HHS has released a report on the first round of rebates to be provided under health care reform’s medical loss ratio (MLR) requirements. The report contains calendar year 2011 data–insurers are required to pay rebates by August 1, 2012 based on their 2011 MLR.
The report provides a detailed breakdown of the rebates to be provided based on 2011 MLRs–both by market type (individual, small and large group markets) and by state.
• HHS estimates that nearly 12.8 million individuals will receive rebates totaling more than $1.1 billion.
• The vast majority of individuals are insured by insurers that meet or exceed the MLR standard–89% in the large group market and 83% in the small group market.
• Insurers in the large and small group markets are expected to return $386 million and $321 million, respectively, in rebates for 2011.
An insurer that issues a rebate must provide a notice explaining the rebate and how it is calculated. For 2012 only (i.e., with respect to the 2011 MLR reporting year), the notice requirement also applies to insurers who are not required to provide rebates because their 2011 MLR meets or exceeds the standard. For the full report, see http://www.healthcare.gov/law/resources/reports/mlr-rebates06212012a.html .
Employers and advisors must gear up for compliance to properly handle these rebates and evaluate the permitted uses. Adding to the complexity is that separate rules apply to ERISA plans, non-federal governmental plans, and non-ERISA, non-governmental plans. (See suggestions from an attorney responding to an inquiry by UBA member Scott Howell immediately below.)
The water was muddied by DOL Technical Release 2011-4 (see http://www.dol.gov/ebsa/newsroom/tr11-04.html) . Basically, the DOL says plan fiduciaries need to go through an analysis of whether some or all of an MLR rebate constitutes plan assets, and if so, how the funds should be held and used. Then the IRS released guidance (in the form of numerous Q&As) on whether MLR rebate payments are taxable to the employee (see http://www.irs.gov/newsroom/article/0,,id=256167,00.html). The DOL and IRS guidance is too technical to summarize in just a few sentences; however, I think I can give you a safe strategy so your clients don’t have to spend time and money trying to analyze all of this.
Strategy – Consider the MLR rebate as plan assets to the extent employees contribute to the premium. The employer should not keep any rebate amount greater than the total amount of premiums and other plan expenses paid by and attributable to the employer. Within 3 months of receipt of an MLR rebate, return any amount paid by and attributable to employees. This avoids any requirement to hold the funds in trust. To avoid most (but not all) payroll headaches and tax issues with employees, consider returning the funds to employees by providing a one-time reduction in a monthly premium (e.g. a premium holiday).
The guidance allows a fiduciary to weigh the costs to the plan as well as the ultimate plan benefit when deciding on an allocation method. If the cost of calculating and distributing a proportional amount of a rebate to former employees approximates or exceeds the amount of the proceeds, a fiduciary is permitted to limit the allocation to current plan participants. In addition, if it is not cost-effective to distribute cash payments to employees (because the amounts are de minimis, or they would produce negative tax consequences for the employees), a fiduciary may use the rebate for other permissible plan purposes (e.g. credit against future employee premium payments, or benefit enhancements).
Note that if an employee paid premiums on a pre-tax basis (i.e., through a cafeteria plan), the return of those premiums (whether received in cash or as a credit against future premiums) will be subject to both income and employment taxes.
