Has your organization received a check from your health insurance company recently? That’s a surprising twist—it usually works the other way, right? That check may be legitimate if it’s a rebate under the Medical Loss Ratio requirement of the Affordable Care Act (ACA).
The ACA requires insurance companies to use a set percentage of the health premiums they collect to pay for claims and activities to improve health care quality for their insured organizations. For small employers, they must pay 80% and for large employers, 85%. Money collected above these limits cannot be kept as profit by the insurer; it must be rebated to the policyholder. This is called the Medical Loss Ratio (MLR).
Once a year, the insurance company runs calculations to determine if the MLR was met and returns any excess money paid. This only applies to insured plans, not self-insured or ACA-excepted plans (for example, stand-alone dental or vision coverage).
Great, we get to keep the check! What can we do with the money?
While that’s a simple question, the answer is complicated. There’s not room here to include all the considerations; the intent of this article is to familiarize you with some of the issues so you can begin to investigate the options.
If employees contributed anything to the premium payments made to the insurer, a representative portion of the rebate is considered to be a “plan asset.” That means the money belongs to the plan, not to the employer. Other controlling factors on using the money are how your plan is set up and whether plan premiums are paid through a trust.
Considerations for ERISA Plans
If the policy is issued to the employer, and there is no plan or insurance policy language on rebates, these guidelines apply:
Plan assets must be used for the exclusive benefit of plan participants and beneficiaries, and rebate allocations have to be impartial. Options for using plan assets include refunding it to participants and beneficiaries, by giving a premium reduction or holiday, providing a benefit enhancement, or paying an actual rebate. Using it to pay plan expenses may create problems with the time deadlines for using the rebate money, so it should be researched carefully.
If the cost of giving refunds to participants is not cost-effective because the amount is de minimus or it creates a tax consequence to the participant or plan, the refund can be used for the other plan purposes mentioned above. De minimus is not defined for this situation.
Other considerations for ERISA plans
- If the organization provides multiple policies, allocate the plan asset portion of the rebate for the benefit of those covered by the plan to which the rebate relates.
- Whether or not to include former plan participants is a decision for the plan’s fiduciaries
- Tax consequences can incur from rebating the money to participants. These vary based on whether participant premiums were pre-tax or post-tax. Consult your tax advisor for guidance.
Government plans (other than the Federal Government)
These plans must use the portion of the rebate attributable to the participants’ premium amounts for the benefit of current participants within 3 months, in one of these three ways:
- Reduce the current participants’ premiums for any option the plan offers, or
- Reduce participant premiums only for those in the plan that got the rebate, or
- Provide a cash refund to participants in the plan that got the rebate
The rebate can be divided equally among participants, or by dividing by each participant’s actual contribution, or apportioning in a way that reasonably reflects each participant’s premium contribution.
Non-ERISA Church Plans
The plan must agree to distribute the rebate within 3 months as under the government plan guidelines above, or the insurer must pay out the rebate directly to the individual participants.