The Affordable Care Act (ACA) established Medical Loss Ratio (MLR) requirements for fully insured medical plans. These rules ensure that most premium dollars are spent on actual health care services and quality improvements, rather than administrative costs or profit.
These rules apply to all fully insured medical plans, regardless of employer size.
MLR is calculated on a calendar-year basis, and if a carrier fails to meet the required standard, it must issue rebates by September 30 of the following year.
MLR Standards
- Individual & Small Group Plans: Insurers must spend at least 80% of premium dollars on health care services and quality improvement.
- Large Group Plans: Insurers must spend at least 85% in these same categories.
These requirements apply only to fully insured plans. Self-funded and level-funded plans are not subject to MLR rules, as employers pay claims directly.
MLR Rebates: Employer Responsibilities
If a rebate is issued, the employer has 90 days to decide how to handle it. Carriers sometimes notify employees directly, so timely action and clear communication are important.
The Department of Labor (DOL) allows three main approaches:
- Reduce future premiums for all employees: Apply the rebate toward everyone’s premium share for the upcoming plan year.
- Reduce future premiums only for impacted subscribers: Apply the rebate only to those covered by the plan that generated it (including COBRA participants, if applicable).
- Cash refunds: Issue the rebate directly to employees who were covered by the plan that generated it.
Employers are not required to locate former employees, but COBRA participants must be included if applicable.
If the plan is entirely employer-paid, the rebate may be retained by the employer – but only if it is not considered a “plan asset” under ERISA. Employers should consult ERISA counsel before deciding to keep rebate funds.
Typical Rebate Amounts
In practice, most group health carriers have become adept at meeting MLR standards, so rebates are uncommon and often modest — typically $10–$30 per employee. Issuing individual checks can create administrative and tax complexities, especially if a Section 125 Premium Only Plan (POP) is in place.
Many employers choose to apply rebates toward future premiums or enhance benefits rather than issuing direct payments. Regardless of the approach, best practices include:
- Document the decision.
- Apply it consistently to similarly situated employees.
- Communicate clearly with employees.
- Include the approach in ERISA plan documents.
Key Compliance Notes
- Timing: Rebates must be issued by carriers by September 30 of the following year (e.g., rebates based on 2025 performance are due by 9/30/2026).
- Applicability: Only fully insured medical plans are subject to MLR rules. Self-funded and level-funded plans are not.
- Tax treatment: Rebates may be taxable to employees depending on how premiums were originally paid. Employers should consult both ERISA counsel and tax advisors.