Does any portion of a non-insured group health plan’s “rebate” get allocated to employees?

[Peter Gulia]

An employer maintains an ERISA-governed group health plan. An employee pays a cafeteria plan’s salary-reduction contribution toward the employer’s cost for the employee’s health coverage. There is no trust. The plan uses no group health insurance contract; every benefit is paid from the employer’s general assets. The employer uses an “ASO” service provider to serve as the plan’s claims administrator. An affiliate of that service provider provides a stop-loss insurance contract.

The employer pays upfront amounts described as its maximum liability. If the experience for a year (after some set-asides, including fees, stop-loss premium, an incurred-but-not-received reserve, and some further margins) is more favorable to the employer than what invokes the maximum liability, the service provider returns money to the employer.

The people who advise the employer are familiar with ERISA Technical Release 2011-04, which includes a little guidance about whether employees might be entitled to some portion of a health insurer’s rebate.

Those advisors disagree about whether employees are entitled to a portion of this “rebate” from an arrangement that involves no group health insurance.

• One believes the employees should get a portion that approximates the ratio of the participant contributions to the whole “cost” of the health coverage.

• Another believes the self-funding adjustment is wholly the employer’s property, and nothing should be allocated to participants or employees.

Who is right? And what reasoning supports the conclusion?

[lvena]

Sounds like what is commonly referred to as Level Funded, Self-Insurance. As a rule, any funds returned to the employer become a taxable event and if there were employee contributions, the employer would need to calculate their portion of the refund and return. As such, most employers will apply the surplus as a future payment, thus avoiding the tax event and refunding to employees.

I am a little confused by what you refer to as “no group health insurance contract” in your statement. There should be documents available, such as SBC’s, a SPD, stop loss contract, etc. Can you expand?

[Peter Gulia]

Thank you for your help.

There is a plan document (which states that it also is the summary plan description), an administrative-services agreement, and a stop-loss insurance contract. And the service provider furnished summaries of benefit coverage, each of which states that the coverage is not insurance.

Why does the fact that participants paid a contribution entitle them to a portion of an adjustment between the employer and its stop-loss insurer?

[lvena]

Thank you for your help.

There is a plan document (which states that it also is the summary plan description), an administrative-services agreement, and a stop-loss insurance contract. And the service provider furnished summaries of benefit coverage, each of which states that the coverage is not insurance.

Why does the fact that participants paid a contribution entitle them to a portion of an adjustment between the employer and its stop-loss insurer?

A couple of things, and I know you are not going to like the first. The entitlement is something I learned a long, long time ago and I cannot easily find any references to it now. Sorry.

The second is that they are not entitled to any adjustments made by the stop-loss carrier. They are entitled to any surplus remaining in the claims account. I may have misunderstood your statement above about this, and if I did I apologize. But the funds are kept by the tpa, not the reinsurer.

Did this make sense?

[Peter Gulia]

Thank you for the further help.

[Flyboyjohn]

I'm in the camp of "Another believes the self-funding adjustment is wholly the employer’s property, and nothing should be allocated to participants or employees."

In a self-funded plan paid from general assets with no trust and accordingly no "plan assets" the participants have no entitlement to any profit or so-called rebate just like they wouldn't have any liability for any losses or excess claims.

[Peter Gulia]

Flyboyjohn, thank you for the further thought.

[Chaz]

In a self-funded plan paid from general assets with no trust and accordingly no "plan assets" the participants have no entitlement to any profit or so-called rebate just like they wouldn't have any liability for any losses or excess claims.

Amounts attributable to employee contributions ARE generally plan assets. Under certain circumstances there may not be a requirement to hold such amounts in trust (i.e., if employees pay them through a cafeteria plan) but they are still plan assets.

It would take some research and some thought to answer the original question but I suspect that, if employee contributions are involved, it may make a difference.

[Peter Gulia]

Flyboyjohn (and others), does Chaz's description about participant contributions lead us to revisit the analysis?

Does it matter whether the participant contribution was specified only as a particular amount (with the employer stuck with the all-else), or instead as a percentage of the "cost" of a specified health coverage?

[Peter Gulia]

Some further guidance is in a recent ERISA Advisory Opinion.

https://www.dol.gov/ebsa/pdf/AO2015-02A.pdf

[GBurns]

I distinguish that recent ERISA Advisory Opinion because the case under discussion does not refer to payments from the stop loss policy but instead refers to the "rebate" as coming from less than expected claims.

My opinion is that since the employee share is a % of the total amount "set aside" for the "expected claims", it is subject to the same % of any reduction of that amount that was "set aside".

[lvena]

Sorry, been away from this for a few days.

I stand by my statement that any monies refunded to the employer from a claim account that had employee contributions, the employer needs to refund a proportional percentage back to them. I am not arguing, just stating that no one has yet to prove to me that I am wrong.

A couple of things I have picked up on this thread.

ERISA Technical Release 2011-04, which is referenced in the original post, applies to possible refunds due to the Minimum Loss Ration provision of ACA. This does not apply to stop-loss contracts that are used in self-funded plans.

I am still a little confused about where the refund is coming from. As I stated above, if the refund is from excess monies left-over in the claims account, a proportion goes to the employee, if the employer takes it in cash. If the employer takes the excess monies as a credit for future months payments, it is not.

However, if we are talking about amounts reimbursed by the stop-loss carrier as a result of large claims exceeding the attachment point, these are not plan assets and are the property of the plan sponsor (usually the employer). I like to describe these policies as a risk management tool for the employer.

[Peter Gulia]

Thanks, everyone, for your good help.

The "refund" or return is under a combination of an administrative-services-only arrangement and a stop-loss insurance contract under which the employer/insured pays upfront amounts that pretend that a year's claims would reach the point at which the stop-loss insurance starts paying. If the experience is better than that "maximum liability", the employer gets a return of the employer's money the ASO held as the employer's agent.

In the real world, does an employer separately account for how participant contributions are used to assure that none of that amount is used for a purpose beyond paying the health plan's benefits and administration expenses?

[GBurns]

I think that your question should be " In the real world, does an employer separately account for participant contributions, employer contributions, administrative expenses and stop-loss policy premiums?" To which the answer is YES.

Every accounting system provides such separate accounting, for example, the employee contributions would first appear on the Payroll Report as an item under Payroll Payables (or very similar name). It is necessary or reconciling each payroll etc. The Stop-Loss Premium would appear in an Accounts Payable Account most likely under the name of the Insurer who submitted the Invoice.

[hr for me]

Agreed that employers separately account for all of the listed ones above because the money is (usually) coming from separate places. Participant contributions are coming from wages/payroll, etc.

I also wonder if you have to consider HOW the employer came up with the participant amount to pay. Did they take into account admin expenses on top of claims? Did they take into account the cost of the stop loss policy (and any amount that was a deposit on that)? If so, I would especially agree they should get a rebate % back.

But honestly I can't imagine an employer who didn't take the full expected cost into account when setting the rates.

[Peter Gulia]

GBurns and hr for me, thank you for the further information.