What should employers do with the Medical Loss Ratio (MLR) rebates received from the carrier?

Medical Loss Ratio (MLR) rebates issued for ERISA-covered health plans may be considered “plan assets,” and therefore, the employer or the administrator of the group health plan may have fiduciary responsibilities regarding the use of the refunds.

If the employer paid 100% of the premium, none of the rebate would be considered plan assets and the entire amount could flow directly back to the employer. The most common situation, however, is when the employer and participants/employees contribute toward the cost of the coverage. In this case, the portion of the rebate that is attributable to participant contributions must be treated as plan assets, which must be used for the exclusive benefit of the employees covered by the policy.

The employer first calculates the percentage of total premium contributed by participants, which includes employee payroll deductions, COBRA premiums paid by participants, premiums paid by participants during an FMLA leave, and any other payment made toward the premium by a participant. The resulting percentage is then applied to the rebate amount to determine the portion of the rebate that must be distributed to plan participants and the portion that may be retained by the employer.

The employer would then need to determine which participants should receive the rebate. The participants’ share of the rebate must be distributed to the participants and beneficiaries who were covered under the policy to which the rebate applies. If the cost of distributing shares of a rebate to former plan participants approximates the amount of the rebate payment, the employer may decide to allocate the rebate payments to current participants.

Finally, the employer would need to decide how to allocate the employees’ share among the participants. The allocation is not required to exactly reflect the premium contribution of individual participants. In deciding on an allocation method, the employer may properly weigh the costs to the plan and the ultimate plan benefit as well as the competing interests of participants or classes of participants provided such method is reasonable, fair and objective. In most situations, the most fair, reasonable, and objective method of allocation may be as easy as evenly dividing the rebate over all current participants of the plan, even if those participants made different employee contributions to the plan.

If distributing cash payments to participants is not cost-effective (e.g., payments to participants are of de minimis amounts, or would give rise to tax consequences to participants or the plan), the employer may utilize the rebate for other permissible plan purposes including applying the rebate toward future participant premium payments or toward benefit enhancements.

All distributions must be made within three months of receipt of the rebate by the employer in order to avoid additional Department of Labor requirements. Employers should document how allocations were distributed and that the distribution was made within the three-month window.