Healthcare reform is hitting the streets and a new area of compliance is starting to make employers' heads spin. Insurance carriers who have not hit the required Medical Loss Ratio (MLR) have begun issuing rebate checks to employers. Now the big question is, what does the employer do with this money? If only you could hear, "Just put it in the bank." Unfortunately, it's not that simple.
First, let's take a look at the major compliance items an employer should consider in handling the MLR rebate. Note that this area can become very complicated based on an employer's plan design and funding arrangement. It may be valuable to consult with a corporate tax advisor to determine the best way to handle the rebate.
- Document Your Process - As the plan fiduciary, an employer should fully document their decision-making process, rebate calculations, and distribution process
- Timely Action - Plan fiduciaries have three months from the date the rebate is received to distribute to participants, as necessary
- Communication - Provide clear communication to employees on your process and their availability or non-availability to a rebate
Now let's take a step-by-step look at the process an employer should undergo in determining how to proceed with their rebate.
Step 1: Are you the policyholder?
In most cases, an employer directly sponsors the group health plan and is therefore the policyholder. Jumbo-size employer group health plans or employers with retiree medical plans could have a trust and the trust itself may be the policyholder.
If the employer is the policyholder, the insurance carrier will issue the MLR rebate directly to the employer. It is then the responsibility of the employer (plan fiduciary) to determine the proper handling of the rebate.
Step 2: What portion of the rebate is plan assets?
This is a very important question as we look to see who should receive the rebate. Which of the following statements best corresponds to your plan?
Step 3: How do I determine what portion of the premium is the employer's and what portion are plan assets?
- The employer pays 100% of the medical premium for employee and dependent coverage. No portion of the rebate is considered plan assets.
- The employees pay 100% of medical premium for employee and dependent coverage. 100% of the rebate is considered plan assets.
- The employer and employee share in the cost of the medical premium for employee and/or dependent coverage. The portion of the premium paid by employees is considered plan assets.
An employer needs to look at their premium contribution model to determine what portion of the rebate constitutes plan assets. Since employers often have their own unique premium contribution models, this calculation demands close attention.
Employers should keep in mind that when calculating the rebate attributable to individual participants, the refund does not need to reflect the premiums paid by the actual participant. As the plan fiduciary, the employer must present a fair and reasonable process in determining the participant's rebate, then document the process and the calculations.
Anthem Blue Cross of CA has put together an MLR rebate calculator which walks employers through a step-by-step guide in determining the rebate per employee. Click here
to access the MLR rebate calculator.
Step 4: How should the rebate be distributed to participants?
The rebate may be distributed as cash to participants. However, this opens up a tax burden to the participant. The cash refund would be considered as W-2 wages and subject to federal, state, and local taxes. Issuing cash may be too administratively costly of a process for the employer.
Employers may opt for an alternative distribution method of reducing the participant premium contributions. The employer can reduce a participant's premium based on the portion of their rebate. This can be a more tax favorable option than issuing a cash payment.
Finally, employers can use the rebate to enhance the participant's benefits. However, this could be done through a wellness incentive. The cost of such a program or similar benefit enhancement may outweigh the total participant rebate.
The Department of Labor (DOL) does not address the issue of employers using the MLR rebates to pay for administrative expenses. Due to the silence on this issue we recommend that employers proceed with extreme caution in using the plan asset portion of the rebate to pay for administrative expenses.
The rebate may be distributed to participants on the plan in the year the MLR rebate is issued (2012). Or the rebate may be distributed to participants who were on the plan the year the MLR was calculated (2011). Most employers will issue the rebate to the current year participants due to the administrative difficulty of finding prior year terminated participants.
The rebate may only be used for participants on the policy that received the rebate. For example, if the HMO plan received a rebate but not the PPO plan, then the employer would only offer the rebate to HMO plan participants. Employers offering multiple policies and multiple insurance carriers must be careful in adhering to this guideline.
Step 5: Document the process
The employer is the plan fiduciary and is responsible for properly distributing the rebate when it applies to plan assets. Employers must be mindful to retain full documentation of their process and rebate calculations. You want to be fully prepared for a DOL audit.
The Affordable Care Act (Health Care Reform Law) requires that all fully insured health plans meet a minimum medical loss ratio (MLR). For small employers (<100 employees) the MLR is 80% and for large employers the MLR is 85%. This means that for every $100 of premium paid on a small group medical plan, the insurance carrier must use at least $80 to pay claims and $20 for administration.
The insurance carriers are required to report their MLR each year to the Health and Human Services. Click here
to find if your insurance carrier will be issuing a rebate by the August 1st deadline.