The Affordable Care Act (ACA) established medical loss ratio (MLR) rules to help control health care coverage costs and ensure that enrollees receive value for their premium dollars. The MLR rules require health insurance issuers to spend 80–85% of premium dollars on medical care and health care quality improvement activities, rather than administrative costs.
Health insurance issuers must report to the Department of Health and Human Services (HHS) on how they spent their premium dollars for the year by July 31 of the following year. Issuers that do not meet the applicable MLR standard must provide rebates to consumers. Rebates must be provided by Sept. 30 following the end of the MLR reporting year.
Employers that receive MLR rebates should review the rebate rules and decide how they will administer the rebates. 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. Also, employers should use this portion of the rebate within three months of its receipt 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:
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85% for issuers in the large group market; and
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80% for issuers in the small and individual group markets.
States may set higher MLR standards than the federal 80–85% thresholds.
MLR Deadlines
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Issuers must report their MLR data to HHS by July 31 following the end of an MLR reporting year.
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Rebates must be provided by Sept. 30 following the end of the MLR reporting year.
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In general, any rebate amount that qualifies as a plan asset under ERISA must be used within three months of receiving it.
Links and Resources
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HHS interim final rules implementing the ACA’s MLR requirements.
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DOL Technical Release 2011-4 (TR 2011-4) explaining how ERISA’s fiduciary duty and plan asset rules apply to MLR rebates.
MLR Rebates
An issuer that does not meet its MLR standard must provide a rebate to the policyholder (typically the employer that sponsors the plan in the group health plan context). For current enrollees, issuers may provide rebates in the form of:
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A lump-sum payment; or
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A premium credit (that is, a reduction in the amount of premium owed).
Also, to avoid having to pay a rebate, an issuer may institute a premium holiday during an MLR reporting year if it finds that its MLR is lower than the required percentage. According to HHS, an issuer may use a premium holiday only if it is permissible under state law. Any issuers 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) and whether the rebate is considered a plan asset.
ERISA Plans
Most group health plans are governed by ERISA. Employers with ERISA plans should not assume that they can simply retain an MLR rebate.
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
According to TR 2011-4, in the absence of specific plan or policy language addressing these distributions, whether the rebate constitutes a plan asset depends, in part, on the identity of the policyholder and the source of premium payments.
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If the plan or its trust is the policyholder, the policy is a plan asset and the entire rebate is a plan asset.
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If the employer paid 100% of the premiums, the rebate is not a plan asset and the employer can retain the entire rebate amount.
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If participants paid 100% of the premiums, the entire rebate is a plan asset.
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If the employer and participants each paid a fixed percentage of the premiums, the same percentage of the rebate is a plan asset.
Also, if the employer was required to pay a fixed amount and participants paid any additional costs, the portion of the rebate not exceeding the participants’ total contributions for the MLR reporting period would be a plan asset. If participants paid a fixed amount and the employer paid additional costs, the portion of the rebate not exceeding the employer’s total contributions during the MLR reporting year would not be a plan asset.
Employers are generally prohibited from retaining a rebate amount greater than the total premiums and other plan expenses paid by the employer.
Using MLR Rebates — Plan Asset Rules
Once an employer determines that all or part of an MLR rebate is a plan asset, it must decide how to use the rebate for the exclusive benefit of participants and beneficiaries. DOL TR 2011-4 identifies the following permissible methods:
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Distribute to participants under a reasonable, fair, and objective allocation method. If paying former participants would approximate the amount of the proceeds, the fiduciary may limit rebates to current participants. An allocation is not improper merely because it does not exactly reflect each participant’s premiums.
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If cash payments are not cost-effective (e.g., amounts are small or create tax issues), apply the rebate toward future participant premium payments or benefit enhancements.
If a plan provides benefits under multiple policies, the employer must allocate a rebate for a particular policy only to participants covered by that policy. Using a rebate generated by one plan to benefit another plan’s participants would be a breach of fiduciary duty.
Time Limit for Using MLR Rebates
To the extent a rebate qualifies as a plan asset, ERISA would generally require the amount to be held in trust. Most group health plans receiving rebates do not maintain trusts because premiums are paid from the employer’s general assets (including employee payroll deductions). TR 2011-4 provides relief from the trust requirement for premium rebates that are used within three months of receipt.
Directing an issuer to apply the rebate toward future participant premium payments or toward benefit enhancements adopted by the plan sponsor would avoid the need for a trust and may be consistent with fiduciary duties. Employers taking this approach should coordinate with their insurers to establish the process for handling rebates.
Non-ERISA Plans — Non-federal Governmental Plans
Group health plans maintained by non-federal government employers (e.g., state and local governments) are not governed by ERISA’s fiduciary standards. HHS’ interim final rules from December 2011 provide that employers must use the portion of the rebate attributable to the amount of premium paid by employees to:
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Reduce subscribers’ portion of the annual premium for the subsequent policy year for all subscribers covered under any group health policy offered by the plan;
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Reduce subscribers’ portion of the annual premium for the subsequent policy year for only those subscribers covered by the group health policy on which the rebate was based; or
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Provide a cash refund only to subscribers covered by the group health policy on which the rebate is based.
In all cases, the rebate is used for those enrolled during the year the rebate is paid (not the MLR reporting year). The policyholder may divide the reduction or refund evenly, by each subscriber’s actual contributions, or in a manner that reasonably reflects contributions.
HHS has clarified that participants of non-federal governmental or other group health plans not subject to ERISA should receive the benefit of MLR rebates within three months of the policyholder’s receipt, similar to ERISA plans.
Non-ERISA, Non-governmental Plans (Church Plans)
HHS rules also address rebates for non-governmental group health plans not subject to ERISA, such as church plans. An issuer may pay a rebate to the policyholder (typically the employer) if it receives written assurance that the rebate will be used for the benefit of current subscribers using one of the non-federal governmental plan methods above. Without this assurance, issuers must pay the rebate directly to employees covered under the policy during the MLR reporting year.
Participants in non-ERISA plans must receive the benefit of the MLR rebate within three months of the plan sponsor’s receipt.
Tax Treatment of Rebates
The IRS issued FAQs addressing the tax treatment of MLR rebates. In general, the tax consequences depend on whether employees paid premiums on an after-tax or pre-tax basis.
After-tax Premium Payments
If employees paid premiums on an after-tax basis, the rebate is generally not taxable and not subject to employment taxes—whether paid in cash or applied to reduce current-year premiums. However, if an employee deducted prior-year premiums on their taxes, the rebate is taxable to the extent of the prior tax benefit.
Pre-tax Premium Payments
If employees paid premiums on a pre-tax basis under a cafeteria plan, the rebate is generally taxable income in the current year and subject to employment taxes—whether paid in cash or applied to reduce current-year premiums. A current-year premium reduction lowers the allowable pre-tax contribution and increases taxable wages accordingly.
This Compliance Overview is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice. ©2012–2014, 2016, 2021, 2023 Zywave, Inc. All rights reserved.