What is the Medical Loss Ratio and how does it apply to group health insurance plans?

A Medical Loss Ratio (MLR) is the percent of premiums an insurance company spends on claims and expenses that improve health care quality. Regulations require that Insurance companies must pay annual rebates if the MLR for groups of health insurance policies is less than 85% for large employer group policies and 80% for most small employer group policies.

The MLR provision is intended to ensure that a minimum percent of health insurance premiums are used to pay claims. This limits the amount health insurance companies can spend on administrative expenses and profits.

Guidelines for Employers’ Application of Medical Loss Ratio (MLR) Rebates

What does your Health and Welfare Plan Document Say?

  • Ideally, an employer has a documented process regarding how they apply their MLR Rebates each year. The written plan should be communicated to all employees and may be included in the plan’s SPD or wrap document. Insurers are required to send MLR Rebate announcements to participants but they are not required to specify rebate amounts. So employers may get questions regarding such rebate amounts.

What is the time limit?

  • The Plan must apportion MLR rebates within 90 days of receipt and they must apply equally to all similarly situated employees. Employees should have access to the rebate distribution process and it should be provided upon request.

Requirements for applying MLR Rebate?

The DOL gives three options to employers to apply the portion of the rebate that is considered “plan assets,” or the coverage portion that employees paid for. For example, if employees contributed 15% of the premium, then 15% of the rebate amount is considered plan assets and must be returned to employees by:

  • Reducing employees’ ( subscribers) portions of the annual premium for the subsequent policy year for all subscribers covered under any group health policy offered by the plan. (often called a “premium holiday.” )
  • Reducing employees’ (subscribers) portions of the annual premium for the subsequent policy year for only those subscribers covered by the health policy on which the rebate is based (in this case those covered in 2021) (“premium holiday” only to those that were covered in 2021).
  • Send cash refunds only to employees and subscribers who were covered under the group health policy on which the rebate is based. (could trigger taxable income if employees paid premiums with pre-tax dollars).

Rebates may be used to pay for the cost of benefit “enhancements” implemented by a plan sponsor (adding a benefit or service).

What employee groups must be included?

  • COBRA participants and those on FMLA must be included in the rebate distribution. Employers are not required to spend extreme amounts of money or administrative work to track down former participants if it exhausts rebate amounts.

What about Premium Only Plans?

  • If the Employer sponsors a Premium Only Plan, the rebate may be considered taxable income to the employees if pre-tax payroll deductions were taken.

What are the most common uses of the MLR rebates?

  • Many employers invoke premium holidays or use rebates to absorb the costs of benefit enhancements. There is an administrative burden to distributing cash refunds via ACH, checks, etc. and the possible tax ramifications may complicate this process.

Please contact Valerie Bruce Hovland, Compliance Manager at for further information on Medical Loss Ratios or other benefit-related compliance issues.

This summary is for informational purposes only and not intended to be legal advice.