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premium credits

In the midst of the coronavirus pandemic, welfare benefits insurers have realized something of a windfall. They’ve collected premiums for several weeks during which time, due to shelter-in-place orders, employees and their dependents have canceled medical, dental and vision appointments, had those appointments canceled by their healthcare providers, or have simply foregone care they might normally have received.

In response, some carriers are declaring a credit against future premiums owed under group benefits contracts. While this is a win for employers and/or their covered employees, some employers have asked about the ERISA implications of the credit, specifically, how they may apply the credit. While ERISA issues with respect to insurer rebates and refunds can be thorny because premium payments are returned to the employer in cash, mere credits don’t pose the same level of risk, for reasons we explain below. However, that’s not to say there is no risk. It’s important that employers understand their rights and responsibilities with respect to these credits.

Plan assets: The crux of the issue

Issues with credits, and refunds and rebates too, all boil down to ERISA’s obsession over proper use of ERISA “plan assets.” Those assets may only be used to pay benefits and the reasonable expenses of plan administration. Plan fiduciaries, which almost always include the employer, cannot profit from transactions involving plan assets.

Employee contributions to an ERISA plan are always considered plan assets. Thus we gain our first glimpse at the crux of the issue with credits, refunds and rebates: Where employees pay all, or even just a part, of the premiums under an ERISA plan, the employer cannot profit from those payments.

Where the insurer returns cash to an employer in the form of a premium refund or rebate, the employer – as a plan fiduciary – must parse whether any portion of the refund or rebate is an asset of the plan and, if so, how it will keep that portion within the plan’s four walls (e.g., refund the cash to participants, enhance benefits or defray other expenses of the plan). That analysis can depend on who holds the insurance contract (i.e., the employer or a trust) and on the terms of the plan documents. Plan terms might permit the employer to claim first bite at the refund or rebate, up to the amount of its contributions to the plan.

Lockton comment: We leave for another day a more detailed analysis of how best to deal with refunds and rebates. We explored these issues in depth with respect to medical loss ratio refunds under the Affordable Care Act. See our guide to those issues.

Premium credits are easier from an ERISA perspective, because the insurer is unilaterally keeping the credit within the four walls of the plan. That is, the insurer will apply the credit against premiums due for future periods under the plan. That’s not to say there are no ERISA traps for the unwary. An employer would not, for example, want to continue the withhold employee premium contributions and pocket, for its own account, those contributions, up to the amount of the premium credit.

Here’s a simple roadmap for applying these premium payment credits, based on Department of Labor guidance over the years. The grid does not explore every allowable option; rather, it briefly describes our thoughts on a practical best practice. We assume the employer is the group contract holder:

Nature of the assets made available by insurerWho made the premium contributions“Best practice” options for dealing with the credit, refund or rebate
Premium creditEmployeesSuspend employee payroll deductions and apply credit until exhausted or, where the credit is not substantial enough to warrant the administrative challenge of suspending contributions, continue employee payroll deductions but be sure all payroll deduction amounts are ultimately applied to premiums or other plan expenses. For example, assuming the carrier will agree, perhaps delay increasing employee contributions next contract year to keep pace with premium increases, instead allowing the credit to defray the premium increase for a while. Or apply the premium credit in the next contract year to pay for a benefits enhancement.
EmployerSuspend employer contributions until the premium credit is exhausted.
Employees and employerWhere plan documents (including, out of an abundance of caution, an open enrollment pricing sheet) do not specify the level of employer contributions the employer committed to make, suspend the employer contributions until the premium credit is exhausted. Where plan documents commit the employer to making its current level of contributions, the better play would be to follow the recommendation above, with respect to plans where the employees alone make contributions.