Disclaimer: We are not attorneys. The below overview is for informational purposes only and should not be construed as legal advice. You should contact your attorney to obtain advice with respect to this matter.
Please also note: if your employer sponsored group health plan is maintained in trust, the answers may be different than what’s included below (most group health plans are NOT maintained in trust). Again, you should contact your attorney to obtain advice.
As a result of COVID-19, some group medical, dental and vision carriers are providing employers with a credit against future premiums owed under their insurance contracts. This has raised the question from many employers: How should we handle our COVID-19 Premium Credit from the Insurance Carrier?
Answer: It’s not one-size fits all. Employers receiving these premium credits should consider their obligations under ERISA and/or state guidelines when determining how to apply the credits. The DOL guidance provides considerable flexibility to the employer, provided that the general approach is fair, reasonable and objective.
Below is a high-level overview of our understanding of the DOL guidance.
If a plan sponsor paid the entire cost of the insurance (there were no participant contributions) none of the rebate would be considered plan assets, and the entire amount could flow directly back to the employer.
If participants paid the entire cost of the insurance, the entire rebate would be considered plan assets, and the entire amount must be distributed to the participants.
If both the plan sponsor and participants contribute toward the cost of the coverage, the plan sponsor must determine the respective portions of total plan cost contributed by both parties so that the rebate can be appropriately allocated between the participants and the employer.
1.Calculate the percentage of total plan premiums paid through participant contributions. This includes employee payroll deductions, COBRA premiums paid by participants, premiums paid by participants during an FMLA leave, and any other payment made toward the premium by a participant. The resulting ratio is then applied to the rebate to determine the portion of the rebate that must be distributed to plan participants vs. the portion that may be retained by the plan sponsor.
2.Decide how to allocate the rebate. Fortunately, the distribution allocation method is not required to exactly reflect the premium activity of individual plan participants. DOL guidance states, “In deciding on an allocation method, the plan fiduciary may properly weigh the costs to the plan and the ultimate plan benefit as well as the competing interests of participants or classes of participants provided such method is reasonable, fair and objective.”
Two methods that generally meet the test of “fair, reasonable and objective” allocation include:
3.Decide what group of participants should receive the rebate. DOL allows various approaches, including:
DOL guidance points out that it will usually not be necessary to distribute rebates to former plan participants. In the guidance the DOL states…”if [an employer] 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]…” In most cases the amount of the rebate on a per participant basis will be so small that the administrative cost of distributing it to former participants will exceed the value of the rebate.
4.Decide how the rebate is to be distributed. There are tax implications to consider. The three methods of distributing the participants’ share of the rebate are:
a. to return the rebate to the participant as a cash payment
b. to apply the rebate as a reduction of future participant contributions (a so-called, “premium holiday”)
c. to apply the rebate toward the cost of benefit enhancements
Each option has its own advantages and disadvantages but option c (benefit enhancement) is viewed by many as being the least favorable due to complexity of making a benefit change and the increased cost to the plan in future years when a rebate may not be available.
According to IRS guidance, if participant contributions were made on a pre-tax basis, the rebate portion returned to the participant as cash or a premium holiday must be treated as taxable income. On the other hand, for contributions made on an after-tax basis the rebate will not be taxable (this most likely would be the case for voluntary benefits).
How quickly must the Plan distribute the participant’s share?
ERISA plan assets must generally be held in trust, however due to DOL guidance released, most employer sponsored group health plans are not required to maintain trusts. Fortunately, in guidance published by the DOL, the Department does not require the rebates to be held in trust, as long as they are distributed to participants within three months of receipt by the plan sponsor.