The Affordable Care Act (ACA) requires group health plans to spend a minimum percentage of premium dollars on members’ health care expenses and services. It also sets a threshold on the maximum amount of premium dollars that can be spent on other administrative costs, such as marketing, profits, salaries, agent commissions, etc. These requirements, known as a plan’s Medical Loss Ratio (MLR), require group health plans to reimburse employers for any premium dollars that exceed MLR limits.
In the Small Group market, the law requires an MLR of 80%. That is, at least 80% of premium dollars must be spent on health care-related expenses, and no more than 20% of premium dollars may be spent on administrative expenses. In the Large Group market, the MLR rises to 85%.
Any year a health plan exceeds its MLR requirements, the health insurance carrier has until the end of September of the following year to distribute MLR rebate funds. Plans that exceeded MLR requirements in 2019 are required to distribute MLR reimbursement checks by 9/30/2020. Employers have several options when it comes to utilizing or dispersing the MLR rebate funds, but the law gives them just 90 days to take action. Furthermore, employees are also notified about forthcoming MLR rebate checks by their plan(s) as required by law, which can also put pressure on employers.
The MLR rebate checks in the group market are generally small, ranging from about $20 to $30 per participant. Forwarding these funds to employees can be a challenge because the funds may result in additional taxable income and can be a burden on payroll. Often, the administrative cost to release the funds to employees is greater than the amount of the rebate checks themselves, which is why employers are granted flexibility when it comes to utilizing the funds.
The Department of Labor provides three options for distributing rebates:
- Reduce subscribers’ portions of the annual premium for the subsequent policy year for all subscribers covered under any group health policy offered by the plan.
- Reduce subscribers’ portions of the annual premium for the subsequent policy year for only those subscribers covered by the health policy on which the rebate is based.
- Provide a cash refund only to subscribers who were covered under the group health policy on which the rebate is based.
If the plan is funded solely by the employer, then the employer may keep the rebate check – as long as the rebate funds are not considered “plan assets” under ERISA law. If the funds are considered “plan assets,” then the funds must be used to enhance employees’ benefits. Consultation with an ERISA attorney is highly recommended for guidance in this area.
Word & Brown General Agency has developed a proprietary MLR rebate calculator to help your clients calculate MLR payment disbursements, for employers who decide to directly refund employees. Contact your W&B representative for the calculator – your clients will find it very helpful.
If the employer has a Section 125 Premium Only Plan (POP) in place, and its employees pay premium contributions on a pre-tax basis, then any MLR rebate amount given to those employees is generally considered taxable income. It is important for an employer to check with its accountant or payroll personnel for counsel on these tax issues. Because of these tax ramifications, most employers opt to utilize MLR rebate funds for future premium payments, or toward benefit enhancements for employees.
Whatever action the employer takes, a documented plan is critical – and communication of this plan is of equal importance. The employer’s MLR rebate plan should clearly document and summarize the employer’s 90-day action plan, should apply to all similarly-situated employees, and should be available for retrieval and review by employees.
On a similar yet separate topic, some Small Group carriers are releasing (or may have already released) medical premium credits to employers due to the COVID-19 pandemic. Most carriers rebating employers on a portion of their premiums due to the pandemic are doing so in the form of premium billing rebate credits; these appear on an employer’s monthly statement, for a previous month (or months) in 2020 – depending on the carrier. To our best knowledge, there has been no official guidance on how employers should go about handling such rebates.
While many employers are likely following the same MLR rebate guidance for their premium credit rebates, employers would be wise to seek legal counsel before moving forward with an action plan. Like with MLR rebates, there can be COBRA concerns, tax factors, and other compliance items of which to be aware. An employer’s legal counsel can ensure the employer complies with the law according to its own specific circumstances. Stay tuned to Word & Brown’s COVID-19 response forum – specifically the Small Group Carrier Survey – for information on carrier premium rebates and other related COVID-19 carrier policies. The document is updated often, any time a new change is announced by any of our carrier partners.
For help with MLR rebate checks and calculations – or anything in the ACA and employee-benefits world – rely on your Word & Brown General Agency and the WBCompliance team for help. WBCompliance can be reached via email at ComplianceSupport@wordandbrown.com.