August 13, 2024

Employers that receive MLR rebates have compliance obligations regarding the use of the rebates, including requirements to distribute to eligible plan participants (potentially including former participants) within three months of receipt for any portion of the rebate that constitutes a plan asset. MLR rebates do not apply to self-insured plans. However, any form of insurer rebates generally should follow the MLR rebate or similar rules to distribute the employees’ share of rebates.

DOL guidance gives employers some discretion when allocating the rebate among plan participants (including former employees participating in the plan under COBRA), provided employers follow ERISA’s general standards of fiduciary conduct.

First, employers should review the applicable ERISA plan document (in conjunction with the carrier policy) for any specific direction as to how the rebate should be used and provided. In determining who is entitled to the distribution, employers should carefully analyze the terms of the governing plan documents.

Whether former participants should be included in any MLR rebate allocations depends on the type of plan. While 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.

For nonfederal governmental plans, any portion of a rebate that is based on former participants' contributions needs to be aggregated and used for the benefit of current participants.

For nongovernmental, non-ERISA plans, if the rebate is paid to the plan sponsor, the plan sponsor must allocate the rebate to current participants only. If the rebate is paid directly to participants by the carrier, the carrier must distribute the rebate equally among those who were participants during the MLR reporting year on which the rebate is based.

For comprehensive information on MLR rebates, distribution methods and employer requirements, please ask your broker or consultant for a copy of the PPI publication MLR Rebates: A Guide for Employers.