Premium Rebates Offered by Carriers Due to Decline in Health Care Services

Due to the COVID-19 pandemic and subsequent lockdowns, many employees have postponed or avoided medical, dental and other health care services. Many carriers are reporting reductions of upwards of 60% for Inpatient hospital services and 30% for Emergency room services from April through June. As a result of this decline in services, many carriers have decided to offer rebates or premium holidays to their fully insured clients. Any credit amount that qualifies as a plan asset under ERISA must be used for the exclusive benefit of the plan’s participants.

The Department of Labor (DOL) has not issued guidance that specifically addresses how employers should handle any COVID-19-related premium credits under ERISA. However, the DOL guidance on medical loss ratio rebates generally indicates that employers must share the premium savings with plan participants based on their plan’s contribution strategy. In addition, ERISA’s fiduciary duty rules prohibit employers from retaining employees’ payroll deductions for plan premiums. These contributions must be used for paying plan benefits and expenses, and not for the employer’s own purposes. To comply with ERISA, employee contribution amounts must be forwarded to the carrier within 90 days or placed in a trust account.

Premium holiday vs. Rebates

In lieu of rebates, some insurers are issuing a premium holiday, where the employer does not have to remit premium or receives a bill for a reduced premium amount. When the employer receives a reduction in premium, that reduction should be shared with both employees and COBRA participants to the extent they paid some portion of the entire premium.

Examples:

1. If the premium was entirely employer paid, there is no requirement to share the rebate or premium holiday with employees.
2. If the premium was entirely employee paid, 100% of the rebate or premium holiday should be returned to covered employees
3. If the employer and employee both share in the premium (including COBRA participants), the portion of the rebate or premium holiday attributable to the employee cost sharing should be returned to the employee or COBRA participant. For example if the company pays 70% of the premium and the employee pays 30%, then 30% of the rebate should be returned to the employee.

What are the options for returning premium rebates to employees?

1. Employers can pay it to the employee through normal payroll or a separate check
2. The employer can provide the employee with a premium holiday or reduction in the current year cost sharing contribution
3. The employer can use the funds for plan enhancement activities such as implementing a corporate wellness program 

How do employers manage the tax treatment?

Most employers have established a Section 125 or Cafeteria plan to allow employees to pay their portion of the health, dental, and vision policies pre-tax. If issuing a separate check or reducing the typical employer cost share for a particular pay period, then the rebate will naturally be taxable to the employee. If the rebate is used for plan enhancement activities, it would generally not be considered taxable.

What about former employees?

The rebate should benefit participants that paid into the policy for the current year since the rebates are related to the current year plan performance. However, in many cases it simply doesn’t make sense to provide a rebate to a former employee when the cost to administer the rebate is greater than the rebate itself. In this case it is up to the plan sponsor to determine the feasibility and cost associated with the rebate process.

Allocating rebates

Although it may be easiest to provide a rebate based on what the employee paid, it doesn’t necessarily have to be performed in that manner (i.e. Family coverage generally costs more than Individual coverage). DOL guidance allows the plan sponsor to use any allocation method that is fair, objective and reasonable. Employers should consider:

1. The costs to the plan to distribute the rebate
2. The ultimate benefit of distributing the rebate
3. Different interests of groups of participants

If a plan provides benefits under multiple policies, the employer must be careful to allocate the rebate for a particular policy only to the participants who were covered by that policy. According to the DOL, using a rebate generated by one plan to benefit another plan’s participants would be a breach of fiduciary duty.

For more news and information regarding COVID-19, please see our COVID-19 Resources page.