Insurer Concessions: A Wrinkle to Consider
As employers and insurers are negotiating plan renewals, a new wrinkle is important to consider. Rather than reducing premium rates, insurers are offering employers/plan sponsors a variety of concessions. These concessions are coming in many shapes, colors and forms. If the employer/plan sponsor does not consider these carefully, these concessions could end up being ‘wolves dressed in sheep’s clothes’, particularly as it relates to ERISA.
If an insurer offers a refund of previously paid premium, consideration must be given to what part of the refund is attributable to plan assets. The particular moniker given to the money makes little difference--what matters is the true nature of the funds. Sometimes these funds are called an abatement or credit. Other examples of the concept are monies earmarked for specific purposes, such as wellness dollars, or for communications or technology purposes. The bottom line is, if the funds are specifically designated for a purpose, they must be used for that purpose.
An example of how a problem can arise is if a dollar amount is earmarked, for example, for communication purposes, but in no instance could that amount of money be actually allocated for communication purposes, then the employer cannot necessarily simply pocket the excess funds. Rather, it would need to get the dollars allocated for other permissible purposes. A scenario might go something like this: an insurer offers $25,000 earmarked for communications. The cost of providing these communications to participants does not exceed $5,000. The extra $20,000 cannot be pocketed by the employer/plan sponsor.
The general rules for determining how to use any of these insurer concessions or monies are parallel to those relating to rebates received under the Affordable Care Act’s medical loss ratio rules.
The employer/plan administrator’s first step is to review the plan document and follow its terms as relates to rebates, refunds, premium holidays, or similar terms. If the terms of the plan do not clearly define how the particular refund or concession can be used, the next step is to consider what portion, if any, of the amount is attributable to the plan assets.
- If the plan is held in trust, all of the funds must be placed in the trust and must be used for the exclusive benefit of plan participants.
- If the plan is not held in trust, which is most typically the case for insured arrangements, the next step is to determine what portion of the premium is attributable to participant contributions. For plans subject to ERISA, participant contributions always constitute plan assets.
If there is no trust in which to deposit rebates, then the rebates must be used within 3 months; or, the rebates can be used to reduce future premium. The rebate can be used to provide a premium credit, sometimes called a “premium holiday”. Or, the rebate can be paid in cash. For ERISA plans only, the rebate can be used as a benefit plan enhancement, such as to purchase additional benefits. It may be permissible for ERISA plans to use the rebate to offset administrative expenses if the relevant plan so provides.
If the monies are to be shared with participants, the shared amount of funds would be based upon how the premium is paid by the employer and employee. For example:
- If an employer pays 80% of the premium and employee pays 20%, the concession amount would be shared on an 80/20 basis.
- If the employee pays a fixed amount and the employer pays the balance, the employer can take full concession amount once it has been made whole; the balance would go to the participant. The same formula would apply in a reverse scenario if the employer pays a fixed amount and the participant pays the balance.
For non-federal government plans, the rebate would be paid to the policyholder (generally, the employer) and must be used to benefit plan participants to the extent the participants contributed to the coverage. For non-ERISA, non-government plans, such as church plans, the rebate must be paid directly to plan participants unless the entity agrees in writing to allocate the premium in accordance with the participant’s contribution.
If it is determined that the concession is, in fact, a premium discount, and if the plan does not require that the premium discount be shared with participants, the employer may be able to retain the discount; however, in no event, can the employer collect from the participant, more than the actual premium amount.
In closing, because these concessions may not be clearly identifiable nor is there a clear path to distribution, it is imperative to have a process in place to analyze these concessions and treat these amounts consistent with the analysis. A solid thought-out process to iron out the wrinkles will serve an employer/plan sponsor well, if ever challenged.
The information contained in this article is provided as general guidance and may be affected by changes in law or regulation. This article is not intended to replace or substitute for accounting or other professional advice. Please consult a CBIZ professional. This information is provided as-is with no warranties of any kind. CBIZ shall not be liable for any damages whatsoever in connection with its use and assumes no obligation to inform the reader of any changes in laws or other factors that could affect the information contained herein.