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The Affordable Care Act (ACA) introduced Medical Loss Ratio (MLR) requirements for fully insured medical plans. These rules require insurers to spend a substantial portion of premium dollars on actual health care services and quality improvements. In turn, they limit the dollars that can go toward administrative costs like marketing, salaries, agent commissions, and profits.
 
The MLR is calculated on a calendar-year basis. This means the MLR for the 2024 calendar year determines whether rebates are required, and if so, they must be distributed to employers by September 30, 2025.
 
Under the ACA, the MLR standards are:

• Small Group and Individual (IFP) Plans: At least 80% of premium dollars must be spent on health care services and quality improvement.
• Large Group Plans: At least 85% of premium dollars must be spent in these same categories.

 
These rules apply only to fully insured plans. Employers with self-funded and level-funded plans are not subject to MLR requirements because they pay claims directly.

What Happens When an Employer Receives an MLR Rebate

Employers have 90 days to determine how to handle a rebate. Covered employees are sometimes notified by their carrier when a rebate is coming, which can create a sense of urgency to act.
 
The Department of Labor (DOL) outlines three allowable approaches:

1. Reduce future premiums for all employees: Apply the rebate toward everyone’s premium share for the next plan year, regardless of which plan they are on.
2. Reduce future premiums only for impacted subscribers: Apply the rebate only to employees (and COBRA participants) who were covered by the plan that generated the rebate.
3. Cash refunds: Provide the rebate directly to employees who were covered under the plan that generated it.

COBRA participants must be included in the calculation when applicable, but employers are not required to locate former employees. If the plan is entirely employer-paid, the rebate may be kept by the employer if it is not considered a “plan asset” under ERISA. Employers should confirm this with an ERISA attorney before deciding to retain the funds.

Group Health Plan Rebates Are Small at Best – and the Tax Conundrum

More than a decade after the ACA’s major provisions took effect in 2014, most group health plan carriers have become highly skilled at setting rates that meet MLR targets. Strong group market risk pools and refined actuarial practices mean many carriers will not need to issue rebates at all.
 
When rebates are required in the group markets, they are usually modest – often $10 to $30 per employee. Issuing checks for these amounts can create unnecessary administrative work and may also result in taxable income for employees, particularly when a Section 125 Premium Only Plan (POP) is in place.
 
To minimize the burden, many employers:

• Apply the rebate toward future premium payments.
• Use the funds to enhance benefits rather than issuing checks.

Even with lesser amounts, consulting both an ERISA attorney and a tax advisor is recommended to ensure the approach is compliant and tax efficient.

Best Practices for Handling MLR Rebates

No matter which method is chosen, employers should:

• Put the decision in writing.
• Apply it consistently to all similarly situated employees.
• Communicate it clearly to employees.
• Include it in ERISA plan documents.

Carrier-Specific MLR Rebate Information for 2025

We are reaching out to our fully insured carrier partners in California and Nevada to confirm their 2025 rebate status for the 2024 calendar year. This section will be updated as additional carrier responses are received.
 
Check back for updates. We will post carrier responses here as they come in.