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Employers must consider specific rules on how to spend MLR rebate checks

Updated: May 9, 2023

Carriers are required to send out Medical Loss Ratio (MLR) payments to employers by September 30th.

As a quick reminder, the ACA says that health insurance carriers have to pay out rebates to employers if the carrier fails to spend at least 85% for large groups or 80% for small groups of total premiums on claims and health care quality improvement activities.  

When an employer receives one of these MLR checks from the insurer, they’ll need to carefully consider how the funds must be spent - they should not just keep it. This is because any portion of the rebate that is considered “plan assets” has to be used in a very specific manner. In other words, if employees paid any portion of the total premium, then that portion related to the MLR rebate check is considered plan assets and can only be used to benefit those participants, not the employer.

For instance, if employees paid 20% of total premiums last year and the employer contributed 80%, then 20% of the rebate check is considered “plan assets” and should only be used for the benefit of plan participants.

There are 3 basic methods an employer may use to spend this portion on participants: 1) Pay out a taxable cash refund 2) Offer a premium holiday for the amount of the rebate 3) Provide some sort of benefit enhancement

However, keep in mind the 3rd option may be more difficult to implement. This part of the rebate must be used within 90 days of receipt and can’t be used for all employees - it can only be used for those who were participating during the relevant plan year. Thus, the 1st or 2nd option may be better suited for distribution of the MLR rebate attributable to plan assets.

If the employer decides to give a premium holiday under option 2, the employer could allocate a premium discount only those who are currently participating and were also participating in that same plan during the related plan year. This means that new enrollees should not be given a portion of the rebate.

If the employer decides to use option 1, then this is the only way a former participant could receive a portion of the rebate. The DOL allows some discretion with regard to former participants. If the amount of the rebate is higher than the cost of tracking down former participants and sending them a check, then an employer should distribute funds to former participants. But if the costs are more than the rebate, then the employer can decide to limit rebates to only current participants.

Finally, there is no de minimis amount for distribution of any portion that’s considered plan assets under the rules. The only leeway given relates to the cost of including former participants in the rebate distribution. In other words, even if the rebate is a very small amount and dividing it up between participants results in a few dollars, any portion related to plan assets still has to be given back to current participants, and possibly to former employees. 

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