The Patient Protection and Affordable Care Act (ACA) established medical loss ratio (MLR) standards for insurance carriers. These standards require that insurance carriers spend at least a certain percentage of their premiums received for incurred claims and expenditures to improve health care quality. If an insurance carrier’s MLR falls below a minimum required ratio (80 percent for individual and small group market, 85 percent for large group market), then the carrier is required to pay rebates to policyholders.
According to the U.S. Department of Health and Human Services, insurance companies will provide more than $1.1 billion in rebates this year. These rebates must be issued to policyholders no later than August 1, 2012. With this deadline fast approaching, many sponsors of group health plans may be receiving a rebate check.
These rebates have important implications for sponsors of ERISA group health plans because the refunds will be subject to ERISA’s fiduciary duties to the extent such refunds constitute plan assets.
Plan Asset Status of MLR Rebate
Under guidance recently issued by the U.S. Department of Labor (DOL), MLR rebates will constitute plan assets if the plan has a “beneficial interest in the distribution under ordinary notions of property rights”. Although this standard is somewhat vague, DOL Technical Release 2011-04 contains specific examples of when MLR rebates will (and will not) be considered plan assets.
Plan as policyholder. If the plan (or its corresponding trust) is the policyholder, the policy is considered a plan asset and, in the absence of specific plan or policy language to the contrary, the entire rebate will be considered plan assets.
Plan sponsor as policyholder. The mere fact that the employer is the policyholder does not necessarily mean that the employer gets to keep the MLR rebate. Rather, the insurance policy and contract, together with other instruments governing the plan, must be reviewed to determine whether they can fairly be read (in conjunction with the parties’ understandings and representations made to employees) to provide that some part or all of the rebate belongs to the plan sponsor. If so, then that language will generally govern, and the plan sponsor may retain the rebate. Regardless, in no event may a plan sponsor receive a rebate greater than the total amount of premiums and other plan expenses paid by the plan sponsor. To the extent the refund exceeds this amount, such excess will be considered ERISA plan assets.
On the other hand, if the documents governing the plan do not provide a method for allocating the MLR rebate, the plan sponsor can look to the source of the premium payment to determine who is entitled to the MLR rebate. The entire MLR rebate is considered plan assets if premiums are paid entirely out of plan assets (e.g., the premiums are paid from a trust that was established in connection with the plan). However, if premiums are paid out of the plan sponsor’s general assets (including salary reduction contributions and after-tax contributions by participants), the portion of the rebate attributable to participant contributions is plan assets. To determine the portion of the rebate that is attributable to employer versus employee contributions, the following rules apply:
- Plan sponsor pays 100 percent of premiums: Entire MLR rebate goes to plan sponsor.
- Participants pay 100 percent of premiums: Entire MLR rebate constitutes plan assets.
- Plan sponsor and participants each pay fixed percentage of premium cost: A percentage of the MLR rebate equal to the percentage of the premiums paid by participants (for the relevant year for which the rebate was generated) will be considered plan assets.
- Plan sponsor pays fixed amount and participants pay any additional costs: The portion of the rebate equal to the participants’ total amount of prior contributions during the relevant period is plan assets; the remainder goes to the plan sponsor.
- Participants pay fixed amount and plan sponsor pays any additional costs: The portion of the rebate equal to the plan sponsor’s total amount of prior contributions during the relevant period goes to the plan sponsor; the remainder is considered plan assets.
Use of MLR Rebates That Constitute Plan Assets
With respect to plans that are exempt from ERISA’s trust requirements (e.g., group health plans pursuant to which contributions are funded through a Code section 125 cafeteria plan), the MLR rebates that are considered ERISA plan assets must be used within three months of receipt to reduce participant premium payments or as a cash rebate to participants.
When determining the manner of allocating the MLR rebate among participants, and whether the rebate is to be applied as a premium reduction or paid out, a plan sponsor will be acting in a fiduciary capacity. This requires that the plan sponsor act prudently, impartially, solely in the interest of participants and beneficiaries, and in accordance with the terms of the plan. Most plans will be silent regarding the use of rebates.
An allocation does not fail to be impartial or “solely in the interest of participants” merely because it does not exactly reflect the premium activity of individual participants. In determining how the MLR refund should be allocated to participants, the plan sponsor may weigh the costs to the plan and ultimate plan benefit as well as competing interests of participants (or classes of participants), provided that such method is reasonable, fair, and objective.
For example, if the cost of distributing the MLR rebate to former participants approximates the amount of proceeds, then the plan sponsor may decide to allocate proceeds to current participants based upon a reasonable, fair, and objective allocation method. Similarly, if distributing the rebate as payments to participants is not cost-effective (either because the payment amounts are de minimis or would give rise to tax consequences to plan participants), then the plan sponsor may use the rebate for other permissible plan purposes (such as applying the rebate toward future participant premium payments).
If the plan provides benefits under multiple policies, the rebate should be allocated to participants and beneficiaries covered by the policy to which the rebate relates, provided that doing so is prudent and solely in the interests of the plan. However, it is important to remember that plan sponsors cannot use the rebate generated by one plan to benefit participants of another plan (this would violate ERISA’s duty of loyalty).
Plan Sponsor Action
Step 1: Determine the portion of the MLR rebate that constitutes ERISA plan assets. As mentioned above, this is a fact-specific inquiry requiring review of insurance policies and other documents governing the plan to determine whether they address the use of rebates. If the plan’s terms contain a method for allocating MLR rebates, those terms generally govern. However, if the documents are silent or ambiguous on this point, the MLR rebates should be allocated based on the source of premium payments.
Step 2: Allocate rebate to participants. To determine the appropriate method of allocation, the plan sponsor should weigh costs to the plan, the ultimate plan benefit, and competing interests of participants, and allocate the rebate in a manner that is reasonable, fair, and objective. For plans that are exempt from ERISA’s trust rules, the premium rebates must be used within three months to either reduce participant premium payments or provide a cash refund to participants.
Step 3: Amend plan document. Plan sponsors may want to consider amending their health plan documents and SPDs to address how the plan assets portion of MLR rebates will be determined. Although not clear, we believe such an amendment could have prospective application only. For example, the plan document could be amended to provide that any rebates or refunds for future plan years from an insurer shall be treated first as a return of employer-paid premiums (to the extent permitted by law). Please note, however, that insurance carriers are required to send a notice to plan participants explaining the MLR rebate that may create an expectation by participants that they receive some sort of refund.