Now that the rubber has met the road, many employers are seeking guidance on how to allocate and distribute their MLR rebates.
As a refresher, The Affordable Care Act mandated that insurers must provide rebates to fully insured policyholders if their MLR (defined as the percentage of premium revenue spent on claims and medical care), is less than 85% (large groups) or 80% (small groups or individuals). If you are one of the employers receiving a check, you are now responsible for the allocation and distribution of those funds.
There are a few simple steps that are necessary to take when deciding what you need to do with the rebate:
Step 1: Review Your Plan Description
You must take a look at your policy or summary plan description to see if it specifically defines what must be done if a rebate is generated. Although this language is not likely to be spelled out, it is important to check.
Step 2: Is the Rebate a Plan Asset?
If you find that there is no guidance in your plan document, you need to determine if the rebate is considered to be a plan asset. This specifically applies to ERISA plans, so if you have a non-ERISA plan (i.e. a non-federal governmental plan) this does not apply to you. We’ll touch on your guidelines later. For ERISA plans, generally, if the policy is issued to a trustee, issued to a group health plan rather than directly to the employer, is paid for by a trust, or if the plan is paid for entirely by the employees, the entire rebate is determined to be a plan asset. If the answer to any of the above questions is yes, you must use the whole rebate to benefit the plan participants. If the plan is paid for by both employer and employees, then only the portion that is attributable to the employee’s contribution must be considered a plan asset and distributed.
Step 3: Rebate Allocation
Now that you have determined if the rebate is a plan asset and must be distributed, let’s discuss methods of allocating the distribution. If the entire premium is paid for by the plan participants or employees, the entire rebate belongs to the plan participants and must be used for their benefit. If the participants pay for a percentage of the coverage, then the rebate should be allocated based on that same percentage, i.e., if employees pay 20% of the premium, and the rebate is $1,000, then $200 (20% of $1,000) must be used for the benefit of the employees. As the plan fiduciary, you have the opportunity to get as specific and detailed as you would like with the allocations based on enrollment status (single versus family), however, it is acceptable to use an average as long as it is done in a fair and reasonable manner. If the employer has multiple policies, and the rebate was generated by a particular policy, it is important that they use the rebate to benefit the participants of that specific policy. One question that seems to arise consistently is whether or not to distribute the rebate to participants who are no longer on the plan, but were on in the time period when the rebate was produced. Guidance seems to say that it is up to the plan fiduciary to decide whether or not to benefit current and/or prior participants, but it would be considered reasonable to take either route. The fiduciary may determine that the cost of distributing the rebates to prior participants would outweigh the benefit, and they may use those funds to benefit the current participants of the plan.
Step 4: Rebate Distribution
The law states that rebates must be distributed within 90 days of receipt, or else they must be held in a trust. That begs the question, how do you distribute the funds? The Department of Labor (DOL) guidance seems to suggest a few different options, and any one is appropriate as long as it is prudent and reasonable. One option is to give a “premium holiday” or to temporarily reduce the participants’ current plan contribution. Another is to distribute it via a check or additional income through payroll. Just keep in mind that there are tax implications to be considered in either scenario. If the premium that was used to pay for the coverage originally was pre-tax, the rebate must be taxed, and vice versa. It is important to consult your accountant in any circumstance to determine the tax implications. Guidance also suggests that the rebate may be used to provide benefit enhancements to the plan, such as health improvement programs that would benefit all participants.
What about Non-Federal Governmental Plans?
For non-federal governmental plans, there are separate rules that apply since ERISA does not apply. The Public Health Service Act provides specific guidance on the distribution of rebates for non-federal governmental plans. The rebates should be distributed one of the following ways, the key differentiation being that they do not need to distribute to participants who are no longer on the plan. They may use the funds:
- To reduce the participant’s portion of premium for the subsequent policy year, for all subscribers covered (at the time the rebate is received) under any option offered under the policyholder's group health plan;
- To reduce the participant’s portion of premium for the subsequent policy year, for only those covered (at the time the rebate is received) under the group health plan option for which the issuer is providing the rebate; or
- As a cash refund to participants enrolled in the group health plan option (at the time the rebate is received) for which the issuer is providing a rebate.
Non-federal governmental plans may distribute the rebates either evenly among all employees, based on each participant’s actual contribution percentage, or in a manner that reasonably reflects each participants’ contribution to premiums (i.e. weighted based on coverage election).
There is a ton of grey area in which the fiduciary must make the decision to allocate and distribute these funds. There will be many circumstances and one-off situations that require further technical guidance, and in these situations, I would strongly advise that you seek the assistance of a qualified attorney or accountant.
In the end, I think it is important to step back and remember that these dollars are a refund of an overpayment in premium. They should be handled in the most prudent, fair and reasonable manner to benefit the people enrolled in the plan for which they were generated. It is important to remember that the method must be fair and reasonable, and as equitable as possible. No one method is going to solve for every single circumstance and that is okay, as long as the method is well documented and consistent.