[authors: Denise L. Atwood and Eva N. Kerr]
Now that the Supreme Court has upheld the constitutionality of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, the “Act”), employers must move forward with implementation. In the coming weeks, we will publish a series of newsletter articles focusing on the changes that most immediately affect employer group health plans and may require immediate attention, especially for employers who had taken a wait-and-see approach in hopes that the Act would be invalidated.
This alert, the first in the series, discusses the Act’s medical loss ratio (MLR) requirements and resulting rebates that may be provided to plan sponsors.
Beginning in 2011, and subject to certain limited exceptions, insurance companies in the individual and small group health insurance markets must spend at least 80 percent of the premium dollars they collect on medical care and quality improvement activities, whereas insurance companies in the large group market must spend at least 85 percent of the premium dollars they collect on medical care and quality improvement activities. This is known generally as the MLR standard. Insurance companies that fail to satisfy the MLR standard must provide a rebate to their subscribers by August 1st of the following calendar year.
Insurance carriers are required to make the first round of MLR rebates by August 1, 2012. Plan sponsors should consider how they will handle any MLR rebates they receive and also be prepared for potential questions from plan participants, who will also receive notice regarding any MLR rebate provided to the plan sponsor.
Medical Loss Ratio Requirements Apply to Health Insurance Policies
The MLR requirements apply to insurance companies offering group or individual health insurance coverage. The MLR requirements do not apply to self-funded group health plans. The MLR requirements also do not apply to “excepted benefits,” such as limited scope dental or vision policies. As a result, any MLR rebate an employer receives will likely relate to its major medical plan.
Calculating Medical Loss Ratios
In general, an insurance company’s MLR must be calculated separately for the large group market, small group market, and individual market within each state. MLRs are not calculated on a per policy basis. States may impose MLRs higher than the 80 percent MLR requirement for the small group market and 85 percent MLR requirement for the large group market required under the Act. In addition, special rules apply for “mini-med” policies (i.e., plans that have a total of $250,000 or less in annual limits) and expatriate policies.
The MLR for an MLR reporting year (i.e., the calendar year) is equal to the total amount spent on medical care divided by the total amount of premium revenues in such year. Medical care includes incurred medical claims and amounts spent to improve health care quality. Premium revenues include amounts received as premiums, minus the issuer’s federal and state taxes and licensing and regulatory fees.
Insurance companies must report their MLR data for an MLR reporting year to the Department of Health and Human Services (DHHS) by the following June 1st. MLR data that was reported on June 1, 2012 was based on 2011 data only. However, beginning in 2013, the MLR for a particular MLR reporting year is calculated by aggregating data over a three-year period.
Insurance companies that fail to satisfy the MLR standard must provide a rebate to their customers. The amount of the rebate for an MLR reporting year must be calculated and reported to DHHS by the following June 1st and provided to their customers by August 1st. In general, an insurance company may provide the rebate in the form of a premium credit, lump sum check, refund to a credit card or debit card or pre-paid debit card provided certain conditions are met.
With respect to individual policies, insurance companies must provide the MLR rebate to individual enrollees.
With respect to the group policies in both the large and small group markets, insurance companies must generally provide the rebate to the policyholder, who, in turn, must ensure that the rebate is used for the benefit of plan participants. How the rebate may be used varies by plan type.
ERISA Plans. Department of Labor (DOL) Technical Release 2011-04 provides guidance on how plan sponsors should handle MLR rebates. To the extent rebates are considered “plan assets,” plan fiduciaries must comply with ERISA’s fiduciary requirements.
When determining whether rebates are plan assets, employers should look to the language in their policy and plan documents. Generally, MLR rebates are plan assets, unless there is specific plan or policy language to the contrary. If the policy and plan documents are ambiguous and the plan or its trust is the policyholder, the MLR rebates are plan assets. However, if the employer is the policyholder, the source of the premium payments will determine what portion, if any, of the MLR rebates is a plan asset. If the premiums are paid entirely out of trust assets, the MLR rebates are plan assets. If all or a portion of the premiums are paid by participant contributions, the portion of the rebate that is attributable to participant contributions is considered a plan asset.
Any portion of a rebate constituting plan assets must be handled in accordance with ERISA’s general standards of fiduciary conduct and can be distributed to participants, applied toward future participant premium payments (i.e., premium payment holidays), or applied toward benefit enhancements. In deciding on an allocation method, the plan fiduciary may consider the costs to the plan and the ultimate plan benefit as well as the competing interests of participants or classes of participants.
For example, if the cost of distributing shares of a rebate to former participants approximates the amount of the proceeds, the fiduciary may properly decide to allocate the proceeds to current participants based upon a reasonable, fair and objective allocation method. Similarly, if payments to participants are of de minimus amounts, the fiduciary may apply the rebate toward future participant premium payments or toward benefit enhancements.
To the extent rebates are plan assets, they should be held in trust. However, the DOL will not assert a violation of ERISA’s trust requirement against plan sponsors that have not established a trust in reliance on DOL Technical Release 92-01 as long as the rebate is used to pay premiums or the amount is refunded to participants within three months of receipt of the rebate. Plan sponsors can avoid the need for a trust by directing insurance companies to apply the rebate toward future participant contributions or benefit enhancements.
Rebates to State and Local Government Plans. Rebates to state and local government plans must be provided to the policyholder. Policyholders must use the amount of the rebate that is proportionate to the premiums paid by employees in one of the following ways: (1) reduce employees’ portion of premiums in the subsequent policy year for all employees currently covered under the option for which the rebate applies (or for all employees covered under any option); or (2) provide a cash refund to employees enrolled in the option, at the time the rebate is received, for which the insurance company is providing the rebate. The premium reduction or cash refund can be divided evenly, divided based on each employee’s actual contributions, or apportioned in a manner that reasonably reflects each employee’s contribution to the premium.
Rebates to Church Plans Exempt from ERISA. Rebates to church plans exempt from ERISA may be provided to the policyholder only if the insurance company receives a written assurance from the policyholder that the rebates will be used to reduce premiums or provide refunds to current plan participants in the manner allowed for state and local governmental plans. If no written notice is received, the insurance company must distribute the MLR rebate to current plan participants by dividing the entire rebate in equal amounts to all participants, regardless of how much each participant actually paid toward premiums.
Rebates to Terminated Plans. With respect to terminated plans, if the insurance company cannot locate the policyholder, the insurance company must distribute the rebate directly to plan participants by dividing the entire rebate in equal amounts to all participants regardless of how much each participant actually paid toward premiums. If the issuer can locate the policyholder of an ERISA plan, the policyholder must comply with ERISA, including looking to the plan document to determine how assets are to be allocated upon termination. If the plan document is silent, the policyholder may need to determine if it is cost effective to distribute the rebate to former participants.
Federal Tax Consequences to Employees
If employees pay premiums on a pre-tax basis, an MLR rebate is subject to federal income and employment tax, regardless as to whether the rebate is in the form of a premium reduction or a cash distribution. If employees pay premiums on an after-tax basis, an MLR rebate is generally not subject to federal income or employment tax, regardless of whether the rebate is in the form of a premium reduction or a cash distribution, with one exception. If the employer provides the rebate only to those employees who participated in the group health plan both in the year the premiums being rebated were paid and in the year the MLR rebates are paid, and an employee deducted the prior premium payments on his/her Form 1040 in the year the premiums were paid, the MLR rebate is taxable to the extent the employee received a tax benefit from the deduction (but it is not subject to employment taxes).
Insurance companies must provide notice of MLR rebates by August 1st of the year following the MLR reporting year for which the rebate is being issued. For example, notices of rebates based on the 2011 MLR reporting year must be provided by August 1, 2012.
Notices must be provided to: (1) subscribers in the individual market who receive a rebate; (2) group policyholders who receive a rebate, as well as plan participants; and (3) plan participants of a group policy who receive the rebate directly from the insurance company.
The notice must include an explanation of the rebate, its calculation, and with respect to group health plans, whether the rebate is being provided to the policyholder and how the rebate can be used. Insurance companies must use the model notices developed by the Centers for Medicare and Medicaid Services. Plan sponsors should be prepared for questions from employees who will receive such notice and may want to consider distributing a communication of its own regarding the use of the MLR rebate.
Insurance companies who meet or exceed the MLR standards must also provide a one-time, basic notice for the 2011 MLR reporting year with the first plan document that the insurer provides to enrollees on or after July 1, 2012. The notice will inform policyholders and subscribers that the insurance company has met the minimum MLR standards, but will not include the insurance company’s MLR or other specific measures of performance. Instead, the notice will generally educate consumers about the MLR requirements and direct them to the DHHS website for additional information.