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Guidance on Plan Asset Implications of Medical Loss Ratio Rebates
Practical Law Legal Update 0-515-2012 (Approx. 4 pages)
Guidance on Plan Asset Implications of Medical Loss Ratio Rebates
by PLC Employee Benefits & Executive Compensation
| Published on 06 Dec 2011 • USA (National/Federal) |
On December 2, 2011, the US Department of Health and Human Services (HHS) issued final regulations regarding the medical loss ratio (MLR) requirements under health care reform. The MLR provisions require health insurers to provide rebates to enrollees if certain amounts are not spent on medical care. On this same date, the DOL also issued Technical Release 2011-04, which provides related guidance regarding whether the rebates are considered plan assets under ERISA.
Section 2718 of the Public Health Service Act was added by the Patient Protection and Affordable Care Act and establishes medical loss ratio (MLR) standards for insurers. Under these standards, insurers must provide rebates to enrollees if the insurer's spending for the benefit of policyholders on reimbursement for clinical services and health care quality improving activities, in relation to the premiums charged, is less than:
- 80% for insurers in the individual and small group market.
- 85% for large groups.
On December 2, 2011, the following guidance was issued regarding the MLR requirements:
- A final rule and an interim final rule by HHS that interprets and implements the MLR requirements under health care reform.
- Technical Release 2011-04, which provides DOL guidance to policyholders and plan sponsors regarding how the rebates should be handled under ERISA's plan asset rules.
Final and Interim Final Rules
The final rule finalizes interim guidance issued by HHS in December 2010 addressing the MLR requirements. In the final rule, HHS generally provides guidance on:
- Taxation of the rebates.
- How notice is provided to enrollees who receive rebates.
- "Mini-med" (plans with annual limits of $250,000 or less) and expatriate policies (generally, plans that cover employees working outside their country of citizenship and outside the employer's country of domicile, and non-US citizens working in their home country).
- The calculation and reporting of MLR by insurers.
In the preamble to the final rule, HHS recognizes that for ERISA-covered group health plans, MLR rebates paid to a policyholder (in this case, the group health plan), may implicate ERISA's fiduciary, plan asset and prohibited transaction rules. As a result, to the extent that MLR rebates are plan assets under an ERISA-covered group health plan, the plan fiduciary must make decisions consistent with ERISA regarding how the rebates are handled and allocated. To address these concerns, the final rule references related DOL guidance regarding the duties of employer/plan sponsors and other fiduciaries under ERISA relating to MLR rebates (see Technical Release 2011-04).
In the interim final rule, HHS provides guidance on providing rebates to enrollees in non-federal governmental plans in group markets.
The effective date of the final and interim final rules is January 1, 2012. HHS also requested comments in the final rule on certain issues, including how rebates are provided to group health plans and providing notice to enrollees. Comments are due no later than January 6, 2012.
Technical Release 2011-04
In Technical Release 2011-04, the DOL addresses the plan asset issues raised by HHS in its MLR final rule. In addition to the fiduciary, plan asset and prohibited transaction concerns noted under the HHS final rule, Technical Release 2011-04 recognizes that plan assets are generally subject to the trust and exclusive benefit requirements under Title I of ERISA. However, many ERISA plans are excused from the trust requirement if they satisfy the requirements of Technical Release 92-01.
Technical Release 2011-04 provides that rebates may constitute plan assets under ERISA requiring handling in accordance with Title I, as follows:
- If the plan or its trust is the policyholder, in the absence of specific plan or policy language to the contrary, the entire rebate would constitute plan assets and the employer would have no interest in the distribution.
- If the plan sponsor is the policyholder, determining whether a rebate is a plan asset depends on:
- the provisions in the plan or the policy (if language can be fairly read to provide that some part or all of a distribution belongs to the employer, that language will generally govern and the employer can keep some or all of the distribution); and
- how the plan sponsor and the plan participants have shared in the cost of the policy (for example, the portion of a rebate that is attributable to participant contributions would be considered plan assets).
Technical Release 2011-04 emphasizes that employers that sponsor insured group health plans are prohibited under ERISA from receiving a rebate amount greater than the total amount of premiums and other plan expenses paid by the employer. Also, the guidance does not address the tax consequences related to the receipt, holding or distribution of a rebate, noting that these issues fall under the IRS' jurisdiction.
Employers will want to be familiar with the plan asset rules set out in Technical Release 2011-04, and should be prepared to determine whether any rebates received, whether by the employer or plan, would be considered plan assets under these rules. If so, the rebates will need to be allocated and handled by a fiduciary consistent with the requirements of ERISA.
For more information on the health care reform requirements, which include the MLR standards, see PLC's Health Care Reform Toolkit. For more information on ERISA fiduciary duties, see Practice Note, ERISA Fiduciary Duties: Overview.