As was the case last year, insurers with medical loss ratios (MLRs) that were below the prescribed levels on their blocks of business must issue rebates to policyholders. Insurers must pay rebates owed on calendar year 2013 experience by August 1, 2014. The rules for calculating and distributing these rebates are largely the same this year as they were last year.
The guidance provided by the regulatory agencies on how employers should distribute rebates gives employers some options on how to calculate and distribute the employee’s share. These general principles apply:
- Assuming both the employer and employees contribute to the cost of coverage, the rebate should be divided between the employer and the employees, based on the employer’s and employees’ relative share. Employers may divide the rebate evenly among the employees who receive it or divide it based on the employees’ actual contribution. Employers are not required to precisely determine each employee’s share of the rebate, and so do not need to perform special calculations for employees who only participated for part of the year, moved between tiers, etc.
- The rebate should be paid to current participants in the plan that is receiving the rebate. The employer may pay the rebate in cash or use it to reduce premiums for the upcoming year. A cash rebate is taxable income to the employee if it was paid with pre-tax dollars. If the employer decides to use the rebate to reduce future premiums, the employer may apply the rebate to reduce the premium for the following year to all options it offers, or just to the option that created the rebate. Insurers must send a notice to all employees who participated in the plan in 2013 stating that a rebate has been issued to the employer, so employers should be prepared to explain why the rebate is only being paid to current participants if that is the case. This might include the fact that since the rebate would be taxable income, the amount involved does not justify the administrative cost to locate former participants and issue a check.
- The employer should consider the practical aspects of providing a rebate in a particular form. Generally speaking, the larger the amount that would be due to an individual, the more effort the employer should make to directly benefit the person through a cash rebate. The agencies have not provided any details as to what amount is so small that it does not need to be returned to the employee. (Insurers are not required to issue a rebate check to individuals if the amount is less than $5.00.) A cash rebate is taxable income if the premium was paid with pre-tax dollars, so issuing a check that is very small after taxes should not be necessary. If an employer knows it costs it $2.00 to issue a check, issuing a rebate check for $1.00 should not be necessary. However, an employer cannot simply keep the rebate if it determines that cash refunds are not practical–it will need to use the employee share of the rebate to provide a benefit enhancement or a premium reduction.
- Many plans now state how a rebate should be used. If the plan describes a method, that method must be followed.
The following Q and A provides additional details.
Q1. If an employer pays most of the premium, and its contribution far exceeds the rebate, can it just keep the rebate?
A1. No, it cannot. If participants paid part of the premium, the participants (as a whole) should get a pro rata share of the rebate. So, if the employer pays 80% of the premium, the employer must return 20% of the rebate to the participants.
Q2. How does as an employer determine the percentage it can keep?
A2. The percentage of the premium paid by the employer and the percentage paid by employees should be calculated on a representative date, such as the first day of the plan year. If the relative shares changed during the calendar year because of a renewal, the percentages likely should be averaged. If contribution percentages changed during a year because of a change in demographics (e.g., virtually all new hires elected family coverage, for which the employer pays a smaller share), recalculating does not seem to be needed.
Q3. How does an employer determine the employer percentage if the employer contributes different percentages for different groups? For example, if the employer pays 80% of the cost of employee only coverage and 50% of the cost of dependent coverage.
A3. The Department of Health and Human Services (HHS) has said that the premium reduction or cash refund can be based on whichever of these methods the employer chooses:
- Divided evenly among participants
- Divided based on each participant’s actual contributions to premium
- Divided based on each participant’s proportionate contribution to premium
Q4. How should an employer distribute the participants’ shares of the rebate?
A4. For state and local government plans, the HHS has stated that the rebate should be used to:
- Reduce the next year’s premium for all participants in all group health plans sponsored by the employer.
- Reduce the next year’s premium only for the participants enrolled in the plan that received the rebate.
- Provide a cash refund to those who were participating in the plan that received the rebate at the time the rebate was received (i.e., 2014 participants) even if they did not participate in teh paln in 2013.
The same rules apply to church plans, as long as the church plan certifies to the insurer that it will distribute the rebate based on the rules described above. If the church plan refuses to provide the certification the insurer will pay the entire rebate (both the employer and employee share) directly to the participants.
Q5. The rebate is based on last year’s results. Does an employer need to pay part of the rebate to last year’s participants?
A5. If the employer chooses a cash rebate, it apparently may either pay the rebate to all current participants in the plan receiving the rebate, or only to those participating in both 2013 and currently. Any premium reduction would apply to 2015, and so would not benefit former participants.
Q6. Should a rebate be paid to COBRA participants?
A6. The agencies have not issued anything that specifically addresses this question. However, in many situations COBRA participants are considered plan participants, so the most conservative approach would be to include individuals on COBRA or in the COBRA election period in the rebate. It should be acceptable to use the standard method of allocating the rebate amount (even though the individual may have paid the full cost of coverage) unless the employer has chosen to base the rebate on the employee’s actual contributions.
Q7. The employer has two plans/policies. One received a rebate and one did not. How does it handle the rebate?
A7. The rebate is tied to the policy that received it, so in most cases only those covered by that policy would get a portion of the rebate if it is paid in cash. This is true even if those in the non-recipient policy say they would have elected the receiving policy if they’d known the rebate would impact the cost. If the rebate is used as a premium holiday, the employer may limit the holiday to those enrolled in the option that received the rebate or provide the holiday to all participants. If the employer chooses to use the rebate to reduce future premiums, it may apply the rebate to all plan options, or just the one that received the rebate.
Q8. If the employer decides to give rebates in cash, are those amounts W-2 or 1099 income?
A8. If the premium was originally paid on a pre-tax basis, the refund is taxable wages, which would be handled like any wages (i.e., subject to income tax, FICA and FUTA) and reported on the person’s W-2. If the premium was paid with after tax dollars, there are no tax consequences (unless the employee claimed the premium as a deduction on their tax return).
See the IRS FAQ on taxation of rebates for more information: Medical Loss Ratio (MLR) FAQs.
Q9. Is the employer required to provide an explanation of its rebate distribution method to participants? A9. An explanation is not required, but it likely will reduce questions and misunderstandings over the long run, particularly since if a rebate is paid the insurer is required to send a notice to those who participated in the plan in 2013 stating that a rebate is being paid. The insurer notice that will be sent when the rebate is paid to the employer is available at: http://www.cms.gov/CCIIO/Resources/Files/Downloads/mlr-notice-2-group-markets-rebate-to-policyholder.pdf.
An employer’s explanation does not need to be involved; something like this may be enough:
XYZ Company has determined that it is in the best interest of our participants to use the Medical Loss Ratio Rebate to provide a “premium holiday” for the month of January 2015. This means that your share of premium for January will be [zero] [reduced to $___]].
XYZ Company has determined that it is in the best interest of our participants to return your share of the rebate to you in cash. The rebate will be added to your ______, 2014 pay as taxable income.
Q10. What can the employer do with its share of the rebate?
A10. Unless the insurance policy is part of a trust, the employer can use its share of the rebate however it sees fit. If the policy is in a trust, the entire rebate — both the employer’s and employees’ share — must be used to benefit plan participants (through reduced contributions or enhanced benefits).
Q11. Are grandfathered plans eligible for rebates?
Q12. Are self-funded plans eligible for rebates?
Q13. How are rebates determined?
A13. Medical loss ratios (MLRs) are based on the cost of claims and health care quality improvements as a percentage of total premium (federal taxes and assessments are excluded from the premium). All of the insurer’s policies in a market, in each state, are combined when calculating its MLR. A policy issued in the large group market is eligible for a rebate if its MLR is less than 85%. A policy in the small group or individual market is eligible for a rebate if its MLR is less than 80%.
Q14: If the employer has employees in several states, how is the rebate determined?
A14: The rebate is based on the state the policy was issued in. It should be shared with all participants, regardless where the participant lives.