Level-Funded Plan Refund / Surplus

[HCE]

We have a level-funded plan.  Some employees pay a portion of the premium (those in HSAs), but it is mostly employer paid.

We are expected to have a refund/surplus this year.  Do we keep it, or are we required to allocate it to employees?  If we are required to allocate to employees, is it just to those who pay premiums on a pro-rata basis?  If employee's paid 10% of the premium, and employer paid 90%, do we allocate 10% to employees?  

As much guidance as you can give, I'd be grateful for!

[Peter Gulia]

As you help the employer think about those and other questions, consider this:

If there is a year for which expenses are more than what had been estimated and paid in as the “level-funded” amount, is the employer obligated to pay whatever is needed to meet all claims and other expenses?

If the employer bears a bad experience, should it take a good experience?

This is not advice to anyone.

[Chaz]

You may need to discuss with benefits counsel.  It is quite possible that the amounts needed to be held in trust.  If they weren't that is a problem itself but in general, they cannot revert back to the employer.  I need to know more facts, though.

[Brian Gilmore]

A few comments/responses: 

1. I assume they are taking advantage of the DOL Technical Release 92-01 trust nonenforcement policy (i.e., the "cafeteria plan exception").  In other words, there is no trust.
2. In an unfunded self-insured health plan, there is no obligation to share any surplus with participants.  This is just a standard risk-shifting structure with claims paid from general assets.
3. Level funded plans essentially pre-pay for claims during the course of the year.  If those funds are not actually drawn down based on more favorable experience, there is no obligation to return them to participants.  No different than if the pre-payment structure had not been in place, and claims were simply paid as they came in.  The employer simply retains the amount in general assets.
4. This is of course different than the situation with MLR rebates for fully insured plans.  In that case, the portion of the rebate attributable to employee contributions is plan assets that must be returned to employees or used for another DOL-approved plan purpose.
5. This is also different from a situation that might arise under some fully insured "participating" policies that were most common in the past and pay a "dividend" or "experience-rated refund".  Those situations are more akin to the insurer rebate/refund/demutualization/shared savings/excess surplus guidance from the early 2000s and generally have to be handled in the same manner as an MLR rebate. 

More details:

• https://www.newfront.com/blog/j-and-j-case-practical-considerations-the-erisa-trust-rules-for-health-plans-part-1
• https://www.newfront.com/blog/mlr-rebates-2

Slide summary:

2025 Newfront ERISA for Employers Guide

[Chaz]

Brian, I typically see in level-funded arrangements that the TPA holds the amounts in its account, and therefore they don't remain in the employer's general assets so, in most cases at least, 92-01 won't apply.  Is that your experience?

[Brian Gilmore]

Yeah the DOL guidance is a bit nuanced in this area.   Especially Advisory Opinion 94-31A: https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/advisory-opinions/1994-31a

Here's some more thoughts on that point:

https://www.newfront.com/blog/j-and-j-case-practical-considerations-the-erisa-trust-rules-for-health-plans-part-2

On the other hand, using a separate account that is not in the plan’s name (e.g., in the employer plan sponsor’s name) would not necessarily cause the funds to be treated as plan assets. DOL guidance provides that “the mere segregation of employer funds to facilitate administration of the plan would not in itself demonstrate an intent to create a beneficial interest in those assets on behalf of the plan.”

Accordingly, the employer could carefully create a separate account in its name whereby there is an “absence of any other actions or representations which would manifest an intent to contribute assets to a welfare plan,” and thereby avoid creation of plan assets in maintaining that separate account.

• Key Point: The DOL states if employers are careful not to cause the plan to gain a beneficial interest in a separate account, “the mere establishment of an account in the name of the employer to be used exclusively in administering the plan would not create a beneficial interest in the plan.” (emphasis added)

Ultimately, this is a facts and circumstances analysis. As the DOL summarizes, “whether a plan acquires a beneficial interest in definable assets depends, largely, on whether the plan sponsor expresses an intent to grant such a beneficial interest or has acted or made representations sufficient to lead participants and beneficiaries of the plan to reasonably believe that such funds separately secure the promised benefits or are otherwise plan assets.”