Employer Health Insurance Rebates & How To Legally Use Them

Did your health insurance company send you a check? Under the Affordable Care Act ("ACA"), health insurance companies must issue a rebate to employers by August 1 each year if they failed to spend a certain percentage of the premiums toward medical care or health care quality improvement.

Private Group Health Plans

Employers with ERISA plans must first determine whether the rebate is considered a plan asset under the insurance contract governing the plan.

• If the rebate is not a plan asset, the employer can retain the funds.
• If the rebate is a plan asset, the employer must use the funds to benefit plan participants.

Is The Rebate A Plan Asset?

Look at the language of the plan to determine the identity of the policyholder and who paid the premiums.

• If the plan is the policyholder, the entire rebate must be treated as a plan asset.
• If the employer is the policy holder, then the portion of the rebate that must be treated as a plan asset depends on who paid the premiums.

You must make this determination and the disbursement within 90 days after receiving the rebate, or the funds must be placed in trust pending the determination.

If All or a Portion is a Plan Asset, How Should the Rebate Be Used?

The Department of Labor has identified the following methods for using the rebates:

1. Distribute the rebate to participants under a reasonable, fair and objective allocation method. If the cost of distributing the rebate to former participants approximates the amount of the proceeds, the employer may decide to limit rebates to current participants.
3. If it is not cost effective to distribute payments to participants (because the amounts are too small or payments would produce negative tax consequences for the employees), you may apply the rebate toward future participant premium payments or toward benefit enhancements.

Church Plans

An employer with a non-governmental group health plan not subject to ERISA, such as a church plan that has opted out of ERISA, may receive rebate payments after providing written assurance to the insurer that the rebate will be used for the benefit of current subscribers. In the absence of a written assurance, insurers are required to pay the entire rebate (including any portion attributable to premiums paid by the employer) directly to the employees covered under the policy during the Medical Loss Ratio reporting year. If you intend to provide written assurance to your insurer that the rebate will be used for the benefit of current subscribers, you must specify that the rebate will be allocated in one of the following ways:

1. Reduce the premiums for the next policy year by allocating it among all participants covered under any plan option at the time the rebate is received;
3. Reduce the premiums for the next policy year by allocating it among only the participants covered under the policy to which the rebate is attributable at the time the rebate is received; or
5. Issue a cash refund to participants covered under the policy to which the rebate is attributable at the time the rebate is received(divided according to each participant's actual contributions to the premium; or in a manner that reasonably reflects each participant's contributions to the premium).

For More Information

Additional information is available at http://www.cms.gov/CCIIO/Programs-and-Initiatives/Health-Insurance-Market-Reforms/Medical-Loss-Ratio.html. The IRS released an FAQ addressing the tax treatment of rebates, which can be found at http://www.irs.gov/uac/Medical-Loss-Ratio-(MLR)-FAQs.

Note:

If you have questions about this issue, please contact our Los Angeles, San Francisco, Fresno, or San Diego office.

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