Executive Summary

This update is designed for the vast majority of MBL Benefits Consulting group health insurance clients. Please contact your MBL Consultant if your plan is one of the following as the recommendations here may not apply to you:

  • Self-insured plans
  • Church plan
  • Government plan
  • Non-ERISA plans

Many employers who sponsor group health plans will be receiving rebates from their insurance carriers before August 1. These rebates result from a provision in the healthcare reform law which requires insurance carriers to spend at least a certain percentage of their premium income on medical costs. If less than that percentage is spent, the carrier must rebate the difference and the sponsoring employer typically needs to allocate the rebate among itself and those employees who participate in their health plan.

The portion allocated to the employees must be distributed to them within 90 days. The distribution may be in cash or may be used to reduce insurance premiums. MBL Benefits Consulting will assist you in determining the allocations.

Background

Under healthcare reform’s medical loss ratio (MLRs) rules, any health insurer whose expenditures on clinical services and quality improvements fall short of 80% for small plans or 85% for large plans must pay rebates, with the distributions to be made by Aug. 1 each year. (There are circumstances where these percentages may vary among the states. For instance, the small-group percentage in New York is 82%.) The cutoff between large and small groups at the present time is 50 employees. For group coverage, both the policyholder (typically an employer) and individual subscribers (usually employees) will receive notices of any MLR rebate owed by the carrier. In most cases, however, only the group policyholder will receive the actual rebate check. Employers in turn must determine (a) how much of the rebate to apply for the benefit of employees and others enrolled in the group plan and (b) how to deliver the rebate.

MBL Benefits Consulting Recommendation: Contact your MBL Consultant for assistance thinking through your next steps.

More on MLRs

Insurers that fail to meet the applicable MLR in any calendar year must send rebate notices and payments by the next Aug. 1. The notice you will be receiving should state that the insurer must send the rebate to the group policyholder; describe how employers and other group policyholders must handle the rebates; and direct participants to contact the employer or plan administrator for more information.

While employers and employees alike will receive notices, insurers will typically pay the rebate only to the employer or apply the rebate to future premiums.

Plan Asset or Employer Property?

Employer-provided group health insurance is a “welfare benefit” plan regulated under ERISA.

Even though employers and other group policyholders will receive MLR rebates, they likely will have to share these funds in some fashion with group health plan enrollees. The key question is whether—or how much of—any MLR rebate on the one hand is a plan asset which must benefit employees or, on the other hand, belongs to the employer.

If the insurance policy and relevant plan documents address how to treat rebates or other distributions, those documents will control how much of an MLR rebate is a plan asset or belongs to the employer. However, if the policy and plan documents are silent or unclear, then the treatment of MLR rebates depends on who is the “policyholder”, the plan (or related trust, if any) or the employer.

MBL Benefits Consulting Recommendation: Consult legal counsel about whether to revise insurance policies and related plan documents to specify how MLR rebates will be handled in the future.

Under ERISA rules, if some or all of a rebate is a plan asset, it needs to be handled in one of two ways:

  • Apply rebates toward premiums or refund to participants within three months. If refunded to participants or applied to pay premiums within 90 days of receipt, MLR rebates do not have to be placed in trust as plan assets.
  • Apply rebates toward future premium payments (premiums after three months) or enhanced benefits. Plan sponsors may direct insurers to hold MLR rebates, such as in a premium stabilization reserve, to offset participants’ share of future premiums or to pay for benefit enhancements.

MBL Benefits Consulting Recommendation: Apply or refund rebates within 90 days to avoid the complexity of setting up trust arrangement to hold the rebate for longer periods.

Fiduciary Requirements

Employers are fiduciaries under ERISA with respect to plan assets and generally can use plan assets only to pay plan benefits and expenses. Fiduciaries must act prudently with respect to a plan’s administration and operation.

Tax Consequences

Per the IRS, if employees made pretax contributions for health coverage, rebates used to reduce premiums or paid to them in cash will be subject to income and employment taxes. Those making after-tax contributions generally would not be taxed on rebates paid directly to them or used to reduce premiums.

MBL Benefits Consulting Recommendation: Your allocation of rebates to employees must be reasonable. MBL Consulting, at no additional charge to clients, is happy to assist in designing a reasonable allocation method.

 

Allocating rebates when insurance policy and ERISA plan documents are silent

If group policyholder is: Then rebate treatment is:
Plan or trust Rebate is plan asset
Employer Cost-sharing arrangement determines rebate treatment
  • 100% employer-paid premiums
  • 100% of rebate belongs to employer
  •  100% participant-paid premiums
  •  100% of rebate is plan asset 
  •  Employer and participants each paid fixed percentage of premiums 
  •  Same percentage determines how much of rebate is plan asset and how much belongs to employer 
  •  Employer paid a fixed sum and participants paid rest of premiums 
  •  Rebate is plan asset, except any amount exceeding participants’ total contributions during MLR reporting year belongs to employer 
  •  Employees paid a fixed amount and employer paid rest of premiums 
  •  Rebate belongs to employer, except any amount exceeding employer’s total contributions during MLR reporting year is plan asset

 

This update does not constitute legal or tax advice. Please consult with your legal, tax, and accounting advisors before applying this information to your fact-specific situation.

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