August 1, 2012
The Affordable Care Act’s medical loss ratio (MLR) rules mandate that health insurance carriers report how they spend their premium revenue to the Department of Health and Human Services (HHS). In addition, carriers that do not spend at least 80 percent (small group) or 85 percent (large group) of their premium revenue on reimbursement for clinical services and health care quality improvement must provide rebates to consumers beginning in 2012.
The MLR requirements, which are enforced by the Department of Health and Human Services (HHS) require rebates be paid by August 1 following the end of the MLR reporting year. Thus, carriers are required to pay rebates by Aug. 1, 2012, based on their 2011 MLRs.
Beginning in 2011, carriers (insurance companies) will have to report the following information in each State it does business. These reports will be posted publicly by HHS so residents of every State will have information on the value of health plans offered by different insurance companies in their State.
Policyholders (Employers) who received an MLR rebate need to carefully review the MLR rebate rules to decide how they will administer the rebates. If your carrier met the MLR, you and yourr employees will receive notification directly from the carrier.
Carriers that fail to achieve the MLR threshold (and therefore spend more than 15% of premium dollars on things other than paying health insurance claims and quality activities) must pay the rebate.
How an employer should handle any MLR rebate it receives from a carrier depends on the type of group health plan (an ERISA plan, a non‐federal governmental group health plan or a non‐ERISA, non‐governmental plan) and whether the rebate is considered a plan asset.
Most, but not all, group health plans are governed by ERISA. Employers with ERISA plans should not assume that they can simply retain an MLR rebate. The Department of Labor (DOL) issued Technical Release 2011‐4 to explain how ERISA’s fiduciary duty and plan asset rules apply to MLR rebates. Any rebate amount that qualifies as a plan asset under ERISA must be used for the exclusive benefit of the plan’s participants and beneficiaries.
The rules offered in Technical Release 2011‐04 are simple enough to follow with respect to current plan participants. But to what extent must former participants share in any rebate? (After all, the rebate paid in the current year will be attributable to plan operations and premiums paid in the prior year.) In that case, the technical release allows an employer to determine whether the cost of distributing shares of a rebate to former participants would outweigh the benefit of the distribution. Specifically, if the cost of making distributions to former participants would equal or exceed the amount to be distributed, a plan fiduciary may use the “de minimis” rules for a participant allocation of less than $20 to decide to allocate the proceeds solely to current participants based on a fair and objective allocation method.
Is the Rebate a Plan Asset?
According to Technical Release 2011‐4, in the absence of specific plan or policy language addressing these types of distributions, whether the rebate will constitute a plan asset depends, in part, on the identity of the policyholder and on the source of premium payments.
How Should the Rebate be Used?
Once an employer determines that all or a portion of an MLR rebate is a plan asset, it must decide how to use the rebate for the exclusive benefit of the plan’s participants and beneficiaries. DOL Technical Release 2011‐04 identifies the following methods for applying the rebates:
If a plan provides benefits under multiple policies, the employer must be careful to allocate the rebate for a particular policy only to the participants who were covered by that policy. According to the DOL, using a rebate generated by one plan to benefit another plan’s participants would be a breach of fiduciary duty.
To the extent a rebate qualifies as a plan asset, ERISA would generally require the amount to be held in trust. However, most group health plans receiving rebates do not maintain trusts because their premiums are paid from the employer’s general assets (including employee payroll deductions). In Technical Release 2011‐4, the DOL provides relief from the trust requirement for premium rebates that are used within three months of their receipt.
In addition, directing an carrier to apply the rebate toward future participant premium payments or toward benefit enhancements adopted by the plan sponsor would avoid the need for a trust and, in some circumstances, may be consistent with the employer’s fiduciary duties. Employers that decide to take this approach should coordinate with their insurance carriers to establish the process for handling rebates.
Non‐federal Governmental Plans
Group health plans maintained by non‐federal government employers (for example, state and local governments) are not governed by ERISA’s fiduciary standards. HHS’ interim final regulations on the MLR rules address how rebates for these plans should be handled.
Under these regulations, employers must use the portion of the rebate attributable to the amount of premium paid by employees for the benefit of its employees covered under the policy. This portion of the rebate must be applied to reduce employees’ premiums or must be provided to these employees as a cash refund. Under either option, the rebate may be applied to employees enrolled during the year in which the rebate is paid, rather than during the MLR reporting year.
Non‐ERISA, Non‐governmental Plans
HHS has also addressed rebates for non‐governmental group health plans that are not subject to ERISA, such as church plans. Under HHS final regulations, an carrier may make a rebate payment to the policyholder (typically, the employer sponsoring the plan) if it receives the policyholder’s written assurance that the rebate will be used for the benefit of current subscribers using one of the options described above for non‐federal governmental plans. Without this written assurance, carriers must pay the rebate directly to employees covered under the policy during the MLR reporting year.
On April 19, 2012, the Internal Revenue Service (IRS) issued a set of frequently asked questions (FAQs) (http://www.irs.gov/newsroom/article/0,,id=256167,00.html) addressing the tax treatment of MLR rebates. In general, the rebates’ tax consequences depend on whether employees paid their premiums on an after‐tax or a pre‐tax basis.
After‐tax Premium Payments
If premiums were paid by employees on an after‐tax basis, the rebate will generally not be taxable income to employees and will not be subject to employment taxes. This tax treatment applies if the rebate is paid in cash or if it is applied to reduce current year premiums. However, if an employee deducted the premium payments on his or her prior year taxes, the rebate is taxable to the extent the employee received a tax benefit from the deduction.
Pre‐tax Premium Payments
If premiums were paid by employees on a pre‐tax basis under a cafeteria plan, the rebate will generally be taxable income to employees in the current year and will be subject to employment taxes. This is the case whether the rebate is paid in cash or is applied to reduce current year premiums. A premium reduction in the current year will reduce the amount that an employee can contribute on a pre‐tax basis. Thus, there is a corresponding increase in the employee’s taxable salary that is also wages subject to employment taxes.
DOL Technical Release 2011‐4 is available at: www.dol.gov/ebsa/newsroom/tr11‐04.html
IRS’ FAQS is available at: www.irs.gov/newsroom/article/0,,id=256167,00.html
MLR guidance is available from HHS at: http://cciio.cms.gov/programs/marketreforms/mlr/index.html
Health Plan met the 2011 MLR Standard: www.healthcare.gov
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