Many insurance carriers are in the process of issuing employer-sponsored group health, dental and vision plan credits for future premiums owed or on current (or past) premiums billed, in response to the coronavirus pandemic and disruption in overall utilization of benefits.
While any premium savings or credits are welcome news in a tough economy, they also create some compliance obligations for employers who sponsor such benefit programs.
To simplify these obligations, we’ve outlined the steps an employer should take when evaluating the proper treatment premium credits or abatements received:
- Review the plan’s existing policy on rebate/credit distribution, if applicable; if one does not exist, follow federal ERISA rules and MLR guidance
The vast majority of employer-sponsored group plans are subject to the federal Employee Retirement Income Security Act (ERISA) and its fiduciary conduct standards. Since group plans with fully-insured medical coverage already have to deal with the possibility of a Medical Loss Ratio (MLR) rebate, many companies already have a process for handling premium credits or rebates outlined in their ERISA wrap document. If the document addresses such distribution or stipulates that the group policyholder has general control of all “plan assets,” then that language prevails.
If there is no plan document or if the document is silent on the topic, then existing ERISA rules prevail. ERISA requires employers to use employee contributions to pay plan premiums and expenses and prohibits them for using employee contributions for their own purposes. MLR guidance states that if premiums were paid partly by the employer and partly by employees, then the rebate must be split amongst those who paid towards the cost of coverage during the plan year.
- Review who the premium discount is going to and which plans are involved
Employers sponsoring health plans generally have a fiduciary responsibility to handle all financial matters related to their group plan arrangement appropriately. If an employer gets a premium credit from multiple carriers or only gets a discount for specific plan choices, the employer must be conscientious about how they handle any plan asset distribution. Using assets generated by one plan to benefit the participants of another coverage option is a fiduciary breach under ERISA.
- Determine how much of the premium credit or discount goes directly to the business vs. affected employees
An employer can decide how to divide the rebate or discount proceeds. For example, a company could choose to give each employee that contributed to the cost of coverage an equal share in any discount. Or, it could weigh each share based on each employee’s overall contribution amount.
Any decision must be fair and consistent for all affected employees. When making the distribution formula decision, employers should keep in mind that they are acting in their capacity as the plan’s administrator and be mindful of their fiduciary responsibilities. The business should weigh what would be most reasonable for the plan and the fairest means of distribution for all participants. If there is no defined method already outlined in the ERISA wrap document, then employers should record how they made their decision and consider formally documenting their process in the group’s plan document going forward. Whatever an employer decides should be in the ultimate best interest of the whole plan.
- Pick the distribution method for any premium credit savings that are “plan assets”
Using the ERISA guidance for an MLR rebate as an example, “plan assets” that come from a COVID-19 premium credit or discount must be used for the exclusive benefit of participants and beneficiaries of the health plan option that generated the premium savings. The savings must then be distributed in one of the following three ways:
- The rebate can go to the participants under a fair and equitable allocation method, such as a cash payment to the employees.
- The employer can apply the rebate by declaring a premium holiday for a specified period*
- The employer can use the rebate to provide enhanced benefits for plan participants.
When deciding how to handle any credits or premium abatement proceeds, the plan administrator needs to weigh what is most reasonable for the plan, the fairest means of distribution for all plan participants, and what is in the ultimate best interest for the plan. They also have to consider the most appropriate ways of delivery for all those who contributed to premium costs. Any decisions made should be documented. *Most employers will likely elect option 2 above, as explained next.
- Decide who is eligible to receive a portion of the group plan rebate or premium credit.
Employers only have to distribute rebates to current employees who are participating in and contribute to the cost of premiums for the affected plan. Group plans may also give credit to former employees who participated in the group plan during the year but no longer work for the company. However, if it is too complicated to divide and distribute the rebate to former employees, or if it will be too difficult and costly to track them down, a business does not have to include former employees. If the employer decides not to provide a share of the rebate to past employees, then ERISA fiduciary guidance suggests that the business should aggregate the rebate portion that is attributable to former employees’ contributions and use it for the benefit of current employees in the group health plan, keeping a record of how it achieved that objective.
- Consider tax implications.
If the employee paid for their share of the group health insurance premium entirely with after-tax dollars, then their portion of any rebate or discount is not federal taxable income. However, if the employee paid his or her share using pre-tax dollars, such as through a Section 125 plan, it would be taxable income. These tax rules apply whether the employee gets a future premium credit or a cash payment. Because of these tax implications, and that there are only 90-days to make distribution decisions (see next), declaring a premium holiday (in Step 4) is likely the best option for employers.
- Dedicate time to quickly address premium credits or reduction from a compliance perspective.
While practically every business is under some degree of coronavirus-related strain, this issue is not one that an employer group plan sponsor can set aside to deal with later. If an employer has a “plan asset” under its purview, it must be distributed within 90 days in almost all cases to avoid triggering ERISA trust requirements.
If you have questions regarding your the proper handling of premium credits/abatements, please contact us.