Guide to Medical Loss Ratio (MLR) Rebates

What are Medical Loss Ratio (MLR) Rebates?

The Affordable Care Act requires health insurance carriers to spend at least 80-85 percent of premium dollars on medical care and healthcare quality improvement. If they don’t meet this medical loss ratio (MLR) obligation, they must give affected customers a rebate.  Rebates must be distributed by the carriers each year by September 30. Any employer that gets a refund then needs to handle it within 90 days to avoid triggering ERISA trust requirements. Allow us at Precision Benefits Group to process your MLR rebates appropriately and quickly!

According to the Kaiser Family Foundation, health insurers will be issuing about $2.7 billion in rebate funds across all markets this September. For perspective, this is almost double the previous record high rebate amount of $1.4 billion last year. The number of rebates varies by market, with insurers reporting about $2 billion in the individual market, $348 million in the small group market, and $341 million in the large group market.

Who Qualifies for Medical Loss Ratio (MLR) Rebates?

Self-Funded Health Plans and level-funded plans do not have to follow the MLR requirements, so businesses with that type of group health plan will never get a rebate. However, companies that offer fully-insured coverage to their employees can always get one, so they must follow the federal MLR rules. MLR rebate-distribution procedures need to be part of each group plan’s ERISA plan documents, too, even if the employer never actually gets a rebate!

How do Medical Loss Ratio (MLR) Rebates Work?

Health insurers may pay MLR rebates either in the form of a premium credit (for returning subscribers) or as a lump-sum payment.  Over 90 percent of group plan rebates come as a lump-sum payment from the carrier to the employer. If the refund due is a small dollar amount—$20 or less for a group health plan—then the insurer does not need to send the employer a check.  For anything more than that, the whole amount will go to the group plan sponsor. Then, the employer has 90 days to handle the distribution.

How do Employers Distribute Medical Loss Ratio (MLR) Rebates?

Employers have to divide and distribute any rebate money they receive based on the distribution method specified in their plan document and who paid the premiums. If the employer and the employees shared premium costs in any way, then the rebate must be split according to the contribution formula. However, employers do have some choices when it comes to rebate distribution. They can pick from one of three ways of distributing the money: (1) paying affected employees directly, (2) using the rebate funds for future premium reductions, or (3) using the money for benefit enhancements.  The federal government urges employers to pick the first option, if possible, but the employer can choose which option is in the overall plan’s best interest. Furthermore, the employer can decide if premium reductions or cash refunds should be divided evenly among the affected employees.  Alternatively, employers can use a weighted average based on the amount each employee paid (i.e., single rate versus family rate).

Employers only have to distribute rebates to current employees who participated in the affected plan last year. It is unnecessary to track down past employees, especially if calculating and distributing shares to the former participants isn’t cost-effective. However, suppose an employer decides not to pay rebates to past employees. In that case, the employer should aggregate this portion of the refund and use it to benefit current plan participants.

What are the Tax Rules for Medical Loss Ratio (MLR) Rebates?

Finally, there are some tax rules related to MLR rebates. If an employee paid their premium share entirely with after-tax dollars, their refund is not federal taxable income. However, if pre-tax dollars were used, such as through a Section 125 plan, the MLR refund is taxable income. These tax statuses apply both in the case of a future premium credit and when an employee gets a cash MLR rebate payment. For example, if an employee contributes $100 per pay period via salary reduction, and the employer reduces that contribution to $50 due to the rebate, the employee’s taxable salary would correspondingly rise. If the company decides to give affected employees a cash payment instead, it is subject to employment taxes.

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