Updated 6/15/20 with new guidance by the Centers for Medicare and Medicaid Services (CMS) on Medical Loss Ratio (MLR) rebates and deadlines.
The coronavirus (COVID-19) outbreak, and the associated stay-at-home orders have caused a decrease in utilization for some employers’ group health plan benefits. As a result, insurance carriers have been notifying employers that they will be receiving a credit for their insurance premiums (“premium credits”). This article discusses how employers may utilize premium credits while staying compliant with their fiduciary responsibilities.
Generally, employers are required to use “plan assets” solely for the benefit of plan participants. Below we discuss how employers can determine whether a premium credit (or a portion thereof) is considered a “plan asset” and how employers can use the credit for the benefit of plan participants.
The policyholder (typically, the employer) has special obligations concerning the treatment of premium credits (which are also referred to as premium rebates) that they receive from their insurance carriers. If any portion of the credit is considered a “plan asset,” the policyholder (i.e. employer) will be acting in a fiduciary capacity when determining how to utilize those funds. Any funds that are plan assets must be used exclusively for the benefit of plan participants. Therefore, if an employer receives a premium credit, they must first determine whether any portion of the credit is considered a “plan asset” before assessing how they are permitted to use the funds.
The Department of Labor (DOL) Technical Release (TR) 2011-04 provides guidance on how employers can determine whether a premium credit (or a portion thereof) is considered a plan asset and how they are permitted to use the credit. Although TR 2011-04 addresses Medical Loss Rebates (MLR rebates), employers can use the same analysis outlined under TR 2011-04 when determining how to treat COVID-19 premium tax credits.
Treatment of Premium Credits
The method for determining how to treat and distribute COVID-19 premium tax credits is outlined below.
Step 1: Determine the plan to which the premium credit applies.
Employers should review any documentation accompanying the premium credit to determine which group health plan the credit applies to. Generally, a credit generated by one plan cannot be used to benefit the participants of another plan. Doing so would be a breach of fiduciary duty.
Step 2: Determine if any portion of the credit can be retained by the employer.
Employers should look at the terms of the insurance policy or contract (“governing documents”) to determine whether they can retain any portion of the premium credit. The governing documents may address who “owns” the credit and/or how the employer must distribute the credit.
If the governing documents address premium credits, employers should follow the documents accordingly. Some common scenarios are as follows:
- If the employer is the policyholder and governing documents provide that some or all the credit belongs to the employer, then the employer may retain the portion that belongs to them. It is important to note that the employer being the policyholder, in and of itself, does not necessarily mean that they have the right to retain the premium credits (the governing documents must explicitly give employers this right).
- If the plan or its trust is the policyholder (not the employer), or if the governing documents provide that some or all of the credit belongs to the plan or plan participants, then the entire credit is considered a “plan asset” and cannot be retained by the employer.
If the governing documents do not address premium credits (or are ambiguous), the employer should look at the source of the premium payments to determine what portion of the premium (if any) is considered a “plan asset” (see Step 3).
Step 3: Determine what portion (if any) of the premium credit relates to employee contributions toward the plan’s premiums.
If the governing documents do not specify who “owns” any premium credits, employers should determine what portion of the premiums (percentage) were paid by the employer versus the employee. Generally, the portion of the credit that is considered a “plan asset” is proportional to the amount employees contributed to the cost of the premiums.
- Employer contributions: The employer may keep the entire portion of the credit that relates to “employer” contributions. If the employer paid the entire portion of the premiums (on all tiers of the plan, not just the “employee-only” portion), then they can retain the entire premium credit.
- Employee contributions: The portion of the credit that relates to employee contributions is generally considered a “plan asset” and can only be used for the benefit of plan participants and beneficiaries.
Step 4: Determine how to distribute the premium credit.
Employers must distribute the portion of the credit that is considered a plan asset to plan participants. Employers have discretion to determine how the credit is distributed, so long as the method is reasonable, fair, and objective. Employers should document their decision-making process for using the distribution method chosen.
Determine which participants will receive the credit: Generally, the employer should distribute the credit to plan participants that were covered under the plan for the year in which the credit was prescribed. However, employers can decide to distribute the credit only to current plan participants (and not former employees) if the employer finds that the cost of distributing shares of the credit approximates the amount of the credit. For instance, an employer can decide to provide a $10 credit only to current employees because it costs $15 to locate and send the rebate to former employees that were covered under the plan during the applicable time period.
Determine how the credit will be allocated among plan participants: Employers should determine whether they want to distribute the credit equally among plan participants or in proportion to their premium contributions. The distribution of the credit does not have to reflect the actual contributions each employee made to the plan, as long as the method for distributing the funds is reasonable, fair and objective. Most employers tend to distribute the funds evenly.
Determine the method for distributing the credit: DOL guidance suggests that the preferred method for distributing the credit is through a direct refund to plan participants (either through cash or check). It is important to note that this “cash” rebate is subject to income taxes if employees paid for their healthcare premiums on a pre-tax basis (the rebate is not subject to taxes if the employees paid for premiums on a post-tax basis).
If distributing “cash” payments is not cost effective because the credit is small or it would result in tax consequences for participants, employers have flexibility on how to apply the credit. Employers have the option of the following additional distribution methods:
- Premium reductions for plan participants;
- A premium holiday; or
- Benefit enhancements to the plan, such as adding a new benefit or service.
Employers should review all the relevant facts and circumstances when determining how the credit is distributed. Most often, employers distribute the credit in the form of a discount on premiums for employees who are currently enrolled.
Step 5: Distribute the credit within 3 months of receipt.
Employers must distribute the portion of the credit that are “plan assets” within 3 months of receiving the credit. If employers fail to distribute the credit within three months, they are required to keep the funds in a trust.
New CMS Guidance on Medical Loss Ratio Rebates
On June 12, 2020, the Centers for Medicare and Medicaid Services (CMS) released a bulletin which temporarily relaxes carrier reporting requirements for the 2019 Medical Loss Ratio (MLR) annual reporting form. Under the ACA, carriers are required to issue a MLR rebate to employers with fully insured plans if the carrier did not spend a certain percentage of the plan’s premiums on health care services. In addition, carriers must submit a report to CMS on premium revenue and expenses related to coverage (to determine whether they owe MLR rebates) by July 31st following the end of the plan year.
The CMS bulletin temporarily relaxes the 2019 reporting requirement by providing the following:
- permits carriers to pre-pay a portion of (or all of) the estimated MLR rebate to employers for the 2019 reporting year to support enrollees who may be struggling to pay premiums because of illness or loss of income resulting from COVID-19;
- extends the deadline for carriers to submit their MLR reporting for the 2019 plan year from July 31, 2020 to August 17, 2020; and
- provides a model notice for carriers to use to inform employers that they are receiving a pre-payment of their MLR rebate.
The CMS bulletin makes it easier for carriers to provide employers with MLR rebates, which will likely result in employers receiving rebates for the 2019 plan year ahead of schedule. Employers should follow the steps outlined above when disbursing the rebates to plan participants.
Employers who receive premium credits due to COVID-19 should determine their obligation (if any) to distribute these credits. Employers should do the following:
- Determine if any portion of the premium credits are considered “plan assets;”
- Use any portion of the premium credits that are considered “plan assets” for the sole benefit of plan participants; and
- Distribute the portion of the premium credits that are “plan assets” to relevant plan participants within 3 months of receiving the credit.
- DOL Technical Release 2011-04: Guidance on Rebates for Group Health Plans Paid Pursuant to the MLR Requirements
- IRS Medical Loss Ratio FAQs
- CMS Temporary Relaxed Enforcement for submitting 2019 MLR Annual Reporting Form
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