ACA: Medical Loss Ratio Rebates



The Affordable Care Act (ACA) requires health insurers to spend specified percentages of the premium they receive on health care benefits. If they fail to achieve those Medical Loss Ratio (MLR) goals, they are required to send rebates to policyholders and insureds. Rebates for a MLR reporting year (calendar year during which group coverage is provided by an insurer) must be paid by August 1 of the following year. Beginning with the 2014 MLR reporting year, the rebates must be paid by September 30.

In the case of insured employer group health plans governed by ERISA, insurers are required to send the rebates to the policyholder (generally the employer) and the policyholder is responsible for determining what portion (if any) of the rebate belongs to its employees and distributing it accordingly. This determination and distribution must be made within three months after receipt.

For private sector plans, decisions on how to apply the plan’s portion of a rebate are subject to ERISA’s general standards of fiduciary conduct. In other words, the responsible plan fiduciaries must act prudently, solely in the interest of the plan participants, and beneficiaries, and in accordance with the terms of the plan to the extent consistent with the provisions of ERISA.

The Department of Labor (DOL) provides additional information and resources on its web site.

Rebates as Plan Assets (for plans subject to ERISA)

Generally, ERISA considers rebates received by employers as plan assets that must be placed in a trust. However, many employers that collect employee contributions through cafeteria plans have not created trusts based on the Department of Labor’s announced policy of not enforcing the trust requirement (with respect to contributions collected in that way). For plans not subject to the trust requirements, fiduciaries may take into account the cost of creating a trust when deciding how to expend rebates. For example, directing insurers to apply the rebate toward future participant premium payments or toward benefit enhancements adopted by the plan sponsor would avoid the need for a trust, and may, in some circumstances, be consistent with fiduciary responsibilities.

In determining who is entitled to the distribution, fiduciaries must first analyze the terms of the governing plan documents and the parties’ understandings and representations. If this does not resolve the distribution issue, the portion of a rebate that is attributable to participant contributions should be allocated back to participants. For example, if the participants and the employer each paid a fixed percentage of the cost, a percentage of the rebate equal to the percentage of the cost paid by participants would be attributable to participant contributions. In any case, employers would be prohibited by ERISA from receiving a rebate amount greater than the total amount of premiums and other plan expenses paid by the employer.

There are circumstances where a plan sponsor may not need to treat MLR rebates as plan assets. However, the rules are complex and technical.  Plan sponsors are strongly encouraged to contact their counsel regarding the handling of MLR rebates.   

Reimbursement Considerations

To the extent that enrollees paid their share of premiums on a nontaxable basis through a cafeteria plan, and the rebates are returned to enrollees in the form of a cash refund, those rebates would constitute taxable income to the enrollee. However, if the rebates are provided in the form of a “premium holiday” in accordance with the MLR regulations (and thus used for payment of future premiums due for group health plan coverage), they would not be taxable to enrollees who pay for coverage on an after-tax basis and do not deduct their premiums on their Form 1040s.  Employees who pay for coverage on a pre-tax basis will, of course, have a reduction in their pre-tax contribution amount and a corresponding increase in taxable income.

If a fiduciary finds that the cost of distributing shares of a rebate to former participants approximates the amount of the proceeds, the fiduciary may properly decide to allocate the proceeds to current participants based upon a reasonable, fair, and objective allocation method. Similarly, if distributing payments to any participant is not cost-effective (e.g., payments to participants are of de minimis amounts, or would give rise to tax consequences to participants or the plan), the fiduciary may utilize the rebate for other permissible plan purposes, including applying the rebate toward future participant premium payments or toward benefit enhancements.

MLR Notice Requirement for Insurers

Notices must be provided by August 1 of the year following the MLR reporting year for which the rebate is being issued. The rebate itself may either be included with the notice, or may be sent separately. The notice may be sent prior to or after payment of the rebate as long as each is provided by August 1 of the year following the MLR reporting year for which the rebate is being issued. The notice must be sent to all group policyholders who receive a rebate and all subscribers of group policyholders who receive a rebate.

Notices must be mailed to subscribers and to group policyholders at the mailing address on file by first-class mail, postage prepaid. However, notices may instead be provided electronically if the insurer regularly communicates electronically with its policyholders and/or subscribers. All reasonable efforts should be made to assure that each subscriber and group policyholder receives the required notice.

The insurance issuer is responsible for distributing this notice.

MLR Notice Exceptions

Issuers of mini-med and expatriate policies will use a separate methodology for calculating the MLR numerator for reporting and rebate purposes and are subject to separate notice rules.

Issuers whose experience is non-credible, as defined in the final regulation (generally, issuers that have fewer than 1,000 covered life-years) do not have sufficiently credible data to determine whether the MLR standard has been met and are presumed to meet or exceed the applicable minimum MLR standard. Because non-credible issuers do not have an MLR to report, the MLR notice requirement in the final rule does not apply.

Non-Federal Government Plans

If you are a non-federal government employer with an insured group health plan, you use the portion of rebates attributable to the amount of premium paid by employees under the plan for the benefit of individuals who are participants at the time the rebate is received in one of the following ways:

Church Plans

In the case of an insured church plan that is not subject to ERISA, rebates may only be paid to the policyholder if the insurer receives a written assurance from the policyholder that the rebates will be used in accordance with the rules applicable to plans sponsored by non-federal government employers; otherwise, the issuer must distribute the rebate directly to the employees covered under the group health plan during the year on which the rebate is based by dividing the entire rebate, including the amount proportionate to the amount of premium paid by the policyholder, in equal amounts to all employees entitled to a rebate without regard to how much each employee actually paid toward premiums.