As a reminder, health insurance carriers must meet certain medical loss ratio (“MLR”) thresholds each year. In general, this means that for every dollar of premium collected on major medical plans, carriers must spend at least 85% in the large group market (or 80% in the small group market) on medical claims and activities designed to improve health care quality.
When carriers fail to meet these thresholds, they must issue rebates to policyholders. For the 2024 reporting year, rebates must be distributed to employers no later than September 30, 2025.
Employers that receive a rebate must carefully review how it should be handled—particularly if any portion of the premium was paid by employees. Rebates tied to employee contributions generally must be shared with participants, either as cash or premium reductions. Self-funded group health plans are not subject to the MLR rebate rules.
What employers should do if they receive a MLR Rebate
The rules governing MLR rebates can be complex and require careful analysis, often with the assistance of ERISA counsel. Employers acting as policyholders should evaluate:
- Who is entitled to the rebate: current participants, former participants, or both.
- How the rebate should be applied: cash distribution, premium reduction, or premium “holiday.”
- The tax consequences: for both the employer and employees.
- Communications to participants: addressing carrier-issued notices and employer decisions.
How much will the rebate be?
Carriers calculate MLR results on a state-by-state basis and by market segment (individual, small group, large group). Rebates are not determined by plan type (e.g., HMO vs. PPO) or by individual policyholder. The carrier will notify employers of the rebate amount.
A carrier is not required to issue rebates below $20 per subscriber (or $5 if paid directly to an enrollee). This de minimis rule applies only to carriers, not to employers redistributing participant amounts.
Will employees receive a notice?
Yes. Carriers must send a standardized notice to all current enrollees who were covered during the MLR reporting year. While employers are not obligated to issue their own notice, many choose to do so in order to clarify how the rebate will be applied.
Sample language might read:
“Employees should have received a rebate notice from [Carrier]. [Employer] received a rebate of $____. Any portion of this rebate attributable to employee contributions will be applied to [reduce future premiums / provide a payroll credit] in accordance with applicable legal requirements.”
What form will the employer rebate take?
Carriers may issue rebates as:
- A premium credit (reduction of future premiums)
- A lump-sum check
- A direct reimbursement to the account used for premium payments
- A premium holiday (suspension of premium obligations), if permitted under state law
When will rebates be issued?
Carriers must distribute rebates by September 30, 2025. If a rebate is late, carriers must also pay interest at the greater of 10% annually or the Federal Reserve lending rate.
Must rebates be shared with participants?
Yes, unless the employer paid 100% of the premium. Any portion tied to employee contributions is generally considered a plan asset under ERISA and must be handled under fiduciary standards.
Are ERISA and non-ERISA plans treated differently?
ERISA Plans: Rebates attributable to participant contributions are plan assets, and employers must allocate them in a way that is reasonable, fair, and objective. Rebates may be distributed to current participants only if extending to former participants would be administratively burdensome or impractical.
Non-ERISA Plans (governmental and church plans): Carriers must obtain written assurance that rebates will be used for the benefit of subscribers. Alternatively, carriers may pay rebates directly to subscribers.
What is the timing and method of distribution?
Employers must apply rebates to participants within three months of receipt. Options include:
- Reduce future premiums (simplest and most tax-efficient).
- Cash payment to current or former participants (administratively complex and taxable).
- Benefit enhancement or plan expense payment, if permitted.
Are there any tax implications?
- Employees (pre-tax contributions): Rebates reduce pre-tax premiums, increasing taxable wages, or if paid in cash, increase taxable income.
- Employees (after-tax contributions): Rebates are generally not taxable.
- Employers: Rebates used for plan benefits are typically not taxable but should be reviewed with a tax advisor.
Key takeaways for employers
If your organization receives an MLR rebate this fall, act promptly to confirm the amount, determine the portion attributable to employees, and select a compliant distribution method. Careful handling helps avoid fiduciary issues and ensures employees receive their fair share.
- Rebates must be issued by carriers by September 30, 2025.
- Employers must share rebates tied to employee contributions within three months of receipt.
- ERISA fiduciary rules apply to insured ERISA-covered plans.
- Premium reductions are usually the easiest and most compliant way to apply rebates.
- Employers should consult ERISA and tax counsel before distributing rebates.
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