Insurers have begun issuing medical loss ratio (MLR) rebate checks for 2011. Particularly when an MLR rebate is small, you may be tempted to put the check in a drawer and forget about it. Employers should resist that impulse and take quick action after they receive an MLR rebate check. In most cases, the U.S. Department of Labor (DOL) requires use of any plan asset received through an MLR rebate within three months in order to avoid trust obligations under the Employee Retirement Income Security Act of 1974 (ERISA).
Employers receiving a rebate check face several questions:
Why did we get a check?
The Affordable Care Act imposed new MLR standards for insurers, requiring that insurers spend a minimum percentage on the reimbursement of clinical services and the improvement of care. Those who spend less must issue rebates. For group health coverage, these rebates are generally paid to the policyholder, which is either the health plan itself or the employer.
Whose money is it?
Once received, an employer must determine who should receive the rebate. The DOL has issued a technical release that details the legal issues raised by this question. If the rebate is a plan asset, then ERISA strictly limits how the rebate may be used.
The name on the check does not automatically determine whether a check is a plan asset. A check may be a plan asset even if payable directly to the employer. While a check issued to a “plan” as policyholder is presumed to be a plan asset, an employer may have a right to the rebate if the plan documents require it.
To determine the proper recipient, the first step is to review the plan document and insurance policy. The plan or policy may include language for treatment of rebates. If the documents are clear, employers generally should follow their terms regarding the rightful owners of the rebate.
If the plan and policy are silent or unclear, the DOL recommends looking to who pays the premiums. An employee contribution toward premiums, and the rebate that results from it, is a plan asset. So if an employer splits the cost of coverage 50/50 with the employee, then half of the rebate would be a plan asset.
In any case, an employer’s share of a rebate cannot exceed the amount spent by the employer for coverage. Any amount above the employer contribution is a plan asset as well.
What can we do with a rebate?
If part or the entire rebate is a plan asset, how that asset is spent is subject to the fiduciary requirements of ERISA. An employer must be prudent, follow the plan, and act in the sole interest of the plan’s participants and beneficiaries when deciding how to share the rebate.
The method for dividing a rebate must be reasonable, fair and objective. It must benefit the participants and beneficiaries of the coverage for which the rebate is paid, but can favor the plan’s current participants over former participants under certain situations. Direct payments to participants, reduced premiums, and benefit enhancements in the plan are acceptable methods for using the participant’s share of a rebate that represents a plan asset.
What happens once we receive a rebate?
Receiving a rebate may have tax consequences for the employer and employees who receive it. In most cases (for example, where plan participants pay for group health coverage on a pre-tax basis), a direct payment of the rebate to a participant or a premium holiday will increase the taxable income of an employee, subject to employment taxes (see these FAQs from the IRS for more information). Because a rebate will usually result in the recovery of a prior year’s deduction, most employers that receive part of the rebate must report it as income as well.
While reductions of future premiums are a valid alternative to direct payments, an employer must carefully review its cafeteria plan to confirm the plan sufficiently addresses and permits mid-year premium reductions. The cafeteria plan administrator should consider whether the premium reduction triggers an election change event and if so, what additional administrative tasks will be necessary to comply with the cafeteria plan rules.
Once you receive an MLR rebate check, the clock is ticking. If you haven’t taken steps to use it within three months, the portion that is a plan asset must be held in trust. The best approach is to act quickly, determine what portion of the rebate is a plan asset, who should receive the rebate, and how to deliver any plan asset to plan participants and beneficiaries, and then provide the payment, reduction, or benefit accordingly.
Stephen A. Riga is an associate in the Indianapolis office of Ogletree Deakins.