Under the Affordable Care Act, insurance carriers are required to spend a minimum percentage of premium dollars on medical care and health care quality improvement. This minimum percentage is referred to as “medical loss ratio” (MLR) and is set at 85% for large group market issuers, and 80% for issuers in the small group and individual markets. Any issuer that does not meet the MLR standard for a year must provide a rebate to its policyholders.
2017 MLR rebates are due to policyholders by September 30, 2018. Where an MLR rebate is issued, carriers will notify both the employer-policyholder and plan participants.
An employer who receives a rebate for its group health plan should carefully consider the proper course of action. Many employer-sponsored health plans are subject to ERISA. ERISA requires that plan assets be used for the exclusive benefit of plan participants, which means that where an MLR rebate constitutes plan assets, the employer cannot retain the rebate for its own benefit. In most cases, if plan participants were required to contribute toward the premium cost of coverage, a portion of the rebate equal to the amount of premium paid by participants are considered plan assets.This portion, then, must be used for the exclusive benefit of plan participants.
In determining how to allocate the rebate, employers are permitted to weigh the costs and benefits of a particular allocation method so long as the chosen method is reasonable, fair, and objective. One option for the employer is to directly distribute the rebate to participants in the form of a cash refund. However, where employees made premium contributions on a pre-tax basis, a refund made to participants will result in taxable income – which may not be desirable. An employer may also find that the amount of the rebate is too small to warrant a refund to each participant.
An alternative to distributing refunds to participants is to apply the rebate toward future participant premium payments in the form of a credit, or to apply the rebate toward benefit enhancements. But regardless of the allocation method, the rebate must generally be used within three months of receipt. This short time-frame should encourage employers to quickly account for and dispose of rebates.
Employers should ensure that the process of rebate allocation is adequately documented in order to demonstrate compliance with handling guidelines. This includes the date of receipt of the rebate, calculations used to determine the portion of the rebate that constitutes plan assets, and the decision-making process used to determine the most reasonable allocation method.
Additionally, employers must be prepared to answer questions from employees regarding use of the rebate. Since carriers will notify plan participants regarding the issuance of the rebate, an employer may wish to draft its own notice to employees to communicate how the rebate will be handled.
For further guidance, the U.S. Department of Labor issued a technical release on the treatment of MLR rebates that constitute plan assets under ERISA. While the guidance is instructive, the details of a particular employer plan or policy may dictate a different course of action.