How to Calculate MLR Rebate for Employees
Navigate the complexities of MLR rebates. Learn how employers accurately calculate and distribute employee portions, ensuring compliance and fairness.
The Affordable Care Act (ACA) introduced a provision known as the Medical Loss Ratio (MLR), designed to ensure that health insurance companies allocate a significant portion of their premium revenue towards actual medical care and quality improvements. This measure aims to limit the amount insurers spend on administrative overhead, marketing, and profits. When an insurer’s spending on medical care falls below a certain threshold, they are required to issue rebates to policyholders, which often include employers and, subsequently, their employees.
Understanding Medical Loss Ratio
The Medical Loss Ratio (MLR) represents the percentage of premium dollars a health plan spends on medical claims and activities that enhance healthcare quality. Under the ACA, specific MLR thresholds are mandated for different market segments. Insurers in the individual and small group markets must spend at least 80% of their premium income on medical care and quality improvement. For large group plans, this threshold is 85%.
Insurers calculate their MLR by dividing total expenditures on clinical services and quality improvement by total premium revenue, after subtracting deductions like federal and state taxes and licensing fees. This calculation is based on a three-year rolling average of an insurer’s performance, not on a single year’s data. Rebates are distributed by September 30th of the year following the end of the MLR reporting year.
Determining Your Employer’s Rebate
Employers with fully insured group health plans may receive an MLR rebate from their health insurance carrier. The insurer determines the total rebate amount for a specific group policy based on aggregate market data within a state, not on an individual employer’s claims experience. The insurer sends a notice to the policyholder, generally the employer, by August 1st, indicating if a rebate is due.
Rebates are issued to the policyholder, typically the employer, as a premium credit or a lump-sum payment. Most group plan rebates are lump-sum. This initial rebate is the total amount received by the employer before any allocation to employees. Employers with self-funded plans are exempt from MLR requirements because they assume the financial risk for claims directly.
Calculating Individual Employee Rebate Amounts
When an employer receives an MLR rebate, a step involves determining the portion that constitutes “plan assets” under the Employee Retirement Income Security Act (ERISA), especially if employees contribute to premiums. If employees pay any portion of the premium, that portion of the rebate is a plan asset and must be used for the benefit of those plan participants. If the employer paid 100% of premiums, the entire rebate may be retained by the employer.
To calculate the employee portion, first, determine the total premium contributions made by employees for the health plan during the rebate period. This includes payroll deductions, COBRA premiums, and premiums paid during FMLA-protected leave. Next, identify the total premium contributions made by the employer for the same period. Calculate the percentage of total premiums contributed by employees.
Apply this employee contribution percentage to the total MLR rebate received by the employer to determine the “employee portion.” For example, if employees contributed 25% of total premiums for the year, then 25% of the MLR rebate would be a plan asset. After determining the total employee portion, employers have discretion in how to divide this amount among individual employees, provided the method is reasonable, fair, and objective. This division can be done by allocating the rebate evenly among all current plan participants, or proportionally based on each employee’s premium contributions, such as single versus family rates.
Rebate Distribution and Tax Considerations
Once individual employee rebate amounts are calculated, employers must distribute these funds within 90 days of receipt to comply with ERISA rules. Failure to distribute within this timeframe may require the employer to establish a trust to hold the plan assets. Employers have several permissible methods for distributing rebates to employees. They can issue direct cash payments, apply the rebate as a credit towards future health insurance premiums, or use the funds to enhance existing health benefits.
When distributing rebates, employers have discretion to include current participants, or current and former participants, including COBRA beneficiaries. However, if the administrative cost of distributing small amounts to former employees outweighs the benefit, employers may allocate those amounts to current employees. Insurers send notices to policyholders and enrollees when a rebate is issued, but employers are not required to send a separate notice, though doing so can proactively address employee questions.
The tax implications for employees receiving MLR rebates depend on how their premiums were originally paid. If employees paid their health insurance premiums with pre-tax dollars, such as through a Section 125 cafeteria plan, the rebate received is taxable income to the employee. This amount must be reported on the employee’s Form W-2 and is subject to federal income and employment taxes. If the rebate is applied as a reduction in future pre-tax premiums, the employee’s taxable salary effectively increases by that amount. Conversely, if employees paid premiums with after-tax dollars, the MLR rebate is not taxable income to the employee, as it is viewed as an adjustment to the purchase price of the insurance. This holds true whether the rebate is received as a cash payment or a reduction in future premiums.