Using Medical Loss Ratio (MLR) Rebates

Employers that have multiple health plans or provide benefits under multiple policies should determine which plan or policy is covered by the rebate. The issuer should include policy information as part of the rebate.

Using a rebate generated by one plan to benefit the participants of another plan would be a breach of ERISA’s duty of loyalty to a plan’s participants. Where a plan provides benefits under multiple policies, the employer should allocate or apply the plan’s portion of the rebate for the benefit of participants who are covered by the policy to which the rebate relates, provided this would be prudent and solely in the interests of the plan.

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Employers should review their plan documents to see if there is any language regarding how to treat distributions (such as demutualization proceeds, refunds, dividends or rebates) from health insurance issuers. In general, ERISA requires employers to follow the terms of their plan documents. However, the plan documents may not specifically address who is entitled to such distributions in all situations, and other factors may need to be considered.

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Employers should review their plan documents to determine who is identified as the policyholder. Employers should verify whether they are identified as the policyholder or whether the policyholder is the plan itself or a trust:

·         In most cases, the employer is the policyholder for the health plan. However, the fact that the employer is the policyholder does not, by itself, mean that the employer may retain the distribution; or

·         If the plan itself or a trust is the policyholder, the entire rebate may be a plan asset, which means the employer would not be able to retain any portion of it.

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If the employer is the policyholder and the plan’s documents do not clearly address how to handle distributions from the issuer, the portion of the rebate that must be treated as a plan asset will generally depend on who paid the insurance premiums for the year. Common payment situations and their corresponding plan asset implications are outlined below:

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Entire rebate is a plan asset

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Any portion of a rebate that is a plan asset must be used for the exclusive benefit of the plan’s participants and beneficiaries. Employers have a few different options for applying the plan asset portion of a rebate:

·         The rebate can be distributed to participants using a reasonable, fair and objective allocation method. If the employer finds that the cost of distributing shares of a rebate to former participants approximates the amount of the proceeds, the employer may decide to limit rebates to current participants. Also, an allocation does not fail to be impartial merely because it does not exactly reflect the premium activities of participants; or

·         The distribution of payments to participants may not be cost-effective because the amounts are small or would cause tax consequences for the participants; in this case, the employer may utilize the rebate for other permissible plan purposes, such as applying the rebate toward future participant premium payments or benefit enhancements.

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The rebate’s tax consequences largely depend on whether employees paid their premiums on a pre-tax or after-tax basis:

·         If premiums were paid by employees on a pre-tax basis under a cafeteria plan, the rebate would generally be taxable income to employees in the current year and would also be wages subject to employment taxes; and

·         If premiums were paid by employees on an after-tax basis, the rebate would generally not be taxable income to employees and would not be subject to employment taxes. However, if an employee deducted the premium payments on their prior year’s taxes, the rebate is taxable to the extent the employee received a tax benefit from the deduction.

If the rebate is used to reduce future pre-tax premium payments, it will generally result in a corresponding increase in the employee’s taxable salary. If the rebate is used for benefit enhancements, those improvements will generally be nontaxable.

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To the extent a rebate qualifies as a plan asset, ERISA would generally require the amount to be held in trust. However, most group health plans receiving rebates do not maintain trusts because their premiums are paid from the employer’s general assets (including employee payroll deductions). The DOL has provided relief from the trust requirement for premium rebates that are used within three months of their receipt.

In addition, directing an issuer to apply the rebate toward future participant premium payments or benefit enhancements adopted by the employer would avoid the need for a trust and, in some circumstances, may be consistent with the employer’s fiduciary duties. Employers that decide to take this approach should coordinate with their issuers to establish the process for handling rebates.

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Under the MLR rules, issuers are required to provide participants with a notice describing the MLR rebates. This notice explains why a rebate is required under the MLR rules, and it provides that the employer may be obligated under ERISA to use all or a portion of the rebate for the benefit of plan participants.

Although the obligation to provide a rebate notice falls on issuers, employers that receive MLR rebates may receive questions from employees who receive the issuer’s notice. As a best practice, employers should consider explaining to participants how they are using the plan asset portion of the rebate for the participants’ benefit.

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