Are Rebates Assets? Guidance Issued Regarding Medical Loss Ratio Rebates
Under the health care reform legislation, health insurance issuers must meet certain medical loss ratio (MLR) standards. If the issuer does not satisfy the MLR standard, it is required to provide rebates to its policyholders. Rebates may be available beginning in August, 2012.
The Department of Labor has issued guidance (available here http://www.dol.gov/ebsa/newsroom/tr11-04.html) regarding these rebates that applies when the plan with respect to which the rebate is issued is subject to ERISA. DOL Technical Release 2011-04 provides guidance regarding (1) when the rebate will constitute plan assets for purposes of ERISA, and (2) what ERISA requirements apply to those plan assets.
Note: Separate guidance for non-ERISA plans (available here https://www.federalregister.gov/articles/2011/12/07/2011-31291/medical-loss-ratio-rebate-requirements-for-non-federal-governmental-plans) was previously issued by the Department of Health and Human Services.
In general, the possibility of the rebate being considered plan assets arises in two situations:
- If the plan or a trust is the policyholder, then the entire rebate will be considered plan assets. Note: For most single employer insured plans, this will not be the case.
- If the employer is the policyholder and at least a portion of the premiums for the insurance are paid from plan assets (e.g., employee contributions), then all or a portion of the rebate will be considered plan assets, unless the plan documentation clearly provides that such rebates belong to the employer. Note: For most single employer insured plans, the necessary plan documentation will be absent. The portion of the rebate requiring treatment as plan assets depends on the manner in which the premiums for the coverage were initially paid. For example, if the employer pays 70% of the premium cost out of its general assets and the employee pays 30% of the premium cost, that ratio will be reflected in identifying how much of the rebate constitutes plan assets.
With respect to the portion of the rebate considered plan assets, the guidance reminds employers that decisions regarding how to apply or expend the plan assets are subject to ERISA’s standards of fiduciary conduct. Such fiduciary standards include using the portion of the rebate that constitutes plan assets for the exclusive benefit of the plan participants (and their beneficiaries) and/or to defray reasonable expenses of administering the plan.
Keep in mind, ERISA generally requires plan assets be held in trust. For plans receiving rebates that constitute plan assets, the guidance contains relief from the trust requirement in certain situations. In other words, the guidance provides an exception to the general trust rule where the plan has not previously established a trust in reliance on Technical Release 92-01 (available here http://www.dol.gov/ebsa/newsroom/tr92-01.html). In that situation, receiving a rebate that constitutes plan assets does not necessarily trigger a trust requirement. Provided certain requirements are met, the protection of Technical Release 92-01 extends to the rebate amounts. However, where the plan does not have a trust but should have one (i.e., is not covered by Technical Release 92-01), receiving a rebate that constitutes plan assets adds to the already present problem of having no trust where a trust is required. This might be a good time to check your plan for compliance with Technical Release 92-01.
If you receive an MLR rebate (or think you might receive one) and need assistance determining whether all or a portion of the rebate must be treated as ERISA plan assets and/or ensuring the rebate does not need to be held in trust, please contact us. In addition, if you would like assistance in reviewing your current plan operations regarding compliance with Technical Release 92-01, please contact us.
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The information contained in this ALERT is intended for general information purposes only and does not constitute legal advice relative to a specific situation.