It’s that time of the year again, when you get your end of summer bonus from your insurance carrier! About time they started returning some of those premiums you’ve been paying, right?
I’m referring to the Medical Loss Ratio (MLR) rebate checks. These are the cryptic payments that employers receive, generally with very little explanation and virtually no breakdown or instruction. And because they only happen once a year, and not necessarily every year, we find it helpful to provide a quick refresher on what they are and what to do with them.
In short, these refunds are being sent because the Affordable Care Act placed limits on the amount of profits and administrative costs for insurance companies. It did so by setting a minimum loss ratio, the ratio of claims paid out to premiums collected. For small groups, that limit was set at 80% and for large groups, 85%. Companies that failed to meet these thresholds are required to refund policyholders however much necessary to bring them back in line.
This loss ratio calculation is done at the carrier level, and segregated by plan, location, and employer size. It’s not based on your particular company or claims. This means that you could theoretically receive a rebate for one of the plans your company offered, but not on the other.
Getting a refund from your insurer sounds like a great thing, and in concept it is! But in practice, it comes with a few headaches because of how the refunds must be handled and distributed. The refund is considered a return of premiums paid. This means that the refund needs to be returned to the employer and employees in the same proportion as the premiums were paid. If, for example, the employer paid 100% of the premiums, then the employer would keep all of the rebate. However, if the employer and employee were involved in paying the cost of medical coverage, as is the case with most plans, then there’s some work to be done to figure out the appropriate allocation. Anyone who paid premiums in the year for which the rebate is payable is eligible, including ex-employees. In determining which plan participants are entitled, the employer must first consider those participants who were covered by the plan option to which the rebate relates. However, if the plan fiduciary (employer) determines it is not cost effective to allocate the rebate to former participants, then the rebate may be allocated to current participants only. This is an important fiduciary decision.
Have no idea how to find that breakdown, by employee? Your certainly not alone! Fortunately, if you use a third-party administrator (Kelly or Benefit Mall) there are some very handy reports you can run that will help establish the premiums paid for each employee. Once you figure out how much each employee is entitled, you do have some flexibility in how you actually distribute the refund (such as a one-time credit on payroll or a separate check). But regardless of how it’s returned, the refund is considered taxable income to employees. There’s no rush! You have 90 days after the receipt of the refund check to remit any eligible share to employees.
At the end of the day, I would HIGHLY suggest that you document whatever methodology you follow and decisions you make. Write down how you calculated the refund and any decisions you made in determining who and how much to pay., and make sure to keep it on file. You do this for two main reasons. First, it will help you remember what you did next year so that you can repeat. And two, it will help you explain to employees (or ex-employees) who are curious as to where their money went. Because when carriers have to issue refunds, they are required to send out notifications to ALL policyholders, regardless of whether that particular member is eligible. Our clients will often get calls from employees (and ex-employees) wanting to know where their check is. Having a documented policy can help provide a consistent and equitable response.
And lastly, we’re here to help! Coffey clients are always welcomed and encouraged to call so that we can talk you through the particulars of your refund and required distribution.