Under the Patient Protection and Affordable Health Care Act, health insurance issuers are required to spend a minimum percentage of their premiums, called a medical loss ratio (MLR), on health care and health care quality improvement activities. Health insurance issuers that do not meet this minimum, which is at least 80 or 85 percent of their premiums, must pay a rebate to consumers.

Under the MLR rules, which became effective in January 2011, rebates must be paid to consumers by Aug. 1 following the end of the MLR reporting year. Rebates for 2011 were due by Aug. 1, 2012. That means ABC members that are sponsors of insured group health plans may have received an MLR rebate from their issuer. The Department of Labor (DOL) has provided general guidelines on how Employee Retirement Income Security Act (ERISA) plan sponsors should handle MLR rebates and ABC Merit Choice Insurance has taken those guidelines and created a step-by-step guide to help members. 

Here is an overview of the steps ABC members who have received a rebate should take:

Step one – Find out which plan or policy the rebate relates to. Employers with multiple health plans or that provide benefits under multiple policies must determine which plan or policy is covered. That information should be included with the rebate, or members can contact their Merit Choice representative.

Step two – Determine if the rebate or a portion of the rebate is a plan asset under ERISA. This step is important because employers cannot retain any portion of a rebate that is a plan asset. In addition, employers are generally prohibited from retaining a rebate amount greater than the total amount of premiums and other plan expenses paid by the employer. For plan documents that do not contain any language indicating how to treat distributions, the ABC Merit Choice Insurance step-by-step compliance guide will help members determine which policies are plan assets.

Step three – Decide how the rebate should be used. For the portion of a rebate that is a plan asset, employers can either distribute the rebate to participants under a reasonable fair and objective allocation method, or apply the rebate toward future participant premium payments or toward benefit enhancements. The Merit Choice guide discusses tax implications of distributions, how they affect former participations and how to allocate the rebate if there are multiple plans or policies. The Internal Revenue Service also has issued a set of frequently asked questions addressing the tax treatment for MLR rebates.

In addition to taking these steps, under the MLR rules issuers are required to provide participants with a notice describing the MLR rebates. This notice explains why a rebate is required under the MLR rules and that the employer may be obligated under ERISA to use all or a portion of the rebate for the benefit of plan participants.

To learn more about how to handle rebates for plans not covered by ERISA, ABC Merit Choice Insurance has issued another guidance document also available in PDF format and the Department of Health and Human Services also has compliance information available on their website.