The Affordable Care Act (ACA) introduced Medical Loss Ratio (MLR) requirements, requiring fully insured health plans to spend a specific and substantial portion of premium dollars on actual health care services and improvements to care. By enforcing this minimum percentage of premiums for health care, the law also indirectly limits how much insurers can spend on administrative expenses such as marketing, salaries, agent commissions, and profits.
What are the MLR Requirements?
- Small Group and Individual (IFP) Plans: These plans must spend at least 80% of premium dollars on health care services and quality improvement.
- Large Group Plans: These must allocate at least 85% of premiums toward these same categories.
MLRs are calculated based on calendar year spending. If insurers fail to meet the required thresholds, they must rebate premiums to policyholders by September 30th of the following year. For instance, rebates for the 2023 calendar year are due to impacted policyholders by September 30, 2024.
It’s important to note that MLR rules apply only to fully insured plans. Employers with self-funded plans are exempt from these requirements, since they assume the financial risk for claims themselves, rather than relying on an insurance provider.
Employer Options for Handling Rebates
When employers receive an MLR rebate, they have 90 days to decide how to handle it. Employees are often notified of upcoming rebates from their insurance carriers, which can add urgency to the employer’s decision making. The Department of Labor provides three options for distributing rebates:
- Reduce future premiums for all employees: Employers can reduce employees’ share of premiums in the following year – for all subscribers covered under any group health policy offered by the employer.
- Reduce future premiums for subscribers impacted by the rebate: Employers can reduce employees’ portions in the following year – only for those subscribers covered by the health policy on which the rebate is based.
- Cash refunds: Employers can issue a cash refund directly to subscribers covered under the plan on which the rebate is based.
COBRA participants must be included in these rebate calculations, but employers are not required to track down former employees. Additionally, if the plan is entirely employer-funded, the employer may retain the rebate, provided the rebate funds do not count as a “plan asset” under ERISA. Consultation with an ERISA attorney is highly recommended, to ensure compliance with all applicable laws according to the employer’s own specific circumstances.
Handling Small Rebates and Tax Implications
MLR rebates in the Small Group market tend to be small, typically ranging from $10 to $30 per employee. Distributing these amounts as cash can be administratively burdensome and may trigger additional taxable income for employees. For employers with a Section 125 Premium Only Plan (POP), rebates distributed to employees may become taxable.
To avoid these complications, many employers choose to apply rebates toward future premium payments or use them to improve benefits, ensuring minimal tax impact. In all cases, employers should consult with their accountant or payroll provider to manage any tax liabilities – as well as consult with an ERISA attorney.
Best Practices for Employers with MLR Rebates
No matter what approach the employer chooses, it’s essential to have a documented plan that is communicated clearly to all employees. The plan should:
- Apply consistently to all similarly situated employees.
- Be available for review and included in ERISA documentation if applicable.
At Word & Brown, we’ve developed an MLR rebate calculator to assist employers in determining rebate distributions. However, the tool does not take the place of official legal guidance from an ERISA attorney.
Carrier-Specific MLR Rebate Information for 2024
Below is the MLR rebate information form our fully insured insurance partners for the 2023 calendar year. This information will be updated as additional carriers provide their data.
Carrier-Specific MLR Rebate Information