[Congressional Record Volume 151, Number 51 (Monday, April 25, 2005)]
[Senate]
[Pages S4190-S4191]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. HATCH (for himself, Mr. Grassley, and Mr. Baucus):
  S. 897. A bill to amend the Internal Revenue Code of 1986 to clarify 
the calculation of the reserve allowance for medical benefits of plans 
sponsored by bona fide associations; to the Committee on Finance.
  Mr. HATCH. Mr. President, I rise today to introduce a bill to clarify 
the tax treatment of a narrow range of health plans sponsored by 
associations. I am joined in this effort by my good friends and 
colleagues, the Chairman and the Ranking Democratic Member of the 
Finance Committee respectively, Senator Grassley and Senator Baucus.
  For many years, trade associations of small businesses have sponsored 
plans for their member companies to provide health care coverage to 
their employees. These plans have helped thousands of small businesses 
across the country control rising health care costs and keep 
administrative costs to a minimum.
  Unfortunately, final regulations issued by the Internal Revenue 
Service in 2003 concerning ``10-or-more'' employer health benefit plans 
that use the experience-rating method threaten to shut down the health 
plans of many associations. Essentially, these regulations state that 
health plans that utilize experience rating are not allowed to 
accumulate reserves, forcing them into the untenable position of either

[[Page S4191]]

operating on a break-even basis or losing money.
  These regulations were not aimed directly at association health 
plans, but at certain other employer-provided benefits, such as life 
and disability insurance, where the IRS has found a pattern of abuse 
among some companies. However, the proposed implementation of the 
regulations make it impossible for an association to continue operating 
a health plan for the group's small business members, even where no 
abuse of the rules has occurred.
  For example, in my home State of Utah, at least one association of 
small businesses has already been negatively affected by these 
regulations. This association has dozens of small business members that 
are dependent upon the health plan the association has had in place for 
decades. Compliance with the regulations will very likely lead to 
increased costs for health coverage for the 1,300 employees and their 
2,200 dependents of these small businesses. If the trust is not able to 
properly reserve funds for the future, some of these businesses could 
be forced to drop out as premiums rise higher and higher and the plan 
is unable to offset those increases with the reserves.
  The legislation we are introducing today would correct this problem 
by providing that medical benefit plans of bona fide associations may 
have a reserve of up to 35 percent. This amount is designed to give 
association health plans the flexibility they need without raising the 
potential for abuse.
  In the face of rising health care costs, employers that offer health 
coverage to their employees are struggling to maintain these benefits, 
and those who do not offer coverage find the cost of providing this 
important advantage increasingly out of reach. With the recent 59 
percent spike in health care costs over the past five years, employers 
have had to resort to various cost-cutting moves in order to keep 
providing health care benefits. The IRS regulations affecting 10-or-
more employer health benefit plans could strike a devastating blow to 
many small businesses, forcing them to stop providing health care 
benefits altogether, or at least making the coverage more expensive 
and/or less available to employees.
  This legislation was developed with bipartisan support. It is 
noncontroversial. It corrects a problem created by a well-meaning 
regulation that inadvertently overreached its target. I urge all of my 
colleagues to help us correct this error and not allow medical benefit 
health plans offered by small business associations to be forced to 
shut down, leaving thousands of employees facing higher costs for 
medical coverage, or worse, no coverage at all.
  I ask unanimous consent that the text of the bill be printed in the 
Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                 S. 897

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. ALLOWANCE OF RESERVE FOR MEDICAL BENEFITS OF PLANS 
                   SPONSORED BY BONA FIDE ASSOCIATIONS.

       (a) In General.--Section 419A(c) of the Internal Revenue 
     Code of 1986 (relating to account limit) is amended by adding 
     at the end the following new paragraph:
       ``(6) Additional reserve for medical benefits of bona fide 
     association plans.--
       ``(A) In general.--An applicable account limit for any 
     taxable year may include a reserve in an amount not to exceed 
     35 percent of the sum of--
       ``(i) the qualified direct costs, and
       ``(ii) the change in claims incurred, but unpaid, for such 
     taxable year with respect to medical benefits (other than 
     post-retirement medical benefits).
       ``(B) Applicable account limit.--For purposes of this 
     subsection, the term `applicable account limit' means an 
     account limit for a qualified asset account with respect to 
     medical benefits provided through a plan maintained by a bona 
     fide association (as defined in section 2791(d)(3) of the 
     Public Health Service Act (42 U.S.C. 300gg-91(d)(3))''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years ending after December 31, 2004.

  Mr. BAUCUS. Mr. President, I am pleased to join my colleagues, 
Senators Hatch and Grassley, in introducing legislation that will allow 
associations to make health insurance available to employers without 
either wondering if the full premium is deductible, or holding minimal 
reserves.
  Across this country, many associations sponsor health insurance plans 
for member employers--plans that provide health coverage for thousands 
of working Americans. These arrangements allow smaller employers to get 
a better deal on insurance than they could on their own. As we struggle 
to improve the number of Americans who have health insurance coverage, 
we surely want to encourage an arrangement that provides cost-effective 
health benefits.
  In order to smooth the cost of these medical benefits, these plans 
often hold reserves that are more than is necessary to cover unpaid 
claims that have been incurred at the end of the year. We should 
encourage that practice. But current law discourages these plans from 
holding more than the bare minimum in reserve.
  The problem is that these plans use welfare trusts as a vehicle to 
fund the benefits. Under current law, if a state trade association 
sponsors a health welfare trust, and that trust does not charge every 
participant the same premium, then that plan may have to go back to 
employers after the end of the year and say ``Sorry. You can't deduct 
all of that premium we asked you to pay last year.'' Either that, or 
the association has to keep premiums low enough to avoid non-deductible 
contributions, and risk under-funding the benefits. That is not a good 
outcome.
  So we have a simple solution here. This bill allows these association 
health plans to maintain reserves of thirty-five percent of annual 
costs without jeopardizing the deductibility of employer contributions 
to the trust. With current technology, claims are usually processed in 
a matter of days, not months, so thirty-five percent of annual costs is 
more than is normally needed to cover unpaid claims at the end of the 
year. That will leave a cushion to cover adverse experience, and help 
smooth future premium fluctuations.
  This simple change will allow bona fide associations all over this 
country to not only continue providing health benefits, but to secure 
those benefits with adequate reserves. Plans like the State Bankers 
Association Group Benefits Trust that has been operating out of my home 
town of Helena, Montana, since 1978. This Trust provides health 
insurance to employees of banks in Montana, Wyoming, and Idaho. Forty-
nine Montana banks provide coverage for nearly 3,000 Montanans through 
this program.
  This bill is important to the employers and employees who get health 
insurance coverage through the State Bankers' trust, and the many other 
association health trusts in Montana and around the country. We 
encourage our colleagues to join us in helping associations continue to 
provide health benefits to tens of thousands of American workers and 
their families.
                                 ______