If you’ve received a check from your health insurance carrier marked as a Medical Loss Ratio (MLR) rebate, you may be wondering: What is this for? Why did we get it? And what should we do with it?
Here’s a clear breakdown of what MLR rebates are, why they exist, and what steps employers should take when they receive one.
What Is the Medical Loss Ratio (MLR)?
Under the Affordable Care Act (ACA), health insurance carriers must spend a certain percentage of the premium dollars they collect on actual medical care and activities that improve health care quality—rather than on administrative costs, marketing, or profits.
This standard, called the Medical Loss Ratio (MLR), ensures that plan members get good value for their health care dollars.
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Large group plans: Insurers must spend at least 85% of premiums on care and quality improvement.
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Small group and individual plans: Insurers must spend at least 80% of premiums on care and quality improvement.
If a carrier does not meet these thresholds, they’re required to refund the difference. That refund is what’s known as an MLR rebate.
Why Did My Company Receive an MLR Rebate?
You received a rebate because your insurance carrier spent less on health care and quality initiatives than required by law.
For example, if a carrier only used 78% of premiums for care when they were required to use 80%, they owe a 2% refund of the premiums collected.
What Should Employers Do With the Rebate?
Receiving the check is just the first step. How you handle and distribute the rebate matters because of federal rules under the Employee Retirement Income Security Act (ERISA).
ERISA states that a portion of the rebate may be considered a plan asset, meaning it belongs—at least in part—to the employees who paid premiums.
Here’s how it typically breaks down:
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If the employer paid 80% of the premiums and employees paid 20%, then 20% of the rebate is a plan asset.
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This employee portion must be used for the benefit of plan participants within 90 days of receiving the rebate.
Options for Using the Plan-Asset Portion of the Rebate
The Department of Labor (DOL) provides three main ways to apply the employee portion of the rebate:
Reduce Future Premiums: Apply the rebate to reduce upcoming premium costs for employees.
Direct Cash Refund: Distribute the employee portion of the rebate directly to the employees who contributed to premiums for the plan year in question.
- Typically distributed as a check or direct deposit.
- Refunds are usually pro-rated based on how much each employee paid in premiums.
- If premiums were originally paid with pre-tax dollars, these refunds are taxable.
Enhance Benefits: Use the rebate to improve the existing plan by adding benefits or coverage enhancements.
While some employers choose to reduce future premiums or enhance benefits, many opt for direct refunds because it most directly returns funds to employees who originally paid them.
Key Takeaways for Employers
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MLR rebates exist to ensure fairness and value in health insurance spending.
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Not all of the rebate belongs to employees—but the employee portion is protected as a plan asset under ERISA.
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Employers must use the employee portion of the rebate within 90 days for the benefit of plan participants.
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If you’re unsure how to calculate or distribute your rebate, it’s best to consult your payroll or benefits provider.
Medical Loss Ratio rebates are an opportunity to demonstrate transparency and reinforce trust with your employees. By understanding how these rebates work and following the Department of Labor’s guidelines for distribution, employers can ensure compliance while showing employees that their contributions to health coverage are being respected and returned appropriately.
Commonwealth Payroll & HR is Here to Help
If you’ve received an MLR rebate and are unsure about the next steps, Commonwealth Payroll & HR is here to help. Contact us to learn how our team can guide you through the process—from calculating the employee portion to managing distributions—so you can stay compliant and focus on supporting your workforce.
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