United States: Year Two Of Medical Loss Ratio Rebates: Five Tips For Insured ERISA Health Plan Sponsors

The Affordable Care Act's medical loss ratio ("MLR") rule requires health insurance companies (but not self-insured plans) in the group or individual market to provide an annual rebate to enrollees if the insurer's MLR falls below a certain minimum level. Generally, this means that health insurance companies in the individual and small group markets must spend at least 80 percent of the premium dollars they collect on medical care and quality improvement activities, and health insurance companies in the large group market must spend at least 85 percent of premium dollars on medical care and quality improvement activities.¹

Health insurers that failed to meet the MLR standards for 2011 were first required to pay rebates in 2012. Health insurers that failed to meet the MLR standards for 2012 were required to pay rebates by August 1, 2013² In addition, health insurers were required to send notice to group policyholders and to all employees who participated in affected plans during 2012 informing them of any rebates.

To help clarify the rules on how rebates are treated under the Employee Retirement Income Security Act of 1974 ("ERISA"), the U.S. Department of Labor ("DOL") issued Technical Release 2011-04 ("TR 2011-04"). Plan sponsors maintaining fully-insured ERISA-covered group health plans (and plan fiduciaries) should keep these rules in mind as they consider their options for managing any MLR rebates.

Here are five tips to consider in the decision-making process.

Do Not Assume You Can Use The Entire MLR Rebate For Corporate Purposes

TR 2011-04 clarifies that insurers must provide any rebates to the "policyholder" of an ERISA plan. Any rebates paid to an ERISA-governed plan may become plan assets, subjecting the policyholder and plan sponsor to special obligations concerning the treatment of the rebates (as explained further below). If the rebates are plan assets, then any individual who has control over the rebates (including a plan sponsor) is a "fiduciary" under ERISA and must act accordingly.

In situations where a plan or its trust is the policyholder (which is typically not the case for ERISA-covered group health plans), the DOL's position is that MLR rebates are generally plan assets and the plan sponsor may not retain any of the rebates.

Where the employer is the policyholder (the more typical case for an ERISA-governed group health plan), the employer may, under certain circumstances, retain some or all of the MLR rebates. In these situations, the DOL will look to the terms of the documents governing the plan, including the insurance policy. If the governing documents are unclear, then the DOL will take into consideration the source of funding for the insurance premium payments. Under this analysis, the amount of a rebate that is not a plan asset (and that the employer may therefore retain) is generally proportional to the amount that the employer contributed to the cost of insurance coverage. For example, if an employer and its employees each pay a fixed percentage of the cost (e.g., employer pays 80% of the premium; employees pay 20% of the premium), a percentage of the MLR rebate equal to the percentage of participants' cost (i.e., 20% in the example) would be attributable to participant contributions and would be plan assets. Based on this guidance, some employers amended their plans last year to clarify how premiums are divided between employer and participants.

Determine The Population That Will Receive An Allocation Of The Rebates And Pick A Reasonable, Fair And Objective Allocation Method

Any MLR rebates that are considered plan assets must be handled according to ERISA's general standards of fiduciary conduct. ERISA's prohibited transaction and exclusive benefit rules require that plan assets be used solely for the benefit of participants and beneficiaries (or to defray reasonable plan administrative expenses). As long as the plan fiduciary (e.g., the plan sponsor) adheres to these standards, it has some discretion when deciding to whom the rebate should be allocated.

As a general rule, TR 2011-04 states that the MLR rebate should be provided to individuals who were enrolled in the plan during the determination period (for the recently issued rebates that would be the 2012 calendar year). However, TR 2011-04 provides that if a plan fiduciary finds that the cost of distributing shares of the MLR rebate to former participants approximates the amount of the proceeds, the fiduciary may decide to distribute the portion of the MLR rebate attributable to employee contributions to current participants using a "reasonable, fair, and objective" method of allocation. The administratively easiest method may simply be to divide the employee portion of the rebate by the number of recipients. However, a fiduciary may decide to apply a more rigorous methodology (e.g., prorate the rebate by the number of months of participation in 2012, "weight" the rebate to account for greater employee contributions for family tiers, etc.) as long as it is impartial and in the best interest of participants.

TR 2011-04 also provides that if a plan has multiple benefit options, the MLR rebate that constitutes plan assets and is attributable to one benefit option cannot be used to benefit enrollees in another benefit option.

Consider Tax Consequences When Deciding How To Use MLR Rebates

As explained above, the MLR rules require insurers of group health plans to pay rebates directly to the policyholder. The policyholder is then responsible for ensuring that employees covered by ERISA group health plans benefit from the rebates to the extent they contributed to the cost of coverage. Once a plan fiduciary decides who will receive MLR rebates attributable to plan assets, it must then determine the form and tax consequences of the distribution.

Last updated in March 2013, the Internal Revenue Service (IRS) issued a set of frequently asked questions at http://www.irs.gov/uac/Medical-Loss-Ratio-(MLR)-FAQs addressing the tax treatment of MLR rebates. The rebates' tax consequences largely depend on whether employees paid their premiums on an after-tax or a pre-tax basis. Generally, when employees contribute to the cost of coverage on a pre-tax basis, MLR rebates should be returned to employees in the form of a premium reduction or a cash payment, both of which are treated the same way for tax purposes. For example, if an employee's pre-tax premium contribution is $100 per month, and the employee receives a $10 premium reduction that month, the pre-tax contribution will be reduced to $90 and the remaining $10 would be wages not reduced from the employee's pay and would be included in income and subject to taxes and withholding. Likewise, if the $10 rebate was treated as a direct cash payment, it would also be included in income and subject to taxes and withholding. However, if the employee portion of the premium is paid by the employee on an after-tax basis, MLR rebates that are distributed as a reduction of future premiums or cash will not be subject to federal income tax (unless the employee deducted the premiums to which to the rebates relate on the employee's tax return).

If distributing cash payments to participants is not cost-effective (e.g., the payments would be de minimis amounts, or would have tax consequences for participants), the fiduciary may apply the MLR rebate toward a benefit enhancements.

Use The MLR Rebates That Are Plan Assets Within Three Months Of Receipt

Under ERISA, plan assets generally must be held in trust until appropriately expended (or they could be sent to an insurer to provide benefits). In reliance on Technical Release 92-01 ("TR 92-01"), many group health plans receiving MLR rebates do not maintain trusts because they are insured plans where premiums are paid by the employer (including employee payroll deductions) directly to the insurer and all benefits are paid by the insurers.

In TR 2011-04, the DOL provides that prior relief under TR 92-01 applies to MLR rebates that are plan assets, and the DOL will not assert a violation of ERISA's trust requirement against plans receiving MLR rebates that do not otherwise maintain a trust so long as such rebates are used within three months of receipt by the policyholder to provide refunds or pay premiums.

Establishing a trust is an administratively cumbersome task. Employers wishing to avoid the need for a trust to hold MLR rebates that are plan assets should consider disposing of such rebates quickly upon receipt as provided in TR 2011-04.

Document Any Decisions Regarding How MLR Rebates Were Used

The determination of whether the MLR rebates constitute "plan assets" (such that employees are entitled to a share) and how and to whom that portion should be allocated is a fiduciary function that may be subject to the DOL's scrutiny on audit or a challenge by a participant. Thus, plan sponsors should document their treatment of the MLR rebates (e.g., how the recipient population was determined, why a certain allocation method was selected, and the time and form of the rebate distribution) and, as appropriate, amend any written plan document and summary plan description to reflect the decisions made. Lastly, while plan participants will receive general information from the health insurers about the MLR rebates, the plan sponsor should notify participants of the decisions made with respect to the use and allocation of those rebates.

Proskauer's Perspective

TR 2011-04 contains many helpful rules and clear constraints as to how MLR rebates may be used by fully-insured ERISA group health plans. Nevertheless, there are still many decisions that plan sponsors and fiduciaries have to make to ensure that they are acting prudently and impartially and for the exclusive benefit of plan participants and beneficiaries.

Footnotes

1. The large group market is generally defined as employers who employ 101 or more employees; although, in some states, it is defined by state insurance law as employers who employ 51 or more employees.

2. On March 1, 2013, the Department of Health and Human Services (HHS) issued a final rule that amends the MLR rule. HHS adjusted the MLR calculation to include premium stabilization amounts, a change HHS stated will improve accuracy. In future years, the final rule extends the annual MLR reporting deadline from June 1 to July 31 and the rebate disbursement deadline from August 1 to September 30, effective for the 2014 MLR reporting year, to allow the deadlines to be after all the premium stabilization payments and receipt amounts are determined.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.