The time has come again for MLR rebates. Could you provide a refresher on what we can do with those rebates?

The ACA requires medical insurance companies to pay annual Medical Loss Ratio (MLR) rebates to policyholders by September 30, 2022, if the insurer spent less than a specified minimum percentage of the premium on medical claims and certain healthcare quality improvement initiatives in the prior calendar year.

Depending on the employer and plan type, insurers will issue MLR rebates in the form of a premium credit or reduction (sometimes through a so-called “premium holiday”), or a lump-sum premium refund (via cash or check). Employers are then tasked with determining the proper use of an MLR rebate, which often requires distribution of a pro-rata share of the rebate to eligible plan participants within three months of the employer’s receipt of the rebate from the insurer.

Plan documents often include rules for treating these rebates, so it is a good idea to consult those documents when determining how to distribute them. When it comes to plans subject to ERISA, in which the employer’s contributions towards coverage comes from general assets (i.e., most plans), applicable guidance provides four steps to follow to determine how to use the rebate.

The first is that the employer must determine the plan(s) to which the MLR rebate applies. MLR rebates generally apply only to a specific plan option (such as an HMO, PPO or an HDHP). The insurer’s MLR rebate notice will specify the plan(s) to which it applies, and only the participants who contribute to the cost of the named plan option(s) should benefit from the rebate. If a rebate relates to two or more separate plan options with different MLR rebate factors, then the rebate should be applied separately by the employer based on the separate plan-specific calculations of the insurer. Remember that using an MLR rebate generated by one plan for the benefit of another plan’s participants or for the benefit of nonparticipants is likely a breach of fiduciary duty.

Second, the employer must determine the portion of the rebate that relates to employee contributions versus employer contributions toward the plan’s premium. The portion of the MLR rebate that relates to employee contributions is generally considered an ERISA “plan asset,” which may only be used for the benefit of plan participants (and any related administrative expenses). For example, if plan participants contribute 30% of the premium, then 30% of the rebate must be used for the benefit of plan participants. The employer may keep the portion of the rebate that relates to employer contributions; the employer portion of the rebate is simply returned to the employer’s general assets. However, if the plan pays benefits through a trust and the plan or trust is the policyholder, the entire refund amount would be considered plan assets and must be used for the benefit of participants.

Third, the employer must determine the participants to whom it will distribute the rebate. This is often the step that generates the most controversy. Note that DOL guidance gives employers some discretion when allocating the rebate among plan participants, provided employers follow ERISA’s general standards of fiduciary conduct. In determining whether to distribute the MLR rebate to all participants who contributed to the plan during the reporting year or only to current plan participants, and whether to weight the rebate ratably according to each participant’s actual contribution amount or to distribute the rebate in equal dollar amounts to all eligible plan participants, employers can follow these general guidelines:

• The allocation method must be reasonable, fair and objective (but does not have to reflect each participant’s actual contribution cost). This means that the employer could choose to provide a flat amount rebate to each participant or a percentage of each participant’s actual contribution, so long as the method is reasonable, fair and objective.
• If the administrative cost of distributing rebates to former participants approximates or exceeds the amount of the rebate, the employer may limit rebates to current participants only. The DOL guidelines do not specify what constitutes an administrative cost. It is generally accepted that these costs include only “hard costs” (such as the cost of producing a check and the related postage and handling) and do not include the effort to track down former participants. Note that the opportunity to exclude participants from MLR rebate actions based on a cost/benefit analysis pertains only to former participants and does not also apply to current participants.

Finally, the employer must determine the method for distributing the rebate to plan participants. MLR regulations provide four possible methods for distributing the rebate to plan participants:

• Premium reductions for plan participants.
• Benefit enhancements to the plan (adding a benefit or service).
• A refund back to plan participants, either through cash or check.
• A premium holiday (either by the employer passing along the insurer’s premium holiday or creating its own).

If it is not cost effective to distribute refunds to participants (both current and former) because the refund amounts approximate the distribution costs or would result in a taxable event to the participants, the employer may use the plan asset portion of the MLR rebate for other permissible plan purposes, such as making near-future premium reductions, premium holidays or benefit enhancements to the plan. Note that any such benefit plan enhancements must be implemented in full within the three-month time limit for using MLR rebates.

In any event, the employer should document the method it used for administering an MLR rebate according to the four steps outlined above or per the controlling ERISA plan document, as applicable. It should maintain records of all per-participant premium reductions or refunds according to its record retention policy. In general, records related to ERISA plans should be retained for eight years.

For more information on MLR rebates, download our white paper on this topic.