Published by Brian Olsen
Many fully-insured carriers are offering premium credits, thus temporarily reducing future monthly premiums. This phenomenon began with carriers offering these premium credits for group dental and vision coverage, and evolved into some carriers offering similar credits for group medical premiums. Employers receiving such credits are asking how they must be handled. May the employer simply keep the credit, or is there an obligation to share some or all of the credit with plan participants?
If the employer pays 100% of the premiums for employees and their dependents, the employer can keep the credit and use it for any business purpose. However, if employees contribute to the monthly premium cost, which is the more common scenario, it may not be possible for the employer to simply retain the credit. If plans are subject to ERISA, the premium credit is likely to be considered plan assets, in which case the funds must be used solely for the benefit of plan participants and beneficiaries by providing benefits or defraying reasonable expenses of plan administration. 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. Additionally, if carriers are advertising these premium credits, choosing not to pass along at least a portion of the temporary reduction in premium costs to employees could turn into an employee relations issue.
We haven’t received any specific guidance about how to deal with these premium credits from the agencies. This may not be popular advice, but until we receive further guidance, we’re assuming that these credits will need to be handled similarly to MLR rebates, likely requiring a cash distribution or premium holiday, to the extent that the premiums are paid by employee contributions.
If we treat these credits as plan assets like we do MLR rebates, it’s first necessary to determine what portion of the credit may be considered plan assets. For example, if employees generally contribute 50% of the monthly premium cost, then 50% of the credit should be treated as plan assets (the employer may keep the other 50%). We’re not aware of any de minimis amount that would allow the employer to simply retain these premium credits; we would recommend a distribution regardless of the size of the participants’ pro rata portion. For the portion considered to be plan assets:
If the plan document specifically addresses carrier rebates or credits and allows the employer to retain these types of refunds, the employer would be permitted to keep the funds and use them for any business purpose. However, most plans are silent about carrier rebates or credits. This is something the employer might want to address in plan documentation for future plan years.
Assuming that the plan document is silent about these types of carrier credits and that employee contributions are involved, the employer should return a pro rata portion of the credit to employees within 90 days to avoid having to hold them in trust. Employers typically distribute the employee’s portion as a cash payment or as a reduction in future premium contributions (a “premium holiday”). We don’t recommend that employers distribute rebates or credits as a “benefit enhancement.” Although that is one of the options listed under DOL guidance for MLR rebates, it’s not clear how it should be handled as such, or how to avoid ERISA trust requirements (e.g. how is it distributed within 90 days?).
For more details about how the DOL advises employers to handle MLR rebates, see our issue brief found here.