Rebate Check Options for Your Employer Clients

Some of your clients will be receiving rebate checks from their health insurance companies as a byproduct of the Patient Protection and Affordable Care Act (PPACA).  They may have questions about why they are receiving these checks and what they can do with the proceeds. This blog will provide you with answers to those questions.

Why are these checks being mailed now?

PPACA contains provisions that require health insurance companies to spend minimum percentages and disclose how much of their health insurance premium is spent on claims and health care improvement activities pursuant to established Medical Loss Ratio (MLR) requirements.[i]   Specifically, insurance companies must comply with MLR standards that mandate small group insurers spend at least 80%, and large group insurers spend 85% of the premium dollar on health care claims and quality improvement programs.  BenefitMall has written extensively about this issue.  Click here for additional background.

The insurance company’s cost of general business expenses and overhead is included in the administrative portion of MLR calculations. This rule, also referred to as the 80/20 rule, mandates that insurers that  do not meet these spending thresholds for group health plans must rebate the difference back to those covered by applicable policies by August 1^st of each year.   Insurance policies that cover more than 100 employees must meet an aggregate 85/15 threshold. 

How are these rebate checks calculated?

 If an insurer fails to meet the 80% or 85% spending threshold, insurers must return the excess amount above that threshold in the form of refunds, dividends, demutualization payments, rebates or excess surplus distributions.  In the majority of cases, it will be in the form of a check.

What is the difference between a small and large group employer?

A small group employer is an employer who employs from 2 to 100 full time equivalent employees, whereas a large group employer is defined as employing 100 or more full time equivalents.

What can an employer do with the rebate check?

The funds received by an employer-sponsored group health plan in the form of a rebate check, may be subject to Title 1 of ERISA and qualified as plan assets.  For those health plans that are covered by ERISA, the rebate of an employee’s contribution will become a plan asset in proportion to the percentages or the amount they paid. 

Employers have three options on what they can do with the proceeds of a rebate check:

1. An employer can reduce the employees’ portion of the annual health insurance premium for the next policy year.

2. An employer can reduce the employees’ portion of the annual premium for the next policy year, but only for only those employees who were covered by the group health policy on which the rebate was based.

3. An employer can provide a refund check to each of the employees who were covered by the group health policy on which the rebate was based.  The amount of the check written to an employee should be pro-rated according to the amount that the employee contributed to the premium paid for the health benefit of the employee.

How an employer chooses to proceed in applying or expending the plan's portion of a rebate is subject to ERISA's general standards of fiduciary conduct.

How does an employer determine how much of the rebate check should be returned to which covered employees?

The US Department of Labor issued a guidance that provides considerable insight on this issue.   The guidance provides the following:

“Thus, if the employer paid the entire cost of the insurance coverage, then no part of the rebate with respect to this particular policy would be attributable to participant contributions.

However, if participants paid the entire cost of the insurance coverage, then the entire amount of the rebate would be attributable to participant contributions and considered to be plan assets.

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.

If the employer was required to pay a fixed amount and participants were responsible for paying any additional costs, then the portion of the rebate under such a policy that does not exceed the participants' total amount of prior contributions during the relevant period would be attributable to participant contributions.

Finally, if participants paid a fixed amount and the employer was responsible for paying any additional costs, then the portion of the rebate under such a policy that did not exceed the employer's total amount of prior contributions during the relevant period would not be attributable to participant contributions.”

Will the rebate check be accompanied with an explanation?

Yes.   Those employers who will receive a rebate check will receive an explanation of how the rebate is calculated.   Those employers who are not due a rebate will receive an explanation that their health insurance carrier fulfilled the minimum requirements of the rebate provisions of PPACA.

Are self-funded employer health benefit plans eligible to receive a rebate?

No.  This rebate process only applies to health benefit plans that are insured by an insurance company.  Self-funded employee health benefit plans are not covered by this process.

How can I find out more information on the amount of rebates being paid by an insurance company?

You can read PPACA’s key provision located in Section 2718, which is entitled “Bringing Down the Cost of Health Care Coverage.”[ii]  In addition, the U.S. Department of Health and Human Services (HHS) has created a web page that offers rebate information that you can access here.  You can read the final HHS rule 45 CFR Part 158 that governs the details of this process here along with a concurrent Department of Labor guidance here.   Finally, HHS has a FAQ sheet which can be found here.    

Please visit www.benefitmall.com to view past Blogs and Legislative Alerts. Or, you may visit www.HealthcareExchange.com for blog posts, polls, surveys and numerous resources.

The views expressed in this Snippet Blog do not necessarily reflect the official policy, position, or opinions of BenefitMall. This update is provided for informational purposes. Please consult with a licensed accountant or attorney regarding any legal and tax matters discussed herein.