Issue 32: Medical Loss Ratio Rebates Expected in August 2012 - Could Constitute Plan Assets

This is the thirty-second issue in our health care reform series of alerts for employers on selected topics in health care reform. (Our general summary of health care reform and other issues in this series can be accessed by clicking here.) This series of Health Care Reform Management Alerts is designed to provide a more in-depth analysis of certain aspects of health care reform and how it will impact your employer-sponsored plans.

Employers sponsoring a fully-insured group health plan or benefit option (e.g., an HMO option) could receive a rebate from the insurance policy issuer as soon as August of this year, under the Affordable Care Act’s new medical loss ratio (MLR) rules. DOL guidance confirms that at least a portion of these rebates are likely “plan assets.” As a result, the DOL issued guidance discussing plan sponsors’ use of these plan assets, as described below.

Background - Affordable Care Act Requires Medical Loss Ratio Reporting and Refunds

The Affordable Care Act requires health insurers to monitor and report to HHS their MLR, which generally means the ratio of health care claims paid to premiums received (health care claims ÷ premiums). If the MLR drops below a certain percentage (85% for large group health plans, 80% for small group health plans), the insurer must refund the excess as a rebate to the insured individual or group health plan sponsor by August 1st of the following year.

Rebates Will Usually Constitute Plan Assets

Employers sponsoring fully-insured group health plans will receive the rebate directly. In most instances though, a portion of these rebates will constitute plan assets. While the determination of which portion constitutes plan assets will vary depending on the terms of the plan document, insurance policy and other factors, the following guidelines generally apply:

Premiums Paid Entirely by Employer. If the insurance premiums are 100% paid by the employer, with no participant premium contribution, the rebate probably will not constitute plan assets and can revert to the employer. Employers should still verify that this treatment is consistent with the terms of the insurance policy and plan document.

Premiums Paid Entirely by Participants. If the insurance premiums are 100% paid by the participant, with no employer contribution, the entire rebate will constitute plan assets. In this scenario, ERISA’s general standards of fiduciary conduct will govern use of the assets, as discussed below.

Premiums Paid Partially by the Employer, Partially by Participants. Most employer-sponsored plans fall into this category. While the rules vary depending on the contribution structure, generally the percentage of the rebate that constitutes plan assets will correspond to the ratio of the premium paid by participants. If participants pay a fixed amount though (as opposed to a percentage), the amount of the rebate that constitutes plan assets will never exceed the fixed cost paid by the participants. The reverse is also true. If the employer only pays a fixed amount (as opposed to a percentage), the amount of the rebate that may revert to the employer can never exceed the fixed amount the employer pays.

Fiduciary Rules Govern Use of Plan Assets

If any portion of the rebate is determined to be plan assets, ERISA’s general fiduciary obligations apply when allocating those assets. Generally, this means the rebates must be used to benefit both current and, in some instances, former participants. Most importantly, plan sponsors should apply the rebates within three months of receipt, otherwise ERISA’s trust requirement applies (which can be costly).

Employer Action Steps

• Review insurance policies to determine whether they address use of rebates.
• Consider amending plan documents (and SPDs) to provide that MLR rebates will revert to the employer, to the greatest extent permitted by law.
• Determine how to use rebates in advance, to ensure all plan assets are allocated within the 90 day time limit.