Accounting for Self-Insured Employee Premiums

[EBECatty]

My understanding is that employee premiums paid toward self-insured group health coverage are considered ERISA plan assets, but may be held in the employer's general assets due to the trust-requirement relief. However, the other ERISA rules (fiduciary obligations, prohibited transactions, reversions, etc.) continue to apply to the employee premiums. 

Say the total premium for a month is $1,000, of which the employee pays $200. The employer sets aside $1,000 in an account in its name and EIN and there is no other indicia of ownership or rights by the plan. 

How do you determine the portion of the account that is plan assets subject to, say, the PT rules? Can you treat the account as using employee contributions first? Would this accounting restart every payroll cycle when new employee premiums are withheld?

Would appreciate any insights.  

[Brian Gilmore]

The DOL's MLR guidance in Technical Release 2011-04 is a good overview.  That guidance generally states that the MLR rebate is considered plan assets under ERISA to the extent it is attributable to employee contributions.

https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/technical-releases/11-04

ERISA does not expressly define plan assets. The Department has issued regulations describing what constitutes plan assets with respect to a plan's investment in other entities and with respect to participant contributions. See 29 C.F.R. §2510.3-101 and 29 C.F.R. §2510.3-102. In other situations, the Department has indicated that the assets of an employee benefit plan generally are to be identified on the basis of ordinary notions of property rights.

...

Similarly, assuming the plan documents and other extrinsic evidence do not resolve the allocation issue, the portion of a rebate that is attributable to participant contributions would be considered plan assets. Thus, if the employer paid the entire cost of the insurance coverage, then no part of the rebate with respect to this particular policy would be attributable to participant contributions. However, if participants paid the entire cost of the insurance coverage, then the entire amount of the rebate would be attributable to participant contributions and considered to be plan assets. If the participants and the employer each paid a fixed percentage of the cost, a percentage of the rebate equal to the percentage of the cost paid by participants would be attributable to participant contributions. If the employer was required to pay a fixed amount and participants were responsible for paying any additional costs, then the portion of the rebate under such a policy that does not exceed the participants' total amount of prior contributions during the relevant period would be attributable to participant contributions. Finally, if participants paid a fixed amount and the employer was responsible for paying any additional costs, then the portion of the rebate under such a policy that did not exceed the employer's total amount of prior contributions during the relevant period would not be attributable to participant contributions.

[EBECatty]

Thanks Brian. I am familiar with that guidance, and I think my real question is at the following step: Once the amount of plan assets is determined, is there any guidance, best practice, or widely used administrative procedure to determine when those plan assets are considered used.

For example, in my hypothetical there would be $200 of plan assets and $800 of non-plan (employer) assets. If a claim was made the next day for $300, would it be reasonable for the employer to pay the claim with all $200 of plan assets and $100 of non-plan assets, such that after that claim there is only $700 of non-plan assets? Or would it more customary to continue to treat the entire account as 1/5 plan assets and 4/5 non-plan assets?

[Brian Gilmore]

It's a good question because there are hardly any situations where that's actually at issue.  In other words, since employers generally don't have to hold the plan assets in trust (thanks to 92-01) I've never really had to face a situation where we had to parse distribution of general assets vs. plan assets.  

My general sense would be that you would follow the same approach in distribution as you would in allocation.  In other words, if the contribution scheme is 80%/20%, then the distribution scheme would be 80%/20%.

That proportional approach seems to be supported by DOL guidance in the MLR context above, as well as the demutualization context:

https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/advisory-opinions/2001-02a

It is the view of the department that, in the case of an employee welfare benefit plan with respect to which participants pay a portion of the premiums, the appropriate plan fiduciary must treat as plan assets the portion of the demutualization proceeds attributable to participant contributions. In determining what portion of the proceeds are attributable to participant contributions, the plan fiduciary should give appropriate consideration to those facts and circumstances that the fiduciary knows or should know are relevant to the determination, including the documents and instruments governing the plan and the proportion of total participant contributions to the total premiums paid over an appropriate time period.

In both the MLR and demutualization context, I think it's the same issue as you raised--just from a third-party entity as the distribution agent.

[EBECatty]

Appreciate your thoughts, Brian. I have never seen this become an issue either, but can see it potentially arising in some circumstances and was curious if others had encountered. For example, the employer has built up a funding reserve from lower-than-expected claims and wants to use some of the reserve for other corporate purposes. In that case, following the logic of dividing employee vs. employer contributions, I would think you would need to find a way to differentiate how much the employer could use without causing a PT or violating the exclusive benefit rule. Either way, thanks for your input. 

[Luke Bailey]

EBECatty, in your example nothing was written in the plan document that would establish the allocation. So now that the employer has determined that an allocation should be made, wouldn't there be an obligation on the employer's part, as a fiduciary with respect to the employees' funds, to consider them used last, or at a minimum to assume that the allocation should be proportional, as suggested by Brian?

Years ago, precisely for the reason you establish, I wrote a provision in an employer's document that said that employee contributions were always used first, and in effect the employer's contributions only came in at the end of the month to the extent necessary to fund any shortfall. That was never examined by anyone, however. Probably proportional would have been a better rule to put in the plan document.

[EBECatty]

Thanks Luke. Yes, I agree, any allocation would have to be in accordance with the employer's fiduciary duties, so proportional is probably the most appropriate if no other reasonable rule is in the plan document.  

[Tripp VanderWal]

EBECatty, for this reason, my standard plan documents and SPDs use the same approach as Luke Bailey's.  They always say that employee contributions will be used first.