Health & Welfare Plan Compliance Reminder: Medical Loss Ratio (MLR) Rebates

MLR Rebate Background

Medical Loss Ratio (MLR) is the percentage of premiums health plan insurance carriers spend on claims and expenses that improve health care quality for plan participants. The MLR provision within the Affordable Care Act (ACA) requires insurance companies to pay annual rebates if the MLR for groups of health insurance plans issued within a state is less than 85% for large employer group health plans and 80% for most small employer group health plans and individual policies. The goal of the MLR regulation is to ensure that a minimum percent of premiums are used to pay health plan claims by limiting the amount that insurance carriers can spend on plan administration, marketing, and profits. Insurance carriers that fail to meet the applicable MLR threshold are required to pay back excess profits in the form of refunds, also known as rebates, to their plan enrollees.

Since MLRs are calculated using aggregate data over an insurer’s entire book of business within each applicable market segment in every state the insurer operates, MLR rebates are not based on the unique claims experience of an individual employer group health plan.

MLR rebates for a particular year (commonly referred to as the rebate year) are calculated based on medical costs incurred during the previous calendar year. Insurance carriers are required to distribute MLR rebates and rebate notices to the policyholder of a group health plan, typically the employer sponsoring the plan for the previous calendar year.

This MLR rebate distribution deadline is September 30^th of the rebate year.

MLR Rules & Plan Type

The table below reflects which group health plans are subject to the MLR rules under the ACA:

MLR Rebates & ERISA Plan Assets

Employers who receive MLR rebates for their group health plans subject to the Employee Retirement Security Act of 1974 (ERISA) plans must determine:

• If the rebate is considered a plan asset under ERISA, and
• What to do with these rebate funds.

To determine if an MLR rebate (or any portion of it) is an ERISA plan asset, plan sponsors should review the ERISA plan documents and insurance contracts. The language in these documents may address how to allocate MLR rebates from insurance carriers. If the plan document or insurance contract is silent with respect to MLR rebates, then allocation of the rebates is determined by contributions toward plan premiums for the year related to the rebates. The DOL has provided guiding principles regarding allocation of MLR rebates in DOL Technical Release 2011-04.

Generally, if a plan premium is 100% employer-paid, the MLR rebate is not considered an ERISA plan asset and the rebate may be retained by the employer. However, if plan participants contribute toward the premium, then a corresponding portion of the premium is treated as a plan asset and cannot be retained by the employer.

MLR rebates that are considered plan assets under ERISA must be used for the benefit of plan participants and beneficiaries (in accordance with ERISA fiduciary duties), through one of the following methods:

1. paying a direct cash refund to plan participants;
2. providing current plan participants with a premium discount or premium holiday; or
3. using the MLR rebate to enhance plan benefits, such as adding a disease management or wellness program.

Group health plan fiduciaries may choose which method outlined above to handle MLR rebates as long as the method is fair, reasonable, and objective.

MLR rebates, or at least the portion that is a plan asset, generally must be used or distributed as soon as possible, but no later than three months after they are received to ensure compliance with ERISA’s trust requirement relief^[1].

Tax Treatment of MLR Rebates

The tax consequences of MLR rebates for employees covered under group health plans are outlined below:

1. If employees paid their plan premiums through a Section 125 plan on a pre-tax basis, then any MLR rebate amount distributed to the employees it will be treated as taxable income.
2. If employees paid their plan premiums on a post-tax basis, then any MLR rebate distributed to the employees will not be treated as taxable income in the year in which it is received.

Click here for the IRS MLR FAQs webpage for additional tax-related information.

Special MLR Rules for Non-Federal Governmental & Church Plans

Non-Federal Governmental Plans

The MLR regulations contain special rules regarding handling MLR rebates for non-federal governmental plans (such as state and local government plans, which are generally not subject to ERISA). The Department of Health and Human Services (HHS) issued separate guidance for these plans as interim final rules, providing employers three options for allocation of MLR rebates among the current plan participants^[2]:

1. Reducing participants' premiums in the next policy year by allocating the rebate among all participants covered under any option offered by the plan at the time the rebate is received;
2. Reducing participants' premiums in the next policy year by allocating the rebate among only the participants covered under the policy to which the rebate is attributable at the time the rebate is received; or
3. Providing a cash refund only to participants covered by the group health policy on which the rebate is based.

In all three options outlined above, the rebate is used to reduce premiums or is paid to participants enrolled during the year in which the rebate is actually paid, rather than the MLR reporting year on which the rebate was calculated.

Whichever option is selected, the employer can choose one of the following:

• Dividing the reduction or refund evenly among the participants;
• Dividing based on each participant’s actual contributions to the premium; or
• Apportioning it in a manner that reasonably reflects each participant’s contributions to the premium.

HHS clarified that employers of non-federal governmental group health plans must use the rebate for the benefit of participants no later than three months after receipt (similar to ERISA group health plans).

Church Plans

For church group health plans (non-governmental, non-ERISA group health plans), the HHS interim final rules provide that an insurance carrier may make rebate payments to the employer only if the carrier receives written assurance from the employer that the rebates will be used for the benefit of the current plan participants in the same way that a rebate to a non-federal governmental plan could be allocated (as detailed in the section above). Without this written assurance, insurance carriers are required to pay the rebate directly to employees covered under the policy during the MLR reporting year.

HHS also clarified that employers of church group health plans must use the rebate for the benefit of participants no later than three months after receipt (again, similar to ERISA group health plans).

MLR Rebates for Multiple Insurance Policies

Certain employers sponsor ERISA health plans with several options under multiple insured policies. In these situations, MLR rebates should be allocated solely for the benefit of the participants covered under the specific insured policy receiving the rebate. The use of an MLR rebate generated by one plan to benefit the participants of another plan would be a breach of the duty of loyalty to a plan's participants.

Next Steps for Employers

Health plan insurance carriers are required to send a notice to the employer policyholder of the fully insured group health plan and to the enrolled members of the plan with details explaining the MLR rebate and how it was calculated for that reporting year. As a result, employers should be prepared to receive questions directly from employees who receive the insurance carrier notice regarding the MLR rebate.

Additionally, employers may also consider providing their own notice to employees explaining how the MLR rebate will be used, particularly if the employer is not anticipating providing direct cash refunds to employees. Employers are advised to maintain records of these employee notices.

Reach out to your Risk Strategies team members with any questions regarding MLR rebates or contact us directly at benefits@risk-strategies.com.

[1] In accordance with DOL Technical Release 2011-04, referencing DOL Technical Release 1992-01.

[2] 45 CFR § 158.242(b)(1)(i), (ii), and (iii).