Medical Loss Ratio Rebate: 3 Things To Know Before Cashing Your Check

One important provision of the healthcare reform law is the “medical loss ratio” (MLR) rebate, which requires insurers to spend a minimum amount of premiums on medical claims, or refund the difference to policyholders. From law firm Schnader:

“Under the Patient Protection and Affordable Care Act, health insurance issuers in the group or individual market must provide an annual rebate to enrollees if the issuer’s medical loss ratio fails to meet minimum percentages. These minimum percentages are 85 percent in the large group market and 80 percent in the small group or individual market. The rebates may either be paid in cash or used to reduce the amount of an employee’s health insurance premium payment.” (What an Employer Should Do with Its Health Insurance Rebate Check by Schnader Harrison Segal & Lewis LLP)

By now, employers with healthcare plans that are due refunds should have received checks from their insurers (the deadline was August 1). What to do with the money? Three things:

1. Determine who owns the rebate:

“If the plan or a trust is the policyholder under the insurance contract, the rebate generally will be considered a plan asset and must be used for the benefit of plan participants. If the employer is the policyholder, the employer must look to the plan language to determine how the rebate may be used. If the plan language can be fairly read to provide that some or all of the MLR rebate belongs to the employer, then the employer may retain such amount and use it for any purpose.” (Medical Loss Ratio Rebates: The Clock Is Ticking by Morgan Lewis)

2. Distribute rebates as appropriate:

“If premiums are paid with employer and employee contributions, rebates generally need to be apportioned. The employer should look to the actual insurance policy, other related materials and communications with participants to determine if there is guidance on how to allocate the rebates. Employers generally have the flexibility to not distribute rebates to participants, but instead apply the amounts received against future contributions or toward benefit enhancements.” (The Supreme Court Ruled on Health Reform – Now What is an Employer to Do? by Saul Ewing LLP)

3. Pay the required taxes:

“If employees pay premiums on a pre-tax basis, an MLR rebate is subject to federal income and employment tax, regardless as to whether the rebate is in the form of a premium reduction or a cash distribution. If employees pay premiums on an after-tax basis, an MLR rebate is generally not subject to federal income or employment tax, regardless of whether the rebate is in the form of a premium reduction or a cash distribution, with one exception. If the employer provides the rebate only to those employees who participated in the group health plan both in the year the premiums being rebated were paid and in the year the MLR rebates are paid, and an employee deducted the prior premium payments on his/her Form 1040 in the year the premiums were paid, the MLR rebate is taxable to the extent the employee received a tax benefit from the deduction (but it is not subject to employment taxes).” (Navigating Health Care Reform: Health Care Reform’s Medical Loss Ratio Rebates and Their Impact on Employer Group Health Plans by Snell & Wilmer L.L.P.)

Additional analysis:

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