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October 28, 2019

Medical loss ratio rebates

Jennifer Stanley

Show Me the Money

The Affordable Care Act’s (ACA) Medical Loss Ratio (MLR) standards require health insurance carriers to spend a specific percent of premium on health care services and activities that could improve quality of care. [1] If the carrier does not meet the MLR standards, it must provide rebates to the policyholders – the employer in the group market and the individuals in the individual market. Each year, insurance carriers calculates their MLR across the particular market segments’ books of business and issues rebates to policyholders if the money spent on health care and quality care activities is less than the required MLR standards.

When an employer receives a rebate, it has 90 days to determine what portion of the rebate is allocable to plan participants and distribute the rebate to participants or use the rebate for their benefit.

Who Gets the Money?

Step 1
Determine if any portion of the rebate is a “plan asset.” Plan assets belong to the participants and may not be kept by the sponsoring employer or used to pay its expenses. The relevant plan documents should indicate the source of the premiums paid to the insurance carrier and might describe the ownership interest in rebates or refunds of premiums received by the plan. 

In many instances, the plan documents will not resolve ownership interests, and the employer will need to rely on the sources and relative ratios of paid premiums in order to determine what portion of the rebate is a plan asset.

Step 2
If the plan documents do not resolve ownership interests, determine what portion of the rebate is a plan asset.

How Premiums are Paid

Plan Asset

Who Receives the Rebate

100% from the plan’s trust assets


100% belongs to the trust as a plan asset and must be used for the benefit of participants

100% by participants


100% belongs to the participants

100% by employer


100% belongs to the employer and may be used for any purpose

Employer and participants each pay a fixed % of the premium (Example: Employer pays 70% and participants pay 30%)

Yes, partially

A % of the rebate belongs to the participants equal to the % of the total premium paid by the participants[2]

The remainder of the rebate belongs to the employer and may be used for any purpose

Participants pay a fixed dollar amount and the employer pays the balance


The portion of the rebate that exceeds the employer’s contributions is plan assets

The remainder of the rebate belongs to the employer and may be used for any purpose

Step 3
Determine how to use the portion of the rebate allocated to plan participants.

Rebate Considerations 

  1. Plan Participants. For the MLR rebate, the employer may determine it is reasonable to use the rebate for current plan year participants and not the exact participants from the plan year for which the rebate applies. This includes current COBRA participants. Factors used to make this determination can include the cost and administrative difficulty of locating former employees and/or whether a large number of the same individuals are participants in both plan years.

    The available guidance prefers the rebate be used for participants in the same insurance policy (or policies) that generated the rebate, but it should be reasonable to share the rebate with participants in the employer’s other medical coverage depending upon the facts and circumstances.[3] For example, if the plan option that generated the rebate has been replaced, it should be reasonable to use the rebate for participants in the plan option(s) that replaced it.   

  2. Preferred Rebate Methods. The most common approaches are to pay the rebate in cash, use it to reduce future premiums in the current year (a full or partial "premium holiday") or apply it to enhance benefits. Enhanced benefits might include HSA contributions or additional wellness benefits. For small rebates or small remainders of larger rebates, an employer could use the rebate to pay for flu shots or educational presentations.

    Note: We do not support the use of rebates to fund opportunities for a relatively few number of participants to win prizes such as through a raffle. This is contrary to the policy that employers should provide a reasonable, fair, and objective rebate allocation method that benefits the entire class of participants. 

  3. Tax Consequences. If the participant premiums were paid pre-tax through an Internal Revenue Code Section 125 cafeteria plan, a rebate paid as cash or as a cash equivalent will be treated as taxable income. This will also be the case when provided as a premium holiday as the employee’s taxable take-home pay will increase.

  4. Timing. The employer must distribute or use the participant’s portion of the rebate within ninety (90) days of receipt.

[1] These are 85% in the large group market and 80% in the small group market.

[2] If the fixed percentage of premiums paid vary by tier of coverage, an employer could choose to use a single average percentage rate for all tiers or determine a weighted average percentage rate for each tier.

[3] In theory, this could extend to all participants in benefits incorporated under the same ERISA plan number, but we generally recommend against this.