In a decision that could change the benefit landscape of the nation's workplaces, the Internal Revenue Service ruled on June 26 that employers who participate in high-deductible health care insurance policies may create Health Reimbursement Arrangements (HRAs) with rollover rights for their employees.

For an HRA to qualify for the rollover treatment, employers must provide employees with a high-deductible health insurance policy with lower premiums than the typical low-deductible health plan popular in the workplace today. In addition, employers will fund a health savings account called an HRA with money that can be used to pay for medical expenses that are not covered by the insurance plan due to the high deductible. A key factor in this plan is that employees will be entitled to rollover unused HRA money from one year to the next, tax-free.

So far few employees have signed on to these new plans, awaiting the IRS decision. Nationally, only a few hundred thousand employees participate in such a plan. It is assumed that with IRS approval of the rollover feature of the HRA plans, many more employers will opt for the high deductible insurance plans.

The new plans will be funded entirely by employers with no payroll deductions, and will provide insurance coverage for only high-cost medical expenses.

One theory behind the new plan is that by shifting the burden of smaller, routine medical expenses to the employee, to be funded through the employee's own HRA account, employees will be less frivolous and more cost-conscious in their decisions about using medical care services.

The IRS has unveiled a new program that uses computer software to match information reported on K-1 forms with information on taxpayers' 1040 forms. Taxpayers receive K-1 forms from partnerships, S-corporations, and trusts of which they are partners, shareholders, and beneficiaries. Income and losses from these types of entities are passed through to taxpayers on the K-1 forms.

The IRS has never before had an efficient method of comparing the information reported on K-1 forms with the information on 1040s. Now, a computer program will advise the IRS of discrepancies. Once a discrepancy is found, the IRS manually examines the return to determine if there is an obvious reason for the discrepancy, such as a passive loss limitation.

The program has been initiated with a review of tax returns from the year 2000. More than 18 million K-1 forms were processed for that year representing $1.2 trillion in income. So far 65,000 notices have been mailed to taxpayers in an attempt to resolve discrepancies on tax returns from 2000. The IRS hopes that most discrepancies will be cleared up on the telephone or with a simple written response.

IRS Commissioner Charles O. Rossotti spoke of the significance of the new program. "One of the most powerful tools that we use to ensure compliance is matching information received from employers, financial institutions, and other businesses with information reported by taxpayers. Third parties report approximately 80 percent of the personal income received by taxpayers. An important compliance strategy is to use this data as effectively as possible."

Members of the House of Representatives sent a strong message to the Senate last week regarding the desire to solidify tax breaks for our aging society. In a 308-70 vote, with 115 Democrats joining 192 Republicans and one Independent, the House resoundingly voted to make permanent the retirement-related tax breaks that were created with the Economic Growth and Tax Relief Act of 2001.

Under the terms of the original act, annual contributions to Individual Retirement Accounts will increase from $3,000 to $5,000 by 2008, and annual contributions to employer-sponsored 401(k) and similar plans will increase from $11,000 to $15,000 by 2006. These provisions are scheduled to expire on December 31, 2010, at which time they will revert to the contribution levels in place in 2001.

The House bill would make the increased retirement contribution levels permanent instead of allowing them to expire.

The bill faces an uphill struggle in the Senate, where many are arguing that with the economy in a recession and the government spending more money on national defense and domestic security, it would be irresponsible to pass such a bill at this time.

Consulting firm Hewitt Associates has released survey results showing an anticipated 20 percent increase in health care costs for 2003. Increases may be even greater for small businesses. Overall, health care premiums rose 15.6 percent in 2002.

As businesses begin the negotiation process for next year’s health plans, health care providers are citing the high price of prescription drugs, the cost of new medical technologies, and the need for new computers and software programs to comply with new federal medical privacy regulations as reasons for the increase. In addition, an anticipated increase in health maintenance organization (HMO) costs for 2003 is attributed to a mass exodus of healthy people from the plans, leaving an HMO population of sicker and more costly patients. Survey information regarding HMO rates indicates that the average increase in the cost of an HMO plan will be 22 percent in 2003, but some plans will show an increase of as much as 94 percent.

"We are seeing unprecedented HMO increases for 2003. With no clear solutions on the horizon we expect that it's going to get worse before it gets better," according to Mindy Kairey, e-business leader for Hewitt's Health Management Practice. "Companies cannot afford these increases and will have to be even more aggressive in making plan design and employee contribution changes for next year. Unfortunately, this means consumers should expect to pay a lot more for health care."

Plan changes are already showing up in 2002 health plans. Increases in co-pay arrangements show many companies moving employees to higher co-pay rates. Forty percent of company plans are requiring a $10 co-pay for generic drugs as compared with 27 percent in 2001, and 26 percent are requiring a $20 co-pay for name brand drugs as compared with 12 percent in 2001. Previously, the most common co-pay arrangements provided for a $5 co-pay for generic drugs and a $10 co-pay for name brand drugs. In addition, 25 percent of companies now require a $15 co-pay for office visits to doctors as compared with 13 percent in 2001.

The Hewitt survey is based on information from nearly 140 employers representing a total of over 1 million employees.

On June 25, 2002, barely a week after the U.S. Securities and Exchange Commission (SEC) and the Senate Banking Committee proposed alternate accounting reform bills, WorldCom announced its intention to restate its recent financial statements. The timing is expected to have far-reaching political implications, particularly when taken together with the statement issued by its former auditor Arthur Andersen.

Andersen denied knowledge of the accounting improprieties and said, "Our work for WorldCom complied with SEC and professional standards at all times." In an audio-taped interview, former SEC Chairman Arthur Levitt was asked for his reaction to the "accounting fraud" and Andersen's statement. His carefully measured reply: "We're not totally certain that it's fraud. . . If that [Andersen's statement] is so, we may have a flaw in standards, or we may have malfeasance, which no amount of auditing can necessarily uncover."

Either way, Mr. Levitt said, the WorldCom announcement will have "very profound political implications" in the U.S." Most notably, he predicted that the Senate Banking Committee bill will become an "almost certainty" because the country and politicians will want faster action than the SEC's plan will provide. The SEC's plan contemplates only minor changes in accounting and auditing standard-setting, at least in the short-term. After the surprises associated with both Enron and WorldCom, Mr. Levitt explained, these minor changes will likely not seem tough enough. "The whole process of standard-setting in the U.S. appears to have been flawed," he concluded, "and I think it's long overdue to review that process and correct it."

Prophetically, the Senate Banking Committee bill, known as "The Public Company Accounting Reform and Investor Protection Act of 2002" was introduced in the Senate on June 26, 2002 as S.2673. The expectation is that the bill will be passed by the full Senate soon after Congress returns from its July 4th recess. That very same day, the SEC posted its Release No. 33-8109 entitled, "Framework for Enhancing the Quality of Financial Information Through Improvement of Oversight of the Auditing Process."