On December 2, 2011, the DOL issued Technical Release 2011-04 concurrently with HHS issuance of an Interim Final Rule regarding Medical Loss Ratio (MLR) rebates. The Interim Final Rule appeared in the December 7, 2011 Federal Register and requests comments no later than February 6, 2012. The HHS guidance is expressed in terms of “subscribers” while the DOL guidance addresses ERISA group health plans. If you provide health benefits via insurance, it’s time to review your plan document language as it relates to rebates.
Background
The health care reform legislation established MLR standards for health insurance issuers. Issuers are required to provide rebates to enrollees when their spending for the benefit of the policy holder on certain categories, in relation to premiums charged, is less than the MLR standards established by statute.
HHS
The Interim Final Rule provides that in the case of a policyholder that is a non-Federal governmental group health plan, the policyholder must use the amount of the rebate that is proportionate to the total amount of premium paid by all subscribers under the policy for the benefit of subscribers in one of the following ways:
- For all employees covered under any option offered under the group health plan at the time the rebate is received to reduce subscribers’ portion of premium for the subsequent policy year
- For subscribers covered, at the time the rebate is received by the policyholder, under the group health plan option for which the issuer is providing a rebate
- A cash refund to subscribers enrolled in the group health plan option
The reduction in future premium or cash refund may at the option of the policyholder be divided:
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evenly among subscribers
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based on each subscriber’s actual contributions to premium or
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apportioned in a manner that reasonably reflects each subscriber’s contributions to premium
DOL
The DOL Technical Release indicates that the HHS regulations do not give specific guidance to policyholders who are ERISA group health plans. Key questions to answer are who is the policyholder, what does the plan provide and are the premium rebates considered plan assets?
Plan Assets
To the extent that the premium rebates are considered to be plan assets, they become subject to the requirements of Title I of ERISA. Anyone with authority or control over plan assets is a fiduciary and therefore any action with respect to any rebate is a fiduciary action.
ERISA does not expressly define plan assets but regulations and guidance have been issued with respect to participant contributions.
Who is the policyholder?
If the group health plan or its trust is the policyholder, the policy would be an asset of the plan and absent any specific plan or policy language to the contrary, the employer would have no interest in the distribution. If there is a trust and premiums are paid entirely out of the trust, the entire amount received from the insurer by the policyholder constitutes plan assets
If the employer is the policyholder and the insurance policy or contract, together with other instruments governing the plan, can fairly be read to provided that some part or all of the distribution belongs to the employer, then that language will generally govern, and the employer may retain distributions.
However, the TR notes that just because the plan sponsor is the policyholder doesn’t automatically mean the plan sponsor is entitled to the rebate. The terms of the governing plan documents are critical in determining who is entitled to the rebate.
Note:it is not unusual for wrap plan documents to contain language regarding the plan sponsor’s right to dividends, retroactive rate adjustments and refunds.
What does the plan provide?
If the plan document and other governing documents do not provide how to allocate any rebates, the portion of the rebate that is attributable to participant contributions would be considered plan assets. The TR provides the following:
- If the employer paid the entire cost of the insurance coverage, then no part of the rebate would be attributable to participant contributions.
- If participants paid the entire cost of insurance coverage, then the entire amount of the rebate would be attributable to participant contributions and considered to be plan assets.
- If the employer and participants each paid a fixed percentage of the cost, of percentage of the rebate equal to the percentage of the cost paid by participants would be attributable to participant contributions.
The same reasoning applies to other possible scenarios (employer pays fixed amount and participant pays any additional amount, participant pays fixed amount and employer pays any additional amount).
In any event, employers that use insurance policies to provide ERISA group health benefits would be prohibited by ERISA from receiving a rebate amount greater than the total amount of
the premium and other expenses paid by the employer. If the rebate is greater than the total amount of the premium and other expenses paid by the employer, the excess must be held in trust for the exclusive benefit of plan participants.
Allocating the rebate
Decisions on how to apply the rebate are subject to ERISA’s general standards of fiduciary conduct. In deciding the allocation method, a plan fiduciary may weigh the costs to the plan and the ultimate plan benefits as well as competing interests of participants or classes of participants provided such method is reasonable, fair and objective. The TR provides some practical guidance including:
- If the cost of distributing shares of a rebate to former participants approximates the amount of the proceeds, the fiduciary may properly decide to allocate the proceeds to current participants based upon a reasonable, fair and objective allocation method.
- If distributing payments to any participant is not cost effective or results in tax consequences to the participant or the plan, the fiduciary may utilize the rebate for other permissible plan purposes including applying the rebate toward future participant premium payments or toward benefit enhancements.
Where a plan provides benefits under multiple policies, the fiduciary should allocate or apply the plan’s portion of a rebate for the benefit of participants and beneficiaries who are covered by the policy to which the rebate relates provided doing so would be prudent and solely in the interests of the plan according to the above analysis. However, the use of a rebate generated by one plan to benefit the participants of another plan would be a breach of the duty of loyalty to a plan’s participants.
ERISA requires that a plan asset must be held in trust until used. Many group health plans that will receive rebates do not utilize a trust. TR 92-01 provides trust relief for certain plans and this relief will apply to any premium rebates that are plan assets if they are used within three months of receipt by the policyholder to pay premiums or refunds.
What should Plan Sponsors do?
First and foremost, review your plan documents. If there is no language regarding how to handle rebates, contact your counsel for next steps.
Consider commenting on the TR or alternatively submitting your comments to your provider for inclusion in their comment letter.
You may want to check our blog periodically for quick updates on compliance issues.
Note: all links are active as of the date of issuance of this ErisaALERT.
Disclaimer: This material is for the sole purpose of providing general information and does not under any circumstances constitute legal advice and should not be used as a substitute for legal advice. You should seek the advice of counsel when applying the requirements to your plan. For more information on this ErisaALERT contact us by phone at 610-524-5351 and ask for Mary Andersen or 973-994-7539 and ask for Theresa Borzelli.
