Understanding the Rules Regarding MLR Rebates
Daszkal Bolton’s professional team has received many questions regarding the Medical Loss Ratio standards and rebates, and what it means to employers. We have outlined a few simple facts to help you better understand the responsibilities incurred by the Affordable Care Act.
The Affordable Care Act (ACA) requires health insurance issuers to spend a minimum percentage of their premium dollars on medical care and health care quality improvement. This percentage, or medical loss ratio (MLR), is 85 percent for issuers in the large group market and 80 percent for issuers in the small and individual group markets. Issuers that do not meet the applicable MLR standard must provide rebates to consumers. An issuer that does not meet its MLR standard must provide a rebate to the policyholder, which is typically the employer that sponsors the plan in the group health plan context. For current enrollees, issuers may provide rebates in the form of a lump-sum payment or a premium credit (that is, a reduction in the amount of premium owed).
The MLR requirements, which are enforced by the Department of Health and Human Services (HHS), became effective for issuers in 2011. Rebates must be paid by August 1 following the end of the MLR reporting year. Thus, issuers are required to pay rebates by August 2012,based on their 2011 MLRs. Employers that expect to receive rebates should become familiar with the MLR rebate rules and should decide how they will administer the rebates. How an employer should handle any MLR rebate it receives from an issuer depends on the type of group health plan(an ERISA plan, or a non-ERISA plan, etc.) 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 thatthey can simply deposit an MLR rebate check into their general business bank account. Any rebate amount that qualifies as a plan asset under ERISA must be used for the exclusivebenefit of the plan’s participants and beneficiaries.
Who Receives MLR Rebates From the Health Insurer in the Group Market?
A health insurer generally will distribute the rebates to the policyholder, i.e., the entity that contracts with the health insurer (typically the employer/plan sponsor), with two limited exceptions:
1. With respect to a non-governmental plan that is not subject to ERISA, the health insurer will distribute the rebates to the policyholder only if the policyholder first provides a written assurance that it will use the rebates to benefit members. Otherwise, the health insurer will divide and pay the full rebate (including amounts attributable to premiums paid by the policyholder) directly to the members who were covered during the calendar year preceding the year that the rebate is distributed. 2. If the group health plan has been terminated as of the date the rebate is paid, the health insurer will distribute the rebate (in equal amounts) directly to the members of the terminated plan, but only if the policyholder cannot be located (e.g., if the employer has gone out of business).
How Should an Employer Handle MLR Rebates That It Receives?
How an employer handles the MLR it receives depends upon whether the rebate is considered an asset plan.
Different rules may apply depending on whether the plan is an ERISA plan, nonfederal governmental plan (e.g., a state, municipal, or local governmental group health plan), or church plan.
ERISA Group Health Plans: For ERISA group health plans, MLR rebates paid to a policyholder may constitute ERISA plan assets, in whole or in part, and thus may need to be handled pursuant to ERISA’s fiduciary standards. Plan fiduciaries must act prudently, impartially, solely in the interest of plan participants and beneficiaries, and in accordance with ERISA and the terms of the plan.
According to the DOL, 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 policyholderand on the source of premium payments.
If the plan or its trust is the policyholder, the policy is an asset of the plan and the entire rebate must be treated as a plan asset.
If the employer is the policyholder, as is most often the case, the portion of the rebate that must be treated as a plan asset depends on who paid the insurance premiums. For example:
o If the premiums were paid entirely out of trust assets, the entire rebate amount is a plan asset; o If the employer paid 100 percent of the premiums, the rebate is not a plan asset and the employer can retain the entire rebate amount; o If participants paid 100 percent of the premiums, the entire rebate amount is a plan asset; and o If the premiums were paid partly by the employer and partly by the participants, the percentage of the rebate equal to the percentage of the cost paid by participants is a plan asset.
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. The DOL identifies the following methods for applying the rebates:
The rebate can be distributed to participants under a reasonable, fair and objective allocation method. If the employer finds that the cost of distributing shares of a rebate to former participants approximates the amount of the proceeds, the fiduciary may decide to limit rebates to current participants.
If distributing payments to participants is not cost-effective because the amounts are small or would give rise to tax consequences to the participants, the employer may utilize the rebate for other permissible plan purposes, such as applying the rebate toward future participant premium payments or toward benefit enhancements, which may include wellness initiatives.
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.
Is There a Time Limit for Using Rebates?
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 issuer 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 withtheir insurance issuers to establish the process for handling rebates.
Rebates that constitute plan assets need not necessarily be held in trust if they are used to pay premiums or refunds within three months of receipt.
Tax Treatment of Rebates
In general, the rebates’ tax consequences depend on whether employees paid theirpremiums 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 toemployees and will not be subject to employment taxes. This tax treatment applies if the rebate is paid in cash or if itis applied to reduce current year premiums. However, if an employee deducted the premium payments on his or herprior 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.
Contact Us: If you still have questions regarding the Medical Loss Ratio standards and rebates, and what it means to you as an employers, please contact Kevin Reynolds, CPA, Partner, at 561-367-11040 or [email protected]. In a brief consultation, Kevin can help you better understand the responsibilities incurred by the Affordable Care Act.