Government Service Administrators (GSA) is taking a proactive approach in assisting our clients in achieving compliance with the final interim rule released by the Department of Health and Human Services (HHS) in 2010 in accordance with the Patient Protection and Affordable Care Act (PPACA) for processing of MLR rebates. Since you may be receiving checks from your health insurance issuers (see Note 1) for the benefit of your employees, GSA is providing the following guidance for processing of MLR payments.
The PPACA contains provisions that are intended to bring down the cost of health care and ensure that consumers receive value for their premium payments. The final interim rule implements MLR compliance for health insurance issuers and states they are required to spend at least 85% or eighty-five cents of every premium dollar on (1) reimbursements of claims submitted for clinical services by enrollees or (2) activities that improve health care quality for enrollees. The rule restricts issuers to spending a maximum of 15% on administrative fees. The MLR is required to be issued to employers in the form of a rebate, by those health insurance issuers who did not meet the minimum requirements.
Note: The MLR rules apply to fully insured plans only.
In most cases, the insurance policy and plan documents do not contain provisions allowing the employer to keep the entire amount of the rebate. If such provisions do not exist in these documents, the portion of the rebate received by the employer that is allocable to employee contributions must presumptively be paid to the employee. The payment would be classified as taxable wages for employees. In some cases, the amount allocable to individual employees would be so small that it becomes an administrative burden and expense for the employer to process the allocation. The Department of Labor will allow an employer to avoid rebate of small, de minimus amounts if the cost of allocating the rebates will exceed the rebate itself or result in an adverse tax consequence to the employee. In this event, the employee’s share of the rebate must be used in some other manner for the benefit of employees.
If the provisions and plan document do not indicate the employer is entitled to keep the entire rebate, the amount attributable to employees must be paid to them or used for their benefit. The portion attributable to enrollees can consist of the portion of insurance premiums paid by the enrollees themselves, either on a before-tax or after-tax basis, in addition to any portion paid by the employer toward fringe benefits for those employees working on SCA contracts. This amount can include both contributions toward dependent coverage, and contributions toward benefit enhancements.
Note that the rule does not require that the rebates actually be paid to enrollees, although that is an option. All that is required, if the employer is not entitled to keep the entire rebate for itself, is that the allocable portion of the rebate must be used for the benefit of enrollees under the plan. Determining how the allocation is processed becomes more involved when the employees involved are those working on an SCA contract. See below for guidance on the handling of MLR rebates for SCA covered workers:
For employers utilizing a VEBA Trust
For the benefit of employees, any rebate checks deposited in the Trust should remain in the Trust. The rebate amounts become part of Trust assets and will be used in accordance with the plan and Trust rules for the benefit of employees.
Additionally, the employer is allowed to pay a portion of the total rebate to the employees who had cost shares, typically for dependent or buy-up coverage, and then deposit the remainder in the Trust. If any portion of the rebate is paid to employees, the rebate paid becomes taxable wages to the employee because they made their contributions to the plan on a pre-tax basis. This would require the employer to first deposit the rebate into their operating account, allocate the applicable portion to employees, and then remit the residual balance to the Trust.
In the absence of formal guidance as to the processing of MLR rebates attributable to insurance policies covering SCA employees, the interpretation is such that fringe benefit contributions made by the employer to purchase insurance coverage for employees is dictated by SCA law. SCA regulations prohibit any portion of the H&W fringe dollars inuring to the benefit of the contractor. Thus, a contractor should not retain the MLR rebate if premiums were funded with H&W fringe dollars. Consequently, a portion of the rebate attributable to fringe benefit contributions are plan assets for purposes of ERISA, and are required to be used for the benefit of employees.
For employers NOT utilizing a VEBA Trust
The employer can issue the rebate (see Note 2) to employees using one of the following options:
a. Determine the total rebate amount due to all employees covered during the year who share in the cost of premiums through payroll deductions (see Note 3)
- Rebate due to individual employees with cost shares:
Employee Cost Share / Total Premiums Paid * Total Rebate Amount
Note: The resulting amount is paid to employees as wages; the total amount rebated to employees as cost shares is then deducted from the total rebate.
b. Distribute the remaining balance of the total rebate to employees working on SCA contracts on a pro-rata basis, based on hours worked during the calendar year:
- Employee hours worked / total hours worked by all employees * total rebate balance
- Issue SCA Employee rebate payments through payroll wages
- Issue SCA Employee rebate payments as discretionary employer contributions into employee 401K accounts
c. The employer has the option to reduce the amount of the covered employee’s insurance premium payments for the remainder of 2012 or a later year
For additional information on MLR compliance, please visit our website at www.gsanational.com and select News & Media. Access the article “Medical Loss Ratio (MLR) Rebates”, dated April 30, 2012 under Industry Alerts. You may also contact GSA directly at 1.800.250.2741 ext. 170 or via email at Solutions@gsanational.com.
Note 1: The term “issuers” refers to those health insurance carriers who provide benefit plans to employees.
Note 2: Check amount received from insurer.
Note 3: For SCA clients, this category typically includes employees with dependent or “buy-up” coverage.