MLR Rebates Due to Plan Sponsors

MLR Rebates Due to Plan Sponsors by September 30, 2025

The Affordable Care Act (ACA) outlines the requirements fully insured health insurance issuers must follow, including obligations related to premium spending. The ACA requires health insurers to spend at least 80% to 85%, depending on the size of the market, of premium dollars on medical care. The remaining 20% to 15% is reserved for administration, marketing expenses and profit. If these requirements are not met, plans are required to provide annual rebates to the policyholders, the Medical Loss Ratio (MLR) Rebates. These refunds or rebates are issued by September 30th each year. In cases where the employer/policyholder has paid the entire cost of the insurance coverage, then no part of the rebate would be distributed to participants. However, in cases where the participant and employer both contribute a specific percentage of the premium to the plan, a percentage of the MLR rebate would be attributed the plan participants consistent with the percentage of the cost contributed.

The Department of Labor (DOL) issued guidance outlining employer/policyholder’s obligation with respect to the rebates. Under this guidance, employers/policyholders have three options for distributing rebates to participants. Rebates can either:

• Be used to reduce the participants’ portion of the annual premium for all participants covered by any of the group health policies offered by the employer/policyholder,
• Be used to reduce the participants’ portion of the annual premium for only the participants on the plan the rebate is associated with, or
• Distributed back to the participants covered by the plan the rebate is associated with in the form of a cash refund

Employers are also able to use the rebates toward benefit enhancements for participants. Since rebates that are paid out are typically relatively small, policyholders will usually opt to apply the rebate to contributions or plan enhancements rather than cut fairly small checks to participants. Additionally, any cash disbursement could be subject to taxation outlined by the Internal Revenue Service (IRS). The IRS has issued FAQs to explain the tax considerations for employers with respect to the MLR rebates.  Employers must distribute the portion of the rebate that is owed to plan participants within three months of receiving the check, and should maintain records outlining how the MLR rebate was handled and who benefitted from the rebate.

If you have additional questions around the MLR rebate, please reach out to us for further assistance.