Hey, I just got a rebate from my insurance company for my group health plan! Now what do I do with it?
Until recently, compliance issues associated with the medical loss ratio (MLR) provisions of the Affordable Care Act (ACA) were of little interest to sponsors of group health plans. This is because the MLR provisions, contained in new Section 2718 of the Public Health Service Act, (PHSA) are imposed on health insurance issuers only.1 In general, the MLR provisions require health insurance issuers to provide annual reports detailing premiums and expenses and, in addition, to provide rebates to enrollees if the relevant MLR threshold is not satisfied. Interim final regulations issued by the Department of Health and Human Services (HHS) in December 2010 (the “December 2010 regulations”) imposed no requirements on sponsors of fully insured group health plans—only insurers. The December 2010 regulations provided that if a rebate was payable with respect to a group health plan, the insurer was responsible for distributing the rebate, including dividing the rebate between the plan sponsor and plan participants based on the relative portion of the premium paid by each. In response to numerous comments on the practical problems with this approach, revised, final regulations issued in December of 2011 (the “MLR Final Regulations”) change that result and now task group health plan sponsors with determining how to distribute any rebate received.2 While the MLR Final Regulations are welcome news to insurers, they raise new questions for group health plan sponsors as to their obligations with respect to distribution of the rebate.
The first rebates are payable in August of this year; plan sponsors should decide how to handle any rebate before it is received in order to ensure compliance with the applicable rules, including ERISA’s fiduciary requirements for plans subject to ERISA.
This advisory discusses the obligations of plan sponsors receiving rebates. The applicable requirements differ based on the type of plan. Thus, this advisory separately addresses rules for plans subject to ERISA, state and local governmental plans, and church plans. Special rules for terminated plans are also discussed.
Timing of Rebates
Insurers are required to report and calculate their MLR for each calendar year. If any rebate is required, it must be paid by the subsequent August. Thus, the first rebates will be paid by August 2012 for the 2011 calendar year. The same timing applies for each subsequent year.
Employer Obligations with Respect to Rebates – In General
The MLR Final Regulations, together with guidance issued contemporaneously by HHS and the Department of Labor (DOL), address the obligations of plan sponsors regarding rebates. Different rules apply based on whether the plan:
- is subject to ERISA,
- is a state or local governmental plan subject to the PHSA,3 or
- is neither of the above (e.g., a church plan).
These categories reflect the different regulatory regimes that apply to each type of plan. Fiduciaries of plans subject to ERISA must comply with ERISA’s fiduciary requirements applicable to plan assets, as described in DOL guidance. State and local governmental plans are not subject to ERISA, but are subject to the enforcement authority of HHS under the PHSA. Thus, rules issued by HHS apply to such plans. Finally, certain plans, such as church plans, are subject neither to the enforcement authority of HHS, nor that of the DOL. In such cases, the final regulations describe how the insurer is to distribute the rebate.
Group Health Plans Subject to ERISA
The Final MLR Regulations provide that, in the case of a plan that is subject to ERISA, the insurer is to pay the rebate to the policyholder. In most cases, the policyholder will be the employer sponsoring the plan.4 To the extent that a rebate is comprised in whole or partly of plan assets, the rebate must be handled in accordance with ERISA’s fiduciary requirements. DOL Technical Release 2011-04 (the “DOL Technical Release”)5 provides guidance with respect to distribution of rebates. The guidance does not contain specific rules as to permitted methods of distribution; rather, the release discusses ERISA’s general fiduciary standards based on prior guidance and how the guidance may apply in the context of MLR rebates.
Is the rebate a “plan asset”?
The first step in determining how rebates must be handled is to determine whether all or any portion of the rebate constitutes plan assets; if so, then the portion of the rebate that is plan assets must be handled in accordance with ERISA’s fiduciary rules.
Practice Pointer: If the plan or the plans’ trust is the policyholder, then the entire amount of the rebate will generally be plan assets. If the employer is the policyholder, then the amount of the rebate that is considered plan assets will generally be based on the relative portion of the premium paid by the employer and plan participants.
If the plan or the plan trust is the policyholder, then the entire rebate is plan assets in the absence of specific plan language to the contrary. If the employer is the policyholder, and plan documents (along with other instruments governing the plan) can be fairly read to provide that some or all of the rebate belongs to the employer, then the plan language will generally govern, and the employer may retain the portion of the rebate as provided under the plan language. In this regard, the DOL is careful to caution that:
In the Department’s view, however, the fact that the employer is the policyholder or the owner of the policy would not, by itself, indicate that the employer may retain the distributions. In determining who is entitled to the distribution, one would need to carefully analyze the terms of the governing plan documents and the parties’ understandings and representations.
In many situations, however, plan documents will not adequately address the issue of disposition of rebates. In such cases, the DOL looks to the relative portion of the premium paid for by the employer and employees for the period that gave rise to the rebate, as follows.
Guidance for determining the portion that is plan assets in the absence of controlling plan language:
Click here to view table
Rebates payable in 2012 relate to calendar year 2011. Although the DOL Technical Release is not clear on this point, it appears that the relevant period for determining the employer and employee share of premiums is generally the 2011 calendar year, regardless of the plan year. For example, in the case of a plan year that is not a calendar year, if different employer/employee contribution rates were in effect for different parts of 2011, the employer may need to consider the different rates in determining what portion of a rebate is plan assets.
To the extent a rebate is plan assets, does the rebate have to be held in a trust until distributed?
ERISA generally requires that plan assets be held in trust. The DOL Technical Release describes two exceptions to this requirement that will be helpful for plan sponsors, recognizing that in many cases there is no trust maintained with respect to the group health plan.
First, the DOL Technical Release applies the same safe harbor to the trust requirement for rebates that currently applies with respect to cafeteria plan contributions and certain other contributory plans under Technical Release 92-01. Thus, if a trust is not established for the plan in reliance on Technical Release 92-01, then the rebate does not have to be held in trust if it is used within three months of receipt by the policyholder. Note that the DOL Technical Release specifically says that, under this safe harbor, the rebate must be used within three months “to pay premiums or refunds.” However, as discussed further below (under “To the extent a rebate constitutes plan assets, how can the rebate be used?”), rebates may be used for purposes other than payment of premiums or refunds. Thus, it is not clear whether the DOL meant to restrict the safe harbor to rebates used for payment of premiums or refunds, or whether these uses are illustrative. The latter would be more consistent with the DOL Technical Release as a whole. If a plan does have a trust, then this safe harbor does not apply.
Practice Pointer: If a plan currently does not have a trust in reliance on the safe harbor the DOL has provided for cafeteria plan contributions, then rebates that are plan assets do not have to be held in trust if the rebates are used within three months of receipt by the employer in accordance with DOL guidance.
Second, under ERISA statutory rules referenced in the DOL Technical Release, the trust requirement does not apply to plan assets that are held by an insurance company. Thus, if the plan does not have a trust, another possibility is to have the insurance company hold the rebate to the extent it constitutes plan assets, and then distribute the rebate as directed by the employer/plan fiduciary. This avoids the need to incur costs associated with a trust when one is not otherwise established under the plan.
In either case, however, ERISA’s fiduciary requirements would apply to the use of the rebate. The DOL Technical Release specifically states that such an approach may, depending on the circumstances, be consistent with fiduciary responsibilities.
To the extent a rebate constitutes plan assets, how can the rebate be used?
The DOL Technical Release does not contain specific rules or safe harbors regarding permitted uses of rebates that are plan assets. Rather, the DOL Technical Release restates general guidance on ERISA fiduciary principles, much of which is based on prior opinions regarding the distribution of demutualization proceeds. Thus, the method of allocation among plan participants and the particular use of the rebates (e.g., to reduce premiums, to make cash distributions or for other permitted plan purposes) is to be determined in accordance with ERISA’s general prudence standard. The plan fiduciary should take into account relative costs and benefits of different approaches. Based on the DOL Technical Release, as well as prior guidance, the following general principles emerge regarding the use of rebates that constitute plan assets:
- Rebates do not have to be precisely allocated among plan participants based upon their premium payments. The allocation method must be reasonable, fair and objective, and cannot benefit a plan fiduciary who is also a plan participant at the expense of other participants.
- Rebates may be allocated to current plan participants if the cost of allocating a portion of the rebate to former plan participants who were in the plan for the year to which the rebate relates is unreasonable. Thus, tracking down former participants to pay rebates is not necessarily required.
- Rebates are not required to be used in any particular way. Rather, rebates may be distributed in cash or may be used to reduce future premiums, enhance benefits or for any other permissible plan purposes, providing such use is consistent with fiduciary requirements. The amount of the rebate will be a significant factor in determining an appropriate use of the rebate. For example, administrative costs of reducing future premiums or distributing cash rebates are likely to be prohibitive in many cases. Thus, other uses are permissible. For example, depending on the circumstances, it may be appropriate to provide a wellness benefit under the plan or to use a rebate to offset plan costs that are not the obligation of the plan.
- If reasonable, rebates should be used for the participants covered by the policy to which the rebate relates. Similarly, if benefits are provided under multiple policies, the fiduciary should generally allocate the plan’s portion of the rebate for the benefit of participants who are covered by the policy to which the rebate relates. However, such an allocation is not required if the fiduciary determines that it is not prudent or in the best interests of plan participants. Thus, it may be prudent in some circumstances to use a rebate for all participants in a plan, not just those in the option that generated the rebate.
- In no event may the use of a rebate generated by one plan be used to benefit the participants in another plan.
State and Local Governmental Plans
As is the case with plans subject to ERISA, the Final MLR Regulations provide that the insurer is to pay any rebate due with respect to a plan of a state or local governmental employer to the policyholder. A contemporaneous, separate interim final rule issued by HHS specifies how the policyholder in such a case is to distribute the rebate.6 In contrast to the general guidance issued by the DOL with respect to plans subject to ERISA, the HHS guidance has specific rules regarding how the policyholder in the case of a state or local government plan is to distribute the rebate.
What portion of the rebate must be used by the policyholder to benefit plan participants?
The policyholder must use the amount of the rebate that is “proportionate” to the total amount of the premium paid by all subscribers under the policy, with respect to which the rebate is paid for the benefit of plan participants. The preamble provides a very simple example of how this is determined. If the rebate with respect to a policy is $20,000 and the policyholder paid 40 percent of the total premium, then the policyholder is required to use $8,000 of the rebate for the benefit of plan participants. While not explicitly stated, the proportionate share of the rebate appears to be based on the year for which the MLR rebate is paid, not the year in which the rebate is received. Thus, for example, for rebates that will be paid in August of 2012, the proportionate share appears to be determined for 2011. In practice, determining the proportionate share may require more detailed calculations, for example, because MLR rebates are based on the calendar year, whereas the employee share of the premium may vary based on the plan year.
What are the permitted means of using the participants’ portion of a rebate?
There are three different permissible distribution methods with respect to the portion of a rebate that is attributable to participants. The policyholder may choose any one of these three methods with respect to a particular rebate. In all cases, the rebate is used to benefit current participants—meaning those covered at the time the rebate is received—so there is no need to track former participants who were in the plan in the year to which the rebate relates.
The policyholder may decide to distribute the participants’ portion of a rebate in any one of the following ways:
- to reduce premiums for the subsequent plan year for all participants in the plan (regardless of whether the participant is covered under the option that generated the rebate);
- to reduce premiums for the subsequent policy year only for those participants who are in the plan option that generated the rebate; or
- to pay cash refunds to participants enrolled in the group health plan option that generated the rebate.
HHS provides options for how the policyholder may divide the participants’ share among different participant groups. At the option of the policyholder, the rebate may be divided evenly among plan participants (e.g., on a per capita basis), divided based on each participant’s actual contributions to the premium or apportioned in a manner that reasonably reflects each participant’s contributions to the premium.
The portion of a rebate that is attributable to former participants’ contributions must be used for the benefit of current plan participants.
Plans That Are Not Governmental Plans and Not Subject to ERISA (e.g., Church Plans)
Group health plans that are church plans are not subject to regulation by either DOL or HHS. HHS does, however, have enforcement authority with respect to a health insurer providing coverage under a church plan. Thus, because neither DOL nor HHS can direct church plans sponsors as to how to distribute any rebate, the regulations provide a different approach than with respect to other types of plans.
If the policyholder is a group health plan that is not a governmental plan and not subject to ERISA (e.g., a church plan), the insurer may pay rebates to the policyholder only if the insurer receives a written assurance from the policyholder that the rebates will be used to benefit participants in the manner provided with respect to state and local governmental plans. Otherwise, the insurer must distribute the rebate directly to the participants of the group health plan covered by the policy during the calendar year on which the rebate is based by dividing the entire rebate, including the amount proportionate to the amount of premium paid by the policyholder, in equal amounts to all subscribers entitled to a rebate without regard to how much each subscriber actually paid toward premiums. This structure provides an incentive for the policyholder to provide the required written assurance to the health insurance issuer, because without that assurance, the entire amount of the rebate will be paid to plan participants, even if the policyholder paid for any portion (including all of) the premium.
Special Rules for Terminated Plans
The MLR Final Regulations include a special rule for the payment of rebates in the case of a terminated group health plan when the policyholder cannot be located despite reasonable efforts. In such cases, regardless of the type of plan (e.g., whether it is subject to ERISA or not), the insurer must pay the entire amount of the rebate on a per capita basis to the former plan participants enrolled in the option that generated the rebate. Thus, all the persons in the plan option will receive the same rebate, regardless of the contributions they made to the plan.
The DOL Technical Guidance also discusses the fiduciary rules that apply in the event a rebate is distributed to a policyholder after a plan is terminated. The DOL’s position is that the policyholder must comply with ERISA’s fiduciary principles with respect to the rebate, including looking to the plan document to determine how plan assets are to be allocated upon plan termination. If the plan document does not provide direction, then the policyholder may need to determine if it is cost effective to distribute the plan’s portion of the rebate to the relevant former participants.
Notice Requirements for Insurers
The MLR Final Regulation requires insurers to provide notices to policyholders that receive rebates, as well as to the participants in the group plan option with respect to which the rebate is received. If the rebate relates to a plan subject to ERISA, the notice must include a statement that the policyholder may have additional obligations under ERISA regarding handling of the rebate and contact information for questions regarding the rebate. If the policyholder is a state or local governmental plan, the notice must include a statement that the portion of the rebate attributable to participant premiums must be used as provided in the HHS guidance. If the policyholder is a church plan, the notice must include either a statement that the policyholder has provided the written assurance regarding distribution of the rebate or that the insurer must distribute the rebate evenly to all enrollees. In all cases, the notice must also include the following information: a general description of the concept of an MLR; the purposes of setting an MLR standard; the applicable MLR standard; the insurer’s MLR; the insurer’s premium revenue; and the rebate percentage and the amount owed to enrollees.
The Internal Revenue Service (IRS) has not yet issued guidance with respect to the tax treatment of rebates for either employers or employees. However, the guidance issued by HHS indicates that one of the reasons for providing that rebates should be paid to the policyholder is to avoid possible tax consequences to employees. Presumably, rebates paid in cash to employees would be included in income where policy premiums were paid by the plan or by employees on a pre-tax basis. The IRS has indicated that it will provide guidance on tax issues at a later date.