May 7, 2012
Authored by: benefitsbclp
Both the Center for Consumer Insurance Information and Oversight (CCIIO – a division of the Centers for Medicare and Medicaid Services) and the IRS have recently issued guidance related to the Medical Loss Ratio requirement under the Patient Protection and Affordable Care Act (“PPACA” or “health reform”). As you may know, the MLR requirements generally mandate that insurers spend a certain percentage of premiums (85% for “large group” plans, 80% for “small group” and individual plans) on (1) claims and (2) healthcare quality improvement activities. If they do not, they must provide rebates to enrollees. Insurers are also required to report on MLR compliance to CCIIO. Employers must properly allocate such rebates between the employer and employees, and satisfy applicable reporting and withholding obligations.
The FAQs released on April 20, provide very few surprises, but provide some helpful answers. They confirm that self-funded plans, Medicaid MCOs, and Medicare Advantage and Part D plans are not subject to the MLR requirements. The FAQs also state that insurance coverage labeled as “blanket” coverage may be subject to the requirements if it qualifies as coverage in the group market or individual market under the Public Health Service Act. Additionally, the FAQs state that coverage issued to a sole proprietor covering the proprietor and his/her spouse is considered individual market coverage.
Under health reform guidance, whether a policy is considered to be part of the “small group” or “large group” market turns on the number of employees of the employer purchasing the policy, rather than the number of enrollees. Insurers had raised with CCIIO that they might not always know the number of employees an employer may have when it issues a policy. This could happen, for example, where separate insurance policies are issued for employees employed in separate states. CCIIO advised that insurers should make every effort to obtain the information on the number of employees. If the information cannot be obtained, then the insurer may report based on the information it has (essentially, the number of employees to whom the policy is available). Employers with insured health plans should make sure insurers are given information on the total number of employees (even if some of them are not eligible for the policy) and should be on the look out for this information request from insurers.
The FAQs also state that insurers may satisfy MLR rebate requirements by providing a premium holiday, if state law permits premium holidays and the holiday is provided on a nondiscriminatory basis. Employers should be aware, however, that the Department of Labor previously issued guidance on how employers should handle MLR rebates. That guidance did not address premium holidays (although the IRS FAQs discussed below mention them). Employers should consult benefits counsel if they seek to apply analogous principles in determining how to provide premium holidays to their employees.
Under the MLR rules, insurers are required to comply with any higher MLR standard a state applies. However, the FAQs clarified that HHS will only apply such higher MLR standard if a state has taken affirmative action to implement such higher standard on or after March 23, 2010 (the date PPACA was passed). The FAQs point out that Massachusetts, New Mexico and New York have all taken such action. This means that if a state had a preexisting MLR requirement that was higher than PPACA’s the state will need to take some kind of affirmative action (the FAQs do not say what that would be) to cause that higher standard to apply.
The IRS has also issued its own set of FAQs on the effect of the MLR requirements. The highlights are:
- MLR rebates are return premiums that reduce the taxable income of insurers, regardless of how the rebates are provided.
- Insurers only have to issue 1099-MISCs if the rebates are greater than $600 and the insurer knows the rebate (in whole or in part) constitutes taxable income to the recipient.
- If an individual does not pay the premiums on a pre-tax basis through a cafeteria plan or deduct premium payments from taxable income, the rebate is not taxable, but if he or she does either of those, then the rebate generally is taxable.
- However, for employees participating in a cafeteria plan, the increase in their taxable income that occurs as a result of the premium holiday satisfies the taxability requirement.
- Any cash payment provided to employees who pay premiums on a pre-tax basis through a cafeteria plan is considered wages subject to employment taxes.
As most employers allow or require employees to pay premiums on a pre-tax basis through a cafeteria plan, the rules for those arrangements will be the most relevant. Employers should bear the reporting concerns in mind when processing MLR rebates.
Update June 8: Additional CCIIO Q&A Guidance
Update July 6: Healthcare.gov Article Summarizing Anticipated MLR Rebates
Update July 18: Additional CCIIO Q&As on MLR Rebates