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Affordable Care Act Update: The Payment of Medical Loss Ratio (MLR) Rebates to Health Insurance Policyholders

As a result of the Patient Protection and Affordable Care Act that was signed into law by President Obama March 23, 2010, many employers have received or will receive medical loss ratio rebates from their health insurance providers. Employers are required to use or distribute these rebates to policy holders in accordance with IRS and DOL rules and regulations.

The below information does not constitute legal or tax advice but is being provided as a courtesy to Paycom clients. If you have any questions concerning Paycom’s services please contact one of our representatives at 800-580-4505.

What is the Medical Loss Ratio (MLR) Rebate?

  • The Patient Protection and Affordable Care Act required that, beginning in 2011, insurance companies spend a specified percentage of insurance premium dollars on medical care and quality improvement activities to meet a medical loss ratio (MLR) standard. Insurance companies that do not meet the MLR standard were required to provide rebates to their consumers beginning in 2012. The MLR spending threshold is 80% or 85% depending on the size of the employer. Beginning in mid-2012, employers have started receiving MLR rebates from their insurers.

What must an Employer do with the MLR Rebate?

  • An employer is required to apply or disburse the MLR Rebate funds in accordance with laws, rules and regulations set forth by the IRS and Department of Labor.

Does an Employer have options on the manner in which to apply or disburse the MLR Rebate?

  • Usually yes. An employer generally has three options on what to do with an MLR Rebate. Those options are:
    • An employer may apply the MLR Rebate to reduce their employees’ health insurance premiums for the subsequent policy year.
    • An employer may apply the MLR Rebate to provide benefit enhancements to their employees for the subsequent policy year.
    • An employer may provide a refund to each of the individuals who were covered by the health insurance policy on which the MLR Rebate was based.

If an Employer chooses to provide a refund, how is the refund calculated and provided to each such employee?

  • As a general rule, the amount of rebate provided to each employee should be proportional to the amount the employee contributed to the health insurance premiums in relation to other employees and the employer. Consideration must also be given to whether the MLR Rebate should be paid to an employee on a pre-tax or after-tax basis. As a general rule, if an employee originally paid his/her premium contributions on a pre-tax basis or if an employee deducted his/her premium contributions, an MLR Rebate refund to an employee would be on an after-tax basis. Similarly, if an employee originally paid his/her premium contributions on an after-tax basis, an MLR Rebate refund to an employee would be on a pre-tax basis.
  • Specific guidance has been issued by the U.S. Department of Labor and Internal Revenue Service on these issues. Employers should consult this guidance before deciding the amounts and manner in which to pay the MLR Rebate.

What resources are available to employers to find out more?

  • Please note that the above answers may or may not apply to your specific situation. For instance, Church Plans Exempt from ERISA, Terminated Plans, and State and Local Government Plans may have special rules that apply. Your company’s ERISA plan document terms may also govern your handling of MLR Rebates. When deciding how to handle an MLR Rebate, employers are encouraged to review and adhere to the following guidance and resources from the Internal Revenue Service and Department of Labor:

Does Paycom’s payroll service accommodate employers providing MLR Rebate refunds to their employees?

  • Yes. No matter what rules apply to an employer or what options are chosen by an employer, the disbursement of an MLR Rebate refund can be implemented within Paycom’s payroll system. Paycom’s system can provide MLR Rebate refunds to employees on a pre-tax or after-tax basis at the employer’s direction. Please contact your payroll specialist at 800-580-4505 with any questions.
About Paycom
For 25 years, Paycom Software, Inc. (NYSE: PAYC) has simplified businesses and the lives of their employees through easy-to-use HR and payroll technology to empower transparency through direct access to their data. And thanks to its industry-first solution, Beti®, employees now do their own payroll and are guided to find and fix costly errors before payroll submission. From onboarding and benefits enrollment to talent management and more, Paycom’s software streamlines processes, drives efficiencies and gives employees power over their own HR information, all in a single app. Recognized nationally for its technology and workplace culture, Paycom can now serve businesses of all sizes in the U.S. and internationally.