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Baldwin Bulletin

Managing MLR Rebates: A Guide for Employers

The Baldwin Group
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Updated: July 8, 2024
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10 minute read

Every year by July 31st, insurers must submit a report detailing their premium expenditure from the prior year to the Department of Health and Human Services (HHS). If any carrier fails to meet the medical loss ratio (“MLR”) standards, they are required to offer rebates to consumers, with the deadline for these refunds set for September 30 after the end of each MLR reporting period. The MLR only applies to fully insured plans and does not extend to self-funded health insurance plans.  Employers must familiarize themselves with the regulations surrounding these rebates and decide how to distribute them accordingly.

Employer Action Items

  1. Understand how the MLR rules are outlined in your company policy and in the Affordable Care Act (ACA).
  2. Determine which plan(s) to which the MLR rebate applies.
  3. Determine whether the refund is considered a “plan asset” under ERISA requirements (in other words, determine the amount of the rebate that relates to employee contributions versus employer contributions toward the plan’s premium).
  4. Once an amount is classified as a plan asset, employers must allocate those funds appropriately among current and/or former eligible participants.
  5. Determine the method for distributing the rebate to plan participants (as outlined in plan documents).
  6. Document all related decisions and actions taken by the employer in relation to the MLR rebate process.
  7. Communicate with participants, informing about the rebates and how they are being used or distributed.
  8. Timely use and/or distribute the rebates. The part of the rebate identified as a plan asset should be used and/or distributed within three months to avoid coming under ERISA’s trust requirements.
  9. Consult with legal counsel. If necessary, consult with legal professionals to ensure proper administration of the rebates as per state and federal laws.

Summary

Upon receiving an MLR refund, employers must decide how to distribute them accordingly. Any rebate amount that meets the definition of a “plan asset” under ERISA regulations must be utilized for the exclusive benefit of the plan’s participants and beneficiaries. Furthermore, employers are required to allocate this portion of the rebate within three months of receiving it to avoid ERISA’s trust requirements.

MLR Standards

The ACA requires health insurers to spend a minimum percentage of their premium dollars on medical care and health care quality improvement. This percentage is:

  • 85% for issuers in the large group market; and
  • 80% for issuers in the small and individual group markets (please note that the definition of small group market varies state-by-state).

States may set higher MLR standards than the federal 80-85% thresholds.

MLR Deadlines

  • Insurers are required to submit their MLR statistics to HHS by July 31st after the completion of an MLR reporting year.
  • Rebates must be issued by September 30th, following the conclusion of the MLR reporting year.
  • Typically, any portion of the rebate considered as a plan asset under ERISA regulations should be utilized within three months of receipt.

 MLR Rebates

If an insurer fails to reach the set MLR standard, it is required to offer a rebate to the policyholder – generally, the employer who sponsors the group health plan. For currently enrolled members, the insurer can provide rebates via:

  • A one-time lump-sum payment, or
  • A credit against the premium, effectively reducing the premium amount due.

To avoid having to pay a rebate, an insurer can implement a “premium holiday” during the MLR reporting year if it discovers that its MLR is falling below the required percentage. This approach, which HHS permits, suspends premium payment for a period. However, please note that it can only be used if allowed by state law. Besides this, insurers opting for premium holidays must satisfy various conditions, such as providing the holiday in a non-discriminatory way and refunding any overpayment of premiums.

The way employers should manage any MLR rebate they receive from an insurer 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) 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. Importantly: Any rebate amount that qualifies as a plan asset under ERISA must be used for the exclusive benefit of the plan’s participants and beneficiaries.

 MLR Rebates as Plan Assets

 As stated in TR 2011-4, in the absence of specific plan or policy language pertaining to such distributions, the categorization of the rebate as a plan asset partially hinges on the identity of the policyholder and the source of premium payments.

If the policyholder is the plan or its trust, the policy becomes a plan asset, and the entire rebate must be treated accordingly. However, if the employer is the policyholder – as is usually the case – the portion of the rebate to be treated as a plan asset is contingent on who paid the insurance premiums. For example:

  • If the premiums were paid entirely out of trust assets, the entire rebate amount is a plan asset;
  • If the employer paid 100% of the premiums, the rebate is not a plan asset, and the employer can retain the entire rebate amount;
  • If participants paid 100% of the premiums, the entire rebate amount is a plan asset; and
  • If the employer and participants each paid a fixed percentage of the premiums, the percentage of the rebate equal to the percentage of the cost paid by participants is a plan asset.

Additionally, if the employer was obligated to pay a fixed amount while the participants paid any additional costs, the part of the rebate that does not surpass the participants’ total contributions during the MLR reporting period, would be considered a plan asset. Conversely, if the participants paid a fixed amount and the employer took care of additional costs, the portion of the rebate that does not exceed the total contributions from the employer during the MLR reporting year would not be considered a plan asset.

However, according to the DOL’s guidance, employers are typically not permitted to keep a rebate amount that is more than the total premiums and other plan-related expenses paid by the employer.

Using MLR Rebates – Guidelines for Plan Assets

 When an employer confirms that an MLR rebate, wholly or in part, qualifies as a plan asset, they must decide how to allocate this rebate for the exclusive benefit of the plan’s participants and beneficiaries. DOL TR 2011-4 outlines the following methods for utilizing rebates:

  • The rebate can be distributed to eligible participants following a reasonable, fair, and objective allocation method. If the employer assesses that the cost of disbursing a proportion of the rebate to former participants is roughly the same as the rebate amount, the fiduciary may choose to limit the rebates to current participants. Also, an allocation is still considered fair even if it does not precisely mirror the premium activities of all participants.
  • If the employer finds that distributing rebates to participants is not cost-effective due to small amounts, or if it may result in tax implications for the participants, the employer can use the rebate for other permissible plan purposes. These could include applying the rebate to future premium payments for participants or enhancing benefits.

In instances where a plan provides benefits under multiple policies, the employer should ensure that the rebate from a specific policy is allocated solely to the participants covered by that policy. As per the DOL, using rebates acquired from one plan to favor the participants of another plan would be a breach of fiduciary duty.

Deadline for Using MLR Rebates

ERISA typically mandates that any rebate qualifying as a plan asset be held in trust. However, the majority of group health plans receiving rebates do not maintain trusts, given that their premiums are paid from the employer’s general assets, including employee payroll deductions. In TR 2011-4, the DOL grants an exemption from the requirement of trust for premium rebates that are utilized within a span of three months from their receipt.

Moreover, instructing a carrier to apply the rebate to future premium payments for participants or towards enhancements of benefits approved by the plan sponsor would eliminate the necessity for a trust and, under certain circumstances, may be consistent with the employer’s fiduciary duties. Employers opting for this approach should consult with their insurance issuers to setup a process for managing rebates.

 Non-federal Governmental Plans

Group health plans maintained by non-federal government employers (such as state and local governments) are not subject to ERISA’s fiduciary standards. HHS’ interim final rules from December 2011 dictate that employers must use the portion of rebate attributed to the premium paid by employees to:

  1. Decrease the subscribers’ annual premium for the following policy year for all subscribers covered under any group health policy offered by the plan;
  2. Reduce the subscribers’ annual premium for the following policy year, solely for those subscribers covered by the group health policy on which the rebate was based; or
  3. Dispense a cash refund exclusively to the subscribers covered by the group health policy on which the rebate was based.

In each of these scenarios, the rebate is used to lower premiums or is paid out to subscribers who are enrolled in the year when the rebate is actually paid out, as opposed to the MLR reporting year when the rebate was calculated. Regardless of the method employed, the policyholder has the option to:

  • Distribute the reduction or refund equally amongst the subscribers;
  • Divide it based on each subscriber’s specific contributions towards the premium; or
  • Distribute it in a fashion that fairly represents each subscriber’s contributions towards the premium.

Notably, HHS has made it clear that participants of non-federal governmental or other group health plans not governed by ERISA should receive the benefit of MLR rebates within three months of receipt of the rebate by their group policyholder, mirroring the provision for participants of group health plans that are subject to ERISA.

Church Plans

 HHS’ interim final rules regarding non-governmental, non-ERISA plans, such as church plans, state that a carrier can make a rebate payment to the policyholder (usually, the employer sponsoring the plan) if it obtains written assurance from the policyholder that the rebate will be used to benefit existing subscribers using one of the above-mentioned options for non-federal governmental plans. In the absence of this written assurance, carriers must directly pay the rebate to employees covered under the policy during the MLR reporting year.

Furthermore, HHS has stressed that participants in non-ERISA plans should receive the benefit of the MLR rebate within three months of when the plan sponsor receives the rebate.

Tax Implications of Rebates

The IRS has issued a series of frequently asked questions (FAQs) that explain the tax implications of MLR rebates. Generally, the tax impact depends on whether employees paid their premiums on an after-tax or pre-tax basis.

After-tax Premium Payments

If employees paid their premiums on an after-tax basis, the rebate generally does not constitute taxable income to the employees and is not subject to employment taxes. This tax treatment applies whether the rebate is paid in cash or is used to reduce premiums for the current year. However, if an employee claimed premium payments as deductions on their taxes for the previous year, the rebate becomes taxable to the extent the employee received tax benefits from the deduction.

Pre-tax Premium Payments

If employees paid their premiums on a pre-tax basis under a cafeteria plan, the rebate will generally be considered taxable income to the employees for the current year and will be subject to employment taxes. This applies whether the rebate is paid in cash or is used to reduce premiums for the current year. A reduction in the current year’s premium reduces the amount an employee can contribute on a pre-tax basis, resulting in a corresponding increase in the employee’s taxable salary, which is also subject to employment taxes.

For More Information

HHS issued interim final rules implementing the ACA’s MLR requirements.

The Department of Labor (DOL) issued Technical Release 2011-4 (TR 2011-4) to explain how ERISA’s fiduciary duty and plan asset rules apply to MLR rebates.

MLR FAQs: https://www.irs.gov/newsroom/medical-loss-ratio-mlr-faqs If you are interested in more information about the MLR rebate rules, you should visit the HHS website at: http://cciio.cms.gov/programs/marketreforms/mlr/index.html and http://cciio.cms.gov/resources/factsheets/mlrfinalrule.html


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