Benefit News

Handling Carrier Credit Related To COVID-19

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.

Compliance Steps

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).

STEP 1: Determine Which Plan or Policy Is Covered by the Credit

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.

  • Where a plan provides benefits under multiple policies, the employer should allocate or apply the plan’s portion of the credit for the benefit of participants who are covered by the policy to which the credit relates, provided this would be prudent and solely in the interests of the plan.
  • Using a credit generated by one plan to benefit the participants of another plan would be a breach of ERISA’s duty of loyalty to a plan’s participants.

STEP 2: Determine Whether the Credit is a Plan Asset

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.

  • In most cases, the employer is the policyholder of the group health plan. If you are the policyholder, you will need to answer the next question regarding who pays the health insurance premiums.
  • However, if the plan or trust is the policyholder, then the entire credit is likely a plan asset. You, as the employer, generally will not be able to retain any portion of the credit. If this is the case, you can skip the next question and proceed to Step Three.

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:

  • If the premiums were paid entirely out of trust assets, the entire credit amount is a plan asset.
  • If the employer paid 100 percent of the premiums, the credit is not a plan asset and the employer may retain it.
  • If participants paid 100 percent of the premiums, the entire credit amount is a plan asset.
  • If the employer and participants each paid a fixed percentage of the cost, the percentage of the credit equal to the percentage of the cost paid by participants is a plan asset.
  • Example: if an employer paid 60 percent of the premiums and employees paid 40 percent during the plan year, the employer may retain 60 percent of the credit. The remaining 40 percent of the credit is a plan asset that must be used for the exclusive benefit of the plan’s participants and beneficiaries.
  • If the employer was required to pay a fixed amount and participants were responsible for paying any additional costs, the portion of the credit that does not exceed the participants’ total amount of contributions for the plan year would be a plan asset.
  • If participants paid a fixed amount and the employer was responsible for paying any additional costs, the portion of the credit that does not exceed the employer’s total amount of contributions during the MLR reporting year would not be a plan asset.

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.

STEP 3: Credit Distribution Options

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.

  • If premiums were paid by employees on a pre-tax basis under a cafeteria plan, the credit will generally be taxable income to employees in the current year and will be subject to employment taxes.
  • If premiums were paid by employees on an after-tax basis, the credit will generally not be taxable income to employees and will not be subject to employment taxes. However, if an employee deducted the premium payments on his or her prior year taxes, the credit is taxable to the extent the employee received a tax benefit from the deduction.

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.

STEP 4: Notify Participants

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 inquiries@burnhambenefits.com.


Burnham Benefits does not engage in the practice of law and this publication should not be construed as the providing of legal advice or a legal opinion of any kind. The consulting advice we provide is intended solely to assist in assessing its compliance with the Patient Protection and Affordable Care Act and other applicable federal and state law requirements, and is based on Burnham Benefit’s interpretation of federal guidance in effect as of the date of this publication. To the best of our knowledge, the information provided herein, and assumptions relied on, are reasonable and accurate as of the date of this publication. Furthermore, to ensure compliance with IRS Circular 230, any tax advice contained in this publication is not intended to be used, and cannot be used, for purposes of (i) avoiding penalties imposed under the United States Internal Revenue Code or (ii) promoting, marketing or recommending to another person any tax-related matter.

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