The Patient Protection and Affordable Care Act (the “Act”) imposes on health insurance issuers or carriers Medical Loss Ratio (MLR) standards which dictate that a certain proportion of the carriers’ income be spent on medical care and quality improvement activities. Insurance carriers in the large-group market (generally, those with at least 100 employees) must spend at least 85% of premium dollars on medical care and quality improvement activities. This percentage is reduced to 80% for carriers in the small-group and individual markets. Where a carrier fails to satisfy the MLR requirements, it must issue a rebate. In the case of policies issued in the individual market, the MLR rebate is paid to the policyholder. In the case of group polices that underlie employer-sponsored group health plans, the rules are more complicated, since premium contributions giving rise to the rebate are in many cases split between employee contributions (usually made on a pre-tax basis under a cafeteria plan) and employers’ contributions. For the most part, these plans are governed by the Employee Retirement Income Security Act of 1974 (ERISA). As a consequence, MLR rebates are subject to the ERISA “plan asset” rules and fiduciary and prohibited transaction standards. This will generally require that the rebate be apportioned between employees and the employer.

Background

Guidance issued by the U.S. Department of Labor (the “DOL” or “Department”) provides that participant contributions are plans assets. Specifically, DOL Reg. 2510.3-102 provides, in relevant part...