Released July 10, 2012I Download as a PDF
July 10, 2012 -- One of the goals of the Affordable Care Act is to incent health insurers to use the bulk of premium dollars for medical services; these provisions are known as the medical loss ratio (MLR) rules. The following Questions and Answers will attempt to distill a complicated topic into some practical information.
What are the MLR Rules?
Specifically, insured plans must spend at least 85% of premium dollars paid by the large group market (over 100 employees) on medical claims; 80% in the small group (100 or fewer employees) and individual markets. If the plan does not meet the required target, a rebate is owed to the policyholder and subscriber. To this end, it is important to think about how the rebate can be used and how it must be allocated between employer and employee.
Who is subject to the MLR Rules?
The MLR rules only apply to insured grandfathered and non-grandfathered health plans.
What is the effective date of the MLR Rules?
These medical loss ratio rules first applied to the 2011 plan year and the first rebate is due by August 1, 2012.
As an employer-policyholder, what do I do if I receive a refund?
As a general statement, any rebate owed to the policyholder must be shared proportionately among those who paid for the coverage, specifically between the employer and the insured. In very simple terms, if the employer pays 60% of the premium and the employee pays 40% of the premium, the rebate must be shared 60/40.
For plans subject to ERISA, it is important to know whether the rebate constitutes plan assets. If the ERISA plan is funded through a trust, the rebate is a plan asset and must be returned to the trust to be used for the exclusive benefit of plan participants. Generally, plan assets must be held in trust. To avoid the trust requirement, the rebate must be used to purchase benefits within 3 months of receipt.
If the ERISA plan is not funded through a trust, the portion of the rebate that relates to employee contribution is plan assets and must be used for the exclusive benefit of plan participants.
For non-federal government plans, the rebate would be paid to the policyholder (generally, the employer) and must be used to benefit plan participants to the extent the participants contributed to the coverage.
For non-ERISA, non-government plans, such as church plans, the rebate must be paid directly to plan participants unless the entity agrees in writing to allocate the premium in accordance with the participant’s contribution.
How can the rebate be used?
The rebate can be used to provide a premium credit, sometimes called a “premium holiday”. Or, the rebate can be paid in cash.
For ERISA plans only, the rebate can be used as a benefit plan enhancement, such as to purchase additional benefits. It may be permissible for ERISA plans to use the rebate to offset administrative expenses if the relevant plan so provides.
What are the tax consequences of the rebate?
Generally, if the premium for the year to which the rebate applies was paid with pre-tax dollars through a cafeteria plan, as is most typically the case for employer plans, the rebate, generally, is taxable.
If the rebate is used to provide a premium holiday, the tax consequence is benign in that it is simply handled by the increased salary that the individual receives by virtue of not having to pay premium.
If the rebate is paid in cash, it is taxable cash.
For ERISA plans utilizing the rebate to provide benefit enhancements, if the benefits constitute health benefits, then the enhancements should be excludible from the employee’s income.
Next Steps
The plan document is the first place to look to determine how a rebate can be used. Some plan documents include specific guidance. In the absence of specific guidance, and given the administrative and tax issues that can arise, it is probably most efficient to provide a premium holiday. If this is going to be done, it is very important to review any applicable cafeteria plan to ensure it allows election adjustments due to a change in cost of coverage. Most cafeteria plans do include a provision that allows salary reduction elections to be automatically increased or decreased due to a change in cost. If the change of cost is significant, many cafeteria plans allow a revocation of existing election and a new election to be made.
Plan sponsors should work closely with their legal and tax advisers to resolve any questions regarding the proper allocation and taxation of rebates.
Background CBIZ Health Reform Bulletins on MLR Rules:
About the Author: Karen R. McLeese is Vice President of Employee Benefit Regulatory Affairs for CBIZ Benefits & Insurance Services, Inc., a division of CBIZ, Inc. She serves as in-house counsel, with particular emphasis on monitoring and interpreting state and federal employee benefits law. Ms. McLeese is based in the CBIZ Leawood, Kansas office.
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