Medical Loss Ratio Rebates: What Employers Should Know

Each year, some employers that sponsor fully insured group health plans receive Medical Loss Ratio (MLR) rebates from their insurance carriers. Employers that receive a rebate need to determine how the funds may be used and whether any portion must be used for the benefit of plan participants.

What Is an MLR Rebate?

The Affordable Care Act requires health insurance carriers to spend a minimum percentage of premium revenue on medical care and activities designed to improve health care quality. Generally, insurers must meet an MLR standard of 80% or 85%, depending on the applicable market.

If an insurer does not meet the applicable standard, it must provide a rebate. MLR calculations are based on the insurer’s experience within the applicable market and state, rather than the claims experience of an individual employer’s group health plan.

When Are MLR Rebates Issued?

Insurers that owe MLR rebates generally must issue them by September 30 following the applicable MLR reporting year. For employer-sponsored group health coverage, the rebate is generally provided to the group policyholder, typically the employer.

Receiving the rebate is only the first step. Employers must determine how the rebate may be used.

Is the Rebate a Plan Asset?

For an ERISA-covered group health plan, some or all of an MLR rebate may constitute plan assets. The determination generally depends on the terms of the insurance policy and plan documents and how the insurance premiums were funded.

If the governing documents do not resolve ownership of the rebate, the source of the premium payments is an important consideration. If employees contributed toward the cost of coverage, the portion of the rebate attributable to participant contributions may generally constitute plan assets.

For example, if the employer paid 75% of the premiums and employees paid 25%, the employer should not automatically assume it can retain the entire rebate. The appropriate allocation must be determined based on the applicable plan documents, premium funding and ERISA requirements.

How Can the Participant Portion Be Used?

If a portion of the rebate constitutes plan assets, the employer must use that portion for the benefit of plan participants and beneficiaries. Depending on the circumstances, permissible approaches may include:

• Providing payments to participants.
• Reducing participants’ future premium contributions.
• Applying the funds toward enhanced plan benefits or other permissible plan purposes.

The employer, acting in its fiduciary capacity, should select a reasonable and appropriate method. The Department of Labor recognizes that employers may consider the costs and administrative burdens associated with different allocation methods.

Employers should also consider which participants should benefit from the rebate, including whether former participants should be included. A reasonable allocation does not necessarily require that every participant receive an identical amount.

Timing Matters

Employers should address an MLR rebate promptly after it is received. When rebate amounts constitute ERISA plan assets, holding the funds for an extended period can raise additional ERISA considerations.

Employers should therefore determine the appropriate treatment of the rebate soon after receipt rather than simply depositing the check and treating it as general company funds.

Don’t Forget the Tax Consequences

The tax treatment of an MLR rebate can depend on how employees originally paid their share of the health insurance premiums and how the rebate is returned to them. For example, the treatment may differ depending on whether employee premiums were paid on a pre-tax or after-tax basis.

Employers should coordinate with their tax or payroll advisors when participant amounts will be distributed or applied as premium reductions.

What Should Employers Do When a Rebate Arrives?

Employers receiving an MLR rebate should review the applicable insurance policy and plan documents, determine how premiums were funded, identify whether any portion of the rebate constitutes plan assets, and select a reasonable method for using the participant portion.

The key is not to assume that an MLR rebate belongs entirely to the employer simply because the rebate check was issued to the company. For ERISA-covered plans, the source of the premium payments and the governing plan documents can determine how the rebate must be handled.