Insights

Carriers’ adjustment of past years’ MLR rebates can result in additional rebate checks to employers. What are employers’ responsibilities regarding these amounts? Must they distribute them out to participants, or is there a de minimis exception?


Generally, employers will have to decide how to handle an adjusted MLR rebate check received from an insurance carrier. This can be somewhat confusing for employers, since the adjustments generally relate to prior years. Overall, though, the employer's MLR rebate distribution responsibilities hinge on whether there's a portion of the rebate that's attributable to employee contributions (which makes them “plan assets,” a status that places some stricter rules on whether and how they should be refunded to employees).

If the entire rebate is attributable to employer contributions (e.g., the employer contributed 100 percent of the premium), then the employer can generally keep the rebate. If, however, employees contributed toward the cost of coverage, the portion of the MLR rebate that's attributable to employee contributions is considered plan assets, meaning it must be used in a way that benefits those employees/participants.

There are basically three ways an employer can use the plan assets portion of the MLR rebate to benefit employees/participants: providing a taxable cash refund, allowing a premium reduction (sometimes called a “premium holiday”), or adding some type of benefit enhancement (such as coverage for an additional service, an additional contribution to an HRA or something similar) to the overall plan design. Most employers settle on using a cash refund or premium holiday to benefit participants. One reason is that the MLR rules require the rebate to be used within 90 days and only on behalf of that specific plan's participants. So, for example, the amount couldn't be used to provide a wellness program that benefits all employees. If the employer instead chooses a premium reduction, the employer could limit the distribution to only those who are currently participating in the plan. Further, the employer could limit the distribution to only those who are participating now AND were also participating in that same plan in the relevant year.

With regard to former participants, the DOL provides employers a bit of flexibility. Since a benefit enhancement or premium holiday wouldn't help a former participant, the only method that would be appropriate for former participants is a cash refund. If the cost of distributing rebates to former participants is approximately equal to or greater than the amount of the rebate, then the employer may decide to limit rebates to current participants. It's unclear what can be taken into consideration in determining cost. While it may include the time to track down individuals, the more conservative approach is that the employer should look only at “hard” costs (e.g., postage, cost of having check cut, locator fees, etc.). Ultimately, since the employer is the fiduciary of the plan assets, they'll have to decide the overall cost-effectiveness of distributing to former participants (but couldn't do the same for current participants).

In addition, there isn't a de minimis threshold. The only consideration is the one outlined above regarding the cost of including former employees compared to the distribution amount. The proportionate amount related to plan assets must be distributed to current participants even if it's a small amount.

Lastly, there's one exception to the general rule that plan assets must be distributed to participants in one of the three ways outlined above. Specifically, if the employer placed specific language in the plan document to retain the rebate amount (which is extremely rare), it's possible they could retain it. Employers relying on that exception should work with outside counsel to ensure compliance with the MLR rules in that situation.

In summary, if employees originally contributed towards the cost of coverage, an employer couldn't keep the entirety of an adjusted MLR rebate. This is because a portion of the rebate is attributable to plan assets and must be handled accordingly. If the rebate is an insignificant amount, the employer may be able to exclude former participants, but it would be required to include current participants in one of the three distribution methods outlined above.