Rebate Checks and how to Distribute

[Ann H]

I received 2 emails today asking for guidance on how they should distribute the refund checks. One group client's e-mail said:

"We received a 2011 Medical Loss Rebate check from BlueCross BlueShield today. I read through the information and am not clear on how our company should handle the rebate. It indicates that it depends on how our policy is held. I called BCBS and they told me I would have to contact a lawyer or go to the various government websites to determine how to manage the rebate. Do you have any resources or recommendations before I start trying to interpret information on the websites? Thanks,"
​

I guess I was hoping someone like Dave Fluker, Somarco, ABC or Leveena would read through the legal jargon and interpret it for us! LOL! Laziness over - I guess I'll read.

 

[leevena]

I am not a lawyer and I only do self funded medical, so that is my disclaimer.

First thing to do is make a determination if the rebate is a plan asset. Check your plan documents for information, my guess is that for most smaller, fully insured groups, the answer is no...but just my uninformed opinion. Next look at who is the policyholder. If the plan or a trust is the policyholder, then the rebate funds are "plan assets" and are distributed to the members.

That leaves the employer as the policyholder. Now, just work the money trail backwards and you will have your answer. If the employer paid the entire bill, the employer gets the money. If the employees paid a portion, then a formula must be determined that is fair and in the best interest of the plan and its members.

If the cost of determining and sending the money to either former participants or current participants approximates or exceeds the amount they are getting, there need not be a distribution.

Also, keep in mind any tax issues, such as if the ee costs were done via a 125 plan.

It's 7:30 am so I hope I got everything.

 

[somarco]

I am sure HHS will be glad to explain how to handle the rebate checks. After all, they are the ones that wrote the regs on this mess.

Truth is, there is no simple answer to this.

Especially if the plan is contributory.

And even more if a 125 plan is in place.

And then there is the issue of allocating the refund over all covered participants during the plan year. Not the calendar year, the plan year.

This includes current and former employees.

I think I feel a blogpost coming on.

 

[Yagents]

Dont worry, the legal and accountant fees will eat it all up

 

[somarco]

Maybe this will clear things up.

InsureBlog: How Now Brown MLR?

Lee, are you awake yet? Care to add your $0.03?

 

[leevena]

Add my $0.03? I am not that wealthy.

All kidding aside, it is not really that difficult, but it can be confusing unless you follow the money trail backwards.

 

[somarco]

Lee, it is not confusing.

Following the money trail will be a major PITA for employers. The more employees you have, the more turnover you have, the more reason the employer has to simply chuck it all.

 

[leevena]

Lee, it is not confusing.

Following the money trail will be a major PITA for employers. The more employees you have, the more turnover you have, the more reason the employer has to simply chuck it all.

I agree wholeheartedly. The formula is easy, the implementation is the pain...no doubt.

My guess is that for most employers the amount that will end up being eligible for disbursement will be small enough so that the employer will not have to go through all of this. Now, whether they choose to do so is another story.

 

[somarco]

My guess is that for most employers the amount that will end up being eligible for disbursement will be small enough so that the employer will not have to go through all of this. Now, whether they choose to do so is another story.

Most employees probably don't know there is a rebate. I believe the employer is required to distribute a letter advising them of the POSSIBILITY, but I could be wrong.

All it takes is one employee to think they have won the lottery and complain if they don't get their share of the rebate.

Yes, I can see this being a lot of fun for employers.

I am sure Sebelius will be getting a lot of Christmas cards from employers as a result.

 

[Ann H]

I appreciate these comments. You guys are very well informed and incredibly smart, which is why I was hoping you'd provide your insights. Last night I read the DOL and IRS technical releases and made notes. I will read some of the carrier's info today and contact the ERISA lawyer I work with sometimes. My husband is a tax accountant, and his input always helps me significantly. Then, I'll post my more educated response. But in the meantime, since all of us getting hammered with calls, I came up with these notes from my reading, which I'm using to prepare a letter to my employer-groups. The following is just a draft...

The easiest way to calculate the refund owed to employees is:

• Find the sum total of all premiums paid in the plan year for your group health insurance plan, no matter if the contribution came from the employer or the employee.
• Calculate the percentage of premium rebated. For instance, if your group premium was $100,000 and you received a check for $2,900, then you received a 2.9% rebate. If the insurance company's letter to you indicated an exact percentage that the rebate constitutes, use that amount.
• Calculate the premium each employee paid for his/her own insurance. This contribution was usually made through payroll deduction. Rebate that percentage to him. (In this example you would rebate 2.9% of the employee-paid premium to the employee.)
• Keep the rest.
• If you, as the Employer, used a Section 125 plan to use pre-tax dollars for employee contributions, then you must include the rebate as taxable income. The reason is that the Section 125 reduced taxable income and therefore reduces the taxes, so the rebate increases taxable income which is subject to taxes (including Employer taxes).

There are 3 entities (ERISA plans, government plans, and non-ERISA non-government plans), but most of our groups will be ERISA plans.

Basic facts for ERISA plans

• Employer must act on behalf of the plan participants in a fiduciary capacity
• If Employee paid part of the premium, they are due a pro-rata part of the rebate.
• Employees are getting letters telling them that the rebate check was cut to the Employer, so you might as well cut the checks in the fairest and most clear-cut manner possible

Basic IRS laws:

• If you tax deducted the premium, then the rebate is taxable
• If you used a Section 125 plan to pay the premium with pre-tax dollars, then the rebate is subject to tax, including employer taxes. This is because the Section 125 pre-tax premium reduced income, and now you must increase income by the amount of the rebate. Edit - The easiest way to avoid a mess with Section 125 is to distribute the funds using a future premium reduction. For instance, if the employee should receive $200, just reduce next month(s)' payroll deduction for the premium by $200, to avoid the whole tax mess. If you have former employees and COBRA participants, however, that are not currently on payroll, I would still send them a cash rebate check. If the premium was originally pre-tax, then the rebate is taxable.

Basic rules of distribution:

• Make the distribution within 3 months of receipt of the rebate check
• Find prior employees who paid premium in the plan year (including COBRA participants), and send them a rebate too.

Other pertinent information

• It appears that you can provide the rebate only to employees who are participating in 2012, even though the rebate is for premium paid in 2011. I don't suggest that you do this, to avoid a lawsuit from former employees. [FONT=&quot]EDIT - This Is because the insurance company is required to send a letter to all plan participants in calendar year 2011, including your former employees, notifying them that the employer received a rebate of premium.Also, the DOL technical release indicates this method can be used only if the rebate is so small as to not be cost effective to distribute. It says, "For example, if a fiduciary finds that the cost of distributing shares of a rebate to former participants approximates the amount of the proceeds, the fiduciary may properly decide to allocate the proceeds to current participants based upon a reasonable, fair and objective allocation method.
  [/FONT]
• It appears that insurers can elect to pay the rebate in cash, or use it to reduce future premiums. Either method of payment results in the same rules of distribution and taxability mentioned above.
• Although insurers can pay the rebate by reducing future premiums, it does not appear that employers can do so. If you received a cash rebate, you must distribute cash rebates to employees who paid part of the premium. CORRECTION - it appears that I was wrong about this. There are 3 methods of Employer distribution - the Employer can distribute using a cash rebate, a future premium reduction, or enhanced benefits for plan participants. I would recommend a cash rebate only, unless there are tax consequences (like with a Section 125). The DOL technical release actually says the last 2 distribution methods can only be used "if distributing payments to any participants is not cost-effective (e.g., payments to participants are of de minimis amounts, or would give rise to tax consequences to participants or the plan), the fiduciary may utilize the rebate for other permissible plan purposes including applying the rebate toward future participant premium payments or toward benefit enhancements."
• There are some provisions for using the rebates as plan assets for things like employee health and welfare fairs. I do not recommend that you do this to avoid complications.
• There is a provision that you do not have to issue checks to employees if the amount is so small that it is not cost effective. Unless your group's rebate is a very small amount in comparison to the overall group premium, or unless employees paid an extremely small percentage of the premium, I do not suggest that you use this loophole to avoid sending a check. It is better to spend $2 to mail a check for 10 cents than to defend a DOL complaint or lawsuit from an angry ex-employee.
• Remember that the insurance company was required to send letters to every employee notifying them of the rebate given to the employer, so do everything you can to avoid a conflict.
• Do not send a complicated cover letter with the rebate check, nor attempt to describe the law and tax consequences for the employee. Just send the check with a simple letter telling the employee that the insurance company rebated a portion of the 2011 health insurance premiums, and the enclosed check represents the employee's pro-rata share. Add that any tax reporting documents will be filed, if any are required.

END OF MY DRAFT....


Lee, you said that if a policyholder is a Trust, then the funds are plan assets and don't need to be distributed to employees, but I didn't read it that way. I read it that "plan assets" means the fiduciary must distribute those funds in a fair manner for the benefit of employees. Please clarify if I'm wrong.

Once again, the above info is just a draft as I'm coming up with a standard answer for my employer-groups. Please, please, correct me if I'm wrong.