limits

or annual dollar limits differ for categories of medical/surgical benefits, the

plan (or coverage) may comply by calculating a weighted average aggregate

lifetime dollar limit or weighted average annual dollar limit for mental health

benefits. The weighted average must

be based on a formula in the interim

rules that takes into account the limits

on different categories of medical/surgical benefits.

In addition, under MHPA and the interim

rules, benefits for treatment of substance

abuse or chemical dependency may not be

3In response to the Departments’ request for public

comments on MHPA published in the Federal

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

regulatory jurisdiction of the EEOC.

1998–3 I.R.B.

counted in applying an aggregate lifetime

or annual dollar limit that applies separately to mental health benefits.

2. Exemptions from the Requirements of

MHPA

(a) Small Employer Exemption

The parity requirements under MHPA

and the interim rules do not apply to any

group health plan (or health insurance

coverage offered in connection with a

group health plan) for any plan year of a

small employer. The term “small employer” is defined as an employer who

employed an average of at least 2 but not

more than 50 employees on business days

during the preceding calendar year and

who employs at least 2 employees on the

first day of the plan year.4

For purposes of the small employer exemption, all persons treated as a single

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

and (o) of section 414 of the Code (26

U.S.C. 414) are treated as one employer.

In addition, if an employer was not in existence throughout the preceding calendar

year, whether the employer is a small employer is determined on the average number of employees the employer reasonably expects to employ on business days

during the current calendar year. Finally,

any reference to an employer in the small

employer exemption includes a reference

to a predecessor of the employer.

(b) Increased Cost Exemption

The second exemption from the MHPA

requirements applies to group health

plans (or health insurance coverage offered in connection with a group health

plan) if the application of the MHPA parity requirements described in paragraph

(b)(1)(i)5 results in an increase in the cost

under the plan (or coverage) of at least

4Section

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

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

an exception that applies under the MHPA provisions as well as under provisions added by HIPAA

and the Newborns’ and Mothers’ Health Protection

Act of 1996. The exception applies to any group

health plan (and health insurance coverage offered in

connection with a group health plan) for any plan

year if, on the first day of the plan year, the plan has

fewer than 2 participants who are current employees.

5Any reference to a particular paragraph in this preamble to the interim rules is a reference to the corresponding paragraphs in each of the Departments’

interim rules.

1998–3 I.R.B

one percent. This exemption is available

only if the requirements of paragraph (f)

are met. If a plan offers more than one

benefit package, the exemption is applied

separately to each benefit package. Except as provided in the transition period

described in paragraph (h), a plan must

implement the parity requirements for the

first plan year beginning on or after January 1, 1998, and must continue to comply

with the parity requirements until September 30, 2001 (the sunset date in paragraph (i)) unless the plan satisfies the exemption described in paragraph (f).

However, the exemption is not effective

until 30 days after the notice requirements

in paragraph (f)(3) are satisfied.

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

describe the ratio of two terms used to determine if a plan (or coverage) has experienced a cost increase of one percent or

more. The first term is the total cost incurred under parity (including both mental health costs and medical/surgical

costs). The second term is the total cost

incurred under parity reduced by the costs

required solely to comply with parity.

Costs required solely to comply with parity include mental health claims that

would have been denied absent amendments required to comply with parity, the

administrative costs related to those

claims, and other administrative costs attributable to complying with the parity requirements. Premium payments are not

considered in this calculation. The ratio

is expressed by the following formula:

IE – (CE + AE)

≥ 1.01000

IE represents the incurred expenditures

during the base period. CE represents the

claims incurred during the base period

that would have been denied under the

terms of the plan absent plan amendments

required to comply with the parity requirements of paragraph (b)(1)(i). AE

represents administrative costs related to

claims in CE and other administrative

costs attributable to 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:

January 20, 1998

NOTICE OF GROUP HEALTH PLAN’S EXEMPTION FROM THE MENTAL HEALTH PARITY ACT

* DESCRIPTION OF THE ONE PERCENT INCREASED COST EXEMPTION — This notice is required to be provided to you under the requirements of the Mental Health Parity Act of 1996 (MHPA) because the group health plan

identified in Line 1 below is claiming the one percent increased cost exemption from the requirements of MHPA. Under

MHPA, a group health plan offering both medical/surgical and mental health benefits generally can no longer set annual

or aggregate lifetime dollar limits on mental health benefits that are lower than any such dollar limits for medical/surgical benefits. In addition, a plan that does not impose an annual or aggregate lifetime dollar limit on medical/surgical benefits generally may not impose such a limit on mental health benefits. However, a group health plan can claim an exemption from these requirements if the plan’s costs increase one percent or more due to the application of MHPA’s

requirements.

This notice is to inform you that the group health plan identified in Line 1 below is claiming the exemption from the requirements of MHPA. The exemption is effective as of the date identified in Line 4 below. Since benefits under your

group health plan may change as of the date identified in Line 4 it is important that you contact your plan administrator

or the plan representative identified in Line 5 below to see how your benefits may be affected as a result of your group

health plan’s election of this exemption from the requirements of MHPA.

Upon submission of this notice by you (or your representative) to the plan administrator or the person identified in Line

5 below, the plan will provide you or your representative, free of charge, a summary of the information upon which the

plan’s exemption is based.

1. Name of the group health plan and the plan number (PN): ______________________________________

2. Name, address, and telephone number of plan administrator responsible for providing this notice:

______________________________________________

3. For single-employer plans, the name, address, telephone number, (if different from Line 2) and employer identification number (EIN) of the employer sponsoring the group health plan:

______________________________________________

4. Effective date of the exemption (at least 30 days after the notices are sent): __________________________________

5. For further information, call: __________________________________

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

January 20, 1998

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

1998–3 I.R.B.

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

1998–3 I.R.B

health insurance issuers offering health

insurance coverage in connection with a

group health plan) for plan years beginning on or after January 1, 1998. MHPA

includes a sunset provision under which

the MHPA requirements do not apply to

benefits for services furnished on or after

September 30, 2001.

However, for requirements of this section other than the one-percent increased

cost exemption, the interim rules provide

a limitation on enforcement actions in

paragraph (h)(2). Under that paragraph,

no enforcement action can be taken by

any of the Secretaries against a group

health plan (or issuer) that has sought to

comply in good faith with the requirements of section 9812 of the Code, section 712 of ERISA, and section 2705 of

the PHS Act with respect to a violation

that occurs before the earlier of the first

day of the first plan year beginning on or

after April 1, 1998, or January 1, 1999.

Compliance with the requirements of the

interim rules is deemed to be good faith

compliance with the requirements of section 9812 of the Code, section 712 of

ERISA, and section 2705 of the PHS Act.

With respect to the increased cost exemption, the interim rules provide in

paragraph (h)(3) a transition period for

compliance with the requirements of

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

enforcement action will be taken against a

group health plan (or issuer) that is subject to the MHPA requirements prior to

April 1, 1998 solely because the plan has

claimed the increased cost exemption

under section 9812(c)(2) of the Code, section 712(c)(2) of ERISA, or section

2705(c)(2) of the PHS Act based on assumptions inconsistent with the rules

under paragraph (f) of the interim rules,

provided that the plan is amended to comply with the parity requirements no later

than March 31, 1998 and the plan complies with the notice requirements in paragraph (h)(3)(ii).

A group health plan satisfies this transition period notice requirement only if the

plan provides notice to the applicable federal agency and posts such notice at the

location(s) where documents must be

made available for examination under

section 104(b)(2) of ERISA and the regulations thereunder (§2520.104b–1(b)(3)).

The notice must indicate the plan’s intent

to use the transition period by 30 days

after the first day of the plan year beginning on or after January 1, 1998, but in no

event later than March 31, 1998. For a

group health plan that is a church plan,

the applicable federal agency is the Department of the Treasury. For a group

health plan that is subject to Part 7 of Subtitle B of Title I of ERISA, the applicable

federal agency is the Department of

Labor. For a group health plan that is a

nonfederal governmental plan, the applicable federal agency is the Department of

Health and Human Services. In all cases,

the notice must include the date; the name

of the plan and the plan number; the

name, address, and telephone number of

the plan sponsor or plan administrator; the

employer identification number (in the

case of single-employer plans only); the

individual to contact for further information; the signature of the plan administrator; and the date signed. In addition, the

notice must be provided at no charge to

participants and beneficiaries (or their

representatives) within 15 days after receipt of a written or oral request for such

notification, but in no event does the notice have to be provided before it has been

sent to the applicable federal agency. For

this purpose, plans may use the following

model:

January 20, 1998

NOTICE OF GROUP HEALTH PLAN’S USE OF TRANSITION PERIOD

* IMPORTANT — This notice is required to be provided if a group health plan uses the transition period under the requirements of the Mental Health Parity Act (MHPA). Under MHPA, a group health plan offering both medical/surgical

and mental health benefits generally can no longer set annual or aggregate lifetime dollar limits on mental health benefits

that are lower than any such dollar limits for medical/surgical benefits. In addition, a plan that does not impose an annual

or aggregate lifetime dollar limit on medical/surgical benefits generally may not impose such a limit on mental health benefits. However, a group health plan can claim an exemption from these requirements if the plan’s costs increase one percent or more due to the application of MHPA’s requirements. Under MHPA, a plan that claimed the one percent increased cost exemption prior to the issuance of the MHPA interim regulations based on assumptions inconsistent with the

MHPA interim regulations may delay compliance with the parity requirements of MHPA until a date no later than March

31, 1998.

This notice is to inform you that the plan is utilizing the MHPA transition period and that the plan is delaying compliance

with the parity requirements of MHPA until a time no later than March 31, 1998.

1. Name of the group health plan and the plan number (PN): ______________________________________

2. Name, address, and telephone number of plan administrator responsible for providing this notice:

______________________________________________

3. For single-employer plans, the name, address, telephone number, (if different from Line 2), and employer identification number (EIN) of the employer sponsoring the group health plan:

______________________________________________

4. For further information, call: ______________________________________________

5. Signature of plan administrator: _____________________________________

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 the

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

January 20, 1998

Date: _____________

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,

1998–3 I.R.B.

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.

ered 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.

D. Regulatory Flexibility Act

E. Executive Order 12866 —

Departments of Labor and Health and

Human Services

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 consid-

1998–3 I.R.B

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 fulfils 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 eco-

nomic 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 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

January 20, 1998

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

January 20, 1998

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 Water-

house, 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 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 Depart-

1998–3 I.R.B.

ments 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 & Ly-

1998–3 I.R.B

brand 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 onepercent cost exemption and how it should

be implemented. In general, they considered (1) whether the eligibility for the exemption should be determined retrospectively or prospectively, and what, if any,

rules should be established with respect to

how eligibility should be determined, (2)

whether eligibility should be contingent

on affirmative approval from an enforcement agency or simply subject to possible

review by such an agency, and (3)

whether plan sponsors electing exemptions should be required to notify participants and/or enforcement agencies of this

action and/or to disclose to these parties

evidence documenting eligibility for the

exemption. They also considered the administrability of each option, seeking to

balance the costs and benefits to plans and

participants, as well as the benefits and

burdens of the regulatory scheme on the

federal government.

Retro/prospective Determination

The options considered ranged from a

purely retrospective interpretation to a

purely prospective one, and included intermediate interpretations that blend these

two approaches.

Under a purely retrospective interpretation, the one percent increased cost exemption would be based on actually incurred expenditures increases, measured

retrospectively after implementation of

the statute. In other words, all plans must

comply and provide parity of annual

and/or lifetime dollar limits of mental

health and medical services for the first

year beginning with the start of a plan

year on or after January 1, 1998. If during

the first year, a plan experiences increases

in expenditures equal to one percent or

more as a result of complying with the

statute, that plan would then be eligible to

exercise an exemption from the MHPA

for subsequent plan years.

The calculation for determining the

percent increase would be based on the

ratio of the increase in plan expenditures

to the total plan expenditures, that is, both

medical and mental health expenditures.

For self-insured plans, the numerator

would be the actual value of mental health

claims paid in excess of the previous plan

January 20, 1998

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 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, the 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

January 20, 1998

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.

1998–3 I.R.B.

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 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

1998–3 I.R.B

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

January 20, 1998

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 could 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.

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.

January 20, 1998

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

1998–3 I.R.B.

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 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-

1998–3 I.R.B

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 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 fulltime 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

January 20, 1998

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

January 20, 1998

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 the Department of

Labor a copy of the summary of material

reductions in covered services or benefits

sent to participants and beneficiaries,

containing the plan number and the plan

sponsor’s employer identification number, or the plan (or coverage) may use the

Departments’ model notice in this interim

final rule which has been developed for

this purpose.

The second ICR is a summary of the information used to calculate the plan’s increased costs under the MHPA for purposes of electing the one percent

increased cost exemption, which the plan

must make available to participants and

beneficiaries, on request at no charge.

The third ICR is a notice of a group

health plan’s use of the transition period.

The rule requires plans exercising the one

percent increased cost exemption during

all or part of the first quarter of 1998

under the rule’s transition provisions to

notify the federal government, and to post

a copy of this notice at the workplace.

1. Notice to Participants and

Beneficiaries and the Federal

Government of Electing One Percent

Increased Cost Exemption

i. Department of Labor

The Department of Labor, as part of its

continuing effort to reduce paperwork and

respondent burden, conducts a preclearance consultation program to provide the

general public and Federal agencies with

an opportunity to comment on proposed

and/or continuing collections of information in accordance with the Paperwork

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

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

1320.11. This program helps to ensure

that requested data can be provided in the

desired format, reporting burden (time

and financial resources) is minimized,

collection instruments are clearly understood, and the impact of collection requirements on respondents can be properly assessed. Currently, the Pension and

Welfare Benefits Administration is soliciting comments concerning the proposed

collection of information, Notice to Participants and Beneficiaries and the Federal Government of Electing One Percent

Increased Cost Exemption. A copy of the

proposed ICR can be obtained by contacting the employee listed below in the contact section of the notice.

Information collection: affected parties

are not required to comply with the ICRs

in these rules until the Department of

Labor publishes in the Federal Register

the control numbers assigned to these

ICRs by OMB. The publication of the

control numbers notifies the public that

OMB has approved these ICRs under the

Paperwork Reduction Act of 1995. The

Department has asked for OMB clearance

as soon as possible, and OMB approval is

anticipated by the applicable effective

date.

Dates: Written comments must be submitted to the office listed in the addressee

section below on or before February 20,

1998. The Department of Labor is particularly interested in comments which:

• evaluate whether the proposed collection of information is necessary for the

proper performance of the functions of

the agency, including whether the information will have practical utility;

1998–3 I.R.B.

• evaluate the accuracy of the agency’s

estimate of the burden of the proposed

collection of information, including the

validity of the methodology and assumptions used;

• enhance the quality, utility, and clarity

of the information to be collected; and

• minimize the burden of the collection of

information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological

collection techniques or other forms of

information technology, e.g., permitting

electronic submissions of responses.

Addressee: Gerald B. Lindrew, Office

of Policy and Research, U.S. Department

of Labor, Pension and Welfare Benefits

Administration, 200 Constitution Avenue, Room N-5647, Washington, DC

20210. Telephone: 202-219-4782 (this is

not a toll-free number). Fax: 202-2194745.

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 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; Notfor-profit institutions; Group health plans.

Frequency: On occasion

Burden:

Year

Total

Respondents

(range)

Total Responses

(range)

Average Time

per Response

(range)

Burden Hours

(range)

Cost

(range)

1998

–

1999

5,612 to 25,446

813,505 to 3.8MM

2 minutes

6,324 to 29,605

2000

TOTALS

–

5,612 to 25,446

–

813,505 to 3.8MM

–

2 minutes

–

6,324 to 29,605

$705,037

to $3.3MM

–

$705,037

to $3.3MM

1998–3 I.R.B

January 20, 1998

Comments submitted in response to this

notice will be summarized and/or included in the request for OMB approval

of the ICRs; they will also become a matter of public record.

2. Calculation and Disclosure of

Documentation of Eligibility for

Exemption

i. Department of Labor

The Department of Labor, as part of its

continuing effort to reduce paperwork and

respondent burden, conducts a preclearance consultation program to provide the

general public and Federal agencies with

an opportunity to comment on proposed

and/or continuing collections of information in accordance with the Paperwork

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

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

1320.11. This program helps to ensure

that requested data can be provided in the

desired format, reporting burden (time

and financial resources) is minimized,

collection instruments are clearly understood, and the impact of collection requirements on respondents can be properly assessed. Currently, the Pension and

Welfare Benefits Administration is soliciting comments concerning the proposed

collection of information, Disclosure of

Documentation of Eligibility for Exemption. A copy of the proposed ICR can be

obtained by contacting the employee

listed below in the contact section of the

notice.

Information collection: affected parties

are not required to comply with the ICRs

in these rules until the Department of

Labor publishes in the Federal Register

the control numbers assigned to these

ICRs by OMB. The publication of the

control numbers notifies the public that

OMB has approved these ICRs under the

Paperwork Reduction Act of 1995. The

Department has asked for OMB clearance

as soon as possible, and OMB approval is

anticipated by the applicable effective

date.

Dates: Written comments must be submitted to the office listed in the addressee

section below on or before February 20,

1998. The Department of Labor is particularly interested in comments which:

• evaluate whether the proposed collection of information is necessary for the

January 20, 1998

proper performance of the functions of

the agency, including whether the information will have practical utility;

• evaluate the accuracy of the agency’s

estimate of the burden of the proposed

collection of information, including the

validity of the methodology and assumptions used;

• enhance the quality, utility, and clarity

of the information to be collected; and

• minimize the burden of the collection of

information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological

collection techniques or other forms of

information technology, e.g., permitting

electronic submissions of responses.

Addressee: Gerald B. Lindrew, Office

of Policy and Research, U.S. Department

of Labor, Pension and Welfare Benefits

Administration, 200 Constitution Avenue,

Room N-5647, Washington, DC 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 it election of the one percent increased cost exemption. The likely

respondents are business or other forprofit institutions, non-profit institutions,

small businesses or organizations, and

Taft-Hartley trusts. Responses to this collection of information are required to obtain the benefit of the exemption.

Books or records relating to a collection of information must be retained as

long as their contents may become material in the administration of any internal

revenue law. Generally, tax returns and

tax return information are confidential, as

required by 26 U.S.C. 6103.

Comments on the collection of information should be sent to the Office of

Management and Budget, Attn: Desk Officer for the Department of the Treasury,

Office of Information and Regulatory Affairs, Washington, DC 20503, with copies

to the Internal Revenue Service, Attn: IRS

Reports Clearance Officer, T:FP, Wash-

ington, 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.

1998–3 I.R.B.

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; Notfor-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 than 4,489 and more

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. As-

suming a cost of $5,000 per affected entity, the total cost associated with determining plans’ eligibility to exercise the

exemption amounts to $12.5 million to

$30.1 million, to be amortized over 10

years beginning in 1998.

Disclosure burden: In addition to the

calculation burden, plans wishing to elect

the one percent increased cost exemption

will incur a burden in connection with

disclosure requests from participants, as

detailed below.

Year

Total

Respondents

(range)

Total Responses

(range)

Average

Time per

Response

Burden Hours

(range)

Cost

(range)

1998

1999

2000

TOTALS

–

5,612 to 25,466

–

30,188 to 140,412

60,377 to 280,824

–

2 minutes

–

235 to 1,101

470 to 2,201

–

$26,163 to $121,690

$52,326 to $243,381

Comments submitted in response to

this notice will be summarized and/or included in the request for OMB approval

of the ICRs; they will also become a matter of public record.

3. Notice of Group Health Plan’s Use of

Transition Period, and Posting

Thereof

i. Department of Labor

The Department of Labor, as part of its

continuing effort to reduce paperwork and

respondent burden, conducts a preclearance consultation program to provide the

general public and Federal agencies with

an opportunity to comment on proposed

and/or continuing collections of information in accordance with the Paperwork

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

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

1320.11. This program helps to ensure

that requested data can be provided in the

desired format, reporting burden (time

and financial resources) is minimized,

collection instruments are clearly understood, and the impact of collection requirements on respondents can be properly assessed. Currently, the Pension and

Welfare Benefits Administration is soliciting comments concerning the proposed

1998–3 I.R.B

collection of information, Notice of

Group Health Plan’s Use of Transition Period. A copy of the proposed ICR can be

obtained by contacting the employee

listed below in the contact section of the

notice.

Information collection: affected parties

are not required to comply with the ICRs

in these rules until the Department of

Labor publishes in the Federal Register

the control numbers assigned to these

ICRs by OMB. The publication of the

control numbers notifies the public that

OMB has approved these ICRs under the

Paperwork Reduction Act of 1995. The

Department has asked for OMB clearance

as soon as possible, and OMB approval is

anticipated by the applicable effective

date.

Dates: Written comments must be submitted to the office listed in the addressee

section below on or before February 20,

1998. The Department of Labor is particularly interested in comments which:

• evaluate whether the proposed collection of information is necessary for the

proper performance of the functions of

the agency, including whether the information will have practical utility;

• evaluate the accuracy of the agency’s

estimate of the burden of the proposed

collection of information, including the

validity of the methodology and assumptions used;

• enhance the quality, utility, and clarity

of the information to be collected; and

• minimize the burden of the collection of

information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological

collection techniques or other forms of

information technology, e.g., permitting

electronic submissions of responses.

Addressee: Gerald B. Lindrew, Office

of Policy and Research, U.S. Department

of Labor, Pension and Welfare Benefits

Administration, 200 Constitution Avenue, Room N-5647, Washington, DC

20210. Telephone: 202-219-4782 (this is

not a toll-free number). Fax: 202-2194745.

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 pro-

January 20, 1998

visions 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:

Year

1998

1999

2000

TOTALS

Total

Respondents

(range)

3,348 to 15,193

–

3,348 to 15,193

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

January 20, 1998

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

Total Responses

(range)

3,348 to 15,193

–

3,348 to 15,193

Average

Time per

Response

2 minutes

–

2 minutes

Burden Hours

(range)

Cost

(range)

19 to 89

–

19 to 89

$1,514 to $6,910

–

$1,514 to $6,910

and Budget (OMB) for review and approval. In order to fairly evaluate

whether an information collection should

be approved by OMB, section

3506(c)(2)(A) of the PRA requires that

we solicit comment on the following issues:

• Whether the information collection is

necessary and useful to carry out the

proper functions of the agency;

• The accuracy of the agency’s estimate of the information collection

burden;

• The quality, utility, and clarity of the

information to be collected; and

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: XXXXXXX

Affected Public: Individuals or households; Business or other for-profit; Notfor-profit institutions; Group Health

Plans.

Frequency: On occasion

Burden:

• 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

1998–3 I.R.B.

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

Year

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:

Total

Respondents

(range)

Total

Responses

(range)

Average

Time per

Response

(range)

Burden

Hours

(range)

Cost

(range)

1998

1999

–

890 to 4,092

–

261,000 to 1.2 MM

–

2 minutes

–

2,133 to 9,975

2000

TOTALS

–

890 to 4,092

–

261,000 to 1.2 MM

–

2 minutes

–

2,133 to 9,975

–

$226,000

to $1.1 MM

–

$226,000

to $1.1 MM

Availability of documentation: Nonfederal governmental plans that take the exemption, or issuers that provide coverage

for such plans, must make available to

participants and beneficiaries, on request

and at no charge, a summary of the data

used to calculate the exemption of this

Year

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

Total

Respondents

(range)

Total

Responses

(range)

1998

1999

–

890 to 4,092

2000

TOTALS

1998–3 I.R.B

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.

Burden:

Burden

Hours

(range)

Cost

(range)

–

9,700 to 45,300

Average

Time per

Response

(range)

–

2 minutes

–

79 to 372

890 to 4,092

9,700 to 45,300

2 minutes

79 to 372

890 to 4,092

19,400 to 90,600

2 minutes

158 to 744

–

$8,400 to

$39,300

$8,400 to

$39,300

$16,800

to $78,600

January 20, 1998

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 the 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

Year

Total

Respondents

(range)

Total

Responses

(range)

1998

531 to 2,441

1999

2000

TOTALS

–

531 to 2,441

We have submitted a copy of this proposed rule to OMB for its review of the

information collection requirements in

§146.136. These requirements are not effective until they have been approved by

OMB.

If you comment on any of these information collection and recordkeeping requirements, please mail copies directly to

the following:

Health Care Financing Administration,

Office of Information Services,

Information Technology Investment

Management Group,

Division of HCFA Enterprise

Standards,

Room C2-26-17, 7500 Security

Boulevard,

Baltimore, MD 21244-1850.

ATTN: John Burke HCFA-2891-IFC

We have submitted a copy of this rule

to OMB for its review of these information collections. A notice will be published in the Federal Register when approval is obtained. Interested persons are

invited to send comments regarding this

burden or any other aspect of these collections of information. If you comment on

these information collection and record-

January 20, 1998

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:

Burden

Hours

(range)

Cost

(range)

531 to 2,441

Average

Time per

Response

(range)

2 minutes

4 to17

–

531 to 2,441

–

2 minutes

–

4 to17

$250 to

$1,151

–

$250 to

$1,151

keeping 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.

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, 300gg13, 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).

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

1998–3 I.R.B.

for §§54.9801–1T through 54.9801–6T

and 54.9802–1T, by removing the entries

for §§54.9804–1T and 54.9806–1T, and

by adding entries for §§54.9812–1T,

54.9831–1T, and 54.9833–1T to read in

part as follows:

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

Section 54.9801–1T also issued under

26 U.S.C. 9833.

Section 54.9801–2T also issued under

26 U.S.C. 9833.

Section 54.9801–3T also issued under

26 U.S.C. 9833.

Section 54.9801–4T also issued under

26 U.S.C. 9833.

Section 54.9801–5T also issued under

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

9833.

Section 54.9801–6T also issued under

26 U.S.C. 9833.

Section 54.9802–1T also issued under

26 U.S.C. 9833.

Section 54.9812–1T also issued under

26 U.S.C. 9833.

Section 54.9831–1T also issued under

26 U.S.C. 9833.

Section 54.9833–1T also issued under

26 U.S.C. 9833.

Par. 2. In §54.9801–1T, paragraph (a)

is revised to read as follows:

§54.9801–1T Basis and scope

(temporary).

(a) Statutory basis. Sections 54.9801–

1T through 54.9801-6T, 54.9802–1T,

54.9812–1T, 54.9831–1T and 54.9833–

1T (portability sections) implement Chapter 100 of Subtitle K of the Internal Revenue Code of 1986.

Par. 3. Section 54.9801-2T is amended

by:

1. Revising the introductory text.

2. Revising the definition of excepted

benefits.

3. Revising the definition of health insurance coverage.

The revisions read as follows:

§54.9801–2T Definitions (temporary).

Unless otherwise provided, the definitions in this section govern in applying

the provisions of §§54.9801–1T through

54.9801–6T, 54.9802–1T, 54.9812–1T,

54.9831–1T, and 54.9833–1T.

1998–3 I.R.B

Excepted benefits means the benefits

described as excepted in §54.9831–1T(b).

Health insurance coverage means benefits consisting of medical care (provided

directly, through insurance or reimbursement, or otherwise) under any hospital or

medical service policy or certificate, hospital or medical service plan contract, or

HMO contract offered by a health insurance issuer. However, benefits described

in §54.9831–1T(b)(2) are not treated as

benefits consisting of medical care.

§54.9801–4T Rules relating to

creditable coverage (temporary).

(a) * * *

(2) Excluded coverage. Creditable

coverage does not include coverage consisting solely of coverage of excepted

benefits (described in §54.9831–1T).

Par. 5. In §54.9801–5T, the first sentence of paragraph (a)(3)(vi) is revised to

read as follows:

§54.9801–5T Certification and

disclosure of previous coverage

(temporary).

(a) * * *

(3) * * *

(vi) Excepted benefits; categories of

benefits. No certificate is required to be

furnished with respect to excepted benefits described in §54.9831–1T. * * *

§54.9804–1T [Redesignated as

§54.9831–1T]

Par. 6. Section 54.9804–1T is redesignated as §54.9831–1T and revised in

paragraph (b)(1) to read as follows:

§54.9831–1T Special rules relating to

group health plans (temporary).

(b) Excepted benefits—(1) In general.

The requirements of §§54.9801–1T

through 54.9801–6T, 54.9802–1T, and

54.9812–1T do not apply to any group

health plan in relation to its provision of

§54.9806–1T [Redesignated as

§54.9833–1T]

Par. 7. Section 54.9806–1T is redesignated as §54.9833–1T and amended by:

1. Revising redesignated paragraph

(a)(1).

2. Revising the first sentence of redesignated paragraph (a)(2).

The revisions read as follows:

Par. 4. In §54.9801–4T, paragraph

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

the benefits described in paragraph (b)(2),

(3), (4), or (5) of this section (or any combination of these benefits).

§54.9833–1T Effective dates (temporary).

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

otherwise provided in this section, Chapter 100 of Subtitle K and §§54.9801–1T

through 54.9806–1T, 54.9802–1T, and

54.9831–1T apply with respect to group

health plans for plan years beginning after

June 30, 1997.

(2) Collectively bargained plans. Except as otherwise provided in this section

(other than paragraph (a)(1) of this section), in the case of a group health plan

maintained pursuant to one or more collective bargaining agreements between

employee representatives and one or more

employers ratified before August 21,

1996, Chapter 100 of Subtitle K and

§§54.9801–1T through 54. 9801–6T,

54.9802–1T, and 54.9831–1T do not

apply to plan years beginning before the

later of July 1, 1997, or the date on which

the last of the collective bargaining agreements relating to the plan terminates (determined without regard to any extension

thereof agreed to after August 21, 1996).

***

Par. 8. Section 54.9812–1T is added to

read as follows:

§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

January 20, 1998

health plan for an individual (or for a

group of individuals considered a single

unit in applying this dollar limitation,

such as a family or an employee plus

spouse).

Annual limit means a dollar limitation

on the total amount of specified benefits

that may be paid in a 12-month period

under a plan for an individual (or for a

group of individuals considered a single

unit in applying this dollar limitation, such

as a family or an employee plus spouse).

Medical/surgical benefits means benefits for medical or surgical services, as defined under the terms of the plan, but does

not include mental health benefits.

Mental health benefits means benefits

for mental health services, as defined

under the terms of the plan, but does not

include benefits for treatment of substance abuse or chemical dependency.

(b) Requirements regarding limits on

benefits—(1) In general—(i) General

parity requirement. A group health plan

that provides both medical/surgical benefits and mental health benefits must comply with paragraph (b)(2), (3), or (6) of

this section.

(ii) Exception. The rule in paragraph

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

plan satisfies the requirements of paragraph (e) or (f) of this section.

(2) Plan with no limit or limits on less

than one-third of all medical/surgical

benefits. If a plan does not include an aggregate lifetime or annual limit on any

medical/surgical benefits or includes aggregate lifetime or annual limits that

apply to less than one-third of all medical/surgical benefits, it may not impose

an aggregate lifetime or annual limit, respectively, on mental health benefits.

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

a plan includes an aggregate lifetime or

annual limit on at least two-thirds of all

medical/surgical benefits, it must either—

(i) Apply the aggregate lifetime or annual limit both to the medical/surgical

benefits to which the limit would otherwise apply and to mental health benefits

in a manner that does not distinguish between the medical/surgical and mental

health benefits; or

(ii) Not include an aggregate lifetime

or annual limit on mental health benefits

that is less than the aggregate lifetime or

annual limit, respectively, on the medical/surgical benefits.

January 20, 1998

(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

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);

of benefits for treatment of chemical dependency

and substance abuse that is subject to a separate,

lower limit and under which claims paid for treatment of substance abuse and chemical dependency

are counted only in applying the annual limit on this

separate category; and

(D) amending the plan to eliminate distinctions

between medical/surgical benefits and mental health

benefits and establishing an overall limit on benefits

offered under the plan under which claims paid for

treatment of substance abuse and chemical dependency are counted with medical/surgical benefits and

mental health benefits in applying the overall limit.

(ii) In this Example 4, the group health plan is

described in paragraph (b)(3) of this section. Because mental health benefits are defined in paragraph (a) of this section as excluding benefits for

treatment of substance abuse and chemical dependency, the inclusion of benefits for treatment of substance abuse and chemical dependency in applying

an aggregate lifetime limit or annual limit on mental

health benefits under option (A) of this Example 4

would not comply with the requirements of paragraph (b)(3) of this section. However, options (B),

(C), and (D) of this Example 4 would comply with

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

because they offer parity in the dollar limits placed

on medical/surgical and mental health benefits.

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

For purposes of this paragraph (b), the determination of whether the portion of

medical/surgical benefits subject to a

limit represents one-third or two-thirds of

all medical/surgical benefits is based on

the dollar amount of all plan payments for

medical/surgical benefits expected to be

paid under the plan for the plan year (or

for the portion of the plan year after a

change in plan benefits that affects the applicability of the aggregate lifetime or annual limits). Any reasonable method may

be used to determine whether the dollar

amounts expected to be paid under the

plan will constitute one-third or twothirds 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—

1998–3 I.R.B.

(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 in-

1998–3 I.R.B

clude 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% 3

$100,000 + 60% x $1,000,000 = $640,000).

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 exc

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