In early July insurance companies (issuers) required to pay rebates to policyholders, are issuing checks to deserving policyholders. Who would have thought it would become so complicated! Although we do have some guidance from the Agencies (Internal Revenue Service, Department of Labor, Department of Health and Human Services, Center for Consumer Information and Insurance Oversight), and Final Rules (December 7, 2011 and May 16, 2012), plan sponsors are struggling with their options. The purpose of this Memorandum is to offer clarity, where possible, to plan sponsors faced with the duty to distribute the loot.


In December 2011, the Agencies  issued the Final Rule on Medical Loss Ratios, but modified it again in 2012. Please refer to our Memorandum dated April 18, 2012 for an explanation of the basic rules on the treatment of rebates. Issuers must distribute rebates by July 31, 2012. Please refer to Exhibit A at the end of this Memorandum for a list of California issuers providing rebates (the complete list by states is available here).

Key Points

  1. What plan sponsors can do with the rebate depends on who sponsors the plan:
  • Plans Subject to ERISA

The plan sponsor can take its share of the rebate based on the percentage of premium it pays for coverage, but must share the balance with plan participants, using one of the following methods:

–  Reduce employee contributions;

–  Enhance benefits;

–  Make a cash payment to plan participants.

We will discuss the intricacies of these three methods later in this Memorandum.

  • Public Agency Plans

Non-federal public agencies (i.e. cities, state agencies, school districts, etc.) may do the following:

–  Reduce employee contributions;

–  Make a cash payment to plan participants.

  • Church Plans

Churches have the following options:

–  Reduce employee contributions;

–  Make a cash payment to plan participants.

However, churches must provide issuers with written assurance that the benefit will be used for plan participants before the issuer can release the payment.

  1. Cash Payments. If a plan sponsor chooses to issue cash payments to plan participants (whether current year or 2011 calendar year), the cash payment:
  • Will be taxable income to participants who made their medical plan contributions on a pre-tax basis, and are subject to all federal payroll taxes (Social Security, Medicare, FIT).
  • Will not be taxable income to those participants who paid contributions on an after-tax basis (whether current or prior year coverage).
  1. Premium Holidays. The option we would expect most plan sponsors to choose is to reduce employee contributions by the amount of the rebate over a one, two, or three month period depending on the amount of the employee share of the rebate. By reducing the employee contribution under a pre-tax contribution plan (IRC Section 125), the reduction amount will revert to taxable income to the employee receiving the reduction. For example, if the employee’s pre-tax salary reduction contribution amount is $100/per pay period and drops to $75 per pay period as a result of the holiday, the employee’s take home pay will increase by $25 minus applicable income and payroll taxes.

Administratively, this approach is far more efficient than sending out checks and adding the amount to W-2 wages later on.

  1. Self-Funded Medical Plans. There are no loss ratio rules and no rebate requirements for self-insured plans. In the case of a multiple employer group/association self-funded health plan, where the plan sponsor sets fixed rates for participating employers (budgeting tool), the plan is not subject to the MLR since the association is not acting as an insurer.

Commonly Asked Questions

Introduction. Plan sponsors who have received rebates have little or no official guidance on how to distribute the rebate beyond two (non-ERISA plans) or three (ERISA plans) major options. In our view, the plan sponsor of an ERISA plan must rely on ERISA fiduciary rules (ERISA Section 404). To wit:

  • 404(a)(1): Must discharge its duties solely in the interest of plan participants;
  • 404(a)(1)(A): With the exclusive purpose of providing benefits to plan participants;
  • 404(a)(1)(D): In accordance with the plan’s documents.

Plan sponsors of public agency plans and church plans must rely on their state fiduciary rules (for example, California Probate Code), which tend to be less restrictive than ERISA’s fiduciary rules.

Dividing the Rebate Between the Employer and the Participants. The plan sponsor can split the rebate between the employer and plan participants by calculating the percentage of total employer contributions against total premiums paid in calendar year 2011 for the plan to which the rebate is attached. The balance goes to plan participants.

Sample Scenario: The total premiums paid to Anthem for the PPO portion of the Anthem policy (rebate is for PPO only) is $990,000 with the employer paying two-thirds of the cost. The rebate is $60,000 for 2011.

  • The employer gets two-thirds of the rebate ($40, 000); and,
  • It must distribute the balance (one-third) to plan participants ($20,000).

Question 1.  Who are the Plan Participants?

It can include one or more of the following groups using our scenario:

–        The active employees currently covered under the Anthem PPO (2012);

–        Active employees covered under the Anthem PPO plan in 2011 (some suggest that the plan sponsor use the enrollment listing for December premiums);

–        The employees covered currently under the Anthem PPO plan who were covered in 2011 (new participants in 2012 wouldn’t get the rebate in this option);

–        Qualified COBRA beneficiaries (in 2011 or 2012) can be included or excluded as a group at the plan sponsor’s discretion. To include COBRA people is a messy option, requiring notices to the Qualified Beneficiaries or even cash refunds. I would not recommend the exercise of this option.

–        Former employees who participated in the 2011 PPO plan. Here the plan fiduciaries should measure the cost of this option (e.g. locating the individuals, cutting checks, etc.) against the value of the exercise. I recommend that they follow the example found in the Final Rule:

  • Issuers whose group policyholders have disappeared must distribute the 2011 rebate among the 2011 plan participants, but only if the rebate is $20.00 or more (45 CFR Section 158.242(b)(4)).

Question 2.  How Much Should a Participant Get?

Using our scenario, 2011 or 2012 Anthem PPO participants can receive one-third of the total rebate without regard to their actual pre-tax contributions. For example, there were (are) 100 PPO employees in the plan. The rebate is $20,000 (1/3 of the total rebate) resulting in each participant either receiving $200 in cash or a credit against their monthly 2012 contributions. The employer receives $40,000.

But wait. Since there are no rules other than the ERISA fiduciary rules, the plan sponsor may drill down, if it wants, to coverage tiers in the distribution process. For example, if the plan sponsor pays 100% for employee only and requires the employees who cover dependents pay 100% of the dependent rate, the plan sponsor would divide the $20,000 as follows:

–        Since the employer paid the full cost for single (100 employees), the rebate would go only to employees who had dependent coverage. Under a three rate structure (excess premium over single premium), with the following enrollment:

  • 30 employees with spouse only coverage each pay $300/month extra
  • 25 employees with family coverage each pay $600/month extra

Employees with spouse only coverage as a group would share $37-1/2% of the rebate and employees with full family coverage would get 62-1/2% of the rebate.

  • Rebate for employees with spouse only coverage: $20,000 X .375 ÷ 30 = $250 each
  • Rebate for employees with family coverage: $20,000 X .625  ÷ 25 = $500 each

Important Note. The rebate rules are very clear about one thing: the rebate does NOT need to match each employee’s contribution amount! It can be divided evenly among all participants. So in this case, the plan sponsor could (and probably should) divide the $20,000 among 55 employees (those with spouse or family coverage or $363.64 per employee, regardless of how many months they were enrolled.

Contributions by Class. If Do-IT-Rite, Inc. (DIR) receives the Anthem PPO rebate but DIR pays 100% of the premium for exempt salaried employees, but only 50% of the premium for non-exempts and hourlies, then only the non-exempts and hourlies get the rebate, using the same logic we used for tiered contributions by family size, above.

Question 3.  What if the plan sponsor has since terminated the Anthem PPO and replaced it with a CIGNA HDHP?

The plan sponsor can apply the rebate amount against its premium liability under the CIGNA HDHP, offsetting current participant contributions either across the board or by class. If a large number of Anthem PPO participants switched to the HMO (to avoid the risk of the HDHP, for example), the current HDHP participants would get a windfall. In this instance it might be better for the plan sponsor to issue the rebates as cash to all eligible former participants of the Anthem plan. There are no rules to prohibit that.

Other Matters

  1. 90 Days to Make the Distribution. The IRS and DOL will treat any portion of the rebate not distributed within the next 90 days as a plan asset which must be held in a formal trust.
  2. Former Employees in the Event of a Distribution of Cash to 2011 Participants. The Final Rule on MLRs provides no specific advice on this issue at the plan sponsor level. As a result, if the plan sponsor finds that getting the money into the hands of its former employees is onerous (i.e. an expensive proposition) it might be to the advantage of current plan participants for the plan sponsor to forget about it!
  3. Amending the ERISA Plan Document. We recommend that plan sponsors amend their ERISA plan document (i.e. wraparound plan document) to incorporate the ERISA plan rebate options and giving the plan sponsor discretion on which option to follow. We have created a sample Amendment. Since, in most instances the Amendment is most likely not a substantial change, the plan sponsor at its discretion can issue a Summary of Material Modification to participants.
  4. Mini-Meds and Expatriate Plans. Special rules apply here, but the rebate methodology itself parallels the content of this Memorandum.
  5. Blue Shield Rebates. Please not that the matters discussed in this memo apply only to rebates generated under the ACA MLR provisions. They do not apply to voluntary rebates such as we saw with Blue Shield in California.
  6. Issuers Sending Notices. At the time the issuer sends out its rebate, it will also notify plan participants. The Final Rule described the content of those notices.

 Needless to say, without more specific guidance, plan sponsors have a great deal of discretion on how to handle an MLR rebate. We will keep you posted in the event of new guidance in the area.

 Copyright © 2012 Kutak Rock LLP • All Rights Reserved. Reprint with permission only. This legislative update is published as an information source for our clients and colleagues. It is general in its nature and is no substitute for legal advice or opinion in any particular case.

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