Labor Department Advises ERISA Plans How to Handle Medical Loss Ratio Rebates

• Identifying Plan Assets. To the extent the rebates are considered plan assets they become subject to Title I of ERISA (e.g., the fiduciary duty, prohibited transaction, and trust requirements apply). Is a rebate plan assets? The determination is based on ordinary notions of property rights.
  • Plan or Trust as Policyholder. If the plan or trust is the policyholder, the policy would be an asset of the plan and, unless there is language in the plan to the contrary, the rebate would generally be a plan asset.
  • Employer as Policyholder. If the employer is the policyholder, and the policy or insurance contract and plan documents provide that some or all of the rebate belongs to the employer, then that will govern. If the documents are ambiguous, however, other evidence needs to be examined, such as the source of premium payments. If, for example, the full premium is paid out of trust assets, the entire rebate amount would be plan assets, according to the Technical Release.
• Determining Amounts Attributable to Participants. Unless the plan document and other extrinsic evidence resolve the allocation issue, the portion of the rebate that is attributable to participant contributions would be considered plan assets. Under this rule, if the employer paid the full premium, none of the rebate would be attributable to participant contributions (and, therefore, none would be plan assets). Similarly if the participants paid the full premium, all of the rebate would be attributable to participant contributions (and, therefore, all would be considered plan assets).

  Similar rules apply where the employer and participants each paid a fixed percentage of the cost: the same percentage would apply to the rebate in determining the portion of the rebate attributable to participant contributions (and, therefore, considered plan assets). However, where the employer paid a fixed percentage and the participants were responsible for the rest, the rebate amount — up to the amount paid by the participants — would be attributable to participant contributions. In the converse situation, where the participants paid a fixed percentage and the employer was responsible for the rest, the amount of the rebate up to the amount paid by the employer would be attributable to the employer.

  In any event, an employer would be prohibited from receiving a rebate amount greater than the total amount of premiums and other plan expenses that were paid by the employer for the period. Any such excess would have to be held in trust for the benefit of plan participants. (However, see the discussion on the Trust Requirements, below.)

• Allocating Rebate Amounts That Are Plan Assets. What is to be done with amounts that are plan assets? ERISA's fiduciary standards apply to decisions on how to allocate those amounts. The fiduciaries must act prudently, solely in the interest of plan participants and beneficiaries, and in accordance with the terms of the plan. A duty of impartiality also applies, the Technical Release explains. For example, an allocation method that benefits the fiduciary, as a participant in the plan, at the expense of other participants, would violate the duty of impartiality.

  Significantly, the Technical Release states that an allocation does not violate the duty to act solely in the interest of the participants simply because it does not reflect the premium activity of the policy subscribers. This means that the plan is permitted to weigh the costs and benefits, and the competing interests, in determining how the plan's rebate is to be allocated. The allocation method need not reflect the premium activity of the individual participants provided that it is reasonable, fair and objective. This rule may be particularly helpful where former participants are involved. The Technical Release explains:

  For example, if a fiduciary finds that the cost of distributing shares of a rebate to former participants approximates the amount of the proceeds, the fiduciary may properly decide to allocate the proceeds to current participants based upon a reasonable, fair and objective allocation method. [Emphasis added.]

  The proceeds can also be applied toward future participant premium payments if it is not cost effective to distribute them.

  Similarly, if distributing payments to any participants is not cost-effective (e.g., payments to participants are of de minimis amounts, or would give rise to tax consequences to participants or the plan), the fiduciary may utilize the rebate for other permissible plan purposes including applying the rebate toward future participant premium payments or toward benefit enhancements.

  It may also be the case that the distribution of non-de minimis amounts to current participants who are making ongoing premium contributions may not be cost effective because of the added administrative complexity in both distributing and collecting funds from individual participants.

  What if a plan provides benefits under multiple policies? The plan's portion of a rebate should be applied for the benefit of the participants and beneficiaries who are covered by the policy to which the rebate relates, the Technical Release explains, provided it would be prudent and solely in the interest of the plan to do so (under the analysis described above). This leaves open the possibility that, in certain limited circumstances, rebates generated under one policy may be applied to participants and beneficiaries who are covered by another policy under the same plan. The Technical Release makes clear this flexibility does not apply across plans, however:

  [T]he use of a rebate generated by one plan to benefit the participants of another plan would be a breach of the duty of loyalty to a plan's participants.

• Trust Requirements. Generally, plan assets must be held in trust until they are expended. As the Technical Release explains, many group health plans that receive premium rebates will not have trusts because the premiums are paid from the employer's general assets (including employee payroll deductions) and the benefits are paid exclusively by policy issuers. In Technical Release 92-01, the Labor Department said it would not assert a violation of the trust requirement for many such plans (i.e., would not assert a violation simply because a Code § 125 cafeteria plan or certain other contributory welfare plans did not hold participant contributions in trust). For these plans, the 92-01 trust relief will extend to premium rebates received by the plan if the rebates are used within three months of receipt to pay premiums or refunds. For plans that are not subject to the 92-01 trust relief, the cost of creating a trust can be taken into account in deciding how to expend the rebates. The Technical Release explains:

  For example, directing insurers to apply the rebate toward future participant premium payments or toward benefit enhancements adopted by the plan sponsor would avoid the need for a trust, and may, in some circumstances, be consistent with fiduciary responsibilities.

• Obligations of Terminated Plans. In the case of a terminated plan, the policyholder must comply with ERISA's fiduciary provisions in handling a premium rebate it receives, including the determination of whether the rebate is plan assets, and how the plan's portion of the rebate should be allocated. ERISA requires that the assets of a terminated plan be distributed in accordance with the plan terms. If the plan document does not provide direction, the policyholder may need to determine if it is cost effective to distribute the plan's portion of the rebate to the former participants, the Technical Release explains.

If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact:

Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.220.2692, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955.

Copyright 2011, Deloitte.

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