Updated: Jan 9, 2019
Under the Affordable Care Act (ACA), there is a provision that limits the portion of premium dollars health insurers may spend on administration, marketing, and profits. That provision is called the Medical Loss Ratio (MLR).
MLR requires that insurers of fully-insured small group* and individual plans spend at least 80% of the premium received on health care claims and quality improvement with the remaining profit of 20% allowed to be spent on administration, marketing and profit. For large group* plans, that spend is slightly higher at 85% towards claims and improvement. The MLR does not apply to self-insured groups.
Any insurer that fails to meet these thresholds and standards must pay rebates back to consumers.
Rebates coming in the fall are based on an average MLR for the prior three years. Those being sent in 2018 are based on each carrier's average for 2015, 2016, and 2017.
Not all consumers will receive rebates. Last year 11 states met the MLR requirements and did not need to send out rebates. Those states were: Alaska, Connecticut, Hawaii, Maine, Minnesota, Montana, New Mexico, Oregon, South Dakota, Vermont, and Wyoming.
Each year information regarding the MLR rebate for each state and carrier is publicly announced by the Centers for Medicare & Medicaid Services (CMS) on their website. Last year's report showed a total rebate of $447 million back to consumers for failed Medical Loss Ratios.
So You Got A Rebate..... What Next?
If you are an individual medical plan consumer, cash the check it's yours!
Plan sponsors on the other hand have four key decision to make when receiving their MLR rebate check.
How much of the rebate does the employer get to keep and how much to owed back to the participating employees?
If participating employees are owed a portion of the rebate, should it be allocated to both prior year and current year participants?
How to pay the rebate to participants?
When to pay the rebate to participants?
Question 1. How Much - If not specified otherwise in the plan sponsors Summary Plan Description (SPD) it's considered "plan assets" and the same percentage of the total premium paid by participants should be used. For example, if the plan participant pays 25% of the total premium and the employer pays 75%, then 25% of the MLR rebate will be "plan assets" and should be paid to or for the benefit of plan participants. This can get tricky when employers are not using a defined-benefit contribution approach. Speak to your benefit advisor or agent for assistance in calculating the MLR rebate by participant, especially with small group Age Banded rate plans.
Question 2. Who - In general employers only pay those currently "still" participating in the plan. DOL guidance states that ERISA's general standards of fiduciary conduct apply but also that the plan may allocate the MLR rebate only to current participants IF the cost of distributing amounts to terminated participants approaches the amount of the proceeds.
Question 3. How To - The participants portion can be paid to them or used toward benefit enhancements. Employers who pay the portion back to participants either include the amount in their paychecks with tax withholding OR reduce the next months premiums by the rebate amount.
Question 4. When - The employer has three (3) months from receipt of the rebate to pay out or they have to set up a trust to hold plan assets. No "de minimus" exception for the employer.
See the DOL's Technical Release for additional details on the above.
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*Protecting Affordable Coverage for Employers (PACE) Act, maintains the current 1-50 employee definition of a small employer and gives states flexibility to expand the small employer definition up to 100 employees if they determine market conditions necessitate the change.