Medical Loss Ratio (MLR) Rebates
Are you an employer that is receiving a rebate check from your group medical insurance carrier? September 30 is the deadline for insurers to issue rebates, if required, under the Affordable Care Act’s medical loss ratio (MLR) rule.
It is estimated that insurers will return over a half billion dollars to employer groups this year. Employers that receive a rebate need to keep in mind that there are restrictions on how the money can be used.
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). This year’s rebates, based on an MLR average over the prior three years, are being paid to groups that had policies in 2020.
Most medical insurers and HMOs meet the MLR standard so many employers do not receive any rebates. Insurers and HMOs that fail to meet the MLR standard, however, are required to rebate (refund) the excess premium back to their policyholders. In those cases, the employer needs to consider appropriate use of the money.
Using a Rebate
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 generally 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.
To recap, employers that offer group medical insurance and receive a rebate from the carrier are reminded that there are restrictions on how the money can be used. Employers are advised to review the language in the plan document and the guidance provided by the DOL in deciding how to proceed.