Many of you already know that The Patient Protection and Affordable Care Act (PPACA) Medical Loss Ratio Rule may result in health insurance premium rebates in the coming months.   In fact, insurers are required to send rebates relating to 2011 premiums to employers by August 1, 2012.  What you may NOT know is how you are going to distribute a portion of these rebates back to current employees, past employees, and COBRA participants.  The 2011 rebates will start arriving this summer. The question is, are you ready for them? 

Under the PPACA Medical Loss Ratio (MLR) provisions for small group plans, carriers must spend 80% of their premium dollars on claims and related expenses, with only 20% to be spent on administrative expenses.  For large group plans, the MLR ratio is 85% to be spent on claims and related expenses and 15% on administrative expenses. If a carrier doesn’t meet the minimum MLR threshold, it is required to issue rebates to the policyholder. For groups, this means that the employer will receive a rebate check and participating plan employees will receive notification that they may be entitled to part of the rebate.

Employers must analyze their plan documents to determine if the rebates are plan assets and must be passed along to participants who contributed to their premiums. See Department of Labor Technical Release 2011-04 for assistance in making this determination.  If required, this must be completed within 90 days of receiving the rebate from the carrier. 

What should you do?

First and foremost, be ready with a documented plan of action. You need to have something in writing to help you respond to employee inquiries. Your plan of action should answer the following questions: 

1. Who will be eligible for the rebate? PPACA does not specify that you have to rebate former employees or COBRA participants.   However, decisions on how to distribute the rebates are subject to ERISA’s fiduciary standards of conduct including the responsibility to act prudently, solely in the interest of the plan participants and beneficiaries, and in accordance with the terms of the plan.  As a company, you need to decide if your shared rebate will be limited to active employees or if it will extend to past employees and COBRA participants who contributed to health premiums during the 2011 policy year. 
2. How will you pay the rebate? Will a check be cut directly to the employee or added to payroll? Or, for active employees, will the refund amount be used to offset the premium amount paid by the employee for this year’s coverage?
3. What is the de minimus cut off? Will you issue rebates regardless of how small, or will you have a de minimum cut-off for minimal rebates owed? – For example, “We will not issue a rebate if the amount due is less than $10.”  If a fiduciary finds that the cost of distributing shares of a rebate to former participants approximates the amount of the proceeds, the fiduciary may properly decide to allocate the proceeds to current participants only. 
4. How will you ensure that you meet your obligations to report taxable income? If you are rebating former employees or COBRA participants, you will need to issue a 1099 if the rebate given exceeds $600.

COBRA participants are a group that shouldn’t be forgotten and thought should be put into what rebates, if any, they will be getting.  Don’t wait until it’s too late.  Talk to your insurance carrier and your legal advisor soon to develop a rebate plan of action for qualified active employees, former employees, and COBRA participants.  

For more insightful COBRA training, sign up for a COBRASchool webinar today. 

Also, insurance brokers can download our free guide, “How to Offer COBRA in the Age of Healthcare Reform.”