July 26, 2012 – MLR REBATES: What to do with them

July 26, 2012 – MLR REBATES: What to do with them

THIS ALERT ADDRESSES INSURED GROUP HEALTH PLANS SUBJECT TO ERISA. 

IMPORTANT:  Insured group health plans that are not subject to ERISA (e.g., non-federal governmental plans, church plans) are not addressed in this Alert. For more information, see https://www.federalregister.gov/articles/2011/12/07/2011-31291/medical-loss-ratio-rebate-requirements-for-non-federal-governmental-plans. 

Under Health Care Reform, health insurance issuers (i.e., the carriers) must meet certain medical loss ratio (MLR) standards. In a nutshell, the MLR standards require a certain percentage of each premium dollar to be spent on “medical care.” If the issuer does not satisfy the MLR standard, it is required to provide rebates to its policyholders.  In most cases, the policyholder is the employer that sponsors the group health plan.

Note:  The MLR standards apply with respect to the group insurance policies used as part of an employer’s benefit plan.  Consequently, self-funded group health plans are not subject to the MLR requirement; there is no group health insurance policy. 

Note:  No special treatment is available for insured group health plans with grandfathered status.  The group insurance policies associated with grandfathered group health plans must also satisfy the MLR requirements.

Rebates are calculated based upon aggregate market data in the State; not upon a particular group’s experience.  Insurers are required to notify the policyholder and the persons covered under the policy that a rebate is being issued to the policyholder.  Once paid to the policyholder, it is the policyholder’s responsibility to decide what to do with them.  The mere fact that the check is delivered to the policyholder does not indicate the policyholder has unfettered discretion regarding use of the funds.

Observation:  Three months is not a particularly long period of time to determine what to do with MLR rebate proceeds and checks are already being issued to policyholders.

ERISA
The Department of Labor (DOL) has issued guidance, DOL Technical Release 2011-04, DOL Technical Release 2011-04 regarding MLR rebates for ERISA covered group health plans.  How the employer receiving the rebate must treat the rebate funds depends in part upon whether, and to what extent, the rebate proceeds are considered plan assets for purposes of ERISA.  The guidance provides assistance in determining (1) what portion of the rebate proceeds is plan assets; (2) how the rebate proceeds that are plan assets must be held upon receipt by the policyholder; and (3) how the rebate proceeds that are plan assets may be used.  In general, the guidance draws upon already established ERISA rules regarding plan assets.

Plan Assets
Regulations under ERISA generally define plan assets as including employee contributions regardless of whether the employee contributions were made on an after-tax or pre-tax basis (e.g., salary reduction through a cafeteria plan).  In addition, assets generated from plan assets are themselves plan assets.  

Based upon these principles, all or a portion of the MLR rebate may be plan assets.  Whether and to what extent the rebate proceeds are plan assets depends in part upon (1) existing plan language regarding the allocation of insurance refunds, rebates, etc., (2) who is the policyholder, and (3) who initially paid the premiums.

Plan Language
The receipt and use of the MLR rebate proceeds that are plan assets trigger fiduciary responsibilities. Rebates, refunds, etc. are not new to the insurance industry.  Almost by definition, they are plan assets because they are generated as the result of premium payments which were typically plan assets.   

However, the plan language may require that the rebate, refund, etc. be first allocated to the employer paid portion of the premium; the idea being that the employer paid portion was not plan assets, therefore, the amounts attributable to those non-plan assets are not plan assets and can be returned to the employer.  Following the plan language is a fiduciary duty.

Note:  Plan language varies.  Some plans already have language that specifies the allocation, other plans have language that defers to the DOL guidance, and some plans have no language.

Absent language to this effect, the receipt and use of the rebate, refund, etc. still remains a fiduciary function.  Where there is no plan language, or the plan language defers to DOL guidance, the recent guidance specifically addresses the MLR rebates.

Two key factors are who is the policyholder and who initially paid the premiums.

• If the plan or a trust is the policyholder, then the entire rebate will be considered plan assets.  For most single employer insured plans, this will not be the case. As mentioned above, the policyholder is probably the sponsoring employer; not the plan or trust.
• 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.

The portion of the rebate requiring treatment as plan assets depends on the manner in which the premiums for the coverage were initially paid:

• If all premiums are paid by employees, the entire rebate constitutes plan assets;
• If premiums are shared by fixed percentage (e.g., employer pays 70% of the premium cost out of its general assets and employees pay 30% of the premium cost), the ratio determines the amount of the rebate that constitutes plan assets;
• If the employer pays a fixed amount and the employees pay the remaining premium (e.g., employer pays $300 per month, employees pay the balance), the rebate constitutes plan assets up to the amount paid by employees; and
• If the employees pay a fixed amount and the employer pays the remaining premium (e.g., employees pay $300 per month, the employer pays the balance), the rebate constitutes plan assets only to the extent it exceeds the amount paid by the employer.

OVERRIDING RULE: Under no circumstances may the employer receive more than it originally paid in premiums and plan expenses in the MLR year. 

Identifying the portion of the MLR rebate proceeds does not end the inquiry.  Rather it identifies the proceeds that must be handled in accordance with the ERISA rules for plan assets.

Comment:  Nothing precludes an employer from forgoing an allocation and treating the entire rebate as plan assets.  This could be advantageous for public relations standpoint and also a time and effort (e.g., cost) standpoint.

Holding Plan Assets
Unless an exception to the trust requirement applies, ERISA requires plan assets be held in trust.  To the extent all or a portion of the MLR rebate proceeds are plan assets, they must be held in trust unless an exception applies. 

With respect to the portion of the MLR rebate that is plan assets, the guidance provides an exception to the trust requirement provided certain conditions are met.  If the group medical plan is otherwise subject to an exception from the trust requirement under DOL Technical Release 92-01 , then the rebate proceeds that are plan assets do not have to be held in trust provided they are used within three months.

DOL Technical Release 92-01
Technical Release 92-01 provides an exception to the trust requirement in two situations.  The most well known exception relates to a plan funded through a cafeteria plan.  Provided certain requirements are met (e.g., no segregation of employee contributions from the employer’s general assets until time of payment, etc.), the employee contributions (which are plan assets) are not required to be held in trust.  Where Technical Release 92-01 applies and, therefore, no trust is required, the guidance provides relief with respect to the MLR rebate proceeds that are plan assets.  A plan in this situation does not have to establish a trust because of the rebate proceeds provided those proceeds are used within three months.

Note:  Where the plan does not have a trust but should have one (i.e., does not satisfy the requirements of 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.   

Technical Release 92-01 also provides an exception to the trust requirement where no cafeteria plan is involved (i.e., where employee contributions are made with after-tax dollars).  For these other types of contributory plans (i.e., plans requiring employee contributions other than on a pre-tax basis through a cafeteria plan), Technical Release 92-01 provides relief where all or a portion of the premiums for insurance are withheld from pay on an after-tax basis and then promptly forwarded to the insurance carrier.  A plan in this situation does not have to establish a trust because of the rebate proceeds provided those proceeds are used within three months.

Caution:  If the situation does not fall within the relief described in the guidance (which incorporates Technical Release 92-01), the rebate proceeds that are plan assets must be held in trust.  That is a very expensive proposition.  Employers are encouraged to bring their plans and practices within the scope of the guidance.

Use of Plan Assets
In general, fiduciaries are prohibited from dealing with plan assets to benefit their own interests.  The policyholder with possession of the MLR rebate proceeds is a fiduciary to the extent the proceeds are plan assets.  Unlike the trust requirement discussed above, no exceptions to this rule exist. 
The guidance reminds employers that decisions regarding how to apply or spend plan assets (including the portion of the MLR rebate constituting plan assets) are subject to ERISA’s standards of fiduciary conduct.  Such fiduciary standards include the requirement to use 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.

Based upon already established ERISA principles, the guidance essentially provides employers with four options:

• Reduce future premiums for current participants;
• Enhance benefits provided to participants;
• Pay reasonable plan expenses; or
• Distribute rebates to current (and, if desired, former) participants.

Note:  Distributing the rebates to participants raises tax issues that should be considered before choosing that option.  The IRS has issued separate guidance regarding the tax consequences (available  here).

To Do Items:

• Identify plans (and the insurance policies) that may result in a rebate.
• Contact (or look for correspondence from) the carriers.
• Decide whether to allocate the rebate between the employer and participants.  Remember:  There is no requirement that the employer allocate a portion to itself.  The entire rebate can be treated as plan assets.
• Decide how to use the plan assets (e.g., consider plan language, consider options available under the guidance, etc.).
• Use the plan assets within three months of original receipt of the rebate proceeds.

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, please contact us.  In addition, if you would like assistance in reviewing your current plan operations regarding general 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.