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:
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:
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.