In the first week of August 2012, as the health care reform law's requirement that carriers notify employers and employees if they meet medical loss ratio requirements went into effect, my office logged in more than 50 phone calls from our clients. They were either wondering what to do or asking how much they would be receiving. The MLR is calculated by dividing the medical expenses by the net earned premiums. The MLR threshold, depending on group size, is 80% or 85%. Rebates are determined according to the prior year's MLR. They are calculated at the carrier and market segment level. The calculation is based on each plan.
Let's look at an example of how this works. One of our clients in Woodland Hills, Calif., received a MLR check for $497 on total premium paid in 2011 of $94,800. This company is with Anthem, but only offers three PPO and three HMO plans to its 10 employees. The employer had to figure out which of the six plans received MLR rebates, which of the 10 employees were enrolled in those plans, and how much of the premium was paid by the employees compared to what the employer paid. Once that was determined, the employer had to determine the amount of the rebate for the company and for each employee, and decide the best way to issue the rebates. Since some employees had enrolled their dependents on the health plan, the situation became even more complex.
Fiduciary duty
Every employer that receives rebate checks or a notification of a credit to a future invoice must understand and handle the rebate based on Department of Labor rules. Employers need to treat the rebates seriously and carefully, since the funds are considered plan assets under ERISA, and since the DOL has hired additional auditors to ensure compliance.
Each employer is entitled to its own percentage of the rebate based on plan contribution; employees receive a portion of the rebate that matches their share of the total premium. This raises a number of questions for the employer, including:
* Should employers pay the rebates to their employees or credit future premiums? What are the advantage and disadvantages of each method?
* How does the employer account for the rebate?
* Is the rebate taxable income for the employees?
* What if the premium the employee paid was pre-tax income through a flexible spending account or premium only plan?
* What if an employee left the company? Are they still entitled to the rebate?
* How does an employer handle a former employee who took COBRA?
* How and what does the employer communicate to their payroll processor?
* How and what does the employer communicate to their tax adviser?
According to healthcare.gov, insurers paid out a little more than $1.1 billion dollars in MLR rebates to 12.8 million plans and individuals in 2012, which averages to $85.94 per member.
This represents a significant amount of work (and cost) for employers who must account for and pay out what amounts to $7.16 per month, or, on average, less than 2% of the premium paid.
Cohn is president and CEO of RGEB Insurance Agency. Reach him at
