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If your company maintains a fully insured group health plan, it
may have received - or will soon receive - a check from its insurer
under the requirements of the so-called "85/15 Rule" of
the Patient Protection and Affordable Care Act, which sets a 15
percent threshold (20 percent for certain smaller employers) on the
amount of premium dollars insurers can spend on administrative
costs (salaries, sales and advertising). Under the 85/15 Rule a
health care insurer that uses less than 85 percent (80 percent for
certain smaller employers) of the health care premium dollars it
receives (calculated on a state-by-state basis) to provide medical
care (doctors and hospital bills, as well as activities designed to
improve health care quality) must either rebate the percentage
difference between what it did spend and 85 percent (80 percent for
certain smaller employers) to the covered employers by August 1,
2012, or apply the rebate amount to the employers' health
insurance premiums due on or after August 1.
If your company receives an 85/15 Rule rebate check, unless its
fully insured medical plan is funded by a trust, the company must
use the funds in one of two ways. It may use the rebate to pay
future premium costs under the plan, or it may retain a portion of
the rebate and share the remaining portion with the employees
covered under the plan. If the company elects to use the rebate to
pay future premiums, the payment should be allocated
proportionately to reduce future employee and employer premiums,
according to the proportion of the premium amounts paid by the
employees as a group and the employer. If the company does not use
the rebate to reduce future premiums, it should allocate the funds
between the company and the participating employees, also on the
basis of the respective proportion of the premiums paid by each. If
an employer pays a portion of the rebate to its employees, and if
the employee contributions were originally paid on a pre-tax basis
under a cafeteria plan salary-deferral arrangement, or if employees
took an income tax deduction for their premium payments, these
rebate payments made to them would constitute taxable
compensation.
Employers that receive an 85/15 Rule notice from their insurers
should promptly make their determination and notify the employees
participating in their health care plans, in writing, as to whether
their insurer has issued a cash rebate or reduced certain future
premium amounts, and in either case, the effect on
participants.
U.S. Department of Labor Technical Release No. 2011-04
Technical Release 2011-04 and Internal Revenue Service FAQs
questions and answers contain further information on a
company's obligations under the 85/15 Rule.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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