QUESTION: We recently received a medical loss ratio (MLR) rebate from our insurer for our ERISA group health plan. Under our plan, the employer contributes 50% toward premiums and plan participants pay the remaining 50%. What are we permitted to do with the rebate?
ANSWER: How the MLR rebate can be used depends in part on whether the rebate belongs to the employer or the plan. In general, the portion of the rebate that belongs to the employer can essentially be used for any purpose. But the portion that is a plan asset must be handled in accordance with ERISA’s fiduciary responsibility rules and DOL guidance regarding permissible uses for MLR rebates.
The ownership of a rebate is not always an all-or-nothing determination. For example, if participants and the employer each paid a fixed percentage of the premiums, a percentage of any rebate equal to the premium percentage paid by participants would be plan assets, and the balance would belong to the employer. In your case, this means 50% of the rebate is a plan asset that must be used for the benefit of participants, while the employer may retain and use the remaining 50% for any purpose.
For the portion that constitutes plan assets, the employer, acting as an ERISA fiduciary, must use it for the exclusive benefit of plan participants and beneficiaries. The DOL guidance includes a reminder that under ERISA’s exclusive benefit rule, an employer may not receive a rebate amount that exceeds the total amount of premiums and plan expenses paid by the employer.
So, what can the plan do with the plan asset portion of its MLR rebate? Technical Release 2011-04 (issued by the DOL to help ERISA group health plans in handling MLR rebates) provides that rebates can be used to reduce future premiums or enhance benefits. Alternatively, they can be returned to participants, but doing so raises tax and administrative issues. Notably, using the rebate to pay plan administrative expenses is not a permissible option under the Technical Release.
When choosing among the permissible uses for the plan asset portion of a rebate, the fiduciary has some flexibility so long as ERISA’s exclusive benefit rule and fiduciary principles are followed. The DOL guidance expressly provides that an allocation does not fail to be impartial or otherwise violate the exclusive benefit rule merely because it does not exactly reflect the premium amounts paid by participants. Furthermore, if making refunds to participants is not cost-effective (e.g., payments would be of de minimis amounts or would create tax consequences to participants or the plan), the rebate may be used for other permissible plan purposes, such as reductions in future participant contributions or future benefit enhancements.
For more information, see EBIA’s Health Care Reform manual at Section XIV.G.2.f (“Guidance for ERISA Group Health Plans Receiving Rebates”). See also EBIA’s ERISA Compliance manual at Sections XVI.B.4.c (“DOL Nonenforcement Policy for Medical Loss Ratio Rebates”) and XIV.E (“Plan Asset Category #3: Amount Attributable to Plan Assets”).
Take your tax and accounting research to the next level with Checkpoint Edge and CoCounsel. Get instant access to AI-assisted research, expert-approved answers, and cutting-edge tools like Advisory Maps and State Charts. Try it today and transform the way you work! Subscribe now and discover a smarter way to find answers.
