Healthcare Reform Act - A Step-by-Step for HR - Part I - Rebates

Yep, I know:  you waited and hoped the Supremes would make your life easier by ruling that the Healthcare Reform Act was unconstitutional.  You haven’t done a thing to prepare.  The Court let you down.  Now you are slammed up against the impending deadlines and you realize that the future election is AFTER some of these deadlines kick in.  There’s no hope that you’ll get out of this now.  Uh Oh!!  Don’t panic.  This week and in the coming weeks, I’ll list some of How-To’s for HR, starting with the most pending deadlines.  We’ll get through this - - we always do.

August 2012 Rebates 

The Patient Protection and Affordable Care Act (PPACA) – the real name of the Healthcare Reform Act – calls for insurers (for our purposes, that would mean insurance companies) to report their Medical Loss Ratios (MLR).  If the insurer fails to achieve the stated MLR, it must issue a rebate.  The first rebate is due August 2012.  Getting money doesn’t sound like a bad thing, but since we in HR are under the rules of the IRS and the Department of Labor (which includes compliance with the Employment Retirement Income Security Act of 1974 – ERISA), we need to make sure we understand the consequences and have a game plan of what to do with the funds.

Where did these funds come from?

A “loss ratio” is not a new term.  Those of us in HR know the term from discussing workers comp premiums with carriers or when a broker is trying to explain why our health insurance rates went up.   Basically, it is the ratio of premiums they receive compared to what they have to pay out (medical care and quality improvement).  Since carriers DO work for a profit, they are going to figure in the loss ratio and add a percentage for administrative costs and profit in determining our premiums each year.  Under PPACA, the carrier is supposed to figure out the Medical Loss Ratio for a plan and determine the exact percentage paid.  For large groups of 100 employees or more (50 or more in some states until 2016, then 100), if the MLR does not reach 85% or, for smaller plans if it does not reach 80%, then a rebate must be given.

Who, what, when?

This rebate does NOT apply to self-funded plans.   Employers with partially- or fully-insured plans may or may not receive a refund.  It depends on the MLR and the manner in which the given state interprets its calculation.  The Kaiser Family Foundation’s recent survey found that, nationwide, employers are expecting rebates totaling $541 million in the large market and $377 in the small market.  This analysis will be ongoing, but the first rebates should be arriving in August 2012.

If your employer purchased the insurance for the benefit of the employees, then the rebate, if there is one, will go to the policy holder, meaning the employer.    Before you start planning on using the rebate to buy an IPad – I have one little heads up for you:  The insurer is supposed to send a letter to ALL subscribers in the group that a rebate is coming!  That’s right!  All those employees who traditionally stand in your doorway, call you, text you, and send you emails regarding every itty bitty thing will now have a good reason to bug you with “Where’s my money?”

Who Gets to Keep the Money?

ERISA has lots of rules regarding “Plan Assets” but these rules normally come into play with regards to retirement plans.  We now have to expand our way of thinking to include Plan Assets in our health insurance plan if we get a rebate.  Basically, we all need to write a policy regarding our medical plan and what to do if we have Plan Assets in the plan.

The DOL has provided some guidance with Technical Release No. 2011-04 with regards to what to do with the money.  The following is MY interpretation of this.  It is not verbatim and if you need more clarification, I suggest you speak with your broker and/or attorney:

-If the employer paid 100% of the premium, then the rebate goes to the employer and there are technically no “Plan Assets”; the employer can do whatever it wants with the money (but wouldn’t it be cool to at least have a little party or a cake or SOMETHING???)

-If the employees paid 100% of the premium, then the entire rebate is considered Plan Assets.

-If the employer paid a stated portion and the employee paid a stated portion, then the percentage that each party paid should be calculated and the employer portion of the premium goes to the employer and the employee percentage goes to “Plan Assets”.

-If the employer paid a fixed portion and the employee a variable portion of the premium – figure out the percentage that the employees paid for the relevant period.  The rebate is then divided proportionately, with the employer receiving its percentage and the “Plan Assets” being the employee portion.  The reverse is true if the employer paid the variable portion and the employee paid a fixed portion.

The above calculations should prove to be “reasonable, fair, and objective” (RFO for short)

The guidelines in the Technical Release No. 2011-04 also discuss the possible scenarios regarding distribution of the “Plan Assets” to the employees.  Things that should be considered: 

-Should the Plan Assets just go to our current insured employees or all of the employees (even the terminated ones) who were covered during the period of coverage?

-What would be the rebate per employee?

-What would be the administrative cost to pay back the employees (or to find the terminated employees)?

-What would be the tax ramifications (more on this in a minute)*?

The guidelines state that, unless you have policies to the contrary, if it is determined that the cost of distributing shares of a rebate to former employees is cost prohibitive (or approximately the cost of the rebate), then it is permissible to allocate the rebate to current employees if that can be done in a RFO fashion.  Or that it may be RFO to determine that, instead of issuing rebates in the form of checks, it may be easier to put the Plan Assets toward future plan premiums to offset the employee pay portion.

A few things to remember –

If you have multiple insurance policies through an insurer, you should make sure you understand which policy had a rebate and make sure the rebate benefits the employees insured under that policy.

*If you plan to hand out checks to your employees and former employees regarding the rebate, remember it is taxable.  If you plan to apply the rebate toward your employees’ portion of the premium (called by some “premium holiday”), then you do not have to charge the employee additional taxes.   As most employers have a pre-tax plan for employee-paid premiums (POP plans or cafeteria plans), the decrease in the pre-tax premium paid would mean an increase in the taxable income, so the tax goes up anyway. 

So What’s the Game Plan?

__ Speak with your finance department and others involved in the decision-making process of what to do if you get a rebate.  Explain that you may or may not be getting a rebate, but that your company should at least go forward with creating a Policy Statement for Plan Assets regarding your medical plans.

__ Write your Policy Statement.  Be sure to consider what you will do with the Plan Assets and consider previous employees, current employees and even future employees (for example, are you going to let new employees get a portion of the rebate even though they were not insured during the policy period that included the rebate?)  Make sure the policy statement is “reasonable, fair, and objective.”

__ Speak to your insurance carrier representative to find out if you are getting a rebate.  If you are, be prepared with a carefully written letter to your employees stating what your policy is regarding the distribution of the rebate.   Write this carefully allowing for as much transparency as possible into your decision-making process.

__ When you receive your rebate, let your employees know.  Remind them what you intend to do with the rebate.   This is a good time to remind them how much money the company has been contributing to their insurance all along.  Turn this administrative exercise into a “Yea Team” pep rally for your organization and its great benefits.

But then again, we’ll have more opportunity to let them know just how much the employer contributes to their benefits when we meet next week for Part 2 of this Blog.  That will be our discussion of Box 12 of our W-2’s.   Until next time...