Health Insurers are Paying out Millions of Dollars to Small Businesses
Under the Affordable Care Act (ACA,) Insurance Carriers must spend at least 80%/85% (small group/large group) of health care premium dollars on medical care (for all treatment claims and other services to improve general health and well-being) rather than on administrative costs. The loss ratio provision limits the amount that carriers can spend on overhead, profit, commissions and other non-claim related expenses.
Those insurers who do not meet this ratio are required to provide a rebate to their policy holders (Employers offering group health plans.)
The ACA gives the Employer discretion on how to spend this Medical Loss Ratio rebate (MLR).
So what can small businesses do with the MLR rebate funds?
Small Employers have discretion to determine a reasonable and fair allocation of the rebate funds. Employers must distribute the rebate in one of two ways:
*Reduce premium for the upcoming year, or
*Provide a cash rebate to active employees that were covered by the health carrier during the rebate period.
Rebates may only be used for the benefit of participants in the actual plan that generated the rebate.
Employers who receive a rebate must determine if the rebate constitutes a plan asset. If your group health plan is not a Federal government plan or a Church plan, it is likely subject to the Employee Retirement Income Security Act of 1974 (ERISA.) Under ERISA, the following rules will apply:
*If the employer paid the entire cost of the coverage, none of the rebate is considered a plan asset and the entire rebate can be retained by the employer.
*If Participating employees paid the entire cost of coverage, the entire amount of the rebate is considered plan assets and can be retained by the participant.
*If the employer and participant each paid a fixed percentage of the cost of the coverage, the percentage of the rebate equal to that paid by the participant will be considered plan assets, and can be retained by the participant.
*If employee participants paid a fixed amount of the cost of coverage with the employer offsetting cost, the portion of the rebate that exceeds the employer’s total contribution would be considered plan assets.
*If the employer paid a fixed amount of the cost of coverage and participants were responsible for all other costs, the rebate is considered plan assets to the extent that it does not exceed the total contributed by participant
Are MLR Rebate funds taxed by the IRS?
The MLR rebate funds are reported to the IRS and are considered taxable if premium is paid with pre-tax dollars. MLR rebates for insurance premium payments made with after-tax dollars are not taxed again. The IRS can guide employers or employers can consult a tax preparer for reporting instructions. For additional information refer to the FAQ set up by the Internal Revenue Service at: http://www.irs.gov/uac/Medical-Loss-Ratio-(MLR)-FAQs
How and When will employers know if they will receive an MLR rebate?
Carriers must notify groups by August 1 each year.
When should the rebate be distributed to Employees?
Within three months of receipt of the rebate, Employers must determine and distribute the funds as appropriate.
Contact Jonathan Schulman to discuss your strategic options