What Health Plan Sponsors Should Know About Medical Loss Ratio Rebates

Employers that sponsor group health insurance plans should be receiving notices from their insurance company regarding the medical loss ratio (MLR) requirements created by the Patient Protection and Affordable Care Act (PPACA). For some plan sponsors, the law will result in a rebate of premiums paid in 2011.

MLRs are an effort by the federal government to ensure that health insurance consumers are getting the greatest value for their premium dollars, and that insurance companies are not spending too much on administration, marketing, and other activities that do not directly benefit consumers. What the requirements mean for an employer/plan sponsor depends on a number of factors, including the size of the plan, the type of employer, and whether the plan is subject to the Employee Retirement Income Security Act (ERISA).

In every case, planning, education, and coordination of efforts are needed to make the rebate program work the way it is intended.

The goal is limiting administrative costs

The PPACA’s MLR standard requires insurance companies in the individual and small group health insurance markets to spend at least 80 percent of premium dollars on medical care and quality improvement activities. This amount increases to 85 percent for insurance companies serving large groups.

Insurance companies that do not satisfy the MLR standards in 2011 must provide a rebate to their customers. Companies offering group or individual health coverage must comply, but not self-funded group health plans or limited-scope dental or vision policies.

Insurance companies that meet or exceed the MLR standards must also provide a one-time, basic notice for the 2011 MLR reporting year, informing policyholders that the insurance company has met the minimum MLR standards. This notice must be sent to enrollees on or after July 1, 2012. The primary purpose of the notice is to educate consumers about MLR, and direct them to the Department of Health and Human Services website for additional information.

Who gets the rebate?

For individual policies, the insurance company must provide the MLR rebate to individual enrollees. For group policies in both the large and small group markets, the insurance company must generally provide the rebate to the policyholder, who, in turn, must ensure that the rebate is used for the benefit of plan participants. Rebates may be in the form of a premium credit, a lump sum payment, a refund to a credit or debit card, or as a pre-paid debit card.

Calculating the rebate

How the rebate amount is calculated depends on whether the plan is subject to ERISA, and whether the plan is a sponsored by a commercial entity, state or local government, or a church. ERISA plans must determine if rebates are plan assets, a question that hinges on the percentage of the premiums paid by the participant and the employee. Rebates to state and local government plans, church plans, and terminated plans follow different sets of rules, with participants sharing in the rebate based on the percentage of the premiums they pay.

Federal tax consequences for employees

If employees pay premiums on a pre-tax basis, an MLR rebate is subject to federal income and employment tax, regardless of 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 (whether cash or a premium reduction) is generally not subject to federal income or employment tax.

Educating employees about the rebate

Rather than waiting for employees to begin asking about MLR rebates, employers can take steps to educate them and streamline the rebated disbursement process.

  • Notify employees that they will be receiving a notice from their insurance company
  • Determine if an MLR will be due (based on information from the insurance company)
  • Determine if a rebate is a plan asset (and subject to ERISA requirements)
  • Review 2011 year-end payroll records for annual employee contributions
  • For each plan receiving a rebate, calculate the portion of premiums paid by participants
  • Determine which participants will receive a rebate and how much they will receive
  • Draft employee communication to explain what the rebate is, why they are receiving it, and the amount they will receive
  • Distribute the rebate to participants using a fair and objective allocation method
  • Consult legal counsel to determine if plan documents should be revised for the future

How we can help

Our employee benefit professionals are well-versed in the calculation of MLR rebates, and we’re ready to help plan sponsors create and implement efficient and cost-effective programs.

Download our white paper, Medical Loss Ratio Rebates.


Anita Baker, Employee Benefit Plans Managing Partner
anita.baker@cliftonlarsonallen.com or 480-615-2410

Published: 8/7/2012