New Mental Health & Substance Abuse Parity Regulations May Require Health Plan Changes This Year

On February 2, three federal agencies jointly issued interim final regulations under the Mental Health Parity and Addiction Equity Act of 2008. The regulations are far more complex than anticipated and may require significant effort to ensure timely compliance.

Basic Overview

The 2008 Act broadens the parity requirements first set forth in the Mental Health Parity Act of 1996. The 1996 Act prohibited plans from applying annual and lifetime limits for mental health coverage which were less than the corresponding limits for medical coverage. The 2008 Act applies the same parity requirement to many other plan features, including financial requirements like deductibles, co-insurance and co-pays, and non-financial requirements like limitations on the number or frequency of doctor visits. The 2008 Act also applies the parity requirements to substance abuse coverage.

Significantly, the 2008 Act does not require health plans to provide mental health or substance abuse benefits (“MH/SA benefits”), or to cover any disease or condition in particular. However, to the extent that plans do provide MH/SA benefits, those benefits must be offered on substantially the same terms as medical and surgical benefits under the plan.

Moreover, state laws mandating coverage for certain MH/SA benefits generally will remain in effect, and any such coverage will need to be provided in accordance with 2008 Act and the new regulations. Plan sponsors should consider all of their plan design options for complying with the 2008 Act, which may include more generous MH/SA benefits, less generous medical and surgical benefits, or some combination of the two.

Effective Dates

The 2008 Act is effective for plan years beginning on or after October 3, 2009 (January 1, 2010 for calendar year plans). The regulations are effective for plan years beginning on or after July 1, 2010 (January 1, 2011 for calendar year plans), but delayed effective dates apply to certain bargained plans. “Good faith compliance” with the statute is required until the final regulations take effect.

The New Regulations

To ensure compliance with the 2008 Act and the new regulations, plan sponsors will need to identify all limitations on MH/SA coverage and determine whether the 2008 Act requires changes to – or the elimination of – those limits. Here are some of the issues addressed in the new regulations:

Multiple Benefit Classifications: The parity requirements apply separately to six different classifications of benefits: Inpatient/In-network, Inpatient/Out-of-network, Outpatient/In-Network, Outpatient/Out-of-network, Emergency care, and Prescription drug coverage. For each classification, the parity requirements also apply separately to different “coverage units” – e.g., self-only, self + spouse, and family coverage.

Determining Applicable Limits: For plans which require different co-pays for different types of medical and surgical benefits, the regulations include detailed examples for calculating the maximum limits which may be applied to MH/SA benefits. These limits must be calculated separately for each benefit classification.

Generalists and Specialists are Not Separate Classifications: Plans may not charge higher co-pays for MH/SA benefits by treating mental health providers as specialists and charging the same co-pay the plan applies to medical care specialists. Instead, all co-pays for medical care must be taken into account for purposes of determining the maximum permissible co-pays for MH/SA benefits.

Separate Deductibles Prohibited: The regulations clarify that plans may not apply separate deductibles for medical and MH/SA benefits, even if the deductibles are equal. Instead, plans may only apply a combined deductible for all benefits.

Non-Quantitative Benefit Limitations: The parity requirements also apply to non-quantitative benefit limitations, like preauthorization requirements and standards for determining usual, customary and reasonable charges. For example, a plan may not require pre-approval for MH/SA expenses if the plan does not also require pre-approval for medical and surgical expenses.

Disclosure Requirements: The criteria for medical necessity determinations for MH/SA benefits must be provided to participants, beneficiaries and contracting providers upon request.

Increased Cost Exemption: Plan sponsors may be eligible for an exemption from the 2008 Act if an actuary certifies that compliance would result in a cost increase which exceeds a certain threshold. However, plans must comply with the 2008 Act for at least one year before the exemption may apply. In addition, the statute suggests that the exemption may not apply for consecutive plan years, which means a plan would be eligible for the exemption only in alternating plan years. It is unclear how this would work in practice, and the regulations do not yet address this exemption.

PBGC Proposed Changes May Trigger Default Under Your Employer's Credit Agreements

Reducing the size of your workforce? Dissolving a subsidiary? Transferring assets and liabilities between plans? These transactions may soon trigger new notice requirements with the PBGC and may cause a default under your employer’s credit agreements as a result.

The typical credit agreement between a company and its lenders contains a trigger for certain transactions that constitute “reportable events” under PBGC rules. Where the reportable event has a notice requirement that is not automatically waived by the PBGC, it will typically constitute a default under the credit agreement. (Often the transaction must exceed a materiality threshold as well.)

Presently, the PBGC provides an automatic waiver for many common transactions, where a well-funded plan is involved, or where the amount involved is de minimis (such as a transfer of benefit liabilities or a change in controlled group). See, e.g., PBGC Reg. section 4043.29. Proposed PBGC regulations would eliminate these automatic waivers, however, regardless of the plan’s funding status.

To prevent inadvertently triggering a default with your lenders, you will want to closely examine the terms of your credit agreements. Modifications may be needed to preserve the original intent negotiated with your lenders. These modifications should be relatively straightforward to obtain, however, since they are consistent with the intent underlying the original credit agreement between the employer and lender.  

The regulations are currently in proposed form and would take effective once finalized by the PBGC.

Background on PBGC Reportable Event Rules

Section 4043(a) of ERISA requires that plan administrators and contributing sponsors must notify the PBGC of certain "reportable events" within 30 days after they occur. (In some cases, advance reporting is also required under section 4043(b) of ERISA, although this does not apply where the contributing sponsor is a publicly traded company.) Reportable events include transactions that threaten the viability of a pension plan, such as the liquidation of the plan sponsor, or the inability to pay benefits. Reportable events can also include more routine changes in the controlled group, such as a reorganization. 

At present, the PBGC automatically waives the post-event notice requirement in many cases. Under the proposed PBGC regulations, however, most of these automatic waivers would disappear. This means that each of the following transactions would require notice to the PBGC within 30 days afterward, even for a fully funded plan or a small plan:

• Active Participant Reduction (i.e., Facility Closure)
• Change in Contributing Sponsor or Controlled Group
• Liquidation
• Extraordinary Distribution or Stock Redemption
• Transfer of Benefit Liabilities
• Loan Default
• Distribution to Substantial Owner

(For privately held companies, the automatic waiver of the advance notice requirement would also be eliminated for transfers of benefit liabilities - even if the plan is fully funded or the transfer complies with Code section 414(l).)

What happens if we miss the deadline?

Failure to provide a timely notice carries a hefty fine: Up to $1,100 per day. The PBGC has discretion to extend the deadline, or to waive it altogether, subject to certain conditions.