Boris Benic and Associates LLP - Certified Public Accountants and Consultants - Garden City, Long Island, New York

Boris Benic and Associates LLP - Certified Public Accountants and Consultants - Garden City, Long Island, New York

   
Resources - Tax Center - Boris Benic and Associates LLP - Certified Public Accountants and Consultants - Garden City, Long Island, New York
     
 

Medical Loss Ratio Rebates - What You Need to Know!

 
 

 

Does your company sponsor a health insurance plan for employees? If so, it may interest you to learn that your insurance carrier may now be required to send you a rebate check. New regulations established by the Patient Care and Affordable Care Act (ACA) place specific rules on how insurance companies are required to use the premium dollars received from policyholders. If these spending requirements are not met then they are required to refund a certain percentage of premium dollars in the form of a medical loss ratio rebate check (MLR). If you received a MLR check recently it’s important to clearly understand the rules for how these funds are to be used.

 

Key Point: Did you recently receive a MLR check? If so, contact us today! Before taking any action it’s important for employers to understand their responsibilities under the law. The regulations vary based on the type of plan your company has and how premiums are paid.

 

What are MLR Rebates?

MLR rebate rules were established as part of the ACA. These rules require that insurance companies must spend a certain percentage of premium dollars on clinical services (claims) and health quality improvement activities. The law states that insurance companies must spend at least 80% of premium dollars on such activities for individual and small group markets and 85% of large group markets in a state. If these minimums are not met then the insurance carrier is required to issue a rebate check to the group policyholder.

 

ERISA Plans

How an employer should invest the rebate funds depends specifically on the type of group health plan (ERISA plan, non-federal government group health plan, non-ERISA or non-governmental) and whether the rebate can be classified as a plan asset. Generally speaking, most (but not all) employer sponsored health plans are classified as ERISA and are governed by rules outlined in the DOL Technical Release 2011-4.

 

Is the Rebate a Plan Asset?

According to the Technical Release, in the absence of plan or policy language addressing these types of distributions, whether the rebate will constitute a plan asset, depends on both the identity of the policyholder and source of the premium payments. Consider the following scenarios:

  • If the plan or its trust is the policyholder, the policy is an asset of the plan and the rebate is considered a plan asset

  • If the employer is the policy holder (which is usually the case) then the portion of the rebate must be treated as a plan asset depends on who paid the insurance premium.

Premium Funding Source

Rebate Classification

 

 

Plan Participants Paid 100%

 

Plan Asset

Employer Paid 100%

 

Not a Plan Asset

Paid Out of Trust Assets

 

Plan Asset

Paid 50% Participants – 50% Employer

Plan Asset  Equal to % of Cost Paid By Participants














Using the Rebate

Once a portion or the entire rebate is identified as a plan asset, it must be decided how to use the funds for the exclusive benefit of participants and beneficiaries. The following rules have been outlined in the DOL Technical Release governing the usage of rebate funds. These include:

  • Distribution to Participants – Funds can be distributed to participants using a reasonable, fair and objective allocation method. If the employer determines the cost of distributing the rebate to former participants comes close to the aggregate rebate amount, they may decide to limit rebates to current participants.

  • Benefit Enhancements – If the employer finds that distributing payments to participants is not cost effective because the per participant amount is too small or would result in tax issues, the employer is allowed to use the rebate for other permissible plan purposes such as the reduction of future premium payments or other benefit enhancements.

It’s important to note that is a plan provides benefits under multiple policies, then the employer must be careful to properly allocate the funds only to the participants who were covered by the policy. It is a breach of fiduciary responsibility to misappropriate funds to ineligible participants.

 

Timeframe for Using Rebates

Assuming the rebate qualifies as a plan asset, ERISA requires the rebate be held in trust. However, most group health plans actually don’t have trusts because their healthcare premiums are paid by the employer’s general assets (including employee payroll deductions). In this situation, the DOL has advised that the rebates must be used within three months of their receipt.

 

Tax Treatment of Rebates

Generally speaking the tax consequences of the rebates depend on whether the employees paid the premium on a pre- tax or after – tax basis. Below we have provided some situation specific information to act as a guide for employees in each situation.

 

After-Tax Payments

If premiums were paid by employees on an after-tax basis, the rebate will generally not be taxable income to employees and will not be subject to employment taxes. This tax treatment applies if the rebate is paid in cash or if it is applied to reduce current year premiums.

 

Pre-Tax Payments

If premiums were paid by employees on a pre-tax basis under a cafeteria plan, the rebate will generally be taxable income to employees in the current year. This is the case whether the rebate is paid in cash or is applied to reduce current year premiums. A premium reduction in the current year will reduce the amount that an employee can contribute on a pre-tax basis. Thus, there is a corresponding increase in the employee’s taxable salary that is also wages subject to employment taxes.

 

Contact Us

Are you unsure how to handle your MLR rebates? If so, then contact us today. There are several factors that go into determining how and when rebates should be used. For this reason it’s essential to consult your Boris Benic & Associates account manager to receive a proper guidance for your situation. For additional information, please contact Boris Benic, CPA, at 516-248-7361, or click here to email Boris. In a brief consultation he can assess your situation and determine the best way to proceed.

 

Sources:

 www.dol.gov/ebsa/newsroom/tr11-04.html

 www.irs.gov/newsroom/article/0,,id=256167,00.html

 
 

Boris Benic and Associates LLP - Certified Public Accountants and Consultants - Garden City, Long Island, New York

 

Boris Benic and Associates LLP - Certified Public Accountants and Consultants - Garden City, Long Island, New York