One consequence of the current COVID-19 crisis for group health plans has been the significant reduction in employee preventive care and elective medical procedures as people shelter in place and socially distance. When group health plan premiums were established last year, the underwriters could not have foreseen 2020’s underutilization, which means many insurance carriers have collected significantly more in premiums then they have paid out in claims. As a result, plan administrators have been receiving higher Medical Loss Ratio Rebates (MLR Rebates), which were mandated by the Affordable Care Act[i], or premium refunds from carriers without any direction as to their proper allocation. The return of these funds can present challenges for plan administrators concerned about how to properly allocate the returned amounts between the plan and plan sponsor and among plan participants. Fortunately, while guidance is sparse, it does exist. The following summarizes the available guidance with respect to identifying and allocating these amounts.
Identifying Whether the Rebate/Refund is a “Plan Asset”
For plan fiduciaries receiving returned funds, the first step is to analyze plan documents to determine whether the funds belong to the plan sponsors or belong to the plan because they constitute “plan assets.” This first step is critical because administrators handling MLR Rebates or premium refund amounts that are “plan assets” are subject to the fiduciary duty and prohibited transaction rules under Title I of ERISA. Among other things, these rules provide that plan assets generally must not inure to the benefit of the employer and must “be held for the exclusive purposes of providing benefits to participants in the plan and their beneficiaries and defraying reasonable expenses of administering the plan.” ERISA § 403(c)(1).
Whether MLR Rebates are plan assets generally depends on how the plan and insurance contracts are structured. In preparation for the initial release of MLR Rebates in 2012, the U.S. Department of Labor (DOL) issued Technical Release 2011-04. This Release states that in the absence of plan provisions specifically characterizing rebates paid by insurers as belonging to either the plan or plan sponsor, the DOL will principally look at the source of the premium payments to determine to what extent MLR Rebates are plan assets. Generally, rebates attributable to premium payments made by participants or out of trust assets will be considered plan assets, and rebates attributable to employer-paid premiums will not be considered plan assets.
While there is no similar DOL guidance specific to premium refunds, we are of the view that the analysis is the same, with the determination of whether a refund is a “plan asset” depending heavily upon how the group health plan is structured, paid for, and documented. If plan documents are silent on the subject, plan fiduciaries should look to how premiums were paid and by whom.
- If premiums are 100% employer paid, none of the rebate/refund is a plan asset
- If premiums are 100% employee paid, the entire rebate/refund is a plan asset
- If premium payment is shared by both the employer and employee, the portion of the rebate/refund paid with employee contributions is a plan asset
- If premiums are paid from a trust, the entire rebate/refund is a plan asset and should be returned to the trust
Allocation of Rebate/Refund
Only once a plan fiduciary has conducted the necessary analysis to conclude what portion of the MLR Rebate or premium refund, if any, constitutes “plan assets,” the fiduciary must consider how to allocate the funds among plan participants. While the DOL has not issued any final or interim rules outlining what allocation methods are proper for MLR rebates, the guidance in Technical Release 2011-04 recognizes three approaches to dealing with the allocation of the “plan asset” portion of the rebate. The fiduciary can:
- pay a direct cash refund to participants;
- provide participants with a premium discount or premium holiday; or
- use the assets to enhance plan benefits (e.g., add a disease management or wellness program).
Technical Release 2011-04 also provides that general fiduciary obligations will apply to all plan assets and that selection of a method of allocation that benefits the plan sponsor or administrator at the expense of plan participants will violate fiduciary obligations. Thus, at a basic level, plan fiduciaries should be careful to avoid the appearance that the selected allocation method favors the plan sponsor or any other plan fiduciaries over the participants.
While Technical Release 2011-04 showcases the direct payment of rebate amounts to participants, it also demonstrates flexibility in two areas. First, the Release provides that a plan fiduciary will not necessarily violate its fiduciary duties simply because the allocation method chosen “does not exactly reflect the premium activity of policy subscribers.” Second, the Release provides that if it is not cost-effective to distribute MLR rebates directly to participants, the plan fiduciary has discretion to apply the rebates to other permissible plan purposes, including benefits enhancement across the plan or as credit toward future participant payments. In short, there are a variety of acceptable allocation methodologies and prudence requires fiduciaries to consider the cost-effectiveness of the allocation methodology selected. So long as the methodology is “reasonable, fair, and objective” (Technical Release 2011-04) and does not favor the interests of the plan sponsor or another plan fiduciary over plan participants, it should not violate the exclusive purpose rule under ERISA. Bottom line: the allocation method for MLR Rebates and premium refunds selected by plan fiduciaries should take into account the different classes of participants as well as the economic viability of calculating actual (or pro-rata) distribution of the funds.
In summary, plan fiduciaries must first analyze plan documents to determine what portion of the returned funds constitute “plan assets” and what portion may belong to the employer or plan sponsor. Second, with respect to amounts that constitute plan assets, plan fiduciaries should consider what actual or (a pro-rata) distribution would mean for different classes of plan participants. So long as a reasonable, fair and objective methodology for allocation is followed, plan fiduciaries may properly consider the cost effectiveness of various allocation methods. Finally, plan fiduciaries should use caution to avoid the appearance self-dealing and other prohibited transaction concerns.
Plan sponsors should take advantage of their broad discretion to update plan documents to clearly define what returned funds are “plan assets.” Plan sponsors should also include language in the plan and related materials that provides plan administrators with discretion for allocating MLR Rebates and premium refund amounts. Finally, regardless of the allocation method selected, plan fiduciaries should document the reasoning supporting the allocation method selected.
[i] The ACA requires health insurance carriers to spend at least 80% of premium dollars on actual participant medical care. If the 80% ratio is not achieved, carriers are required to issue rebates.