Medical Loss Ratio Rebate Overview for Employers
What is the Medical Loss Ratio Rebate?
- The Medical Loss Ratio (MLR) rule of the Affordable Care Act requires insurance carriers to spend at least 80% of premium dollars on medical expenses such as claims, services and wellness programs that improve healthcare quality. The remaining 20% is used to pay administrative costs, broker fees, and other fees.
- In the individual and small group market (2 to 100 full time equivalent employees), health plans are required to maintain a MLR of at least 80% and in the large group market (100 or more full time equivalent employees) a MLR of at least 85%.
- When an insurance company exceeds these percentages, customers will receive a rebate, usually in the form of a check.
- The total rebate amount is based on the portion of premium payments paid in 2011.
Does the Medical Loss Ratio Rebate apply to all types of health plans?
- No, the Medical Loss Ratio Rebate applies only to health plans that are insured by an insurance company. Self-funded plans are not included.
When will the rebate checks be mailed and what type of information will my employees receive?
- The checks will be issued by August 1, 2012.
- The Affordable Care Act requires insurance companies to send a notification to employers and employees explaining why they are receiving a rebate check.
- If an insurance carrier met the MLR requirements, then employers will receive an explanation stating that they will not receive a check.
What does an employer do with the rebate once it is received?
- Different rules may apply depending on whether the health plan is an ERISA (Employment Retirement Income Security Act) plan, a nonfederal governmental plan (for example: state, municipal, or local governmental group health plan) or church plan.
- For ERISA group health plans, rebates paid to a policyholder may constitute ERISA plan assets and must be qualified as plan assets.
- Here are three options employers can do with a rebate check:
1.) Reduce employee’s premiums for all members who, as of the date the rebate is received, are covered under any group policy offered under the plan.
2.) Reduce employee’s premiums for members who, as of the date the rebate is received, are covered by the specific group policy offered under the plan.
3.) Provide a refund check to each of the employees who were covered by the group health policy on which the rebate was based. The rebates can be divided evenly among employees or divided based on actual contributions to premiums.
How are the rebates treated for federal tax purposes?
- If employee premium contributions are made on a pre-tax basis through a cafeteria plan, then any rebates paid to employees (for example: premium credits, cash payments, credit/debit card reimbursements, or pre-paid debit/credit cards) will be subject to federal income and employment taxes in the year paid.
- If employee premium contributions are made on an after-tax basis, then any rebates paid to employees, regardless of form, generally will not be subject to federal income or employment taxes except: if the rebate is paid to an employee who participated in the plan before the rebate distribution, and the employee previously deducted on his federal income tax return the premium payments made for that year, then the rebate will be subject to federal income taxes because the employee received a tax benefit from the income tax deduction. The rebate will not be subject to federal employment taxes.
For more information, see the Centers for Medicare and Medicaid Services information page about Medical Loss Ratios.
This Focus Benefits Flash is for informational purposes only and is not intended to be legal, accounting or other professional advice. Please consult with a licensed accountant or tax professional for additional information about the Medical Loss Ratio Rebate.