Part II: What Constitutes a "Plan Asset" and How Do Employers Allocate and Distribute a Premium Rebate When the Employees' Contribution to the Group Health Plan is Treated as a Plan Asset?
(NB: Before reading this post, we suggest you read Part I "What Should Employers Know About the "Affordable Care Act" and the Medical Loss Ratio?" from June 5, 2019)
The premium rebate an employer receives from their health insurance provider may be considered a "plan asset." Under, and subject to, the Employee Retirement Income Security Act (ERISA), if the rebate is considered a "plan asset," then it must be used within three months of when it is received by the plan sponsor.
However, if the plan sponsor (employer) paid the entire cost of health insurance, then none of the premium rebates would be considered a "plan asset." Conversely, if both the employer and plan participants (employees) contributed to the total cost of healthcare coverage, then the employees' contribution may be treated as a plan asset.
Allocation of the Premium Rebate
Typically, to determine the appropriate allocation to plan participants (employees), plan sponsors (employers) must:
- First, determine the total participant contributions for the reporting calendar year (i.e. for premiums paid/contributed to by employees in the 2017 reporting year);
- Then, calculate the percentage (%) of total plan premiums paid to the insurance company due to participant contributions, including employee payroll deductions, COBRA premiums paid by participants, premiums paid by participants during a Family Medical Leave Act (FMLA) leave, and other premium payments made by participants; and
- Lastly, the resulting ratio is applied to the premium rebate to determine the appropriate allocation of the rebate that must be distributed to participants (employees).
For example:
- If the total plan premiums paid to the insurance carrier in 2017 for a plan with 100 covered employees is $1,000,000; and
- The total employee payroll deductions in the 2017 reporting year equal $350,000 (or 35% of total plan premium paid); and
- The employer receives $15,000 in premium rebate from the insurance company; then
- $5,250 (i.e. 35% of $15,000) must be returned to the participants at $52.50 per covered employee ($5,250/100).
Distribution of Premium Rebate
Typically, determining which of the plan participants (employees) must receive a portion of the rebate is subject to the general ERISA rules of fiduciary conduct. If a plan has multiple benefits under the policy, the distribution must be made to the participants (and beneficiaries) for the policy that the rebate would apply to.
The most common options of distribution are:
- returning the rebate to employees covered by the group plan in the year in which the rebate was received (for example, 2018); or
- returning the rebate to employees in the year the rebate was received (2018) and the year used to calculate the rebate (2017).
The United States Department of Labor (DOL) guidance provides employers with the following three options for disbursing rebates, all of which have differing tax consequences. Employers can:
- Reduce subscribers' portion of the annual premium for the subsequent policy year for all subscribers covered under any group health policy offered by the plan; or
- Reduce subscribers' portion of the annual premium for the subsequent policy year for only those subscribers covered by the group health policy on which the rebate was based; or
- Provide a cash refund only to subscribers who were covered by the group health policy on which the rebate is based.
What If Plan Participants Consist of Both Former and Current Employees?
According to the DOL guidance, it is often the case that it will not be necessary for plan sponsors to distribute the rebate to former plan participants if the administrative costs of disbursement to them exceeds the value of the rebate.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
