Under the Affordable Care Act, (ACA) insurance companies must spend a minimum percentage of premiums on medical care rather than administrative costs, referred to as the Medical Loss Ratio (MLR). If an insurer does not meet this minimum percentage amount, it is required to provide rebates to policyholders.
Insurers are required to notify the plan whether a rebate is owed. Insurers also will notify individuals who are enrolled in coverage that an MLR rebate is being paid with respect to that policy. As such the employer, as the plan sponsor, needs to be prepared to answer questions from individual participants.
Once you receive your rebate, you must decide what you are required to do with the funds and what options you may have. You only have 90 days to complete the handling and distribution of any rebate. Plan participants should be notified about how the MLR rebate will be used by the employer, whether or not the employer distributes a portion of the rebate.
What Rules should the employer follow in determining what to do with the rebates?
There are specific rules issued by the Department of Labor as to how employers, as plan sponsors, can use these funds. An employer has to look to the terms of the insurance policy or wrap plan document to determine the amount of the rebate that can be retained by the employer and the portion, if any, that must be distributed to participants. If the employer does not have a wrap plan document, or the plan document does not address rebates, then the employer has to look at the source of premium payments.
• If the employer paid the entire costs of premiums, then the entire rebate can be retained by the employer;
• If both employee and employer contributed a percentage of the premium, then the portion of the MLR rebate that can be attributed to employee contributions has to be used to benefit employees (this is referred to herein as the “Employee Portion” of the rebate. The portion associated with the employer contribution is referred to as the “Employer Portion” of the rebate).
If the employer funds the health plan using a trust, the entire MLR rebate would be subject to distribution to employees, thus considered the “Employee Portion.”
Employers are allowed to retain the Employer Portion of the rebate (assuming the policy is issued to the Employer) and are required to follow their plan documents or use a reasonable approach to distribution of the Employee Portion of the rebate as described below.
How do I calculate the employee portion?
For medical plans that DO NOT use a trust to fund the premium or claims payments:
Employee Portion = Total Employee Contributions x Total MLR Rebate
Example: Assuming the MLR Rebate received by the employer is $900. The amount attributable to employee contributions is calculated as follows:
Employee Portion = $60,000 (total employee contributions) x $900
$180,000 (total premium)
= $300 – this is the Employee Portion and must be distributed to or used for the benefit of participants.
If a trust is used for funding the plan, the entire rebate must be used to benefit the participants – either by following the plan language or distributing the rebate using a reasonable method.
Which Employees should receive the Benefit or Distribution of the Rebate and how is the Employee amount determined?
If the wrap plan document (or other plan document) allows the employer to keep the rebate and use it for the benefit of employees, there is no requirement to distribute any portion of it. Instead, the employer could retain the rebate and use it to benefit, for example, employees who participate in the plan during the next plan year by reducing premium contributions. The employer should start by reviewing plan document wording to see if any options are described there that would need to be followed.
If the plan document is silent on this issue, the employer could decide to use the Employee Portion in any of the following ways:
• Only employees who participated in the plan for the year in which the rebate was generated would receive the benefit of the rebate (this would include COBRA participants); or
• Only employee who currently participate in the plan will the benefit of the rebate, regardless of previous participation. This option is generally only advisable when the cost of distributing the rebate approaches or exceeds the amount of the rebate.
The employer then has to use a fair, reasonable objective method of allocating the Employee Portion of the rebate among the participants that will receive that rebate. This can be done, for example, by looking at the portion of the total contributions paid by each employee in comparison to the total contributions.
Example: Employee X paid $1200/year for coverage of the Employee and her spouse. All employees in the plan paid $60,000 in contributions for the year. This means that Employee X should receive:
$60,000 or 2% of the Employee Portion of the Rebate
There are other reasonable methods that the employer could use to calculate each participant’s share of the rebate. The employer will need to determine this reasonable method by looking at how contributions are determined.
Is the Rebate considered Taxable Income to Employees?
Generally, yes. If the employee or former employee receives a cash distribution of a portion of the plans MLR rebate, this payment will be taxable income to the employee. If the employer is allowed to retain the rebate and use it to benefit the employee and charges employees a lower contribution amount due to the rebate, the employee will have more taxable income because she will be contributing less to the health plan.
If employees pay their contributions on a post-tax basis, there is no taxable income when the employee receives the rebate because the employee has already paid income tax on the amounts associated with the rebate.
If the employer is permitted by the plan document to retain the rebate or if the employer decides not to issue rebate checks to employees who received a notification about the rebate from the carrier, it is especially important for employers to communicate that decision. No matter how the rebate is going to be used, however, we recommend that the employer describe the use of the rebate to employees and former employees, quoting plan language or describing the reasons for its determination on how to use the rebate. This notification and any distribution should occur within 90 days of receipt of the rebate.