June 12, 2020
The COVID-19 pandemic has significantly decreased health care utilization as health care providers and patients have canceled appointments and postponed elective procedures. Because employees have not been using their insurance benefits, some group medical, dental and vision carriers are providing employers with a credit against future premiums owed under their insurance contracts.
Employers receiving these premium credits and who sponsor ERISA plans should consider their fiduciary obligations under ERISA when determining how to apply the credits. Any credit amount that qualifies as a plan asset under ERISA must be used for the exclusive benefit of the plan’s participants.
In addition, ERISA’s fiduciary duty rules prohibit employers from retaining employees’ payroll deductions for plan premiums. Employee contributions are always considered plan assets that are subject to ERISA’s exclusive benefit rule. These contributions can only be used for plan purposes. These contributions must be used for paying plan benefits and expenses, and not for the employer’s own purposes. To comply with ERISA, employee contribution amounts must be forwarded to the carrier within 90 days or placed in a trust account.
The Department of Labor (DOL) has previously addressed how ERISA’s fiduciary rules apply to medical loss ratio (MLR) rebates that employers receive from their carriers. While the premium credits are not the same as MLR rebates (for example, the credits are applied to future premium obligations and not actually paid out to the employer), the same general fiduciary rules should apply to both situations.
Guidance on MLR rebates generally indicates that employers must share the premium savings with plan participants based on their plan’s contribution strategy. This means that, if the employer and participants both contribute to the premium cost, the premium credit should be shared with plan participants. For example, the credit could be shared with participants in the form of a premium holiday, reduced payroll deductions or benefit enhancements.
The DOL issued Technical Release 2011-4 (TR 2011-4) to explain how ERISA’s fiduciary duty and plan asset rules apply to MLR rebates. The following is a summary of these rules, made applicable to premium credits received, as the same principles would apply. Similar rules apply to non-federal governmental entities (see Interim Final Rule).
When you receive a credit, you must determine which plan or policy is covered by the credit. The issuer providing the credit should give this information to you.
Next, you must determine whether the credit, or any portion of the credit, is a plan asset under ERISA. This step is crucial because any credit amount that qualifies as a plan asset must be used for the exclusive benefit of the plan’s participants and beneficiaries. You, as the employer, cannot retain any portion of the credit that is a plan asset.
You should review your plan documents to see if there is any language regarding how to treat distributions (such as demutualization proceeds, refunds, dividends or rebates) from health insurance issuers. If your plan does not contain this type of specific language, whether the credit is a plan asset, in whole or part, will generally depend on the identity of the policyholder and source of premium payments.
Unless you pay the entire cost of health insurance without any employee contribution, at least a portion of the credit will typically be a plan asset.
Who is the policyholder?
To answer this question, you must first review the plan’s documents to determine who is identified as the policyholder. You should determine whether you are identified as the policyholder, or whether the policyholder is the plan itself or a trust.
Who pays the premiums?
If you are the policyholder and the plan’s documents do not clearly address how to handle distributions from the issuer, the portion of the credit that must be treated as a plan asset depends on who paid the insurance premiums for the plan year in which the credit relates. For example:
In any case, under the DOL’s guidance, employers are generally prohibited from retaining a credit amount greater than the total amount of premiums and other plan expenses paid by the employer.
Any portion of a credit that is a plan asset must be used for the exclusive benefit of the plan’s participants and beneficiaries. Plan sponsors have a few different options for applying the plan asset portion of a credit. The following questions and answers address these options:
1. Distribute Credit to Current Plan Participants
The credit can be distributed to participants under a reasonable, fair and objective allocation method. An allocation does not fail to be impartial merely because it does not exactly reflect the premium activities of participants.
The credit’s tax consequences largely depend on whether employees paid their premiums on a pre-tax or after-tax basis.
2. Distribute Credit to Both Current and Former Participants
If you find that the cost of distributing shares of a credit to former participants approximates the amount of the proceeds, you may decide to limit credits to current participants. Former participants are those who participated in the plan for the MLR reporting year but are not participating in the plan when you receive the credit.
3. Apply Credit Amount to Future Participant Premium Payments or Benefit Enhancements
In most cases cash distributions to participants and former participants will not be cost-effective (for example, the amounts are going to be small and will give rise to tax consequences). Under these circumstances, it may make more sense to apply the credit toward future participant premium payments (premium holiday) or toward benefit enhancements. If applied against the cost of future premiums, any allocation can be pro-rated equally to all current participants or weighted by enrollment tier.
Directing an issuer to apply the credit toward future participant premium payments or toward benefit enhancements would avoid the need for a trust and may, in some circumstances, be consistent with ERISA’s fiduciary responsibilities. Also, employers may find the premium reduction (or premium holiday) approach to be administratively easier than sending out checks and calculating the additional taxes.
When employee premiums are paid on a pre-tax basis, a premium holiday will reduce the amount that the employee can contribute to the cafeteria plan on a pre-tax basis. There will be a corresponding increase in the employee’s taxable salary and wages subject to employment taxes.
Under the MLR rules, issuers are required to provide participants with a notice describing the MLR rebates. Notice should also be provided with respect to the credit received. This notice should explain why a credit is being provided and should state that the employer may be obligated under ERISA to use all or a portion of the credit for the benefit of plan participants. You should also consider explaining to participants how you are using the plan asset portion of the credit for their benefit.
For additional information, please contact your Burnham Benefits Consultant or Burnham Benefits at 949-833-2983 or firstname.lastname@example.org.
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