September 20, 2017
ACTION MAY BE REQUIRED
In December 2011, the Department of Health & Human Services (HHS) published final regulations on the medical loss ratio (MLR) requirements under healthcare reform. The requirement to maintain a certain MLR applies only to fully insured health insurance carriers. These rules impact employers with fully insured group health plans, as employers are responsible for distributing rebates to participants in group health plans. Self-funded employers will not receive MLR rebates.
In 2017, employers and plan participants receiving an MLR rebate will receive notification from the carrier. To date, only UnitedHealthcare is expected to issue rebates on some, but not all, products sold in 2016. HCW is working with UHC to identify clients receiving a rebate and the amount of the rebates. BCBSNC and Aetna are not issuing rebates this year. To date, CMS has not published MLR rebate reporting data for 2016. When available, a list of MLR rebates by state and market and health insurers owing MLR rebates for 2017 will be published here.
Under healthcare reform, fully insured carriers in the small and large group markets must report to HHS how they spend premium dollars. This reporting and MLR calculation is done on a calendar year basis. If a carrier fails to spend at least 85% of each premium dollar in the large group market (80% of each premium dollar in the small group market) on clinical services and health care quality improvement during the calendar year, a notice and a rebate must be issued in the following year. Carriers are required to notify all group policyholders who receive a rebate and all subscribers of group policyholders who receive a rebate. This notice must be provided by September 30, and it can be provided before, after, or contemporaneously with the rebate issued to the group policyholder.
Rebates for Group Health Plans
Under the final regulations, the identity of the plan sponsor determines who receives the rebate. There are three categories: (1) ERISA plans; (2) non-federal government plans; and (3) plans that are not ERISA plans or government plans (e.g., church plans). Answers to common questions about MLR rebates and their distribution are provided below.
FREQUENTLY ASKED QUESTIONS
1. Are rebates considered ERISA plan assets?
Rebate amounts that are considered plan assets must be returned to or used for the benefit of the participants in the plan that received the rebate. Determining if MLR rebates are considered plan assets depends on several factors. DOL Technical Release 2011-04 provides guidance for the use of rebates for plans subject to ERISA and whether the rebate constitutes plan assets. Your HCW Consultant or Client Manager will work with plans that receive MLR rebates to determine whether all or a portion of the MLR rebate is considered plan assets.
2. Must employers hold the rebate in trust?
Yes. However, where the employees’ portion of the premium is withheld under a pre-tax cafeteria plan and where premiums are paid from the employer’s general assets (including employee salary reductions), DOL Technical Release 92-01 provides an exemption from the trust requirement.
If a plan meets these requirements, the rebate does not have to be held in trust if it is used within three months of receipt by the policyholder to pay premiums or refunds. “Receipt” means actual receipt of the MLR rebate check, not depositing or cashing the check.
3. How can employers use the rebate?
ERISA requires that fiduciaries act solely in the best interest of plan participants. This means that plan assets must be held for the exclusive purpose of providing benefits to employees and offsetting reasonable administrative expenses of the plan.
Examples of permissible rebate allocation methods include refunds to participants, reductions in future participant contributions, or benefit enhancements. When deciding how to use an MLR rebate, a fiduciary must “weigh the costs to the plan and the ultimate plan benefit, as well as the competing interests of participants or classes of participants” and the allocation method used should be “reasonable, fair, and objective.” Specifically:
- If the cost of distributing the share of the rebate allocated to former participants (who were enrolled during the calendar year for which the rebate applies) is not cost-effective, rebates can be distributed to current participants only.
- If distributing the rebates is not cost-effective (e.g., participant payments are of de minimis amounts or would give rise to tax consequences to participants or the plan), the rebate may be used for other permissible plan purposes, including applying the rebate toward future participant premium payments or benefit enhancements.
- If a plan provides benefits under multiple polices, the rebate for one plan should not be used to benefit participants in another plan.
4. If an employer switched carriers in the middle of 2016 or at the start of 2017, will the employer receive an MLR rebate from the old carrier?
Possibly. If you made a carrier change during the 2016 calendar year and your new carrier is not issuing MLR rebates, you may still receive an MLR rebate from your former carrier for the months in 2016 during which that plan was in effect.
5. Are there special rules for state and local government plans that are not subject to ERISA?
In May 2012, HHS issued final regulations addressing rebates for state and local government plans. Plan policyholders are required to use the portion of the rebate attributable to the amount of premium paid by participants for the benefit of plan participants. For example, if the plan’s rebate is $20,000 and participants paid 40% of the total premium, the policyholder is required to use 40% of the rebate (or $8,000) for the benefit of plan participants. It can be used in one of three ways:
- To reduce premiums for the subsequent plan year for all participants covered under any plan option offered (regardless of whether the participant is covered under the plan option that generated the rebate);
- To reduce premiums for the subsequent plan year for only those participants covered under the plan option that generated the rebate; or
- To provide cash refunds to only those employees covered by the plan that generated the rebate.
Regardless of which option a non-federal governmental plan selects, the benefit must be provided to employees enrolled during the year in which the rebate is paid (versus the MLR reporting year on which the MLR rebate was calculated). Additionally, the regulations give the policyholder the discretion to divide the rebate (1) evenly among plan participants; (2) based on each participant’s actual contributions to the premium; or (3) apportioned in a manner that reasonably reflects each participant’s contributions to the premium.
6. Are there special rules for church plans that are not subject to ERISA?
Yes. MLR rebates may be paid to the policyholder of the church plan only if the insurance carrier receives a written assurance from the policyholder that the rebates will be used to benefit participants (see the discussion above for Question #3).
If no such written assurance is received, the carrier must distribute the rebates directly to participants covered by the group health plan during the MLR reporting year on which the rebate is based. In this situation, the entire rebate, including the amount proportionate to the premium paid by the policyholder, is divided equally among all participants entitled to a rebate without regard to how much each actually paid toward premiums.
7. Will employees participating in our group health plan in 2016 be notified that our company is receiving an MLR rebate?
Yes. Under the final regulations, any time an insurance carrier provides a rebate to a group health plan policyholder, the carrier must provide written notice to the policyholder and participants. If a fully insured group health plan carrier issues a rebate, participants in that plan during 2016 will receive a notice from the carrier.
8. Is MLR rebate money distributed to plan participants considered taxable income?
Yes. If plan participants paid premiums by pre-tax salary reduction through an employer’s Section 125 cafeteria plan, MLR rebate amounts are considered taxable income. Because MLR rebate amounts are considered wages, any former employees to whom a rebate is distributed must receive a Form W-2 indicating the MLR rebate amount.
EMPLOYER CALL TO ACTION
Employer group health plan sponsors are generally tasked with distributing MLR rebates amounts to eligible plan participants. Employer group health plan sponsors should receive MLR rebates no later than September 30, 2017.
HCW wants to highlight the following reminders for you as you prepare to distribute your MLR rebate.
- Determine whether any rebate will be considered plan assets. This involves analyzing the employer contribution strategy and determining which portion of the MLR rebate will be considered plan assets. Your HCW Consultant can assist with this determination, particularly if you did not receive an MLR rebate in 2015 or 2016.
- Prepare to use any rebate received within three months of receipt. Rebates received on September 30, 2017, should be distributed or otherwise used for a permissible purpose no later than December 31, 2017. Rebates received prior to September 30, 2017, should be used within three months of the date of receipt.
- Determine how the plan will use any rebate it received. HCW recommends providing a cash refund processed through payroll. Remember, if premiums were paid pre-tax by plan participants, MLR rebate amounts will be considered taxable wages. Distributing the MLR rebate through payroll is the quickest and cleanest distribution method.
State and Local Government Plans
- Determine the percentage of the rebate that must be used for the benefit of participants. This involves analyzing the employer contribution strategy and determining which portion of the MLR rebate will be considered plan assets. Your HCW Consultant can assist with this determination, particularly if you did not receive an MLR rebate in 2015 or 2016.
- Determine how the plan will use any rebate received in accordance with the HHS guidance. Unlike ERISA plans, state and local government plans only have three choices for distributing MLR rebates. As described above, providing cash rebates to those employees covered by the plan generating the rebate is generally the quickest and cleanest method for distributing MLR rebates.
- Determine how to divide any rebate among plan participants.
- Determine whether the plan wants to receive a rebate. Remember, the rebate can only be paid to the policyholder if the carrier receives certain written assurances from the plan. Absent such written assurance, employers should understand that the carrier will divide the entire rebate among participants (including any amounts that could be kept by the employer if the policyholder was receiving the rebate).
- If the plan will receive the rebate from the carrier, the employer should provide the carrier with the appropriate written assurances. Additionally, the employer should determine (1) the percentage of the rebate that must be used for the benefit of participants; (2) how the plan will use any rebate received (following the HHS guidance); and (3) how to divide any rebate among plan participants.
Information for All Plan Types
If a rebate is expected, employers should consider communicating to participants how the plan will use the rebate. Remember, participants will receive a notice from the carrier that a rebate has been issued to the plan policyholder. Communicating your rebate distribution strategy to plan participants is a proactive step you can take to keep plan participants informed and provide additional clarity regarding the notice they will receive from the carrier.
HCW is equipped to help you calculate MLR rebate amounts for your plan participants based on your contribution strategy and distribution method. Your consultant will contact your organization to guide you through the MLR rebate distribution process.
As additional guidance and regulations become available, HCW will continue to keep you updated through our Compliance Alerts. In the meantime, if you have any questions about healthcare reform or the MLR rebate requirements, please contact your HCW consultant or client manager at (919) 403-1986.