Sharing a Group Health Plan Premium Refund from a Medical Loss Ratio

While much of the work of Michigan HR Group is focused on candidate recruitment and employee development, along with the basic 'blocking and tackling' of HR administration, sometimes our blog posts have to dive into the weeds.  If the next paragraph applies to you, then join us in another weedy space where we can offer some insight.  (That just means we read a dozen web postings including those from the DOL, IRS and several law firms, and summarize some keys points here for you.)

As part of the Affordable Care Act, group insurance companies were subjected to a rule whereby if their profits are too high ("medical loss ratio"), they had to refund the amount to the employer.  The employer in turn has 90 days to act as a "fiduciary" on behalf of the plan participants for whom the refund applies.  Did you get such a payment from group health plan insurance company?  Do you know what to do with it?

There are different ways to allocate the premium return.  One clear way is if the employee paid 10% of the premium, than each formerly participating employee receives 10% of the returned dollars. If employees paid premiums on a pre-tax basis, the refund is taxable; or vice versa. You are expected to provide refunds to former employees, too, if they were in the plan during the time the loss ratio was calculated.

https://www.irs.gov/uac/Medical-Loss-Ratio-(MLR)-FAQs

"...the responsible plan fiduciaries must act prudently, solely in the interest of the plan participants and beneficiaries, ... a fiduciary also has a duty of impartiality to the plan's participants....

"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.**

"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."

http://www.dol.gov/ebsa/newsroom/tr11-04.html

So if you do the rough math and the dollars are small (no, neither the IRS nor DOL tell us exactly when small is small), then it is reasonable to do something other than determine a prudent and unbiased way to allocate the dollars back to the individual, affected employees and former employees.

Several law firms have posted similar versions of an employer's options. Here's one:

"It is important to note that the DOL specifically states that a fiduciary breach occurs if a rebate generated by one plan is used to benefit the participants of another plan. As a result, careful attention must be given to the definition of a plan.

"The following options may be acceptable MLR rebate allocation methods for rebates considered to be plan assets:

  • Distributing the rebate directly to participants (and/or former) participants in amounts related to individual premium activity as a premium refund.
  • Application of the rebate toward future participant premium payments.
  • Payment for benefit enhancements."

http://www.troutmansanders.com/what-to-do-with-your-medical-loss-ratio-rebates-08-16-2012/

If the refund amount is small, you can apply it against future premiums (preferably, for that same plan, or similar plan if the affected plan no longer exists) and thus pass on less of the cost of the increase than the employer incurred.  But unless, and only possibly unless, you have documented this method in your plan documents (a document which some employers don't have), you can't do this unless the cost to do the refund equals the refund or the amount is de minimis.  If so, you could, for example, tell employees:

The dollars received from [insert medical insurance company] were literally only apportionable as less than [name the approximated amount you calculated, say, a dollar] for most affected employees.  Those have already been applied to the overall premium we are charging employees for the next plan year in order to reduce the amount of the premium increase we are sharing with employees.

However, you must say (perhaps like the above and document you said it in your annual, healthcare compliance file) or do something (like chose a method to refund the premium individually) ... and do so within 90 days of having received the refund payment.

Yes, we were in the weeds on this one but hopefully you never lost sight of the lake of building a great company.

No, we did not pay an attorney to review this summary and even if we did, we would still have to tell you not to rely on the above for your specific situation but only use it for a general overview of the topic and seek competent counsel before choosing an appropriate course of action. And then get back to excellent work of enabling great employees to deliver awesome service and solutions to prospects and customers.

For further reading, which hopefully you don't have to do, check out http://www.shrm.org/hrdisciplines/benefits/articles/pages/medical-loss-ratio-rebates.aspx or the footnotes on the above cited DOL page.