Office of Regulations and Interpretations
Pension and Welfare Benefits Administration
U.S. Department of Labor
200 Constitution Avenue, NW Room N-5669
Washington, DC 20210
Attention: Benefit Claims Regulation
Dear Sir or Madam:
The Office of Advocacy of the U.S. Small Business Administration (SBA) is charged under the Regulatory Flexibility Act (RFA) with assuring that agencies take account of the impact that proposed regulations would have on small entities. We are pleased that in the preamble to the above notice of proposed rulemaking (published in the Federal Register September 9, 1998, at pp. 48390-48409), the Pension and Welfare Benefits Administration (PWBA) has noted its responsibility under the RFA to determine if a proposed rule has a significant economic impact on a substantial number of small entities.
However, we believe PWBA erred when it "preliminarily determined that this rule will not have a significant economic impact on a substantial number of small entities." We further believe that PWBA has not presented a justification for promulgating a new claims appeals procedure for pension plans, even if the agency has correctly estimated the cost of the proposal for small plans. The lack of justification is even more of a concern if, as we estimate, the actual cost of compliance is 3-5 times as great as PWBA estimates.
Background
As PWBA explains in the summary published in the Federal Register, the proposed regulation would establish new standards for the processing of group health, disability, pension, and other employee benefit plan claims filed by participants and beneficiaries. If adopted as final, the proposed regulation would affect participants and beneficiaries, plan fiduciaries, and others who assist in the provision of plan benefits, such as third-party benefits administrators and health service providers or health maintenance organizations that provide benefits to participants and beneficiaries of employee benefit plans. We understand that DOL has received hundreds of comments relating to the health plan aspects of the proposed rule and we do not see a need at this time to add to that record. Thus, we will limit our comments to the impact of the proposed rule on small pension plans.
Since PWBA estimates that small pension plans would incur most of the costs of compliance without providing any justification for applying the rule to them, we want to address two questions: Would the proposed rule have a significant impact on a substantial number of small entities? Why extend the rule to pension plans?
Would the Rule Have a Significant Impact on a Substantial Number of Small Entities?
As noted, the RFA requires agencies to determine if a proposed rule has a significant impact on a substantial number of small entities. Then the agency must either certify that it would not and explain its basis for such certification, or perform an initial regulatory flexibility analysis to show what the impact would be.
The certification or analysis begins by defining "small entity" for purposes of the rule, identifying the number of entities affected and estimating how much the rule would cost these entities.
PWBA proposes to consider a small entity "an employee benefit plan with fewer than 100 participants" and "believes that assessing the impact of this proposed rule on small plans is an appropriate substitute for evaluating the effect on small entities." (emphasis added)
The Office of Advocacy agrees. PWBA does provide a reasonable justification for this cutoff, basing it on section 104(a)(2) of the Employee Retirement Income Security Act of 1974 (ERISA), which permits the Secretary of Labor to prescribe simplified annual reports for pension plans that cover fewer than 100 participants. PWBA notes that DOL has used the same definition for a number of other rules intended to provide limited relief to various types of benefit plans.
Using this definition, PWBA estimates that the proposed rules, which affect all small employee benefit plans covered by ERISA, would apply to an estimated 629,000 pension plans, 2.6 million health plans, and 3.4 million non-health welfare plans (mainly life and disability insurance plans). Out of this universe, DOL estimates that the proposed rules would require all 629,000 pension plans to revise their own procedures. In contrast, other types of plans are assumed to buy "a limited number of standard products from vendors", estimated at 11,000 for health plans and 14,000 for welfare plans. Thus, a total of 654,000 entities, in this case small pension plans or vendors of small health and welfare plans—clearly a "substantial number of small entities"—would have to revise their procedures.
B. Impact on Small Entities
DOL estimates an average cost to revise procedures of $100, for a total cost to the 654,000 small entities of $65 million. The $100 estimate is based on clerical costs of $11 per hour and a blended rate of $50 per hour for tasks requiring both clerical and professional costs. To this amount DOL adds an estimate for the one-time cost of preparing claims and appeals determination forms of $37 million for small plans, including "a $0.50 to $1.00 unit cost for materials and distribution of each claim or appeal decision notice." These estimates, $65 million plus $37 million, bring the total start-up cost for small plans to $102 million. DOL says "the small plan cost is attributable mostly to small pension plans."
DOL estimates that the ongoing cost of the rules for small plans will be only $6 million per year in 2000 and then "will vary over time with claims volume and mix." The combined start-up and ongoing cost for small plans is estimated to total $108 million, which amounts to $2.29 per participant or just 69 cents per claim.
These costs, if accurate, would support PWBA’s finding that the rules would not impose a significant impact on a substantial number of small entities. However, the costs appear to be understated in several respects.
First, the fully allocated costs of even clerical labor, including benefits, employers’ taxes, and overhead, are likely to exceed $11 per hour by a wide margin in 2000. DOL’s Bureau of Labor Statistics (BLS) on December 22, 1998 released 1997 national employment and wage data for 770 occupations, based on the Occupational Employment Statistics survey. Although the survey does not cover pension plan personnel explicitly, it includes the following hourly mean wage rates for selected clerical categories that are likely to include such personnel:
Insurance examining clerks $11.14
Assuming wages rise at 3% per year between 1997 and 2000, the mean wage rates for these occupations in 2000 would be roughly $12.50 per hour, excluding benefits. Another BLS series, the March 1998 survey of employer costs per hour worked for employee compensation, shows that for private industry white-collar occupations, total compensation amounted to 138% of wages for administrative support workers, including clerical. (Total compensation includes paid leave, supplemental pay, employer contributions to retirement and savings plans, legally required benefits such as social security and unemployment taxes, and severance pay.) Thus, compensation costs alone for clerical workers are likely to average approximately $17.30 per hour in 2000, or 57% higher than DOL assumed. Overhead and general and administrative expenses for these workers (including office space, supplies, utilities, and related personnel) would push the overall cost considerably higher still.
Second, most plans are likely to incur significant one-time professional costs in familiarizing themselves with the new regulations, deciding what, if any, changes in procedures are required, and designing the revised procedures and the documents and training materials to accompany them. Pension plan professionals who have spoken with the Office of Advocacy suggest that a cost of $350 to $500 per plan is the minimum likely to be charged for these plan reviews and revisions. Even the lower bound of these estimates would cost the 629,000 small pension plans in excess of $220 million.
Third, the assumed "$0.50 to $1.00 unit cost for materials and distribution of each claim or appeal decision notice" appears to be unrealistically low. If each notice must be individually filled out, addressed and mailed (as would be the case for notices to former employees, dependents and ill or injured employees), the cost would be several times as high as PWBA assumes. Further, the decision as to whether a notice must be prepared and sent may require considerable mid- to high-level review, even if the notice is ultimately sent by a clerical worker.
In short, the proposed rule would impose a significant cost on a substantial number of small entities. Accordingly, PWBA should have performed an initial regulatory flexibility analysis rather than certifying that the rule carried no significant cost. Such an analysis would require the agency to consider alternatives that would reduce or eliminate the burden to small entities.
Why Extend the Rule to Pension Plans?
Putting aside the accuracy of the cost assumptions, it remains questionable whether there is sufficient justification for forcing pension plans to change procedures and notices at all. This office is unaware of pension claimants being dissatisfied with their plans’ review procedures.
The proposed regulation follows by a year a Request for Information that the Department of Labor (DOL) published in the Federal Register on September 8, 1997 (p. 47262), seeking the views of the public on the advisability of amending the current regulation. The scores of comments received in response to that requests and the 600-plus comments on the proposed rule focused mainly on health plans. Similarly, in its discussion of the comments received in response to that request and of other reasons for proposing this regulation, DOL focuses at length on claims involving group health plans. Yet, without citing similar problems with pension or other employee benefit plans and without providing a rationale for including them in the proposed regulation, DOL says, "The Department believes that the proposed changes that apply to non-health plans will be beneficial and that it is desirable, as appropriate, to have uniform claim and appeal procedures for different types of employee benefits."
It is not acceptable to extend these rules to pension plans if there is no evidence of the need for similar procedures for those plans. Administrative rule-making should address well-documented problems or measurable benefits and a public policy justification for imposing regulatory burdens. A one-time cost of nearly $100 million (DOL’s estimate) for small pension plans—and likely much more—will lower returns to pension plan participants with no offsetting benefits or drive up costs for plan sponsors and will further discourage small businesses from offering such plans.
Conclusion
The record does not appear to justify imposing on small pension plans an expense of at least $100 million, and most likely several times that amount, absent any demonstrated problem that would be ameliorated by such expense.
If you wish to discuss these points further, please call the Office of Advocacy’s senior economic advisor, Ken Simonson (202-205-6973), or assistant advocate Russ Orban (202-205-6946).
Sincerely,
Jere W. Glover
Chief Counsel for Advocacy