What Employers Need to Know about Medical Loss Ratio Rebates in 2024

Insurance carriers must meet specific Medical Loss Ratio (“MLR”) thresholds, which require that a portion of every premium dollar collected on major medical plans be directed toward medical care and health quality improvement. Generally, this means spending at least 85 cents per dollar in large group markets and 80 cents per dollar in small group markets. When these thresholds are not met, carriers issue rebates, which employers may receive as a premium credit or a check.

For 2024, carriers are required to send any applicable MLR rebates to employers by September 30. Employers receiving rebates must also allocate the portion related to employee contributions back to employees and manage any tax implications. Note that this requirement does not apply to self-funded plans.

What Should Employers Do with an MLR Rebate?

The rules governing MLR rebates can be complex and often require consultation with ERISA counsel. Employers who receive an MLR rebate as policyholders should carefully consider the following:

• Who will receive the rebate (e.g., current vs. former participants).
• How the rebate will be distributed (e.g., as a premium reduction or direct cash payment).
• Any tax impacts associated with the rebate (for both the employer and the participants).
• Potential communications to participants regarding the rebate.

The questions below offer insights into the employer actions that may be necessary.

How Much Will the Rebate Be?

MLR rebates are calculated by carriers at the state level, based on market segment (individual, small group, or large group). Carriers do not break down rebates by specific plan types (e.g., PPO, HMO) or policyholders, so employers must rely on carriers to disclose rebate amounts.

For amounts owed to enrollees, a carrier is not required to issue rebates if the amount is under $20 per subscriber (or under $5 when paid directly to each subscriber). However, employers distributing rebates to participants are not subject to this minimum amount.

Is Communication Required?

Yes. Carriers must notify policyholders and current enrollees in a format approved by the Department of Health and Human Services (“HHS”). While employers are not required to issue notices to employees, they may want to consider informing employees about rebate-related communications from the carrier. A suggested message might be:

“Employees should have received a rebate notice from [carrier]. [Employer] has received a rebate check of $_____. The portion of this amount attributable to participant contributions will be used to [reduce future premiums] for [currently enrolled employees] in compliance with applicable regulations. These adjustments will appear in the [September _ ] payroll.”

How Will Employers Receive the Rebate?

Rebates may be provided in several forms, including premium credits, lump-sum payments, reimbursements, or, in some states, “premium holidays” (temporary premium suspensions).

When Will Rebates Be Issued?

Rebates are typically issued by September 30 each year. Late rebates are subject to interest at the greater of the current Federal Reserve lending rate or 10% annually, calculated from the original due date.

Are Employers Required to Share the Rebate with Participants?

Yes, if employees contributed to the premiums, employers must distribute a proportional share of the rebate to those employees. Employers who paid 100% of all coverage tiers may retain the full rebate.

ERISA-Covered Group Health Plans

For ERISA-covered group health plans, any portion of the rebate tied to employee contributions is considered a plan asset and must be managed in compliance with ERISA’s fiduciary guidelines. Employers must determine how to allocate plan assets fairly, balancing the costs of distributing small amounts to past employees with the interests of current participants.

Options to consider:

1. Future premium reductions for current plan participants, which is easy to administer and has minimal tax implications.
2. Direct cash payments to current participants, which are more administratively complex and have tax consequences.
3. Payments to former participants, which are also administratively complex and could have tax implications.

Employers might also explore options like providing benefit enhancements or covering certain plan costs, with advice from legal counsel.

MLR Rebate Tax Implications

If employee premiums were paid pre-tax under a cafeteria plan, the rebate may have tax implications, such as increased taxable income when it’s distributed as cash or as a premium reduction. Rebates on after-tax premium payments generally have no additional tax impact.

Employers should consult a tax advisor to confirm the specific implications for their organization.

Election Changes Due to Mid-Year Premium Adjustments

In most cases, a reduction in employee premiums due to an MLR rebate does not trigger an opportunity for employees to change elections under Section 125 rules, as MLR rebate amounts are generally modest.

Employers should ensure their cafeteria plan documents align with their intended approach, particularly if the premium adjustment is significant.