Many companies recently received rebate checks from their insurance carriers, and a vast majority of those companies probably deposited the funds into operating accounts, booking the gain. If you have deposited rebate dollars into your account without sharing those funds with plan participants, read on.

The Affordable Care Act mandates that insurance carriers pay out a minimum of 80% of collected premiums to claims in the small group market and 85% in the large group market. Under the Act, any excess premium dollars must be returned to companies and plan participants in a fair and equitable way. The Act also states that rebates from the prior plan year may be distributed to current plan participants in the form of a premium reduction in order to avoid any potential tax consequences as well as the pain of issuing checks to terminated employees.

There’s no specific guidance how these funds must be distributed, but many carriers have already issued letters to plan participants informing them that a goose laid a golden egg for them. Many of the employees we service are now assuming that there will be a free family vacation courtesy of Big Insurance this year, but that’s just not the case. In fact, most of the participants in single-only coverage where the employer contributes significantly have been receiving about $10 or less.

The following is an excerpt from an employee communication that we provided to several of our client companies and provides a fair and equitable model that falls within the current guidelines we have been provided:

The amount each participant receives will be a percentage of total rebate dollars the company receives equivalent to that participant’s percentage of total monthly health insurance premium dollars paid by [Company] as a whole. The rebate dollars relate to health insurance only and will be distributed to current plan participants by way of premium reductions on the next regularly scheduled payroll. A sample of this calculation follows:

  1. Total monthly medical health insurance premium: $20,000
  2. Total monthly out of pocket health insurance premium paid by employee: $200
  3. Percentage of total premium paid by employee: $200/$20,000 = .01= 1%
  4. Rebate received by company = $500
  5. Reduction of premium passed along to employee = 1% of $500 = $5.00

We realize that this reasoning is a bit skewed because it rewards current plan participants based on the previous plan year’s numbers, but the Act allows for it, and it is far easier and more economical than tracking down last year’s employees to send out tiny checks net of necessary taxes. We also understand that these dollars can arguably be used by the company as a sort of intrinsic reduction in premium, but we feel that this would be a far less defensible than our current stance of sharing refunds in a documentable way.

None of these checks is worth a court battle.