On March 23, 2010, the Patient Protection and Affordable Care Act (“PPACA”) added Section 2718 to the Public Health Services Act (“PHSA”). The new section requires health insurance companies to submit an earned premium and expenditure report to the Department of Health and Human Services and comply with specific medical loss ratios (80% for employers with less than 100 employees and 85% for employers with more than 100 employees). The first report was due on June 1, 2012. If an insurance company’s spending on reimbursement for clinical services, activities to improve health care quality and other non-claims costs fail to meet the required percentages (80% or 85%), the insurance company is required to refund part of the premiums received to policyholders. The amount of the refund is based on aggregate market data in each state and not upon any particular employer’s individual experience. As a result of this PPACA mandate, some employers will receive a premium refund from their group medical insurance carrier no later than August 1, 2012.
What can employers do with the refund? Generally, if the employer paid the entire cost of the medical insurance coverage for employees and their dependents, then the full premium refund belongs to the employee contributions will likely be considered a plan asset under ERISA. Because a portion of the premium refund is a plan asset and because plan fiduciaries must always act prudently and “solely in the interest of the plan participants and beneficiaries,” all employers (who require employees to contribute to the cost of their coverage) must determine how to allocate these refunds for the benefit of the participants. The decision on how to allocate the premiums is considered a fiduciary act under ERISA.
Generally, employers can apply the refund to reduce future employee premium payments or apply it towards benefit enhancements. However, to avoid the requirement to hold the premium refund in trust, the refund should be allocated within 90 days of receipt. Because every situation is different (amount of refund, number of employees, etc.), please be sure to contact your relationship attorney with any questions.