As part of the insurance-market reforms enacted by the Patient Protection and Affordable Care Act (PPACA), insurance carriers are required to spend a minimum percentage of premiums (generally 85%) on medical care and quality improvement. If this percentage -- the "medical loss ratio" -- is not satisfied, premiums must be returned to the policyholder to the extent necessary to reach the required percentage.
A recent report by the Kaiser Family Foundation (read here) estimates that under this rule, carriers nationwide will be rebating as much as $1.3 billion in total premiums collected during 2011. Of that, employer-sponsored plans are expected to receive approximately $900 million, and at least some rebates are expected in every state except Hawaii.
When a rebate is received with respect to an ERISA-covered plan, care must be taken to determine whether some portion of the rebate is a "plan asset". If so, it must be treated in a manner that complies with the ERISA fiduciary obligations that apply to handling plan assets. The Department of Labor (DOL) has provided some specific guidance on this issue (read here). The guidance instructs that the rebate generally must be allocated between the employer and the plan participants. The portion allocable to the participants is a plan asset and must either be returned to the participants or used exclusively for their benefit.
The facts of each arrangement must be considered, but a rebate generally will be allocated between the employer and the plan participants based on their relative contributions to the premiums paid. For example, if the employer paid 100% of the premium then 100% of the rebate would be allocated to the employer. Similarly, if the employer paid 60% of the premium and participants paid 40%, the rebate would be allocated between the employer and participants in those same percentages. The DOL guidance provides other allocation examples as well.
While it will be tempting to promptly pocket any windfall, employers receiving rebates will need to think through these issues and develop a plan for applying the rebate in a manner consistent with ERISA.