Ask the Experts: Medical Loss Ratio (MLR) Rebates

Affordable Care Act

Question: Our company received a rebate check from our health insurance carrier. As the employer, we pay the bulk of premiums, although employees who enroll for coverage do pay a portion of the cost. Are there restrictions on how we can use the rebate money?

Answer: Yes, there are restrictions on using the rebate. The details depend on a few factors.

Health insurers, including HMOs, are required to spend the majority of the premiums they collect on actual health benefits, excluding administration, marketing, and profit. The percentage of premium spent on claim payments and other benefits is called the medical loss ratio (MLR). The MLR standard is 80 percent in the small group market or 85 percent in the large group market (or the percentage set by state law).

Insurers that fail to meet the MLR standard are required to rebate (refund) the excess premium back to their policyholders.

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. In most cases, at least a portion of the rebate is a plan asset, so the ERISA rules apply. The Department of Labor (DOL) provides guidance to employers who receive MLR rebates.

First, the DOL guidance indicates that the employer may retain the rebate to use at its discretion, but only if the plan’s governing documents state that:

  • A rebate is an employer asset and is not a plan asset; and
  • The amount of the rebate is less than the employer’s total contribution during the relevant period.

Next, many plan documents and SPDs do not include the necessary language allowing the employer to retain the rebate. In that case, the DOL guidance requires the plan sponsor (employer) to use all or some of any rebate for the sole benefit of plan participants (employees, COBRA beneficiaries) based on the percentage of premium attributed to participant contributions. For example, let’s assume the employer paid 80 percent of premium costs while the total of employee payroll deductions and COBRA payments represented the other 20 percent. That means that 20 percent 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 percent as it chooses.

Here are a few options for using plan assets appropriately:

  • Provide additional 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.

As an alternative, 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).

Note that 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 using the asset within three months.

Lastly, in special cases, such as plans sponsored by governmental employers or policies that are in the name of a plan or trust, the employer should review its options with legal counsel.

Get It All

The Medical Loss Ratio (MLR) requirement was enacted as part of the Affordable Care Act (ACA). ThinkHR customers can find a wealth of information about the MLR rules and other ACA requirements by logging on to Comply.

 

About Kathleen A. Berger, CEBS

Kathy Berger is ThinkHR’s principal benefits consultant. She is a Certified Employee Benefits Specialist (CEBS) with over 25 years of experience working with brokers and employers. Kathy uses her extensive knowledge of ERISA, HIPAA, the ACA, and other benefits laws and regulations to assist our clients with practical information in clear language.