Did Your Insurer Send You a Health Insurance Premium Rebate Check?
Insurance carriers were required to send employers their 2014 Premium Rebate check by September 30th, 2015 – did you get yours? And if so, have you made plans to allocate the funds?
The Affordable Care Act requires health insurance companies to maintain a Medical Loss Ratio (“MLR”) of at least 80 percent for Individual and Small Group plans and 85 percent for Large Group plans. The MLR is the percentage of premium dollars a health plan spends on physician, hospital, other medical services and activities that improve health care quality, including wellness programs.
If the insurer does not meet these percentages, the insurer must refund part of the premium back to the group. This Affordable Care Act rule was designed to ensure groups and members receive optimal value for their health care dollars.
Employers only have 90 days from the date the check is received to allocate the funds as specified by the guidelines, so if you haven’t already figured out how to disburse the funds, you’ll need to do so as soon as possible to avoid penalties.
How to Determine Rebate Allocations
If the employer paid the entire cost of the insurance coverage, then no part of the rebate would be attributable to participant contributions. 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, i.e., a plan asset.
When the rebate is considered a plan asset, it cannot be kept by the employer or used to pay corporate expenses. Instead, the rebate must be used in a manner consistent with ERISA and DOL guidance.
Below is a summary of the permitted uses of these rebates:
|1||Reductions in future premiums for current participants||Administratively easy, no tax issues|
|2||Benefit enhancements||Administratively easy, no tax issues|
|3||Payments to current participants||Creates tax and administrative issues*|
|4||Payments to former participants||Creates tax and administrative issues*|
|5||Payment of reasonable plan expenses||Not specifically approved or prohibited|
* When participants pay their portion of the premiums for employer-sponsored health coverage on a pre-tax basis under a cafeteria plan, MLR rebates that are distributed as a reduction of the participants’ premium cost or in cash to participants will be subject to federal income tax in the year of distribution. When participants pay their portion of the premiums on an after-tax basis, MLR rebates that are distributed as a reduction of the participants’ premium cost or in cash to participants will generally not be subject federal income tax. Note: COBRA participants must be included in the rebate allocation.
If the employer decides to allocate the rebate only among current participants, the allocation must be based on a reasonable, fair, and objective allocation method. The employer can divide the rebate in any of the following three ways as long as it meets ERISA fiduciary standards:
- Evenly among participants – this will be the easiest and most straightforward to calculate; or
- Based on each participant’s actual contributions to premium; or
- In a manner that reasonably reflects each participant’s contributions to premium
If you need assistance with how to allocate and calculate your 2014 Premium Rebate check please contact us.