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Employers sponsoring a fully-insured group health plan may have received a check from their insurance company. This check is an MLR rebate which insurance companies are required to distribute annually by September 30^th each year.

It’s important to note that employers are required to follow certain rules with regards to handling of the MLR rebate check. How an employer may use the rebate amount will depend on how coverage premiums are paid. For any portion of the rebate that is considered plan assets, ERISA trust rules make it so that the employee’s share of the rebate should be distributed within 90 days of the employer’s receipt of the MLR rebate check.

While employers are not required to send a notice to their employees, the insurance company is required to send notices of the MLR rebate to plan participants. The notice to plan participants won’t include the amount of the rebate, but it will state that the rebate was sent to the employer and there may be a portion that is distributed to participants. Employers may want to communicate with participants about whether, and how, they may expect to receive their portion of the rebate.

What is the Medical Loss Ratio (MLR)?

The MLR, or Medical Loss Ratio, is a provision in the Affordable Care Act (ACA) designed to hold insurance companies accountable for how they spend premium dollars. The law mandates that insurance companies must spend a minimum percentage of the premiums they collect on medical claims and healthcare services, ensuring that a significant portion of your premium dollars directly benefits your health.

How Does the MLR Work?

Insurance companies must adhere to specific MLR thresholds, which are set at either 80% or 85%, depending on the type of insurance policy. Here’s what that means:

For Individual and Small Group Policies: At least 80% of the premium dollars must be spent on medical claims and healthcare services, leaving a maximum of 20% for administrative costs and profits.

For Large Group Policies: The threshold is a higher 85%, ensuring that a minimum of 85% of premiums is dedicated to medical care.

If an insurance company fails to meet these MLR thresholds, they are required to issue MLR rebates to policyholders to correct the imbalance. MLR rebates and rebate notices are mailed out by the end of September each year.

Who Receives the MLR Rebate?

The MLR rebate typically goes to the main policyholder, which may be the individual policyholder or the employer in the case of an employer-sponsored group health plan. For individual policyholders, the rebate is straightforward – it goes to the person who holds the policy. However, for those with employer-sponsored plans, the employer usually receives the rebate.

Although the employer receives the rebate check, the insurance company is required to send a separate letter to plan enrollees notifying them that a rebate was issued. This could cause confusion as employees receive the letter.

IMA comment: we find that it’s prudent for employers to proactively address when the employer is owed a rebate. IMA clients can contact their service team to obtain a template that can be used to communicate with employees.

Allocation of the MLR Rebate

The allocation of the MLR rebate can vary depending on the insurance plan and the agreements in place. There are two common methods:

Employer Retention: Some insurance plans stipulate that the MLR rebate will be retained by the employer. This money can be used to offset the costs of administering benefit plans and may be applied towards benefit enhancements.

Employee Allocation: If the plan document doesn’t specify how MLR rebates should be used, the law steps in to provide guidance. In this case, a portion of the rebate is typically distributed among employees, with the exact allocation typically based on the contribution percentages for both the employer and the employees. The rebate may be added as an extra line item of taxable compensation on the next payroll or applied as a credit towards the employee’s next payroll deduction.

IMA comment: Calculating Allocation requires two steps: 1) identifying which participants will receive a rebate and 2) calculating the amount of the rebate for each participant. Bolton clients can contact their service team for more information including an MLR rebate calculator.

Summary

Employers should take note that there are specific rules regarding distribution and timing of rebate amounts attributable to employees enrolled in the plan. Employers should keep an eye out for a potential rebate check by the end of September each year to ensure rebates are distributed to participants within 90 days, if applicable.

We recommend contacting your benefits broker with any questions.

IMA will continue to monitor regulator guidance and offer meaningful, practical, timely information. This material should not be considered as a substitute for legal, tax and/or actuarial advice. Contact the appropriate professional counsel for such matters. These materials are not exhaustive and are subject to possible changes in applicable laws, rules, and regulations and their interpretations.