Some small businesses were among the most strident opponents of the Affordable Care Act, but by Wednesday, many of these businesses will have received checks totaling $321 million from their health insurance providers, courtesy of the health care overhaul that became law in 2010. The checks are rebates from insurers that did not spend at least 80 percent of the premiums they collected from small group plans on either actual health care expenses or improving the quality of health care, a provision known as the medical loss ratio rule.
Small businesses in 38 states, the District of Columbia and three United States territories are receiving checks on behalf of their employees, according to the Department of Health and Human Services. (In the remaining 12 states and in the Northern Mariana Islands, insurance companies in the small group market spent at least 80 percent of collected premiums on health care-related expenses.) The typical subscriber, which could be either an individual or a family, will receive a $174 rebate. Average rebates are highest in Georgia, at $811 per subscriber, and lowest in Utah, at $7 per subscriber.
The extent to which an employer can keep the rebate depends on whether under the terms of the health plan, the rebate is considered a plan asset: if it is a plan asset, then under the Employee Retirement Income Security Act of 1974, known as Erisa, it must be used for the benefit of the people participating in the health plan. Generally speaking, a private company is entitled to keep the share equivalent to its contribution to its employees’ insurance costs, said a Labor Department spokesman who requested anonymity, and is required to allocate the rebate to plan subscribers in the same proportion as those employees’ premium contributions. Beyond that, an employer, as a fiduciary for the health plan, must “act prudently, solely in the interest of the plan participants and beneficiaries, and in accordance with the terms of the plan,” according to guidance for employers from the Labor Department.
The allocation must also be impartial. “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,” according to the guidance. An employer could distribute the rebate among employees participating in the plan in the year the plan was overcharged, or it could distribute the rebate among current plan participants. Alternatively, according to the guidance, it can apply the rebate “toward future participant premium payments or toward benefit enhancements.”
Lawyers who specialize in employee benefits law disagree on the implications for small businesses. But Priscilla E. Ryan of the law firm Sidley Austin in Chicago said companies might be better off allocating all of the rebate to the benefit of their employees. “The easiest thing to do is just have the money be used for plan participants, and not say part of it is coming back to the employer, because that’s just too complicated,” Ms. Ryan said. “You’re going to have people who have individual coverage, and people with plus-one coverage, and people with family coverage. The subsidy that the employer gives to each of those coverages is different. I would not want to be figuring out how much is going to be coming back to the employer for that reason.”
The law also requires insurers to notify individuals enrolled in plans entitled to rebates of the coming windfall — no doubt as a way to build popular support for the overhaul — something that is sure to raise expectations among employees. But those waiting for a check in the mail may end up disappointed: the rules and regulations to carry out the law give companies pretty broad discretion to decide how to spend the money on their workers’ behalf, according to lawyers who specialize in employee benefits, and few are likely to actually cut checks to their employees.
Both Ms. Ryan and Mark A. Bodron, a lawyer with the Baker Botts firm in Houston, said that companies, having decided how much of the rebate to allocate to plan participants, would find it easier and cheaper to plow the proceeds back into the plan. The simplest option is to decree a “premium holiday” the next time employee premiums are due, and offset as much of the employee contributions as the rebate affords.
But could a business actually hold the rebate until next year and use it to offset some of its own contribution to employee premiums — that is to say, effectively pocket the money for itself? After all, the company could argue that without the rebate, it simply could not afford to pay the same share of its employees’ health coverage — that the rebate, in other words, kept the employees’ premium contribution from going up. Ms. Ryan said a company could do this.
“There is no technical definition of employees’ share,” she said. “The employer is under no obligation to offer health coverage, and if the employer does offer health coverage, there’s no obligation to subsidize any particular portion of the premium. You can use the rebate to keep the employees’ contribution level.”
Other lawyers were more cautious. The Labor Department has not given clear guidance on that, and “in the absence of the guidance, that’s a position you could take,” said Chris Rylands, a lawyer in Atlanta with the firm Bryan Cave. “I would make sure that if you’re going to do anything beyond an immediate premium holiday or cutting a check that you document it thoroughly and you seek advice of counsel. Because it’s an area where there’s risk, you ought to think hard about it before you play too many games.”
Mr. Bodron was still more skeptical. “I don’t think you want to hold the money that long, because I think that raises additional issues,” he said. “The employer would have to worry if there’s a prohibited transaction, because the employer has use of the money” for that period. And, he added, “to the extent that these are for the benefit of the participants, I don’t think you want to do that. At the end of the day, employers are going to need to feel comfortable that if the Department of Labor were to look at what you did with the premium rebate that you met your fiduciary duties.” An employer who breached those duties could face lawsuits from employees and the Labor Department, he said, and possibly even criminal prosecution.
But Mr. Bodron said that under Erisa law, it might be possible for an employer that holds the policy on a health plan to craft legal documents that specifically exclude rebates from the plan’s assets. Such a move, he said, could be risky. “Generally, the plan documents control, and if the plan documents clearly say the rebate is not a plan asset, then arguably the employer may take the position you don’t allocate any portion to the employees,” Mr. Bodron said. “It will be interesting to see if an employer goes down that route and what the response would be from employees and the Labor Department.”
Mr. Rylands said that he expected the government to tighten the rules eventually. “As we get further down the road,” he said, “I think the Department of Labor will issue clearer parameters about what you can and can’t do with the money.”