How Should Employers Handle Medical Loss Ratio Rebates?
Many employers have now received rebates from insurance companies whose use of premium dollars to pay non-health benefit expenses exceed the limits imposed under the medical loss ratio ("MLR") standards of the Patient Protection and Affordable Care Act. Under the Affordable Care Act, insurance carriers in the large group market (i.e., selling group health insurance policies to employers having at least 100 employees) must spend at least 85% of premium dollars on the payment of medical care claims and quality improvement activities. Carriers that fail to achieve that threshold (and therefore spend more than 15% of premium dollars on things other than paying health insurance claims and quality activities) must pay the rebate. That's good news for employers and participants in employer-sponsored health plans. So with the deadline for rebate payments just a day away, we wanted to offer a brief refresher about how the U.S. Department of Labor thinks employers should handle MLR rebates.
When you consider the proper disposition of MLR rebates, recall that the assets of an ERISA plan include amounts "that a participant or beneficiary pays to an employer, or amounts that a participant has withheld from his wages by an employer" for contribution to the plan. (See DOL Regulations section 2510.3-102.) That rule applies to group health plans just as it applies to retirement plans. So the employee's share of the monthly health insurance premium, almost universally paid with pre-tax dollars withheld from pay under a cafeteria plan, is considered an asset of the health plan. Although the assets of a group health plan need not be held in trust – the way the assets of a 401(k) plan must be – they still must be protected and dealt with by plan fiduciaries in a way that is consistent with the requirements of ERISA. That means, among other things, that if the plan (or the employer in its stead) receives a distribution with respect to plan assets, that distribution itself must be considered an asset of the plan. The DOL has dealt with this issue in the past, for example in the context of the demutualization of insurance companies.
Consistent with those well-established concepts, the DOL issued Technical Release 2011-04 in order to provide explicit directions to employers regarding the handling of MLR rebates. The technical release confirms that MLR rebates should generally be treated, in whole or in part, as plan assets and should be dealt with accordingly by plan fiduciaries. The extent to which an MLR rebate must be considered a plan asset will turn primarily on who covered the cost of health insurance premiums. An employer may be entitled to retain all or a portion of the rebate depending upon the portion of the premium it paid. To aid plan fiduciaries in making this determination, the technical release offers the following guidelines:
- If the entire cost of group health insurance coverage was paid by the employer, with no contributions made by participants, the employer is free to retain the entire rebate.
- Conversely, if plan participants paid the entire cost of coverage then the full amount of the rebate will be attributable to participant contributions (i.e., plan assets) and would be allocated among them.
- If participants and the employer shared in the cost of coverage, each would receive a portion of the rebate commensurate with the portions of the premium paid by them respectively. This could apply in the case where participant cost sharing is expressed as a percentage of the premium, as well as cases in which the employer pays a fixed dollar amount (e.g., the cost of single coverage) and the participants pay the balance for the coverage they select.
The rules offered in Technical Release 2011-04 are simple enough to follow with respect to current plan participants. But to what extent must former participants share in any rebate? (After all, the rebate paid in the current year will be attributable to plan operations and premiums paid in the prior year.) In that case, the technical release allows an employer to determine whether the cost of distributing shares of a rebate to former participants would outweigh the benefit of the distribution. Specifically, if the cost of making distributions to former participants would equal or exceed the amount to be distributed, a plan fiduciary may properly decide to allocate the proceeds solely to current participants based on a fair and objective allocation method.
Finally, the technical release considers the possibility that the cost of making actual distributions of rebate shares even to active participants may be prohibitively costly (or otherwise not a prudent use of plan assets). In that case, a fiduciary is permitted to apply the rebate to other permissible plan purposes, including the application of the rebate amounts in order to reduce future participant premium payments or to provide benefit enhancements.
If you are fortunate enough to receive an MLR rebate, follow the road map provided by the DOL in Technical Release 2011-04 to make sure you handle the rebate correctly.