[authors: Beth Alcalde and Leanne Reagan]
In recent weeks, health insurers have issued rebates to plan sponsors of fully insured group health plans, pursuant to the medical loss ratio (“MLR”) standards that were established under the Patient Protection and Affordable Care Act of 2010, together with the Health Care and Education Tax Credits Reconciliation Act of 2010 (collectively, the “Health Reform Act”). In addition, health insurers have been communicating with employers and with individual plan participants about these rebates. This Practice Update addresses sponsors of ERISA-governed group health plans, with a focus on these employers' fiduciary responsibilities following receipt of carrier rebates. This summary does not address special rules for governmental plans or church plans. Also, this MLR rebate does not apply to self insured employer-sponsored group health plans, even if those plans are subject to ERISA.
MLR Rebates Generally
Under the Health Reform Act, the MLR standards require insurance companies to spend a certain proportion of premium income on health care for their insured market. In the large group market (i.e., groups over 100), for every premium dollar received by an insurer, 85 cents of that dollar must be spent on paying medical claims, and/or undertaking wellness-related activities. In the small group market, the MLR ratio is slightly lower, at 80 cents for every premium dollar. If an insurer did not meet the MLR standards for 2011, the issuer was required to issue a rebate by August 1, 2012. In most cases, the carriers are remitting MLR rebate checks to the employers, as provided for under the Health Reform Act. The employers must then allocate the rebate appropriately among itself and the group health plan participants, and address any tax consequences of the rebate distribution.
MLR Rebates as ERISA “Plan Assets”
In December of 2011, the DOL issued Technical Release 2011-04, which provided guidance on how policyholders of group health plans covered by ERISA should handle such rebates. In the common situation where the employer is listed as the policyholder, and where employees were required to contribute toward the cost of their health insurance premiums, then in the absence of explicit insurance contract language regarding the distribution of rebates, the individual plan participants must receive part or all of the rebates. In other words, in most situations, the employer will not be able to retain the full rebate, but rather must allocate part or all of the rebate among individual plan participants, in accordance with the fiduciary responsibilities described below.
In circumstances where the insurance policyholder is not the employer, but rather is the group health plan itself or its trust, and there is no specific language in the plan or policy to the contrary, then the rule is even simpler, as all of the MLR rebate would need to flow to plan participants, with no portion benefitting the employer.
Fiduciary Responsibilities with Regard to Plan Assets
In general, plan assets must be held for the exclusive purpose of providing benefits to the plan participants and their beneficiaries and defraying reasonable expenses of administering the plan. As a result, the employer would have no interest in any portion of the rebate that is considered to be an ERISA plan asset. The DOL’s guidance further provides that, pursuant to standards of fiduciary conduct, in situations where MLR rebates are attributable to employee premium contributions or otherwise considered to be plan assets, the rebates generally must be either:
• distributed to the participants;
• used to reduce future participant premiums (e.g., a premium holiday); or
• used toward benefit enhancements.
It is important to note that if plan asset rebate amounts are used to reduce premiums, such amounts should only be used to reduce the individual participant’s premium contribution and may not be used to reduce the employer’s contribution. When considering how to distribute the rebates, the employer should consider whether the proposed method of distribution will create any adverse tax consequences for the employees.
Allocations of the MLR Rebates Must be Reasonable
MLR rebates that are considered ERISA plan assets must be allocated using a reasonable, fair, and objective allocation method. No single allocation method is prescribed for ERISA plans. Rather, the policyholder will make the allocation decision in accordance with general fiduciary principles. The DOL has provided examples of reasonable methods for allocating MLR rebates that are plan assets, so as to satisfy these ERISA fiduciary duties.
One example addresses former participant allocation considerations. This issue arises because the carrier rebates received in the summer of 2012 actually relate to the 2011 year. So plan sponsors will need to evaluate whether it is practicable to include former plan participants (i.e., employees who participated in the plan in 2011 but who terminated employment in 2012) within its rebate allocation. The DOL has explained that if a plan fiduciary determines that the administrative cost of distributing the share of a rebate to former participants approximates or exceeds the amount of the rebate itself, then it would be reasonable to allocate the rebates only among current plan participants based on a reasonable, fair and objective allocation method.
The Health Reform Act's initial MLR rebates have recently been sent by insurance carriers to employers sponsoring ERISA-governed fully insured group health plans. Employers who are the policyholders should:
• Review their plan documents and insurance policies to determine whether these documents address the payment of rebates.
• Determine the appropriate allocation of rebates, remembering that in most situations, the participants will receive part or all of the carrier MLR rebate.
• Consult, as appropriate, with qualified legal counsel when undertaking ERISA fiduciary actions.