Best Practices for Handling MLR Rebates 2021

Many insurance companies spend a substantial portion of consumers’ premium dollars on administrative costs and profits, including executive salaries, overhead, and marketing.

The Affordable Care Act requires health insurance issuers to submit data on the proportion of premium revenues spent on clinical services and quality improvement, also known as the Medical Loss Ratio (MLR). It also requires them to issue rebates to enrollees if this percentage does not meet minimum standards. The Affordable Care Act requires insurance companies to spend at least 80% or 85% of premium dollars on medical care, with the rate review provisions imposing tighter limits on health insurance rate increases. If an issuer fails to meet the applicable MLR standard in any given year, as of 2012, the issuer is required to provide a rebate to its customers.

While the regulations state that employers should evaluate the feasibility of distributing rebates to individuals who were enrolled in the plan during the year for which the rebate was issued, there is a catchall provision that employers can utilize to make the distribution process significantly easier.  

The following MLR Rebate provision can be summarized in the following manner:

If distributing payments to participants is not cost-effective because the amounts are small or would cause tax consequences for the participants, the employer may utilize the rebate for other permissible plan purposes, such as applying the rebate toward future participant premium payments (“premium holiday”) or benefit enhancements, so long as rebates are utilized within 3 months of receipt, and the method of distribution is reasonable, fair, and objective

Here’s why the above language is a catchall:

  1.  The cost-effectiveness of distributing payments to participants
    •  First, participants are only entitled to the percentage of the rebate that reflects employee contributions.  So, assume the average employee contribution across the four tiers for the plan receiving the rebate is 40%, only 40% of the rebate must be distributed.  So, if a group receives a $1000 rebate, only $400 (40%) are attributable to average employee contributions.  This is a small dollar amount for which plan sponsors could easily argue that the cost associated with mailing rebate checks (both from a time cost and hard dollar cost) outweigh the value of the rebate.  Of course this argument gets more difficult with larger rebate checks, but always keep in mind the relative size of the group.  The larger the group, the greater the time costs/hard costs.  But, even if a group feels uncomfortable with concluding that the costs associated with distributing the checks do not outweigh the value of the employee portion of the rebate, the second condition will capture all employers utilizing a section 125 plan (which should be all of our clients with a contributory plan).
  2. Tax consequences for participants
    • The section that states “or would cause tax consequences for participants” catches all employers that utilize a Section 125 plan where employees contribute pre-tax.  If an employer were  to distribute the rebate to employees who contributed pre-tax dollars towards the rebated plan during the rebated year, the employee’s portion of the rebate would be treated as taxable income to the employee.  This, by definition, is a “tax consequence.”  The regulations do not set any standard above and beyond “tax consequence.”  Therefore, any employer utilizing a 125 plan can argue that since employees would need to pay taxes on the rebates because they pay through a 125 plan, they satisfy the above condition, and therefore, can use the proceeds for either a premium holiday or benefit enhancement. 

Note that I bolded the or in the summary of the regulatory language above.  I did this because if an employer satisfies either of these conditions (cost effectiveness or tax consequences), they can use the employee portion of the rebate to provide a premium holiday or benefit enhancements (rather than mailing checks to employees who participated in the plan during the year for which the rebate was issued).  Providing a premium holiday or benefit enhancement is MUCH easier than mailing checks.   

So, once we’ve gotten a rebated client to feel comfortable with the fact that they collect employee contributions on a pre-tax basis, therefore distributing the rebate would cause “tax consequences” for employees receiving a rebate check, therefore they are entitled to use the employee contribution share of the money towards either a “premium holiday” or benefit enhancements, how should they go about doing this? 

I think the best method is granting a premium holiday within 3 months of receipt of the rebate.  What does this look like?

The method for allocating the premium holiday must be “reasonable, fair, and objective.” The regulations state that it can be distributed to current participants in the rebated plan-only, and it need not perfectly reflect each participants premium contribution so long as the allocation is “reasonable, fair, and objective.”

  • First, determine the portion of the rebate that will be allocated to employees
    • A reasonable, fair, and objective method for determining the portion of the rebate attributable to employee contributions is to blend the portion employees pay across the 4-tiers towards the rebated plan to come up with an average employee contribution. 
      • For instance, if employee contributions towards the rebated plan for single coverage are set at 20%, 40% for ee/spouse, 50% for ee/child, and 50% ee/family, the average employee contribution towards the rebated plan is 40% (20+40+50+50=160, 160/4=40).
  • So, if an employer receives a $1000 rebate check for a given plan, $400 (40%) will be distributed equally to active participants in that plan in the form of a premium reduction.  If there are 10 employees presently enrolled in the specific rebated plan, each employee is receiving a $40 reduction in monthly premium payments.  The reduction must occur within 3 months of receiving the rebate.
  • This is a reasonable, fair, and objective method of utilizing the rebate.  Is it possible that employees who moved out of the plan in the current year, but were in the plan the previous year for which the rebate was issued complain? Of course there’s a chance.  But, next year, the complaining individuals could move into a plan that receives a rebate for the previous year during which they were not enrolled in the plan, and they would have the same reasonable, fair, and objective chance of benefitting from the rebate.
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Precision Benefits Group

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