Question:  How should clients handle the Medical Loss Ratio (MLR) rebates for employees who have terminated employment with the company?

Answer: The guidance issued by the Department of Labor is that an employer’s allocation of the rebates should be “impartial and in the interest of participants,” for purposes of ERISA section 404(a)(1), even if it doesn’t exactly reflect the premium activity of policy subscribers. The DOL guidance further suggests that employers decide on an allocation method by weighing the costs to the plan and the ultimate plan benefit as well as the competing interests of participants or classes of participants. And the method should be “reasonable, fair and objective” and well-documented in case there are challenges later.

When you think about the spirit and intent of this law, it is to provide the plan participants with a refund for what they were overcharged in 2011. So to the extent that an employer can provide the rebate to the 2011 participants, that would be the best outcome except for the reasons outlined in the next paragraph.

The guidance suggests that if the plan sponsor finds that the cost of distributing shares of a rebate to former participants approximates the amount of the proceeds, the plan sponsor may properly decide to allocate the proceeds to current participants based upon a reasonable, fair and objective allocation method. Similarly, if distributing payments to any participants is not cost-effective (e.g., payments to participants are of de minimis amounts, or would give rise to tax consequences to participants or the plan), the fiduciary may utilize the rebate for other permissible plan purposes including applying the rebate toward future participant premium payments or toward benefit enhancements.

In addition, the DOL guidelines suggest that the distribution, premium credit or benefit enhancement be made within three months after receipt of the rebate so that a trust to hold the rebate will not need to be established.  The guidelines issued by the DOL and IRS are incomplete, with many questions left unanswered. For further guidance, we suggest that you consult with your benefits attorney or tax advisor.