- Posted by Jessica Waltman
- On September 12, 2019
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, then they must give affected customers a rebate. According to the Kaiser Family Foundation, health insurers will be issuing a record-high number of rebates for the calendar year 2018. Approximately 211,000 small businesses will get a total of $250 million in rebates, and 27,000 large employers will share in $284 million of rebate dollars. Rebates must be distributed each year by September 30. It’s important to note, however, that self-funded and level-funded plans do not have to follow the MLR requirements, so businesses sponsoring these types of health plans will not receive rebates.
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. Once an employer receives this money, it is their responsibility to distribute the rebate to plan beneficiaries appropriately within 90 days or risk triggering ERISA trust requirements.
Employers have to divide and distribute any rebate money they receive based on 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 best interest of the overall plan. 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 not necessary to track down past employees, particularly if calculating and distributing shares to the former participants isn’t cost-effective. However, if an employer decides not to pay rebates to past employees, then the employer should aggregate this portion of the refund and use it for the benefit of current plan participants.
Finally, there are some tax rules related to MLR rebates. If an employee paid their premium share entirely with after-tax dollars, then their rebate is not federal taxable income. However, if pre-tax dollars were used, such as through a Section 125 plan, then 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 employer decides to give affected employees a cash payment instead, then it is subject to employment taxes.