Medical Loss Ratio Rebates

 As many employers and employees already know, 2012 is the first year in which rebate checks are being issued pursuant to the new Healthcare Reform mandates. 

THE GENERAL PREMISE: 

Insurers segment their book of business into large group (51 or more employees), small group (2 to 50 employees) and individual.  The carriers then break these segments further down into general plan segments.  The rebates are not based on your specific policies performance, but they are based on the performance of the segment to which your policy applies.

Insurers must spend a certain percentage of premiums on claims, clinical services and activities that improve the quality of health for members.  For large group it is 85% and for small group it is 80%.  If the insurer does not spend at least the required percentage , then they are required to issue rebates to policy holders in each segment that they do not meet the requirements.

WHO RECIEVES THE REBATE CHECKS:

Individual: Rebates for individuals are issued by the carrier to the specific individual.

Group Insurance: Rebates will be issued to the employer.  The employer is then responsible for distributing the checks according to federal regulations. 

GOVERNMENTAL GUIDANCE:

The distribution of group market rebates are addressed by the Depart of Labor Technical Release 2011-4 (Dec. 2, 2011).  This memo will attempt to break down the release to understand the obligations of an employer in determining how to distribute these assets.  If employees contribute to premiums for a plan in which a rebate was issued fiduciary duties will apply to your handling of the rebate.

IS THE REBATE CONSIDERED A PLAN ASSET:

Step 1:  Determine if some or all of the rebate would be considered plan assets; the amount that is considered plan assets will need to be distributed.

               - If a trust or the plan is the policyholder, the entire rebate is a plan asset

             - If the employer is the policy holder, plan documents and the parties' understanding  and representations determine what portion of the rebate is a plan asset

             - If plan documents and other evidence are not conclusive, the portion of  the rebate attributable to employee contributions in the MLR reporting year is considered to be a plan asset.

             - Employer pays entire premium- none of rebate is a plan asset, employer is entitled to all of the rebate and can use it as general funds for the employer

             - Employees pay entire premium-all of the rebate is a plan asset

             - If employer and employees each paid a fixed percentage of the premium, a percentage of the rebate equal to the percentage of the premium paid by the employees would be plan assets

            - If the employer paid a fixed amount and employees paid the balance of the premium, then the entire rebate would be plan assets (as long as the rebate is not larger than the employee contribution)

             - If employees paid a fixed amount and the employer paid the balance of the premium, then none of the rebate would be plan assets (as long as the rebate is not larger than the employer contribution)

I HAVE PLAN ASSETS, DO I NEED A TRUST:

Step 2:  If you determine that some or the entire rebate would be considered plan assets, then you need to determine if the money must be held in a trust account

                -DOL Technical Release 92-01 provides for an exception to holding these funds in trust

                   - In sum, if benefits are provided exclusively through insurance contracts, the premiums for which are paid directly by the employer form its general assets or partly from its general assets and partly from contributions from it employees then a trust does not need to be established as long as the money is forwarded to the insurance carrier within three months of receipt.  (THIS IS AN INCOMPLETE SUMMARY OF THE RELEASE BUT PROVIDES THE PART MOST APPLICABLE TO OUR CLIENT BASE)

        - Essentially, an employer will want to make sure that the funds are used within 90 days of receipt to avoid trust requirements.

HOW DO I ALLOCATE AND DISTRIBUTE THE PLAN ASSET PORTION OF THE REBATE:

Step 3:  Allocation of the plan asset portion of the rebate

                -This portion must be used to benefit plan participants

                -Employers may consider costs in deciding on an allocation method

                -I f the cost of distributing rebates to former participants would approximate the amount they would receive, the employer could choose to apply the plan asset portion of the rebate for the benefit of current participants based on a reasonable, fair and objective allocation method.

                - In making this determination, it is very important to document how you come up with your allocation method and why. 

                - If cash allocation is not cost-effective then the employer can choose to apply rebates to reduce future premium payments.  This will likely result in an employer having to make a payroll adjustment, however, it is likely the most cost effective and least disruptive method. 

               - It is important to note that you will want to apply the rebates to those participants in the same plan as the rebate applies.  If the plan was terminated, then look to your plan document to see if it provides direction for assets of a terminated plan.  If there is no guidance then use the information in the above steps and provide the rebate to the participants in the current plan that is comparable. 

2011-04   Rebates

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

92-01  Trust Exemption

http://www.dol.gov/ebsa/newsroom/tr92-01.html

DISCLAIMER:  This memo was created for informational purposes only.  The reader of this memo should seek legal counsel before using any of the information contained within this memo.  Evolve Consulting Group, Inc. is not providing legal advice but merely information.  The information is provided "as-is" without warranties of any kind and you are using this information at your own risk.  

 

 

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