Last year, the Department of Health and Human Services published regulations advising health insurance companies how to implement the medical loss ratio (MLR) requirements under health care reform (these requirements relate to the percentage of premiums spent on health care and health quality improvement activities). Companies generally must issue rebates to the insured health plans if their MLR is less than 85% in the large group market and less than 80% in the small group market. The first rebates, based on results for 2011, are due by August 1, 2012.
The Department of Labor recently published Technical Release 2011-04, which addresses how these rebates should be handled when they are made to health insurance plans that are subject to ERISA. A plan sponsor first must determine whether the rebate is a plan asset. If the plan is the policyholder, then the rebate generally would be considered a plan asset. If the employer is the policyholder, further inquiry is required before the employer retains the entire rebate. The employer should review the sources of the premium payments. The portion of a rebate attributable to participant contributions should be considered plan assets. In addition, an employer may not receive a rebate that exceeds the total premiums and other plan expenses paid by the employer.
Once an employer determines the amount of the rebate that is plan assets, the employer must determine how to allocate the rebate to plan participants. In making this determination, the employer or other appropriate fiduciary must, in accordance with ERISA requirements, act prudently, solely in the interest of plan participants and beneficiaries, and in accordance with the terms of the plan. However, DOL does not require the allocation to reflect the premiums paid by individual participants. For example, if the cost of distributing shares of a rebate to former participants approximates the amount of the rebate, the employer may decide to allocate the rebate only to current participants. Similarly, if distributing the rebate to participants is not cost-effective, the rebate may be used to reduce future premium payments or to provide benefit enhancements.
In addition, plan assets generally must be held in trust. However, most insured health plans do not have trusts, and the DOL referred to earlier guidance in Technical Release 92-01 and stated that it will not take any enforcement action if a rebate is used within three months of receipt to pay premiums or make refunds to participants.
Employers should be aware of the DOL's guidance as they begin to receive rebates during 2012.