Medical Loss Ratio Rebates:
What Plan Sponsors Need to Know

If you are the sponsor of an insured ERISA health plan, you might receive, or perhaps you have already received, a rebate check from your insurer. Before you cash that check, be sure you understand why you received it and what you need to do with it.

As a part of the Patient Protection and Affordable Care Act, health plans must provide rebates to enrollees if the plan's medical loss ratio (MLR) does not meet the minimum standards for a given plan year. Insurers are currently issuing premium rebate checks for not meeting MLR standards in 2011.  

Please note that insurers are also required to send a notice to each of the employees who participated in the plan in 2011, including terminated employees who no longer work for you. This notice will inform these affected participants of the rebates, so be prepared to respond to questions from confused current and former employees.

Both the Department of Labor and the IRS have issued recent guidance regarding what you should do with these checks, because the premise is that plan sponsors who receive rebates must share with plan participants that portion of the rebate that constitutes "plan assets."   This certainly makes the rules more complicated as you are subject to the ERISA "plan asset" rules and fiduciary and prohibited transaction standards.

As the plan sponsor, you are responsible for properly allocating the rebates among plan participants. Do not assume you can keep the entire amount. Unfortunately, there is no de minimis amount, so if you receive a rebate you are going to have to figure out what to do with the funds.

As the ERISA plan sponsor, you need to consider the following five questions. Click here to review general options regarding these issues, but contact your WK advisor for more specific guidance.

1. How can the rebate check be used?
2. How much of the rebate must be paid to plan participants and how much can you as an employer keep, if any?
3. How many different policies do you have under your plan and which ones did you receive the check(s) for?
4. Should the rebate be allocated to just current 2012 plan participants or both prior year (2011 rebate origination year) and current plan participants?
5. How much time do I have to pay the refunds?

Not surprisingly, how you decide to allocate your rebate has corresponding tax consequences.  The IRS has issued a set of FAQs to address the issue of the MLR rebates, but the tax consequences as set out in the FAQs are consistent with fundamental principles of federal income taxation. You will need to consider your choice of the form of the rebate and its corresponding tax implications, based upon whether participants pay their share of premiums on a pre-tax or after-tax basis.

Determining how to properly handle the MLR rebates is not easy. If you have questions about this or other aspects of the Patient Protection and Affordable Care Act, contact your WK advisor at (573) 442-6171 or (573) 635-6196.

Click here for a printer-friendly PDF version of this Client Alert and a flyer containing more detail.

Last updated: July 18, 2012