MLR Rebates & How to Handle Them
Each year, employers sponsoring a fully insured group health plan may receive a medical loss ratio (MLR) rebate from their insurer. Under the ACA's MLR rules, insurers must provide rebates when their spending on clinical services and quality improvement activities, relative to premium revenue, falls below the applicable MLR standard. Rebates generally must be provided by September 30 of the year following the MLR reporting year, although some insurers may issue them earlier. How an employer may use a rebate depends on plan documentation and how coverage premiums are paid.
What can employers do with an MLR rebate?
If the employer pays 100% of the premium for employees and any enrolled spouses or dependents, then any rebate belongs to the employer to do what they wish.
If participant contributions paid for any portion of the premium, that portion of the rebate is considered “plan assets,” meaning that the funds belong to the plan as a whole and not the plan sponsor. ERISA restricts the use of plan assets to the exclusive benefit of plan participants. There is no ‘de minimis’ portion of the MLR rebate being a plan asset that would allow an employer or plan to ignore the plan asset implications.
How much of the rebate is considered plan assets?
If participant contributions are paid for any portion of a plan’s premium, the employer must then calculate how much of any MLR rebate should be considered plan assets (i.e., should be used strictly for the benefit of plan participants). Below are listed contribution strategies and whether (and how much of) MLR rebates will be considered plan assets in each:
Premium Payment Strategy | Plan Assets | |
Most Common | Employer and Employee pay a fixed percentage of the premium (e.g., 80/20%) | Percentage of MLR rebate equal to participants’ contribution percentage is plan assets |
Less Common | Employee pays a fixed amount and Employer pays the remaining amount (e.g., Employee pays $250 for single coverage under an age-rated plan and Employer pays the difference) | None of MLR rebate is plan assets unless the rebate amount exceeds the amount paid by Employer |
Less Common | Employer pays the entire premium | None of the MLR rebate is plan assets |
To most easily determine the portion of the MLR rebate to be considered plan assets, the employer should calculate the percentage of total plan premiums paid to the insurer during the previous year that can be attributed to participant contributions. This includes employee payroll deductions, COBRA premiums, premiums paid during leave, and any other premium payments made by participants. The resulting percentage is then applied to the MLR rebate to determine the portion that must be treated as plan assets.
Example
• Total group health plan premiums paid to a carrier for 100 covered employees during 2025 = $1,000,000.
• Total employee payroll deductions + COBRA premium payments received during 2025 = $250,000.
• Employer receives a $15,000 rebate from the carrier in 2026.
In this example, participant contributions made up 25% of total plan premiums for the year ($250,000 / $1,000,000), so a total of $3,750 is considered plan assets (25% of $15,000).
What can employers do with rebate amounts that are plan assets?
Employers should first look to their plan document to answer this question, as some plan documents address how to handle the portion of the MLR rebate that is determined to be a plan asset. However, many plan documents will not contain such provisions, in which case the employer may do one of two things with the rebate:
Improve plan benefits; or
Return the appropriate amount to plan participants.
Improve Plan Benefits
The first option of improving plan benefits could include a reduction in plan cost-sharing, expanded benefit coverage, improved access to providers, or adding or expanding a wellness program. Benefit enhancements can be permissible, but they are often impractical because rebate amounts may be small and likely won’t recur in the same amount.
Distribute Amounts to Plan Participants
The second and more popular option is to return the appropriate amount of the rebate to participants through a cash payment or a “premium holiday” that temporarily reduces participant premium contributions. Some carriers issue rebates electronically rather than by check, which may affect distribution logistics. If participant contributions were made on a pre-tax basis, a cash distribution is generally taxable wages; if the rebate is applied as a premium reduction, the employee’s pre-tax salary reduction decreases, resulting in a corresponding increase in taxable wages. If participant contributions were made on an after-tax basis and were not deducted, the returned amount is generally not taxable.
How quickly must the plan asset portion of the rebate be used?
ERISA generally requires plan assets to be held in trust, unless the assets are used withing 90 days of receipt. So, an employer wishing to provide participants with a premium holiday should do so within 90 days of receiving the MLR rebate from the carrier and not wait until next year.
Which participants should receive the rebate or premium holiday?
In deciding which group(s) of participants should receive the rebate amount, the most common options are:
Returning the rebate to current plan participants in the year in which the rebate is received (current plan year participants, generally including COBRA participants); or
Returning the rebate to current plan participants in the year in which the rebate is received and to former participants from the year used to calculate the rebate.
The DOL has stated that it is not usually necessary to distribute rebates to former plan participants, given the fact that the per participant amount is so small that the administrative cost of locating and distributing to former plan participants will likely exceed the value of the rebate. The DOL has also indicated that the amount of rebate or premium holiday doesn’t need to match the premium activity of any one individual participant. That means that a plan may divide the amount evenly over all current participants, even if some of those participants made different contributions to the plan or were not even participants in the previous year.
What about non-ERISA plans?
Obviously, non-ERISA plans are not subject to the plan asset rules described above. But non-ERISA plans must follow the same basic guidelines: 45 C.F.R. § 158.242(b)(1)-(2) requires the portion of the rebate attributable to subscriber premium contributions to be used for subscribers’ benefit within three months of receipt. The non-ERISA plan may provide premium holidays or provide cash refunds, allocating the amount evenly, based on actual contributions, or under another method that reasonably reflects those contributions.
Are there any notice requirements?
No. Employers are not required to send a separate MLR rebate notice; the insurer provides the required notice to policyholders and subscribers. The standard notice does not require the rebate amount, although the issuer may choose to include it. Employers may still want to explain whether and how participants will receive a share of the rebate and that the per-participant amount may be relatively small.