Medical Loss Ratio Rebates

Employers only have 90 days to complete distributions of Medical Loss Ratio Rebates.

In August of this year, some employers with fully insured employee health benefit plans will receive a Medical  Loss Ratio (MLR) rebate. These rebates are mandated under the Patient Protection and Affordable Care Act (PPACA) in the instance where health insurers did not spend at 80% of the prior year’s health premiums directly on the delivery of health care services.  The rebates will be issued by August 1, 2014 for premiums that were collected during the 2013 calendar year.

Once employers receive these rebates, they only have 90 days to complete their handling and distribution of the rebate in order to be in compliance with the law.

The good news is that employers have some discretion in deciding how to distribute these funds.  For example, if tracking down and issuing checks for former employees is prohibitively expensive or time consuming, the employer can decide to limit the rebate to currently active employees.

Is the Rebate Part of Plan Assets?

When it comes to deciding how to distribute these rebates, it must be determined if whether the rebate is considered part of the health insurance plan’s assets.  If the group insurance policy is in the name of the group health plan rather than the employer, then the rebate is considered a plan asset and must be used solely for the benefit of the plan participants.

If the plan document does not define plan assets, employers then need to determine what portion of the rebate, if any, should be attributed to employee contributions.  In general, a rebate on any amount of health insurance premiums paid by the employer is not considered plan assets, while a rebate of any amount of health insurance premiums paid by employees is considered plan assets.

Let’s explore three potential scenarios:

1. If the employer paid the entire premium during the calendar year and did not collect any contributions from employees, then the rebate is not part of plan assets and the employer is allowed to keep the entire rebate.
2. If employees covered the entire cost of the health insurance premiums, the entire rebate is considered plan assets and is required to be used for the sole benefit of the participants.
3. If both the employer and their employees contributed a portion to the health insurance premiums, employers will need to determine how to allocate the appropriate portion of the rebate that is to be used for the sole benefit of the participants.

These are complicated decisions that impact an employer’s fiduciary duty as a health insurance plan sponsor, so employers should contact legal counsel to aid them in making their decisions.

Communication is Key

If the employer decides not to issue rebate checks to individual employees, it is important for employers to communicate that decision to employees and the reason for it as soon as possible.

In some cases, employers are going above and beyond of what is required by giving the entire rebate back to employees because they wish to avoid questions and complaints from the employees.

In addition, the rebate is not required to be distributed in the form of a check.  Employers may use the rebate to do some sort of premium holiday or benefit enhancement as long as they are using the money from the rebate on behalf of the employees.

Rebate Options:

1. The rebate can be paid to the participants under a fair and equitable allocation method, such as a money payment to employees.  What is “fair and equitable” is undefined, allowing the employer the ability to decide if any future premium reduction or refund payment should be divided evenly among the employees based on the actual total premium payment or divided based on a weighted average using the amount each individual employee paid (i.e., single rate versus family rate).
2. The employer can apply the rebate toward future participant premium payments by reducing the impacted employees’ salary reduction contributions for a specified period.
3. The employer may use the rebate to provide enhanced benefits for the participants. 
4. Enhanced benefits are not defined, but they are generally understood to mean an improvement to the group health plan’s benefits or providing an enhanced health related benefit to beneficiaries.

Even if employers did not receive a rebate this year, the Medical Loss Ratio (MLR) rebates will be an annual rite for insurance companies that do not maintain an appropriate MLR in their administrative operations.  Therefore, employers would be wise to consider how they will handle a rebate situation in the future and take necessary steps to improve the process if they have received a rebate this year.