As insurance companies collect payments from U.S. employers, the profit is split into two general categories. One category is for clinical services and quality improvement, also known as the Medical Loss Ratio (MLR). The other is for administrative costs and profits (executive salaries, overhead, and marketing).
If too much of insurance companies’ profits are dumped into administrative costs, health services may suffer. To ensure that doesn’t happen, the Patient Protection and Affordable Care Act (PPACA) mandates that rebates be paid to employers and insured individuals if a certain percentage (80-85%) of insurance company profit isn’t put back into clinical services for overall quality improvement.
The rebates began to take effect in 2012, but we have seen its impact more in 2018 than in previous years. In light of this, there are a few items that employers need to be aware of in order to effectively prepare for a MLR rebate.
How Do I Know If My Company is Eligible for a Medical Loss Ratio Rebate?
Employers that are eligible for a medical loss ratio rebate should receive a letter from their insurance company, providing them with details on their rebate. There’s no need to request a rebate check. It’s also important to note that employers must let their employees know about the rebate and how they intend to distribute it.
Who Gets to Keep the Rebate?
Both current and previous employees may be entitled to a portion of the rebate received. It’s the employer’s duty to provide the portion of the rebate that is attributable to insurance premiums paid for by the employees. For example, if an employee pays for 30% of the premium through payroll deductions, they are entitled to 30% of the rebate.
How Do I Distribute MLR Rebates to Employees?
The good news is that employers have options on how to distribute rebates to employees. These options include:
- Providing a refund to employees via a check (Department of Labor guidance suggests this as the preferred method)
- Reducing employee portions of premiums
- Enhancing benefits under their plan (i.e. funding additional wellness programs or health benefits)
Whatever the employer decides, it’s important for them to keep detailed notes on how they allocate the MLR rebate and which employees receive it. Generally, employers have 90 days from the time they receive the rebate to determine how they will distribute it. For plans that have a trust or are funded through a Voluntary Employees Beneficiary Association (VEBA), there are no specific dates as to when the rebates must be distributed.
Employers do have the option to only distribute rebates to insured employees who were enrolled during the year in which the rebate was received, rather than basing the distribution on those employees that were employed in the year the rebate was calculated (the prior year).
How Much Will the Rebate Be?
Employers and employees should not expect a large rebate. In fact, the individual rebate will most likely be very small, around $20 to $30. Since the refund isn’t that much per person, employers should not spend a significant amount of time, effort, and money in order to issue the refunds.
Will the Employee Medical Loss Ratio Rebates Be Taxed?
The portion of the rebate paid to employees may be taxable to them. As a result, employers will need to determine how the premiums were paid by employees. The scenarios are as follows:
- If the employee pays for the insurance premiums with pre-tax dollars, or if they take a 1040 deduction for their premiums paid, the portion of the rebate paid to them will be treated as taxable.
- If the employee pays for the insurance premiums with post-tax dollars and they do not take a deduction on their 1040 for their premiums paid, the portion of the rebate paid to them will be treated as non-taxable.
Have you received a MLR rebate and need to distribute it to your employees? Do you have additional questions about the MLR rebate? Contact Ben Ritenour, CPA or another business professional today!