by Hans M. Zimmer
Unless you live under a rock, you've likely heard the story through any number of media that the United States Supreme Court in a very divisive 5-4 vote upheld the constitutionality of the Patient Protection and Affordable Care Act (aka Obamacare but in this article, PPACA). The purpose of this article is not to talk about whether the Court was right or wrong, but to highlight one of the features of that Act that may soon result in some welcome news showing up in your mailbox.
Employers who sponsor group health plans that are fully insured may already have received a notice from their insurance carrier that they will receive a rebate for the insurance premiums paid the prior year. If you haven’t gotten such a notice, don’t panic – the deadline for insurance companies to send out these notices is August 1, 2012. You may also get a notice that states that you don’t get a rebate and explains why no rebate is due.
The source of the rebates and the notices is a provision in the health care law that requires insurers to rebate premiums to policyholders unless the insurance companies can demonstrate that they met a Medical Loss Ratio (MLR). The MLR for large group carriers (more than 1,000 employees) is that no less than 85% of premium income must be spent on medical claims and health care quality improvement actions. For the small carriers, that ratio drops to 80% of premium income. While the dollar figures are not fully known yet, estimates have ranged anywhere from $800 million to $1.5 billion that will be sent to policyholders of group plans.
Let’s assume your company’s plan is one of the lucky ones that get money back from the insurance company that insures your company’s health plan. What options do you as the employer sponsoring the health plan have with respect to this refund check?
You are probably aware that your company’s health plan is governed by a federal statute known as the Employee Retirement Income and Security Act (“ERISA”). Nearly every employer-sponsored plan for a non-governmental employer is governed by this statute. The PPACA requires the insurance companies to send the check for the rebate and the notice explaining the calculation to the employer, but also requires that the same notice be sent to every employee (including terminated employees) covered under the plan in 2011. This means that all your employees will know that the company received the rebate and questions are sure to come up and you should be prepared to respond to those questions.
To properly determine how to respond to questions that may come up, you need to answer 4 questions:
- How much of the rebate must be paid to plan participants and how much can the employer keep?
- If the rebate has to be paid to participants, how do I allocate the amount among my participants? Do I have to include terminated employees?
- Do I have to send the participants a check or are there other ways to use the rebate?
- How soon do I have to distribute the rebate to participants?
The Department of Labor in Technical Release 2011-04 issued some very concise guidance on these questions. In summary:
- The amount of the rebate that belongs to plan participants is likely determined according to the percentage of the premium cost paid by the employer and the employee. If the employer pays the entire bill, then the entire rebate belongs to the employer. However, if the employees contribute to the premium payment, then whatever percentage of the cost paid by the employees will be equal to their share of the rebate. For example, if the employer pays 50% of the premium and employees pay the other 50%, then the rebate check is also split 50/50.
- If the determination is made, that some percentage of the rebate check belongs to plan participants, the Department of Labor allows the sponsor to decide how to allocate the funds in one of 3 ways:
- Only to current participants (i.e. 2012 participants)
- Only to current employees who are current participants in the plan and also participated in 2011, or
- Current employees who are current participants and to persons who were on the plan in 2011 and are no longer on the plan (even terminated employees).
I would submit that the easiest way is to leave any former employees out of the calculation and divide any funds only among your current employees. You can do this either evenly based on a headcount or do a calculation based on the premiums paid by each employee to take into account that some employees cover only themselves, while some cover spouses and children as well. Either method is acceptable under the Department of Labor’s guidance.
- The easiest way to use the rebate is to reduce premiums for the upcoming year for employees. That method certainly meets the Department of Labor guidelines and is by far the easiest to communicate and the easiest for employees to understand.
- Any rebate that you receive should be used within 90 days of your receipt of the funds. If the rebate is not used within three months, the Department of Labor requires that the funds be placed into a trust account for the benefit of the employee-participants in the health plan. The failure to either disburse the rebate or to place it into a trust can result in substantial penalties if discovered on audit.
It remains to be seen just how large the rebates will be or, for that matter, if any will be issued. The insurance companies will likely attempt to keep as much money as possible and it is quite possible that rebates will be minimal or non-existent. Nevertheless, since all employers sponsoring a health plan and all employees covered under a health plan will receive some form of notice by August 1, 2012, you should be prepared to act and respond to the inevitable questions you will receive.