SECOND OPINIONS: What Should Plans Do with MLR Rebates?

August 7, 2012 ( - A new rule under PPACA requires health insurers to review the ratio of costs paid out for claims and quality improvement expenses to total premium dollars earned to determine a "medical loss ratio" or MLR.

If an insurer’s MLR does not meet certain minimum thresholds, PPACA requires the insurer to issue a rebate to the policyholder.  The first rounds of rebates were required to be paid out in early August for the prior plan year.  The calculations are fairly complex, but the end result for plan sponsors is that you may receive a rebate check from your insurer. 

There are specific rules as to how plan sponsors can use these funds, which will vary based on the plan type and a number of other facts.  However, we address below some basic questions we have received to get plans started. 

Do the MLR rules apply to both insured and self-funded plans?  What about grandfathered plans? 

The MLR rules only apply to insured plans.  Even if a self-funded plan uses a health insurer to administer claims, the plan will not receive an MLR notice or rebate check.  The MLR rules do apply to grandfathered plans, so these plans may receive a rebate check from their insurer.   

How will I know if my plan is supposed to receive a rebate? 

Insurers are required to notify the plan regarding whether a rebate is owed.  Plans will receive notification about the insurer’s MLR regardless of whether a rebate is required to be paid.  Insurers also will notify individuals who are enrolled in coverage that an MLR rebate is being paid with respect to that policy.  As such, plans may need to be prepared to answer questions from individual participants as well. 

Are there restrictions in how plans may use this money? 

Yes.  The Department of Labor has issued Technical Release 2011-4, which explains how MLR rebates may be used for ERISA plans, where the rebate amounts may be considered “plan assets.”  The Department of Health and Human Services has issued regulations that apply to governmental and church plans.  76 Fed. Reg. 76596 (Dec. 7, 2011).  These rules are complex and based on the plan’s specific facts and circumstances, so plans should review them carefully and may need to consult legal counsel.  In general, rebate amounts must be distributed to participants, used to reduce future participant premiums, or be used to enhance benefits.  The guidance provides more specific direction on how to allocate the amount among participants, which participants should receive rebates (including former participants), trust issues, and how to handle terminated plans.

Is their a time limit within which the plan must pay out this money? 

Again, plans will need to review the agency guidance based on their own facts.  However, the DOL guidance provides that ERISA plans generally must distribute rebate checks within 3 months of receipt in order to avoid certain trust and reporting requirements.  For calendar year plans, this means that plans may not be able to simply apply the premium reduction to the 2013 plan year, but may need to act more quickly and pay out the rebate within the next couple of months. 

Will rebates be taxable to individuals? 

Whether rebates are taxable will depend on how and to whom they are paid.  The IRS has issued FAQs on the tax issues surrounding MLR rebates.  Generally, a premium reduction likely will not be taxable (although as a practical matter, if an employee has a lower payroll deduction for a particular month due to the rebate, he or she will then have more wages subject to tax).  If the rebate is distributed in cash, it generally would be treated as taxable wages, subject to income and employment taxes. 


Health plan sponsors should be on the look-out for communications from their insurers on the MLR rebate.  If the plan receives a rebate, plan sponsors should review the above guidance and, if needed, consult legal counsel to determine how the rebate should be paid out, to whom, and by what date. 


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Christy Tinnes is a Principal in the Health & Welfare Group of Groom Law Group in Washington, D.C.  She is involved in all aspects of health and welfare plans, including ERISA, HIPAA portability, HIPAA privacy, COBRA, and Medicare.  She represents employers designing health plans as well as insurers designing new products.  Most recently, she has been extensively involved in the insurance market reform and employer mandate provisions of the health-care reform legislation.  

Brigen Winters is a Principal at Groom Law Group, Chartered, where he co-chairs the firm's Policy and Legislation group. He counsels plan sponsors, insurers, and other financial institutions regarding health and welfare, executive compensation, and tax-qualified arrangements, and advises clients on legislative and regulatory matters, with a particular focus on the recently enacted health-reform legislation.  

PLEASE NOTE:  This feature is intended to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.