Question: What are the general rules that apply when an employer receives an MLR rebate?  If it’s a small amount, can the employer simply keep the MLR rebate in its general assets?

Compliance Team Response:

One of the core ERISA fiduciary duties imposed upon employers is the “exclusive benefit rule.”  This rule requires employers to act solely in the interest of participants and beneficiaries with respect to any fiduciary function.

The DOL has interpreted the application of the exclusive benefit rule to medical loss ratio (MLR) rebates in Technical Release 2011-04.  In that guidance, the DOL provides three options for using the plan assets in a manner consistent with the employer/plan administrator’s fiduciary duties, as described below.

The following is a step-by-step approach to handling the MLR rebate:

Step 1: Determine the Portion of the MLR Rebate that is Plan Assets

The MLR rebate is considered plan assets under ERISA to the extent it is attributable to employee contributions.  So, for example, if the employer pays 80% of the premium and the employee pays 20%, then 20% of the rebate will be plan assets (and the other 80% can be retained by the employer).

Step 2: Determine How to Use the MLR Plan Assets to Benefit Participants

Three Options:

1. Refund the MLR plan assets directly to employees as taxable cash;

2. Apply the MLR plan assets to premium reductions for current participants; or

3. Apply the MLR plan assets to benefit enhancements for the plan.

In practice, I generally see employers evenly split between the first two options above.  I have rarely seen the benefit enhancement approach.

Any other approach would very likely be considered a breach of the employer’s fiduciary duties, which raises DOL enforcement liability and employee lawsuit liability.  There is no “administratively burdensome” exception that an employer can rely on in this context to retain any plan assets that are part of a small MLR rebate.

Step 3: If Rebated—Include Former Participants?

In general, the answer is yes—former participants should be included in the rebate.  However, the key is that the allocation method be “reasonable, fair, and objective.”

The example in the guidance states that if the employer believes the cost of distributing MLR rebate to former participants approximates the amount of the rebate itself, the employer could reasonably decide to allocate the MLR rebate only to current participants.

Step 4: How Much Time Do We Have to Take Action?

The employer will need to take action under any of the three options above within three months of receipt of the MLR rebate to avoid burdensome ERISA trust requirements.

Guidance:

DOL Technical Release 2011-04: https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/technical-releases/11-04

IRS MLR FAQ: https://www.irs.gov/newsroom/medical-loss-ratio-mlr-faqs

Regulations

ERISA §404(a)(1)(A):

(a) Prudent man standard of care.

(1) Subject to sections 403(c) and (d) [29 USC §1103(c) and (d) ], 4042 [29 USC §1342], and 4044 [29 USC §1344], a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and—(A) for the exclusive purpose of:
(i) providing benefits to participants and their beneficiaries; and
(ii) defraying reasonable expenses of administering the plan;
(B) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims;
(C) by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; and
(D) in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this title and title IV.
(2) In the case of an eligible individual account plan (as defined in section 407(d)(3) [29 USC §1107(d)(3)]), the diversification requirement of paragraph (1)(C) and the prudence requirement (only to the extent that it requires diversification) of paragraph (1)(B) is not violated by acquisition or holding of qualifying employer real property or qualifying employer securities (as defined in section 407(d)(4) and (5) [29 USC §1107(d)(4) and (5)]).