By: HUB’s EB Compliance Team
As part of the response to the COVID-19 crisis, many insurers are issuing premium rebates or reductions. The crisis has resulted in employees seeking less care for medical, dental, and other services while they shelter in place. As a result, some carriers have decided to offer rebates, premium holidays, or other similar financial relief. The good news is that the U.S. Department of Labor (“DOL”) has provided a roadmap on how to handle rebates like this in connection with its medical loss ratio (“MLR”) rebate guidance.
Rebate v. Premium Holiday
In some cases, carriers are not sending money, but may simply give the employer a “premium holiday” where the employer does not have to send the premium, or may send a reduced premium, for a month or more. Here, if the employer is receiving a premium break, it should share that break with the employees and COBRA participants to the extent they shared in the cost of the coverage. It can determine what portion to share based on the same principles outlined below for rebates.
The Importance of Plan Assets
How you handle a rebate or premium holiday depends on whether part of the premium is paid with “plan assets.” Plan assets are that portion (if any) of the money used for paying plan premiums or benefits that must be handled according to special fiduciary rules. This means they must be used for the benefit of plan participants. For an employer’s plan, the most typical example of plan assets is employee contributions.
How do you determine whether part of the premium was paid with plan assets?
- First, look to the plan documents and insurance contracts. Do they address what portion of the rebate is plan assets? Federal benefits law, known as ERISA, requires the employer to follow the terms of the plan. Therefore, if the plan or policy addresses whether the employer owns the rebates, the fiduciary should follow the plan. However, in many cases, the plan or policy is silent on the treatment of rebates.
- Second, if the plan or policy is silent, look at how the premiums were paid:
- Entirely Employer-Paid: None of the rebate is a plan asset. The employer may use the rebate for corporate purposes.
- Entirely Employee-Paid: The entire rebate is a plan asset. In that case, 100% of the rebate must be returned to employees.
- Employer and Employees Each Pay a Share of the Premium: The portion of the rebate attributable to employee contributions (including COBRA participants, whether or not they are or were employees) is a plan asset and therefore must be returned to the employees/COBRA participants/prior employees. For example, if employee contributions (from both active employees and COBRA participants) totaled 25% of the contributions, then 25% of the rebate would be considered plan assets.
- Paid for Through a Trust: The entire rebate must be deposited into the trust. In that case, it must be used only for the expenses of that particular plan. It should not be used to pay for premiums of any other plans that might be funded through the same trust, for example. It also should not be returned to the employer.
Because “employee” contributions/plan assets include contributions by COBRA participants, nearly all plans will fall in the third bullet.
Plans not subject to ERISA, such as governmental and some church plans, may have different rules and should consult with counsel on which laws apply. However, they too should generally check plan or policy terms for the treatment of rebates.
Options for Reimbursing Plan Assets to the Employees
In the MLR context, the DOL has provided three basic options for dealing with the “plan asset” portion of the rebate, which could also be applied here:
- Pay it to participants (through payroll or via separate check). This is the DOL’s preferred approach.
- Give participants a premium holiday or reduction in the current year (obviously, this option is not available to former participants).
- Use the funds for plan enhancement activities (such as adding a wellness program to the plan).
Rebates usually must be used or distributed as soon as possible, but no later than three months after they are received.
If an employee paid for the health insurance coverage on a pre-tax basis through a cafeteria plan, then the rebate will be taxable to them. In other words, if the deduction for the health insurance was taken on a pre-tax basis, the rebate is taxable. On the other hand, if original health insurance deduction was after-tax, the rebate would not be taxable.
If the rebate is used to fund a premium holiday for employees, and the employee is paying for the health insurance on a pre-tax basis, then the employee’s taxable income will naturally increase by the amount of the holiday. For example, assume an employee is paying $400/month on a pre-tax basis. The employer gets a rebate and reduces the premium for one month by $150. The employee will only pay $250 that month, which means the employee will naturally have $150 of additional taxable income.
If the rebate is used for plan enhancement activities, those additional plan enhancements should generally not be taxable.
Treatment of Former Participants
Generally, the rebate should benefit the participants that paid into the plan or policy for the current year since these COVID-19-related rebates are for the current year.
However, in some cases, it simply doesn’t make sense to find prior employees who may have terminated employment during the year to provide them with a rebate. For example, the rebate may be so small that the cost of distributing the rebate to people who aren’t on the policy anymore may be more than the rebate they would receive. In that case, the plan fiduciaries could decide to provide the rebate only to participants who are still on the policy, including COBRA participants.
Allocating the Rebate
The rebate does not necessarily have to be allocated based on what employees paid. For example, employees who had family coverage do not necessarily have to receive a greater rebate than those who had only single coverage.
The relevant DOL guidance permits the plan fiduciary to weigh several factors. These include (1) the costs to the plan of distributing the rebate, (2) the ultimate plan benefit of distributing the rebate, and (3) the competing interests of groups of participants. As long as the allocation method is fair, objective, and reasonable, the DOL is likely to respect it.
Rebates are on a Policy Basis
Typically, the plan asset portion of a rebate received under a particular policy should be paid to participants on that policy. For example, if an employer receives a rebate on the HMO option under its plan, it should be used to benefit employees in that HMO option. This also means that rebates from different policies should not be pooled together and then distributed. Each policy should be treated separately.
However, under no circumstances should a rebate issued to a particular policy be used to benefit participants of a different plan. For example, a rebate from the health plan should not be used to reduce premiums in the employer’s disability plan.
For the latest information on the COVID-19 crisis and its effect on employers, please keep visiting HUB’s Coronavirus Resource Center. If you have any questions, please contact your HUB Advisor. You can also view more compliance articles in our Compliance Directory.
NOTICE OF DISCLAIMER
The information herein is intended to be educational only and is based on information that is generally available. HUB International makes no representation or warranty as to its accuracy and is not obligated to update the information should it change in the future. The information is not intended to be legal or tax advice. Consult your attorney and/or professional advisor as to your organization’s specific circumstances and legal, tax or other requirements.