Medical Loss Ratio Requirements (and Rebates) under the Affordable Care Act

Under the Medical Loss Ratio (MLR) requirements of the Affordable Care Act (ACA), health insurance carriers must spend at least 80 to 85% of the premium dollars they collect each year on medical care and quality improvement or pay affected customers a rebate. For plan year 2018, the Kaiser Family Foundation estimates approximately 211,000 small businesses and 27,000 large employers will get a share of between $250M-$284M respectively in MLR rebates. (Note: Self- and level-funded, along with ‘association’ health plans, do not have to follow MLR requirements, so no such rebates will apply.)

Health insurers may pay rebates in the form of a premium credit or lump-sum payment. Upon receipt, the employer is responsible to distribute the rebate monies to plan beneficiaries within 90 days or risk triggering ERISA trust requirements.

Employers are required to divide and distribute monies based on who paid the premiums. If the employer and the employees shared premium costs in any way, then the rebate must be split according to the contribution formula. Employers can pick one of three ways to distribute the funds: (1) pay affected employees directly, (2) use the funds for future premium reductions, or (3) use the money for benefit enhancements.  The federal government favors the first option when possible, but the employer can choose which option is in the best interest of the overall plan.

Employers only have to distribute rebates to current employees who participated in the affected plan for the rebate year. It is not necessary to track down past employees, particularly if calculating and distributing shares to former participants is not cost-effective. However, if an employer decides not to pay rebates to past employees, then the employer should aggregate the portion of the refund and use it for the benefit of current plan participants.

Finally, if an employee paid their share of premiums entirely with after-tax dollars, then their rebate is not federally taxable income; however, if pre-tax dollars were used, such as through a Section 125 plan, then the MLR refund is taxable income. In the case of a future premium credit, when the employer reduces that contribution due to the rebate, the employee’s taxable salary will correspondingly rise. If the employer decides to give affected employees a cash payment instead, then it is subject to employment taxes.

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