If You Got a MLR Rebate Check From Your Health Insurance In September, Make Sure You Know What To Do With It!
- Posted by Jessica Waltman
- On October 19, 2020
The Affordable Care Act (ACA) 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. Affected health insurance carriers must distribute refunds to their past year’s customers by September 30 of the following year. According to federal guidelines, any employer group health plan that gets a rebate must then distribute the funds to affected plan participants.
The Kaiser Family Foundation reports that health insurers will be issuing about $2.7 billion in rebate funds across all markets in September of 2020. 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.
Self-funded 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!
As with most things ACA-related, MLR rebates can be tricky. Employers sponsoring fully-insured health plans generally have a fiduciary responsibility to figure out what to do with the money and handle it appropriately. There is one set of distribution rules that apply to the vast majority of all group health plans—all of the ones subject to the Employee Retirement Income Security Act (ERISA) —and another set of rules for state and local government and church plans.
For ERISA plans, the most important thing to do when it comes to MLR rebates is document, document, document. The best way for a plan sponsor to show they’ve met their fiduciary responsibility is to develop an MLR rebate distribution policy and include that process in their wrap plan document. Acting quickly is also critical. In almost all cases, the employee’s share of any rebate must be distributed within 90 days to avoid triggering ERISA trust requirements.
If an employer’s health insurer did not meet their MLR standard for the prior year, they are responsible for providing a rebate to the group policyholder, not individual beneficiaries. The insurance carrier 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.
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 employer must split the rebate according to the contribution formula. An employer can keep whatever part of health plan costs they paid directly and use those as they wish.
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, so each gets the same rebate amount. Alternatively, an employer could use a weighted average to divide the employee’s share of the rebate funds. Using this method, the employer bases the calculation on the number of people in the employee’s family covered by the group plan and the amount each employee paid (i.e., single rate versus family rate).
Employers should only 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.
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.
Please contact your Client Executive or Account Manager for a helpful tool to calculate the distributions.