What MLR Is
The ACA’s Medical Loss Ratio (MLR) rules require health insurance carriers to spend a minimum share of premium dollars on medical care and quality improvement, rather than on administrative costs and profit:
- Individual and small group markets: at least 80%
- Large group market: at least 85%
If a carrier falls short, it must pay rebates.
Which Employers Can Receive a Rebate
- MLR rules apply to fully insured plans of any size.
- Self-funded and level-funded plans aren’t subject to MLR rules.
- A carrier’s MLR is measured by state and by market (individual, small group or large group), across all of its business in that market, not employer by employer. So whether an employer gets a rebate depends on how the carrier’s whole market performed, not on the employer’s own claims.
When Rebates Are Paid
- MLR is calculated using a three-year average.
- Carriers must pay any rebates by September 30 each year, based on prior years’ results.
- For group plans, the rebate goes to the employer (the policyholder). Carriers also send a notice to covered employees explaining that a rebate was issued.
What Happens to a Rebate
How an employer handles a rebate is a legal and tax decision that depends on the plan’s terms and circumstances. Employers should review their situation with their ERISA counsel and tax advisor. The general framework below comes from DOL guidance.
For employer plans covered by ERISA, part of a rebate may be considered a plan asset, which belongs to the plan and its participants rather than to the employer:
- The portion tied to employee contributions is generally a plan asset. Under DOL guidance, it’s generally used for the benefit of plan participants within three months of receipt, for example by:
- Reducing future employee premium contributions
- Providing cash refunds to participants
- Enhancing plan benefits
- The portion tied to employer contributions generally isn’t a plan asset. If the employer paid the full premium, the employer may generally keep the rebate, depending on the plan’s terms.
Tax treatment depends on how employees paid their share of premiums. For example, cash refunds of premiums paid pre-tax through a Section 125 plan are generally taxable.
Important: This information is provided for general educational purposes. It is not legal or tax advice. How these rules apply depends on each employer’s specific circumstances, so employers should review their situation with their own legal counsel, ERISA attorney, CPA or tax advisor.