Carriers to Issue MLR Rebates by September 30
The Affordable Care Act (ACA) requires health insurance carriers to spend a minimum percentage of their premium dollars on medical care and health care quality improvement. This percentage, or medical loss ratio (MLR), is 85 percent for issuers in the large group market (50 + employees) and 80 percent for issuers in the small group (2-49 employees) and individual markets. Carriers that do not meet the applicable MLR standard must provide rebates to consumers.
Carriers are required to pay rebates by Sept. 30, 2024, based on their 2023 MLRs. While any fully insured employer with an active health insurance policy during the prior calendar year is eligible for a rebate, not everyone will receive a payment. The MLR rule does not apply to self-funded plans. Employers that expect to receive rebates should review the MLR rules and decide how they will administer them.
MLR Rebates
A carrier that does not meet its MLR standard must provide a rebate to the policyholder, which is typically the employer that sponsors the fully insured plan in the group health plan context. For current enrollees, issuers may provide rebates in the form of a lump-sum payment or a premium credit (that is, a reduction in the amount of premium owed).
Also, to avoid having to pay a rebate, a carrier may institute a “premium holiday” during an MLR reporting year if it finds that its MLR is lower than the required percentage. According to the Department of Health and Human Services (HHS), a carrier may use a premium holiday only if it is permissible under state law. Also, any carrier using premium holidays must meet certain other requirements, such as providing the holiday in a nondiscriminatory manner and refunding premium overpayments.
How an employer should handle any MLR rebate it receives from an issuer depends on the type of group health plan (an ERISA plan, a non-federal governmental group health plan, or a non-ERISA, non-governmental plan (church plan)) and whether the rebate is considered a plan asset.
ERISA Plans
Most, but not all, group health plans are governed by ERISA. Employers with ERISA plans should not assume that they can simply retain an MLR rebate. The Department of Labor (DOL) issued Technical Release 2011-4 to explain how ERISA’s fiduciary duty and plan asset rules apply to MLR rebates.
Non-federal Governmental Plans
Group health plans maintained by non-federal government employers (for example, state and local governments) are not governed by ERISA’s fiduciary standards. HHS’ interim final regulations on the MLR rules address how rebates for these plans should be handled.
HHS’ final 2016 Notice of Benefit and Payment Parameters changed the MLR rules to require that participants of non-federal governmental or other group health plans not subject to ERISA receive the benefit of MLR rebates within three months of receipt of the rebate by their group policyholder, just as participants of group health plans subject to ERISA do.
Non-ERISA, Non-governmental Plans (Church Plans)
HHS has also addressed rebates for non-governmental group health plans that are not subject to ERISA, such as church plans. HHS’ final regulations on the MLR rules address how rebates apply to these plans. If a church plan is covered by ERISA, the standard rules for ERISA plan assets will apply.
Tax Treatment of Rebates
The Internal Revenue Service (IRS) issued a set of frequently asked questions addressing the tax treatment of MLR rebates. In general, the rebates’ tax consequences depend on whether employees paid their premiums on an after-tax or a pre-tax basis.
After-tax Premium Payments
If premiums were paid by employees on an after-tax basis, the rebate will generally not be taxable income to employees and will not be subject to employment taxes. This tax treatment applies if the rebate is paid in cash or if it is applied to reduce current year premiums. However, if an employee deducted the premium payments on his or her prior year taxes, the rebate is taxable to the extent the employee received a tax benefit from the deduction.
Pre-tax Premium Payments
If premiums were paid by employees on a pre-tax basis under a cafeteria plan, the rebate will generally be taxable income to employees in the current year and will be subject to employment taxes. This is the case whether the rebate is paid in cash or is applied to reduce current year premiums. A premium reduction in the current year will reduce the amount that an employee can contribute on a pre-tax basis. Thus, there is a corresponding increase in the employee’s taxable salary that is also wages subject to employment taxes.
MLR Rebate Frequently Asked Questions
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The ACA requires health insurers to spend a specific percentageof collected premiums on health claim reimbursements andother activities to improve healthcare quality for their members.If your insurance carrier spent more than allowed by statute onadministrative costs, as opposed to reimbursement for medicalservices and activities to improve healthcare quality, they mustprovide your group with an MLR rebate check. Checks must bemailed by August 1 of each year for the previous calendar year.
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There are restrictions on using the rebate. Most health plans sponsored by private sector employers are subject to the Employee Retirement Income Security Act (ERISA) ,which imposes rules on the use of plan assets, such as participant contributions. In most cases, at least a portion of the rebate is a plan asset, so ERISA rules apply.
Note: ERISA does not explicitly define “plan assets.” The U.S. Department of Labor (DOL) regulations state that participant and beneficiary contributions paid to the employer or withheld from employee pay are always plan assets.
The DOL provides guidance to employers that receive MLRrebates, which indicates they may retain the rebate to use at theirdiscretion, but only if the plan’s governing documents state that:
A rebate is an employer asset and is not a plan asset; and
The rebate amount is less than the employer's total contribution during the relevant period.
Many plan documents and Summary Plan Descriptions (SPDs)do not include the necessary language allowing the employer to retain the rebate. In such cases, the DOL guidance requires the plan sponsor (employer) to use all or some of any rebate for the sole benefit of plan participants (employees and COBRA beneficiaries) based on the percentage of premium attributed to participant contributions. For example, let’s assume the employer paid 80% of premium costs while the total of employee payroll deductions and COBRA payments represented the other 20%. This means 20% of the rebate is an ERISA plan asset and must be used for the participants’ sole benefit, while the employer can use the other 80% as it chooses.
Here are a few options for using plan assets appropriately:
Provide additional or enhanced plan benefits, such as reducing deductibles or copays.
Reduce future participant contributions, such as reducing future payroll deduction amounts and COBRA premiums, or granting a premium holiday.
Issue cash refunds. This option (discussed later) is generally not advised because of the potential tax impact.
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The DOL has not defined a benefit enhancement, but it seems reasonable that this means coverage for items and services not previously covered by the policy issuing the rebate. For example, this might include a wellness, disease management, or vision program. Employers that want to use this option are encouraged to consult with their benefits attorney or tax advisor; the guidelines issued by the DOL and IRS are not explicit.
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Rebates, or at least the portion that is a plan asset, should be used within three months of receiving the funds from the insurer. ERISA requires plan assets to be held in trust, but this requirement can be avoided by distributing the asset within three months.
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Cash refunds can be made to the plan’s participants. Cash refunds are not advisable, however, due to tax consequences(unless the same participants had originally contributed the premium on an after-tax basis). If the employee premiums were deducted on a pre-tax basis, then the rebate is treated as taxable wages subject to income and employment taxes. If the employee premiums were deducted on an after-tax basis, the rebate isn’t taxable income.
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In cases where a rebate is a small amount, if the administrative cost of allocating funds to prior calendar year participants(including former employees) is more than the rebate amount, the guidance allows employers to choose to only provide the rebate to current plan participants. Administrative costs could include locating the former participants or preparing tax forms due to possible cash refunds
Source: Mineral Medical Loss Ratio (MLR) FAQs Guide