Ask a Zenefits Advisor: What is a MLR Rebate Check, and What Should I Do With It?

Bud Bowlin has been advising business owners about health insurance and benefits for more than 35 years. For his 70th birthday, we gave him his own advice column. Got a burning benefits question for Bud? Send it to [email protected].

Dear Bud,

I just got a MLR rebate check. What exactly IS this? Do I split it among our employees? How exactly should I split it up? What about employees who no longer work here? Do I need to track them down? Help!

Thanks,
Inquiries Galore Over Rebates

Dear I.G.O.R.,

Don’t panic, I can explain everything. Right now, insurance carriers are sending out Medical Loss Rebate checks for the 2014 plan year. See, carriers can spend your money on a number of things, including their own overhead (marketing, administrative costs, commissions, etc.). MLR is a metric set by the Affordable Care Act to encourage carriers to use your company’s insurance premium dollars in specific, beneficial ways. For Large Group Employers, MLR must be at least 85%. For Small Group Employers, it’s 80%. If carriers fail to allocate these percentages of your premium dollars to medical claims and activities that improve the quality of care, they must send your business an MLR rebate check.

OK, so now that you know what you’ve got in your hand, we’ll talk about what to do with it. Let’s look at Katz and Bagels, a cafe that serves bagels while patrons pet cats. In 2014, Katz and Bagels paid their insurance carrier $100,000 in premiums. (Katz paid $60,000, and the employees paid $40,000.) Let’s assume the rebate check is for $5,000. So, the business keeps 60% (or $3,000) and distributes 40% (or $2,000) to the employees.

The ACA gives employers leeway on how to distribute the MLR rebate check, as long as it’s “reasonable, fair, and objective.” You don’t have to consider how much each employee paid in premiums or even whether you pay the actual people who were on the plan during the rebated year. You don’t have to track down your former employees either—you can distribute the MLR to your current staff. Katz and Bagels has 25 active employees. As mentioned previously, the business kept 60% of the MLR check. To distribute the remaining 40%, the business divided $2,000 by 25, and each employee received $80.

Employers who receive an MLR rebate check have 90 days to determine how they wish to distribute it. Insurance carriers often notify both the business and policyholders of their intent to send rebates. This may generate questions from employees, so it’s a good idea to communicate how you intend to distribute a rebate (if any) as soon as you know. (I recommend indicating the amount, so that employees don’t think they’ve won the lottery…) Here are three acceptable ways to take care of that task:

Add the $80 to each employee’s regular paycheck. (It becomes taxable income.)
Declare the rebate a premium holiday against current employee premium payroll deductions. (Do this by reducing the amount of payroll deductions for premiums by $80 for one pay period.)
Apply the rebate against enhanced or improved benefits. (For instance, lower the plan deductible, and then apply the $80 toward the increase in premiums the group has to pay.)

I hope this clears up all your questions about MLR rebate checks. If not, you know where to find me.