Final medical loss ratio (MLR) regulations, which took effect Jan. 1, 2012, require group health insurers to spend between 80 and 85 cents of every premium dollar on medical care and health care quality improvement. Insurers that fall short must make rebates to participants, beginning Aug. 1, 2012.
These rebates have raised unexpected payroll tax and Employee Retirement Income Security Act (ERISA) issues. In conjunction with the final regs, the U.S. Department of Labor (DOL) has issued advice for ERISA-covered plans. (76 F.R. 76574, 12-7-11; Technical Release 2011-04, 12-2-11)
The regs allow insurers to pay rebates to employers on employees’ behalf. According to the DOL, rebates of employees’ contributions become plan assets in proportion to the percentages or amounts they pay.
If, on the other hand, the plan is the policyholder, or the entire premium is paid out of trust assets, the entire rebate becomes a plan asset. Once rebates become plan assets, plan sponsors have a fiduciary duty to spend them solely for the benefit of the plan and employees.
Employees, however, don’t need to receive rebates in cash. DOL: If distributing payments to employees isn’t cost-effective (e.g., payments are de minimis or would result in taxable wages), fiduciaries may use rebates for other permissible plan purposes—applying rebates to future employee premiums or benefit enhancements, for example.
Sigh of relief: As long as rebates are used in this manner, they will not be taxable to employees.
For cafeteria plans that don’t establish trusts because premiums are paid from the employer’s general assets, the DOL said that there will be no breach of fiduciary duty if plans make decisions on how to spend the rebates within three months.
For non-ERISA-covered plans (such as a church plan), employers may receive rebates on employees’ behalf if they provide written assurance to the insurer that the rebates will be used to benefit employees.
Idea: Avoid payroll tax consequences by amending plan documents to require that rebates be applied to reduce employees’ future premium payments.