What is the legal way to account for credits and rebates from an ERISA

[Guest Martena Fallon]

To whom do self-insurance rebates belong? Our non-profit organization self-insures for medical, dental and disability. Employees pay about 20% of the total insurance bill and the non-profit pays the balance (about 80%). There is never any employee balance in the fund. The amount in excess of claims is rebated and the EO believes that the rebate belongs to the organization because the employee dollar is considered the "first dollar in." Employee money is spent on claims first, then the organization's contribution pays the balance so that the rebate belongs to the employer as excess contributions and this excess is put into another fund to pay for additional benefits such as vacation vouchers, tuition reimbursement, and to fund investments. Is this acceptable practice under ERISA?

[KIP KRAUS]

I agree with the EO.

[Kirk Maldonado]

What does the plan say?

By the way, this issue comes up all of the time with respect to demutualizations (of insurance companies).

Absent any specific language in the plan that says that the employee contributions are first used to pay the benefits, I believe that the refund should be split on a pro-rata basis.

If the plan is silent, you might want to first check out what the DOL's position is, if you want to do something other than a pro-rata distribution.

[Guest Martena Fallon]

I am very grateful for these two responses. I have tried to contact DOL but have had no luck. I am only a board member but have spent evenings and weekends trying to research this point because resolving the matter has become critical to our agency. I am delighted with Kip's response and would love to to learn of any reference or examples he might have to support his response. Kirk's response is good also, but apparently the agency never constructed a formally drafted plan other than minutes of meetings and a brochure given to employees at orientation with the plan manager. My recent research tends to indicate that if there is no formally-written plan procedure, then policy established by precedent dictates the the terms and intent of the plan. At any rate, does anyone know if there would be any criminal ramifications if the EO is mishandling the employer's contributions? Thanks again for your comments.

Tena

[Greg Judd]

Originally posted by Martena Fallon

To whom do self-insurance rebates belong?  Our non-profit organization self-insures for medical, dental and disability. Employees pay about 20% of the total insurance bill and the non-profit pays the balance (about 80%).  There is never any employee balance in the fund.  The amount in excess of claims is rebated and the EO believes that the rebate belongs to the organization because the employee dollar is considered the "first dollar in."  

Little extra info please. Is this a multiple employer arrangement? Sounds like it but not specified. Otherwise, the "amount in excess of claims (plus expenses, I'm presuming)" part throws me. There wouldn't be any reason for an organization to put more into a self-funded arrangement than is needed for claims as they arise; so unless there are multiple employers putting in some formula-driven amounts over time, there'd be no 'excess'.

So I know I'm missing something here. Thanks for bearing with me.

[Guest Martena Fallon]

Gregg: Thanks for responding. As a board member of this agency my forte is not insurance, so please overlook naivete. Simplifying my understand our plan, it is self-funded and at the beginning of last year we paid $1M to the insurance company ($200K from employee contributions and $800K from agency's general assets). At year's end the records showed that the employees had filed $700K in medical claims during the year. The insurance company rebated $300K representing the difference between the $1M initial payment to the insurance company and the $700K in medical payments the agency paid for employee claims during the year. The $300K that came back to the agency has caused a lot of trouble and the disposition of this $300K is what my question relates to. The plan provides that the "surplus" ($300K last year) is then used to pay for additional benefits for employees and clients and also for agency investments. The over-all plan which creates this scenario discloses all aspects, however, we have new board members who are questioning the plan criteria as it relates to ERISA. You asked why we paid $1M when our claims are $700. This is because the $1M is paid at the beginning of the fiscal year long before the employees seek medical care so there is no way of knowing in advance what the costs are going to be. I hope this helps.

Tena

[Greg Judd]

Originally posted by Martena Fallon

You asked why we paid $1M when our claims are $700.  This is because the $1M is paid at the beginning of the fiscal year long before the employees seek medical care so there is no way of knowing in advance what the costs are going to be.  I hope this helps.

Aye, there's the rub. Your plan is not what many would regard as 'self-funded'; rather it's a participating arrangement, in the sense that your organization participates, or shares, with your insurer the good--or bad--financial ramifications of your group's claims experience for the year, at the end of your plan's year

a) recouping any excess of premium over claims at year end, as you have in the year you've described, or

b) making up the shortfall of premiums vs claims, either in the form of higher premiums in the ensuing year or via a cash payment at year end.

Had your plan experienced b), you probably wouldn't have passed the hat among employees for a share of the difference. The organization bears the risk of such a year; contributions are required from employees as a condition for plan participation, regardless the claims the plan may incur during the year.

Employee contributions, once made, do become plan assets, so it's important to check what the plan says, if anything, about disbursement of assets that might be construed to be a mix of employer & employee monies. Ideally, the plan spells out how surpluses are handled, & it may (subject to state insurance law/reg constraints) ok handing all surpluses back to the sponsoring organization. If it's silent, or vague, the plan's decisionmakers obviously have a tougher job to do.

In short, my opinion based on what you've described is somewhere between Kip's & Kirk's: the excess is the organization's, IF the plan language is silent, the plan's practice has been to return surpluses to the employer, and there's no contravening state law/regs governing how excesses are divvied up.

Simple, right?

Unfavorable tax treatment of any such refund is a deterrent for many organizations (reduces the premium deductible as an ordinary biz expense), but this may not impact your organization. Also, refunds are sometimes used to create premium stabilization reserves, which can be used to moderate the impact of premium increases in ensuing years. Insurers don't pay the greatest rates on such reserves, & reserve must meet IRC code standards for a "welfare benefit fund" (Section 419 IRC I believe).

All that said, depending on the number of years your organization's been in existence, the number of employees in the plan (I'm guessing 2 to 3 hundred), whether the year you described is representative of your plan's experience, and the reliability of your cash flow, your organization may want to explore other funding arrangements--or at least an adjustment of the 'pooling points' (the $ thresholds at which your group members' claims are no longer counted towards your group's participation in year-end surplus/deficit) that give your organization the use of that excess cash during your year.

$1 million's a lot of dough to hand over--did you say all at the beginning of the plan year? to an insurance company (or broker/other plan representative?), if your group's claims experience is similar to the good year you've just had, year in and year out. Basically, someone else has had use of a lot of the organization's money for that period, which wasn't needed for the group's health care tab. If year-end surpluses are consistently generous, it may be good for someone(s) other than the organization and/or the covered employees. A 'rule of thumb' underwriting margin (a 'fudge factor' for projected claims+expenses) for a group of under 250 is 10-15% of premium; it generally declines, the larger the group. Consistent 30% surpluses would indicate someone needs to sharpen their projection pencil.

And we haven't even gotten into the potentially negative employee reaction to news (formal or informal) that the organization intends to pocket that surplus....

Good luck with it!

[Guest Martena Fallon]

Greg:

Thanks a lot. It appears that all respondents (to whom I am so very grateful) tend to agree that the money does not belong to the employees. This makes me very happy because of underlying events.

Tena

[Greg Judd]

Originally posted by Martena Fallon

It appears that all respondents (to whom I am so very grateful) tend to agree that the money does not belong to the employees.  This makes me very happy because of underlying events.  

Well, yes...but.

I'd caution you not to automatically equate the plan with the plan sponsor. If your role is to make decisions on behalf of the plan, it's a meaningful distinction. Once premiums are paid on the plan's behalf, the $ are the plan's; whether any/some/all of it returns to the plan sponsor's hands depends on factors such as we've kicked around previously, such as what the plan docs say, past practice, etc.

[Kirk Maldonado]

Greg Judd:

Thanks. You provided some valuable insights.

[Guest Martena Fallon]

Greg: Thanks for your concern. The agency does not want the money for its own purposes. The "surplus" funds are actually diverted to another part of the plan that provides for additional benefits, programs and investments; it all falls within the framework of the overall plan. The most significant thing here is that the plan dictates, not ERISA, and not any other public officials. Allegations of mishandling ERISA funds are very disruptive and I wanted to get to the bottom of it.

Actually, another question just popped into my head. The "surplus" assets that are diverted to another plan -- are those "surplus" assets regulated by ERISA statute? The overall plan does not provide for this scenario. I hope you say "no!"

[IRC401]

<< I'd caution you not to automatically equate the plan with the plan sponsor. If your role is to make decisions on

behalf of the plan, it's a meaningful distinction. Once

premiums are paid on the plan's behalf, the $ are the plan's; >>

Why would you take the position that the $ are the plan's??? Plans are not(at least at common law) legal entities capable of owning property. (Trusts can own property.) Furthermore, there are numerous DOL advisory opinions that make it clear that an employer can pay for medical expenses. The $ are employer $ unless there is some document that converts them into something else.

[Guest Martena Fallon]

I contacted Self-Insurance Institute of American, Inc. who advises that the returned premium from a "stop loss" policy (which is apparently what this is) belongs to the employer because the contract to purchase insurance is between the employer and the insurance company. The employees are not a party to the contract. Employees pay the employer to provide them with insurance and that is the extent of their contract for insurance. The resolution to this issue does not lie within any statute, instead it lies within contract law and insurance law/regs.

[Greg Judd]

Originally posted by IRC401

Why would you take the position that the $ are the plan's???  Plans are not(at least at common law) legal entities capable of owning property.  (Trusts can own property.)  Furthermore, there are numerous DOL advisory opinions that make it clear that an employer can pay for medical expenses.   The $ are employer $ unless there is some document that converts them into something else.  

Thanks IRC for smacking me upside the head, accuracy wise. TF, what s/he said, nb especially the trust/plan distinction.

[Kirk Maldonado]

I think that the position that the SIIA takes is inconsistent with that of the DOL. They have made speeches to that effect in the context of insurance company demutualizations.

Remember, the DOL enforces ERISA, not the SIIA or any of the persons (including myself) who make comments on BenefitsBoard. Unless you like getting sued, I'd recommend getting some clarification before you take any action.

[Guest Martena Fallon]

I called DOL and spoke with a young woman who researched the question all morning and finally gave up! She doesn't know. She suggests I ask for an Advisory Opinion. You are right, Kirk, she did not like the SIIA's response; her opinion is that "there are still some plan assets left" so that there is connotation of employee ownership. Also she added, perhaps the money should go back to pay the following year's premium rather than be diverted to another part of the plan to do other things. But I guess we would still wonder who's money was paying the following year's premium and then we'd get into a worse pro-rata issue, right?

[Kirk Maldonado]

Why not use the money to pay the following year's premium on a pro-rata basis? That is very simple. Believe me, you don't want to get into fights with the DOL. Especially when the employer looks real greedy. You could also get into litigation with the employees. You would most certainly lose any fight you get into.

Remember the line from Wall Street: Bulls make money, bears make money, pigs get slaughtered. Don't be a pig; split the money on a pro-rata basis.

I wouldn't recommend doing any thing less favorable to the employees than a pro-rata split under these circumstances absent written guidance from the DOL.

[Guest Martena Fallon]

Kirk, thanks. I know you've been a proponent of "pro-rata" and I like it. I am going to propose it, but there are individuals who feel the employees are entitled to 100% of the money so that the "surplus" $ that went into the second plan and the expenditures that those funds made with those $ are the residual problem. If I can document that the $ are the agency's $ (like IRC401 says), then I will accomplish something. I am troubled by something I downloaded from "ERISA Q&A" that says, "Contributions made to a plan by an EMPLOYER ORGANIZATION AND contributions made by withholdings from employees' salaries would normally become funds or other property of the plan if and when they are: (a) taken out of the general assets of the employer...." This article was written by Nicholas W. Ferrigno, Jr. and Frank J. Bitzer.

Are we having fun yet?????

[Greg Judd]

Originally posted by Martena Fallon

If I can document that the $ are the agency's $ (like IRC401 says), then I will accomplish something.  I am troubled by something I downloaded from "ERISA Q&A" that says,  "Contributions made to a plan by an EMPLOYER ORGANIZATION AND contributions made by withholdings from employees' salaries would normally become funds or other property of the plan if and when they are: (a) taken out of the general assets of the employer...."  This article was written by Nicholas W. Ferrigno, Jr. and Frank J. Bitzer.  

Are we having fun yet?????

Laffffin! TF, my impression is that Mssrs. Ferrigno & Bitzer are getting at similar issues, maybe from a different angle, that IRC is--namely, there's plan sponsors, there's plans, there's trusts, there's employers, there's employees.... a bunch of 'entities', some of which may wear different hats while wearing the same pair of shoes [my, it's crowded in there!]. Who owns what depends on the intent of the parties involved, & that as we've already covered can get difficult to determine precisely if the parties didn't explicitly address whatever issue we happen to be interested in at the moment--in this case, premium refunds.

Kirk makes a very good point about the practical consequences of taking an employer-centric line in the absence of any documentable intent to do so in advance of the issue arising: it seems doubtful it would get much sympathy from inquiring employees or authorities.

[Guest Martena Fallon]

Okay then, are we to conclude that though there is a "participating self-insurance" product out there with "stop loss" coverage being sold to businesses in the U.S. today (which product satisfies the needs pursuant to ERISA standards) but DOL either hasn't recognized its existence or DOL hasn't yet determined the lawful way of administrating its performance as it relates to the protection of employees' interests? I am finishing up on a 10-page report and I think this is going to be my conclusion following up with a recommendation to recalculate figures so that the funds can be split up on a pro-rata basis -- a la Kirk Maldonado!

Thanks everyone for your help.

[IRC401]

It is always dangerous to respond without having seen any of the documents, and therefore, assuming that nothing I state is inconsistent with the documents:

I have a client that was just audited by the DoL on this issue, took (with my encouragement) the position that the "reversion" belonged to the employer, and survived the audit (which is NOT to say that the DoL has a national position or consistent audit policy on this issue). I see no reason why the money doesn't belong to the employer unless there is a document provision that gives employees the right to the reversion OR the reversion is greater than the total amount of employer (excluding 125 money) contributions.

NOTE: If the employees elect to have their wages reduced by $XX (and the $XX are used to pay for medical benefits via a 125 plan), I think that any reversion belongs to the employer. ON THE OTHER HAND, if the employees are told that they are paying for 20% of the cost of health insurance, they should be entitled to 20% of any reversion. What the employees are told, and what they elect under their 125 plan, are important. I think that you need to look at the 125 plan elections to answer this question for any particular client.

[Guest Martena Fallon]

Thanks IRC140. I have been narrow minded in considering only the "non profit" issue. It has occurred to me that if I were dealing with a "for profit" and this same situation occurred and the employer paid 70% of the premium and the employees paid 30% whereby the employees got 100% of the reversion (as you call it) wouldn't that come under the "disproportionate distribution" rules of IRS so that the 70% gain would be considered taxable?

I got an email in response to this message board and that individual questions whether the money should be in trust. I responded that ERISA Section 1103(B)(1) excludes insurance from having to be in trust. But then I wondered about the "surplus." That money coming out is not insurance money and it needs to be put into a trust if it is considered part of the plan, right? I think this dovetails with another question that I asked (but nobody answered it), and that is: The prior years' surpluses have been put into a separate plan that provides for agency benefits to employees, clients and certain agency programs. Do we consider that the "surplus" (reversion) is ERISA money? If it is, then all those expenditures from the second plan are in trouble. God help us!

Why isn't anything simple? I am sure we are all happy that you prevailed in your DOL hearing. Our board members are petrified of DOL.

I would like to learn what others think about the "disproportionate distribution" concept and also the classification of funds in the second plan where "surplus" funds have been transferred (100%) into that plan for other benefits.

Thanks