Look out for your Medical Loss Ratio Rebates!

Under the new health care law employers and health insurance policy holders can look forward to insurance premium rebates in 2012. The Affordable Care Act requires health insurers to spend at least a certain minimum percentage of their premium dollars on medical claims and quality improvement.  Insurers in the large group market must achieve a medical loss ratio (“MLR”) of 85%, while insurers in the individual and small group markets must achieve an MLR of 80%. The MLR is a measure of an insurers efficiency.  If an insurer spends more than 15% (large group market) or 20% (individual/small group market) of the premiums on overhead and salary then the insurer will be forced to issue rebates to the policy holders. The first of these MLR rebates were due in August of 2012, so plan sponsors should begin planning how to handle potential rebates they might receive.

Which Plans Are Covered?

The MLR rules apply to all fully insured health plans (even grandfathered plans).  Self-funded plans are exempt.  Certain types of insured coverage, such as fixed indemnity, stand-alone dental and vision, and long-term disability, are also exempt.
If a rebate is payable to a group policyholder, the insurer must issue a single rebate check to the plan.  The plan sponsor must then decide whether and how to pass the rebate on to the plan’s participants.

Calculating a Medical Loss Ratio

The calculation of an MLR is not specific to each policyholder, but is a state-by-state aggregate of the insurer’s overall MLR within a particular market segment (e.g., individual, small group, or large group).  Thus, even if a specific employer plan has a low MLR (i.e., favorable claims experience); the employer may not necessarily receive a rebate.

States are permitted to set higher MLR targets.  In those states, insurers must comply with the more stringent state requirements.

Notices to Subscribers

Insurers must send written notices to their subscribers, informing them that a rebate will be issued.  Plan sponsors should be prepared to respond to questions from participants who receive these notices, particularly if the sponsor does not intend to share any of the rebate with those participants.
Likewise, even if an insurer meets the MLR requirements, it must notify subscribers that no rebate will be issued.  This notice must be included with the first plan document provided to enrollees on or after July 1, 2012.  Model notices are available on the Centers for Medicare & Medicaid Services website.

How to Allocate MLR Rebates

Generally most health plans are part of a “Cafeteria Plan” model so the health care benefits are commonly tax free to the recipients.  Also, most plans require that an employee  cover a portion of the costs through payroll deductions.  If the employer pays 100% of the plan, the rebate will reduce the plan cost in the year received.  The calculation is more complex where the employee pays a portion of the plan.

If the employee pays a portion of the costs through payroll deductions then part of the rebate should be reimbursed to the employee. What happens if the employee is no longer working for the company when the rebate arrives?

Per the Department of Labor regulations the rebate is owed to the employee so the employer is required to make a concerted effort to remit the payment to the applicable recipient. There is an exception to this rule if either the amount is diminimus, or if the employee cannot be found.

Tax Reporting of MLR rebates

If  insurance premiums were previously deducted from the employee’s wages on a pre-tax basis the rebate would be considered taxable compensation (subject to Social Security and Medicare taxes.)

Self employed individuals that receive a rebate will need to report the rebate as taxable income. If the  health insurance expense did not originally reduce self employment income directly the rebate will not be subject to self employment tax.
Individuals that deduct health insurance premiums as an itemized deduction on their personal return will also be required to report the rebate as taxable income.