My client sponsors a group health plan for its employees. It
recently received a medical loss rebate check from its insurer. The employer is
asking what he should do with it. Can
he keep it? Or does he have to give a portion of the rebate to the
participants?
Allocating the Rebate
Technical Release 2011-04, the Department of Labor (DOL)
outlined how employers should handle rebates for their ERISA group insured
health plans. The DOL indicated that to the extent that all or a portion of the
rebate constitutes a "plan asset," the employer may have a fiduciary
duty to share the rebate with participants.
In the absence of specific plan or policy language, the determination
of whether a rebate is considered to be a plan asset will depend, in part, on
the identity of the group policyholder. If the plan or trust is the
policyholder, the rebate will likely be considered a plan asset under ordinary
notions of property rights. This means it stays with the plan and the employer
cannot share in any part of it.
If the employer is the policyholder, the determination will
hinge on the source of the premium payments and the percentage of premiums paid
by the employer, as opposed to plan participants. If a portion of the premium
is paid by participants, that portion will be considered a plan asset and must
be used for their benefit. An employer cannot use the rebate generated by one
plan to benefit participants in another plan. Such action would constitute a
breach of fiduciary duty.
If all or a portion of a rebate does constitute a plan
asset, then the plan sponsor will have to determine how and to whom to allocate
the rebate. For example, must a portion of the rebate be allocated to former
plan participants? The selection of an allocation method must be reasonable and
it must be made solely in the interest of plan participants and beneficiaries.
In making the determination, the plan fiduciary may weigh
the costs to the plan - and the ultimate plan benefit - when deciding on an
allocation method. If the cost of calculating and distributing shares of a
rebate to former participants approximates (or exceeds) the amount of the
proceeds, a plan fiduciary is permitted to limit the allocation to current plan
participants.
If it is not cost-effective to distribute cash payments to
plan participants (because the amounts are de minimis, or they would produce
negative tax consequences for the participants), the fiduciary may use the
rebate for other permissible plan purposes. These might include a credit
against future participant premium payments or benefit enhancements.
Notices to Subscribers
Insurers must send written notices to group policyholders -
and their subscribers -informing them that a rebate will be issued. Employers
should be prepared to respond to questions from participants who receive these
notices, particularly if the sponsor does not intend to share any of the rebate
with those participants.
The notice must include information regarding:
* The purpose of the MLR requirement imposed by the ACA;
* The applicable MLR standard;
* The issuer's actual MLR for the reporting year at issue
and its adjusted aggregate premium revenue;
* The rebate being provided; and
* If applicable, an explanation that the rebate is being
provided to the policyholder.
For ERISA plans, this explanation must state that
policyholders may have obligations under ERISA with respect to the handling of
the rebate amount, and the contact information for the ERISA covered plan. For
other group health plans (such as non-federal governmental plans), the
explanation must explain how the policyholders will use the rebate to benefit
subscribers
Likewise, even if an insurer meets the Medical Loss Ratio
requirements, it must notify subscribers that no rebate will be issued. This
notice must be included with the first plan document provided to enrollees on
or after July 1, 2012. Model notices are available on the Centers for Medicare
& Medicaid Services website.
Tax Consequences
For participants in a group plan, the tax consequences will
depend on factors such as the source of the premium payments (employer versus
participant), whether participant premiums were paid on an after-tax or pre-tax
basis.
If the rebate is distributed as a premium reduction for the
employee, then the amount paid for the coverage is less, resulting in increased
taxable wages. If the rebate is distributed in cash, then the rebate is treated
as taxable wages, subject to income and employment taxes.
A link to Technical Release 2011-04 is provided below:
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