Rebate Checks and how to Distribute

It appears that insurers can elect to pay the rebate in cash, or use it to reduce future premiums.

Ah, another wrinkle.

That is going to be fun.

Ann, this is certainly a well researched epistle you have written. Are you planning on distributing this, or something similar, to your clients?

If so, do you think you might be thought of as practicing law (presumably without a license)?

No way in hell I would ever send anything like this to clients. Having worked in ERISA plans for several years, as a close friend said of the party in interest provisions, if you were invited to the party you are a party in interest.

This is an issue created by HHS.

I stick with my original comment.

They created this mess, let them deal with it.
 
Ah, another wrinkle.

That is going to be fun.

Ann, this is certainly a well researched epistle you have written. Are you planning on distributing this, or something similar, to your clients?

If so, do you think you might be thought of as practicing law (presumably without a license)?

No way in hell I would ever send anything like this to clients. Having worked in ERISA plans for several years, as a close friend said of the party in interest provisions, if you were invited to the party you are a party in interest.

This is an issue created by HHS.

I stick with my original comment.

They created this mess, let them deal with it.

Thank-you Somarco for the advice. This is indeed scary. And I don't think my E&O covers ERISA advice! Maybe I'll just answer each Employer's direct questions by phone - very simply and with a disclaimer! The Employers are hammering me with e-mails right now, and most questions have to do with Section 125, taxability, and how to calculate the employee's portion.
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United Healthcare just informed me that I can look online and see what rebate amounts my group clients received. A group with 44 enrolled employees in 2011 and an annual premium of $132,211.45 for 2011 will receive a rebate of $124.97 representing .001%. What a mess.

BCBSAZ is rebating 2.1%.

Humana didn't list the rebate amounts for my clients, but I just received an e-mail from a client who has 5 enrolled employees on one of Humana's lowest cost plans ($5,000 deductible 70% plan), and they received a $1018 rebate.
 
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Ann,

See bottom, Conclusion.
Hope this helps.

Lee

Technical Release No. 2011-04

Guidance on Rebates for Group Health Plans Paid Pursuant to the Medical Loss Ratio Requirements of the Public Health Service Act

December 2, 2011
Printable Version
Background

Section 2718 of the Public Health Service Act (PHSA), 42 U.S.C. 300gg-18, as added by the Patient Protection and Affordable Care Act (Affordable Care Act) (Pub.L. 111-148, 124 Stat. 119), enacted on March 23, 2010, requires that health insurance issuers publicly report on major categories of spending of policyholder premium dollars, such as clinical services provided to enrollees and activities that will improve health care quality. The law establishes medical loss ratio (MLR) standards for issuers. Issuers are required to provide rebates to enrollees when their spending for the benefit of policyholders on reimbursement for clinical services and health care quality improving activities, in relation to the premiums charged (as adjusted for taxes), is less than the MLR standards established pursuant to the statute. Rebates are based upon aggregated market data in each State and not upon a particular group health plan's experience.
The Department of Health and Human Services (HHS) has promulgated regulations interpreting and implementing the requirements of section 2718 of the PHSA (75 FR 74864, December 1, 2010 (Interim Final Rule); 75 FR 82277, December 30, 2010 (Technical Correction); and 45 CFR Part 158 (Final Rule with comment period made available to the public on December 2, 2011, and scheduled to be published in the Federal Register on December 7, 2011).(1) In order to reduce burdens on issuers and to minimize the tax impacts on participants in and sponsors of group health plans, the regulations provide that issuers must pay to the policyholder any rebates owed to persons covered under a group health plan. The regulations do not give specific instructions to policyholders who are group health plans covered by the Employee Retirement Income Security Act of 1974 (ERISA) or the sponsors of such plans regarding their responsibilities under ERISA concerning rebates. However, when rebates are issued to such policyholders, issues concerning the status of such funds under ERISA and how such funds must be handled necessarily arise.
Discussion

Distributions from health insurance issuers, such as insurance companies, to their policyholders, including employee benefit plans, take a variety of forms, including refunds, dividends, demutualization payments, rebates, and excess surplus distributions. To the extent that distributions, such as premium rebates, are considered to be plan assets, they become subject to the requirements of Title I of ERISA. Anyone with authority or control over plan assets is a "fiduciary," as defined in section 3(21), and subject to, among other things, the fiduciary responsibility provisions of ERISA section 404 and the prohibited transaction provisions of ERISA section 406. Further, under section 403 of ERISA, plan assets generally must be held in trust, may not inure to the benefit of any employer, and must be held for the exclusive purpose of providing benefits to participants in the plan and their beneficiaries and defraying reasonable expenses of administering the plan. However, the trust requirement does not apply to any assets of a plan which consist of insurance contracts or policies issued by an insurance company qualified to do business in a State or to any assets of a plan which are held by such an insurance company. See ERISA sections 401(b)(2) and 403(b).
ERISA does not expressly define plan assets. The Department has issued regulations describing what constitutes plan assets with respect to a plan's investment in other entities and with respect to participant contributions. See 29 C.F.R. §2510.3-101 and 29 C.F.R. §2510.3-102. In other situations, the Department has indicated that the assets of an employee benefit plan generally are to be identified on the basis of ordinary notions of property rights.
For group health plans, a distribution such as the rebate will be a plan asset if a plan has a beneficial interest in the distribution under ordinary notions of property rights. Under ERISA section 401(b)(2), if the plan or its trust is the policyholder, the policy would be an asset of the plan, and in the absence of specific plan or policy language to the contrary, the employer would have no interest in the distribution. On the other hand, if the employer is the policyholder and the insurance policy or contract, together with other instruments governing the plan, can fairly be read to provide that some part or all of a distribution belongs to the employer, then that language will generally govern, and the employer may retain distributions.
In the Department's view, however, the fact that the employer is the policyholder or the owner of the policy would not, by itself, indicate that the employer may retain the distributions. In determining who is entitled to the distribution, one would need to carefully analyze the terms of the governing plan documents and the parties' understandings and representations.
Under ordinary notions of property rights, if a contract is ambiguous, other evidence may be used to determine the intent of the parties. In the absence of more direct evidence, the Department has looked to the sources of the insurance policies' premium payments.(2) For example, where the premium is paid entirely out of trust assets, it is the view of the Department that the entire amount received from the insurer by the policyholder constitutes plan assets.(3)
Similarly, assuming the plan documents and other extrinsic evidence do not resolve the allocation issue, the portion of a rebate that is attributable to participant contributions would be considered plan assets. Thus, if the employer paid the entire cost of the insurance coverage, then no part of the rebate with respect to this particular policy would be attributable to participant contributions. However, if participants paid the entire cost of the insurance coverage, then the entire amount of the rebate would be attributable to participant contributions and considered to be plan assets. If the participants and the employer each paid a fixed percentage of the cost, a percentage of the rebate equal to the percentage of the cost paid by participants would be attributable to participant contributions. If the employer was required to pay a fixed amount and participants were responsible for paying any additional costs, then the portion of the rebate under such a policy that does not exceed the participants' total amount of prior contributions during the relevant period would be attributable to participant contributions. Finally, if participants paid a fixed amount and the employer was responsible for paying any additional costs, then the portion of the rebate under such a policy that did not exceed the employer's total amount of prior contributions during the relevant period would not be attributable to participant contributions.
In any case, employers that sponsor group health plans that use insurance policies to provide benefits would be prohibited by ERISA section 403(c)(1) from receiving a rebate amount greater than the total amount of premiums and other plan expenses paid by the employer. To the extent that an employer's portion of the rebate exceeds the amount of such employer's total amount of premiums and other plan expenses paid, that excess amount must be held in trust for the exclusive benefit of participants and beneficiaries.
Decisions on how to apply or expend the plan's portion of a rebate are subject to ERISA's general standards of fiduciary conduct. Under section 404(a)(1) of ERISA, the responsible plan fiduciaries must act prudently, solely in the interest of the plan participants and beneficiaries, and in accordance with the terms of the plan to the extent consistent with the provisions of ERISA. With respect to these duties, the Department notes that a fiduciary also has a duty of impartiality to the plan's participants. A selection of an allocation method that benefits the fiduciary, as a participant in the plan, at the expense of other participants in the plan would be inconsistent with this duty. See Restatement (Second) of Trusts § 183 (requiring fiduciaries to "deal impartially with beneficiaries"). An allocation does not fail to be impartial or "solely in the interest of participants," for purposes of ERISA section 404(a)(1), merely because it does not exactly reflect the premium activity of policy subscribers. In deciding on an allocation method, the plan fiduciary may properly weigh the costs to the plan and the ultimate plan benefit as well as the competing interests of participants or classes of participants provided such method is reasonable, fair and objective. 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.(4) Similarly, 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.
Where a plan provides benefits under multiple policies, the fiduciary should allocate or apply the plan's portion of a rebate for the benefit of participants and beneficiaries who are covered by the policy to which the rebate relates provided doing so would be prudent and solely in the interests of the plan according to the above analysis. However, the use of a rebate generated by one plan to benefit the participants of another plan would be a breach of the duty of loyalty to a plan's participants.
Under ERISA section 403(a), plan assets generally must be held in trust until appropriately expended. However, many group health plans receiving premium rebates do not maintain trusts because their premiums are paid from the general assets of the employer (including employee payroll deductions) and all benefits are paid by the policy issuers. In ERISA Technical Release 92-01 (TR 92-01, May 28, 1992), the Department stated that in the case of cafeteria plans established under section 125 of the Internal Revenue Code and certain other contributory welfare plans, it would not assert a violation solely for a failure to hold participant contributions to the plan in trust. In the case of these types of plans, with respect to which a trust is not established in reliance on TR 92-01, the Department would treat the trust relief under TR 92-01 and the limited reporting exemptions in 29 CFR §§2520.104-20 and 104-44 as available for premium rebates that are plan assets if they are used within three months of receipt by the policyholder to pay premiums or refunds as provided in §§2520.104-20 and 2520.104-44. For other plans not otherwise subject to the trust requirements of section 403(a) of ERISA, fiduciaries may take into account the cost of creating a trust when deciding how to expend rebates. For example, directing insurers to apply the rebate toward future participant premium payments or toward benefit enhancements adopted by the plan sponsor would avoid the need for a trust, and may, in some circumstances, be consistent with fiduciary responsibilities.
In some cases, the plan involved may have terminated before the rebate is paid to the policyholder. The HHS regulation at §158.242(b)(4) describes the issuer's obligations in the event that it cannot, despite reasonable efforts, locate the policyholder with respect to a terminated plan. In cases where the issuer is able to locate the policyholder with respect to a terminated ERISA-covered plan, we believe that the policyholder must comply with ERISA's fiduciary provisions in the handling of rebates that it receives, including looking to the plan document to determine how assets of the plan are to be allocated upon termination. Under ERISA section 403(d)(2), the assets of an employee welfare benefit plan that terminates must be distributed in accordance with the terms of the plan to the extent the plan terms are consistent with the provisions of Title I of ERISA and following the terms of the plan would not violate any other applicable federal law or regulation. If the plan document does not provide direction, the policyholder may need to determine if it is cost effective to distribute the plan's portion of the rebate to the relevant former participants in the plan.
Conclusion

Rebates paid pursuant to section 2718 of the PHSA, in connection with group health plans covered by ERISA, may constitute plan assets. If the plan or its trust is the policyholder, in the absence of specific plan or policy language to the contrary, the entire rebate would constitute plan assets, and the policyholder would be required to comply with ERISA's fiduciary provisions in the handling of rebates that it receives. If the plan sponsor is the policyholder, determining the plan's portion, if any, may depend on provisions in the plan or the policy or on the manner in which the plan sponsor and the plan participants have shared in the cost of the policy. Any portion of a rebate constituting plan assets must be handled in accordance with the fiduciary responsibility provisions of Title I of ERISA.
The Department expresses no view concerning the tax consequences of any action taken by a policyholder with regard to the receipt, holding, or distribution of the rebate. Such issues are exclusively within the jurisdiction of the Internal Revenue Service.
For Further Information Contact: Office of Regulations and Interpretations, Employee Benefits Security Administration, Department of Labor, at (202) 693-8510.
 
Thanks Lee. Also, I noticed that some people are saying that you must find employees who participated in the PLAN YEAR, not calendar year, and I cannot find any resource to back up that concept. The information I have read says that the rebate is based on calendar year 2011 premiums, no matter what the group's plan year is. That leads me to believe the Employer distribution should be for plan participants in calendar year 2011, not the plan year. Am I wrong? Does anyone have any definitive source to answer that question?
 
Thanks Lee. Also, I noticed that some people are saying that you must find employees who participated in the PLAN YEAR, not calendar year, and I cannot find any resource to back up that concept. The information I have read says that the rebate is based on calendar year 2011 premiums, no matter what the group's plan year is. That leads me to believe the Employer distribution should be for plan participants in calendar year 2011, not the plan year. Am I wrong? Does anyone have any definitive source to answer that question?

Again, I do self-funding so keep that in mind, but I agree with you. All that I have seen says "calendar" year, not plan year.
 
I don't think my E&O covers ERISA advice!

Only if you paid extra.

A LOT extra.

Even then, you are swimming in shark infested waters.


I noticed that some people are saying that you must find employees who participated in the PLAN YEAR, not calendar year, and I cannot find any resource to back up that concept.

I am saying plan year.

Not because of some special revelation, but because it makes sense.

Say you had UHC for January through June, then switched to Aetna in July for the balance of the year.

You hired Joe in January and he quit in May.

UHC does not give you a rebate, but Aetna does.

Are you going to give Joe a rebate?

But keep in mind I am not advising any clients on these matters so I can say anything I want here . . . even if I have nothing to back it up . . . or if I am 100% wrong.
 
I am saying plan year.

Not because of some special revelation, but because it makes sense.

Say you had UHC for January through June, then switched to Aetna in July for the balance of the year.

You hired Joe in January and he quit in May.

UHC does not give you a rebate, but Aetna does.

Are you going to give Joe a rebate?

But keep in mind I am not advising any clients on these matters so I can say anything I want here . . . even if I have nothing to back it up . . . or if I am 100% wrong.

Get real, Somarco, how often are you 100% wrong? Your posts are like an encyclopedia of good information. Sometimes you're 100% sarcastic, but never 100% wrong!

I agree with you about the multiple plan issue and also about the issue of an employee who only participated for part of the year. But I think we're miscommunicating about the basic issue with plan year and calendar year.

What some are saying is that the rebate is based on the policy's plan year (for instance if your plan renews July 1st, then your plan year may be July 1st to June 30th). Then they are saying that the rebate should be paid to participants for that plan year, based on the premium they paid in that plan year. I think the rebate is based on calendar year 2011 and the pro-rata share should be distributed to employees who paid premiums during 2011. (Granted, if there were 2 insurers you don't distribute the rebate to employees who did not participate in that insurer's plan.)
 
Sometimes you're 100% sarcastic, but never 100% wrong!

100% sarcastic?

Rarely.

I always try to tell some version of the truth in my posts.

What some are saying is that the rebate is based on the policy's plan year (for instance if your plan renews July 1st, then your plan year may be July 1st to June 30th). Then they are saying that the rebate should be paid to participants for that plan year, based on the premium they paid in that plan year. I think the rebate is based on calendar year 2011 and the pro-rata share should be distributed to employees who paid premiums during 2011. (Granted, if there were 2 insurers you don't distribute the rebate to employees who did not participate in that insurer's plan.)


Gotcha.

I don't have any groups getting rebates. GA was one of those states where there were no rebates on small groups (and I got out of the large group market years ago).

But you raise an interesting point.

Let's use the Jan - June and Jul - Dec example.

The carrier that was on the risk in Jan would have to calculate half year rebates since MLR only applied as of 1/1/2011.

The carrier that takes over in Jul won't know the MLR rebate (if any) until the end of the plan year in Jun, 2012.
 
Thanks, Lee. This is such a confusing issue. I even have some Church plans and you'd think it would be easier since they are not bound by ERISA, but actually HHS has managed to make a nightmare out of those rules, too.

Back to the issue of the policyholder being a trust, and therefore the rebates being a plan asset... I don't mean to argue this point at all, particularly not with you since you are such a well-informed and professional agent. I always value what you post. However, I think it's important because some agents were saying they wanted to tell their clients that the employer does not need to distribute refund checks to employees if the the policyholder is the trust. That is because the HHS technical release states that the rebate becomes plan assets if the policyholder is a trust. The agents' conclusion, therefore, is that the "plan asset" belongs to the plan and does not have to be distributed to employees. However, I think this is being read wrong. From what I've read (which is a substantial amount), the exact opposite conclusion should be reached.

If the policyholder is the plan or the trust (which is NOT the case for most of our clients), then the rebate is PLAN ASSETS. However, that means that the rebate MUST be distributed to employees or used for their benefit. Most of what I've read states that the Employer cannot keep ANY of the rebate if the plan or trust is the policyholder. Conversely, if the policyholder is the Employer, the Employer would normally have rights to that money, under ordinary notions of property rights, however, the DOL specifically stated that in this case, if the employee paid part of the premium then the employee is due a pro-rata portion of the refund.

Once again, this information came from what I've read from pretty reputable sites. Since Somarco put the ERISA fear of God into me, I must say this. I'm certainly not an ERISA expert, and what I have written on this forum is just conversation between me and other agents who are trying to understand our clients' situation. It is not meant as legal advice, it is not complete, and it may be inaccurate. I have not (thanks to Somarco's advice) written any of this in a letter to my clients, nor do I intend to. I am referring my clients to an ERISA attorney and I suggest that other agents do likewise.
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Somarco, and all of the other many GA agents on this forum - I am so glad that MLR rebates were generally not required in GA. THIS IS A MESS!!! I am absolutely being hammered with calls and e-mails from groups (and some individuals) about this. The only good news I can see from this is:
  1. Employers will hate PPACA more
  2. Employers will understand that they need an agent to help them through PPACA now and in 2014.
 
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Thanks, Lee. This is such a confusing issue. I even have some Church plans and you'd think it would be easier since they are not bound by ERISA, but actually HHS has managed to make a nightmare out of those rules, too.

Back to the issue of the policyholder being a trust, and therefore the rebates being a plan asset... I don't mean to argue this point at all, particularly not with you since you are such a well-informed and professional agent. I always value what you post. However, I think it's important because some agents were saying they wanted to tell their clients that the employer does not need to distribute refund checks to employees if the the policyholder is the trust. That is because the HHS technical release states that the rebate becomes plan assets if the policyholder is a trust. The agents' conclusion, therefore, is that the "plan asset" belongs to the plan and does not have to be distributed to employees. However, I think this is being read wrong. From what I've read (which is a substantial amount), the exact opposite conclusion should be reached.

If the policyholder is the plan or the trust (which is NOT the case for most of our clients), then the rebate is PLAN ASSETS. However, that means that the rebate MUST be distributed to employees or used for their benefit. Most of what I've read states that the Employer cannot keep ANY of the rebate if the plan or trust is the policyholder. Conversely, if the policyholder is the Employer, the Employer would normally have rights to that money, under ordinary notions of property rights, however, the DOL specifically stated that in this case, if the employee paid part of the premium then the employee is due a pro-rata portion of the refund.

Once again, this information came from what I've read from pretty reputable sites. Since Somarco put the ERISA fear of God into me, I must say this. I'm certainly not an ERISA expert, and what I have written on this forum is just conversation between me and other agents who are trying to understand our clients' situation. It is not meant as legal advice, it is not complete, and it may be inaccurate. I have not (thanks to Somarco's advice) written any of this in a letter to my clients, nor do I intend to. I am referring my clients to an ERISA attorney and I suggest that other agents do likewise.
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Somarco, and all of the other many GA agents on this forum - I am so glad that MLR rebates were generally not required in GA. THIS IS A MESS!!! I am absolutely being hammered with calls and e-mails from groups (and some individuals) about this. The only good news I can see from this is:
  1. Employers will hate PPACA more
  2. Employers will understand that they need an agent to help them through PPACA now and in 2014.


Just figured out the confusion. I have been agreeing with you all along and could not figure out what the issue was. My originial post from a few weeks ago was typed fast and said the assets should NOT be distributed. I did not intend for the word "not" to be there. Sorry for the mistake and confusion. I did go ahead and edit my post to correct my mistake.

If you want a copy of the legislative brief I receive from a legal firm send me an email address and I will forward to you.
 
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