Notice to Participants and Beneficiaries and the Federal Government of Electing One Percent Increased Cost Exemption

federal register

Monday
December 22, 1997

Part V
Department of the Treasury
Internal Revenue Service
26 CFR Part 54

Department of Labor
Pension Welfare Benefits Administration
29 CFR Part 2590

Department of Health and
Human Services
Health Care Financing Administration
45 CFR Part 146
Mental Health Parity; Interim Rules
HIPAA Mental Health Parity Act;
Proposed Rule

66931

66932 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 54
[T.D. 8741]
RIN 1545–AV53

DEPARTMENT OF LABOR
Pension and Welfare Benefits
Administration
29 CFR Part 2590
RIN 1210–AA62

DEPARTMENT OF HEALTH AND
HUMAN SERVICES
Health Care Financing Administration
45 CFR Part 146
RIN 0938–AI05

Interim Rules for Mental Health Parity
Internal Revenue Service,
Department of the Treasury; Pension
and Welfare Benefits Administration,
Department of Labor; Health Care
Financing Administration, Department
of Health and Human Services.
ACTION: Interim rules with request for
comments.
AGENCIES:

SUMMARY: This document contains
interim rules governing parity between
medical/surgical benefits and mental
health benefits in group health plans
and health insurance coverage offered
by issuers in connection with a group
health plan. The rules contained in this
document implement changes made to
certain provisions of the Internal
Revenue Code of 1986 (Code), the
Employee Retirement Income Security
Act of 1974 (ERISA or Act), and the
Public Health Service Act (PHS Act)
enacted as part of the Mental Health
Parity Act of 1996 (MHPA) and the
Taxpayer Relief Act of 1997. Interested
persons are invited to submit comments
on the interim rules for consideration by
the Department of the Treasury, the
Department of Labor, and the
Department of Health and Human
Services (Departments) in developing
final rules. The rules contained in this
document are being adopted on an
interim basis to ensure that sponsors
and administrators of group health
plans, participants and beneficiaries,
States, and issuers of group health
insurance coverage have timely
guidance concerning compliance with
the requirements of MHPA.
DATES: Effective date. The interim rules
are effective January 1, 1998.

Applicability dates. The requirements
of MHPA and the interim rules apply to
group health plans and health insurance
issuers offering health insurance
coverage in connection with a group
health plan for plan years beginning on
or after January 1, 1998. MHPA includes
a sunset provision under which the
MHPA requirements do not apply to
benefits for services furnished on or
after September 30, 2001.
Information collection. Affected
parties are not required to comply with
the information collection requirements
in these interim rules until the
Departments publish in the Federal
Register the control numbers assigned
to these information collection
requirements by the Office of
Management and Budget (OMB).
Publication of the control numbers
notifies the public that OMB has
approved these information collection
requirements under the Paperwork
Reduction Act of 1995. The
Departments have submitted a copy of
this rule to OMB for its review of the
information collections. Interested
persons are invited to send comments
regarding these burdens or any other
aspect of these collections of
information on or before February 20,
1998.
Comments. Written comments on
these interim rules are invited and must
be received by the Departments on or
before March 23, 1998.
ADDRESSES: Comments on the
information collection requirements
should be sent directly to:
Office of Information and Regulatory
Affairs, Office of Management and
Budget, Room 10235, New Executive
Office Building, Washington, DC
20503, Attention: HCFA Desk Officer.
Health Care Financing Administration,
Office of Financial and Human
Resources, Management Planning and
Analysis Staff, Room C2–26–17, 7500
Security Boulevard, Baltimore, MD
21244–1850; Attention: John Burke
Written comments on other aspects of
the interim rules should be submitted
with a signed original and three copies
(except for electronic submissions sent
to the Internal Revenue Service (IRS)) to
any of the addresses specified below.
For convenience, comments may be
addressed to any of the Departments.
Comments addressed to any Department
will be shared with the other
Departments.
Comments to the IRS can be
addressed to: CC:DOM:CORP:R (REG–
109704–97), Room 5228, Internal
Revenue Service, POB 7604, Ben
Franklin Station, Washington, DC
20044.

In the alternative, comments may be
hand-delivered between the hours of 8
a.m. and 5 p.m. to: CC:DOM:CORP:R
(REG–109704–97), Courier’s Desk,
Internal Revenue Service, 1111
Constitution Avenue, NW., Washington,
DC 20224.
Alternatively, taxpayers may transmit
comments electronically via the IRS
Internet site at: http://
www.irs.ustreas.gov/prod/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
or
Room C5–09–26, 7500 Security
Boulevard, Baltimore, MD 21244–
1850
All submissions to the Internal
Revenue Service will be open to public
inspection and copying in Room 1621,
1111 Constitution Avenue, NW,
Washington, DC from 9:00 a.m. to 4:00
p.m.
All submissions to the Department of
Labor will be open to public inspection
and copying in the Public Documents
Room, Pension and Welfare Benefits
Administration, U.S. Department of
Labor, Room N–5638, 200 Constitution
Avenue, NW, Washington, DC from 8:30
a.m. to 5:30 p.m.
All submissions to the Department of
Health and Human Services will be
open to public inspection and copying
in Room 309–G of the Department of
Health and Human Services offices at
200 Independence Avenue, SW,
Washington, DC from 8:30 a.m. to 5:00
p.m.
FOR FURTHER INFORMATION CONTACT:
Terese Klitenic, Health Care Financing
Administration, Department of Health
and Human Services, at (410) 786–1565;
Mark Connor, Pension and Welfare
Benefits Administration, Department of
Labor, at (202) 219–4377; or Russ

l

Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations
Weinheimer, Internal Revenue Service,
Department of the Treasury, at (202)
622–4695.
Customer service information.
Individuals interested in obtaining a
copy of the Department of Labor’s
booklet entitled ‘‘Questions and
Answers: Recent Changes in Health Care
Law,’’ which includes information on
MHPA, may call the following toll-free
number: 1–800–998–7542.
SUPPLEMENTARY INFORMATION:

A. Background
The Mental Health Parity Act of 1996
(MHPA) was enacted on September 26,
1996 (Pub. L. 104–204, 110 Stat. 2944).
MHPA amended the Employee
Retirement Income Security Act of 1974
(ERISA) and the Public Health Service
Act (PHS Act) to provide for parity in
the application of certain dollar limits
on mental health benefits with dollar
limits on medical/surgical benefits.
Provisions implementing MHPA were
later added to the Internal Revenue
Code of 1986 (Code) under the Taxpayer
Relief Act of 1997 (Pub. L. 105–34).
1. Regulatory Responsibility
The provisions of MHPA are set forth
in Chapter 100 of Subtitle K of the Code,
Part 7 of Subtitle B of Title I of ERISA,
and Title XXVII of the PHS Act.1 The
Secretaries of the Treasury, Labor, and
Health and Human Services share
jurisdiction over the MHPA provisions.
These provisions are substantially
similar, except as follows:
• The MHPA provisions in the Code
generally apply to all group health plans
other than governmental plans, but they
do not apply to health insurance issuers.
A taxpayer that fails to comply with
these provisions may be subject to an
excise tax under section 4980D of the
Code.
• The MHPA provisions in ERISA
generally apply to all group health plans
other than governmental plans, church
plans, and certain other plans. These
provisions also apply to health
insurance issuers that offer health
insurance coverage in connection with
such group health plans. Generally, the
Secretary of Labor enforces the MHPA
provisions in ERISA, except that no
enforcement action may be taken by the
Secretary against issuers. However,
individuals may generally pursue
actions against issuers under ERISA
and, in some circumstances, under State
law.
1 Chapter 100 of Subtitle K of the Code, Part 7 of
Subtitle B of Title I of ERISA, and Title XXVII of
the PHS Act were added by the Health Insurance
Portability and Accountability Act of 1996 (HIPAA),
Pub. L. 104–191.

• The MHPA provisions in the PHS
Act generally apply to health insurance
issuers that offer health insurance
coverage in connection with group
health plans and to certain State and
local governmental plans. States, in the
first instance, enforce the PHS Act with
respect to issuers. Only if a State does
not substantially enforce any provisions
under its insurance laws will the
Department of Health and Human
Services enforce the provisions, through
the imposition of civil money penalties.
Moreover, no enforcement action may
be taken by the Secretary of Health and
Human Services against any group
health plan except certain State and
local governmental plans.
The interim rules being issued today
by the Secretaries of the Treasury,
Labor, and Health and Human Services
have been developed on a coordinated
basis by the Departments. In addition,
these interim rules take into account
comments received by the Departments
in response to the request for public
comments on MHPA published in the
Federal Register on June 26, 1997 (62
FR 34604). Except to the extent needed
to reflect the statutory differences
described above, the interim rules of
each Department are substantively
identical. However, there are certain
non-substantive differences. The interim
rules reflect certain stylistic differences
in language and structure to conform to
conventions used by a particular
Department. These differences have
been minimized and any differences in
wording are not intended to create any
substantive difference.
2. Preemption of State Laws
The McCarran-Ferguson Act of 1945
(Pub. L. 79–15) exempts the business of
insurance from federal antitrust
regulation to the extent that it is
regulated by the States and indicates
that no federal law should be
interpreted as overriding State
insurance regulation unless it does so
explicitly. Section 514(a) of ERISA
preempts State laws relating to
employee benefit plans (including group
health plans). Section 731 of ERISA and
section 2723 of the PHS Act provide
that Part 7 of Subtitle B of Title I of
ERISA and Part A of Title XXVII of the
PHS Act (including the MHPA
provisions) do not in any way affect or
modify section 514 of ERISA with
respect to group health plans.
Section 514(b)(2) of ERISA saves from
preemption any State law that regulates
insurance. However, section 731(a) of
ERISA and section 2723(a) of the PHS
Act preempt State insurance laws
relating to health insurance issuers in
connection with group health insurance

66933

coverage to the extent such laws
‘‘prevent the application of’’ Part 7 of
Subtitle B of Title I of ERISA or Part A
of Title XXVII of the PHS Act, including
the MHPA provisions. (There is no
corresponding provision in the Code.) In
this regard, the conference report to
HIPAA states that the conferees
generally intended the narrowest
preemption of State laws with regard to
health insurance issuers (not group
health plans) with respect to the
provisions of Part 7 of Subtitle B of Title
I of ERISA and Part A of Title XXVII of
the PHS Act.2 Consequently, the
conference report to HIPAA states that
State laws with regard to health
insurance issuers that are broader than
federal requirements in certain areas
would not ‘‘prevent the application of’’
the provisions of Part 7 of Subtitle B of
Title I of ERISA or Part A of Title XXVII
of the PHS Act. Further, the conference
report to MHPA states that the
application of these preemption
provisions should permit the operation
of any State law or provision that
requires more favorable treatment of
mental health benefits under health
insurance coverage than that required
under the MHPA provisions.
Thus, generally, a State law that
requires more favorable treatment of
mental health benefits under health
insurance coverage offered by issuers
would not be preempted by the
provisions of MHPA and the interim
rules.
B. Overview of MHPA and the Interim
Rules
The MHPA provisions are set forth in
section 9812 of the Code, section 712 of
ERISA, and section 2705 of the PHS Act.
MHPA and the interim rules apply to a
group health plan (or health insurance
coverage offered by issuers in
connection with a group health plan)
that provides both medical/surgical
benefits and mental health benefits.
The MHPA provisions provide for
parity in the application of aggregate
lifetime dollar limits, and annual dollar
limits, between mental health benefits
and medical/surgical benefits. If a group
health plan offers two or more benefit
packages under the plan, the
2 However, the preemption is broader for the
statutory requirements of section 701 of ERISA and
section 2701 of the PHS Act that limit the
application of preexisting condition exclusions.
Under these broader provisions, State laws cannot
‘‘differ’’ from the preexisting condition exclusion
requirements of section 701 of ERISA or section
2701 of the PHS Act except as specifically
permitted by section 731(b)(2) of ERISA and section
2723(b)(2) of the PHS Act. These provisions permit
a State to impose on health insurance issuers
certain stricter limitations relating to preexisting
condition exclusions.

66934 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations
requirements of MHPA and the interim
rules apply separately to each package.
The interim rules make clear that the
MHPA requirements apply regardless of
whether the mental health benefits are
administered separately under the plan.
In addition, the interim rules make clear
that the MHPA requirements in ERISA
and the PHS Act apply both to group
health plans and to health insurance
issuers offering coverage in connection
with a group health plan.
MHPA and the interim rules do not
require a group health plan (or health
insurance coverage offered in
connection with a group health plan) to
provide mental health benefits. In
addition, MHPA and the interim rules
do not affect the terms and conditions
(including cost sharing, limits on the
number of visits or days of coverage,
requirements relating to medical
necessity, requirements that patients or
providers obtain prior authorization for
treatment, and requirements relating to
primary care physicians’ referrals for
treatment) relating to the amount,
duration, or scope of mental health
benefits under a plan (or coverage)
except as specifically provided in regard
to parity of aggregate lifetime dollar
limits and annual dollar limits.3
1. Aggregate Lifetime Limits and Annual
Limits
Under MHPA and the interim rules, a
group health plan (or health insurance
coverage offered in connection with a
group health plan) providing both
medical/surgical benefits and mental
health benefits may comply with the
MHPA parity requirements in any of the
following general ways:
• The plan (or coverage) may comply
by not including any aggregate lifetime
dollar limit or annual dollar limit on
mental health benefits.
• The plan (or coverage) may comply
by imposing a single aggregate lifetime
or annual dollar limit on both medical/
surgical benefits and mental health
benefits in a way that does not
distinguish between the two.
• The plan (or coverage) may comply
by imposing an aggregate lifetime dollar
limit or annual dollar limit on mental
health benefits that is not less than the
aggregate lifetime dollar limit or annual
3 In response to the Departments’ request for
public comments on MHPA published in the
Federal Register (62 FR 34604), the Equal
Employment Opportunity Commission (EEOC)
noted that the Americans with Disabilities Act
(ADA) prohibits disability-based distinctions
(including such distinctions relating to the
provision of mental health benefits) in employerprovided health insurance plans unless the plan
otherwise falls within the protections of section
501(c) of the ADA. The ADA is within the
regulatory jurisdiction of the EEOC.

dollar limit on medical/surgical
benefits.
• In the case of a plan (or coverage)
under which aggregate lifetime dollar
limits or annual dollar limits differ for
categories of medical/surgical benefits,
the plan (or coverage) may comply by
calculating a weighted average aggregate
lifetime dollar limit or weighted average
annual dollar limit for mental health
benefits. The weighted average must be
based on a formula in the interim rules
that takes into account the limits on
different categories of medical/surgical
benefits.
In addition, under MHPA and the
interim rules, benefits for treatment of
substance abuse or chemical
dependency may not be counted in
applying an aggregate lifetime or annual
dollar limit that applies separately to
mental health benefits.
2. Exemptions from the Requirements of
MHPA
(a) Small Employer Exemption
The parity requirements under MHPA
and the interim rules do not apply to
any group health plan (or health
insurance coverage offered in
connection with a group health plan) for
any plan year of a small employer. The
term ‘‘small employer’’ is defined as an
employer who employed an average of
at least 2 but not more than 50
employees on business days during the
preceding calendar year and who
employs at least 2 employees on the first
day of the plan year.4
For purposes of the small employer
exemption, all persons treated as a
single employer under subsections (b),
(c), (m), and (o) of section 414 of the
Code (26 U.S.C. 414) are treated as one
employer. In addition, if an employer
was not in existence throughout the
preceding calendar year, whether the
employer is a small employer is
determined on the average number of
employees the employer reasonably
expects to employ on business days
during the current calendar year.
Finally, any reference to an employer in
the small employer exemption includes
a reference to a predecessor of the
employer.
4 Section 9831(a) of the Code, section 732(a) of
ERISA, and section 2721(a) of the PHS Act provide
an exception that applies under the MHPA
provisions as well as under provisions added by
HIPAA and the Newborns’ and Mothers’ Health
Protection Act of 1996. The exception applies to
any group health plan (and health insurance
coverage offered in connection with a group health
plan) for any plan year if, on the first day of the
plan year, the plan has fewer than 2 participants
who are current employees.

(b) Increased Cost Exemption
The second exemption from the
MHPA requirements applies to group
health plans (or health insurance
coverage offered in connection with a
group health plan) if the application of
the MHPA parity requirements
described in paragraph (b)(1)(i) 5 results
in an increase in the cost under the plan
(or coverage) of at least one percent.
This exemption is available only if the
requirements of paragraph (f) are met. If
a plan offers more than one benefit
package, the exemption is applied
separately to each benefit package.
Except as provided in the transition
period described in paragraph (h), a
plan must implement the parity
requirements for the first plan year
beginning on or after January 1, 1998,
and must continue to comply with the
parity requirements until September 30,
2001 (the sunset date in paragraph (i))
unless the plan satisfies the exemption
described in paragraph (f). However, the
exemption is not effective until 30 days
after the notice requirements in
paragraph (f)(3) are satisfied.
The interim rules, in paragraph (f)(2),
describe the ratio of two terms used to
determine if a plan (or coverage) has
experienced a cost increase of one
percent or more. The first term is the
total cost incurred under parity
(including both mental health costs and
medical/surgical costs). The second
term is the total cost incurred under
parity reduced by the costs required
solely to comply with parity. Costs
required solely to comply with parity
include mental health claims that would
have been denied absent amendments
required to comply with parity, the
administrative costs related to those
claims, and other administrative costs
attributable to complying with the
parity requirements. Premium payments
are not considered in this calculation.
The ratio is expressed by the following
formula:

IE
≥ 1.01000
IE − (CE + AE )
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
5 Any reference to a particular paragraph in this
preamble to the interim rules is a reference to the
corresponding paragraphs in each of the
Departments’ interim rules.

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

66935

this exemption under MHPA is not
effective until at least 30 days after the
notice is sent to the participants and
beneficiaries and the appropriate federal
agency even if the notice is incorporated
into a summary of material reductions
in covered services or benefits.
A group health plan that is not subject
to Part 7 of Subtitle B of Title I of
ERISA, and a plan subject to Part 7 of
Subtitle B of Title I of ERISA that
chooses not to incorporate the
information in paragraph (f)(3)(i) into a
summary of material reductions in
covered services or benefits (which
must be furnished to participants and
beneficiaries and the appropriate federal
agency), may use the following model to
satisfy the notice requirement under
paragraph (f)(3) of the interim rules:
BILLING CODE 4830–01–P; 4510–29–P; 4120–01–P

66936 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations

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

Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations
To claim the one-percent increased
cost exemption, a group health plan that
is a church plan (as defined in section
414(e) of the Code) also must furnish to
the Department of the Treasury a copy
of the notice sent to participants and
beneficiaries that satisfies the
requirements of paragraph (f)(3)(i). To
claim the one percent increased cost
exemption, a group health plan subject
to Part 7 of Subtitle B of Title I of ERISA
also must furnish to the Department of
Labor a copy of the notice sent to
participants and beneficiaries that
satisfies the requirements of paragraph
(f)(3)(i). To claim the one percent
increased cost exemption, a group
health plan that is a nonfederal
governmental plan also must furnish to
the Department of Health and Human
Services a copy of the notice sent to
participants and beneficiaries that
satisfies the requirements of paragraph
(f)(3)(i). In all cases, the exemption is
not effective until 30 days after notice
has been sent both to participants and
beneficiaries and to the appropriate
federal agency. Any notice submitted to
the Department of Labor or Health and
Human Services will be available for
public inspection.
The Secretaries have designated the
following addresses for delivery of these
notices:
For notices to the Department of the
Treasury, church plans should mail the
notice to: Office of the Assistant
Commissioner, Examination,
Examination Programs CP:EX:E, 1111
Constitution Avenue, NW., Washington,
DC 20224; Attention: MHPA onepercent cost exemption notice.
For notices to the Department of
Labor, plans should mail the notice to:
Public Documents Room, Pension and
Welfare Benefits Administration, U.S.
Department of Labor, Room N–5638,
200 Constitution Avenue, NW.,
Washington, DC 20210; Attention:
MHPA one-percent cost exemption
notice.
For notices to the Department of
Health and Human Services, plans
should mail the notice to: Health Care
Financing Administration, 7500
Security Boulevard, Baltimore, MD
21244–1850; Attention: Insurance
Standards: Exemptions.
Finally, to claim the one percent
increased cost exemption, a plan (or
issuer) must make available to
participants and beneficiaries (or their
representatives), on request and at no
charge, a summary of the information

described in paragraph (f)(4). An
individual who is not a participant or
beneficiary and who presents a notice
described in paragraph (f)(3)(i) is
considered to be a representative. For
this purpose, individually identifiable
information in the notice may be
redacted. The summary of information
must include the incurred expenditures,
the base period, the dollar amount of
claims incurred during the base period
that would have been denied under the
terms of the plan absent amendments
required to comply with parity, and the
administrative expenses attributable to
complying with the parity requirements.
In no event should a summary of
information include individually
identifiable information.
Civil money penalties as described in
regulations at 45 CFR 146.184(d) apply
to an issuer or nonfederal governmental
plan that fails to satisfy the
requirements of paragraph (f).
3. MHPA’s Effective Date and Sunset
Provision
The MHPA provisions are generally
effective for group health plans (and
health insurance issuers offering health
insurance coverage in connection with a
group health plan) for plan years
beginning on or after January 1, 1998.
MHPA includes a sunset provision
under which the MHPA requirements
do not apply to benefits for services
furnished on or after September 30,
2001.
However, for requirements of this
section other than the one-percent
increased cost exemption, the interim
rules provide a limitation on
enforcement actions in paragraph (h)(2).
Under that paragraph, no enforcement
action can be taken by any of the
Secretaries against a group health plan
(or issuer) that has sought to comply in
good faith with the requirements of
section 9812 of the Code, section 712 of
ERISA, and section 2705 of the PHS Act
with respect to a violation that occurs
before the earlier of the first day of the
first plan year beginning on or after
April 1, 1998, or January 1, 1999.
Compliance with the requirements of
the interim rules is deemed to be good
faith compliance with the requirements
of section 9812 of the Code, section 712
of ERISA, and section 2705 of the PHS
Act.
With respect to the increased cost
exemption, the interim rules provide in
paragraph (h)(3) a transition period for
compliance with the requirements of

66937

paragraph (f). Under paragraph (h)(3),
no enforcement action will be taken
against a group health plan (or issuer)
that is subject to the MHPA
requirements prior to April 1, 1998
solely because the plan has claimed the
increased cost exemption under section
9812(c)(2) of the Code, section 712(c)(2)
of ERISA, or section 2705(c)(2) of the
PHS Act based on assumptions
inconsistent with the rules under
paragraph (f) of the interim rules,
provided that the plan is amended to
comply with the parity requirements no
later than March 31, 1998 and the plan
complies with the notice requirements
in paragraph (h)(3)(ii).
A group health plan satisfies this
transition period notice requirement
only if the plan provides notice to the
applicable federal agency and posts
such notice at the location(s) where
documents must be made available for
examination under section 104(b)(2) of
ERISA and the regulations thereunder
(§ 2520.104b–1(b)(3)). The notice must
indicate the plan’s intent to use the
transition period by 30 days after the
first day of the plan year beginning on
or after January 1, 1998, but in no event
later than March 31, 1998. For a group
health plan that is a church plan, the
applicable federal agency is the
Department of the Treasury. For a group
health plan that is subject to Part 7 of
Subtitle B of Title I of ERISA, the
applicable federal agency is the
Department of Labor. For a group health
plan that is a nonfederal governmental
plan, the applicable federal agency is
the Department of Health and Human
Services. In all cases, the notice must
include the date; the name of the plan
and the plan number; the name,
address, and telephone number of the
plan sponsor or plan administrator; the
employer identification number (in the
case of single-employer plans only); the
individual to contact for further
information; the signature of the plan
administrator; and the date signed. In
addition, the notice must be provided at
no charge to participants and
beneficiaries (or their representatives)
within 15 days after receipt of a written
or oral request for such notification, but
in no event does the notice have to be
provided before it has been sent to the
applicable federal agency. For this
purpose, plans may use the following
model:
BILLING CODE 4830–01–P; 4510–29–P; 4210–01–P

66938 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations

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

Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations
The Secretaries have designated the
following addresses for delivery of the
notices: For notices to the Department of
the Treasury, plans should mail the
notice to: Office of the Assistant
Commissioner, Examination,
Examination Programs CP:EX:E, 1111
Constitution Avenue, NW., Washington,
DC 20224; Attention: MHPA transition
period notice.
For notices to the Department of
Labor, plans should mail the notice to:
Public Documents Room, Pension and
Welfare Benefits Administration, U.S.
Department of Labor, Room N–5638,
200 Constitution Avenue, NW.,
Washington, DC 20210; Attention:
MHPA transition period notice.
For notices to the Department of
Health and Human Services, plans
should mail the notice to: Health Care
Financing Administration, 7500
Security Boulevard, Baltimore, MD
21244–1850; Attention: Insurance
Standards: Exemptions.
C. Interim Rules and Request for
Comments
Section 9833 of the Code (formerly
section 9806), section 734 of ERISA
(formerly section 707), and section 2792
of the PHS Act provide, in part, that the
Secretaries of the Treasury, Labor, and
Health and Human Services may
promulgate any interim final rules as
they determine are appropriate to carry
out the provisions of Chapter 100 of
Subtitle K of the Code, Part 7 of Subtitle
B of Title I of ERISA, and Part A of Title
XXVII of the PHS Act, including the
MHPA provisions.
Under Section 553(b) of the
Administrative Procedure Act (5 U.S.C.
551 et seq.) a general notice of proposed
rulemaking is not required when an
agency, for good cause, finds that notice
and public comment thereon are
impracticable, unnecessary, or contrary
to the public interest.
These rules are being adopted on an
interim final basis because the
Secretaries have determined that
without prompt guidance some
members of the regulated community
may not know what steps to take to
comply with the MHPA requirements,
which may result in an adverse impact
on participants and beneficiaries with
regard to their mental health benefits
under group health plans and the
protections provided under MHPA.
Moreover, MHPA’s requirements will
affect the regulated community in the
immediate future.
MHPA’s requirements are effective for
all group health plans and for health
insurance issuers offering coverage in
connection with such plans for plan
years beginning on or after January 1,

1998. Plan administrators and sponsors,
issuers, and participants and
beneficiaries, will need guidance on the
new statutory provisions before MHPA’s
effective date. As noted earlier, these
interim rules take into account
comments received by the Departments
in response to the request for public
comments on MHPA published in the
Federal Register on June 26, 1997 (62
FR 34604). For the foregoing reasons,
the Departments find that the
publication of a proposed regulation, for
the purpose of notice and public
comment thereon, would be
impracticable, unnecessary, and
contrary to the public interest.
D. Regulatory Flexibility Act
The Regulatory Flexibility Act (5
U.S.C. 601 et. seq.) (RFA) requires an
agency to publish a regulatory flexibility
analysis describing the impact of a
proposed rule which the agency
determines would have a significant
impact on a substantial number of small
entities. The RFA requires that the
agency present an initial regulatory
flexibility analysis and seek public
comment on its analysis when the
agency publishes a general notice of
proposed rulemaking (NPRM) under
section 553 of the Administrative
Procedures Act (5 U.S.C. 553 et seq.)
(APA). Under the RFA, small entities
include small businesses, non-profit
organizations and governmental
agencies. For our purposes, under the
RFA, States and individuals are not
considered small entities. However,
small employers and small group health
plans are considered small entities.
Since these rules are issued as interim
final rules, and not as an NPRM, a
formal regulatory flexibility analysis has
not been prepared. Nonetheless, in the
discussion below on the rule’s impact
on the regulated community, the
Departments present an analysis
addressing many of the same issues
otherwise required by the RFA,
including the likely impact of the
interim rule on small entities, and a
discussion of regulatory alternatives
considered in crafting the rule. The
Departments invite interested persons to
submit comments for consideration in
the development of the final rules
implementing the MHPA. Consistent
with the RFA, the Departments
encourage the public to submit
comments that accomplish the stated
purpose of the MHPA and minimize the
impact on small entities. Specifically,
we welcome comments addressing the
impact of the MHPA’s 1 percent cost
exemption for plans and issuers that can
demonstrate that implementation of the
parity rules would raise their

66939

expenditures by more than one percent.
We also welcome comments addressing
the operation of the MHPA provision
requiring that plans using differential
aggregate lifetime or annual limits for
various categories of benefits use a
weighted average of such differential
limits to calculate the overall aggregate
lifetime and annual limits for the plan.
E. Executive Order 12866—
Departments of Labor and Health and
Human Services
The Office of Management and Budget
has determined this rule to be a major
rule, as well as an economically
significant regulatory action under
Section 3(f) of Executive Order 12866.
The following analysis fulfills the
requirement under the Executive Order
to assess the economic impact of major
and economically significant regulatory
actions.
Executive Order 12866 requires
agencies to assess the costs and benefits
of available regulatory alternatives, and
when regulation is necessary, to select
regulatory approaches that maximize
net benefits (including potential
economic, environmental, public health
and safety effects; distributive impacts;
and equity). Section 3(f) of the
Executive Order 12866 requires agencies
to prepare a regulatory impact analysis
for any rule which is deemed a
‘‘significant regulatory action’’
according to specified criteria, including
whether the rule may have an annual
effect on the economy of $100 million
or more or certain other specified
effects; or whether the rules raise novel
legal or policy issues arising out of the
President’s priorities.
This analysis was conducted by the
Departments of Labor and Health and
Human Services. It discusses the
economic impact of the MHPA, which
this rule implements, with special
emphasis on the one percent cost
exemption. It quantifies the number of
plans and individuals who might be
affected by the exemption rule,
illustrating the exemption’s effect in the
context of other statutory MHPA
provisions. It separately considers the
impact of regulatory discretion
exercised by the Departments in
connection with this rule.
a. Overall Impact of the MHPA
In general, the MHPA may have both
direct and indirect effects on group
health plans, plan sponsors, and plan
participants. Direct effects may include
broader coverage of mental health
treatments and associated increases in
mental health benefit payments. Indirect
effects may include the steps employers
who sponsor plans may take to reduce

66940 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations
or offset their expenditures attributable
to compliance with the MHPA, such as
amending, curtailing or dropping
mental health benefits or other
components of compensation, as well as
participants’ responses to any
expenditure increases that are passed to
them.
Direct Effects
The most direct effect of the MHPA is
broader health insurance coverage for
mental health treatment. In many health
plans, mental health coverage is more
restrictive than medical/surgical
coverage due to lower annual and/or
lifetime dollar limits, more restrictive
limits on visits and stays, and other plan
provisions. For example, a recent survey
of employee benefit plans by Hay/
Huggins illustrates the differences in
plan terms and lower dollar limits of
mental health services and medical/
surgical services. The survey reported
that indemnity plans typically impose a
lifetime limit of $50,000 for mental
health benefits. On the other hand,
medical/surgical benefits of a typical
indemnity plan provide a lifetime limit
of $1,000,000.
Requiring fuller coverage of mental
health treatment will increase mental
health benefit payments and associated
plan expenditures. Some of this increase
will be paid by plan sponsors, and some
will be paid by participants in the form
of increased premiums and/or
reductions in other compensation.
Aside from any increased administrative
costs involved, these plan expenditure
increases generally represent one side of
transfer payments rather than erosion in
overall social welfare. In other words,
additional plan expenditures arising
from the MHPA are balanced by
additional benefits paid for mental
health services. One result will be that
some money that would have been
spent on other goods or services will be
spent instead on mental health services.
The direct effects of the MHPA will in
turn cause other effects due to
subsequent responses by affected
employers (in their capacity as plans
sponsors) and participants.
Indirect Effects of the MHPA
There are numerous ways in which
plan sponsors affected by the MHPA
might react. Some might take no action
other than to remove or increase dollar
limits on mental health benefits. Others
might make other changes to their
mental health benefits in order to
reduce or offset expenditure increases
from compliance with MHPA. The
statute explicitly preserves plan
sponsors’ right to provide no mental
health benefits, or to set the ‘‘terms and

conditions (including cost sharing,
limits on numbers of visits or days of
coverage, and requirements relating to
medical necessity) relating to the
amount, duration, or scope of mental
health benefits,’’ except with respect to
annual or lifetime dollar limits. Some
plan design options would be associated
with lower plan expenditure increases
from compliance with the MHPA. The
statute also provides an ‘‘increased cost
exemption’’ under which the statute
‘‘shall not apply’’ if its application
‘‘results in an increase in the cost . . .
of at least 1 percent’’ (ERISA Section
712(c)(2)). Plan sponsors’ responses to
the MHPA may lessen their
expenditures associated with
compliance; that is, their responses may
reduce the amount of transfers arising
from the MHPA.
For example, many mental health
plans currently have non-dollar limits.
According to the U.S. Bureau of Labor
Statistics, among full-time participants
at private establishments with 100 or
more employees in 1993, 55 percent
were subject to separate day limits for
inpatient mental health treatment, and
43 percent were subject to separate visit
limits for outpatient mental health
treatment (U.S. Bureau of Labor
Statistics, Employee Benefits in Medium
and Large Private Establishments, 1993).
Plans that impose non-dollar limits on
mental health benefits may face smaller
expenditures increases from the MHPA.
Many plans currently subject mental
health benefits to separate cost sharing
provisions. Among full-time
participants in medium and large
private establishments in 1993, 15
percent were subject to separate
coinsurance rates and 4 percent were
subject to separate copayment rates for
inpatient mental health care, while 53
percent and 18 percent were
respectively subject to separate
coinsurance and copayment rates for
outpatient mental health care. Cost
sharing generally affects plan
expenditures in two ways. First, by
shifting some payments for services to
participants, cost sharing directly
reduces the expenditures borne by
plans. Second, by increasing the price of
services faced by participants, cost
sharing reduces the quantity of services
that participants demand. Because of
both of these mechanisms, plans that
have more cost sharing for mental
health benefits will not be impacted as
much by the MHPA as plans that have
parity in cost sharing.
Many plans use HMO-style
management techniques to control
mental health benefit expenditures.
Plans that have HMO-style mental
health ‘‘carve-outs’’ but no mental

health limits are likely to pay less for
mental health benefits than fee-forservice plans with low dollar limits that
are impermissible under the MHPA. For
example, a FFS plan with utilization
review and an annual mental health
limit of $10,000 averages $6.51 per
member per month, while an unlimited
‘‘carve out’’ plan pays $6.12, according
to a Price Waterhouse LLP actuarial
model developed for the Departments
based on the same data as above.
There are a number of reasons why
the permissible plan designs outlined
here should have little negative effect on
existing mental health coverage. First,
the modest expenditure increases
necessitated by the MHPA would be
unlikely to prompt many major design
changes. As noted below, approximately
10 percent of affected plans will face
increased expenditures under the
MHPA of at least one percent, according
to the Price Waterhouse, LLP analysis
conducted for the Departments. Only 4
percent of affected plans are expected to
be faced with increases from the MHPA
of 1.5 percent or more, according to the
same analysis. Second, the largest
expenditure increases and therefore the
most aggressive responses will be
associated with plans that have the
tightest dollar caps today—that is, with
plans that would have provided the
most restrictive coverage anyway.
Other effects resulting from the
MHPA may include plan sponsors
dropping mental health coverage
altogether, or dropping or curtailing
other health benefits or components of
compensation. Such curtailments could
include shifting some of the cost of
benefits to employees, for example in
the form of increased participant
premium contributions for health
benefits. Participants, in turn, might
respond to premium increases by
dropping their health benefits or
electing less expensive plans. As with
plan sponsor amendments to mental
health benefits, such responses by plan
sponsors and participants are expected
to be modest and/or rare, given the
generally small direct effects of the
MHPA on plan expenditures.
b. Review of Quantitative Estimates
The Congressional Budget Office
(CBO) estimated that the MHPA’s direct
effect would be to increase health plan
expenditures by 0.4 percent on
aggregate. (See Congressional Budget
Office, ‘‘CBOs Estimates of the Mental
Health Parity Amendments to the VA/
HUD Appropriation Bill, as Passed in
the Senate,’’ September 10, 1996.) This
assumes that plan sponsors make no
changes to their plans other than to raise
or eliminate dollar limits on mental

Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations
health benefits consistent with the
MHPA’s parity requirements. However,
some plan sponsors may make other
changes to their plans in order to reduce
or offset the impact of the MHPA on
their expenditures. For example, some
plan sponsors might amend, curtail, or
drop mental health benefits or health
benefits in general. Taking into account
the likely incidence of such plan
sponsor responses to the MHPA, CBO
estimated that the true aggregate
increase in health plan expenditures
attributable to the MHPA would only be
0.16 percent.
Combining these figures with those
from an earlier CBO analysis, the
Departments calculate that, in dollar
terms, the total annual direct impact of
the MHPA would be to increase
aggregate health plan expenditures by
$1.16 billion, not accounting for plan
sponsor responses to reduce that
impact. Accounting for those responses,
the actual increase in annual aggregate
health plan expenditures would be $464
million. It should be noted that these
figures do not account for the MHPA’s
increased cost exemption, its exemption
of firms with 50 or fewer employees, the
incidence of managed care plans whose
added cost under the MHPA would be
smaller than those of managed fee for
service plans, or for plans that are
separately subject to state requirements
equal or greater than the MHPA’s. The
Departments’ estimates, reported below,
incorporate these adjustments.
CBO also reports the Joint Committee
on Taxation’s estimate that the MHPA
will reduce federal revenues by $560
million over six years. CBO explains
that most of the 0.16 percent increase in
plan expenditures would be shifted
back to employees as lower pay, thus
eroding the income and payroll tax
bases. On an annual basis, the MHPA
would increase expenditures for federal
annuitants’ health benefits by $30
million, CBO reports. Finally, the
MHPA’s impact on nonfederal
governmental entities would amount to
$50 million, while its impact on the
private sector would probably exceed
$100 million, according to CBO.
The CBO estimates were based on a
typical fee-for-service indemnity plan
with customary management techniques
to control expenditures, and not on
plans with other types of delivery
systems, such as Health Maintenance
Organizations (HMOs), Preferred
Provider Organizations (PPOs), or Pointof-Service (POS) plans. In fact, plans
using different delivery systems will
face different expenditure increases
under the MHPA. For example, HMOs,
which typically contract with health
care providers at discounted rates and

tightly manage utilization, will face
smaller increases under the MHPA.
Coopers & Lybrand (C&L) also
estimated the impact of the MHPA
(Ronald E. Bachman, ‘‘An Actuarial
Analysis of S. 2031, The Mental Health
Parity Act of 1996,’’ prepared for the
American Psychological Association.
Coopers & Lybrand LLP, September
1996). C&L estimated that the MHPA
would increase plan expenditures by
0.12 percent per plan on average before
taking into account any responses by
plan sponsors. Taking plans sponsors’
responses into account and using the
same response assumption as CBO, C&L
estimated that plan expenditures would
increase by less than 0.05 percent. In
dollar terms, these increases would
amount to $348 million and $139
million respectively.
Unlike CBO, C&L considered four
different delivery systems: fee-forservice with standard utilization review
on typical medical services, fee-forservice with specialized mental health
utilization review, PPO and POS plans
with specialized mental health
utilization review, and HMO and carveout mental health plans. Under each
delivery system, C&L also considered a
variety of annual dollar limits ranging
from $10,000 to unlimited amounts,
rather than assuming that all plans in
the delivery system provided the same
level of benefits.
The Departments performed
additional quantitative analysis,
generally analogous to CBO’s, in the
course of assessing the impact of the
regulatory discretion reflected in this
rule. The additional analysis suggests
that the direct impact of the MHPA, not
accounting for plan sponsors’ responses,
would be to increase annual aggregate
health plans expenditures by 0.29
percent or $653 million. Under CBO’s
assumption regarding plan sponsor
responses to reduce the added
expenditure, actual added expenditures
would amount to $261 million. The
Departments did not attempt to
independently quantify such responses.
However, the Departments estimate that
if all plans eligible for the one percent
cost exemption exercise it, the increase
in plan expenditures would be reduced
from 0.29 percent to 0.14 percent or
$310 million. The Departments’ analysis
is detailed below.
c. Exercise of Regulatory Discretion
One Percent Cost Exemption
The main area in which the agencies
exercised regulatory discretion is in
connection with the one percent cost
increase exemption. Alternative
regulatory interpretations can impact

66941

the outcome of the number of plans,
firms, policyholders, and covered lives
that would be exempted from the
MHPA.
The Departments considered options
concerning the interpretation of the onepercent cost exemption and how it
should be implemented. In general, they
considered (1) whether the eligibility for
the exemption should be determined
retrospectively or prospectively, and
what, if any, rules should be established
with respect to how eligibility should be
determined, (2) whether eligibility
should be contingent on affirmative
approval from an enforcement agency or
simply subject to possible review by
such an agency, and (3) whether plan
sponsors electing exemptions should be
required to notify participants and/or
enforcement agencies of this action and/
or to disclose to these parties evidence
documenting eligibility for the
exemption. They also considered the
administrability of each option, seeking
to balance the costs and benefits to
plans and participants, as well as the
benefits and burdens of the regulatory
scheme on the federal government.
Retro/prospective Determination
The options considered ranged from a
purely retrospective interpretation to a
purely prospective one, and included
intermediate interpretations that blend
these two approaches.
Under a purely retrospective
interpretation, the one percent increased
cost exemption would be based on
actually incurred expenditures
increases, measured retrospectively after
implementation of the statute. In other
words, all plans must comply and
provide parity of annual and/or lifetime
dollar limits of mental health and
medical services for the first year
beginning with the start of a plan year
on or after January 1, 1998. If during the
first year, a plan experiences increases
in expenditures equal to one percent or
more as a result of complying with the
statute, that plan would then be eligible
to exercise an exemption from the
MHPA for subsequent plan years.
The calculation for determining the
percent increase would be based on the
ratio of the increase in plan
expenditures to the total plan
expenditures, that is, both medical and
mental health expenditures. For selfinsured plans, the numerator would be
the actual value of mental health claims
paid in excess of the previous plan
limits. For example, if the annual
mental health limit were $10,000 and
the medical/surgical were $1,000,000,
then the sum of all mental health claims
paid in excess of $10,000 would be
included in the numerator of the ratio

66942 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations
used for that plan in calculations related
to the one percent exemption. The
denominator for self-insured plans
would be the total value of medical and
mental health claims excluding mental
health claims in excess of $10,000. If the
result is an increase of one or more
percent, the plan would be exempt from
complying with the statute in any other
year until the statute sunsets in 2001.
Because there is a lag between the time
that claims are incurred and the time
they are reported, complete data needed
for the calculation might not be
available until three or six months after
the end of the first plan year under the
MHPA. With respect to fully insured
plans, the calculation would be slightly
different. To the extent that different
plans’ experiences are pooled for
purposes of setting premiums, their
eligibility for the exemption would
depend on their pooled experience
under MHPA, rather than on each plan’s
individual experience.
The purely retrospective
interpretation would minimize the
availability of the exemption, and
therefore might result in both the
greatest incidence of parity in lifetime
and annual dollar limits and the greatest
incidence of other plan actions to
reduce or offset the increase in
expenditures arising from the MHPA. It
would also assure that all plan elections
to exercise the one percent increased
cost exemption are based on actual
experience under the MHPA’s parity
requirements and not on projections or
estimates of such experience.
Under a purely prospective
interpretation, a plan would be eligible
for the exemption prospectively if its
expected additional expenditures from
the MHPA act equaled or exceeded one
percent of its expected total
expenditures absent the MHPA. A selfinsured plan would project these
figures, relying on available data and
actuarial projection methods. A fully
insured plan would compare legitimate
premium quotes with and without the
exemption to determine if the difference
equals or exceeds one percent. The
purely prospective interpretation would
maximize the availability of the
exemption, and therefore might result in
both the least incidence of parity in
lifetime and annual dollar limits and the
least incidence of other plan actions to
reduce or offset expenditure increases
arising from the MHPA.
Other interpretations were also
considered, some closer to a purely
retrospective interpretation and others
closer to a purely prospective one. For
example, one interpretation might allow
plans to prospectively determine their
eligibility and exercise the exemption,

but only based upon a narrowly
constrained analysis of their own prior
experience, taking into account only the
potential added expenditure from the
MHPA associated with participants
whose past mental health claims
reached or nearly reached MHPAprohibited dollar limits. Interpretations
closer to the purely retrospective view
would lessen the availability of the
exemption, and therefore might result in
both greater incidence of parity in
lifetime and annual dollar limits and
lesser incidence of other plan actions to
reduce or offset expenditure increases
arising from the MHPA; those closer to
the purely prospective view would do
the opposite.
The approach adopted under this
rule, referenced above, can be
characterized as modified retrospective
approach, based on a relatively brief
base period. It is intended to assure the
accurate measurement of increased costs
while minimizing the burden on plan
sponsors who wish to exercise the
exemption as soon as accurate
measurements can be made. It also
assures that all plan elections to
exercise the one percent increased cost
exemption are based on actual
experience under the MHPA’s parity
requirements and not on projections or
estimates of such experience. The rule
eases compliance burdens by providing
a transition period under which certain
plans whose plan years begin during the
first quarter of 1998 can exercise the
exemption until April 1, 1998.
Exemption Authority
This rule provides that plans may
determine their own eligibility for the
exemption and, if eligible, exercise the
exemption, without affirmative approval
from any enforcement agency.
Notification and Disclosure
The Departments also exercised
discretion in requiring notice and
disclosure in connection with the one
percent increased cost exemption. The
rule requires plans exercising the one
percent increased cost exemption
during all or part of the first quarter of
1998 under the rule’s transition
provisions to notify the federal
government, and to post a copy of this
notice at the workplace. It further
requires plans otherwise exercising the
exemption to notify participants and the
federal government, and to disclose on
request to these parties summary
documentation of the plans’ eligibility
for the exemption.
Notifications and disclosures will be
of benefit to participants. They will help
assure plans’ compliance with the
MHPA, and will promote participants’

understanding of their and their plans’
status under the MHPA. Moreover, by
promoting participants’ understanding,
notifications and disclosures will
inform participants’ choices among
plans and their feedback to plan
sponsors, thereby fostering more
vigorous competition among plan
sponsors and issuers to provide benefits
attractive to participants at competitive
prices. The cost of these notifications
and disclosures is outlined below.
Weighted Average Limits
The Departments also exercised
discretion in developing rules that
specify when plans may impose
separate dollar limits on mental health
benefits equal to the weighted average of
limits imposed on other benefit
categories, and in how this weighted
average may be calculated. In general,
the rules provide that such mental
health limits may be imposed if the
benefit categories to which separate
limits apply account for at least onethird of total plan expenditures and are
comparable in scope to mental health
benefits. The average is calculated by
weighting each applicable limit to
reflect its share of total plan
expenditures. Any unlimited categories
are figured into the average by using in
place of a limit a reasonable estimate of
the maximum plan expenditure that
could possibly be incurred in
connection with all such categories, and
weighting this estimate to reflect the
proportion of total plan expenditures
attributable to all such categories.
Alternative rules might have
permitted more, fewer, or different
plans to impose such limits on mental
health benefits, and/or resulted in
calculated averages that were higher or
lower. For example, if unlimited
categories were treated as having
infinite limits, then the weighted
average of category limits would equal
infinity and the option of imposing a
weighted average limit on mental health
benefits effectively would be foreclosed.
In contrast, if limits applicable to
benefit categories narrower in scope
than mental health benefits could be
averaged to arrive at the permissible
mental health limit, plans might be able
to impose very low limits on very
narrow benefit categories, with little
effect on coverage of these categories but
with the result of a lower permissible
mental health benefit limit.
d. Impact of Regulatory Discretion
Because the Departments exercised
regulatory discretion in connection with
the one percent cost exemption, it is
necessary to quantify the number of
plans eligible for the exemption. This

Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations
requires both estimates of the affected
universe and estimates of the
distribution of impacts within that
universe. CBO reported universe
estimates but did not estimate the
distribution of impacts. C&L provided a
distribution but not universe estimates.
Thus, neither source provides the
necessary basis for estimating the reach
of the one percent cost exemption. To
address this gap, the Departments,
assisted by Price Waterhouse LLP,
combined the CBO and C&L analyses
with other data to produce relevant
national estimates, as follows.
First, the Departments estimated the
relevant universe at 3.0 million plans
sponsored by 2.8 million employers
covering 145 million individuals. To
derive these estimates, we tallied the
number of group health plan
policyholders and dependents by firm
size from the Census Bureau’s March
1996 Current Population Survey. Census
enterprise data provided average firm
sizes in each size category, allowing us
to estimate the number of employers
covering these individuals. KPMG Peat
Marwick’s 1997 survey provided the
average number of plans per firm in
each size group, supporting estimates of
the number of plans. Data from the
Bureau of Labor Statistics’ Employee
Benefits Survey and the Health and
Retirement Study provided a
proportionate breakdown of plans and
individuals in each firm size group
across plan types (HMO, PPO, and fee
for service). Likewise, data from KPMG
and Foster Higgins surveys were used to
divide insured from self-insured plans.
Second, the Departments narrowed
the focus to plans affected by the
MHPA. Approximately 296,000 plans,
sponsored by 136,000 employers and
covering 113 million individuals, would
be directly affected by the MHPA. This
excludes firms with fewer than 50
employees (which are exempt under
ERISA Section 712 (c)(1)), plans already
covered by state mandates to provide
parity in annual and lifetime dollar
limits (based on C&L and Hay Huggins
reports of the incidence of differential
limits—roughly 29,000 plans were
excluded here), and insured plans in 13
states that, independent of the MHPA,
as of January 1, 1998 will require parity
equivalent to or surpassing that required
by the MHPA. (Those 13 states are:
Indiana, Maryland, Minnesota,
Montana, Arkansas, Colorado,
Connecticut, Maine, Missouri, New
Hampshire, North Carolina, Rhode
Island, and Texas.) Some of the plans
identified here as affected may not be
affected. The MHPA permits selfinsured nonfederal governmental plans
to opt out of compliance. This includes

roughly 22,000 plans covering about 18
million individuals. It also exempts
plans whose costs increase by one
percent or more, as enumerated below.
Third, the Departments estimated the
overall impact of the MHPA as follows:
affected plans’ potential increases in
mental health expenditures under the
MHPA equal $653 million, or 0.29
percent of affected plans’ $226 billion in
total expenditures. (The 0.29 percent
figure is benchmarked to CBO’s estimate
that the average cost increase for
indemnity plans would be 0.4 percent,
but it is adjusted to reflect C&L’s
assessment of the relative magnitude of
cost increases for different plan types.
The $226 billion figure is benchmarked
to CBO’s $290 billion universe, but
reduced proportionately to reflect the
Department’s estimate of the proportion
of the total universe that is affected by
the MHPA.) Under CBO’s assumption
regarding plan sponsor actions to reduce
the added expenditure, actual added
expenditures would amount to $261
million. Expenditures could be smaller
still as a result of self-insured
nonfederal governmental plans’ right to
opt out of compliance and the MHPA’s
one percent increased cost exemption,
which are not accounted for in the
foregoing estimates. Recall also that
these expenditures represent transfer
payments and not social costs.
One Percent Cost Exemption
The effect of this rule will be to
prohibit all covered plans from
imposing annual or lifetime dollar
limits on mental health benefits that are
lower than limits imposed on medical
and surgical benefits during at least
seven months of the first plan year
beginning on or after January 1, 1998.
Specifically, after six months, the rule
permits plans to exercise an exemption
as soon as they document a cost
increase of one percent or more and
provide 30 days notice to participants
and the federal government.
Exactly when a given plan will
become eligible to elect the one percent
increased cost exemption will depend
on the timing of its increased costs and
its documentation of those costs. In
many cases, plans’ increased costs
under the MHPA will not equal or
exceed one percent until more than the
initial six months have elapsed. For
example, added costs from the MHPA’s
provision restricting the use of annual
dollar limits on mental health benefits
would likely be concentrated late in the
plans year, when some participants
would otherwise have reached these
limits. In addition, plans that utilize this
rule’ transition period may not be
affected by the MHPA’s provisions until

66943

after the first three months of the plan
year have elapsed. Therefore, these may
be less likely to incur added costs of one
percent or more until later in the plan
year, or until a subsequent plan year (in
which they would be affected by the
MHPA beginning on the first day of the
plan year).
Whether eligible plans wishing to
reduce the direct impact of the MHPA
will opt to pursue the exemption or opt
for alternative responses will depend on
each plan’s particular circumstances
and priorities.
The Departments estimated the
number of affected plans with potential
increases of at least one percent.
Roughly 30,000 plans, or about 10
percent of a plans affected by MHPA,
potentially would be eligible for the
one-percent increased cost exemption.
That is, all else being equal, complying
with the MHPA would increase 30,000
plans’ expenditures by at least one
percent. These plans cover about 5
million policyholders and 11 million
individuals. This is the universe
potentially affected by the provisions of
this rule that address the one percent
increased cost exemption.
In assessing the impact of this rule,
the Departments considered the
economic consequences of its
provisions implementing the one
percent cost exemption. Several factors
are likely to affect the magnitude of
those consequences.
First, under any interpretation, only
10 percent of MHPA-affected plans (or
30,000 plans) could become eligible for
the exemption, and only some of those
would elect to exercise it. The estimated
30,000 plans that would become eligible
for the one-percent cost exemption
represents the upper limit of the number
of plans that would actually exercise the
exemption. Many of the potentially
eligible plans are likely to forego the
exemption in favor of other permitted
actions. A survey of 300 large firms
conducted by William M. Mercer, Inc.,
found that fewer than 2 percent
intended to pursue the one percent
increased cost exemption. Extrapolated
to the Departments’ estimated plan
universe, this suggests that 6,000 plans,
or 22 percent of the 30,000 that are
potentially eligible, would pursue the
exemption.
Second, expenditure increases from
the MHPA will generally be modest,
even for plans potentially eligible for
the one percent cost exemption. Their
potential expenditure increase would be
$332 million on a base of $23 billion in
total expenditures, or 1.47 percent
overall.

66944 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations
Third, as noted above, plans can be
designed in ways that lessen these
expenditure increases.
Fourth, the 2,215 self-insured
nonfederal governmental plans that
might become eligible for the one
percent cost exemption are separately
permitted to opt out of the MHPA
entirely, thereby exercising an
alternative exemption with equivalent
effect. These plans cover 1.8 million
individuals, or 16 percent of individuals
in potentially eligible plans.
Fifth, the estimates presented in this
analysis are conservative; actual
expenditures arising from compliance
with the MHPA are likely to be less than
reported here. In particular, the
estimates may understate the reach and
cost-effectiveness of managed mental
health programs that will exist during
the years that the MHPA is in effect (See
Roland Sturm, ‘‘How Expensive is
Unlimited Mental Health Care Coverage
Under Managed Care?’’ JAMA, Nov. 12,
1997—Vol. 278 No. 18).
Sixth, because plan expenditure
increases under the MHPA (aside from
increases in administrative expenses)
are transfers, the availability and use of
the exemption does not change
aggregate social welfare. However, the
availability and use of the exemption
does affect the size and incidence of
transfers across affected parties.
Finally, this rule preserves the
availability of most of this savings under
the one percent exemption—certain
eligible plans are permitted to exercise
the exemption after seven months,
thereby operating under the exemption
for up to 38 of the 45 months during
which the MHPA is in effect.
This rule also requires certain notices
and disclosures by plans exercising the
one percent increased cost exemption.
The Departments undertook to estimate
the paperwork burdens associated with
these provisions, as well as the burden
associated with determining whether a
plan is eligible for the exemption. These
estimates are summarized below.
The estimates reported immediately
below are for all plans affected by the
notice and disclosure provisions of this
rule. The Paperwork Reduction Act
(PRA) analysis that follows is presented
separately for affected private-sector
plans and for plans sponsored by
nonfederal governmental employers,
which are under the jurisdictions of the
Departments of Labor and of Health and
Human Services, respectively.
With respect to the notice to
participants and beneficiaries and to the
federal government by plans exercising
the one percent cost exemption, the
maximum possible number of such
notices is approximately 5.0 million

(reflecting all plans potentially eligible
to elect the exemption), while a more
likely figure is 1.1 million (reflecting the
Mercer survey cited above). Assuming
each notice requires 2 minutes of labor
at $11 per hour, plus $0.50 for postage
and materials, total costs would amount
to up to $4.3 million or more probably
$931,000. (These assumptions reflect
plans’ ability to satisfy this notice
requirement through the provisions of a
separately required summary of material
modifications, as well as availability of
a model notice to the government,
which together essentially eliminate
separate preparation burdens under this
requirement and help minimize ongoing
burdens.)
With respect to requirement for group
health plans to notify the federal
government of use of the transition
period, and to post these notices in the
workplace, only those plans whose plan
years begin during the first three months
on 1998 and who are potentially eligible
for the one percent cost exemption are
potentially affected by this provision.
These notices would be filed and posted
within 30 days or less of the beginning
of the plan year, so all would be filed
in 1998. Based on annual reports filed
with the Department of Labor, the
Departments estimate that 60 percent of
all eligible plans, accounting for 72
percent of participants in such plans,
begin their plan years during these
months. This amounts to 18,000 plans,
representing the maximum number of
notices that would be filed.
Extrapolating from the Mercer survey
cited above, about 4,000 of these plans
might intend to pursue the exemption,
representing a more probable number of
notices to be filed. Applying the same
per unit cost assumptions as above to
the filing and posting of these notices,
the cost of these notices would be no
more than $8,000 and more likely
$2,000. These assumptions reflect the
availability of a model notice, the use of
which eliminates preparation costs and
helps minimize ongoing burdens.
With respect to the requirement for
plans to disclose on request summary
information documenting the plan’s
eligibility for the one percent increased
cost exemption, the number of such
disclosures will depend on the volume
of requests. One might expect requests
to arise most commonly when
participants are at or near plans’ dollar
limits. Hay Huggins estimates for the
Congressional Research Service (See
Roland Sturm, ‘‘How Expensive is
Unlimited Mental Health Care Coverage
Under Managed Care?’’ JAMA, Nov. 12,
1997—Vol. 278 No. 18) suggest that 0.73
percent of participants on average incur
mental health claims of more than

$10,000—a typical annual limit—in a
given year. The Departments adjusted
this figure to reflect the estimated
relationship between increased
expenditures under the MHPA for plans
eligible for the one percent increased
cost exemption and increased
expenditures under the MHPA for all
affected plans, concluding that 3.74
percent of participants in plans eligible
for the one percent increased cost
exemption incur claims of more than
$10,000 in a given year. Assuming that
this proportion of participants in plans
electing the exemption request
disclosures, the maximum number of
such disclosure requests would be
186,000, while a more probable figure
would be 40,000. Given the same per
unit cost assumptions as above, the
associated costs would be $161,000 and
$35,000, respectively.
Finally, with respect to plan
determinations of eligibility for the one
percent increased cost exemption, the
Departments expect that plans wishing
to exercise the one percent increased
cost exemption or their service
providers will revise their automated
claim record systems to facilitate
calculation of the plans’ increased costs
attributable to the MHPA. The number
of plans performing such functions inhouse that might wish to exercise the
exemption is estimated to be no more
than 5,346 and more probably 1,142.
The number of service providers
(including health insurance issuers and
third party administrators) that will
perform this function for plans that
wish to exercise the exemption is
estimated to be 1,770 (including 400
third party administrators, 650 health
insurers, 645 HMOs, and 75 Blue Cross
Blue Shield organizations). Assuming a
start up cost of $5,000 per affected
entity, the total start-up cost associated
with determining plans’ eligibility to
exercise the exemption amounts to
$14.6 million to $35.6 million, to be
amortized over 10 years beginning in
1998.
The estimates of the numbers and
costs of notices, disclosures and
calculations reported above, and below
in connection with the Paperwork
Reduction Act, may be high with
respect to nonfederal governmental
plans. An estimated 2,215 self-insured
nonfederal governmental plans might
become eligible for the one percent cost
exemption. These plans are separately
permitted to opt out of the MHPA
entirely, thereby exercising an
alternative exemption with equivalent
effect, and without becoming subject to
the calculation, notice, and disclosure
requirements. These plans cover 1.8

Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations
million individuals, or 16 percent of
individuals in potentially eligible plans.
Weighted Average
The economic impact of the
Departments’ exercise of discretion in
the weighted average rule is also
expected to be modest.
First, separate limits for benefit
categories other than mental health are
not very common. For example, among
full-time employees at establishments
with 100 or more employees
participating in non-HMO group health
plans in 1993, only a fraction were
subject to separate limits for many major
benefit categories. For example, just 14
percent were subject to separate limits
for inpatient surgery, just 13 percent
were subject to such limits for
outpatient surgery, and only about one
in four were subject to separate limits
for both inpatient and office physician
visits (U.S. Bureau of Labor Statistics,
Employee Benefits in Medium and
Large Private Establishments, 1993).
‘‘Separate limits’’ in this context include
not only dollar limits, but also nondollar limits, such as inpatient day or
outpatient visit limits, as well as
differential coinsurance rates,
copayments, or deductibles. Therefore,
the proportion with separate dollar
limits that would permit imposition of
a weighted average limit on mental
health benefits would be even smaller.
In addition, such separate limits are
even less common in HMOs.
Second, discretion exercised in the
weighted average rule affects plans’
ability to impose weighted average
limits on mental health benefits only at
the margin. In other words, compared
with the approach set forth in the rule,
alternative approaches would have
increased or decreased the proportion of
plans that are able to impose weighted
average limits and the dollar level of
calculated averages by only a small
amount.
Third, not all plans that are permitted
to impose weighted average limits on
mental health benefits will elect to do
so.
Fourth, some plans that under the
rule are not permitted to impose
weighted average limits on mental
health benefits, under an alternative
approach, might have been permitted to
impose only a relatively high limit. As
such, their expenditure increases from
the MHPA might have been nearly the
same with a weighted average limit on
mental health benefits as with no
separate limit on such benefits.
Consider a plan with a $500,000 annual
cap on all inpatient care and a $250,000
annual cap on all outpatient care, and
a $25,000 annual cap on mental health

benefits. Under the interim rules, such
a plan could not impose a weighted
average limit on mental health benefits.
Any separate limit on mental health
care would have to be at least $750,000,
or at least $500,000 for inpatient care
and at least $250,000 for outpatient care.
Had the plan been permitted to impose
a weighted average cap, however, it still
would have been required to increase its
mental health cap from $25,000 to some
amount between $250,000 and
$500,000, depending on the weights.
Finally, as with the one percent cost
exemption and with the MHPA
generally, the impact of regulatory
discretion in the weighted average rule
will be reduced because self-insured
nonfederal governmental plans can opt
out, the MHPA’s added expenditure is
modest, plans can be designed in ways
that lessen the MHPA’s added
expenditure, and the estimates
presented here are conservative.
F. Unfunded Mandates Reform Act of
1995
The Unfunded Mandates Reform Act
of 1995 (P.L. 104–4) requires agencies to
prepare several analytic statements
before proposing any rules that may
result in annual expenditures of $100
million by state, local and tribal
governments or the private sector. These
rules are not subject to the Unfunded
Mandates Reform Act because they are
interim final rules. However, consistent
with the policy embodied in the
Unfunded Mandates Reform Act, the
regulation has been designed to be the
least burdensome alternative for state,
local and tribal governments, and the
private sector, while achieving the
objectives of the MHPA.
G. Small Business Regulatory
Enforcement and Fairness Act of 1995
The Administrator of the Office of
Information and Regulatory Affairs of
the Office of Management and Budget
has determined that this is a major rule
for purposes of the Small Business
Regulatory Enforcement Fairness Act of
1996 (5 U.S.C. Section 801 et. seq.)
(SBREFA).
The Secretaries have determined that
the effective date of these interim final
rules is January 1, 1998. Pursuant to
Section 808(2) of SBREFA, the
Secretaries find, for good cause, that
notice and public procedure thereon are
impracticable, unnecessary and contrary
to the public interest.
These rules are adopted on an interim
final basis because the Secretaries have
determined that without prompt
guidance some members of the
regulated community may have
difficulty complying with the MHPA

66945

requirements, which may result in an
adverse impact on participants and
beneficiaries with regard to their mental
health benefits under group health plans
and the protections provided under
MHPA. Moreover, MHPA’s
requirements will affect the regulated
community in the immediate future.
MHPA’s requirements are effective for
all group health plans, and for health
insurance issuers offering coverage in
connection with such plans for plan
years beginning on or after January 1,
1998. Plan administrators and sponsors,
issuers and participants and
beneficiaries will need guidance on the
new statutory provisions before MHPA’s
effective date. As noted earlier, these
interim rules take into account
comments received by the Departments,
in response to the request for public
comments on MHPA published in the
Federal Register on June 26, 1997. 62
FR 34604. For the foregoing reasons, the
Departments find that notice and public
comment would be impracticable,
unnecessary and contrary to the public
interest.
H. Paperwork Reduction Act—The
Department of Labor and the
Department of the Treasury
The Department of Labor and the
Department of the Treasury have
submitted this emergency processing
public information collection request
(ICR), consisting of three distinct ICRs to
the Office of Management and Budget
(OMB) for review and clearance under
the Paperwork Reduction Act of 1995
(Pub. L. 104–13, 44 U.S.C. Chapter 35).
The Departments have asked for OMB
clearance as soon as possible, and OMB
approval is anticipated by the
applicable effective date.
These regulations contain three
distinct ICRs. The first ICR is a notice
to participants and beneficiaries and to
the federal government of the plan’s
election of the exemption from the
MHPA’s provisions due to an increase
in cost under the plan of at least one
percent attributable to compliance with
these provisions. A plan may satisfy this
requirement by providing participants
and beneficiaries with a notice of
material reductions in covered service
or benefits, under the Department of
Labor’s regulations at 29 CFR section
2520.104b–3(d), that includes the
information in paragraph (f)(3)(i) of this
interim final rule regarding issuing a
notice to participants and beneficiaries
of the plan’s exemption from these
parity requirements. Before the one
percent increased cost exemption is
effective, the plan must also notify the
federal government. For this purpose,
the group health plan may either send

66946 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations
the Department of Labor a copy of the
summary of material reductions in
covered services or benefits sent to
participants and beneficiaries,
containing the plan number and the
plan sponsor’s employer identification
number, or the plan (or coverage) may
use the Departments’ model notice in
this interim final rule which has been
developed for this purpose.
The second ICR is a summary of the
information used to calculate the plan’s
increased costs under the MHPA for
purposes of electing the one percent
increased cost exemption, which the
plan must make available to participants
and beneficiaries, on request at no
charge.
The third ICR is a notice of a group
health plan’s use of the transition
period. The rule requires plans
exercising the one percent increased
cost exemption during all or part of the
first quarter of 1998 under the rule’s
transition provisions to notify the
federal government, and to post a copy
of this notice at the workplace.
1. Notice to Participants and
Beneficiaries and the Federal
Government of Electing One Percent
Increased Cost Exemption
i. Department of Labor
The Department of Labor, as part of its
continuing effort to reduce paperwork
and respondent burden, conducts a
preclearance consultation program to
provide the general public and Federal
agencies with an opportunity to
comment on proposed and/or
continuing collections of information in
accordance with the Paperwork
Reduction Act of 1995 (Pub. L. 104–13,
44 U.S.C. Chapter 35) and 5 CFR
1320.11. This program helps to ensure
that requested data can be provided in
the desired format, reporting burden
(time and financial resources) is
minimized, collection instruments are
clearly understood, and the impact of
collection requirements on respondents
can be properly assessed. Currently, the
Pension and Welfare Benefits
Administration is soliciting comments
concerning the proposed collection of
information, Notice to Participants and
Beneficiaries and the Federal
Government of Electing One Percent
Increased Cost Exemption. A copy of the
proposed ICR can be obtained by
contacting the employee listed below in
the contact section of the notice.
Information collection: affected
parties are not required to comply with
the ICRs in these rules until the
Department of Labor publishes in the
Federal Register the control numbers
assigned to these ICRs by OMB. The

publication of the control numbers
notifies the public that OMB has
approved these ICRs under the
Paperwork Reduction Act of 1995. The
Department has asked for OMB
clearance as soon as possible, and OMB
approval is anticipated by the
applicable effective date.
Dates: Written comments must be
submitted to the office listed in the
addressee section below on or before
February 20, 1998. The Department of
Labor is particularly interested in
comments which:
• Evaluate whether the proposed
collection of information is necessary
for the proper performance of the
functions of the agency, including
whether the information will have
practical utility;
• Evaluate the accuracy of the
agency’s estimate of the burden of the
proposed collection of information,
including the validity of the
methodology and assumptions used;
• Enhance the quality, utility, and
clarity of the information to be
collected; and
• Minimize the burden of the
collection of information on those who
are to respond, including through the
use of appropriate automated,
electronic, mechanical, or other
technological collection techniques or
other forms of information technology,
e.g., permitting electronic submissions
of responses.
Addressee: Gerald B. Lindrew, Office
of Policy and Research, U.S. Department
of Labor, Pension and Welfare Benefits
Administration, 200 Constitution
Avenue, Room N–5647, Washington,
D.C. 20210. Telephone: 202–219–4782
(this is not a toll-free number). Fax: 202219–4745.
ii. Department of the Treasury
The collection of information is in
54.9812–1T. This information is
required by the interim final rules so
that participants will be informed about
their rights under MHPA, and so that
participants and beneficiaries, and the
federal government, will receive notice
of a plan’s election of the one percent
increased cost exemption. The likely
respondents are business or other forprofit institutions, non-profit
institutions, small businesses or
organizations, and Taft-Hartley trusts.
Responses to this collection of
information are required to obtain the
benefit of the exemption.
Books or records relating to a
collection of information must be
retained as long as their contents may
become material in the administration
of any internal revenue law. Generally,
tax returns and tax return information

are confidential, as required by 26
U.S.C. 6103.
Comments on the collection of
information should be sent to the Office
of Management and Budget, Attn: Desk
Officer for the Department of the
Treasury, Office of Information and
Regulatory Affairs, Washington, DC
20503, with copies to the Internal
Revenue Service, Attn: IRS Reports
Clearance Officer, T:FP, Washington, DC
20224. Comments on the collection of
information should be received on or
before February 20, 1998. In light of the
request for OMB clearance by the
effective date of the MHPA, submission
of comments within the first 30 days is
encouraged to ensure their
consideration. Comments are
specifically requested concerning:
Whether the proposed collection of
information is necessary for the proper
performance of the functions of the
Internal Revenue Service, including
whether the information will have
practical utility;
The accuracy of the estimated burden
associated with the proposed collection
of information;
How to enhance the quality, utility,
and clarity of the information to be
collected;
How to minimize the burden of
complying with the proposed collection
of information, including the
application of automated collection
techniques or other forms of information
technology; and
Estimates of capital or start up costs
and costs of operation, maintenance,
and purchase of services to provide
information.
I. Background
MHPA generally requires that group
health plans provide parity in the
application of dollar limits to mental
health and medical/surgical benefits.
The statute exempts plans from this
requirement if its application results in
an increase in the cost under the plan
or coverage of at least one percent. This
regulation requires a plan electing this
exemption to notify participants and
beneficiaries and the federal
government of the plan’s election of the
exemption. This ICR covers this
notification requirement.
II. Current Actions
Under 29 CFR 2590.712(f)(3) (i) and
(ii), and 26 CFR 54.9812–1T a group
health plan electing the one percent
exemption is obligated to provide a
written notice of that election to
participants and beneficiaries and to the
federal government of the plan’s
election of the exemption. A plan may
satisfy this requirement by providing

Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations
participants and beneficiaries with a
notice of material reductions in covered
service or benefits, under the
Department of Labor’s regulations at 29
CFR section 2520.104b–3(d), that
includes the information in paragraph
(f)(3)(i) of this interim final rule
regarding issuing a notice to
participants and beneficiaries of the
plan’s exemption from these parity
requirements. To satisfy the requirement
to notify the federal government, a
group health plan may either send the
Department a copy of the summary of
material reductions in covered services

or benefits sent to participants and
beneficiaries, containing the plan
number and the plan sponsor’s
employer identification number, or the
plan may use the Department’s model
notice in this interim final rule which
has been developed for this purpose.
Based on past experience, the staff
believes that most of the materials
required to be issued under this notice
procedure will be prepared by contract
service providers such as insurance
companies and third-party
administrators.
Type of Review: New.

Agencies: U.S. Department of Labor,
Pension and Welfare Benefits
Administration; U.S. Department of the
Treasury, Internal Revenue Service.
Title: Notice to Participants and
Beneficiaries and the Federal
Government of Electing One Percent
Increased Cost Exemption.
OMB Number: XXXXXXX
Affected Public: Individuals or
households; Business or other for-profit;
Not-for-profit institutions; Group health
plans.
Frequency: On occasion.
Burden:
Average
time per
response
(range)
(minutes)

Total respondents
(range)

Total responses
(range)

1998 ....................................................................................................................
1999 ....................................................................................................................

..................
5,612 to
25,446.

..................
813,505 to
3.8MM.

..................
2 ..............

..................
6,324 to
29,605.

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

..................

..................

..................

..................

Totals ..................................................................................................................

5,612 to
25,446.

813,505 to
3.8MM.

2 ..............

6,324 to
29,605.

Year

Comments submitted in response to
this notice will be summarized and/or
included in the request for OMB
approval of the ICRs; they will also
become a matter of public record.
2. Calculation and Disclosure of
Documentation of Eligibility for
Exemption
i. Department of Labor
The Department of Labor, as part of its
continuing effort to reduce paperwork
and respondent burden, conducts a
preclearance consultation program to
provide the general public and Federal
agencies with an opportunity to
comment on proposed and/or
continuing collections of information in
accordance with the Paperwork
Reduction Act of 1995 (Pub. L. 104–13,
44 U.S.C. Chapter 35) and 5 CFR
1320.11. This program helps to ensure
that requested data can be provided in
the desired format, reporting burden
(time and financial resources) is
minimized, collection instruments are
clearly understood, and the impact of
collection requirements on respondents
can be properly assessed. Currently, the
Pension and Welfare Benefits
Administration is soliciting comments
concerning the proposed collection of
information, Disclosure of
Documentation of Eligibility for
Exemption. A copy of the proposed ICR
can be obtained by contacting the

employee listed below in the contact
section of the notice.
Information collection: Affected
parties are not required to comply with
the ICRs in these rules until the
Department of Labor publishes in the
Federal Register the control numbers
assigned to these ICRs by OMB. The
publication of the control numbers
notifies the public that OMB has
approved these ICRs under the
Paperwork Reduction Act of 1995. The
Department has asked for OMB
clearance as soon as possible, and OMB
approval is anticipated by the
applicable effective date.
Dates: Written comments must be
submitted to the office listed in the
addressee section below on or before
February 20, 1998. The Department of
Labor is particularly interested in
comments which:
• Evaluate whether the proposed
collection of information is necessary
for the proper performance of the
functions of the agency, including
whether the information will have
practical utility;
• Evaluate the accuracy of the
agency’s estimate of the burden of the
proposed collection of information,
including the validity of the
methodology and assumptions used;
• Enhance the quality, utility, and
clarity of the information to be
collected; and

66947

Burden
hours
(range)

Cost
(range)

$705,037
to
$3.3MM
$705,037
to
$3.3MM

• Minimize the burden of the
collection of information on those who
are to respond, including through the
use of appropriate automated,
electronic, mechanical, or other
technological collection techniques or
other forms of information technology,
e.g., permitting electronic submissions
of responses.
Addressee: Gerald B. Lindrew, Office
of Policy and Research, U.S. Department
of Labor, Pension and Welfare Benefits
Administration, 200 Constitution
Avenue, Room N–5647, Washington,
D.C. 20210. Telephone: 202–219–4782
(this is not a toll-free number). Fax: 202219–4745.
ii. Department of the Treasury
The collection of information is in
Section 54.9812–1T. This information is
required by the interim final rules so
that participants will be informed about
their rights under MHPA, and so that
participants and beneficiaries may
receive a summary of the information
upon which the plan based its election
of the one percent increased cost
exemption. The likely respondents are
business or other for-profit institutions,
non-profit institutions, small businesses
or organizations, and Taft-Hartley trusts.
Responses to this collection of
information are required to obtain the
benefit of the exemption.
Books or records relating to a
collection of information must be

66948 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations
retained as long as their contents may
become material in the administration
of any internal revenue law. Generally,
tax returns and tax return information
are confidential, as required by 26
U.S.C. 6103.
Comments on the collection of
information should be sent to the Office
of Management and Budget, Attn: Desk
Officer for the Department of the
Treasury, Office of Information and
Regulatory Affairs, Washington, DC
20503, with copies to the Internal
Revenue Service, Attn: IRS Reports
Clearance Officer, T:FP, Washington, DC
20224. Comments on the collection of
information should be received on or
before February 20, 1998. In light of the
request for OMB clearance by the
effective date of the MHPA, submission
of comments within the first 30 days is
encouraged to ensure their
consideration. Comments are
specifically requested concerning:
Whether the proposed collection of
information is necessary for the proper
performance of the functions of the
Internal Revenue Service, including
whether the information will have
practical utility;
The accuracy of the estimated burden
associated with the proposed collection
of information;
How to enhance the quality, utility,
and clarity of the information to be
collected;
How to minimize the burden of
complying with the proposed collection
of information, including the
application of automated collection
techniques or other forms of information
technology; and

Estimates of capital or start up costs
and costs of operation, maintenance,
and purchase of services to provide
information.
I. Background
MHPA generally requires that group
health plans provide parity in the
application of dollar limits to mental
health and medical/surgical benefits.
The statute exempts plans from this
requirement if its application results in
an increase in the cost under the plan
or coverage of at least one percent. This
regulation requires plans wishing to
elect this exemption to calculate their
increased costs according to certain
rules. It further requires plans electing
this exemption to disclose to
participants and beneficiaries (or their
representatives), on request, and at no
charge, a summary of the information
upon which the exemption was based.
This ICR covers this disclosure
requirement.
II. Current Actions:
Under 29 CFR 2590.712(f)(2) and 26
CFR 54.9812–1T, a group health plan
wishing to elect the one percent
exemption must calculate their
increased costs according to certain
rules. Under 29 CFR 2590.712(f)(4) and
26 CFR 54.9812–1T, a group health plan
electing the one percent exemption is
obligated to disclose to participants and
beneficiaries (or their representatives),
on request and at no charge, a summary
of the information on which the
exemption was based.
Type of Review: New.

Year

1998 ...........................................................................................................
1999 ...........................................................................................................
2000 ...........................................................................................................
Totals .........................................................................................................

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

Agencies: U.S. Department of Labor,
Pension and Welfare Benefits
Administration; U.S. Department of the
Treasury, Internal Revenue Service.
Title: Calculation and Disclosure of
Documentation of Eligibility for
Exemption.
OMB Number: XXXXXXX.
Affected Public: Individuals or
households; Business or other for-profit;
Not-for-profit institutions; Group Health
Plans.
Frequency: On occasion.
Calculation burden: It is expected that
plans wishing to exercise the one
percent increased cost exemption or
their service providers will revise their
automated claim record systems to
facilitate calculation of the plans’
increased costs attributable to the
MHPA. The number of plans performing
such functions in-house that might wish
to exercise the exemption is estimated
to be no more than 4,489 and probably
958. The number of service providers
(including health insurance issuers and
third party administrators) that will
perform this function for plans using
service providers that wish to exercise
the exemption is estimated to be 1,770.
Assuming a cost of $5,000 per affected
entity, the total cost associated with
determining plans’ eligibility to exercise
the exemption amounts to $12.5 million
to $30.1 million, to be amortized over 10
years beginning in 1998.
Disclosure burden: In addition to the
calculation burden, plans wishing to
elect the one percent increased cost
exemption will incur a burden in
connection with disclosure requests
from participants, as detailed below.

Total respondents
(range)

Total responses
(range)

Average
time per
response
(minutes)

Burden
hours
(range)

..................
5,612 to
25,466.
5,612 to
25,466.

..................
30,188 to
140,412.
30,188 to
140,412.

..................
2 ..............

..................
235 to
1,101.
235 to
1,101.

$26,163 to
$121,690
$26,163 to
$121,690

5,612 to
25,466.

60,377 to
280.824.

2 ..............

470 to
2,201.

$52,326 to
$243,381

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

2 ..............

Cost (range)

the desired format, reporting burden
(time and financial resources) is
minimized, collection instruments are
clearly understood, and the impact of
collection requirements on respondents
can be properly assessed. Currently, the
Pension and Welfare Benefits
Administration is soliciting comments
concerning the proposed collection of
information, Notice of Group Health
Plan’s Use of Transition Period. A copy

Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations
of the proposed ICR can be obtained by
contacting the employee listed below in
the contact section of the notice.
Information collection: affected
parties are not required to comply with
the ICRs in these rules until the
Department of Labor publishes in the
Federal Register the control numbers
assigned to these ICRs by OMB. The
publication of the control numbers
notifies the public that OMB has
approved these ICRs under the
Paperwork Reduction Act of 1995. The
Department has asked for OMB
clearance as soon as possible, and OMB
approval is anticipated by the
applicable effective date.
Dates: Written comments must be
submitted to the office listed in the
addressee section below on or before
February 20, 1998. The Department of
Labor is particularly interested in
comments which:
• Evaluate whether the proposed
collection of information is necessary
for the proper performance of the
functions of the agency, including
whether the information will have
practical utility;
• Evaluate the accuracy of the
agency’s estimate of the burden of the
proposed collection of information,
including the validity of the
methodology and assumptions used;
• Enhance the quality, utility, and
clarity of the information to be
collected; and
• Minimize the burden of the
collection of information on those who
are to respond, including through the
use of appropriate automated,
electronic, mechanical, or other
technological collection techniques or
other forms of information technology,
e.g., permitting electronic submissions
of responses.
Addressee: Gerald B. Lindrew, Office
of Policy and Research, U.S. Department
of Labor, Pension and Welfare Benefits
Administration, 200 Constitution
Avenue, Room N–5647, Washington,
D.C. 20210. Telephone: 202–219–4782
(this is not a toll-free number). Fax:
202–219–4745.
ii. Department of the Treasury
The collection of information is in
Section 54.9812–1T. This information is

required by the interim final rules so
that participants will be informed about
their rights under MHPA, and so that
plans electing the one percent increased
cost exemption during all or part of the
first quarter of 1998 under the rules’
transition provisions will notify the
federal government and post the notice
in the workplace. The likely
respondents are business or other forprofit institutions, non-profit
institutions, small businesses or
organizations, and Taft-Hartley trusts.
Responses to this collection of
information are required to obtain the
benefit of the exemption.
Books or records relating to a
collection of information must be
retained as long as their contents may
become material in the administration
of any internal revenue law. Generally,
tax returns and tax return information
are confidential, as required by 26
U.S.C. 6103.
Comments on the collection of
information should be sent to the Office
of Management and Budget, Attn: Desk
Officer for the Department of the
Treasury, Office of Information and
Regulatory Affairs, Washington, DC
20503, with copies to the Internal
Revenue Service, Attn: IRS Reports
Clearance Officer, T:FP, Washington, DC
20224. Comments on the collection of
information should be received on or
before February 20, 1998. In light of the
request for OMB clearance by the
effective date of the MHPA, submission
of comments within the first 30 days is
encouraged to ensure their
consideration. Comments are
specifically requested concerning:
Whether the proposed collection of
information is necessary for the proper
performance of the functions of the
Internal Revenue Service, including
whether the information will have
practical utility;
The accuracy of the estimated burden
associated with the proposed collection
of information;
How to enhance the quality, utility,
and clarity of the information to be
collected;
How to minimize the burden of
complying with the proposed collection
of information, including the

Year

1998 ....................................................................................................................
1999 ....................................................................................................................
2000 ....................................................................................................................

66949

application of automated collection
techniques or other forms of information
technology; and
Estimates of capital or start up costs
and costs of operation, maintenance,
and purchase of services to provide
information.
I. Background
MHPA generally requires that group
health plans provide parity in the
application of dollar limits to mental
health and medical/surgical benefits.
The statute exempts plans from this
requirement if its application results in
an increase in the cost under the plan
or coverage of at least one percent. This
regulation requires a notice of group
health plan’s use of transition period,
under which plans electing the one
percent increased cost exemption
during all or part of the first quarter of
1998 under the rule’s transition
provisions must notify the federal
government and to post a copy of the
notice in the workplace. This ICR covers
this notification requirement.
II. Current Actions
Under 29 CFR 2590.712(h)(3)(ii) and
26 CFR 54.9812–1T, group health plans
electing the one percent increased cost
exemption during all or part of the first
quarter of 1998 under the rule’s
transition provisions must notify the
federal government. Based on past
experience, the staff believes that most
of the materials required to be issued
under this notice procedure will be
prepared by contract service providers
such as insurance companies and thirdparty administrators.
Type of Review: New.
Agencies: U.S. Department of Labor,
Pension and Welfare Benefits
Administration; U.S. Department of the
Treasury, Internal Revenue Service.
Title: Notice of Group Health Plan’s
Use of Transition Period.
OMB Number:
Affected Public: Individuals or
households; Business or other for-profit;
Not-for-profit institutions; Group Health
Plans.
Frequency: On occasion.
Burden:

Total respondents
(range)

Total responses
(range)

Average
time per
response
(minutes)

Burden
hours
(range)

3,348 to
15,193.
..................
..................

3,348 to
15,193.
..................
..................

2 ..............

19 to 89 ...

..................
..................

..................
..................

Cost
(range)
$1,514 to
$6,910

66950 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations
Total respondents
(range)

Year

Totals ...........................................................................................................

Comments submitted in response to
this notice will be summarized and/or
included in the request for OMB
approval of the ICRs; they will also
become a matter of public record.
I. Paperwork Reduction Act—
Department of Health and Human
Services
Under the Paperwork Reduction Act
of 1995 (PRA), agencies are required to
provide a 60-day notice in the Federal
Register and solicit public comment
before a collection of information
requirement is submitted to the Office of
Management and Budget (OMB) for
review and approval. In order to fairly
evaluate whether an information
collection should be approved by OMB,
section 3506(c)(2)(A) of the PRA
requires that we solicit comment on the
following issues:
• Whether the information collection
is necessary and useful to carry out the
proper functions of the agency;
• The accuracy of the agency’s
estimate of the information collection
burden;
• The quality, utility, and clarity of
the information to be collected; and
• Recommendations to minimize the
information collection burden on the
affected public, including automated
collection techniques.
Therefore, we are soliciting public
comment on each of these issues for the

3,348 to
15,193.

Total responses
(range)
3,348 to
15,193.

information collection requirements
discussed below.
Section 146.136 of this document
contains three distinct information
collection requirements, as summarized
below:
Type of Information Request: New
collection.
Title of Information Collection:
Mental Health Parity Act of 1996;
Information Collection Requirements
Contained in 45 CFR 146.136; HCFA–
2891–IFC.
Form Number: HCFA–R–223 (OMB
approval #: 0938–XXXX).
Use: The information collection
requirements contained in this interim
final rule will help ensure that sponsors
and administrators of group health
plans notify the required individuals/
entities of a plan’s exemption from the
MHPA parity requirements and make
the data used to calculate the exemption
available to affected individuals and
entities.
Frequency: On occasion.
Affected Public: States, businesses or
other for profit, not-for-profit
institutions, Federal Government,
individuals or households.
Notification Requirements:
Nonfederal governmental plans, not
exempt from the parity requirements by
reason of an opt out under regulations
at 45 CFR 146.180, must furnish
participants and beneficiaries with a
notice of the plan’s exemption from the

Average
time per
response
(minutes)

Burden
hours
(range)

2 ..............

19 to 89 ...

Average
time per
response
range
(minutes)

Total responses
(range)

1998 ....................................................................................................................
1999 ....................................................................................................................

..................
890 to
4,092.

..................
261,000 to
1.2 MM.

..................
2 ..............

..................
2,133 to
9,975.

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

..................

..................

..................

..................

890 to
4,092.

261,000 to
1.2 MM.

2 ..............

2,133 to
9,975.

Total .............................................................................................................

Availability of documentation:
Nonfederal governmental plans that take
the exemption, or issuers that provide
coverage for such plans, must make
available to participants and
beneficiaries, on request and at no

charge, a summary of the data used to
calculate the exemption of this section.
The summary of data must include the
incurred expenditures (including
identification of the portion of the total
representing claims and the portion of

$1,514 to
$6,910

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)

Year

Cost
(range)

Burden
hours
(range)

Cost
(range)

$226,000
to $1.1
MM
$226,000
to $1.1
MM

the total representing administrative
expenses), the base period, the claims
incurred during the base period that
would have been denied under the
terms of the plan absent amendments
required to comply with parity, and the

Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations
administrative expenses attributable to
complying with the parity requirements.

Burden:

Year

1998 ....................................................................................................................
1999 ....................................................................................................................
2000 ....................................................................................................................
Total .............................................................................................................

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

Average
time per
response
(range)
(minutes)

Burden
hours
(range)

..................
9,700 to
45,300.
9,700 to
45,300.

..................
2 ..............

..................
79 to 372

2 ..............

79 to 372

19,400 to
90,600.

2 ..............

158 to 744

Total respondents
(range)

Total responses
(range)

..................
890 to
4,092.
890 to
4,092.
890 to
4,092.

that is subject to the MHPA
requirements prior to April 1, 1998
solely because the plan claims the
increased cost exemption under section
2705(c)(2) of the PHS Act based on
assumptions inconsistent with the rules
under paragraph (f), provided that the
plan is amended to comply with the
parity requirements no later than March
31, 1998 and the plan complies with
certain notice requirements. A
nonfederal governmental plan satisfies
the notice requirements only if such
plan provides notice to the Department
of Health and Human Services of the

Year

1998 ....................................................................................................................
1999 ....................................................................................................................
2000 ....................................................................................................................
Total .............................................................................................................

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

66951

Total responses
(range)

531 to
2,441.
— .............
— .............

531 to
2,441.
— .............
— .............

531 to
2,441.

531 to
2,441.

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

$8,400 to
$39,300
$8,400 to
$39,300
$16,800 to
$78,600

plan’s intent to use the transition period
by 30 days after the first day of the plan
year beginning on or after January 1,
1998, but in no event can the notice be
provided later than March 31, 1998.
Such notice shall include the name of
the plan; the name, address, and
telephone number of the plan sponsor
or plan administrator; the employer
identification number; and the plan
number. In addition, such notice must
be provided at no charge to participants
within 30 days after receipt of a written
request for such notification.
Burden:

Total respondents
(range)

published in the Federal Register when
approval is obtained. Interested persons
are invited to send comments regarding
this burden or any other aspect of these
collections of information. If you
comment on these information
collection and recordkeeping
requirements, please mail copies
directly to the following addresses:

Cost
(range)

Average
time per
response
(range)
(minutes)

Burden
hours
(range)

2 ..............

4 to 17 .....

— .............
— .............

— .............
— .............

2 ..............

4 to 17 .....

Cost
(range)

$250 to
$1,151
—
—
$250 to
$1,151

Statutory Authority
The Department of the Treasury
temporary rule is adopted pursuant to
the authority contained in sections 7805
and 9833 of the Code (26 U.S.C. 7805,
9833), as amended by HIPAA (Pub. L.
104–191, 110 Stat. 1936) and the
Taxpayer Relief Act of 1997 (Pub. L.
105–34, 111 Stat. 788).
The Department of Labor interim final
rule is adopted pursuant to the authority
contained in sections 107, 209, 505,
701–703, 711, 712, and 731–734 of
ERISA (29 U.S.C. 1027, 1059, 1135,
1171–1173, 1181, 1182, and 1191–
1194), as amended by HIPAA (Pub. L.
104–191, 110 Stat. 1936) and MHPA
(Pub. L. 104–204, 110 Stat. 2944), and
Secretary of Labor’s Order No. 1–87, 52
FR 13139, April 21, 1987.

66952 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations
The Department of Health and Human
Services interim final rule is adopted
pursuant to the authority contained in
sections 2701, 2702, 2705, 2711, 2712,
2713, 2721, 2722, 2723, and 2792 of the
PHS Act (42 U.S.C. 300gg, 300gg–1,
300gg–5, 300gg–11, 300gg–12, 300gg–
13, 300gg–21, 300gg–22, 300gg–23, and
300gg–92), as established by HIPAA
(Pub. L. 104–191, 110 Stat. 1936) and
MHPA (Pub. L. 104–204, 110 Stat.
2944).
List of Subjects
26 CFR Part 54
Excise taxes, Health insurance,
Pensions, Reporting and recordkeeping
requirements.
29 CFR Part 2590
Employee benefit plans, Employee
Retirement Income Security Act, Health
care, Health insurance, Reporting and
recordkeeping requirements.
45 CFR Part 146
Health care, Health insurance,
Reporting and recordkeeping
requirements, State regulation of health
insurance.
Adoption of Amendments to the
Regulations
Internal Revenue Service
26 CFR Chapter I
Accordingly, 26 CFR Part 54 is
amended as follows:
PART 54—PENSION EXCISE TAXES
Paragraph 1. The authority citation
for part 54 is amended by revising the
entries for sections 54.9801–1T through
54.9801–6T and 54.9802–1T, by
removing the entries for sections
54.9804–1T, and 54.9806–1T, and by
adding entries for sections 54.9812–1T,
54.9831–1T, and 54.9833–1T to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 54.9801–1T also issued under 26
U.S.C. 9833.
Section 54.9801–2T also issued under 26
U.S.C. 9833.
Section 54.9801–3T also issued under 26
U.S.C. 9833.
Section 54.9801–4T also issued under 26
U.S.C. 9833.
Section 54.9801–5T also issued under 26
U.S.C. 9801(c)(4), 9801(e)(3), and 9833.
Section 54.9801–6T also issued under 26
U.S.C. 9833.
Section 54.9802–1T also issued under 26
U.S.C. 9833.
Section 54.9812–1T also issued under 26
U.S.C. 9833.
Section 54.9831–1T also issued under 26
U.S.C. 9833.
Section 54.9833–1T also issued under 26
U.S.C. 9833.

Par. 2. In § 54.9801–1T, paragraph (a)
is revised to read as follows:
§ 54.9801–1T
(temporary).

Basis and scope

(a) Statutory basis. Sections 54.9801–
1T through 54.9801–6T, 54.9802–1T,
54.9812–1T, 54.9831–1T and 54.9833–
1T (portability sections) implement
Chapter 100 of Subtitle K of the Internal
Revenue Code of 1986.
*
*
*
*
*
Par. 3. Section 54.9801–2T is
amended by:
1. Revising the introductory text.
2. Revising the definition of excepted
benefits.
3. Revising the definition of health
insurance coverage.
The revisions read as follows:
§ 54.9801–2T

Definitions (temporary).

Unless otherwise provided, the
definitions in this section govern in
applying the provisions of §§ 54.9801–
1T through 54.9801–6T, 54.9802–1T,
54.9812–1T, 54.9831–1T, and 54.9833–
1T.
*
*
*
*
*
Excepted benefits means the benefits
described as excepted in § 54.9831–
1T(b).
*
*
*
*
*
Health insurance coverage means
benefits consisting of medical care
(provided directly, through insurance or
reimbursement, or otherwise) under any
hospital or medical service policy or
certificate, hospital or medical service
plan contract, or HMO contract offered
by a health insurance issuer. However,
benefits described in § 54.9831–1T(b)(2)
are not treated as benefits consisting of
medical care.
*
*
*
*
*
Par. 4. In § 54.9801–4T, paragraph
(a)(2) is revised to read as follows:
§ 54.9801–4T Rules relating to creditable
coverage (temporary).

(a) * * *
(2) Excluded coverage. Creditable
coverage does not include coverage
consisting solely of coverage of excepted
benefits (described in § 54.9831–1T).
*
*
*
*
*
Par. 5. In § 54.9801–5T, the first
sentence of paragraph (a)(3)(vi) is
revised to read as follows:
§ 54.9801–5T Certification and disclosure
of previous coverage (temporary).

(a) * * *
(3) * * *
(vi) Excepted benefits; categories of
benefits. No certificate is required to be
furnished with respect to excepted

benefits described in § 54.9831–
1T. * * *
*
*
*
*
*
§ 54.9804–1T
1T]

[Redesignated as § 54.9831–

Par. 6. Section 54.9804–1T is
redesignated as § 54.9831–1T and
amended by revising paragraph (b)(1) to
read as follows:
§ 54.9831–1T Special rules relating to
group health plans (temporary).

*

*
*
*
*
(b) Excepted benefits—(1) In general.
The requirements of §§ 54.9801–1T
through 54.9801–6T, 54.9802–1T, and
54.9812–1T do not apply to any group
health plan in relation to its provision
of the benefits described in paragraph
(b) (2), (3), (4), or (5) of this section (or
any combination of these benefits).
*
*
*
*
*

§ 54.9806–1T
1T]

[Redesignated as § 54.9833–

Par. 7. Section 54.9806–1T is
redesignated as § 54.9833–1T and
amended by:
1. Revising paragraph (a)(1).
2. Revising the first sentence of
paragraph (a)(2).
The revisions read as follows:
§ 54.9833–1T

Effective dates (temporary).

(a) General effective dates—(1) Noncollectively-bargained plans. Except as
otherwise provided in this section,
Chapter 100 of Subtitle K and
§§ 54.9801–1T through 54.9806–1T,
54.9802–1T, and 54.9831–1T apply with
respect to group health plans for plan
years beginning after June 30, 1997.
(2) Collectively bargained plans.
Except as otherwise provided in this
section (other than paragraph (a)(1) of
this section), in the case of a group
health plan maintained pursuant to one
or more collective bargaining
agreements between employee
representatives and one or more
employers ratified before August 21,
1996, Chapter 100 of Subtitle K and
§§ 54.9801–1T through 54.9801–6T,
54.9802–1T, and 54.9831–1T do not
apply to plan years beginning before the
later of July 1, 1997, or the date on
which the last of the collective
bargaining agreements relating to the
plan terminates (determined without
regard to any extension thereof agreed to
after August 21, 1996).* * *
*
*
*
*
*
Par. 8. Section 54.9812–1T is added
to read as follows:

Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations
§ 54.9812–1T Parity in the application of
certain limits to mental health benefits
(temporary).

(a) Definitions. For purposes of this
section, except where the context
clearly indicates otherwise, the
following definitions apply:
Aggregate lifetime limit means a
dollar limitation on the total amount of
specified benefits that may be paid
under a group health plan for an
individual (or for a group of individuals
considered a single unit in applying this
dollar limitation, such as a family or an
employee plus spouse).
Annual limit means a dollar
limitation on the total amount of
specified benefits that may be paid in a
12-month period under a plan for an
individual (or for a group of individuals
considered a single unit in applying this
dollar limitation, such as a family or an
employee plus spouse).
Medical/surgical benefits means
benefits for medical or surgical services,
as defined under the terms of the plan,
but does not include mental health
benefits.
Mental health benefits means benefits
for mental health services, as defined
under the terms of the plan, but does
not include benefits for treatment of
substance abuse or chemical
dependency.
(b) Requirements regarding limits on
benefits—(1) In general—(i) General
parity requirement. A group health plan
that provides both medical/surgical
benefits and mental health benefits must
comply with paragraph (b) (2), (3), or (6)
of this section.
(ii) Exception. The rule in paragraph
(b)(1)(i) of this section does not apply if
a plan satisfies the requirements of
paragraph (e) or (f) of this section.
(2) Plan with no limit or limits on less
than one-third of all medical/surgical
benefits. If a plan does not include an
aggregate lifetime or annual limit on any
medical/surgical benefits or includes
aggregate lifetime or annual limits that
apply to less than one-third of all
medical/surgical benefits, it may not
impose an aggregate lifetime or annual
limit, respectively, on mental health
benefits.
(3) Plan with a limit on at least twothirds of all medical/surgical benefits. If
a plan includes an aggregate lifetime or
annual limit on at least two-thirds of all
medical/surgical benefits, it must
either—
(i) Apply the aggregate lifetime or
annual limit both to the medical/
surgical benefits to which the limit
would otherwise apply and to mental
health benefits in a manner that does
not distinguish between the medical/
surgical and mental health benefits; or

(ii) Not include an aggregate lifetime
or annual limit on mental health
benefits that is less than the aggregate
lifetime or annual limit, respectively, on
the medical/surgical benefits.
(4) Examples. The rules of paragraphs
(b)(2) and (3) of this section are
illustrated by the following examples:
Example 1. (i) Prior to the effective date of
the mental health parity provisions, a group
health plan had no annual limit on medical/
surgical benefits and had a $10,000 annual
limit on mental health benefits. To comply
with the parity requirements of this
paragraph (b), the plan sponsor is
considering each of the following options:
(A) Eliminating the plan’s annual limit on
mental health benefits;
(B) Replacing the plan’s previous annual
limit on mental health benefits with a
$500,000 annual limit on all benefits
(including medical/surgical and mental
health benefits); and
(C) Replacing the plan’s previous annual
limit on mental health benefits with a
$250,000 annual limit on medical/surgical
benefits and a $250,000 annual limit on
mental health benefits.
(ii) In this Example 1, each of the three
options being considered by the plan sponsor
would comply with the requirements of this
section because they offer parity in the dollar
limits placed on medical/surgical and mental
health benefits.
Example 2. (i) Prior to the effective date of
the mental health parity provisions, a group
health plan had a $100,000 annual limit on
medical/surgical inpatient benefits, a $50,000
annual limit on medical/surgical outpatient
benefits, and a $100,000 annual limit on all
mental health benefits. To comply with the
parity requirements of this paragraph (b), the
plan sponsor is considering each of the
following options:
(A) Replacing the plan’s previous annual
limit on mental health benefits with a
$150,000 annual limit on mental health
benefits; and
(B) Replacing the plan’s previous annual
limit on mental health benefits with a
$100,000 annual limit on mental health
inpatient benefits and a $50,000 annual limit
on mental health outpatient benefits.
(ii) In this Example 2, each option under
consideration by the plan sponsor would
comply with the requirements of this section
because they offer parity in the dollar limits
placed on medical/surgical and mental
health benefits.
Example 3. (i) A group health plan that is
subject to the requirements of this section has
no aggregate lifetime or annual limit for
either medical/surgical benefits or mental
health benefits. While the plan provides
medical/surgical benefits with respect to both
network and out-of-network providers, it
does not provide mental health benefits with
respect to out-of-network providers.
(ii) In this Example 3, the plan complies
with the requirements of this section because
they offer parity in the dollar limits placed
on medical/surgical and mental health
benefits.
Example 4. (i) Prior to the effective date of
the mental health parity provisions, a group

66953

health plan had an annual limit on medical/
surgical benefits and a separate but identical
annual limit on mental health benefits. The
plan included benefits for treatment of
substance abuse and chemical dependency in
its definition of mental health benefits.
Accordingly, claims paid for treatment of
substance abuse and chemical dependency
were counted in applying the annual limit on
mental health benefits. To comply with the
parity requirements of this paragraph (b), the
plan sponsor is considering each of the
following options:
(A) Making no change in the plan so that
claims paid for treatment of substance abuse
and chemical dependency continue to count
in applying the annual limit on mental health
benefits;
(B) Amending the plan to count claims
paid for treatment of substance abuse and
chemical dependency in applying the annual
limit on medical/surgical benefits (rather
than counting those claims in applying the
annual limit on mental health benefits);
(C) Amending the plan to provide a new
category of benefits for treatment of chemical
dependency and substance abuse that is
subject to a separate, lower limit and under
which claims paid for treatment of substance
abuse and chemical dependency are counted
only in applying the annual limit on this
separate category; and
(D) Amending the plan to eliminate
distinctions between medical/surgical
benefits and mental health benefits and
establishing an overall limit on benefits
offered under the plan under which claims
paid for treatment of substance abuse and
chemical dependency are counted with
medical/surgical benefits and mental health
benefits in applying the overall limit.
(ii) In this Example 4, the group health
plan is described in paragraph (b)(3) of this
section. Because mental health benefits are
defined in paragraph (a) of this section as
excluding benefits for treatment of substance
abuse and chemical dependency, the
inclusion of benefits for treatment of
substance abuse and chemical dependency in
applying an aggregate lifetime limit or annual
limit on mental health benefits under option
(A) of this Example 4 would not comply with
the requirements of paragraph (b)(3) of this
section. However, options (B), (C), and (D) of
this Example 4 would comply with the
requirements of paragraph (b)(3) of this
section because they offer parity in the dollar
limits placed on medical/surgical and mental
health benefits.

(5) Determining one-third and twothirds of all medical/surgical benefits.
For purposes of this paragraph (b), the
determination of whether the portion of
medical/surgical benefits subject to a
limit represents one-third or two-thirds
of all medical/surgical benefits is based
on the dollar amount of all plan
payments for medical/surgical benefits
expected to be paid under the plan for
the plan year (or for the portion of the
plan year after a change in plan benefits
that affects the applicability of the
aggregate lifetime or annual limits). Any
reasonable method may be used to

66954 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations
determine whether the dollar amounts
expected to be paid under the plan will
constitute one-third or two-thirds of the
dollar amount of all plan payments for
medical/surgical benefits.
(6) Plan not described in paragraph
(b)(2) or (3) of this section—(i) In
general. A group health plan that is not
described in paragraph (b)(2) or (3) of
this section, must either—
(A) Impose no aggregate lifetime or
annual limit, as appropriate, on mental
health benefits; or
(B) Impose an aggregate lifetime or
annual limit on mental health benefits
that is no less than an average limit for
medical/surgical benefits calculated in
the following manner. The average limit
is calculated by taking into account the
weighted average of the aggregate
lifetime or annual limits, as appropriate,
that are applicable to the categories of
medical/surgical benefits. Limits based
on delivery systems, such as inpatient/
outpatient treatment or normal
treatment of common, low-cost
conditions (such as treatment of normal
births), do not constitute categories for
purposes of this paragraph (b)(6)(i)(B).
In addition, for purposes of determining
weighted averages, any benefits that are
not within a category that is subject to
a separately-designated limit under the
plan are taken into account as a single
separate category by using an estimate
of the upper limit on the dollar amount
that a plan may reasonably be expected
to incur with respect to such benefits,
taking into account any other applicable
restrictions under the plan.
(ii) Weighting. For purposes of this
paragraph (b)(6), the weighting
applicable to any category of medical/
surgical benefits is determined in the
manner set forth in paragraph (b)(5) of
this section for determining one-third or
two-thirds of all medical/surgical
benefits.
(iii) Example. The rules of this
paragraph (b)(6) are illustrated by the
following example:
Example. (i) A group health plan that is
subject to the requirements of this section
includes a $100,000 annual limit on medical/
surgical benefits related to cardio-pulmonary
diseases. The plan does not include an
annual limit on any other category of
medical/surgical benefits. The plan
determines that 40% of the dollar amount of
plan payments for medical/surgical benefits
are related to cardio-pulmonary diseases. The
plan determines that $1,000,000 is a
reasonable estimate of the upper limit on the
dollar amount that the plan may incur with
respect to the other 60% of payments for
medical/surgical benefits.
(ii) In this Example, the plan is not
described in paragraph (b)(3) of this section
because there is not one annual limit that
applies to at least two-thirds of all medical/

surgical benefits. Further, the plan is not
described in paragraph (b)(2) of this section
because more than one-third of all medical/
surgical benefits are subject to an annual
limit. Under this paragraph (b)(6), the plan
sponsor can choose either to include no
annual limit on mental health benefits, or to
include an annual limit on mental health
benefits that is not less than the weighted
average of the annual limits applicable to
each category of medical/surgical benefits. In
this example, the minimum weighted average
annual limit that can be applied to mental
health benefits is $640,000 (40% x $100,000
+ 60% x $1,000,000 = $640,000).

(c) Rule in the case of separate benefit
packages. If a group health plan offers
two or more benefit packages, the
requirements of this section, including
the exemption provisions in paragraph
(f) of this section, apply separately to
each benefit package. Examples of a
group health plan that offers two or
more benefit packages include a group
health plan that offers employees a
choice between indemnity coverage or
HMO coverage, and a group health plan
that provides one benefit package for
retirees and a different benefit package
for current employees.
(d) Applicability—(1) Group health
plans. The requirements of this section
apply to a group health plan offering
both medical/surgical benefits and
mental health benefits regardless of
whether the mental health benefits are
administered separately under the plan.
(2) Health insurance issuers. See 29
CFR 2590.712(d)(2) and 45 CFR
146.136(d)(2), which provide that health
insurance issuers offering health
insurance coverage for both medical/
surgical benefits and mental health
benefits in connection with a group
health plan are subject to rules similar
to those applicable to group health
plans under this section.
(3) Scope. This section does not—
(i) Require a group health plan to
provide any mental health benefits; or
(ii) Affect the terms and conditions
(including cost sharing, limits on the
number of visits or days of coverage,
requirements relating to medical
necessity, requiring prior authorization
for treatment, or requiring primary care
physicians’ referrals for treatment)
relating to the amount, duration, or
scope of the mental health benefits
under the plan except as specifically
provided in paragraph (b) of this
section.
(e) Small employer exemption—(1) In
general. The requirements of this
section do not apply to a group health
plan for a plan year of a small employer.
For purposes of this paragraph (e), the
term small employer means, in
connection with a group health plan
with respect to a calendar year and a

plan year, an employer who employed
an average of at least two but not more
than 50 employees on business days
during the preceding calendar year and
who employs at least two employees on
the first day of the plan year. See section
9831(a) and § 54.9831–1T(a), which
provide that this section (and certain
other sections) does not apply to any
group health plan for any plan year if,
on the first day of the plan year, the
plan has fewer than two participants
who are current employees.
(2) Rules in determining employer
size. For purposes of paragraph (e)(1) of
this section—
(i) All persons treated as a single
employer under subsections (b), (c), (m),
and (o) of section 414 are treated as one
employer;
(ii) If an employer was not in
existence throughout the preceding
calendar year, whether it is a small
employer is determined based on the
average number of employees the
employer reasonably expects to employ
on business days during the current
calendar year; and
(iii) Any reference to an employer for
purposes of the small employer
exemption includes a reference to a
predecessor of the employer.
(f) Increased cost exemption—(1) In
general. A group health plan is not
subject to the requirements of this
section if the requirements of this
paragraph (f) are satisfied. If a plan
offers more than one benefit package,
this paragraph (f) applies separately to
each benefit package. Except as
provided in paragraph (h) of this
section, a plan must comply with the
requirements of paragraph (b)(1)(i) of
this section for the first plan year
beginning on or after January 1, 1998,
and must continue to comply with the
requirements of paragraph (b)(1)(i) of
this section until the plan satisfies the
requirements in this paragraph (f). In no
event is the exemption of this paragraph
(f) effective until 30 days after the notice
requirements in paragraph (f)(3) of this
section are satisfied. If the requirements
of this paragraph (f) are satisfied with
respect to a plan, the exemption
continues in effect (at the plan’s
discretion) until September 30, 2001,
even if the plan subsequently purchases
a different policy from the same or a
different issuer and regardless of any
other changes to the plan’s benefit
structure.
(2) Calculation of the one-percent
increase—(i) Ratio. A group health plan
satisfies the requirements of this
paragraph (f)(2) if the application of
paragraph (b)(1)(i) of this section to the
plan results in an increase in the cost
under the plan of at least one percent.

Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations
The application of paragraph (b)(1)(i) of
this section results in an increased cost
of at least one percent under a group
health plan only if the ratio below
equals or exceeds 1.01000. The ratio is
determined as follows:
(A) The incurred expenditures during
the base period, divided by,
(B) The incurred expenditures during
the base period, reduced by——
(1) The claims incurred during the
base period that would have been
denied under the terms of the plan
absent plan amendments required to
comply with this section; and
(2) Administrative expenses
attributable to complying with the
requirements of this section.
(ii) Formula. The ratio of paragraph
(f)(2)(i) of this section is expressed
mathematically as follows:

IE
≥ 1.01000
IE − (CE + AE )
(A) IE means the incurred
expenditures during the base period.
(B) CE means the claims incurred
during the base period that would have
been denied under the terms of the plan
absent plan amendments required to
comply with this section
(C) AE means administrative costs
related to claims in CE and other
administrative costs attributable to
complying with the requirements of this
section.
(iii) Incurred expenditures. Incurred
expenditures means actual claims
incurred during the base period and
reported within two months following
the base period, and administrative
costs for all benefits under the group
health plan, including mental health
benefits and medical/surgical benefits,
during the base period. Incurred
expenditures do not include premiums.
(iv) Base period. Base period means
the period used to calculate whether the
plan may claim the one-percent
increased cost exemption in this
paragraph (f). The base period must
begin on the first day in any plan year
that the plan complies with the
requirements of paragraph (b)(1)(i) of
this section and must extend for a
period of at least six consecutive
calendar months. However, in no event
may the base period begin prior to
September 26, 1996 (the date of
enactment of the Mental Health Parity
Act (Pub. L. 104–204, 110 Stat. 2944)).
(v) Rating pools. For plans that are
combined in a pool for rating purposes,
the calculation under this paragraph
(f)(2) for each plan in the pool for the
base period is based on the incurred
expenditures of the pool, whether or not
all the plans in the pool have

participated in the pool for the entire
base period. (However, only the plans
that have complied with paragraph
(b)(1)(i) of this section for at least six
months as a member of the pool satisfy
the requirements of this paragraph
(f)(2).) Otherwise, the calculation under
this paragraph (f)(2) for each plan is
calculated by the plan administrator
based on the incurred expenditures of
the plan.
(vi) Examples. The rules of this
paragraph (f)(2) are illustrated by the
following examples:
Example 1. (i) A group health plan has a
plan year that is the calendar year. The plan
satisfies the requirements of paragraph
(b)(1)(i) of this section as of January 1, 1998.
On September 15, 1998, the plan determines
that $1,000,000 in claims have been incurred
during the period between January 1, 1998
and June 30, 1998 and reported by August 30,
1998. The plan also determines that $100,000
in administrative costs have been incurred
for all benefits under the group health plan,
including mental health benefits. Thus, the
plan determines that its incurred
expenditures for the base period are
$1,100,000. The plan also determines that the
claims incurred during the base period that
would have been denied under the terms of
the plan absent plan amendments required to
comply with this section are $40,000 and that
administrative expenses attributable to
complying with the requirements of this
section are $10,000. Thus, the total amount
of expenditures for the base period had the
plan not been amended to comply with the
requirements of paragraph (b)(1)(i) of this
section are $1,050,000 ($1,100,000—($40,000
+ $10,000) = $1,050,000).
(ii) In this Example 1, the plan satisfies the
requirements of this paragraph (f)(2) because
the application of this section results in an
increased cost of at least one percent under
the terms of the plan ($1,100,000/$1,050,000
= 1.04762).
Example 2. (i) A health insurance issuer
sells a group health insurance policy that is
rated on a pooled basis and is sold to 30
group health plans. One of the group health
plans inquires whether it qualifies for the
one-percent increased cost exemption. The
issuer performs the calculation for the pool
as a whole and determines that the
application of this section results in an
increased cost of 0.500 percent (for a ratio
under this paragraph (f)(2) of 1.00500) for the
pool. The issuer informs the requesting plan
and the other plans in the pool of the
calculation.
(ii) In this Example 2, none of the plans
satisfy the requirements of this paragraph
(f)(2) and a plan that purchases a policy not
complying with the requirements of
paragraph (b)(1)(i) of this section violates the
requirements of this section.
Example 3. (i) A partially insured plan is
collecting the information to determine
whether it qualifies for the exemption. The
plan administrator determines the incurred
expenses for the base period for the selffunded portion of the plan to be $2,000,000
and the administrative expenses for the base

66955

period for the self-funded portion to be
$200,000. For the insured portion of the plan,
the plan administrator requests data from the
insurer. For the insured portion of the plan,
the plan’s own incurred expenses for the base
period are $1,000,000 and the administrative
expenses for the base period are $100,000.
The plan administrator determines that
under the self-funded portion of the plan, the
claims incurred for the base period that
would have been denied under the terms of
the plan absent the amendment are $0
because the self-funded portion does not
cover mental health benefits and the plan’s
administrative costs attributable to
complying with the requirements of this
section are $1,000. The issuer determines
that under the insured portion of the plan,
the claims incurred for the base period that
would have been denied under the terms of
the plan absent the amendment are $25,000
and the administrative costs attributable to
complying with the requirements of this
section are $1,000. Thus, the total incurred
expenditures for the plan for the base period
are $3,300,000 ($2,000,000 + $200,000 +
$1,000,000 + $100,000 = $3,300,000) and the
total amount of expenditures for the base
period had the plan not been amended to
comply with the requirements of paragraph
(b)(1)(i) of this section are $3,273,000
($3,300,000¥($0 + $1,000 + $25,000 +
$1,000) = $3,273,000).
(ii) In this Example 3, the plan does not
satisfy the requirements of this paragraph
(f)(2) because the application of this section
does not result in an increased cost of at least
one percent under the terms of the plan
($3,300,000/$3,273,000 = 1.00825).

(3) Notice of exemption—(i)
Participants and beneficiaries—(A) In
general. A group health plan must
notify participants and beneficiaries of
the plan’s decision to claim the onepercent increased cost exemption. The
notice must include the following
information:
(1) A statement that the plan is
exempt from the requirements of this
section and a description of the basis for
the exemption;
(2) The name and telephone number
of the individual to contact for further
information;
(3) The plan name and plan number
(PN);
(4) The plan administrator’s name,
address, and telephone number;
(5) For single-employer plans, the
plan sponsor’s name, address, and
telephone number (if different from
paragraph (f)(3)(i)(A)(3) of this section)
and the plan sponsor’s employer
identification number (EIN);
(6) The effective date of the
exemption;
(7) The ability of participants and
beneficiaries to contact the plan
administrator to see how benefits may
be affected as a result of the plan’s claim
of the exemption; and
(8) The availability, upon request and
free of charge, of a summary of the

66956 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations
information required under paragraph
(f)(4) of this section.
(B) Use of summary of material
reductions in covered services or
benefits. A plan may satisfy the
requirements of paragraph (f)(3)(i)(A) of
this section by providing participants
and beneficiaries (in accordance with
paragraph (f)(3)(i)(C) of this section)
with a summary of material reductions
in covered services or benefits required
under 29 CFR 2520.104b–3(d) that also
includes the information of this
paragraph (f)(3)(i). However, in all cases,
the exemption is not effective until 30
days after notice has been sent.
(C) Delivery. The notice described in
this paragraph (f)(3)(i) is required to be
provided to all participants and
beneficiaries. The notice may be
furnished by any method of delivery
that satisfies the requirements of section
104(b)(1) of the Employee Retirement
Income Security Act of 1974 (29 U.S.C.
1024(b)(1)) (e.g., first-class mail). If the
notice is provided to the participant at
the participant’s last known address,
then the requirements of this paragraph
(f)(3)(i) are satisfied with respect to the
participant and all beneficiaries residing
at that address. If a beneficiary’s last
known address is different from the
participant’s last known address, a
separate notice is required to be
provided to the beneficiary at the
beneficiary’s last known address.
(D) Example. The rules of this
paragraph (f)(3)(i) are illustrated by the
following example:
Example. (i) A group health plan has a
plan year that is the calendar year and has
an open enrollment period every November
1 through November 30. The plan determines
on September 15 that it satisfies the
requirements of paragraph (f)(2) of this
section. As part of its open enrollment
materials, the plan mails, on October 15, to
all participants and beneficiaries a notice
satisfying the requirements of this paragraph
(f)(3)(i).
(ii) In this Example, the plan has sent the
notice in a manner that complies with this
paragraph (f)(3)(i).

(ii) Federal agencies. A group health
plan that is a church plan (as defined in
section 414(e)) claiming the exemption
of this paragraph (f) for any benefit
package must provide notice in
accordance with the requirement of this
paragraph (f)(3)(ii). This requirement is
satisfied if the plan sends a copy, to the
address designated by the Secretary in
generally applicable guidance, of the
notice described in paragraph (f)(3)(i) of
this section identifying the benefit
package to which the exemption
applies. For any other group health
plan, see 29 CFR 2590.712(f)(3)(ii)(B).

(4) Availability of documentation. The
plan must make available to participants
and beneficiaries (or their
representatives), on request and at no
charge, a summary of the information on
which the exemption was based. An
individual who is not a participant or
beneficiary and who presents a notice
described in paragraph (f)(3)(i) of this
section is considered to be a
representative. A representative may
request the summary of information by
providing the plan a copy of the notice
provided to the participant under
paragraph (f)(3)(i) of this section with
any individually identifiable
information redacted. The summary of
information must include the incurred
expenditures, the base period, the dollar
amount of claims incurred during the
base period that would have been
denied under the terms of the plan
absent amendments required to comply
with paragraph (b)(1)(i) of this section,
the administrative costs related to those
claims, and other administrative costs
attributable to complying with the
requirements of this section. In no event
should the summary of information
include any individually identifiable
information.
(g) Special rules for group health
insurance coverage—(1) Sale of
nonparity policies. See 29 CFR
2590.712(g)(1) and 45 CFR 146.136(g)(1)
for rules limiting the right of an issuer
to sell a policy without parity (as
described in 29 CFR 2590.712(b) and 45
CFR 146.136(b)) to a plan that meets the
requirements of 29 CFR 2590.712 (e) or
(f) and 45 CFR 146.136 (e) or (f)).
(2) Duration of exemption. After a
plan meets the requirements of
paragraph (f) of this section, the plan
may change issuers without having to
meet the requirements of paragraph (f)
of this section again before September
30, 2001.
(h) Effective dates—(1) In general. The
requirements of this section are
applicable for plan years beginning on
or after January 1, 1998.
(2) Limitation on actions. (i) Except as
provided in paragraph (h)(3) of this
section, no enforcement action is to be
taken by the Secretary against a group
health plan that has sought to comply in
good faith with the requirements of
section 9812, with respect to a violation
that occurs before the earlier of—
(A) The first day of the first plan year
beginning on or after April 1, 1998; or
(B) January 1, 1999.
(ii) Compliance with the requirements
of this section is deemed to be good
faith compliance with the requirements
of section 9812.

(iii) The rules of this paragraph (h)(2)
are illustrated by the following
examples:
Example 1. (i) A group health plan has a
plan year that is the calendar year. The plan
complies with section 9812 in good faith
using assumptions inconsistent with
paragraph (b)(6) of this section relating to
weighted averages for categories of benefits.
(ii) In this Example 1, no enforcement
action may be taken against the plan with
respect to a violation resulting solely from
those assumptions and occurring before
January 1, 1999.
Example 2. (i) A group health plan has a
plan year that is the calendar year. For the
entire 1998 plan year, the plan applies a
$1,000,000 annual limit on medical/surgical
benefits and a $100,000 annual limit on
mental health benefits.
(ii) In this Example 2, the plan has not
sought to comply with the requirements of
section 9812 in good faith, and this
paragraph (h)(2) does not apply.

(3) Transition period for increased
cost exemption—(i) In general. No
enforcement action will be taken against
a group health plan that is subject to the
requirements of this section based on a
violation of this section that occurs
before April 1, 1998 solely because the
plan claims the increased cost
exemption under section 9812(c)(2)
based on assumptions inconsistent with
the rules under paragraph (f) of this
section, provided that a plan
amendment that complies with the
requirements of paragraph (b)(1)(i) of
this section is adopted and effective no
later than March 31, 1998 and the plan
complies with the notice requirements
in paragraph (h)(3)(ii) of this section.
(ii) Notice of plan’s use of transition
period. (A) A group health plan satisfies
the requirements of this paragraph
(h)(3)(ii) only if the plan provides notice
to the applicable federal agency and
posts the notice at the location(s) where
documents must be made available for
examination by participants and
beneficiaries under section 104(b)(2) of
the Employee Retirement Income
Security Act of 1974, and the
regulations thereunder (29 CFR
2520.104b–1(b)(3)). The notice must
indicate the plan’s decision to use the
transition period in paragraph (h)(3)(i)
of this section by 30 days after the first
day of the plan year beginning on or
after January 1, 1998, but in no event
later than March 31, 1998. For a group
health plan that is a church plan (as
defined in section 414(e)), the
applicable federal agency is the
Department of the Treasury. For a group
health plan that is not a church plan,
see 29 CFR 2590.712(h)(3)(ii). The
notice must include—
(1) The name of the plan and the plan
number (PN);

Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations
(2) The name, address, and telephone
number of the plan administrator;
(3) For single-employer plans, the
name, address, and telephone number of
the plan sponsor (if different from the
plan administrator) and the plan
sponsor’s employer identification
number (EIN);
(4) The name and telephone number
of the individual to contact for further
information; and
(5) The signature of the plan
administrator and the date of the
signature.
(B) The notice must be provided at no
charge to participants or their
representative within 15 days after
receipt of a written or oral request for
such notification, but in no event before
the notice has been sent to the
applicable federal agency.
(i) Sunset. This section does not apply
to benefits for services furnished on or
after September 30, 2001.
Dated: December 16, 1997.
Michael P. Dolan,
Deputy Commissioner of Internal Revenue.
Approved: December 16, 1997.
Donald C. Lubick,
Acting Assistant Secretary of the Treasury.

Pension and Welfare Benefits
Administration
29 CFR Chapter XXV
29 CFR Part 2590 is amended as
follows:
PART 2590—RULES AND
REGULATIONS FOR HEALTH
INSURANCE PORTABILITY AND
RENEWABILITY FOR GROUP HEALTH
PLANS
1. The authority citation for Part 2590
is revised to read as follows:
Authority: Secs. 107, 209, 505, 701–703,
711, 712, and 731–734 of ERISA (29 U.S.C.
1027, 1059, 1135, 1171–1173, 1181, 1182,
and 1191–1194), as amended by Pub. L. 104–
191, 110 Stat. 1936 and Pub. L. 104–204, 110
Stat. 2944; and Secretary of Labor’s Order No.
1–87, 52 FR 13139, April 21, 1987.

Subpart B—Other Requirements
2. Section 2590.712 is revised to read
as follows:
§ 2590.712 Parity in the application of
certain limits to mental health benefits.

(a) Definitions. For purposes of this
section, except where the context
clearly indicates otherwise, the
following definitions apply:
Aggregate lifetime limit means a
dollar limitation on the total amount of
specified benefits that may be paid
under a group health plan (or group
health insurance coverage offered in

connection with such a plan) for an
individual (or for a group of individuals
considered a single unit in applying this
dollar limitation, such as a family or an
employee plus spouse).
Annual limit means a dollar
limitation on the total amount of
specified benefits that may be paid in a
12-month period under a plan (or group
health insurance coverage offered in
connection with such a plan) for an
individual (or for a group of individuals
considered a single unit in applying this
dollar limitation, such as a family or an
employee plus spouse).
Medical/surgical benefits means
benefits for medical or surgical services,
as defined under the terms of the plan
or group health insurance coverage, but
does not include mental health benefits.
Mental health benefits means benefits
for mental health services, as defined
under the terms of the plan or group
health insurance coverage, but does not
include benefits for treatment of
substance abuse or chemical
dependency.
(b) Requirements regarding limits on
benefits—(1)—general—(i) General
parity requirement. A group health plan
(or health insurance coverage offered by
an issuer in connection with a group
health plan) that provides both medical/
surgical benefits and mental health
benefits must comply with paragraph
(b)(2), (3), or (6) of this section.
(ii) Exception. The rule in paragraph
(b)(1)(i) of this section does not apply if
a plan, or coverage, satisfies the
requirements of paragraph (e) or (f) of
this section.
(2) Plan with no limit or limits on less
than one-third of all medical/surgical
benefits. If a plan (or group health
insurance coverage) does not include an
aggregate lifetime or annual limit on any
medical/surgical benefits or includes
aggregate lifetime or annual limits that
apply to less than one-third of all
medical/surgical benefits, it may not
impose an aggregate lifetime or annual
limit, respectively, on mental health
benefits.
(3) Plan with a limit on at least twothirds of all medical/surgical benefits. If
a plan (or group health insurance
coverage) includes an aggregate lifetime
or annual limit on at least two-thirds of
all medical/surgical benefits, it must
either—
(i) Apply the aggregate lifetime or
annual limit both to the medical/
surgical benefits to which the limit
would otherwise apply and to mental
health benefits in a manner that does
not distinguish between the medical/
surgical and mental health benefits; or
(ii) Not include an aggregate lifetime
or annual limit on mental health

66957

benefits that is less than the aggregate
lifetime or annual limit, respectively, on
the medical/surgical benefits.
(4) Examples. The rules of paragraphs
(b)(2) and (3) of this section are
illustrated by the following examples:
Example 1. (i) Prior to the effective date of
the mental health parity provisions, a group
health plan had no annual limit on medical/
surgical benefits and had a $10,000 annual
limit on mental health benefits. To comply
with the parity requirements of this
paragraph (b), the plan sponsor is
considering each of the following options:
(A) Eliminating the plan’s annual limit on
mental health benefits;
(B) Replacing the plan’s previous annual
limit on mental health benefits with a
$500,000 annual limit on all benefits
(including medical/surgical and mental
health benefits); and
(C) Replacing the plan’s previous annual
limit on mental health benefits with a
$250,000 annual limit on medical/surgical
benefits and a $250,000 annual limit on
mental health benefits.
(ii) In this Example 1, each of the three
options being considered by the plan sponsor
would comply with the requirements of this
section because they offer parity in the dollar
limits placed on medical/surgical and mental
health benefits.
Example 2. (i) Prior to the effective date of
the mental health parity provisions, a group
health plan had a $100,000 annual limit on
medical/surgical inpatient benefits, a $50,000
annual limit on medical/surgical outpatient
benefits, and a $100,000 annual limit on all
mental health benefits. To comply with the
parity requirements of this paragraph (b), the
plan sponsor is considering each of the
following options:
(A) Replacing the plan’s previous annual
limit on mental health benefits with a
$150,000 annual limit on mental health
benefits; and
(B) Replacing the plan’s previous annual
limit on mental health benefits with a
$100,000 annual limit on mental health
inpatient benefits and a $50,000 annual limit
on mental health outpatient benefits.
(ii) In this Example 2, each option under
consideration by the plan sponsor would
comply with the requirements of this section
because they offer parity in the dollar limits
placed on medical/surgical and mental
health benefits.
Example 3. (i) A group health plan that is
subject to the requirements of this section has
no aggregate lifetime or annual limit for
either medical/surgical benefits or mental
health benefits. While the plan provides
medical/surgical benefits with respect to both
network and out-of-network providers, it
does not provide mental health benefits with
respect to out-of-network providers.
(ii) In this Example 3, the plan complies
with the requirements of this section because
they offer parity in the dollar limits placed
on medical/surgical and mental health
benefits.
Example 4. (i) Prior to the effective date of
the mental health parity provisions, a group
health plan had an annual limit on medical/
surgical benefits and a separate but identical

66958 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations
annual limit on mental health benefits. The
plan included benefits for treatment of
substance abuse and chemical dependency in
its definition of mental health benefits.
Accordingly, claims paid for treatment of
substance abuse and chemical dependency
were counted in applying the annual limit on
mental health benefits. To comply with the
parity requirements of this paragraph (b), the
plan sponsor is considering each of the
following options:
(A) Making no change in the plan so that
claims paid for treatment of substance abuse
and chemical dependency continue to count
in applying the annual limit on mental health
benefits;
(B) Amending the plan to count claims
paid for treatment of substance abuse and
chemical dependency in applying the annual
limit on medical/surgical benefits (rather
than counting those claims in applying the
annual limit on mental health benefits);
(C) Amending the plan to provide a new
category of benefits for treatment of chemical
dependency and substance abuse that is
subject to a separate, lower limit and under
which claims paid for treatment of substance
abuse and chemical dependency are counted
only in applying the annual limit on this
separate category; and
(D) Amending the plan to eliminate
distinctions between medical/surgical
benefits and mental health benefits and
establishing an overall limit on benefits
offered under the plan under which claims
paid for treatment of substance abuse and
chemical dependency are counted with
medical/surgical benefits and mental health
benefits in applying the overall limit.
(ii) In this Example 4, the group health
plan is described in paragraph (b)(3) of this
section. Because mental health benefits are
defined in paragraph (a) of this section as
excluding benefits for treatment of substance
abuse and chemical dependency, the
inclusion of benefits for treatment of
substance abuse and chemical dependency in
applying an aggregate lifetime limit or annual
limit on mental health benefits under option
(A) of this Example 4 would not comply with
the requirements of paragraph (b)(3) of this
section. However, options (B), (C), and (D) of
this Example 4 would comply with the
requirements of paragraph (b)(3) of this
section because they offer parity in the dollar
limits placed on medical/surgical and mental
health benefits.

(5) Determining one-third and twothirds of all medical/surgical benefits.
For purposes of this paragraph (b), the
determination of whether the portion of
medical/surgical benefits subject to a
limit represents one-third or two-thirds
of all medical/surgical benefits is based
on the dollar amount of all plan
payments for medical/surgical benefits
expected to be paid under the plan for
the plan year (or for the portion of the
plan year after a change in plan benefits
that affects the applicability of the
aggregate lifetime or annual limits). Any
reasonable method may be used to
determine whether the dollar amounts
expected to be paid under the plan will

constitute one-third or two-thirds of the
dollar amount of all plan payments for
medical/surgical benefits.
(6) Plan not described in paragraph
(b)(2) or (3) of this section—(i) In
general. A group health plan (or group
health insurance coverage) that is not
described in paragraph (b)(2) or (3) of
this section, must either—
(A) Impose no aggregate lifetime or
annual limit, as appropriate, on mental
health benefits; or
(B) Impose an aggregate lifetime or
annual limit on mental health benefits
that is no less than an average limit
calculated for medical/surgical benefits
in the following manner. The average
limit is calculated by taking into
account the weighted average of the
aggregate lifetime or annual limits, as
appropriate, that are applicable to the
categories of medical/surgical benefits.
Limits based on delivery systems, such
as inpatient/outpatient treatment or
normal treatment of common, low-cost
conditions (such as treatment of normal
births), do not constitute categories for
purposes of this paragraph (b)(6)(i)(B).
In addition, for purposes of determining
weighted averages, any benefits that are
not within a category that is subject to
a separately-designated limit under the
plan are taken into account as a single
separate category by using an estimate
of the upper limit on the dollar amount
that a plan may reasonably be expected
to incur with respect to such benefits,
taking into account any other applicable
restrictions under the plan.
(ii) Weighting. For purposes of this
paragraph (b)(6), the weighting
applicable to any category of medical/
surgical benefits is determined in the
manner set forth in paragraph (b)(5) of
this section for determining one-third or
two-thirds of all medical/surgical
benefits.
(iii) Example. The rules of this
paragraph (b)(6) are illustrated by the
following example:
Example. (i) A group health plan that is
subject to the requirements of this section
includes a $100,000 annual limit on medical/
surgical benefits related to cardio-pulmonary
diseases. The plan does not include an
annual limit on any other category of
medical/surgical benefits. The plan
determines that 40% of the dollar amount of
plan payments for medical/surgical benefits
are related to cardio-pulmonary diseases. The
plan determines that $1,000,000 is a
reasonable estimate of the upper limit on the
dollar amount that the plan may incur with
respect to the other 60% of payments for
medical/surgical benefits.
(ii) In this Example, the plan is not
described in paragraph (b)(3) of this section
because there is not one annual limit that
applies to at least two-thirds of all medical/
surgical benefits. Further, the plan is not

described in paragraph (b)(2) of this section
because more than one-third of all medical/
surgical benefits are subject to an annual
limit. Under this paragraph (b)(6), the plan
sponsor can choose either to include no
annual limit on mental health benefits, or to
include an annual limit on mental health
benefits that is not less than the weighted
average of the annual limits applicable to
each category of medical/surgical benefits. In
this example, the minimum weighted average
annual limit that can be applied to mental
health benefits is $640,000 (40% x $100,000
+ 60% x $1,000,000 = $640,000).

(c) Rule in the case of separate benefit
packages. If a group health plan offers
two or more benefit packages, the
requirements of this section, including
the exemption provisions in paragraph
(f) of this section, apply separately to
each benefit package. Examples of a
group health plan that offers two or
more benefit packages include a group
health plan that offers employees a
choice between indemnity coverage or
HMO coverage, and a group health plan
that provides one benefit package for
retirees and a different benefit package
for current employees.
(d) Applicability—(1) Group health
plans. The requirements of this section
apply to a group health plan offering
both medical/surgical benefits and
mental health benefits regardless of
whether the mental health benefits are
administered separately under the plan.
(2) Health insurance issuers. The
requirements of this section apply to a
health insurance issuer offering health
insurance coverage for both medical/
surgical benefits and mental health
benefits in connection with a group
health plan.
(3) Scope. This section does not—
(i) Require a group health plan (or
health insurance issuer offering
coverage in connection with a group
health plan) to provide any mental
health benefits; or
(ii) Affect the terms and conditions
(including cost sharing, limits on the
number of visits or days of coverage,
requirements relating to medical
necessity, requiring prior authorization
for treatment, or requiring primary care
physicians’ referrals for treatment)
relating to the amount, duration, or
scope of the mental health benefits
under the plan (or coverage) except as
specifically provided in paragraph (b) of
this section.
(e) Small employer exemption—(1) In
general. The requirements of this
section do not apply to a group health
plan (or health insurance issuer offering
coverage in connection with a group
health plan) for a plan year of a small
employer. For purposes of this
paragraph (e), the term small employer
means, in connection with a group

Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations
health plan with respect to a calendar
year and a plan year, an employer who
employed an average of at least two but
not more than 50 employees on business
days during the preceding calendar year
and who employs at least two
employees on the first day of the plan
year. See section 732(a) of the Act and
§ 2590.732(a), which provide that this
section (and certain other sections) does
not apply to any group health plan (and
health insurance issuer offering
coverage in connection with a group
health plan) for any plan year if, on the
first day of the plan year, the plan has
fewer than two participants who are
current employees.
(2) Rules in determining employer
size. For purposes of paragraph (e)(1) of
this section—
(i) All persons treated as a single
employer under subsections (b), (c), (m),
and (o) of section 414 of the Internal
Revenue Code of 1986 (26 U.S.C. 414)
are treated as one employer;
(ii) If an employer was not in
existence throughout the preceding
calendar year, whether it is a small
employer is determined based on the
average number of employees the
employer reasonably expects to employ
on business days during the current
calendar year; and
(iii) Any reference to an employer for
purposes of the small employer
exemption includes a reference to a
predecessor of the employer.
(f) Increased cost exemption—(1) In
general. A group health plan (or health
insurance coverage offered in
connection with a group health plan) is
not subject to the requirements of this
section if the requirements of this
paragraph (f) are satisfied. If a plan
offers more than one benefit package,
this paragraph (f) applies separately to
each benefit package. Except as
provided in paragraph (h) of this
section, a plan must comply with the
requirements of paragraph (b)(1)(i) of
this section for the first plan year
beginning on or after January 1, 1998,
and must continue to comply with the
requirements of paragraph (b)(1)(i) of
this section until the plan satisfies the
requirements in this paragraph (f). In no
event is the exemption of this paragraph
(f) effective until 30 days after the notice
requirements in paragraph (f)(3) of this
section are satisfied. If the requirements
of this paragraph (f) are satisfied with
respect to a plan, the exemption
continues in effect (at the plan’s
discretion) until September 30, 2001,
even if the plan subsequently purchases
a different policy from the same or a
different issuer and regardless of any
other changes to the plan’s benefit
structure.

(2) Calculation of the one-percent
increase—(i) Ratio. A group health plan
(or group health insurance coverage)
satisfies the requirements of this
paragraph (f)(2) if the application of
paragraph (b)(1)(i) of this section to the
plan (or to such coverage) results in an
increase in the cost under the plan (or
for such coverage) of at least one
percent. The application of paragraph
(b)(1)(i) of this section results in an
increased cost of at least one percent
under a group health plan (or for such
coverage) only if the ratio below equals
or exceeds 1.01000. The ratio is
determined as follows:
(A) The incurred expenditures during
the base period, divided by,
(B) The incurred expenditures during
the base period, reduced by—
(1) The claims incurred during the
base period that would have been
denied under the terms of the plan
absent plan amendments required to
comply with this section; and
(2) Administrative expenses
attributable to complying with the
requirements of this section.
(ii) Formula. The ratio of paragraph
(f)(2)(i) of this section is expressed
mathematically as follows:

IE
≥ 1.01000
IE − (CE + AE )
(A) IE means the incurred
expenditures during the base period.
(B) CE means the claims incurred
during the base period that would have
been denied under the terms of the plan
absent plan amendments required to
comply with this section
(C) AE means administrative costs
related to claims in CE and other
administrative costs attributable to
complying with the requirements of this
section.
(iii) Incurred expenditures. Incurred
expenditures means actual claims
incurred during the base period and
reported within two months following
the base period, and administrative
costs for all benefits under the group
health plan, including mental health
benefits and medical/surgical benefits,
during the base period. Incurred
expenditures do not include premiums.
(iv) Base period. Base period means
the period used to calculate whether the
plan may claim the one-percent
increased cost exemption in this
paragraph (f). The base period must
begin on the first day in any plan year
that the plan complies with the
requirements of paragraph (b)(1)(i) of
this section and must extend for a
period of at least six consecutive
calendar months. However, in no event
may the base period begin prior to

66959

September 26, 1996 (the date of
enactment of the Mental Health Parity
Act (Pub. L. 104–204, 110 Stat. 2944)).
(v) Rating pools. For plans that are
combined in a pool for rating purposes,
the calculation under this paragraph
(f)(2) for each plan in the pool for the
base period is based on the incurred
expenditures of the pool, whether or not
all the plans in the pool have
participated in the pool for the entire
base period. (However, only the plans
that have complied with paragraph
(b)(1)(i) of this section for at least six
months as a member of the pool satisfy
the requirements of this paragraph
(f)(2).) Otherwise, the calculation under
this paragraph (f)(2) for each plan is
calculated by the plan administrator (or
issuer) based on the incurred
expenditures of the plan.
(vi) Examples. The rules of this
paragraph (f)(2) are illustrated by the
following examples:
EXAMPLE 1. (i) A group health plan has a
plan year that is the calendar year. The plan
satisfies the requirements of paragraph
(b)(1)(i) of this section as of January 1, 1998.
On September 15, 1998, the plan determines
that $1,000,000 in claims have been incurred
during the period between January 1, 1998
and June 30, 1998 and reported by August 30,
1998. The plan also determines that $100,000
in administrative costs have been incurred
for all benefits under the group health plan,
including mental health benefits. Thus, the
plan determines that its incurred
expenditures for the base period are
$1,100,000. The plan also determines that the
claims incurred during the base period that
would have been denied under the terms of
the plan absent plan amendments required to
comply with this section are $40,000 and that
administrative expenses attributable to
complying with the requirements of this
section are $10,000. Thus, the total amount
of expenditures for the base period had the
plan not been amended to comply with the
requirements of paragraph (b)(1)(i) of this
section are $1,050,000 ($1,100,000 ¥
($40,000 + $10,000) = $1,050,000).
(ii) In this Example 1, the plan satisfies the
requirements of this paragraph (f)(2) because
the application of this section results in an
increased cost of at least one percent under
the terms of the plan ($1,100,000/
$1,050,000 = 1.04762).
EXAMPLE 2. (i) A health insurance issuer
sells a group health insurance policy that is
rated on a pooled basis and is sold to 30
group health plans. One of the group health
plans inquires whether it qualifies for the
one-percent increased cost exemption. The
issuer performs the calculation for the pool
as a whole and determines that the
application of this section results in an
increased cost of 0.500 percent (for a ratio
under this paragraph (f)(2) of 1.00500) for the
pool. The issuer informs the requesting plan
and the other plans in the pool of the
calculation.
(ii) In this Example 2, none of the plans
satisfy the requirements of this paragraph

66960 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations
(f)(2) and a plan that purchases a policy not
complying with the requirements of
paragraph (b)(1)(i) of this section violates the
requirements of this section. In addition, an
issuer that issues to any of the plans in the
pool a policy not complying with the
requirements of paragraph (b)(1)(i) of this
section violates the requirements of this
section.
EXAMPLE 3. (i) A partially insured plan is
collecting the information to determine
whether it qualifies for the exemption. The
plan administrator determines the incurred
expenses for the base period for the selffunded portion of the plan to be $2,000,000
and the administrative expenses for the base
period for the self-funded portion to be
$200,000. For the insured portion of the plan,
the plan administrator requests data from the
insurer. For the insured portion of the plan,
the plan’s own incurred expenses for the base
period are $1,000,000 and the administrative
expenses for the base period are $100,000.
The plan administrator determines that
under the self-funded portion of the plan, the
claims incurred for the base period that
would have been denied under the terms of
the plan absent the amendment are $0
because the self-funded portion does not
cover mental health benefits and the plan’s
administrative costs attributable to
complying with the requirements of this
section are $1,000. The issuer determines
that under the insured portion of the plan,
the claims incurred for the base period that
would have been denied under the terms of
the plan absent the amendment are $25,000
and the administrative costs attributable to
complying with the requirements of this
section are $1,000. Thus, the total incurred
expenditures for the plan for the base period
are $3,300,000 ($2,000,000 + $200,000 +
$1,000,000 + $100,000 = $3,300,000) and the
total amount of expenditures for the base
period had the plan not been amended to
comply with the requirements of paragraph
(b)(1)(i) of this section are $3,273,000
($3,300,000¥($0 + $1,000 + $25,000 +
$1,000) = $3,273,000).
(ii) In this Example 3, the plan does not
satisfy the requirements of this paragraph
(f)(2) because the application of this section
does not result in an increased cost of at least
one percent under the terms of the plan
($3,300,000/$3,273,000 = 1.00825).

(3) Notice of exemption—(i)
Participants and beneficiaries—(A) In
general. A group health plan must
notify participants and beneficiaries of
the plan’s decision to claim the onepercent increased cost exemption. The
notice must include the following
information:
(1) A statement that the plan is
exempt from the requirements of this
section and a description of the basis for
the exemption;
(2) The name and telephone number
of the individual to contact for further
information;
(3) The plan name and plan number
(PN);
(4) The plan administrator’s name,
address, and telephone number;

(5) For single-employer plans, the
plan sponsor’s name, address, and
telephone number (if different from
paragraph (f)(3)(i)(A)(3) of this section)
and the plan sponsor’s employer
identification number (EIN);
(6) The effective date of the
exemption;
(7) The ability of participants and
beneficiaries to contact the plan
administrator to see how benefits may
be affected as a result of the plan’s claim
of the exemption; and
(8) The availability, upon request and
free of charge, of a summary of the
information required under paragraph
(f)(4) of this section.
(B) Use of summary of material
reductions in covered services or
benefits. A plan may satisfy the
requirements of paragraph (f)(3)(i)(A) of
this section by providing participants
and beneficiaries (in accordance with
paragraph (f)(3)(i)(C) of this section)
with a summary of material reductions
in covered services or benefits required
under § 2520.104b–3(d) that also
includes the information of this
paragraph (f)(3)(i). However, in all cases,
the exemption is not effective until 30
days after notice has been sent.
(C) Delivery. The notice described in
this paragraph (f)(3)(i) is required to be
provided to all participants and
beneficiaries. The notice may be
furnished by any method of delivery
that satisfies the requirements of section
104(b)(1) of ERISA (e.g., first-class mail).
If the notice is provided to the
participant at the participant’s last
known address, then the requirements
of this paragraph (f)(3)(i) are satisfied
with respect to the participant and all
beneficiaries residing at that address. If
a beneficiary’s last known address is
different from the participant’s last
known address, a separate notice is
required to be provided to the
beneficiary at the beneficiary’s last
known address.
(D) Example. The rules of this
paragraph (f)(3)(i) are illustrated by the
following example:
Example. (i) A group health plan has a
plan year that is the calendar year and has
an open enrollment period every November
1 through November 30. The plan determines
on September 15 that it satisfies the
requirements of paragraph (f)(2) of this
section. As part of its open enrollment
materials, the plan mails, on October 15, to
all participants and beneficiaries a notice
satisfying the requirements of this paragraph
(f)(3)(i).
(ii) In this Example, the plan has sent the
notice in a manner that complies with this
paragraph (f)(3)(i).

(ii) Federal agencies—(A) Church
plans. A church plan (as defined in

section 414(e) of the Internal Revenue
Code) claiming the exemption of this
paragraph (f) for any benefit package
must provide notice to the Department
of the Treasury. This requirement is
satisfied if the plan sends a copy, to the
address designated by the Secretary in
generally applicable guidance, of the
notice described in paragraph (f)(3)(i) of
this section identifying the benefit
package to which the exemption
applies.
(B) Group health plans subject to Part
7 of Subtitle B of Title I of ERISA. A
group health plan subject to Part 7 of
Subtitle B of Title I of ERISA, and
claiming the exemption of this
paragraph (f) for any benefit package,
must provide notice to the Department
of Labor. This requirement is satisfied if
the plan sends a copy, to the address
designated by the Secretary in generally
applicable guidance, of the notice
described in paragraph (f)(3)(i) of this
section identifying the benefit package
to which the exemption applies.
(C) Nonfederal governmental plans. A
group health plan that is a nonfederal
governmental plan claiming the
exemption of this paragraph (f) for any
benefit package must provide notice to
the Department of Health and Human
Services (HHS). This requirement is
satisfied if the plan sends a copy, to the
address designated by the Secretary in
generally applicable guidance, of the
notice described in paragraph (f)(3)(i) of
this section identifying the benefit
package to which the exemption
applies.
(4) Availability of documentation. The
plan (or issuer) must make available to
participants and beneficiaries (or their
representatives), on request and at no
charge, a summary of the information on
which the exemption was based. An
individual who is not a participant or
beneficiary and who presents a notice
described in paragraph (f)(3)(i) of this
section is considered to be a
representative. A representative may
request the summary of information by
providing the plan a copy of the notice
provided to the participant under
paragraph (f)(3)(i) of this section with
any individually identifiable
information redacted. The summary of
information must include the incurred
expenditures, the base period, the dollar
amount of claims incurred during the
base period that would have been
denied under the terms of the plan
absent amendments required to comply
with paragraph (b)(1)(i) of this section,
the administrative costs related to those
claims, and other administrative costs
attributable to complying with the
requirements of this section. In no event
should the summary of information

Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations
include any individually identifiable
information.
(g) Special rules for group health
insurance coverage—(1) Sale of
nonparity policies. An issuer may sell a
policy without parity (as described in
paragraph (b) of this section) only to a
plan that meets the requirements of
paragraphs (e) or (f) of this section.
(2) Duration of exemption. After a
plan meets the requirements of
paragraph (f) of this section, the plan
may change issuers without having to
meet the requirements of paragraph (f)
of this section again before September
30, 2001.
(h) Effective dates—(1) In general. The
requirements of this section are
applicable for plan years beginning on
or after January 1, 1998.
(2) Limitation on actions. (i) Except as
provided in paragraph (h)(3) of this
section, no enforcement action is to be
taken by the Secretary against a group
health plan that has sought to comply in
good faith with the requirements of
section 712 of the Act, with respect to
a violation that occurs before the earlier
of—
(A) The first day of the first plan year
beginning on or after April 1, 1998; or
(B) January 1, 1999.
(ii) Compliance with the requirements
of this section is deemed to be good
faith compliance with the requirements
of section 712 of Part 7 of Subtitle B of
Title I of ERISA.
(iii) The rules of this paragraph (h)(2)
are illustrated by the following
examples:
Example 1. (i) A group health plan has a
plan year that is the calendar year. The plan
complies with section 712 of Part 7 of
Subtitle B of Title I of ERISA in good faith
using assumptions inconsistent with
paragraph (b)(6) of this section relating to
weighted averages for categories of benefits.
(ii) In this Example 1, no enforcement
action may be taken against the plan with
respect to a violation resulting solely from
those assumptions and occurring before
January 1, 1999.
Example 2. (i) A group health plan has a
plan year that is the calendar year. For the
entire 1998 plan year, the plan applies a
$1,000,000 annual limit on medical/surgical
benefits and a $100,000 annual limit on
mental health benefits.
(ii) In this Example 2, the plan has not
sought to comply with the requirements of
section 712 of the Act in good faith and this
paragraph (h)(2) does not apply.

(3) Transition period for increased
cost exemption—(i) In general. No
enforcement action will be taken against
a group health plan that is subject to the
requirements of this section based on a
violation of this section that occurs
before April 1, 1998 solely because the
plan claims the increased cost

exemption under section 712(c)(2) of
Part 7 of Subtitle B of Title I of ERISA
based on assumptions inconsistent with
the rules under paragraph (f) of this
section, provided that a plan
amendment that complies with the
requirements of paragraph (b)(1)(i) of
this section is adopted and effective no
later than March 31, 1998 and the plan
complies with the notice requirements
in paragraph (h)(3)(ii) of this section.
(ii) Notice of plan’s use of transition
period. (A) A group health plan satisfies
the requirements of this paragraph
(h)(3)(ii) only if the plan provides notice
to the applicable federal agency and
posts such notice at the location(s)
where documents must be made
available for examination by
participants and beneficiaries under
section 104(b)(2) of ERISA and the
regulations thereunder (29 CFR
2520.104b–1(b)(3)). The notice must
indicate the plan’s decision to use the
transition period in paragraph (h)(3)(i)
of this section by 30 days after the first
day of the plan year beginning on or
after January 1, 1998, but in no event
later than March 31, 1998. For a group
health plan that is a church plan, the
applicable federal agency is the
Department of the Treasury. For a group
health plan that is subject to Part 7 of
Subtitle B of Title I of ERISA, the
applicable federal agency is the
Department of Labor. For a group health
plan that is a nonfederal governmental
plan, the applicable federal agency is
the Department of Health and Human
Services. The notice must include—
(1) The name of the plan and the plan
number (PN);
(2) The name, address, and telephone
number of the plan administrator;
(3) For single-employer plans, the
name, address, and telephone number of
the plan sponsor (if different from the
plan administrator) and the plan
sponsor’s employer identification
number (EIN);
(4) The name and telephone number
of the individual to contact for further
information; and
(5) The signature of the plan
administrator and the date of the
signature.
(B) The notice must be provided at no
charge to participants or their
representative within 15 days after
receipt of a written or oral request for
such notification, but in no event before
the notice has been sent to the
applicable federal agency.
(i) Sunset. This section does not apply
to benefits for services furnished on or
after September 30, 2001.

66961

Signed at Washington, DC, this 16th day of
December, 1997.
Olena Berg,
Assistant Secretary, Pension Welfare Benefits
Administration, U.S. Department of Labor.

Health Care Financing Administration
45 CFR Subtitle A, Subchapter B
45 CFR Part 146 is amended as
follows:
PART 146—REQUIREMENTS FOR THE
GROUP HEALTH INSURANCE
MARKET
1. The authority citation for Part 146
is revised to read as follows:
Authority: Secs. 2701 through 2763, 2791,
and 2792 of the PHS Act (42 U.S.C. 300gg
through 300gg–63, 300gg–91, and 300gg–92).

2. A new Subpart C is added to Part
146 to read as follows:
Subpart C—Requirements Related to
Benefits
§ 146.136 Parity in the application of
certain limits to mental health benefits.

(a) Definitions. For purposes of this
section, except where the context
clearly indicates otherwise, the
following definitions apply:
Aggregate lifetime limit means a
dollar limitation on the total amount of
specified benefits that may be paid
under a group health plan (or group
health insurance coverage offered in
connection with such plan) for an
individual (or for a group of individuals
considered a single unit in applying this
dollar limitation, such as a family or an
employee plus spouse).
Annual limit means a dollar
limitation on the total amount of
specified benefits that may be paid in a
12-month period under a plan (or group
health insurance coverage offered in
connection with such plan) for an
individual (or for a group of individuals
considered a single unit in applying this
dollar limitation, such as a family or an
employee plus spouse).
Medical/surgical benefits means
benefits for medical or surgical services,
as defined under the terms of the plan
or group health insurance coverage, but
does not include mental health benefits.
Mental health benefits means benefits
for mental health services, as defined
under the terms of the plan or group
health insurance coverage, but does not
include benefits for treatment of
substance abuse or chemical
dependency.
(b) Requirements regarding limits on
benefits—(1) In general—(i) General
parity requirement. A group health plan
(or health insurance coverage offered by
an issuer in connection with a group

66962 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations
health plan) that provides both medical/
surgical benefits and mental health
benefits must comply with paragraph
(b)(2), paragraph (b)(3), or paragraph
(b)(6) of this section.
(ii) Exception. The rule in paragraph
(b)(1)(i) of this section does not apply if
a plan, or coverage, satisfies the
requirements of paragraph (e) or
paragraph (f) of this section.
(2) Plan with no limit or limits on less
than one-third of all medical/surgical
benefits. If a plan (or group health
insurance coverage) does not include an
aggregate lifetime or annual limit on any
medical/surgical benefits or includes
aggregate lifetime or annual limits that
apply to less than one-third of all
medical/surgical benefits, it may not
impose an aggregate lifetime or annual
limit, respectively, on mental health
benefits.
(3) Plan with a limit on at least twothirds of all medical/surgical benefits. If
a plan (or group health insurance
coverage) includes an aggregate lifetime
or annual limit on at least two-thirds of
all medical/surgical benefits, it must
either—
(i) Apply the aggregate lifetime or
annual limit both to the medical/
surgical benefits to which the limit
would otherwise apply and to mental
health benefits in a manner that does
not distinguish between the medical/
surgical and mental health benefits; or
(ii) Not include an aggregate lifetime
or annual limit on mental health
benefits that is less than the aggregate
lifetime or annual limit, respectively, on
the medical/surgical benefits.
(4) Examples. The rules of paragraphs
(b) (2) and (3) of this section are
illustrated by the following examples:
Example 1. (i) Prior to the effective date of
the mental health parity provisions, a group
health plan had no annual limit on medical/
surgical benefits and had a $10,000 annual
limit on mental health benefits. To comply
with the parity requirements of this
paragraph (b), the plan sponsor is
considering each of the following options:
(A) Eliminating the plan’s annual limit on
mental health benefits;
(B) Replacing the plan’s previous annual
limit on mental health benefits with a
$500,000 annual limit on all benefits
(including medical/surgical and mental
health benefits); and
(C) Replacing the plan’s previous annual
limit on mental health benefits with a
$250,000 annual limit on medical/surgical
benefits and a $250,000 annual limit on
mental health benefits.
(ii) In this Example 1, each of the three
options being considered by the plan sponsor
would comply with the requirements of this
section because they offer parity in the dollar
limits placed on medical/surgical and mental
health benefits.

Example 2. (i) Prior to the effective date of
the mental health parity provisions, a group
health plan had a $100,000 annual limit on
medical/surgical inpatient benefits, a $50,000
annual limit on medical/surgical outpatient
benefits, and a $100,000 annual limit on all
mental health benefits. To comply with the
parity requirements of this paragraph (b), the
plan sponsor is considering each of the
following options:
(A) Replacing the plan’s previous annual
limit on mental health benefits with a
$150,000 annual limit on mental health
benefits; and
(B) Replacing the plan’s previous annual
limit on mental health benefits with a
$100,000 annual limit on mental health
inpatient benefits and a $50,000 annual limit
on mental health outpatient benefits.
(ii) In this Example 2, each option under
consideration by the plan sponsor would
comply with the requirements of this section
because they offer parity in the dollar limits
placed on medical/surgical and mental
health benefits.
Example 3. (i) A group health plan that is
subject to the requirements of this section has
no aggregate lifetime or annual limit for
either medical/surgical benefits or mental
health benefits. While the plan provides
medical/surgical benefits with respect to both
network and out-of-network providers, it
does not provide mental health benefits with
respect to out-of-network providers.
(ii) In this Example 3, the plan complies
with the requirements of this section because
they offer parity in the dollar limits placed
on medical/surgical and mental health
benefits.
Example 4. (i) Prior to the effective date of
the mental health parity provisions, a group
health plan had an annual limit on medical/
surgical benefits and a separate but identical
annual limit on mental health benefits. The
plan included benefits for treatment of
substance abuse and chemical dependency in
its definition of mental health benefits.
Accordingly, claims paid for treatment of
substance abuse and chemical dependency
were counted in applying the annual limit on
mental health benefits. To comply with the
parity requirements of this paragraph (b), the
plan sponsor is considering each of the
following options:
(A) Making no change in the plan so that
claims paid for treatment of substance abuse
and chemical dependency continue to count
in applying the annual limit on mental health
benefits;
(B) Amending the plan to count claims
paid for treatment of substance abuse and
chemical dependency in applying the annual
limit on medical/surgical benefits (rather
than counting those claims in applying the
annual limit on mental health benefits);
(C) Amending the plan to provide a new
category of benefits for treatment of chemical
dependency and substance abuse that is
subject to a separate, lower limit and under
which claims paid for treatment of substance
abuse and chemical dependency are counted
only in applying the annual limit on this
separate category; and
(D) Amending the plan to eliminate
distinctions between medical/surgical
benefits and mental health benefits and

establishing an overall limit on benefits
offered under the plan under which claims
paid for treatment of substance abuse and
chemical dependency are counted with
medical/surgical benefits and mental health
benefits in applying the overall limit.
(ii) In this Example 4, the group health
plan is described in paragraph (b)(3) of this
section. Because mental health benefits are
defined in paragraph (a) of this section as
excluding benefits for treatment of substance
abuse and chemical dependency, the
inclusion of benefits for treatment of
substance abuse and chemical dependency in
applying an aggregate lifetime limit or annual
limit on mental health benefits under option
(A) of this Example 4 would not comply with
the requirements of paragraph (b)(3) of this
section. However, options (B), (C), and (D) of
this Example 4 would comply with the
requirements of paragraph (b)(3) of this
section because they offer parity in the dollar
limits placed on medical/surgical and mental
health benefits.

(5) Determining one-third and twothirds of all medical/surgical benefits.
For purposes of this paragraph (b), the
determination of whether the portion of
medical/surgical benefits subject to a
limit represents one-third or two-thirds
of all medical/surgical benefits is based
on the dollar amount of all plan
payments for medical/surgical benefits
expected to be paid under the plan for
the plan year (or for the portion of the
plan year after a change in plan benefits
that affects the applicability of the
aggregate lifetime or annual limits). Any
reasonable method may be used to
determine whether the dollar amounts
expected to be paid under the plan will
constitute one-third or two-thirds of the
dollar amount of all plan payments for
medical/surgical benefits.
(6) Plan not described in paragraph
(b)(2) or paragraph (b)(3) of this
section—(i) In general. A group health
plan (or group health insurance
coverage) that is not described in
paragraph (b)(2) or paragraph (b)(3) of
this section, must either impose—
(A) No aggregate lifetime or annual
limit, as appropriate, on mental health
benefits; or
(B) An aggregate lifetime or annual
limit on mental health benefits that is
no less than an average limit for
medical/surgical benefits calculated in
the following manner. The average limit
is calculated by taking into account the
weighted average of the aggregate
lifetime or annual limits, as appropriate,
that are applicable to the categories of
medical/surgical benefits. Limits based
on delivery systems, such as inpatient/
outpatient treatment, or normal
treatment of common, low-cost
conditions (such as treatment of normal
births), do not constitute categories for
purposes of this paragraph (b)(6)(i)(B).
In addition, for purposes of determining

Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations
weighted averages, any benefits that are
not within a category that is subject to
a separately-designated limit under the
plan are taken into account as a single
separate category by using an estimate
of the upper limit on the dollar amount
that a plan may reasonably be expected
to incur with respect to such benefits,
taking into account any other applicable
restrictions under the plan.
(ii) Weighting. For purposes of this
paragraph (b)(6), the weighting
applicable to any category of medical/
surgical benefits is determined in the
manner set forth in paragraph (b)(5) of
this section for determining one-third or
two-thirds of all medical/surgical
benefits.
(iii) Examples. The rules of this
paragraph (b)(6) are illustrated by the
following example:
Example. (i) A group health plan that is
subject to the requirements of this section
includes a $100,000 annual limit on medical/
surgical benefits related to cardio-pulmonary
diseases. The plan does not include an
annual limit on any other category of
medical/surgical benefits. The plan
determines that 40% of the dollar amount of
plan payments for medical/surgical benefits
are related to cardio-pulmonary diseases. The
plan determines that $1,000,000 is a
reasonable estimate of the upper limit on the
dollar amount that the plan may incur with
respect to the other 60% of payments for
medical/surgical benefits.
(ii) In this Example, the plan is not
described in paragraph (b)(3) of this section
because there is not one annual limit that
applies to at least two-thirds of all medical/
surgical benefits. Further, the plan is not
described in paragraph (b)(2) of this section
because more than one-third of all medical/
surgical benefits are subject to an annual
limit. Under this paragraph (b)(6), the plan
sponsor can choose either to include no
annual limit on mental health benefits, or to
include an annual limit on mental health
benefits that is not less than the weighted
average of the annual limits applicable to
each category of medical/surgical benefits. In
this example, the minimum weighted average
annual limit that can be applied to mental
health benefits is $640,000 (40% ‘‘ $100,000
+ 60% ‘‘ $1,000,000 = $640,000).

(c) Rule in the case of separate benefit
packages. If a group health plan offers
two or more benefit packages, the
requirements of this section, including
the exemption provisions in paragraph
(f) of this section, apply separately to
each benefit package. Examples of a
group health plan that offers two or
more benefit packages include a group
health plan that offers employees a
choice between indemnity coverage or
HMO coverage, and a group health plan
that provides one benefit package for
retirees and a different benefit package
for current employees.
(d) Applicability—(1) Group health
plans. The requirements of this section

apply to a group health plan offering
both medical/surgical benefits and
mental health benefits regardless of
whether the mental health benefits are
administered separately under the plan.
(2) Health insurance issuers. The
requirements of this section apply to a
health insurance issuer offering health
insurance coverage for both medical/
surgical benefits and mental health
benefits in connection with a group
health plan.
(3) Scope. This section does not—
(i) Require a group health plan (or
health insurance issuer offering
coverage in connection with a group
health plan) to provide any mental
health benefits; or
(ii) Affect the terms and conditions
(including cost sharing, limits on the
number of visits or days of coverage,
requirements relating to medical
necessity, requiring prior authorization
for treatment, or requiring primary care
physicians’ referrals for treatment)
relating to the amount, duration, or
scope of the mental health benefits
under the plan (or coverage) except as
specifically provided in paragraph (b) of
this section.
(e) Small employer exemption—(1) In
general. The requirements of this
section do not apply to a group health
plan (or health insurance issuer offering
coverage in connection with a group
health plan) for a plan year of a small
employer. For purposes of this
paragraph (e), the term small employer
means, in connection with a group
health plan with respect to a calendar
year and a plan year, an employer who
employed an average of at least two but
not more than 50 employees on business
days during the preceding calendar year
and who employs at least two
employees on the first day of the plan
year. See regulations at § 146.145(a),
which provide that this section (and
certain other sections) does not apply to
any group health plan (and health
insurance issuer offering coverage in
connection with a group health plan) for
any plan year if, on the first day of the
plan year, the plan has fewer than two
participants who are current employees.
(2) Rules in determining employer
size. For purposes of paragraph (e)(1) of
this section—
(i) All persons treated as a single
employer under subsections (b), (c), (m),
and (o) of section 414 of the Internal
Revenue Code of 1986 (26 U.S.C. 414)
are treated as one employer;
(ii) If an employer was not in
existence throughout the preceding
calendar year, whether it is a small
employer is determined based on the
average number of employees the
employer reasonably expects to employ

66963

on business days during the current
calendar year; and
(iii) Any reference to an employer for
purposes of the small employer
exemption includes a reference to a
predecessor of the employer.
(f) Increased cost exemption—(1) In
general. A group health plan (or health
insurance coverage offered in
connection with a group health plan) is
not subject to the requirements of this
section if the requirements of this
paragraph (f) are satisfied. If a plan
offers more than one benefit package,
this paragraph (f) applies separately to
each benefit package. Except as
provided in paragraph (h) of this
section, a plan must comply with the
requirements of paragraph (b)(1)(i) of
this section for the first plan year
beginning on or after January 1, 1998,
and must continue to comply with the
requirements of paragraph (b)(1)(i) of
this section until the plan satisfies the
requirements in this paragraph (f). In no
event is the exemption of this paragraph
(f) effective until 30 days after the notice
requirements in paragraph (f)(3) of this
section are satisfied. If the requirements
of this paragraph (f) are satisfied with
respect to a plan, the exemption
continues in effect (at the plan’s
discretion) until September 30, 2001,
even if the plan subsequently purchases
a different policy from the same or a
different issuer and regardless of any
other changes to the plan’s benefit
structure.
(2) Calculation of the one-percent
increase—(i) Ratio. A group health plan
(or group health insurance coverage)
satisfies the requirements of this
paragraph (f)(2) if the application of
paragraph (b)(1)(i) of this section to the
plan (or to such coverage) results in an
increase in the cost under the plan (or
for such coverage) of at least one
percent. The application of paragraph
(b)(1)(i) of this section results in an
increased cost of at least one percent
under a group health plan (or for such
coverage) only if the ratio below equals
or exceeds 1.01000. The ratio is
determined as follows:
(A) The incurred expenditures during
the base period, divided by,
(B) The incurred expenditures during
the base period, reduced by—
(1) The claims incurred during the
base period that would have been
denied under the terms of the plan
absent plan amendments required to
comply with this section, and
(2) Administrative expenses
attributable to complying with the
requirements of this section.
(ii) Formula. The ratio of paragraph
(f)(2)(i) is expressed mathematically as
follows:

66964 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations
IE
≥ 1.01000
IE − (CE + AE )
(A) IE means the incurred
expenditures during the base period.
(B) CE means the claims incurred
during the base period that would have
been denied under the terms of the plan
absent plan amendments required to
comply with this section.
(C) AE means administrative costs
related to claims in CE and other
administrative costs attributable to
complying with the requirements of this
section.
(iii) Incurred expenditures. Incurred
expenditures means actual claims
incurred during the base period and
reported within two months following
the base period, and administrative
costs for all benefits under the group
health plan, including mental health
benefits and medical/surgical benefits,
during the base period. Incurred
expenditures do not include premiums.
(iv) Base period. Base period means
the period used to calculate whether the
plan may claim the one-percent
increased cost exemption in this
paragraph (f). The base period must
begin on the first day in any plan year
that the plan complies with the
requirements of paragraph (b)(1)(i) of
this section and must extend for a
period of at least six consecutive
calendar months. However, in no event
may the base period begin prior to
September 26, 1996 (the date of
enactment of the Mental Health Parity
Act (Pub. L. 104–204, 110 Stat. 2944)).
(v) Rating pools. For plans that are
combined in a pool for rating purposes,
the calculation under this paragraph
(f)(2) for each plan in the pool for the
base period is based on the incurred
expenditures of the pool, whether or not
all the plans in the pool have
participated in the pool for the entire
base period. (However, only the plans
that have complied with paragraph
(b)(1)(i) of this section for at least six
months as a member of the pool satisfy
the requirements of this paragraph
(f)(2).) Otherwise, the calculation under
this paragraph (f)(2) for each plan is
calculated by the plan administrator (or
issuer) based on the incurred
expenditures of the plan.
(vi) Examples. The rules of this
paragraph (f)(2) are illustrated by the
following examples:
Example 1. (i) A group health plan has a
plan year that is the calendar year. The plan
satisfies the requirements of paragraph
(b)(1)(i) of this section as of January 1, 1998.
On September 15, 1998, the plan determines
that $1,000,000 in claims have been incurred
during the period between January 1, 1998
and June 30, 1998 and reported by August 30,

1998. The plan also determines that $100,000
in administrative costs have been incurred
for all benefits under the group health plan,
including mental health benefits. Thus, the
plan determines that its incurred
expenditures for the base period are
$1,100,000. The plan also determines that the
claims incurred during the base period that
would have been denied under the terms of
the plan absent plan amendments required to
comply with this section are $40,000 and that
administrative expenses attributable to
complying with the requirements of this
section are $10,000. Thus, the total amount
of expenditures for the base period had the
plan not been amended to comply with the
requirements of paragraph (b)(1)(i) of this
section are $1,050,000 ($1,100,000—($40,000
+ $10,000) = $1,050,000).
(ii) In this Example 1, the plan satisfies the
requirements of this paragraph (f)(2) because
the application of this section results in an
increased cost of at least one percent under
the terms of the plan ($1,100,000/$1,050,000
= 1.04762).
Example 2. (i) A health insurance issuer
sells a group health insurance policy that is
rated on a pooled-basis and is sold to 30
group health plans. One of the group health
plans inquires whether it qualifies for the one
percent increased cost exemption. The issuer
performs the calculation for the pool as a
whole and determines that the application of
this section results in an increased cost of
0.500 percent (for a ratio under this
paragraph (f)(2) of 1.00500) for the pool. The
issuer informs the requesting plan and the
other plans in the pool of the calculation.
(ii) In this Example 2, none of the plans
satisfy the requirements of this paragraph
(f)(2) and a plan that purchases a policy not
complying with the requirements of
paragraph (b)(1)(i) of this section violates the
requirements of this section. In addition, an
issuer that issues to any of the plans in the
pool a policy not complying with the
requirements of paragraph (b)(1)(i) of this
section violates the requirements of this
section.
Example 3. (i) A partially-insured plan is
collecting the information to determine
whether it qualifies for the exemption. The
plan administrator determines the incurred
expenses for the base period for the selffunded portion of the plan to be $2,000,000
and the administrative expenses for the base
period for the self-funded portion to be
$200,000. For the insured portion of the plan,
the plan administrator requests data from the
insurer. For the insured portion of the plan,
the plan’s own incurred expenses for the base
period are $1,000,000 and the administrative
expenses for the base period are $100,000.
The plan administrator determines that
under the self-funded portion of the plan, the
claims incurred for the base period that
would have been denied under the terms of
the plan absent the amendment are $0
because the self-funded portion does not
cover mental health benefits and the plan’s
administrative costs attributable to
complying with the requirements of this
section are $1,000. The issuer determines
that under the insured portion of the plan,
the claims incurred for the base period that
would have been denied under the terms of

the plan absent the amendment are $25,000
and the administrative costs attributable to
complying with the requirements of this
section are $1,000. Thus, the total incurred
expenditures for the plan for the base period
are $3,300,000 ($2,000,000 + $200,000 +
$1,000,000 + $100,000 = $3,300,000) and the
total amount of expenditures for the base
period had the plan not been amended to
comply with the requirements of paragraph
(b)(1)(i) of this section are $3,273,000
($3,300,000 ¥ ($0 + $1,000 + $25,000 +
$1,000) = $3,273,000).
(ii) In this Example 3, the plan does not
satisfy the requirements of this paragraph
(f)(2) because the application of this section
does not result in an increased cost of at least
one percent under the terms of the plan
($3,300,000/$3,273,000 = 1.00825).

(3) Notice of exemption—(i)
Participants and beneficiaries—(A) In
general. A group health plan must
notify participants and beneficiaries of
the plan’s decision to claim the one
percent increased cost exemption. The
notice must include the following
information:
(1) A statement that the plan is
exempt from the requirements of this
section and a description of the basis for
the exemption.
(2) The name and telephone number
of the individual to contact for further
information.
(3) The plan name and plan number
(PN).
(4) The plan administrator’s name,
address, and telephone number.
(5) For single-employer plans, the
plan sponsor’s name, address, and
telephone number (if different from
paragraph (f)(3)(i)(A)(3) of this section)
and the plan sponsor’s employer
identification number (EIN).
(6) The effective date of such
exemption.
(7) The ability of participants and
beneficiaries to contact the plan
administrator to see how benefits may
be affected as a result of the plan’s
election of the exemption.
(8) The availability, upon request and
free of charge, of a summary of the
information required under paragraph
(f)(4) of this section.
(B) Use of summary of material
reductions in covered services or
benefits. A plan may satisfy the
requirements of paragraph (f)(3)(i)(A) by
providing participants and beneficiaries
(in accordance with paragraph
(f)(3)(i)(C)) with a summary of material
reductions in covered services or
benefits consistent with Department of
Labor regulations at 29 CFR 2520.104b–
3(d) that also includes the information
of this paragraph (f)(3)(i). However, in
all cases, the exemption is not effective
until 30 days after notice has been sent.
(C) Delivery. The notice described in
this paragraph (f)(3)(i) is required to be

Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations
provided to all participants and
beneficiaries. The notice may be
furnished by any method of delivery
that satisfies the requirements of section
104(b)(1) of ERISA (29 U.S.C.
1024(b)(1)) (e.g., first-class mail). If the
notice is provided to the participant at
the participant’s last known address,
then the requirements of this paragraph
(f)(3)(i) are satisfied with respect to the
participant and all beneficiaries residing
at that address. If a beneficiary’s last
known address is different from the
participant’s last known address, a
separate notice is required to be
provided to the beneficiary at the
beneficiary’s last known address.
(D) Example. The rules of this
paragraph (f)(3)(i) are illustrated by the
following example:
Example. (i) A group health plan has a
plan year that is the calendar year and has
an open enrollment period every November
1 through November 30. The plan determines
on September 15 that it satisfies the
requirements of paragraph (f)(2) of this
section. As part of its open enrollment
materials, the plan mails, on October 15, to
all participants and beneficiaries a notice
satisfying the requirements of this paragraph
(f)(3)(i).
(ii) In this Example, the plan has sent the
notice in a manner that complies with this
paragraph (f)(3)(i).

(ii) Federal agencies—(A) Church
plans. A church plan (as defined in
section 414(e) of the Internal Revenue
Code) claiming the exemption of this
paragraph (f) for any benefit package
must provide notice to the Department
of the Treasury. This requirement is
satisfied if the plan sends a copy, to the
address designated by the Secretary in
generally applicable guidance, of the
notice described in paragraph (f)(3)(i) of
this section identifying the benefit
package to which the exemption
applies.
(B) Group health plans subject to Part
7 of Subtitle B of Title I of ERISA. A
group health plan subject to Part 7 of
Subtitle B of Title I of ERISA, and
claiming the exemption of this
paragraph (f) for any benefit package,
must provide notice to the Department
of Labor. This requirement is satisfied if
the plan sends a copy, to the address
designated by the Secretary in generally
applicable guidance, of the notice
described in paragraph (f)(3)(i) of this
section identifying the benefit package
to which the exemption applies.
(C) Non-Federal governmental plans.
A group health plan that is a nonFederal governmental plan claiming the
exemption of this paragraph (f) for any
benefit package must provide notice to
the Department of Health and Human
Services (HHS). This requirement is

satisfied if the plan sends a copy, to the
address designated by the Secretary in
generally applicable guidance, of the
notice described in paragraph (f)(3)(i) of
this section identifying the benefit
package to which the exemption
applies.
(4) Availability of documentation. The
plan (or issuer) must make available to
participants and beneficiaries (or their
representatives), on request and at no
charge, a summary of the information on
which the exemption was based. An
individual who is not a participant or
beneficiary and who presents a notice
described in paragraph (f)(3)(i) of this
section is considered to be a
representative. A representative may
request the summary of information by
providing the plan a copy of the notice
provided to the participant under
paragraph (f)(3)(i) of this section with
any individually identifiable
information redacted. The summary of
information must include the incurred
expenditures, the base period, the dollar
amount of claims incurred during the
base period that would have been
denied under the terms of the plan
absent amendments required to comply
with paragraph (b)(1)(i) of this section,
the administrative costs related to those
claims, and other administrative costs
attributable to complying with the
requirements for the exemption. In no
event should the summary of
information include any individually
identifiable information.
(g) Special rules for group health
insurance coverage—(1) Sale of
nonparity policies. An issuer may sell a
policy without parity (as described in
paragraph (b) of this section) only to a
plan that meets the requirements of
paragraph (e) or paragraph (f) of this
section.
(2) Duration of exemption. After a
plan meets the requirements of
paragraph (f) of this section, the plan
may change issuers without having to
meet the requirements of paragraph (f)
of this section again before September
30, 2001.
(h) Effective dates—(1) In general. The
requirements of this section are
applicable for plan years beginning on
or after January 1, 1998.
(2) Limitation on actions. (i) Except as
provided in paragraph (h)(3) of this
section, no enforcement action is to be
taken by the Secretary against a group
health plan that has sought to comply in
good faith with the requirements of
section 2705 of the PHS Act, with
respect to a violation that occurs before
the earlier of—
(A) The first day of the first plan year
beginning on or after April 1, 1998; or
(B) January 1, 1999.

66965

(ii) Compliance with the requirements
of this section is deemed to be good
faith compliance with the requirements
of section 2705 of the PHS Act.
(iii) The rules of this paragraph (h)(2)
are illustrated by the following
examples:
Example 1. (i) A group health plan has a
plan year that is the calendar year. The plan
complies with section 2705 of the PHS Act
in good faith using assumptions inconsistent
with paragraph (b)(6) of this section relating
to weighted averages for categories of
benefits.
(ii) In this Example 1, no enforcement
action may be taken against the plan with
respect to a violation resulting solely from
those assumptions and occurring before
January 1, 1999.
Example 2. (i) A group health plan has a
plan year that is the calendar year. For the
entire 1998 plan year, the plan applies a
$1,000,000 annual limit on medical/surgical
benefits and a $100,000 annual limit on
mental health benefits.
(ii) In this Example 2, the plan has not
sought to comply with the requirements of
section 2705 of the PHS Act in good faith and
this paragraph (h)(2) does not apply.

(3) Transition period for increased
cost exemption—(i) In general. No
enforcement action will be taken against
a group health plan that is subject to the
requirements of this section based on a
violation of this section that occurs
before April 1, 1998 solely because the
plan claims the increased cost
exemption under section 2705(c)(2) of
the PHS Act based on assumptions
inconsistent with the rules under
paragraph (f) of this section, provided
that a plan amendment that complies
with the requirements of paragraph
(b)(1)(i) of this section is adopted and
effective no later than March 31, 1998
and the plan complies with the notice
requirements in paragraph (h)(3)(ii) of
this section.
(ii) Notice of plan’s use of transition
period. (A) A group health plan satisfies
the requirements of this paragraph
(h)(3)(ii) only if the plan provides notice
to the applicable federal agency and
posts the notice at the location(s) where
documents must be made available for
examination by participants and
beneficiaries under section 104(b)(2) of
ERISA and the regulations thereunder
(29 CFR 2520.104b–1(b)(3)). The notice
must indicate the plan’s decision to use
the transition period in paragraph
(h)(3)(i) of this section by 30 days after
the first day of the plan year beginning
on or after January 1, 1998, but in no
event later than March 31, 1998. For a
group health plan that is a church plan,
the applicable federal agency is the
Department of the Treasury. For a group

66966 Federal Register / Vol. 62, No. 245 / Monday, December 22, 1997 / Rules and Regulations
health plan that is subject to Part 7 of
Subtitle B of Title I of ERISA, the
applicable federal agency is the
Department of Labor. For a group health
plan that is a nonfederal governmental
plan, the applicable federal agency is
the Department of Health and Human
Services. The notice must include—
(1) The name of the plan and the plan
number (PN);
(2) The name, address, and telephone
number of the plan administrator;
(3) For single-employer plans, the
name, address, and telephone number of
the plan sponsor (if different from the
plan administrator) and the plan

sponsor’s employer identification
number (EIN);
(4) The name and telephone number
of the individual to contact for further
information; and
(5) The signature of the plan
administrator and the date of the
signature.
(B) The notice must be provided at no
charge to participants or their
representative within 15 days after
receipt of a written or oral request for
such notification, but in no event before
the notice has been sent to the
applicable federal agency.

(i) Sunset. This section does not apply
to benefits for services furnished on or
after September 30, 2001.
Dated: December 16, 1997.
Nancy-Ann Min DeParle,
Administrator, Health Care Financing
Administration.
Dated: December 16, 1997.
Donna E. Shalala,
Secretary, Department of Health and Human
Services.
[FR Doc. 97–33262 Filed 12–19–97; 8:45 am]
BILLING CODE 4830–01–P; 4510–29–P; 4120–01–P