Common Compliance Questions: -Receiving Premium Refund from Insurer
Question:
My employer is receiving a refund of premium from our medical insurer for our
group medical coverage. If our employees contributed toward part of the
premium, is the employer required provide them with part of that refund?
Answer: Under DOL Technical
Release 2011-04 (Dec. 2, 2011);and DOL Advisory Opinion 2005-08A (May 11,
2005), the DOL has provided guidance on allocating insurance distributions
based on different premium payment arrangements, as follows:
* If the entire cost of the coverage was paid by plan participants, the entire amount of any distribution would be plan assets.
* If the employer-not the
plan or a trust-paid the entire cost of coverage, then no part of the
distribution would be attributable to participant contributions.)
* If the employer and
participants shared the premium costs based on a percentage, the distribution
would be divided based on that same percentage.
* If the employer paid a
fixed amount toward the cost of coverage and participants paid the remainder, the
distribution would belong entirely to the plan (i.e., constitute plan assets),
except that if the distribution exceeded the participants' contributions during
the relevant period, the excess would not constitute plan assets.
* If the participants paid a
fixed cost and the employer paid the remainder, then the distribution would
belong to the employer to the extent the amount of the distribution did not
exceed the employer's contributions.
The DOL observes an important overriding rule: No employer can
receive an amount that exceeds the premiums and plan expenses the employer paid
from its general assets during the relevant period; any excess would be plan
asset as provided in DOL Advisory Opinion 2005-08A (May 11, 2005).
Question: Do the refunds contain ERISA plan assets?
Answer: Under these ERISA fiduciary rules, if the refund is
considered to be composed of ERISA plan assets,
whether in whole or in part, then that amount of ERISA plan assets must be used for the exclusive benefit of the
plan's participants and beneficiaries.
whether in whole or in part, then that amount of ERISA plan assets must be used for the exclusive benefit of the
plan's participants and beneficiaries.
Question: How can my employer use the premium refunds?
Answer: Once your employer determines what portion of the premium
refund is considered to be plan assets, then it needs to decide how to use
that portion of the refund for the exclusive benefit of the
plan's participants and beneficiaries.
The following general
principles are acceptable under the MLR Guidance:
* The applicable refund
amounts that are plan assets can be distributed to participants under a
reasonable,
fair and objective allocation method.
fair and objective allocation method.
* The plan fiduciary can
determine the allocation method among plan participants and the particular use
of the refunds, e.g., to reduce future premiums or make taxable cash
distributions, in accordance with ERISA's fiduciary standards.
* The applicable refund
amounts can be allocated to only current plan participants (as of a certain
date) if
the cost of allocating a portion of the refund to former plan participants is unreasonable.
the cost of allocating a portion of the refund to former plan participants is unreasonable.
* If distributing applicable
refund payments to participants is not cost-effective because the amounts
are considered to be de minimis (that is, too small to really matter - a
term that is not defined by a precise dollar amount in the applicable rules),
or if it would result in tax consequences to the participants or the
plan, the employer may use the rebate for other permissible plan purposes,
such as applying it toward future participant premium payments or
benefit enhancements.
* The applicable funds must
be distributed within 90 days from when the employer received
the funds.