SUMMARY OF PRINCIPAL POINTS IN THE PREPARED STATEMENT BY ARTHUR W.

ERICSON

Mr. Ericson is Vice President and Associate Actuary in the Group Insurance Department of the Prudential Insurance Company of America. His prepared statement on S. 1039 has been endorsed by John Hancock Mutual Life Insurance Company, The Equitable Life Assurance Society of the United States, Aetna Life and Casualty Company, and Connecticut General Life Insurance Company.

Mr. Ericson's statement incudes the following principal points:

"We strongly support S. 1039. In order for pre-paid legal services plans to play a meaningful role in employee benefit programs, it is imperative that the tax exclusion for contributions and benefits under qualified group legal services plans be made permanent. Enactment of S. 1039 is needed to encourage the continuation of existing plans and the establishment of new plans.

"At the same time, we agree with Senator Packwood that currently proposed rules for qualifying for the exclusion are unduly restrictive in some respects. The regulations under Code section 120 which were proposed by the Internal Reve nue Service in April 1980 contain various unnecessary restrictions. Because of the current uncertainty created by the proposed regulations, and because there is a broad consensus regarding the unfairness and undesirability of certain of their restrictions, we ask the Subcommittee to expand S. 1039 to eliminate the most objectionable of these restrictions."

In brief, Mr. Ericson recommends that S. 1039 be expanded in the following ways: To make it clear that qualified group legal services plans are not required to limit initial consultations in any way;

To make clear that qualified plans may, without restriction, allow employees to make payments under the plan in any form;

To define "personal legal services" as legal services other than legal services primarily related to the conduct of a trade or business; and

To pervent or limit reliance on actual utilization rates of plan benefits for purposes of determining plan qualification.

PREPARED STATEMENT BY ARTHUR W. ERICSON

My name is Arthur W. Ericson. I am Vice President and Associate Actuary in the Group Insurance Department of The Prudential Insurance Company of America. I am accompanied today by Ted Groom of Groom and Nordberg, Washington counsel to Prudential.

Prudential is one of the largest underwriters and administrators of employee benefit plans in the country. Approximately 30,000,000 employees and dependents are insured under our 9,800 group insurance contracts.

I am here today to offer comments on S. 1039, a bill to make permanent the tax exclusion for contributions made by employers, and benefits received by employees, under qualified group legal services plans. Before beginning, I would like to express our appreciation to Senator Packwood for all he has done to promote the development of these plans. I would also like to say that, like Prudential, a number of other major insurance companies offer (or are considering offering) group legal insurance plans, including John Hancock Mutual Life Insurance Company, The Equitable Life Assurance Society of the United States, Aetna Life and Casualty Company, and Connecticut General Life Insurance Company. The companies I have named have reviewed and endorsed this statement on S. 1039.

Many major underwriters of employee benefit plans have been monitoring the development of group legal services plans since the early to mid-1970's. Today, some have indemnity contracts which have been approved by a number of insurance departments and are prepared to underwrite group legal services insurance programs. For a number of reasons, however, the industry has not perceived the development of legal services as a true group insurance benefit to be as rapid as wished for by many public interest groups. One of these reasons has been the temporary nature of the tax exclusion and the uncertainties associated with current rules for qualifying for the exclusion.

Nevertheless, it is our hope that pre-paid legal services plans will become an integral part of employee benefit programs. To this end, one of my responsibilities has been to guide Prudential into this market and to direct the development of a group insurance product. During this time, I have been a member of the Pre-paid Legal Services Committee of the New Jersey Bar Association, having served on its Subcommittee to draft legislation which authorizes the underwriting of legal services plans. Until recently, I have also served on an American Council of Life Insurance Subcommittee for New Forms of Employee Benefits, having been its chairman for the last two years.

We strongly support S. 1039. In order for pre-paid legal services plans to play a meaningful role in employee benefit programs, it is imperative that the tax exclusion for contributions and benefits under qualified group legal services plans be made permanent. Enactment of S. 1039 is needed to encourage the continuation of existing plans and the establishment of new plans.

Prudential's experience in development and providing group legal insurance indicates that the tax exclusion is doing exactly what Congress intended it to do. It is causing legal services to become more widely available to taxpayers, especially middle income taxpayers. As Congress also intended, the tax inclusion is providing taxpayers with some relief from the high cost of legal fees.

Although the number of group legal services plans established during the past few years may be relatively small, we believe that many more plans will be established in the future if the exclusion is made permanent. The exclusion provides a meaningful_impetus for the development of group legal services plans, and it should be made permanent.

At the same time, we agree with Senator Packwood that currently proposed rules for qualifying for the exclusion are unduly restrictive in some respects. When Senator Packwood introduced S. 1039, he identified several aspects of the current rules which are of concern to him. We share the Senator's concern.

The regulations under Code section 120 which were proposed by the Internal Revenue Service in April 1980 contain various unnecessary restrictions. Although these restrictions were discussed extensively by witnesses at an IRS hearing last September, the proposed regulations still are outstanding. Final regulations to be issued by the IRS may provide some relief, but they are not likely to solve all of the problems.

Because of the current uncertainty created by the proposed regulations, and because there is a broad consensus regarding the unfairness and undesirability of certain of their restrictions, we ask the Subcommittee to expand S. 1039 to eliminate the most objectionable of these restrictions. We recognize that the most important current legislative goal for group legal services plans is to make the tax exclusion permanent. However, it is also important to resolve other problems related to the tax exclusion at the earliest possible time. Therefore, we ask the Subcommittee to address these problems in connection with its consideration of S. 1039.

INITIAL CONSULTATIONS

One of the areas of concern which Senator Packwood has identified is limitations on initial consultations with a lawyer. This is an area of great concern to us. Since a qualified plan may provide only personal legal services, consultations must be held to determine whether a plan participant is in need of a personal legal service, and, if so, whether such service may be provided under the plan. The proposed regulations refer to these consultations as "initial consultations."

The regulations place limits on the extent to which a qualified plan may provide initial consultations and on the way in which a lawyer may conduct an initial consultation. In effect, the proposed regulations require qualified plans to limit the initial consultations available to any plan participant, either in time (no more than 4 hours of initial consultation during any year) or number (no more than 4 initial consultations during any year). The regulations also provide that an initial consultation must not include document preparation or review, or representation of the participant.

In our judgment, these limitations severely undermine the success of group legal services plans and serve no useful purpose. We strongly believe that qualified plans should not be required to limit initial consultations in any way. Therefore, we ask the subcommittee to amend S. 1039 by adding a provision to make it clear that qualified plans are not so required. This provision could simply amend Code section 120 to provide that the term "personal legal services" includes consultations held to determine whether a plan participant is in need of a legal service which may be provided under the plan.

In order to achieve their purpose of making legal services more widely available, and in order to be cost efficient, group legal services plans must provide plan participants with easy and frequent access to initial consultations. A survey on the legal needs of the American public which was conducted by the American Bar Association in 1974 shows the need for such access. Eighty percent of those surveyed did not know which lawyer could help them with their specific legal problem, and 62 percent felt that lawyers were too expensive. As a result, one-third of the public have never visited a lawyer and another one-third have visited a lawyer only once. We concluded from these facts, that easy and ready access to legal consultation, at a cost that people do not fear, would go a long way toward breaking down the barrier which seems to exist between the American public and lawyers. The central and

most important part of Prudential's Group Legal Services Plan, therefore, is our preventive legal care benefit. This benefit provides unlimited telephone access to personal legal services.

We believe that it is extremely important from a cost point of view to encourage people to seek a lawyer's advice at the earliest stage of a legal problem. Addressing a legal problem at an early stage can often avoid expensive litigation that can occur if the problem is allowed to become aggravated. Statistics being accumulated from legal services programs providing easy access to legal consultation, indicate that 80 to 85 percent of the legal questions can be resolved via telephone conversation between the plan participant and the lawyer, together with any resulting telephone calls and simple letters to third parties. This not only helps to avoid later expensive litigation costs for some of the problems, but it also screens many of the perceived legal problems from requiring unnecessary attorney office visits. This feature should help provide legal services to the public at a low cost.

For these reasons, initial consultations are a vital part of a successful group legal services plan. Qualified plans should not be required to limit these initial consultations in any way-not in duration, not in number, and not in the way in which a lawyer conducts a consultation.

EMPLOYEE CONTRIBUTIONS

Another area of concern which Senator Packwood has mentioned is excessive restrictions on employee contributions. This is also an area of great concern to us. Code section 120 allows a qualified group legal services plan to provide personal legal services through prepayment of, or provision in advance for, legal fees in whole or in part by the employer. In spite of the statute's use of the words “or in part," the proposed regulations virtually prohibit employee contributions under qualified plans.

We believe that no limitations should be placed on employee contributions under qualified group legal services plans. Any such limitations deter the establishment of new plans and, in our opinion, serve no useful purpose. Therefore, we ask the Subcommittee to amend S. 1039 by adding a provision to make it clear that employee contributions are permitted without limit. This provisions could simply amend Code section 120 to provide that a qualified group legal services plan may, without restriction, allow an employee to make payments under the plan in any form, including contributions, premiums, copayments, and deductibles.

Prohibiting almost all employee contributions, as the current regulations do, has a direct negative impact on the cost effectiveness of qualified plans. To assure cost effectiveness, a group legal services plan should have some cost sharing between the employer and employee. As much as possible, we should avoid the problems of overusing legal services indemnified through insurance in the same way that medical services indemnified through insurance have been overused. Experience gained from group health insurance plans certainly leaves little doubt that overuse is more likely to occur when the insured employee has no financial interest in the plan. Prohibiting employee contributions under qualified group legal services plans also ignores a very basic marketing and underwriting concept in group insurance. The fact is, the vast majority of successful group insurance benefit plans in this country involve some cost sharing between the employer and employee. In spite of the fact that many plans are paid for entirely by employers, new coverages which have been added during the past decade, such as long term disability and dental benefits, have not been paid for entirely by employers-at least not initially. With existing costs for medical services benefits increasing so rapidly, employers are most reluctant to grant additional employee benefits without some cost sharing by employees.

Prohibiting employee contributions under a qualified plan may also cause an additional problem-that of preventing an employee's dependents from being covered under the plan. For example, to preserve equity among employees, many employers adhere to non-discrimination guidelines which encourage them to administer and fund their employee benefit programs on a basis pertaining only to employment. In fact, this condition is a part of many state laws governing group life and health insurance. Consequently, although an employer may pay the entire cost of the employee's coverage because of the employment relationship, the employee may have to contribute the entire premium required to insure his dependents. Therefore, if employees cannot contribute for group legal insurance, their dependents might not become insured. Certainly, this was not intended by Congress. For these reasons, we believe that employee contributions under qualified group legal services plans should be allowed, and should be allowed without limit.

ADDITIONAL CONCERNS

Other areas of concern mentioned by Senator Packwood also are of concern to us. One of these is excessive restrictions on the definition of "personal legal services." Essentially, the proposed regulations define a personal legal service as a legal service which does not pertain to: (i) a trade or business of the recipient; (ii) the management, conservation or preservation of property held by the recipient for the production of income; or (iii) the production or collection of income by the recipient. Parts (ii) and (iii) of the foregoing definition seem to us to be overly restrictive. Therefore, we would support an amendment to Code section 120 to define the term "personal legal services" as legal services other than legal services primarily related to the conduct of a trade or business of an employee, his spouse, or his dependent. (As previously discussed, the term "personal legal services" should also be statutorily defined to include consultations held to determine a plan participant is in need of a legal service which may be provided under the plan.)

Another area of concern mentioned by Senator Packwood is reliance on actual utilization rates of plan benefits to determine if a plan is entitled to qualification. The proposed regulations provide for such reliance in applying both the statutory requirement of non-discrimination and the statutory limitation on contributions for shareholders. Actual utilization rates on legal services generally are fortuitous and therefore unpredictable. Thus, reliance on such rates for purposes of determining plan qualification is likely to deter the establishment of new plans, especially for small employers. Reliance on utilization rates may also result in unfair disqualification of established plans.

For these reasons, we prefer that actual utilization rates not be used in determining plan qualification. However, if such rates are to be used, we suggest that they not be taken into account until the plan has been in operation for at least three years; in many cases, utilization rates for a period of less than three years may not be indicative of a long-term pattern. Most importantly, utilization rates should not be taken into account for purposes of retroactive disqualification of a plan.

A related problem which is associated with the statutory limitation on contributions for shareholders is the fortuity of employment levels. Because of the unpredictability of employment levels, the 25 percent limitation on contributions for shareholders is likely to be a strong deterrent to the establishment of group legal services plans by small employers. For example, the plan of an employer with 16 employees, 4 of whom are in the limitation class, would be disqualified automatically if one of the other 12 employees quit. We believe that the Subcommittee should explore ways of making qualified group legal services plans a more feasible alternative for small employers, and we would be happy to work with the Subcommittee in this endeavor.

Thank you for this opportunity to present our views. We strongly support S. 1039, and we hope that the Subcommittee will also expand the bill in the ways we have suggested.

PREPARED STATEMENT BY RICHARD SCUPI, DIRECTOR, UAW LEGAL SERVICES PLAN

Mr. Chairman, my name is Richard Scupi. I am the Director of the UAW Legal Services Plan. The UAW Legal Services Plan was the first organization to receive a 501(c)(20) ruling from the Internal Revenue Service to provide prepaid legal services. We are here to day to testify in strong support of S. 1039, which you have introduced to make permanent Section 120 of the Internal Revenue Code.

We all recognize that lawyers and the judicial system play a central role in our society. This means that in order for Americans to fully participate in their society, they must have access to lawyers and to the judicial system. Increasing awareness of this point has created significant interest in prepaid legal services as an employment fringe benefit. In 1976, Congress recognized this interest by enacting Section 120 of the Internal Revenue Code for a temporary five-year period.

Enactment of Section 120 was an important breakthrough, as it permitted unions to collectively bargain for prepaid legal services. UAW immediately seized the opportunity to establish a model prepaid legal services program. The UAW Legal Services Plan is demonstrating that a broad section of Americans-UAW members, retirees and their dependents-can be provided meaningful access to lawyers and courts at a modest cost.

The Plan is a national prepaid pilot program which provides personal legal services for most hourly UAW members who work for the Chrysler Corporation or who have retired under the UAW-Chrysler pension program and for the families of such employees and retirees. It received the first 501(c)(20) ruling from the IRS in

1978. By early 1979, the Plan was operational on a nationwide basis providing prepaid legal servcies to its Participants.

In contrast to the traditional methods of providing professional services, where the profesionals control the costs and quality of their services, the Plan's structure places cost and quality controls over professional services in the hands of people representing consumer interests.

The Plan's policy-making body is its Administrative Committee, chaired by Gabriel N. Alexander, a nationally-known arbitrator who also serves as Impartial Chairman of the Appeal Board under the UAW-Chrysler contract. The Chairman appoints three independent members to the Committee. These members are Theodore St. Antoine, a professor and former Dean at the University of Michigan Law School; Ruth Kahn, an attorney and arbitrator; and Arthur Johnson, Vice President of Wayne State University. UAW's representatives on the Committee are Homer Jolly, Assistant Director of the UAW's Chrysler Department; M. Jay Whitman, UAW Associate General Counsel; and Arthur Hughes, formerly on the UAW staff in a variety of key positions. Former members of the Committee include Marc Stepp, UAW Vice President, and John Fillion, UAW General Counsel.

Unlimited legal services for 140,000 families throughout the country could not be provided with the limited funds available to the Plan. The Plan's prepaid benefits were designed to provide comprehensive legal services for certain important legal problems and to provide either office work or referrals for most other legal problems. (A detailed statement of Plan benefits is in the "Summary Plan Description” booklet.)

Because its goal is to provide its Participants with high-quality legal services in as economical and efficient a manner as possible, the Plan maintains a high degree of control over costs and quality. One effective way of maintaining such control is through a delivery sytem where the Plan selects, employes, trains, and supervises salaried full-time attorneys, and organizes and systematizes the practice in the offices out of which these attorneys work. For this reason, the Plan relies heavily upon the staff office delivery system to provide services. Such offices have been established by the Plan throughout the country in areas where a significant concentration of eligible Participants live and work. The Plan's largest office is in Detroit (where its National Administrative offices are also located), and was established to make services available to approximately 85,000 Participants in 1978 through 30 attorneys and an equal number of support staff. The Plan's other offices are located in St. Louis, Missouri; Central Indiana (Indianapolis, Kokomo and New Castle); Belvidere, Illinois (near Rockford); Twinsburg, Ohio (near Cleveland); Perrysburg, Ohio (near Toledo); Newark, Delaware; and Syracuse, New York. About 85 percent of those eligible are provided services by attorneys out of these staff offices.

There are, however, about 15,000 employees and retirees who do not live or work near one of the Plan's offices, and who are scattered throughout 46 states. Since a staff model was not a feasible approach to providing services to these Participants, other delivery systems had to be employed. The Cooperating Attorney Program was developed to fill this need. On the basis of information obtained from a comprehensive questionnaire and discussions with individuals who have personal knowledge of an attorney's competence, performance, and reputation, the Plan has selected and contracted with several hundred private attorneys nationwide who constitute the Cooperating Attorney network. These attorneys have agreed with the Plan to provide services to Participants referred to them, to bill the Plan at specified rates for specified services, to provide the Plan with detailed reports regarding time spent, fees charged and the final result for each case, to refer any desputes between themselves and a referred Participant to the Plan for resolution, and to abide by the Plan's disposition of such matters. Participants who are referred to a local attorney after calling a central toll-free number in Detroit, are in turn encouraged to take an active role in resolving their legal matter, to contract the Plan with questions or for assistance in order to make certain that the Cooperating Attorney is providing satisfactory services, and to complete a Client Satisfaction Questionnaire. These questionnaires, along with an experimental peer review program, enable the Plan to monitor the quality of services being provided and to a take corrective action where necessary.

Some representative comments from Participants using the Plan's benefits have been:

An assembly line worker from Illinois wrote: "I think this program is a wonderful program for those of us who make too much money to qualify for the poor class and not enough to say we are rich."

A retiree from Florida said: "[I think] this is a very good thing for the retirees— they have to live on a small pension and can't afford the expense.'

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