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How will your company comply with new medical premium rebate requirements, if a rebate is received from its medical insurance provider?

Beginning with the 2011 year of coverage -- based on the Affordable Care Act, medical insurance companies are required to spend a percentage of the premiums they receive for medical purposes vs. administrative.  For the large group market the percentage, also known as the Medical Loss Ratio, is 85%.  For the small group market, the ratio is 80%.  If the insurer falls below this ratio, they are required to refund the difference to the employer.

 

When the employer receives the refund, they have the following choices - 

  • provide rebates to each plan participant; or,
  • use the rebate to lower premiums during the following year.

 

The issue seems simple enough, but when you consider mechanics of implementing each option, it becomes difficult.

 

Please respond with how your company is adressing this situation.

Answers

Jason Chroman
Title: Vice President Finance & Controller
Company: Tubular Labs
LinkedIn Profile
(Vice President Finance & Controller, Tubular Labs) |

For us, a tricky element was that the rebate only applied to two of the less popular plans that we offered to employees last year, so it only impacted a small number of employees. Giving out rebates was a bit of a data exercise, because we had to figure out the relative contributions from the employees and company, and allocate the refund accordingly.

It wound up being at most a few hundred dollars per employee, and that had to be taxed, though payroll, because the rebate is a refund of pre-tax money.

Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

The pre-tax to tax issue is one of the tricky ones I was thinking of. Thanks for your comment.

Topic Expert
Brenda Goudey
Title: CFO/VP of Finance
Company: KDR Designer Showrooms
(CFO/VP of Finance, KDR Designer Showrooms) |

I just finished this exercise yesterday. Although we only had 30 plan participants last year, it took about 4 hours to massage the data and calculate employee rebates ranging from $0.62 to $230. The company pays approximately 80% of employee premiums.

We offer two health plan options with a mid-year renewal, so I essentially had to take four plans into account and then filter out premiums paid for dental and vision because that isn't part of the ACA.

There is an allowance for employers to not distribute funds to former employees if the cost of distribution exceeds the distribution amount, but if you don't rebate them then you have to redistribute those funds among the participants who are receiving rebates.

Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

Very helpful. Thanks.

Robert Rochester
Title: VP & CFO
Company: Edcor Data Services LLC
(VP & CFO, Edcor Data Services LLC) |

We have not received any rebates yet, so I can only provide a hypothetical answer. However, I suspect we would determine the best approach would be to keep the money and consider it a reduction to future health care insurance costs.

Topic Expert
Brenda Goudey
Title: CFO/VP of Finance
Company: KDR Designer Showrooms
(CFO/VP of Finance, KDR Designer Showrooms) |

Robert,

That would have been our preference as well, but the Federal government disagrees.

The DOL has determined the rebate resulting from employee contributions is an ERISA asset so has to be managed as such - basically being returned to the employees within 90 days or else be held in a trust...

Also, if premiums were deducted pre-tax, the IRS rules state that the rebate has to be distributed to the employees in such a way as to create taxable income, either as an outright payment or a reduction in the health insurance deduction on future payrolls.

Robert Rochester
Title: VP & CFO
Company: Edcor Data Services LLC
(VP & CFO, Edcor Data Services LLC) |

Brenda, you are correct. Perhaps I didn't explain it very well. I didn't mean to say we would deposit it and forget about it. I was thinking we would use the "employee" portion of the rebate to reduce the following year's health care payroll deductions.

I am being very optimistic to suggest employees share of medical insurance would go down the following year. Given the double-digit increases in annual insurance premiums we have experienced, it is more likely the rebate would only mitigate the increase in the employee's contribution.

Topic Expert
Brenda Goudey
Title: CFO/VP of Finance
Company: KDR Designer Showrooms
(CFO/VP of Finance, KDR Designer Showrooms) |

The additional consideration I had to deal with was the fact that United Healthcare helpfully sent a letter to all of the participants advising them that the rebate was on the way and they could contact their benefits administrator to see how/when it would be distributed - so it was easier to just pay out the money and be done with it.

Robert Rochester
Title: VP & CFO
Company: Edcor Data Services LLC
(VP & CFO, Edcor Data Services LLC) |

Brenda,

Don't forget to thank United for their thoughtfulness and consideration... :)

Topic Expert
Brenda Goudey
Title: CFO/VP of Finance
Company: KDR Designer Showrooms
(CFO/VP of Finance, KDR Designer Showrooms) |

Yes, I regularly tell them how much I love them.

Anonymous
(Agent) |

Would an employer of one 'part-time' salaried employee be able to deduct health-insurance contributions in the same way as wages?

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