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The Kaiser Family Foundation recently reviewed industry data submitted by insurance carriers to state regulators and has forecast that employers who sponsor fully insured group health plans should expect to receive historically large medical loss ratio (MLR) rebates starting in September. The total rebate amounts are not expected to be quite as large as the past two years, but insurance carriers are projected to issue approximately $275 million in rebates to small group policyholders, and $168 million to large group policyholders. Plan sponsors should be prepared to handle any MLR rebates according to applicable rules.
Background
The ACA requires health insurers to spend at least a certain percentage of the total premium they collect on medical care. This minimum required percentage, known as the MLR, is 80% for small group insurers and 85% for insurers in the large group market. The MLR rule does not apply to self-funded health plans or stop-loss insurance policies.
The ACA dictates that insurers not meeting the MLR standard must refund the excess premiums to their policyholders. Insurers can either offer rebates as cash refunds or as a credit on the employer’s premium statement. Employers that receive a rebate must handle the funds appropriately, based on whether the Employee Retirement Income Security Act of 1974 (ERISA) applies to the plan.
ERISA Plans
Generally, group health plans sponsored by employers are ERISA plans (except for governmental entities and certain churches). Therefore, the U.S. Department of Labor (DOL) applies ERISA’s general fiduciary duty and plan asset rules to MLR rebates, stating that a plan sponsor must use any rebate amount that qualifies as an ERISA plan asset for the exclusive benefit of the plan’s participants.
When is an MLR rebate a plan asset?
Typically, a plan document will include clear language regarding MLR rebates, and it is presumed that the plan sponsor will follow the plan’s written terms. Absent clear plan language regarding how to allocate an MLR rebate, DOL guidance states that classifying the rebate as a plan asset requires assessing who is the policyholder and the source of premium payments. If the plan or its trust is the policyholder, the policy is a plan asset; so, the entire rebate must be treated as a plan asset.
In most cases, however, the employer is the policyholder. Therefore, the portion of the rebate that must be treated as a plan asset depends on who paid the insurance premiums, as follows:
- If premiums were paid entirely out of trust assets, the entire rebate is a plan
- If the employer paid 100% of the premiums, the rebate is not a plan asset, and the employer can retain the entire rebate amount.
- If participants paid 100% of the premiums, the entire rebate amount is a plan
- If the premiums were paid partly by the employer and partly by participants, the percentage of the rebate equal to the percentage of the cost paid by participants is a plan
In any case, under the DOL’s guidance, employers are generally prohibited from retaining a rebate amount greater than the total amount of premiums and other plan expenses paid by the employer.
How can an employer use the rebate?
After deciding whether all or just a portion of an MLR rebate is a plan asset, an employer must decide how to use the rebate for the exclusive benefit of plan participants as well as whether prior year participants will share in the rebate, or it will be limited only to current participants. The DOL has approved the following methods for this determination:
- Distributed to participants under a reasonable, fair, and objective If the employer finds that the cost of distributing shares to former participants approximates the amount of the proceeds, the fiduciary may decide to limit rebates to current participants.
- If distributing payments to participants is not cost-effective because the amounts are small or would have negative tax effects on affected participants, the employer may utilize the rebate for other permissible plan purposes (e.g., apply the rebate toward future participant premium payments or toward benefit enhancements).
If a plan provides benefits under multiple policies, the employer must allocate the rebate for each relevant policy only to participants who were covered by that policy. The DOL has offered that using a rebate generated by one plan to benefit another plan’s participants would be a breach of fiduciary duty.
When must an employer dispose of an MLR rebate?
ERISA generally imposes a requirement that plan assets must be held in trust. However, DOL guidance provides that MLR rebate amounts that are plan assets do not have to be held in a trust provided that an employer disposes of the funds within three months of receipt. Further, directing an insurer to apply the rebate toward future participant premium payments or toward benefit enhancements adopted by the plan sponsor will avoid the need for a trust. Employers going this route should work closely with their issuers to properly handle MLR rebates.
Tax Treatment of Benefits
The Internal Revenue Service (IRS) has issued FAQs to explain the tax treatment of MLR rebates. In general, a cash refund to an employee would create a taxable event unless the worker had previously contributed the funds on a post-tax basis. For this reason, employers should avoid issuing cash refunds to participants except upon advice of legal counsel.
Governmental Entities and Churches
The MLR regulations specify how non-federal governmental and church plans must handle MLR rebates.
Church plans will need to confirm at the insurer’s request that they will follow the rules set forth above. If an insurer does not receive confirmation, it will distribute the entire rebate amount directly to the previous year’s participants rather than to the policyholder.
For non-federal governmental plans, the portion of an MLR rebate attributable to employee contributions must benefit only current participants. Such employers must use the rebate either to reduce employee premium contributions in the next plan year or distribute the rebate amount as a cash refund to current participants.
Final Notes
Employers should maintain records to detail how they determined the MLR rebate payable to eligible plan participants and exactly who benefitted. Finally, employers should seek advice from outside counsel to help determine how to properly use any MLR rebate.
This information has been prepared for UBA by Fisher & Phillips LLP. It is general information and provided for educational purposes only. It is not intended to provide legal advice. You should not act on this information without consulting legal counsel or other knowledgeable advisors.
