Medical Loss Ratio Rebates – Do You Know How to Handle Them?

Employers only have 90 days to complete any distribution of the rebate

In August of this year, some employers with fully insured employee health benefit plans received a medical loss ratio (MLR) rebate. These rebates were mandated under the Patient Protection and Affordable Care Act (PPACA) whenever health insurers do not spend at least 80 percent of the prior year’s health insurance premiums on health care services. The rebates received in August 2013 cover premiums collected for the 2012 plan year.

Once employers receive these rebates, they only have 90 days to complete their handling and any distribution of the rebate. The good news is that employers have some leeway when it comes to deciding how to distribute these funds. For example, if tracking down and cutting checks for former employees is prohibitively expensive, employers could decide to limit the rebate to current employees only.

Is the Rebate Part of Plan Assets?

When it comes to deciding how to distribute these rebates, the first question to ask is 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 can move on to determining how much 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. Here are three potential scenarios:

1. If the employer paid the entire premium with no contributions from employees, then the rebate is not part of plan assets and the employer can keep the entire rebate.
2. If employees covered the entire cost of their health insurance premiums, the entire rebate would be considered plan assets and must be used for the sole benefit of the participants.
3. If employees contributed a portion of their health insurance premiums, employers need to determine how to apportion the amount of the rebate 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 before making any final 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 doing more than required when it comes to these rebates by giving all of it back to employees because they wish to avoid hassles and questions from the employees. In addition, the rebate does not have to be distributed in check form. Employers could use the rebate to do some sort of premium holiday or benefit enhancement as long as they are using the money on behalf of employees.

Rebate Options:

1. The rebate can be paid to the participants under a fair and equitable allocation method, such as a cash payment to the employees. What is “fair and equitable” is undefined, giving the employer the ability to decide if any premium reduction or cash refund 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 employee’s salary reduction contributions for a specified period.
3. The employer can use the rebate to provide enhanced benefits for the participants. Enhanced benefits are not defined, but they are generally believed 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 MLR rebates will be an annual rite for insurance companies that do not maintain an appropriate MLR in their administrative operations. Therefore, employers should think through how they will handle a rebate situation in the future and take steps to improve the process if they have received a rebate this year.