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What Should Employers Do With MLR Rebates Under ERISA Health Plans?

Some employers which are policyholders of group health insurance contracts that fund employee benefit plans have started to receive rebates from health insurance companies due to the Patient Protection and Affordable Care Act’s medical loss ratio (MLR) standards, which were first applicable for the 2011 policy year. What should employers do with this rebate money?

The Department of Labor has issued guidance indicating that MLR rebates attributable to participant contributions may constitute “plan assets,” that employers in receipt of such rebates could be fiduciaries, and that some or all of the MLR rebate may need to be apportioned among participants by the plan fiduciary. Recent guidance from the Internal Revenue Service indicates that amounts rebated to plan participants are reportable employment income.

New medical loss ratio rules

Under the Act and the new MLR rules, health insurance carriers in the large-group market (100 or more employees) must spend at least 85 percent of premium dollars on medical care. This percentage is reduced to 80 percent for insurance carriers in the small-group market. Carriers not meeting these applicable MLR requirements must issue a rebate to policyholders. An employer receiving an MLR rebate attributable to an insurance contract funding an ERISA group health plan must determine whether the rebate constitutes a plan asset under ERISA. Persons exercising discretion over ERISA plan assets are subject to strict fiduciary requirements.

MLR rebates may constitute ERISA plan assets

In Technical Release 2011-04, the Department of Labor determined that, in situations in which employees pay all or a portion of the premiums under the group health plan, all or some portion of an MLR rebate could constitute a plan asset subject to ERISA. Employers should carefully review applicable plan documents for guidance. Employers receiving MLR rebates may face a variety of different scenarios, including the following:

  1. If the plan or trust is named as the policyholder, then the employer may have no interest in the MLR rebate, and the entire rebate may constitute a plan asset.
  2. If an employer is named as the policyholder and pays the entire cost of the group health insurance premium, then none of an MLR rebate would be considered a plan asset subject to ERISA. The employer would be entitled to keep the entire rebate.
  3. If participants pay the entire premium, then the entire MLR rebate would constitute a plan asset subject to ERISA and its fiduciary duty requirements.
  4. If the employer and participants each pay a fixed percentage of the total premium, the percentage of an MLR rebate attributable to the participant’s percentage would be attributable to participant contributions.


ERISA fiduciary duties may apply when apportioning MLR rebates

When determining how to apportion an MLR rebate, some portion of which constitutes a plan asset, fiduciaries are required to act prudently, solely in the interest of plan participants and in accordance with governing plan documents (to the extent consistent with ERISA). The Department of Labor reminded fiduciaries of their duty to be impartial among an ERISA plan’s participants. The Department of Labor indicated that when the cost of distributing the applicable portion of an MLR rebate to former plan participants (e.g., former employees no longer covered under the plan) would exceed the amount of the rebate, the fiduciary can allocate the rebate only among current participants based upon a reasonable, fair allocation method. The Department of Labor also indicated that an MLR rebate may be applied toward future participant premium payments (i.e., a premium holiday) if actual distributions to participants would be of de minimis amounts or would give rise to tax consequences.

MLR rebate credited to employee may be taxable income

The IRS has issued a set of “Frequently Asked Questions” which indicates that MLR rebates credited to employees would constitute employment income reportable for tax purposes.

Bottom line

Employers receiving MLR rebates should work carefully with counsel and other advisors to ensure that all ERISA fiduciary requirements are met and that all IRS reporting obligations are fulfilled. If you have questions about how this may affect you or your business, please contact a member of the Employee Benefits Team at Bingham Greenebaum Doll LLP.

DISCLOSURE REQUIRED BY CIRCULAR 230.  This Disclosure may be required by Circular 230 issued by the Department of Treasury and the Internal Revenue Service.  If this article, including any attachments, contains any federal tax advice, such advice is not intended or written by the practitioner to be used, and it may not be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer.  Furthermore, any federal tax advice herein (including any attachment hereto) may not be used or referred to in promoting, marketing or recommending a transaction or arrangement to another party.  Further information concerning this disclosure, and the reasons for such disclosure, may be obtained upon request from the author of this article. Thank you.

  • Partner

    Ben concentrates his practice in employee benefits law, including qualified retirement plans, employee welfare benefit plans, nonqualified deferred compensation arrangements, COBRA, and ERISA-related litigation. Ben also ...

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