Will You Benefit from a Medical Loss Rebate?
The Patient Protection and Affordable Care Act established medical loss ratio standards for health insurance providers, requiring them to provide rebates to group health plans and insured individuals if the insurer fails to spend a minimum percentage of premiums received on medical care claims and activities to improve health care quality. Insurers were required to pay rebates for 2011 in early August 2012.
Of course receipt of the rebate is a positive event, yet with it comes fiduciary responsibilities for employers sponsoring health plans and tax considerations for individual recipients. Sponsors of health insurance plans are now faced with decisions regarding:
- implications of the rebate constituting a plan asset when otherwise there is no trust,
- properly using and allocating the rebate, and
- properly responding to inquiries from plan participants regarding the individual tax implications of the rebate
Guidance regarding these rebates is included in the Department of Labor’s Technical Release No. 2011-04. We recommend close consideration of what constitutes a plan asset in light of the rebates. Many health plans sponsored by employers do not utilize a trust for plan assets, thus, avoiding any action causing the rebate to become a plan asset is important. The Technical Release highlights that under the Employee Retirement Income Security Act of 1974 (ERISA), rebates attributable to employee contributions are considered plan assets and must be used for a plan purpose and for the exclusive benefit of the plan participants. Determining the amounts treated as plan assets depends on a number of factors, including the terms of the plan documents (if any) and the underlying insurance policy. In the absence of such provisions in the plan or policy, the Department of Labor considers if premiums are paid by the employer or the participants.
If the employer paid the entire cost of the medical coverage for which the rebate applies, none of the rebate is considered a plan asset and the entire rebate can be retained by the employer. However, if the participant and employer shared the cost of coverage, the portion of the cost paid by participants would be considered a plan asset, not available for use by the employer sponsoring the medical plan. The portion of rebates considered plan assets may be distributed to plan participants in cash, applied to reduce future participant premiums or used in accordance with the terms of the plan.
When an employer receives the medical loss rebate and a portion of the original premiums paid for the coverage were paid by the participant, proper disposition of the participants’ portion of the rebate could be achieved if the rebate is used within three months of receipt to pay premiums or refunded. Technical Release No. 2011-04 refers to ERISA Technical Release 92-01, which addresses avoiding inadvertent creation of a trust solely for a failure to hold participant contributions in trust.
As indicated herein, prompt attention to use of the rebate is necessary especially since New York and New Jersey are among the states where a large portion of the rebates will be delivered. For more information, please contact Diane Wasser or Denise Finney.