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Medical Loss Ratio Rebates: ERISA Plan Assets?

The Affordable Care Act requires health insurers to spend a minimum percentage of premium dollars on medical claims and quality improvement.  Insurers in the large group market must achieve a medical loss ratio of 85%, while insurers in the individual and small group markets must achieve a medical loss ratio of 80%.  Insurers that fail to achieve these percentages must issue rebates to policyholders (“MLR rebate”).

The Department of Labor (“DOL”) has issued new guidance on the medical loss ratio rules reminding plan sponsors of fully insured group health plans that there are potential plan asset considerations involved in the receipt of any MLR rebate.  As a result, plan sponsors who receive such rebates must think carefully about how to allocate them.

For plans subject to ERISA, the first relevant question is whether the rebate will constitute a plan asset.  If so, ERISA’s prohibited transaction and exclusive benefit rules require that the rebate be used solely for the benefit of plan participants and beneficiaries.  This would mean that the plan sponsor could not simply deposit an MLR rebate into its general assets. 

This question is reminiscent of the 1990s when many group policyholders received proceeds from several life insurance companies that were going through a demutualization process.  At that time, the DOL issued an Advisory Opinion providing guidance on the use of demutualization proceeds.  In Technical Release 2011-04, the DOL reiterates some of the same guidelines for determining what plan sponsors can do with an MLR rebate. 

If the plan or trust is the policyholder, in the absence of specific plan or policy language to the contrary, the MLR rebate will almost certainly be considered a plan asset under ordinary notions of property rights. Thus, MLR rebates issued to multiemployer plans will most likely be considered plan assets since the insurance policy would typically be issued directly to the multiemployer trust.  However, if the employer is the policyholder, the determination of whether a rebate is a plan asset is more complicated. 

In such instances, the plan sponsor will have to carefully analyze the terms of the insurance policy and other governing plan documents to determine whether the employer may retain the rebate for itself.  If the plan documents are silent, the determination will likely hinge on the source of the premium payments and the percentage of premiums paid by the employer vs. plan participants.  If the premium is paid entirely out of trust assets, the DOL’s view is that the entire amount of the rebate would be considered plan assets.  In other circumstances, the portion of the rebate that is attributable to participant contributions will be considered plan assets.

If all or a portion of the rebate does constitute plan assets, then plan sponsors will have to determine how and to whom to allocate the rebate.  For example, must a portion of the rebate be allocated to former plan participants?  The selection of an allocation method must be reasonable and must be made solely in the interest of plan participants and beneficiaries.  However, the plan fiduciary may weigh the costs to the plan and the ultimate plan benefit when deciding on an allocation method.  So, if the cost of calculating and distributing shares of the rebate to former participants approximates (or exceeds) the amount of the proceeds, the fiduciary is permitted to limit the allocation to current plan participants.  Similarly, if it is not cost-effective to actually distribute payments to plan participants (e.g., the amounts are de minimis, or would give rise to negative tax consequences for plan participants), the fiduciary may utilize the rebate for other permissible plan purposes (e.g., as a credit against future participant premium payments or for benefit enhancements). 

Furthermore, ERISA normally requires that any plan assets must be held in trust. However, under a long-standing non-enforcement policy, the DOL has exempted employee contributions that are made through cafeteria plans from the trust requirement.  Technical Release 2011-04 confirms that a similar non-enforcement policy will apply to MLR rebates that are plan assets if such rebates are used within three months of receipt.

The first set of rebates will be due in August, 2012, based upon insurers’ calculations of their medical loss ratio for 2011.  Plan sponsors should review applicable insurance policies and plan documents, and consider the plan asset issues before then to ensure that they will know what to do with any MLR rebates that they receive.