Carriers To Pay MLR Rebates By September 30
The Affordable Care Act (ACA) requires health insurance carriers to spend a minimum percentage of their premium dollars on medical care and health care quality improvement. This percentage, or medical loss ratio (MLR), is 85 percent for issuers in the large group market (50 + employees) and 80 percent for issuers in the small group (2-49 employees) and individual markets. Carriers that do not meet the applicable MLR standard must provide rebates to consumers.
Carriers are required to pay rebates by Sept. 30, 2019, based on their 2018 MLRs. While any fully insured employer with an active health insurance policy during the prior calendar year is eligible for a rebate, not everyone will receive a payment. The MLR rule does not apply to self-funded plans. Employers that expect to receive rebates should review the MLR rules and decide how they will administer them.
A carrier 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, a carrier may institute a “premium holiday” during an MLR reporting year if it finds that its MLR is lower than the required percentage. According to the Department of Health and Human Services (HHS), a carrier may use a premium holiday only if it is permissible under state law. Also, any carrier 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. Click here for a spreadsheet to aid in these calculations (We recommend saving the file before using).
Most, but not all, group health plans are governed by ERISA. Employers with ERISA plans should not assume that they can simply retain an MLR rebate. The Department of Labor (DOL) issued Technical Release 2011-4 to explain how ERISA’s fiduciary duty and plan asset rules apply to MLR rebates.
Non-federal Governmental Plans
Group health plans maintained by non-federal government employers (for example, state and local governments) are not governed by ERISA’s fiduciary standards. HHS’ interim final regulations on the MLR rules address how rebates for these plans should be handled.
HHS’ final 2016 Notice of Benefit and Payment Parameters changed the MLR rules to require that participants of non-federal governmental or other group health plans not subject to ERISA receive the benefit of MLR rebates within three months of receipt of the rebate by their group policyholder, just as participants of group health plans subject to ERISA do.
Non-ERISA, Non-governmental Plans (Church Plans)
HHS has also addressed rebates for non-governmental group health plans that are not subject to ERISA, such as church plans. HHS’ final regulations on the MLR rules address how rebates apply to these plans. If a church plan is covered by ERISA, the standard rules for ERISA plan assets will apply.
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.
For more information on MLR rebates, please contact your Caravus advisor.