18 Sep Employers receiving medical loss ratio (MLR) rebates must proceed cautiously
By Anita Byer
The Affordable Care Act’s Medical Loss Ratio (MLR) is designed to hold health insurance companies accountable and keep consumer costs down. According to KFF, nearly $12 billion in rebates have been issued since the MLR took effect in 2012. Approximately $1.1 billion more in rebates will be issued in 2024. Employers receiving MLR rebates, which are generally distributed by September 30th, must proceed cautiously to avoid serious ERISA violations.
The MLR generally requires group health insurers to spend at least 80% (or 85% for large groups) of premium income on health care costs and quality improvement activities. The other 20% (or 15%) can go to overhead expenses and profits. Group health insurers that fail to satisfy the ACA’s medical loss ratio (or 80/20 rule) are required to rebate a portion of the premiums paid by policyholders.
There are specific rules governing MLR rebates. The first step is to determine whether the employer or plan participants are entitled to the rebate, which depends on whether all or part of the rebate is considered a plan asset under ERISA. Any part of the rebate that is considered a plan asset must be used by the employer, in its fiduciary capacity, solely for the benefit of the plan. Conversely, the employer is entitled to retain any part of the rebate that is not considered a plan asset.
According to the Department of Labor, in the absence of direct evidence to the contrary, like specific language in plan documents, rebates should generally be allocated between the employer and plan participants based on their relative premium contributions.
- Employer Pays 100%: Employer may retain the entire rebate because it is not a plan asset
- Participants Pay 100%: The entire rebate is a plan asset that must be used solely for the benefit of the plan
- Each Pay Fixed Percentage: Each are entitled to portion of rebate commensurate with the portion of the premium each paid
- Employer Pays Fixed Amount and Participants Pay Additional Costs: The total amount paid by participants must be allocated as a plan asset for their benefit, and any remaining amount may be retained by the employer
After determining how much of the rebate must be used to benefit participants (because it is considered a plan asset under the DOL’s guidance), the next step is distributing the rebate. Employers must use the amount of the rebate that is proportionate to the total amount of premium paid by all employees under the policy, for the benefit of such employees in a manner that is reasonable, fair, and objective. According to the DOL, employers may:
- Reduce employees’ portion of premium for the subsequent policy year for all employees covered (at the time the rebate is received) under any option offered under a group health plan.
- Reduce employees’ portion of premium for the subsequent policy year for employees covered (at the time the rebate is received) under the specific plan option for which the rebate was issued.
- Give a cash refund to employees enrolled (at the time the rebate is received) in the group health plan option for which the rebate was issued.
The regulations provide that premiums reductions or cash refunds may, at the option of the employer: 1) be divided evenly among employees; 2) be divided based on each employee’s actual premium contributions; or 3) apportioned in a manner that reasonably reflects each employee’s premium contributions. Employers must generally do this within three months of receiving the rebate.
Dealing with MLR rebates can be risky and time consuming because they are governed by complex laws and regulations. Consultation with legal, insurance, and accounting professionals may be necessary to avoid potentially costly ERISA violations. If you have any other questions, please contact us.