HANDLING OF MEDICAL LOSS RATIO REBATE (MLR) CHECKS 

Some employers with insured group health plans may have received rebate checks from their insurers. If you did, you will need to consider how to apply for the money in a manner that complies with applicable law. In general, policyholders will be required to determine an appropriate method of application of the rebate within 90 days of receipt of the rebate check. You will need to be prepared to address the issue with your employees and to answer their questions.

Notices Sent to Plan Sponsor AND Plan Participants

Insurers send notices and the rebates–if earned–to the group policyholder (plan sponsor), as well as send notices to each employee who participated in the plan in 2012 (including to terminated employees no longer working for the company).

Even if a company does not receive a rebate, insurers must send notices with general MLR information to each policyholder and subscriber of a group health plan and to each subscriber in the individual market. This means even if your group health plan does not receive an MLR rebate, your plan participants will receive an MLR notice from the carrier, so you may get questions from confused participants.

How Do I Know if I’m Subject to ERISA?

The rules differ somewhat for plans that are not governed by the Employee Retirement Income Security Act (ERISA), such as those maintained by state and municipal governments and church plans.

A group health plan is subject to ERISA if it:

  • is established or maintained by a non-governmental, non-church US employer or a union, and
  • provides medical benefits (including hospitalization, sickness, prescription drugs, vision, or dental) to employees and their families, and
  • pays benefits directly by the employer, through insurance, reimbursement or other funding.

What Do ERISA Rules Require of Plan Sponsors?

Plan sponsors are responsible to properly allocate the rebates among plan participants. ERISA plan sponsors that receive MLR rebate checks from their insurers must make four determinations:

  • How much of the rebate must be paid to plan participants, and how much can the employer keep?
  • Must or should the rebate be allocated to both prior year and current year participants?
  • How may the rebate be used?
  • When must the rebate be paid?

ERISA rules require that “plan assets” be used solely for the benefit of plan participants and beneficiaries. Thus, plan sponsors (ERISA fiduciaries) must first determine what part of any MLR rebate constitutes “plan assets.” Even if you receive an MLR rebate check from your insurer, do not assume you can use the entire amount for corporate purposes. Second, if any amount of the rebate is “plan assets” you must decide how to allocate that amount among current and/or former participants, and how to use the money for the benefit of participants and beneficiaries (e.g., whether to pay rebates, reduce premiums, or fund enhanced benefits).

The Department of Labor (DOL) issued the following guidance on these issues:

  1. How much of the rebate must be paid to plan participants, and how much can the employer keep?

If the plan or trust is the policyholder (which is not the case for most ERISA plan sponsors), the entire rebate is plan assets, unless there is a specific plan or policy language to the contrary. Plan assets must be used only for the benefit of plan participants and beneficiaries or to pay reasonable administrative expenses. The plan sponsor can keep none of the rebates for itself if the plan or trust is the policyholder.

If the plan sponsor is the policyholder (as is the case for most ERISA plan sponsors), it must first review the plan or policy language to determine what portion of the rebate is plan assets. If the documents are silent or unclear, the determination will likely be based on what percentage of total premiums were paid by plan sponsors and participants in the past. For example, if the plan sponsor paid 60% of total premiums in 2012 and participants paid 40%, then 60% of the MLR rebate for 2012 would belong to the plan sponsor and 40% would be plan assets that must be used for plan participants.

  1. Must or should the rebate be allocated to both prior-year and current-year participants?

ERISA’s general standards of fiduciary conduct apply and the plan fiduciary may allocate the MLR rebate only to current participants—and not to former participants—if the fiduciary finds the cost of distributing amounts to former participants approximates the amount of the proceeds. The employer is not required to pay part of the rebate back to former employees.

The plan sponsor can decide, subject to ERISA fiduciary rules, to pay the rebate to:

  • only current year participants, or
  • current employees who are current-year participants and were prior-year participants, or
  • current employees who are current-year participants, and to all individuals who were prior-year employee participants (even if they are now former employees).

If the employer decides to allocate the rebate only among current participants, the allocation must be based on a reasonable, fair and objective allocation method.

The DOL’s rules allow a plan sponsor to divide the rebate or refund in any of the following three ways, so long as they meet ERISA fiduciary standards:

  • Evenly among subscribers – this will be the easiest and most straightforward to calculate; or
  • Based on each subscriber’s actual contributions to premium; or
  • In a manner that reasonably reflects each subscriber’s contributions to how may the rebate be used?

Employers may find reducing premiums for plan participants in 2013 is the easiest way to administer the rebates. Since the intent of the MLR provision is to return money to those individuals who paid premiums in the prior year, one obvious way to apply the rebate is to provide cash amounts to participants (either current year and/or prior year participants). The plan fiduciary is given discretion in applying the rebate, subject to ERISA fiduciary obligations. Specifically, if cash rebate amounts to individuals are de minimis or would result in tax consequences to participants or the plan, the fiduciary may use the rebate for other permissible plan purposes, including applying it toward future participant premium payments or toward benefit enhancements. As explained below in the Tax Consequences section, the type of rebate the plan sponsor provides does not affect the tax consequences.

  1. When must the rebate be paid?

Plan fiduciaries should apply MRL rebates that are plan assets within three months of the date the MLR check is received from the insurer.

Next Steps for Plan Sponsors of Insured ERISA Plans

Consider the options described above (e.g., allocating the rebate to current-year and prior-year participants or only to current-year participants).

Amend your written plan document and summary plan description (SPD) to specify how the plan assets portion of the rebate will be determined (e.g., the percentage of any rebate that will be “plan assets” is the same percentage of total premiums that were paid by participants), the methods by which rebates may be provided (e.g., cash payments or premium reductions), and/or whether the plan assets portion can or will be applied toward plan administrative expenses paid

Notify your plan participants as to whether or not your plan received an MLR rebate for 2012.

Implement the method you have selected (e.g., cash rebates, premium reductions or benefit enhancements) within 90 days after you receive the MLR rebate from the carrier.

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