Health insurance carriers are required to send out Medical Loss Ratio (MLR) payments to employers by September 30th when they did not spend enough of the premiums collected the previous calendar year on claims and allowable plan expenses. Most carriers are becoming better about not collecting more insurance premiums than MLR rules allow, so MLR rebates are not usually expected. But occasionally they still occur, and the employer has 90 days to determine how much of the rebate must be shared back with participants and former participants.
Applies To:
Any size employer with a fully insured health plan the previous calendar year who receives an MLR rebate check this August or September.
Go Deeper:
When an employer receives a MLR rebate check from the insurer, they need to carefully consider how the funds must be spent. They may not be able to keep the rebate unless their plan document specifies such rebates are retained by the employer. An employer with such language can simply retain the full rebate as taxable income to the organization.
Without such plan language, any portion of the rebate that is considered “plan assets” must be used in a very specific manner as described below. In other words, if employees paid any portion of the total premium, then that portion related to the MLR rebate may be considered plan assets which can only be used to benefit those participants, not the employer.
For instance, if employees paid 20% of total premiums last year and the employer contributed 80%, then 20% of the MLR rebate may be considered “plan assets” and should only be used for the benefit of plan participants.
There are three basic methods an employer may use to spend the participants' portion of the MLR rebate:
- Pay out a taxable cash refund
- Offer a premium holiday for the amount of the rebate
- Provide some type of benefit enhancement (keeping in mind participants must actually receive this within 90 days)
If the employer determines they need to share some of the rebate with former participants, a premium holiday or benefit enhancement might not work for them and sending a check may be more appropriate.
There is no de minimis exception to get out of distributing any portion that is considered plan assets (with a small exception regarding whether to include former participants). In other words, even if the rebate is a very small amount and dividing it up between participants results in a few dollars, any portion related to plan assets still must be given back to current participants, and possibly to former employees (such as COBRA qualified beneficiaries and retirees).
Employers have express latitude under federal guidance to just divvy up the amount attributable to employees in an equal distribution. So, unless they choose, the employer does not need to further allocate the rebate for more equitable distribution reflective of how much different people paid. For example, if the employer provides single coverage at no cost to employees, the employer could issue an equal payment to all plan participants or could do further calculations to determine those in single coverage should not receive funds because they did not pay for coverage last year, so the rebate is shared with those who did pay.
Read more here: DOL Guidance for Handling MLR Rebates
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