Understanding and Distributing Medical Loss Ratio (MLR) Rebates

Insurance carriers must issue Medical Loss Ratio (MLR) rebates by September 30 when too much of the prior year’s premiums went to administrative costs or profit instead of claims and quality improvements. Employers who received MLR rebate checks will need to determine how much—if any—belongs to the plan and its participants.

How a rebate is treated depends on who paid the premiums:

• If the employer paid the full premium, the rebate is generally the employer’s to manage.
• If employees contributed to premiums—even partially—the corresponding percentage of the rebate is considered a plan asset governed by ERISA. Those funds must be used solely for the benefit of participants.

To determine the plan asset portion, employers should:

1. Calculate the percentage of total premiums paid by employees (including COBRA, payroll deductions, and premiums paid under FMLA).
2. Apply that percentage to the rebate amount.

If multiple plans are covered under the same insurer, rebates must be allocated proportionally unless the carrier breaks them out by plan option.

How Employers Can Use the Plan’s Share

When a portion of the rebate is considered a plan asset, there are two compliant options:

1. Enhance plan benefits.
2. Return funds to participants—either as a cash refund or a premium credit (“premium holiday”).

Most employers favor returning rebates to participants because benefit enhancements are difficult to implement with small or inconsistent rebate amounts.

Tax treatment depends on how participants originally paid their share:

• If premiums are paid on a pre-tax basis, rebate amounts are taxable income.
• If premiums are paid after tax, rebates are not taxable.

Timing

Employers should distribute any plan asset portion within 90 days of receiving the rebate.

Employers can generally limit distributions to current participants in the year the rebate is received. While former enrollees may technically be considered, the Department of Labor acknowledges it is usually impractical when the per-person amount is minimal.

Rebates can be divided evenly among eligible participants, if the method is reasonable and impartial.

Employer Considerations

Carriers must notify participants that a rebate was issued to the employer, but the notice does not specify amounts or distribution details. Employers are encouraged—though not required—to communicate how and whether participants will receive any share. Setting expectations is helpful, as per-person amounts tend to be small.

Carriers are required to distribute MLR payments each year no later than September 30.

If your organization receives a rebate, determine how much of the rebate qualifies as plan assets and decide how those funds will be allocated. Because these assets may fall under ERISA rules, employers must follow specific guidelines. In most situations, any plan-related portion of the rebate must be disbursed within 90 days of receipt.

It does not apply to excepted benefits, retiree-only plans, or account-based arrangements such as HRAs or FSAs.

Nondiscrimination Testing and the New Dependent Care FSA Contribution Limit

Beginning in January 2026, the maximum contribution to a Dependent Care Flexible Spending Account (DCFSA) will increase from $5,000 to $7,500 ($3,750 for married employees filing separately). This expanded limit offers employees greater tax savings for child and adult care expenses, but it also raises the stakes for employers when it comes to nondiscrimination testing (NDT).

Why This Matters

NDT rules haven’t changed, and with higher contribution limits, plans may be more likely to fail the 55% Average Benefits Test, which requires that non-highly compensated employees (NHCEs) receive at least 55% of the benefits received by highly compensated employees (HCEs). Other tests, such as the More-Than-5% Owner Concentration Test and Eligibility/Benefits Tests, also continue to apply.

While the higher contribution limit is a win for employees, it also makes careful planning and monitoring essential for employers. Reviewing plan design, updating documents where needed, and engaging in early testing can help ensure your DCFSA remains compliant while maximizing the benefit for your workforce.

Pfizer and U.S. Government Announce Drug Pricing Agreement

Pfizer has entered into a voluntary agreement with the U.S. government designed to reduce prescription drug costs for American patients while maintaining support for continued investment in U.S.-based innovation and manufacturing.

Pfizer leadership said the agreement provides greater policy certainty on pricing and trade issues, enabling the company to focus investment on innovation in oncology, obesity, vaccines, and immunology.

Question of the Month

Q. The birth of a child is a qualifying life event, allowing an employee to change plans mid-year. Can an employee still change plans if they don’t add the child to the medical plan?

A. The birth of a child is not only a qualifying life event, but it is a HIPAA special enrollment event. This means the employee has the right to change benefit options regardless of whether the employee adds the new child to the medical plan.

Answers to the Question of the Month are provided by Kutak Rock LLP. Kutak Rock provides general compliance guidance through the UBA Compliance Help Desk, which does not constitute legal advice or create an attorney-client relationship. Please consult your legal advisor for specific legal advice.