Many plan participants in fully insured health, dental and vision plans have delayed care due to the COVID-19 pandemic, and as a result of the decreased utilization many of the fully insured carriers are providing employers with refunds (e.g., credits, discounts, or actual checks) under their insurance contracts. While this is a positive development for employers, companies or plan sponsors receiving these refunds must consider their fiduciary obligations when determining how to apply them. Simply put, in most instances, an employer or plan sponsor can’t merely keep all of the refunds or credits. This is primarily the case where an employee contributes towards some portion of the premium through a payroll deduction.
Specifically, employee contributions may be considered “plan assets” and any portion of a premium refund that is a plan asset must be used for the exclusive benefit of plan participants and cannot be retained by the employer for its own use. Specific guidance has not been issued on how employers should handle any COVID-19-related premium credits. However, the rules for Medical Loss Ratio (MLR) rebates under the Affordable Care Act provide guidance on determining whether an insured plan refund (or any portion of a refund) is a plan asset and generally indicates that employers must share the premium savings (plan assets) with plan participants based on their plan’s contribution strategy. Please see our Distribution of MLR Rebates legislative update for more information regarding MLR rebate distributions, which summarizes guidance provided to both ERISA and non-ERISA plans.
When the employer is the policyholder, the portion of any refund that must be treated as a plan asset depends on who paid the insurance premiums (assuming the plan documents and other extrinsic evidence do not resolve the allocation issue). For example:
If the employer paid the full premium, the refund is not a plan asset and the employer can retain the entire refund amount and simply return it to employer general assets;
If the participants (including COBRA participants) paid the full premium, the entire refund amount is a plan asset and the refund or credit must be returned to the participants in some fashion;
If the employer and participants each paid a portion of the premiums, a percentage of the refund equal to the percentage of the cost paid by participants would be attributable to participant contributions and is therefore a plan asset. And here too, the portion attributed to the participants must be returned in some fashion.
Employers must determine the affected participants, and the allocation method to those participants must be reasonable, fair, and objective. An employer may decide to limit the refund only to current participants as the cost of distributing to former participants will often approximate or exceed the refund amount. The distribution methods of returning the portion belonging to participants may happen in a variety of ways:
A benefit enhancement to the plan – This may include adding a benefit or service equal to the value of the participant’s amount owed. For example, waive member copays for some period so that the amount due back participants is technically returned to them via a short term reduction in a copayment (i.e. PCP, generic Rx, etc.)
A premium reduction for plan participants or a premium holiday – This would generally include simply reducing or waiving employee contributions in such a way that is equal to the value of their share of the refund (i.e., for example, waive two weeks of payroll cost sharing that is equal to the portion of the refund to be returned, etc.)
A refund back to plan participants – Whether through cash or check, employers could simply pass back the amount this way. Note that if a refund is given back as cash or check to plan participants, the refund will be taxable (unless the original premium was paid post-tax). For these purposes, even where the refund is a very small amount per employee, the amounts which are determined to be plan assets must be distributed to plan participants in some manner.
Mishandling of plan assets is a prohibited transaction under ERISA and could result in personal civil and even criminal liability for the employer and its owners. And even if the plan is not subject to ERISA, similar risks may apply under applicable state law. As such, the proper management and return of participant portions of refunds is essential and, accordingly, employers should keep records describing how any refund payable to plan participants was determined and how it was distributed.
Employer Next Steps The COVID-19 pandemic has made receipt of insurance company payments a more common occurrence for plan sponsors. Both ERISA-covered and non-ERISA plan sponsors will need to determine if any portion of a refund is payable to participants and then be clear as to how that portion of the refund can be used. Plan sponsors unfamiliar with the applicable fiduciary rules may wish to consider what steps might be advisable and consult counsel as needed to determine the best approach for handling these refunds.
Many employers have chosen to simplify the process by extending an “employee premium holiday” approach to allocating the participant portion of the refund.
Your Conner Strong & Buckelew account team will work with you in helping to evaluate the best way to handle the allocation and management of refunds and credits for insured plans. Conner Strong & Buckelew will provide alerts and updates as new information becomes available. Please contact your Conner Strong & Buckelew account representative toll-free at 1-877-861-3220 with any questions. For a complete list of Legislative Updates issued by Conner Strong & Buckelew, visit our online Resource Center.
NOTE: THE RESOURCES PROVIDED ON THIS PAGE SHOULD NOT BE INTERPRETED AS LEGAL ADVICE. IF YOU HAVE ANY QUESTIONS, PLEASE CONSULT YOUR LEGAL COUNSEL