Insurers are beginning to announce premium credits due to reduced claims expenses in the wake of stay at home orders due to COVID-19, but the major question this generates is, “Can an employer reap the benefits of the credit or is the employer required to share it with employees?” Certain insurers are telling employers that they can keep the funds and others are saying that employers should share them back with participants.
While the current premium credits are not part of the Affordable Care Act’s medical loss ratio rules, it might be prudent for employers to apply a similar analysis. These rules require that insurers refund premiums in a market when less than 80% to 85% of the premium dollars are spent on medical care. These refunds are seen as plan assets and employers are generally required to share rebates with employees if they have contributed to the cost of coverage, unless the plan document provides otherwise. Therefore, in order to get to the answer, it makes sense to consider whether any portion of the premium represents a plan asset and what the plan document says about such amounts.
Plan Documents
How the plan document is drafted and how it communicates how the plan is funded by the employer and participants is generally the first step in the analysis. For example, some employers draft plan documents reflecting that the employer as the plan sponsor may retain any premium rebates, refunds, or credits to the extent that they do not exceed employer contributions. In this case, an employer may retain any premium credit or refund unless it exceeds the portion of the premium paid by the employer and no further analysis is usually necessary. However, a plan document or insurance policy that is silent on how rebates or similar items are shared between the employer and the employee should consider sharing to the extent a portion of the return represents participant contributions.
Plan Assets
To the extent that participants contribute to the cost of coverage for a plan, these participant contributions are always considered plan assets because the Employee Retirement Income Security Act of 1974 (ERISA) defines them as such. And, when a plan document is silent on the issue of rebates, whether an employer can retain a premium rebate, refund, or subsidy depends largely on who paid for the cost of the insurance coverage.
If an employer pays 100% of the cost of the insurance, there are no plan assets and the employer can retain 100% of a premium return without violating ERISA. However, if the employee and the employer each pay a fixed percentage of the premium, then it follows that the employer would be expected to proportionately share the premium refund as any amount that is determined to be a plan asset must be used for the sole purpose of providing benefits to participants (often referred to as the exclusive benefit rule). The guidance generally outlines three ways to share with participants, including:
- Reducing the employee’s portion of future premiums for employees currently enrolled;
- Reducing the employee’s portion of future premiums for employees covered under the plan at the time for which the refund is attributable; or
- Providing a direct cash payment to current employees and current COBRA enrollees who were covered by the group health policy on which the refund was based.
Conclusion
Before employers make any final determination, they may also want to consider the public nature of the COVID-19 pandemic. For example, insurers are publicly communicating premium credits and reductions. This may create an expectation that the employer should share – regulations and considerations aside – posing employee relations challenges for employers who choose not to share. To further complicate matters, different insurers are handling how they are sharing their savings with employers differently and some ways may not trigger the plan assets rules at all. With all considerations in mind, prudent employers should consult their legal counsel for a thorough analysis of current plan language, regulation and guidance around premium credits to ensure compliance.
Please contact your HORAN representative with additional questions.
