What to Do with Medical Loss Ratio (MLR) Rebates
With all the recent and ongoing changes with relation to healthcare, we have been getting a lot of questions and we thought we’d share this with you.
Q: We just received a medical loss ratio rebate check from our health insurance carrier. In what ways are we permitted to use it? If we opt to distribute the rebate through cash refunds to participants, how should these refunds be taxed?
A: Basically, the guidance allows an employer to use the rebate in one of three ways. The employer may elect to:
Reduce the participants’ portion of the annual premium for the next plan year for all plan participants covered;
Reduce the participants’ portion of the annual premium for the next plan year for only those participants covered by the group health plan in the 2011 calendar year; or provide a cash refund only to employees who were covered by the group health plan in the 2011 calendar year.
Should the employer opt to cut refund checks (option 3 above), the employers only have to distribute rebates to current employees who participated in the plan during the 2011 calendar year under most circumstances. Employers are not required to track down former employees and attempt to provide them with a rebate if the employer finds that the cost of doing so equals or exceeds the amount of the former employee’s share of the rebate. Therefore, as long as the company’s rebate amount is not a substantial amount of money per participant, it is not required to track down previous employees.
If the cost of health insurance is shared among the employee and the employer, the rebate must be split according to the contribution formula and may only be provided to employees who participated in the plan in calendar year 2011. The employer may choose the method of distribution, as long as the method is reasonable and consistent. For example, the employer may opt to divide the rebate evenly among employees who contributed to the plan in 2011, or may choose to allocate the refund based on contribution amounts. So, it is up to the employer whether it would like to make distinctions as to types of coverage (i.e. single or family coverage) and the refund amount. It is also up to the employer whether the company pro rates the rebates based on the length of time each employee spent in the plan in 2011. We simply recommend remaining consistent among employees in this regard.
Should the employer opt to distribute the funds via rebates, we recommend doing so within three (3) months of receiving the rebate. Otherwise, the federal Department of Labor may require the employer to set up and maintain a trust for the funds.
With respect to taxes, if the employee’s premiums were taken on a pre-tax basis, then the rebate is treated as taxable wages, subject to income and employment taxes. The same does not hold true if the premiums were taken on an after tax basis.