Premium Refunds for ERISA Plans: Risk and Reward for Employers

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BlueCross BlueShield of Tennessee has announced that it is distributing approximately $67 million to its insurance clients for 2003. The refund is ostensibly attributable to lower-than-projected increases in medical claim costs. While the refund is certainly good news for employers, the receipt of the refund poses some potential risks for employers who sponsor employee benefit plans.

If you are an employer maintaining a group health plan for your employees (other than a governmental or church employer), your plan is generally subject to the requirements under the Employee Retirement Income Security Act ("ERISA"). Furthermore, if your employees are contributing towards the cost of the coverage, a portion of the refund you are eligible to receive may be regarded as "plan assets" under ERISA. To the extent the refund constitutes plan assets, you will be limited in what you can do permissibly with the funds.

As a general principle, plan assets may not inure to the benefit of the employer and must be used solely to provide benefits to participants and beneficiaries and to pay reasonable plan expenses. In addition, ERISA generally requires that plan assets be held in a trust unless such assets are held by an insurer. Accordingly, it would be problematic for an employer to take a refund, deposit it in a general account, and used the funds solely for its own benefit. Rather, the employer must consider what portion of the refund, if any, is attributable to employee contributions and decide upon a method of allocating the refund for the benefit of participants.

In any case, the employer should consider not taking a refund check directly from the insurer. Instead, the employer should evaluate how the funds may be distributed directly to participants or used for a premium holiday. As a practical matter and to avoid holding plan assets directly, the employer should strongly consider the premium holiday approach. If such approach is taken, the employer will also need to review whether a modification should be made to the employees' cafeteria plan elections.