HUMAN CAPITAL PRACTICE ALERT: HEALTH CARE REFORM BILL August 2012 www.willis.com MY PLAN IS GETTING A REBATE FROM THE INSURER WHAT DO I DO WITH IT? EXECUTIVE SUMMARY All insured employer group medical plans (but not self-funded plans) will be receiving rebates from their insurers if the insurers spent less than 85% (80% in the small group market as determined by the states but in all cases fewer than 100 covered lives) of the premium dollars collected for their group of policies on medical expenses. Those insurers have sent or will soon be sending those rebates to individuals and employers. Employers will need to determine how much, if any, of the rebate they can retain, use for plan operations or return to plan participants. Employers are plan fiduciaries and therefore must make prudent determinations in the best interests of the plan participants and beneficiaries. Many employers will take a conservative view and distribute the rebates to the plan participants in proportion to the amount that they paid for their coverage, and some may even choose to distribute the entire rebate to plan participants, even if that is not mandated. There are methods for employers who would prefer to use those funds for plan operations or other purposes. While that may be an option for some employers in some situations, the conservative option is to reallocate those funds to the plan participants. In the event that they prefer to use the funds in another way, employers should consult legal counsel to make certain that they are comfortable with that option. DISCUSSION Under the Patient Protection and Affordable Care Act (PPACA), health insurance issuers are required to provide rebates to enrollees when their spending for the benefit of policyholders (on reimbursement for clinical services and activities for improving health care quality) in relation to the premiums charged (as adjusted for taxes) is less than the MLR standards established pursuant to the statute. Rebates are based upon aggregated market data in each state and not upon a particular group health plan's experience. While that is a requirement at the insurance company level (note that this requirement is NOT applicable to self-funded plans, even those with stop-loss coverage), the rebates will be sent to the employers sponsoring the plans, and the Department of Labor (DOL) has provided rules that will apply to the manner in which employers can or must allocate those rebates. When rebates are issued to employer plans, issues concerning the status of such funds under ERISA, and how such funds must be handled, necessarily arise. Traditionally, ERISA fiduciary standards apply to any return of premiums to employer plans. In addition, under PPACA the rebates may now be distributed to non-erisa plans (such as governmental plans and church plans), so while those assets will not be governed by ERISA, in some ways they have to be treated as though they were. The general rule that applies for any rebate is that, to the extent that the rebates are plan assets (and that characterization will apply relatively broadly), they become subject to ERISA s
fiduciary requirements and, with some exceptions, must be held in trust (although there is an exception for insurance contracts), may not inure to the benefit of any employer, and must be held for the exclusive purpose of 1) providing benefits to plan participants and their beneficiaries and 2) defraying reasonable expenses of administering the plan. If the employer is the policyholder and the insurance policy or contract, together with other instruments governing the plan, can fairly be read to provide that some part or all of a distribution belongs to the employer, then that language will generally govern, and the employer may retain distributions. However, the DOL states in its guidance that the fact that the employer is the owner of the policy would not, by itself, indicate that the employer may retain the distributions. In determining who is entitled to the distribution, one would need to carefully analyze the terms of the governing plan documents and the parties understandings and representations. Assuming the plan documents and other extrinsic evidence do not resolve the allocation issue, the portion of a rebate that is attributable to participant contributions would be considered plan assets. The guidance discusses five scenarios: 1. If the employer paid the entire cost of the insurance coverage, then no part of the rebate would be attributable to participant contributions and there would be no plan assets. 2. On the other hand, if participants paid the entire cost of the insurance coverage, then the entire amount of the rebate would be attributable to participant contributions and would be deemed entirely plan assets and would have to be distributed entirely to the participants. 3. If the participants and the employer each paid a fixed percentage of the cost, a percentage of the rebate equal to the percentage of the cost paid by participants would be attributable to participant contributions. 4. If the employer was required to pay a fixed amount and participants were responsible for paying any additional costs, then the portion of the rebate under the policy up to the participants total amount of contributions during the relevant period would be attributable to participant contributions and be plan assets. 5. Finally, if participants paid a fixed amount and the employer was responsible for paying any additional costs, then the portion of the rebate under the policy up to the employer s total amount of contributions during the relevant period would not be attributable to participant contributions and would not be plan assets. To the extent that an employer s portion of the rebate exceeds the employer s total premiums and other plan expenses paid (an unlikely occurrence), the excess must be held in trust for the exclusive benefit of participants and beneficiaries. Unfortunately, those scenarios do not answer the next question: We have plan assets now what? Decisions on how to apply or expend the plan's portion of a rebate are subject to ERISA's general standards of fiduciary conduct. The DOL also reiterated that the fiduciary has a duty of impartiality to the plan's participants, so no allocation method should be considered that would affect the fiduciary (in his or her role as a participant) differently than other plan participants. In deciding on an allocation method, the plan fiduciary may properly weigh the costs to the plan and the ultimate plan benefit as well as the competing interests of participants or classes of 2 Willis North America 08/12
participants, provided such method is reasonable, fair and objective. For example, if a fiduciary finds that 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. Similarly, if distributing payments to any participants is not cost-effective (e.g., payments to participants are of de minimis amounts, or would give rise to tax consequences to participants or the plan), the fiduciary may use the rebate for other permissible plan purposes, including applying the rebate toward future participant premium payments or toward benefit enhancements. In some cases, the plan involved may have terminated before the rebate is paid to the policyholder. The DOL states that the policyholder, in handling rebates, must comply with ERISA's fiduciary provisions, including looking to the plan document to determine how assets of the plan are to be allocated upon termination. Finally, if the determination is made that the rebate does constitute plan assets, the DOL guidance provides that any distribution or premium holiday should be completed no later than the third month after receipt of the rebate from the insurer or be put in trust for the plan. GOVERNMENTAL PLANS The Department of Health and Human Services (HHS) promulgated special rules for non-erisa plans, since the DOL s rules do not apply to them. With respect to rebates paid to non-federal governmental plans, HHS indicates that the rebate may be used, at the option of the policyholder, to: 1. Reduce subscribers' portion of the annual premium for the subsequent policy year for all subscribers covered under any group health policy offered by the plan 2. Reduce subscribers' portion of the annual premium for the subsequent policy year for only those subscribers covered by the group health policy on which the rebate was based 3. Provide a cash refund only to subscribers that were covered by the group health policy on which the rebate is based In all three options, the rebate would reduce premiums or be paid to subscribers enrolled during the year in which the rebate is actually paid, rather than the MLR reporting year on which the rebate was calculated. CHURCH PLANS These HHS rules, as outlined above, apply to church plans that have not elected to be subject to ERISA. The plan sponsor could only provide the rebate to the employer if the insurer receives written assurance from the policyholder that the rebates will be used in the same way that a rebate to a non-federal governmental plan could be used. Therefore, the church plan would follow the rules set out above, or if the plan does not provide the written assurance, the insurer would pay the rebate directly to the plan participants covered by the policy, including any portion attributable to premiums paid by the employer, so the employer should consider whether the avoidance of the administrative burden outweighs the value of the rebate. WHAT PARTICIPANTS ARE INCLUDED IN THE REBATE DETERMINATION? The rules generally provide that former employees do not have to be included in the distribution of the rebate. That general rule applies for ERISA plans if the administrative costs outweigh the value of the distribution; there is no requirement to distribute the funds to the former participants. Employers should not rely on a gut determination that the costs exceed the value of the distribution, but should look at the costs and make a decision based on all the facts and circumstances and document that determination. 3 Willis North America 08/12
For non-federal government plans, the guidance explicitly provides that former participants do not have to be included in the distribution; that applies generally for church plans as well. (The exception is if the insurer makes the distribution to participants because the church plan sponsor has declined to provide the assurance of compliance. In that case, the insurer must provide the rebate to all participants who were in the plan during the year to which the rebate relates.) USES OTHER THAN REALLOCATION DIRECTLY TO PLAN PARTICIPANTS The guidance under the MLR provisions is not as general as prior guidance from the DOL. However, it may be that reallocating the funds directly to plan participants is administratively difficult for employers. In that circumstance, employers can use the funds to reduce plan premiums in the future or enhance benefits under the plan. That is the general rule under the prior guidance. In addition, prior guidance would permit the use of plan assets to pay the administrative expenses for the plan. That would be the most efficient use of the rebates for most employers and would likely be sanctioned by the DOL under prior guidance. However, there is no specific guidance with respect to the MLR rebates. So, that leaves a question for employers since there is no direct guidance; but under the general rules for ERISA plans, it would be a proper use of plan assets. Since the PPACA rules also require the insurer to notify participants about the rebate, the determination to use the assets in a way that would not permit participants to see a direct benefit would potentially lead them to ask questions and maybe seek other avenues to recover a portion of the rebate they feel should be allocated directly to them. Some employers may determine that, despite the general guidance on plan assets and proper uses, there are other risks to avoid and therefore will seek to take a more conservative view than they would otherwise think necessary. TAX TREATMENT If any portion of the rebate is paid to the participants, the rebate will generally be reported on the W-2 in the year it is received. That is because the participants likely paid for their share of the premium on a pre-tax basis. To the extent a portion of the rebate was paid on an after-tax basis, the rebate would not be considered taxable income and would not be reported. That would be an atypical result, but it would be possible. For instance, coverage of a domestic partner in an employer plan would likely have resulted in the use of after-tax funds to pay for a share of the employee s premium. That proportion of the rebate would be on an after-tax basis and would not be reported as taxable income. CONCLUSION Employers have to act as plan fiduciaries and make a prudent determination of the optimal method of allocation of the rebates based on the facts and circumstances. Employers should remember that the amounts that are being returned are quite small and therefore the stakes are quite small as well. It may be that the most efficient option for many employers, even if not absolute mandated by the analysis, would be to distribute the entire rebate, in cash or if easier in the form of a premium holiday, to the plan s current participants. That option may not be as appealing to employers as using the funds in another manner but sometimes those additional documentation and administrative hoops outweigh the benefit. 4 Willis North America 08/12
KEY CONTACTS U.S. HUMAN CAPITAL PRACTICE OFFICE LOCATIONS NEW ENGLAND Auburn, ME 207 783 2211 Bangor, ME 207 942 4671 Boston, MA 617 437 6900 Burlington, VT 802 264 9536 Hartford, CT 860 756 7365 Manchester, NH 603 627 9583 Portland, ME 207 553 2131 Shelton, CT 203 924 2994 NORTHEAST Buffalo, NY 716 856 1100 Morristown, NJ 973 539 1923 Mt. Laurel, NJ 856 914 4600 New York, NY 212 915 8802 Norwalk, CT 203 523 0501 Radnor, PA 610 254 7289 Wilmington, DE 302 397 0171 ATLANTIC Baltimore, MD 410 584 7528 Knoxville, TN 865 588 8101 Memphis, TN 901 248 3103 Metro DC 301 581 4262 Nashville, TN 615 872 3716 Norfolk, VA 757 628 2303 Reston, VA 703 435 7078 Richmond, VA 804 527 2343 Rockville, MD 301 692 3025 SOUTHEAST Atlanta, GA 404 224 5000 Birmingham, AL 205 871 3300 Charlotte, NC Gainesville, FL 352 378 2511 Greenville, SC Jacksonville, FL 904 355 4600 Marietta, GA 770 425 6700 Miami, FL 305 421 6208 Mobile, AL 251 544 0212 Orlando, FL 407 562 2493 Raleigh, NC Savannah, GA 912 239 9047 Tallahassee, FL 850 385 3636 Tampa, FL 813 490 6808 813 289 7996 Vero Beach, FL 772 469 2842 MIDWEST Appleton, WI 800 236 3311 Chicago, IL 312 288 7700 312 348 7700 Cleveland, OH 216 861 9100 Columbus, OH 614 326 4722 Detroit, MI 248 539 6600 Grand Rapids, MI 616 957 2020 Milwaukee, WI 414 203 5248 414 259 8837 Minneapolis, MN 763 302 7131 763 302 7209 Moline, IL 309 764 9666 Pittsburgh, PA 412 645 8506 Schaumburg, IL 847 517 3469 SOUTH CENTRAL Amarillo, TX 806 376 4761 Austin, TX 512 651 1660 Dallas, TX 972 715 2194 972 715 6272 Denver, CO 303 765 1564 303 773 1373 Houston, TX 713 625 1017 713 625 1082 McAllen, TX 956 682 9423 Mills, WY 307 266 6568 New Orleans, LA 504 581 6151 Oklahoma City, OK 405 232 0651 Overland Park, KS 913 339 0800 San Antonio, TX 210 979 7470 Wichita, KS 316 263 3211 WESTERN Fresno, CA 559 256 6212 Irvine, CA 949 885 1200 Las Vegas, NV 602 787 6235 602 787 6078 Los Angeles, CA 213 607 6300 Novato, CA 415 493 5210 Phoenix, AZ 602 787 6235 602 787 6078 Portland, OR 503 274 6224 Rancho/Irvine, CA 562 435 2259 San Diego, CA 858 678 2000 858 678 2132 San Francisco, CA 415 291 1567 San Jose, CA 408 436 7000 Seattle, WA 800 456 1415 The information contained in this publication is not intended to represent legal or tax advice and has been prepared solely for educational purposes. You may wish to consult your attorney or tax adviser regarding issues raised in this publication. 5 Willis North America 08/12