Under Section 2718 of the Public Health Service Act, health insurers are required to spend a minimum percentage of insurance premiums (generally 85 percent in the large-group market and 80 percent in the small-group market) on medical care and quality improvement. This percentage is often referred to as the “medical loss ratio” or “MLR.” If the MLR minimum is not satisfied, premiums must be returned to the extent necessary to reach the required percentage.
When a rebate is paid to a group health plan, additional issues must be addressed, such as what may or must be done with the rebate and whether there are tax consequences associated with the receipt and further disposition of the rebate.
MLR rebates are paid to the policyholder. When a rebate is received to a group policy that is part of an ERISA-covered plan (as are nearly all group health plans), consideration must be given to whether some portion of the rebate is a “plan asset” and so must be used for the benefit of the plan participants and otherwise treated in a manner that complies with the ERISA fiduciary obligations applicable to handling plan assets.
But if, as is more commonly the case, the policy is owned by the employer, then the terms of the plan (and any other relevant facts and circumstances) must be reviewed to see if there is some understanding about how premium rebates are to be allocated between the employer and the plan participants. Many plans, of course, will be silent on this issue. Premium allocations are rarely addressed by the plan document.
Technical Release 2011-04 says that in the absence of more direct evidence (e.g., specific plan language),a rebate generally is to be allocated between the employer and the plan participants based on their relative contributions to the premiums paid. So, for example, if the employer paid 60 percent of the premium and the participants paid 40 percent, the rebate would be allocated between the employer and participants in those same percentages.
The DOL also has said that some rules of reason may be applied in allocating a rebate. For example, if the cost of distributing a rebate to former participants is not justified by the amount of the rebate, allocations may be limited to current participants, using any “reasonable, fair and objective allocation method.” And it is not necessary to distribute a rebate in cash if a plan fiduciary determines that the rebate is better used for other permissible plan purposes, such as reducing future premium payments or enhancing benefits.
What isn’t covered is how to treat contributions that are 100% paid by participants, such as dependent coverage.
EMT has tools at our disposal that can help determine how much participants may be entitled to should the plan sponsor (employer) decide to give participants their proportionate shares in cash. Please contact us for details.
In short, some latitude is available in determining what to do with an MLR rebate, so long as any portion of the rebate that is allocable to participants is used in a reasonable manner to benefit current or former participants.
In deciding what to do with an MLR rebate, employers should remember that, under ERISA, plan assets generally must be held in trust. But many employers do not utilize trusts in connection with their group health plans. While it may not be necessary to establish a trust for the rebates, it may be necessary to act quickly to use the rebates for the benefit of the participants.
Finally, once it has been determined how an MLR rebate will be utilized, consideration should be given to the tax consequences associated with the rebate, which may affect an employer’s reporting and withholding obligations. In general terms, whether a participant’s share of an MLR rebate is taxable depends on the tax character of the premium associated with the rebate. If the rebate relates to a premium that was paid on a pre-tax basis, the rebate generally is taxable. And if the rebate relates to a premium that was paid on an after-tax basis, the rebate generally is tax-free.
Group health plans and their sponsors and advisors should carefully consider how rebates will be handled to ensure compliance with these related obligations under ERISA and the Internal Revenue Code.
We can help you with these important decisions – give us a call if you have questions.