ACA Medical Loss Ratio Rebates

September 23, 2016


The Affordable Care Act (“ACA”) requires health insurers to spend a minimum percentage of the premiums they collect every calendar year on health care services and certain quality improvements for enrolled members. This percentage, called the Medical Loss Ratio (“MLR”), is 85% for large groups over 50 employees and 80% for small groups under 50. Insurers are required to issue rebates no later than September 30 to enrolled members or groups if this percentage does not meet minimum standards.


If your company received a rebate check, you will need to consider how to apply the money in a manner that complies with applicable law. In general, policyholders will be required to apply the rebates to appropriate uses within 90 days of when the rebate check is received. You will also need to be prepared to address the issue with your employees and answer their questions.

Notices Sent to Plan Sponsor AND Plan Participants
Insurers send notices and the rebates – if earned -- to the group policyholder (plan sponsor), as well as notices to each of the employees who participated in the plan. (This includes terminated employees who no longer work for the company.)

Even if a company does not receive a rebate, insurers must send notices with general MLR information to each policyholder and subscriber of a group health plan and to each subscriber in the individual market. This means that even if your group health plan does not receive a MLR rebate, your plan participants will receive a MLR notice from the carrier, so you may get questions from confused participants.

How to Distribute Rebates
Plan sponsors are responsible to properly allocate the rebates among plan participants. ERISA plan sponsors that receive MLR rebate checks from their insurers must make four determinations:

  • How much of the rebate must be paid to plan participants, and how much can the employer keep? 

  • Must or should the rebate be allocated to both prior year and current year participants? 

  • How may the rebate be used? 

  • When must the rebate be paid? 

ERISA rules require that “plan assets” be used solely for the benefit of plan participants and beneficiaries. Thus, plan sponsors must first determine what part of any MLR rebate constitutes “plan assets.” Even if you receive a MLR rebate check from your insurer, do not assume you can use the entire amount for corporate purposes. Second, if any amount of the rebate is “plan assets” you must decide how to allocate that amount among current and/or former participants and how to use the money for the benefit of participants and beneficiaries (e.g., whether to pay rebates, reduce premiums, or fund enhanced benefits).

The Department of Labor (“DOL”) issued the following guidance on these issues:

  1. How much of the rebate must be paid to plan participants, and how much can the employer keep?

    If the plan or trust is the policyholder (which is not the case for most ERISA plan sponsors), the entire rebate is plan assets, unless there is specific plan or policy language to the contrary. Plan assets must be used only for the benefit of plan participants and beneficiaries or to pay reasonable administrative expenses. The plan sponsor can keep none of the rebate for itself if the plan or trust is the policyholder. 

    If the plan sponsor is the policyholder (as is the case for most ERISA plan sponsors), it must first review plan or policy language to determine what portion of the rebate is plan assets. If the documents are silent or unclear, the determination will likely be based on what percentage of total premiums were paid by plan sponsors and participants in the past. For example, if the plan sponsor paid 60% of total premiums in the previous year and participants paid 40%, then 60% of the MLR rebate would belong to the plan sponsor and 40% would be plan assets that must be used for plan participants. 

  2. Must or should the rebate be allocated to both prior-year and current-year participants?

    The plan fiduciary may allocate the MLR rebate only to current participants — and not to former participants — if the fiduciary finds that the cost of distributing amounts to former participants approximates the amount of the proceeds. The employer is not required to pay part of the rebate back to former employees. 

    The plan sponsor can decide, subject to ERISA fiduciary rules, to pay the rebate to:

    o Only current year participants, or
    o Current employees who are current-year participants and were prior-year participants, or
    o Current employees who are current-year participants, and to all individuals who were prior-year employee participants (even if they are now former employees).

    If the employer decides to allocate the rebate only among current participants, the allocation must be based on a reasonable, fair, and objective allocation method. The DOL’s rules allow plan sponsors to divide the rebate or refund in any of the following three ways, so long as they meet ERISA fiduciary standards:

    o Evenly among subscribers – this will be the easiest and most straightforward to calculate; or
    o Based on each subscriber’s actual contributions to premium; or
    o In a manner that reasonably reflects each subscriber’s contributions to premium

  3. How may the rebate be used? 

    Employers may find that reducing premiums for plan participants in the upcoming year is the easiest way to administer the rebates. Since the intent of the MLR provision is to return money to those individuals who paid premiums in the prior year, one obvious way to apply the rebate is to provide cash amounts to participants (either current year and/or prior year participants). If cash rebate amounts to individuals are de minimis or would result in tax consequences to participants or the plan, the fiduciary may use the rebate for other permissible plan purposes including applying it toward future participant premium payments or toward benefit enhancements. 

  4. When must the rebate be paid? 

Plan fiduciaries should apply MLR rebates that are plan assets within three months of the date the MLR check is received from the insurer.

Next Steps for Plan Sponsors of Insured ERISA Plans

  1. Consider the options described above (e.g., allocating the rebate to current-year and prior-year participants or only to current-year participants). 

  2. Amend your written plan document and summary plan description to specify how the plan assets portion of the rebate will be determined (e.g., the percentage of any rebate that will be “plan assets” is the same percentage of total premiums that were paid by participants), the methods by which rebates may be provided (e.g., cash payments or premium reductions), and/or whether the plan assets portion can or will be applied toward plan administrative expenses paid by the employer. 

  3. Notify your plan participants as to whether or not your plan received a MLR rebate. 

  4. Implement the method you have selected (e.g., cash rebates, premium reductions or benefit enhancements) within 90 days after you receive the MLR rebate from the carrier.  

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