Summary of Medical Loss Ratio (MLR) rebates
The ACA requires health insurers to spend a minimum percentage of their premium dollars, or MLR, on medical care and health care quality improvement. This percentage is:
- 85 percent for issuers in the large group market; and
- 80 percent for issuers in the small and individual group markets.
Issuers that do not meet these requirements must pay rebates to the policyholder (employer) by Sept 30 of each year and the rebates are based upon aggregated market data in each state, not upon a particular group health plan’s experience. In other words, even if a particular employer’s plan’s MLR was below the applicable required standard, they will not receive a rebate unless the particular insurance product they purchased in their market size in their state qualifies for an MLR rebate.
NOTE: Carriers are required to mail out MLR (medical loss ratio) rebates by September 30.
Who does this apply to?
- Fully insured health plans only. This does not apply to self-funded health plans or to polices for “excepted benefits” such as stand-alone dental or vision coverage.
How should employer handle MLR rebates?
>>Determine which plan or policy is covered by the rebate they received. (The issuer should include policy information as part of the rebate.)
>>Decide how much of the rebate must be paid to plan participants, and how much the employer may keep.
- If the plan documents do not specify otherwise, the portion of the rebate that will be considered “plan assets” is the same percent of the total premium that was paid by participants. Under ERISA, the portion of the rebate considered “plan assets” can only be used for the exclusive benefit of plan participants and beneficiaries and therefore, must be paid to or used for the benefit of plan participants (more on this below).
e.g. If ER contributes 55% of total premiums, EE contributes 45%, then 45% of the MLR rebate are plan assets
>>Must or should the rebate be allocated to both prior year and current year participants?
- If the employer finds that the cost of distributing shares of a rebate to former participants approximates the amount of the proceeds, the employer may decide to allocate the portion of a rebate attributable to employee contributions only to current participants using a “reasonable, fair, and objective” method of allocation. (Technical Rel. 2011-04)
>>Decide how the rebate be paid or used
- If distributing cash payments to participants is not cost-effective (for example, the payments would be de minimis amounts, or would have tax consequences for participants) the employer may apply the rebate toward future premium payments (e.g. premium reduction) or benefit enhancements.
- An employer may also “weight” the rebate so that employees who paid a larger share of the premium will receive a larger share of the rebate.
- Pay the rebate to current employees by including the amount in their paychecks and withholding taxes.
- Reduce employees next month’s premiums (e.g. premium reduction) by the rebate amount or discount to all employees participating in the plan at the time the rebate is distributed.
>>When must the rebate be paid to participants?
- The “plan asset” portion must be paid within 3 months of the date the employer receives the check from the insurer, or the employer must establish a trust to hold plan assets.
If an employer receives a rebate, and part of the rebate is “plan assets,” the employer is required to return the appropriate amount to participants. There is no minimum amount (de minimis exception) below which employers do not have to comply with the MLR rebate rules.
Therefore, employers should review all relevant facts and circumstances when determining how the rebate will be distributed and ensure they have procedures in place for determining the amount of any MLR rebate issued by an insurer that would be considered “plan assets” and required to be provided to participants.