Is your medical insurance rebate TAXABLE???

Technical Release 2011-04

In Technical Release 2011-04, the DOL addresses the plan asset issues raised by HHS in its MLR final rule. In addition to the fiduciary, plan asset and prohibited transaction concerns noted under the HHS final rule, Technical Release 2011-04 recognizes that plan assets are generally subject to the trust and exclusive benefit requirements under Title I of ERISA. However, many ERISA plans are excused from the trust requirement if they satisfy the requirements of Technical Release 92-01.

Technical Release 2011-04 provides that rebates may constitute plan assets under ERISA requiring handling in accordance with Title I, as follows:

  • If the plan or its trust is the policyholder, in the absence of specific plan or policy language to the contrary, the entire rebate would constitute plan assets and the employer would have no interest in the distribution.
  • If the plan sponsor is the policyholder, determining whether a rebate is a plan asset depends on:
    • the provisions in the plan or the policy (if language can be fairly read to provide that some part or all of a distribution belongs to the employer, that language will generally govern and the employer can keep some or all of the distribution); and
    • how the plan sponsor and the plan participants have shared in the cost of the policy (for example, the portion of a rebate that is attributable to participant contributions would be considered plan assets).

Technical Release 2011-04 emphasizes that employers that sponsor insured group health plans are prohibited under ERISA from receiving a rebate amount greater than the total amount of premiums and other plan expenses paid by the employer. Also, the guidance does not address the tax consequences related to the receipt, holding or distribution of a rebate, noting that these issues fall under the IRS’ jurisdiction.

Employers will want to be familiar with the plan asset rules set out in Technical Release 2011-04, and should be prepared to determine whether any rebates received, whether by the employer or plan, would be considered plan assets under these rules. If so, the rebates will need to be allocated and handled by a fiduciary consistent with the requirements of ERISA.