Plan Sponsors Should Prepare for Substantial Medical Loss Ratio Rebates in 2022

9/12/2022

2-Minute Read

According to The Kaiser Family Foundation, insurance carriers are projected to issue approximately $275 million in rebates to small-group policyholders and $168 million to large-group policyholders. Plan sponsors should be prepared to handle any medical loss ratio (MLR) rebates according to applicable rules.

The Affordable Care Act (ACA) requires health insurers in the small group market to spend 80% on medical care, and insurers in the large group market must spend 85% on medical care. The MLR rule does not apply to self-funded health plans or stop-loss insurance policies. 

The ACA dictates that insurers not meeting the MLR standard must refund the excess premiums to their policyholders, either as cash refunds (rebates) or as a credit on the employer’s premium statement. Employers that receive a rebate must handle the funds appropriately, based on whether the Employee Retirement Income Security Act of 1974 (ERISA) applies to the plan. 

Under the U.S. Department of Labor’s (DOL) guidance, employers are generally prohibited from retaining a rebate amount greater than the total amount of premiums and other plan expenses paid by the employer. The DOL has approved the following methods for distribution:  

1. Distributed to participants under a reasonable, fair, and objective method.  
2. If distributing payments to participants is not cost-effective because the amounts are small or would have negative tax effects on affected participants, the employer may utilize the rebate for other permissible plan purposes, such as applying the rebate toward future participant premium payments or toward benefit enhancements.  

The Internal Revenue Service (IRS) has issued a set of FAQs to explain the tax treatment of MLR rebates. In general, a cash refund to an employee would create a taxable event unless the employee had previously contributed the funds on an after-tax basis. For this reason, employers should avoid issuing cash refunds to participants except upon advice of legal counsel. 

Employers should maintain records to detail how it determined the MLR rebate payable to eligible plan participants and exactly who benefitted. Finally, employers should seek advice from outside counsel to help determine how to properly use any MLR rebate.  

What We Do 

In today’s world of employee benefits, staying compliant with ever-evolving laws, rules and regulations is a constant challenge. Well-versed in both federal and state legislation as well as the changes brought about by the Affordable Care Act, our expert advisors have a deep knowledge of employee benefits and a detailed understanding of healthcare laws, regulations, and standards. Contact Morris & Garritano today for a complimentary compliance assessment.  

This information is general and is provided for educational purposes only. It is not intended to provide legal advice. You should not act on this information without consulting legal counsel or other knowledgeable advisors.