Fully Insured Sponsors May Receive Medical Loss Ratio (MLR) Rebates

August 30, 2023

Plan sponsors of certain fully-insured group health plans may soon receive a medical loss ratio (MLR) rebate from their health insurance issuers based on calendar year 2022 results. Plan sponsors should be prepared to handle any MLR rebate received according to applicable federal rules. The MLR rule does not apply to self-funded health plans or stop-loss insurance policies. As a refresher, we have provided herein an update on the applicable MLR rules:

Issuer MLR Requirements

1. The Affordable Care Act MLR rules require health insurance issuers to spend a minimum percentage of their premium dollars on medical care and health care quality improvement. This minimum percentage (known as the MLR) is 85% for issuers in the large group market and 80% for small group issuers. The MLR rules are not at the “group specific level” but based on insurer’s book of business.
2. Issuers who did not meet the applicable MLR percentage for 2022 must provide rebates to plan sponsors by September 30, 2023. Issuers can either offer rebates as cash (lump sum) refunds or as a credit on the employer’s premium statement. The amount of any rebate depends on the issuer’s book of business and the coverage the employer has. While some rebates are small, and others may be significant, the rebates are never based on an individual employer’s specific group health plan.
3. Issuers who issue rebates must provide plan sponsors and participants with a notice explaining the rebate and how it was calculated. Language must be included in the notice for plan sponsors subject to ERISA, which informs participants that the plan sponsor may have additional fiduciary obligations and provides contact information for rebate questions. Notices sent to participants of non-ERISA plans must contain an explanation as to how the rebate will be handled. Here are the links for instructions and a template notice.

Plan Sponsor MLR Requirements

1. Fully insured plan sponsors who receive MLR rebates have options for using the rebate. Employers should not assume they can simply retain an MLR rebate. Plan sponsors are responsible for determining the appropriate way to use the rebates and must adopt distribution methods that comply with the Employee Retirement Income Security Act of 1974 or ERISA (if applicable) and other governmental guidance.
2. Most group health plans sponsored by employers in the private sector are subject to ERISA. In general, unless an employer pays the entire cost of health coverage without any employee contribution, at least a portion of the rebate will be subject to ERISA’s general fiduciary duty and plan asset rules. Any rebate amount that qualifies as a plan asset must be used for the exclusive benefit of the plan’s participants and beneficiaries. Employers can satisfy ERISA’s exclusive benefit requirement by distributing the plan asset portion of the rebate to participants under a reasonable, fair and objective allocation method. If distributing payments to participants is not feasible, the employer may use this portion of the rebate for other permissible plan purposes, such as applying the rebate toward future participant premium payments or benefit enhancements. To avoid the requirement to hold plan assets in trust, employers should use any plan asset portion of the rebate within three months of its receipt. The agencies have also issued rebate distribution guidance for non-federal governmental plans (state and local government plans) that impacts how non-ERISA plan sponsors are to use MLR rebates. Please see our Distribution of MLR Rebates Update which summarizes the agency rebate distribution guidance provided to both ERISA and non-ERISA plans.
3. Employers who receive MLR rebates should be prepared to answer questions from employees about the rebate and how it is being allocated. Although the obligation to provide a rebate notice is on the issuers, employers that sponsor group health plans may receive inquiries from employees who receive the issuer notice. For example, some employees may expect that they will receive checks reflecting their share of a rebate, or may want details on how the rebates are being allocated. Employers should be prepared for those questions. Employers should also separately maintain records to detail how they determined the MLR rebate payable to eligible plan participants and exactly who benefitted. Both ERISA-covered and non-ERISA plan sponsors are advised to consult counsel to determine the best approach for handling rebates. For more information, see Department of Labor guidance on MLR rebates available here, and IRS FAQs on MLR rebates available here.

Should you have questions about this or any aspect of healthcare reform, contact your Conner Strong & Buckelew account representative toll free at 1-877-861-3220. For a complete list of Legislative Updates issued by Conner Strong & Buckelew, visit our online Resource Center.