Understanding Medical Loss Ratio (MLR) Rebates

As summer progresses, employers may begin receiving Medical Loss Ratio (MLR) rebates from their health insurance carriers. While not every carrier issues rebates each year, summer is a good time for HR and benefits professionals to understand what these payments are, why they are issued, and how they should be handled. Health insurance carriers that owe rebates generally distribute them by September 30.

What Is an MLR Rebate?

The Affordable Care Act (ACA) requires health insurance companies to spend a minimum percentage of premium dollars on medical claims and activities that improve health care quality. Insurers offering coverage in the large group market generally must spend at least 85% of premium revenue on these purposes, while insurers in the individual and small group markets generally must spend at least 80%. If an insurer does not meet the applicable standard, it must issue rebates to policyholders.

MLR rebates are calculated using the insurer’s claims experience over a rolling three-year period rather than a single year. As a result, rebates are not directly tied to the most recent renewal increase or claims activity. An employer may receive a rebate even after experiencing premium increases, while another employer may receive no rebate despite favorable claims experience.

Who Is Entitled to the Rebate?

For employers that sponsor fully insured health plans, receiving a rebate does not necessarily mean the employer may keep the entire amount. If employees contributed toward the cost of coverage, all or a portion of the rebate may be considered plan assets under ERISA. Employers should review how premiums were funded and determine an appropriate method for allocating any employee portion of the rebate.

How Can the Rebate Be Used?

If all premiums were paid entirely by the employer, the employer generally may retain the rebate. However, if employees paid a portion of the premiums, employers should consult with legal counsel or benefits advisors before determining how the rebate will be used.

Depending on the circumstances, the employee portion of the rebate may be used to:

• Reduce employees’ future premium contributions through a temporary premium credit or “premium holiday.”
• Provide cash payments to eligible employees.
• Enhance plan benefits when distributing small amounts to individual employees would not be practical or cost-effective.

The method selected should be reasonable, fair, and consistent with ERISA fiduciary obligations. Employers should also consider the tax treatment of any rebate, particularly if employee premiums were paid on a pre-tax basis through a cafeteria plan.

Questions HR Should Consider

When an MLR rebate is received, HR should work with finance, payroll, benefits advisors, and legal counsel to answer several important questions:

• Who is the policyholder entitled to receive the rebate?
• Did employees contribute toward the premiums?
• Does any portion of the rebate constitute plan assets under ERISA?
• What is the most appropriate method for allocating the employee portion?
• Are payroll or tax adjustments required?
• Are employee communications needed?

Be Prepared

Although MLR rebates are not issued every year and are often modest in amount, employers should have a process in place to evaluate them promptly. By understanding the rules before a rebate arrives, HR teams can make informed decisions and help ensure any rebate received later this summer is handled in compliance with ERISA, tax rules, and other applicable legal requirements.