The President's Corner *
John P. Foran, President/CEO, LIA, RHU

Greetings and Best Wishes for a Happy Summer Season!

Typically during the Summer Season we experience a bit of a hiatus here in the activities of EBS Foran as many of our Client renewals have been finalized and many others do not occur until either the Fourth calendar quarter or the First calendar quarter of Next Year.

We use this "sabbatical' time to review all that has transpired over the course of the past renewal season and begin to create a strategic plan so that each of our accounts are ensured of receiving the most contemporary advice and optimal services possible. In this vein, we are compiling data and information on the various Consumer Driven Health Plans that Insurance Carriers are now offering. We feel that this type of Plan along with a well-structured Health Reimbursement Account or Health Savings Account will help to better control a Medical Plan's inflationary spiral. However, as we undertake this and other standard seasonal tasks during this time, many other issues have risen to the forefront and require our immediate attention. Specifically, I cite the Medicare Modernization Act (MMA) and its Retiree Prescription Drug Plan, commonly referred to as Medicare D. This particular piece of legislation, while not effective until 2006, requires Employers to initiate certain steps as early as September of this year. Our staff has been diligently working to prepare the necessary communication pieces and we have recently released information to each Client. Within our Newsletter, you will also find more information about the requirements of this new law both for Employers that offer retiree coverage as well as those that at this time do not offer retiree Medical Benefits coverage.

In addition, we are continuing to work with our Clients to ensure they are aware of HIPAA and the new "Security Standards for the Protection of Electronic Protected Health Information" (e-PHI). All of our Clients have received the new amended version of our Business Associates Agreements that include these regulations. We have worked assiduously to make EBS Foran compliant with the Statute. I would like to take this opportunity to thank all of you who attended our most recent HIPAA Seminar and hope that you came away with some informative information from our presenter, Alden Bianchi, Esq.

I would also like to take a moment to recognize a very special EBS Foran Employee, Ken Lombardi. As you will note in a separate article in our Newsletter, Ken has recently been elected to the position of Chief Executive Officer and I am thoroughly excited about the prospect of Ken assuming this new position and working closely with me as we strive to ensure that your interests are best served.

Lastly, I also would like to thank the Shepley Corporation for allowing us to have them as our Featured Client in our Summer Edition of the EBS Forum. Please take a moment to read the story about Shepley Wood Products, as it is both interesting and a testimony to what dedicated customer service and hard work can do for any business. We are privileged to count among our Clients Shepley Wood Products.

In closing and as I always request, if you do have a question or concern about benefit issues, please direct them to our office. If you are pleased with our service, we would greatly appreciate a referral to one of your business associates. If for whatever reason you're not satisfied with our service, please let me know personally so I may work to resolve any issue that may be of concern.

Again, thank you for allowing our team to be of service to you. We look forward to continuing our strategic partnership for many years to come and as we move into the world of consumer-driven healthcare plans, our efforts will become more intensified on your behalf.

Best wishes for the remainder of our Summer Season!

Sincerely,

John P. Foran, LIA, RHU
President/CEO

* This Newsletter and the articles that appear in it are purely informational in content and character and are not meant or intended to be in the nature of advice or legal counsel. The invitation to contact individuals of EBS Foran is not to be construed as a solicitation for business or insurance services in any State or jurisdiction in which the individual is not licensed as an Insurance Agent or Broker.

By Alden J. Bianchi, Esq.*

Enacted into law on December 8, 2003, the Medicare Prescription Drug Improvement and Modernization Act (the "Act") radically overhauled many key features of Medicare and added a new outpatient prescription drug benefit (Medicare Part D). The Centers for Medicare & Medicaid Services (CMS) recently published a comprehensive final rule implementing many of the Act's important features. This client advisory describes the particulars of the standard Medicare Part D benefit and explains how the Act affects employer-sponsored group health plans in the following two important respects:


(i) Beginning later this year, employer and union-sponsored group health plans must provide certain notices to their Medicare-eligible participants advising whether the coverage under the plan is so-called "creditable coverage." A common misconception is that this notice requirement only applies to plans that cover retirees. This is not the case. Rather, it applies as well to any employer-sponsored plan covering only active employees and their beneficiaries if any covered employee or beneficiary is Medicare eligible. (This would include, for example, the "working aged" under the Medicare secondary payer rules-i.e., someone who continues to work past age 65.)

(ii) The Act also includes a subsidy designed to encourage employers to continue to provide retiree medical coverage. This subsidy could prove to be a boon to employers with existing retiree medical programs that cover prescription drugs.

I. The Standard Medicare Part D Outpatient Prescription Drug Benefit
The Act amends the Social Security Act ("SSA") to include a new, voluntary Medicare Part D outpatient prescription drug benefit beginning in 2006. Medicare Part D covers outpatient prescription drugs, as well as insulin and associated medical supplies and certain prescription biological products, but not over-the-counter drugs. Prescription drugs that are covered under Medicare Parts A (hospital charges) or B (physician services) are also excluded from coverage under Medicare Part D. Individuals who are entitled to benefits under Medicare Part A, or who are enrolled in Medicare Part B, are eligible. As is the case currently with Medicare Part B, there is a deadline for enrollment. If an individual fails to timely enroll, then he or she must pay a higher rate upon late enrollment. Importantly, though, the increased rate will not apply where the individual continues to work past age 65 and is covered under a group health plan with prescription drug coverage that qualifies as "creditable coverage."

Unlike Medicare Parts A and B benefits that are paid by the Government, usually through intermediaries, Medicare Part D benefits will be provided commercially through either a Medicare Advantage-Prescription Drug plan ("MA-PD") or through a stand-alone prescription drug plan ("PDP"). PDPs are state-licensed, risk bearing entities that meet Federally-established reserve requirements. MA-PDs and PDPs are funded through a combination of monthly premiums and Medicare subsidies. The prescription drug benefit that they provide must be either the standard Part D benefit or a benefit that is the actuarial equivalent of the standard Part D benefit. CMS's final rule establishes rules for determining actuarial equivalence, which are explained below.

Medicare Part D enrollees will be able to choose between "standard coverage" and "alternative coverage" (which is the actuarial equivalent of standard coverage). The standard Medicare Part D prescription drug benefit has an annual deductible of $250 (in 2006) and covers 75% of drug costs between $250 and $2,250. There is also a catastrophic coverage feature under which individuals are covered once they have reached an annual out-of-pocket threshold-referred to in the final rule as an individual's true-out-of-pocket (or "TrOOP") costs-of $3,600. Above that threshold, Medicare will pay any expenses subject to a co-payment which is the greater of (i) $2 for a generic drug and $5 for any other drug or (ii) 5% of the cost of the drug.

The absence of coverage between $2,250 and $3,600 is referred to as the "donut hole." While potentially burdensome to rank-and-file Medicare beneficiaries, Congress determined that this feature was essential to keeping the costs of the Act from spiraling out of control. To be eligible to reach the catastrophic coverage threshold requires $5,100 in prescription drug costs. This is so because the first $2,250 of prescription drug costs results in an out-of-pocket cost to the individual of only $750 (i.e., the annual deductible of $250, plus $500 of co-insurance-25% of the costs between $250 and $2,250-equals $750). Therefore, to reach the $3,600 out-of-pocket threshold amount, the individual must contribute an additional $2,850 ($3,600 - $750). The initial prescription drug costs of $2,250 (shared by the individual and Medicare) plus the additional $2,850 paid by the individual equals $5,100. When the annual Medicare Part D premium is added to the $3,600 out-of-pocket threshold, an individual would incur $4,020 before reaching the catastrophic threshold.

A participant's TrOOP costs for purposes of catastrophic coverage include only those amounts paid by a Part D enrollee or on behalf of a Part D enrollee by another individual, a charitable organization, or a State pharmaceutical assistance program. Not counted for this purpose are amounts paid by insurers, government-funded health care programs, group health plans, and other similar third party arrangements. Nor do TrOOP costs include amounts paid for prescription drugs that are not "Medicare Part D drugs"-i.e., a drug that may be covered under Part D. Distributions from health savings accounts and flexible spending accounts, however, are counted toward a participant's TrOOP.

II. Notices of Creditable Coverage
Medicare-eligible individuals may choose whether or not to enroll in Medicare Part D. This option extends to active employees who attain age 65 even if they are covered under an employer-sponsored group health plan that covers prescription drugs. For their initial enrollment to be considered "timely," these individuals must enroll in Part D between November 15, 2005 and May 15, 2006. (Thereafter, the annual open enrollment period runs from November 15 of each year to May 15 of the following year.) An eligible individual who fails to timely enroll in Medicare Part D must either maintain "creditable prescription drug coverage" (under rules that are similar to the creditable coverage provisions of Title I of the Health Insurance Portability and Accountability Act of 1996) or pay a late enrollment penalty. The late enrollment penalty is the greater of 1% of the base Part D premium for each uncovered month or the amount that the Secretary of Health and Human Service determines to be actuarially sound. It is therefore a matter of some importance that affected individuals be informed about their "creditable coverage."

Under the final rule, for employer-provided coverage to be treated as creditable coverage, its actuarial value must be equal to or greater than standard Part D coverage. CMS has yet to announce the form in which this information is to be reported. A plan sponsor offering prescription drug coverage must advise Medicare beneficiaries whether its prescription drug coverage is or is not actuarially equivalent to Medicare Part D. This notice is referred to as a "Notice of Creditable Coverage." If the coverage is not creditable, the notice must also explain that there are limitations on the periods during the year in which the individual may enroll in a Medicare prescription drug plan and that the individual may be subject to a late enrollment penalty.

NOTE: Curiously, neither the statute nor CMS's final rule imposes any penalty on plan sponsors who fail to provide this notice.

The notice of creditable coverage must be provided (i) in advance of the individual's Medicare Part D enrollment period (i.e., from November 15, 2005 to May , 2006), (ii) before the effective date of enrollment in the plan and in the case of any change that affects whether the employer-sponsored coverage is creditable coverage, and (iii) prior to each annual Medicare Part D enrollment period (i.e., May 15 of each year to May 15 of the following year).

III. The Retiree Subsidy
Included among the Act's provisions is a subsidy designed to encourage employers to continue to provide retiree medical coverage. Congress recognized that employer-sponsored retiree health plans routinely cover prescription drugs, and it was concerned that the addition of a Medicare prescription drug benefit would cause employers to drop retiree coverage altogether. After all, retirees will now have access to retiree medical coverage-including prescription drugs-under Medicare. Congress considered, and ultimately rejected, a "maintenance of effort" approach under which employers that currently offered retiree medical coverage would be required to continue to do so or face a penalty or sanction. Rather than opt for the stick, Congress chose to offer a carrot in the form of a subsidy.

CMS sets out three options for employers and unions who offer drug benefits to their retirees:

(1) Continue to provide prescription drug coverage through an employment-based retiree health plan. Where the coverage is at least actuarially equivalent to the standard Part D prescription drug benefit, the plan sponsor is eligible for a special Federal subsidy with respect to individuals who waive coverage under Medicare Part D.

(2) Contract with a PDP or MA-PD to offer prescription drug benefits to retirees who are eligible for Medicare. The preamble to the final rule notes that the plan sponsor could instead establish its own plan, which could offer either the standard Part D benefit or so-called "enhanced alternative coverage," which is more generous than the standard benefits. (This option would make sense only for very large employers and unions.)

(3) Provide separate prescription drug coverage that supplements or "wraps around" the coverage offered under Part D. Under this approach, the employer's plan pays for benefits that Medicare Part D does not. It might, for example, fill in the donut hole.
There is one other option that CMS does not discuss: the plan sponsor could drop retiree coverage altogether. While this may prove attractive to some employers, it may not be possible under all circumstances. The Equal Employment Opportunity Commission recently issued a final rule allowing employers to reduce or terminate health coverage when a retiree becomes Medicare eligible. But a Federal court has suspended the rule pending an appeal by the AARP.

Of these approaches, the subsidy is available only for the first option, i.e., where the plan sponsor continues to provide prescription drug coverage through employment-based retiree health plan in an amount that is at least the actuarial equivalent of the Part D benefit.

The Act's retiree drug subsidy pays employers 28% of a retiree's drug costs between $250 and $5000 in 2006, but only with respect to retirees who are eligible for but not enrolled in Medicare Part D. These payments are tax-free, thereby increasing their net value in the hands of employers subject to tax. The subsidy is paid only with respect to "qualifying covered retirees" who participate in a "qualified prescription drug plan," and it is determined based on his or her "gross retiree plan-related prescription drug costs."

A "qualified covered retiree" means an individual who is covered under a qualified retiree prescription drug plan who is also entitled to benefits under Medicare Part A or who is enrolled in Part B, and who is not enrolled in either Medicare Part D or in an MA-PD plan.

A "qualified prescription drug plan" is a "group health plan" within the meaning of ERISA section 607(1), which provides a prescription drug benefit that is the actuarial equivalent (or better) of the standard Medicare Part D outpatient prescription drug benefit. Qualified retiree prescription drug plans may also be governmental plans or church plans. Accordingly, governmental subdivisions and churches are also eligible to sponsor qualified prescription drug plans.

The term "gross retiree plan-related prescription drug costs" means the aggregate prescription drug costs that are incurred under the plan for a qualifying covered retiree, excluding administrative costs, but including the costs directly related to the dispensing of prescription drugs that are otherwise covered under Medicare Part D.
"Allowable retiree costs" are costs that are actually paid, net of discounts, charge-backs and average percentage rebates, by the plan sponsor or by or on behalf of a qualifying covered retiree under the plan.

To arrive at the subsidy for any particular participant, subtract from his or her allowable retiree costs, the annual "cost threshold" ($250 in 2006), and multiply the result (but not in excess of the "cost limit" of $5,000 in 2006) by 28%. The sum of these amounts for all qualifying covered retirees is the amount to which the plan sponsor is entitled.
In order to qualify for the subsidy, the plan sponsor must trace or allocate all costs in order to be able to establish that all of the components of the subsidy have been properly calculated. Certain other obligations are imposed on plan sponsors. In particular, the sponsor must provide the Secretary of the Department of Health and Human Services with an attestation that the actuarial value of the prescription drug coverage under the plan is at least equivalent to the actuarial value of the standard Medicare prescription drug coverage. This attestation must be made annually, or more often if directed by the Secretary. The plan must also provide information regarding the prescription drug coverage under its retiree health plan to both the Department of Health and Human Services and to all eligible individuals. Among other things, this disclosure will enable a participant to establish that he or she has creditable prescription drug coverage so as to avoid incurring a late enrollment fee once he or she does elect Part D coverage. The sponsor is required to maintain the necessary records sufficient to document the calculation of the subsidy for audit and oversight purposes.

IV. Actuarial Equivalence
Whether a benefit provided under an employer or union-sponsored group health plan is actuarially equivalent to the Medicare Part D outpatient prescription drug benefit is important both for purposes of the notice of creditable coverage and for the retiree subsidy. For purposes of creditable coverage notice, the determination is based on a so-called "gross value" test. Under the gross value test, both employer and employee contributions are counted. If the gross value of the plan benefits exceeds that of the Medicare Part D benefits, the plan passes the gross value test, which means that it provides creditable coverage for Medicare Part D purposes. This requirement makes sense because the purpose of the exercise is to let Medicare eligible individuals know whether they should be concerned about late enrollment penalties.

For purposes of the retiree subsidy, there is an additional requirement. The plan sponsor must-in addition to establishing that the gross value of the retiree prescription drug benefit under its plan is equivalent to or better than the Medicare Part D benefit-demonstrate that the value of the employer-provided coverage is also actuarially equivalent to Medicare Part D. This latter test is referred to as the "net value" test. The purpose of the net value test is to show that the employer is providing a Medicare equivalent benefit out of its own pocket.

NOTE: Shortly after the Act's adoption, there was speculation in the press that plan sponsors would get the benefit of the subsidy even where the retiree coverage was paid for entirely by the beneficiary-an interpretation which finds support in the Act. CMS was under some pressure to fix this "loophole," and it responded by making the employer contribution a component of establishing what constitutes actuarial equivalence. Some commentators questioned whether CMS has the authority to impose the net value requirement. CMS defended its position at length in the preamble to the final rule.

The final rule provided employers with substantial flexibility both in determining the "plan" with respect to which it claims the subsidy and in allocating employer contributions to prescription and non-prescription benefits under a plan that covers both. If a plan offers more than one category or class of prescription drug coverage, the employer can apply the net value test either in the aggregate or category-by-category. If one category or class fails the net value test, then the test (and the subsidy) can be limited to the categories that do pass. In the case of an integrated group health plan (i.e., a plan that reimburses both medical and prescription drug costs), the plan sponsor can allocate its entire contribution to the prescription portion for purposes of the net value test, which should vastly improve an employer's chance of collecting the subsidy.

V. True-Out-Of-Pocket Costs (TrOOPs)
As discussed above, the standard Medicare Part D benefit has a gap (or donut hole) that the Medicare Part D enrollee must cover out of his or her own funds before being eligible for catastrophic prescription drug coverage. Whether an enrollee has fulfilled this requirement is measured with respect to his or her TrOOP. TrOOP is important for two reasons:

(1) Amounts paid by an employer under a wrap around plan do not count toward the determination of TrOOP costs. This means that employer-provided coverage that is more generous than the standard benefit will in some instances be of little use to a covered individual with significant outpatient prescription drugs.

(2) TrOOP costs can be factored into the net value portion of the actuarial equivalence calculation, making it marginally easier for employers to demonstrate compliance. For this purpose, the net value of the Part D benefit is reduced by the value of the supplemental employer-provided coverage.

VI. Conclusion
Employers that sponsor group health plans, whether covering active employees, retirees or both, cannot escape the reach of these new rules. The Act's notice provisions are onerous to be sure, but they are also necessary. Plans will likely rely on their insurance carriers to comply with the Act's notice and reporting requirements, but they should expect that insurers and providers of administrative services will pass along the added compliance costs.

The Act's retiree subsidy will require sponsors of retiree plans (and those considering adding retiree coverage) to weigh their options and decide how best to proceed. Congress understood that adding an outpatient prescription drug benefit to Medicare might hasten the decline of employer-sponsored retiree medical plans. The purpose of the subsidy is to counter that decline. Whether it will achieve that result remains to be seen. By design, the subsidy is not as valuable as the Part D outpatient prescription drug benefit. The financial consequences will of course vary from employer-to-employer, and there are other, non-financial considerations (e.g., benefits might be required under the terms of a collective bargaining agreement) that need to be weighed.
IRS CIRCULAR 230 NOTICE

In compliance with IRS requirements, we inform you that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of avoiding tax penalties or in connection with marketing or promotional materials.

* Alden J. Bianchi is a Member in the Boston office of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., where he leads the employee benefits and executive compensation practice.

Mr. Bianchi has written and lectured extensively on employee benefits issues. He is the author of three books, Employee Benefits for the Contingent Workforce and Plan Disqualification and ERISA Litigation (both published by Tax Management, Inc.), and Benefits Compliance (published by World-at-Work), and dozens of benefits-related articles. His speaking engagements include presentations to the American Bar Association, American Insurance Group, Deloitte & Touche, PricewaterhouseCoopers, Salomon Smith Barney, UBS, ING Financial Services and the Risk Insurance Management Society, as well as a host of bar groups and professional, educational and civic organizations.

Mr. Bianchi is a graduate of Worcester Polytechnic Institute and the Suffolk and Georgetown Law Schools, and he holds an LL.M. in taxation from the Boston University Law School. He is listed in Woodward & White’s The Best Lawyers in America, and Marquis’ Who’s Who in American Law, and he is a Fellow of the American College of Employee Benefits Counsel

The company's success can be defined by one word SERVICE. Tony Shepley, co- founder, differentiated the company from its inception not only by naming his business "Wood Products" instead of "lumberyard" but by shifting the prototype of the lumber supply business from "what you see is what you get" to "what you need we will get for you". Shepley has piloted the industry in innovations among which are a four hour delivery time, in-house mill working, engineered wood products, a nationally ranked service department and an expert interior trim department. Local contractors anxiously wait for the company's Service Seminars to inform them on the most current product performance guidelines and service procedures.

The company's mission statement speaks of becoming an industry leader by investing in its customers, employees and community. Shepley Wood Products is committed to making this into a statement of fact. Tony Shepley is an active member and Past President of the Massachusetts Retail Lumber Dealers Association and serves on the Legislative Committee. The company encourages and empowers its employees to seek advancement and growth and offers both in-house and manufacturers training on its products and services. Open communication and a free flow of ideas have lead to an atmosphere of teamwork, innovation and dedication in a working environment that recognizes the worth of each individual. Tony himself serves on the board of the Cape & Islands United Way, RHCI and many other Cape Cod Charities. His leadership in community involvement has brought the entire company to participate in such events as the March of Dimes Telethon, Dream Day of Cape Cod, the American Cancer Society Relay For Life Team and the Seaside LeMans.

For over a quarter of a century Shepley has truly been a guiding light on Cape Cod encouraging and fostering as a business and a member of the community, growth, innovation and commitment.

The choice of either 1 or 2 above might make an Employer eligible for the prescription drug subsidy under Medicare Part D provided that the requirements outlined in our Article on the Prescription Drug Subsidy in this Newsletter.

A Private Sector Employer could also chose to terminate a Retiree Health Plan prescription drug provision and let Medicare Part D cover their Medicare-Eligible Retirees. Our Public Sector clients that are required by State mandate to offer Retiree Health benefits cannot chose to elect this option. The decision of which alternative is best for Employers who offer Retiree Health benefits can only be made on a case by case analysis of each individual Employer. We will be contacting each of our clients so that we may schedule a review of the alternatives and suggest what choices we feel may best suit them.

1. U.S. Bureau of the Census "Aging in the Americas into the XXI Century"
2. U.S. Bureau of the Census "US Interim projections by Age, Sex, Race, and Hispanic Origin"
3. Mercer Human resource Consulting "National Survey of Employer-Sponsored Health Plans 2004"
4. ibid

EBS Foran Featured Employee

Our featured Employee for this issue of the Forum is Mr. Kenneth Lombardi who was recently appointed to the position of Chief Executive Officer of EBS Foran.

Mr. Lombardi joined EBS Foran in September 2000 serving in the capacity of Senior Vice President. Since his arrival, the EBS Foran Group has realized a substantial growth in both the number of Clients served and related income generated.

Ken has over twenty years of experience in group benefit underwriting and consulting services. Prior to joining EBS Foran, Ken was affiliated with Allmerica Financial for over seventeen years in both an underwriting and sales capacity. At Allmerica Financial Ken was responsible for many special projects and served in the capacity of Vice President and Officer of the Corporation. He was also instrumental in the development of Starnex, an employee benefits technology firm he successfully launched in January 1999. His career has evolved through most aspects of the group benefit industry, including sales, underwriting, underwriting management and consulting. He is currently a Licensed Insurance Broker for Life and Accident & Health products in the Commonwealth of Massachusetts. In addition to being a Licensed Insurance Broker, Mr. Lombardi is also a Licensed Insurance Advisor.

Ken has significant experience directly related to the development of prospective costs of group medical care products, including the development of fully insured rates and the working rate levels required to appropriately fund self-funded financial programs. Ken also has extensive underwriting experience with Life Insurance, Short and Long Term Disability and Dental Products.

Commenting upon Mr. Lombardi's employment as CEO, Mr. Foran indicated "the appointment of Ken to the position of CEO comes at a most important time in the strategic growth and planning of our Organization. In addition, his appointment to this position is a direct reflection of the hard work and endless dedication he has to the EBS Foran Group. We are indeed fortunate to have someone with Ken's talent and vision as a part of our Senior Management Team and we look forward to further growth with his assuming these additional responsibilities." Mr. Lombardi is a resident of Auburn, Massachusetts and a graduate of Worcester State College. He is married with two children and enjoys spending weekends in the summer on Cape Cod with his family.

• MMA requires that all Employers give Notice of Credible or Non-Credible Coverage to all Medicare Eligible Employees. For details visit our web site

• Notice of intent (Application For Prescription Drug Subsidy) must be made by September 30, 2005 unless an Employer has applied for an extension.

• The Working families Tax Relief Act of 2004 (WFTRA) has change the meaning of the word "dependant" in Internal Revenue Code sections 152 and 105 beginning in the 2005 tax year. The IRS issued a Bulletin that revised section 106(a) to also comply with these new definitions. A "dependant" may be either a "qualifying Child" or a "qualifying Relative". In regard to group health care including Flexible Spending Accounts (FSA) the key elements are as follows

o A "qualifying Child" must have the same principal residence as the Taxpayer for more than half the tax year (full time students under 24 are excepted).

o A "qualifying Child" cannot attain the age of 19 (24 for full time students) during the Tax year (disabled children exempted)

o A "qualifying Child" must not earn more than half of its own support.

o A "qualifying Relative" must be a child or descendant thereof, sibling or step-sibling, cousin, mother- or father-in-law, son-or daughter-in-law, or brother-or sister-in-law of the taxpayer. The relative may also be any individual who has the same principal address as the taxpayer and is a legal member of the taxpayer's household.

o A "qualifying Relative" must receive more than half of their support from the taxpayer
You should review your Health Plan descriptions with your own legal counsel and tax adviser to be sure that the definition of "dependant" is consistent with the above. You should also discuss with them how to determine if some of your employees may have imputed taxable income for federal tax purposes.

Since 1988 the number of Employers that were offering Retiree Health Coverage declined from 66% to 36% as of 200 . This long decline has begun to level off, as the percentage drop from 2001 to 2004 was only 1%. The rising cost of Health Care in general can be attributed as the primary cause of this decline another proximate cause is the rise in prescription Drug cost for Retirees implicit by their demographics and the proliferation of various maintenance drugs designed specifically for treatment of geriatric maladies. . A recent report issued by the Government Accountability Office (GAO) indicates that only about 33% (1/3) of all retired Medicare Beneficiaries obtained supplementary health benefits from former employers or other employment-based groups. While most of these plans had some prescription coverage these participants were among the majority of Medicare beneficiaries who needed to use their own funds to pay for prescription drugs. It was these conditions that impelled Congress to Pass the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) in December of 2003.
In general we have all experienced the need to make strategic decisions to control the inflationary spiral that health care cost have been undergoing in recent years. Many times in the private sector some of these decisions have been born by retirees. In addition to cost sharing many retiree plans have eliminated future participation. While our Public sector clients have instituted some of these measures they are prohibited under current law from eliminating retiree health benefits. The MMA offers a number of options to help Employers offer Retiree prescription coverage that run the gamut from Employers creating their own Medicare Advantage program to paying a portion of the premium for any approved prescription drug plan that Medicare-eligible retirees (and their dependants) chose to participate in.

This issue of our Newsletter will deal with the options and obligations that all Employers will need to be aware of as we approach the implementation in January 2006 of Medicare Part D which is the new prescription drug benefit offered under MMA. with the options and obligations that all Employers will need to be aware of as we approach the implementation in January 2006 of Medicare Part D which is the new prescription drug benefit offered under MMA. We trust that the articles and forms contained in this newsletter will be of use to all our clients.

As always we stand ready to offer assistance to you in navigating the shoals of this Act. And this assistance is now an integral part of the total service packaged for all our clients. The information contained in this Newsletter is meant to be informational in manner and is by no means to be construed as either legal or tax advice and we suggest that your own legal counsel or accountant review the MMA.