MLR Rebates Due By Sept. 30
The Affordable Care Act (ACA) established medical loss ratio (MLR) rules to help control health care coverage costs and ensure that enrollees receive value for their premium dollars. The MLR rules require health insurance issuers to spend 80-85 percent of premium dollars on medical care and health care quality improvement, rather than administrative costs. Issuers that do not meet the applicable MLR standard must provide rebates to consumers.
While any fully insured employer or individual who had an active health insurance policy during the prior calendar year is eligible for a rebate, not everyone will receive a payment. Issuers are required to pay rebates by Sept. 30, 2016, based on their 2015 MLRs. Employers that expect to receive rebates should review the MLR rules and decide how they will administer them.
An issuer that does not meet its MLR standard must provide a rebate to the policyholder, which is typically the employer that sponsors the fully insured plan in the group health plan context. For current enrollees, issuers may provide rebates in the form of a lump-sum payment or a premium credit (that is, a reduction in the amount of premium owed).
Also, to avoid having to pay a rebate, an issuer may institute a “premium holiday” during an MLR reporting year if it finds that its MLR is lower than the required percentage. According to HHS, an issuer may use a premium holiday only if it is permissible under state law. Also, any issuers using premium holidays must meet certain other requirements, such as providing the holiday in a nondiscriminatory manner and refunding premium overpayments.
How an employer should handle any MLR rebate it receives from an issuer depends on the type of group health plan (an ERISA plan, a non-federal governmental group health plan, or a non-ERISA, non-governmental plan (church plan)) and whether the rebate is considered a plan asset.
Tax Treatment of Rebates
The Internal Revenue Service (IRS) issued a set of frequently asked questions addressing the tax treatment of MLR rebates. In general, the rebates’ tax consequences depend on whether employees paid their premiums on an after-tax or a pre-tax basis.
After-tax Premium Payments If premiums were paid by employees on an after-tax basis, the rebate will generally not be taxable income to employees and will not be subject to employment taxes. This tax treatment applies if the rebate is paid in cash or if it is applied to reduce current year premiums. However, if an employee deducted the premium payments on his or her prior year taxes, the rebate is taxable to the extent the employee received a tax benefit from the deduction.
Pre-tax Premium Payments If premiums were paid by employees on a pre-tax basis under a cafeteria plan, the rebate will generally be taxable income to employees in the current year and will be subject to employment taxes. This is the case whether the rebate is paid in cash or is applied to reduce current year premiums. A premium reduction in the current year will reduce the amount that an employee can contribute on a pre-tax basis. Thus, there is a corresponding increase in the employee’s taxable salary that is also wages subject to employment taxes.