For the past few weeks, we’ve been talking a lot about medical loss ratio (MLR) rebate distribution. The Affordable Care Act (ACA) requires health insurers to give MLR rebates back to policyholders when they didn’t spend enough of the prior year’s premiums on healthcare claims and quality expenses. The topic of MLR rebate distribution keeps coming up because it is rebate season—September 30th is the annual deadline for insurers to distribute funds to eligible policyholders. Plus, this year, there is more rebate money being given back than ever before. So lots of employers just got checks in the mail.

According to a Kaiser Family Foundation analysis, insurers will be issuing a record-high $1.3 billion in rebate checks this fall to compensate for 2018 coverage. Employer group policyholders from 41 states will get $600 million of that money. Rebate amounts will vary on a group-by-group basis, but the average rebate for small groups in 2019 is $1,190, and for large companies, it is $10,660. And no matter what the amount is on the check, every business owner who gets one wants to know what they are supposed to do with it.

As with most things ACA-related, there are no simple answers when it comes to MLR rebates. Employers sponsoring health plans generally have a fiduciary responsibility to figure out what to do with the money and handle it appropriately. There is one set of distribution rules that apply to the vast majority of all group health plans—all of the ones subject to the Employee Retirement Income Security Act (ERISA) —and another set of rules for state and local government and church plans.

For ERISA plans, the most important thing to do when it comes to MLR rebates is document, document, document. The best way for a plan sponsor to show they’ve met their fiduciary responsibility is to develop an MLR rebate distribution policy and include that process in their wrap plan document. Acting quickly is also critical. If the MLR rebate distribution is a plan asset, it must be distributed within 90 days in almost all cases to avoid triggering ERISA trust requirements.

From a practical perspective, the first thing an employer should do is look to see what name is on the rebate check. If it is payable to the group health plan itself, then all of the money is considered to be “plan assets.” If the plan sponsor or company paid the group health plan premiums directly, then some (but probably not all) of the rebate is a “plan asset”—unless the plan document says otherwise. If a wrap plan document specifies who controls the rebate funds, then that language prevails. Otherwise, the portion of the rebate attributable to “plan assets” must be split amongst those who paid towards the cost of coverage during the plan year according to federal MLR rebate guidance.

In ERISA plans, plan assets in the form of an MLR rebate must be distributed for the exclusive benefit of participants and beneficiaries in the following three ways:

  1. The rebate can go to the participants under a fair and equitable allocation method, such as a cash payment to the employees.
  2. The employer can apply the rebate by declaring a premium holiday for a specified period.
  3. The employer can use the rebate to provide enhanced benefits for plan participants.

The Department of Labor does suggest that they prefer option number one, but ultimately, the plan sponsor has to determine which choice is in the best interest of the entire group plan.

We’ve noticed that the plan sponsors with the most questions about MLR rebate distribution are often the ones whose rebate is for a relatively small dollar amount. If the overall rebate is very minimal—$20 or less for a group health plan—then the health insurance carrier isn’t even required to pay it out. However, for any amount greater than that, the traditional rules still apply. When deciding what to do, the plan administrator must weigh what is most cost-effective. They also have to consider the fairest means of distribution for all of those who contributed towards premium costs. Ultimately, their fiduciary responsibility is to act in the best interest of the plan and to follow the plan documents. So for minimal MLR rebates, employers often decide to use the money to provide enhanced benefits to health plan participants. Any other means of distribution would be too expensive and complicated.

To put it another way, for any employer who ever wondered if it would be okay to use a $25 MLR rebate check to buy each employee a banana, the answer is yes. But if you know an employer who wants to do something like that, then you need to make sure their plan document reflects such a decision-making process. Fortunately, you have a friend who knows how to make that happen!