# Medical loss ratio rebates. What to do when the carrier sends a check.

Source: https://ethosbenefits.com/benefits-101/mlr-rebates
Type: Benefits 101
Topic: Compliance rules and deadlines
Author: Donovan Ryckis, Founder and CEO
Reviewed by: Patrick Ansara, Partner and Director of Client Operations
Publisher: Ethos Benefits
Published: 2023-09-21
Last updated: 2026-11-03
Cite as: "Medical loss ratio rebates," Ethos Benefits, https://ethosbenefits.com/benefits-101/mlr-rebates, updated 2026-11-03.

**Short answer:** An employer that receives an MLR rebate must give employees the share that came from their premium contributions. Under DOL Technical Release 2011-04, that share is a plan asset and should be used within three months, as a premium holiday, reduced contributions, cash or benefit enhancements. The employer may keep only the share its own contributions paid for.

## What is the medical loss ratio rule?

The medical loss ratio rule requires health insurers to spend most of each premium dollar on medical care and quality improvement, not on overhead and profit. The Affordable Care Act set the minimums, and CMS enforces them through regulations at 45 CFR Part 158.

| Market | Minimum MLR | What it means |
|---|---|---|
| **Small group** | 80% | At least 80 cents of each premium dollar goes to claims and quality improvement |
| **Large group** | 85% | At least 85 cents of each premium dollar goes to claims and quality improvement |

Your state sets the line between small and large group, usually at 50 employees. The ratio is calculated for each insurer by state and market, averaged over three years, so a rebate reflects the insurer's whole block of business in your state, not your plan's own claims.

The rule applies only to insured coverage. A self-funded plan has no insurer collecting premiums for medical claims, so it never receives an MLR rebate. If you are weighing funding models, see [level-funded vs. fully insured](https://ethosbenefits.com/benefits-101/level-funded-vs-fully-insured).

## When do insurers pay MLR rebates?

Insurers that fall below the minimum must pay rebates by September 30 of the year after the MLR reporting year. A rebate paid in September 2026 relates to the 2025 reporting year.

For group coverage, the insurer usually pays the policyholder, which is normally the employer, with a notice explaining the rebate. Very small amounts are not paid out. If the total rebate owed to a group policyholder and its subscribers is under $20, the insurer pools it with other small amounts and spreads it across enrollees who are receiving rebates.

## Who owns an MLR rebate?

An MLR rebate belongs to the plan to the extent participants paid the premiums, and the employer may keep only the share its own contributions paid for. An employer that receives a rebate for an ERISA plan has to decide how much of it belongs to the plan. DOL Technical Release 2011-04 explains that a rebate is a plan asset to the extent the plan has a beneficial interest in it, which mostly comes down to who paid the premiums.

| Who paid the premium | Who the rebate belongs to |
|---|---|
| **Employer paid 100%** | The employer, if the plan documents and policy support that result |
| **Employees paid 100%** | The plan, for the benefit of participants |
| **Cost shared** | Split in the same proportion. If employees paid 30% of the premium, 30% of the rebate is attributable to them |
| **Plan or trust is the policyholder** | Generally the whole rebate is a plan asset, unless plan or policy terms say otherwise |

Your plan documents matter. Many wrap documents state how rebates are handled, and the employer should follow them. ERISA also sets a ceiling: the employer can never keep more of a rebate than the premiums and plan expenses it actually paid. Anything above that must be used for participants.

Once part of a rebate is a plan asset, the employer handles it as a fiduciary. That means acting solely in the interest of participants and documenting each decision. If your plan has no wrap document or summary plan description that addresses rebates, the [summary plan description](https://ethosbenefits.com/benefits-101/summary-plan-description) explainer covers what those documents should say.

## How should employers use the employee share?

Employers can use the employee share for a premium holiday, reduced contributions, a cash refund or benefit enhancements. The DOL guidance gives fiduciaries flexibility, as long as the participant share is used for participants and is used promptly. Under Technical Release 2011-04, a plan avoids the ERISA trust requirement for that share if it is used within three months of receipt to pay premiums or refunds. Treat three months as the working deadline.

| Option | How it works | Things to weigh |
|---|---|---|
| **Premium holiday** | Employees pay no contribution, or a reduced one, for one or more pay periods | Easy to run through payroll, reaches only current participants |
| **Reduced future contributions** | Lower employee contributions for a set period | Same as above, spread over more pay periods |
| **Cash refund** | A payment to each participant | Most direct, but creates payroll and tax work and can be costly for small amounts |
| **Benefit enhancements** | The plan adds or improves benefits | Must benefit the participants covered under the policy that earned the rebate |

The allocation method must be "reasonable, fair and objective," in the DOL's words. You can split the share evenly or in proportion to what each person contributed, for example weighting family coverage more heavily than employee-only coverage. A method does not have to match each person's premium history exactly to be fair.

Keep the money with the right group. If the rebate came from the medical policy, it should benefit the people covered by that policy. Using one plan's rebate to help a different plan breaches the duty of loyalty.

## Do employers have to pay former participants?

Employers do not always have to track down people who have left. The DOL recognizes that paying former participants may cost as much as the amounts owed, or more. When that is true, a fiduciary can reasonably decide to apply the share to current participants instead.

The same reasoning covers de minimis amounts. If a cash payment to each participant would be tiny, or would create tax consequences that outweigh it, the fiduciary may use the share for another permitted plan purpose, such as a premium reduction. Write down the numbers you looked at and the reason for your choice.

If the plan has terminated, the plan documents generally govern, and the fiduciary still has to consider whether paying former participants is cost-effective.

## Are MLR rebates taxable to employees?

Usually yes, because most employees pay premiums pre-tax. The tax result depends on how employees paid their share of the premium. The IRS addressed this in its MLR FAQs.

| How employees paid | Rebate as premium reduction | Rebate as cash |
|---|---|---|
| **Pre-tax, through a cafeteria plan** | Taxable. Lower salary reductions mean higher taxable wages | Taxable wages, subject to income and employment taxes |
| **After-tax, no deduction taken** | Not taxable | Not taxable |
| **After-tax, premiums deducted on the employee's return** | Taxable to the extent of the earlier tax benefit | Taxable to the extent of the earlier tax benefit |

Most employer plans collect employee contributions pre-tax, so in practice the rebate usually ends up as taxable wages. A premium holiday handles this through regular payroll. A cash refund should run through payroll too, with withholding.

## Government and church plans.

Plans not covered by ERISA follow the CMS rule in 45 CFR 158.242 instead of the DOL guidance.

- **Non-federal governmental plans.** The policyholder must use the subscriber share, in proportion to premiums subscribers paid, to reduce future premiums or pay cash refunds. It may divide the amount evenly or based on each person's contributions. Payment is due within three months of receipt, and late payments carry interest.
- **Former subscribers.** Amounts tied to former subscribers are pooled and used for current subscribers.
- **Church and other non-ERISA, non-governmental plans.** The insurer can pay the policyholder only if it receives a written assurance that the rebate will be used under the same rules. Without that assurance, the insurer pays the whole rebate directly to subscribers in equal amounts.

## A worked example.

*The figures below are illustrative round numbers, not from a real plan.*

An employer with 100 enrolled employees has a fully insured large group medical plan. Total annual premium was $1,200,000. The employer paid 75%, or $900,000, and employees paid 25%, or $300,000, through pre-tax payroll deductions. On September 15, the carrier sends a $50,000 MLR rebate.

1. **Find the employee share.** Employees paid 25% of the premium, so $12,500 of the rebate is attributable to them and is a plan asset. The employer may keep the other $37,500 if the plan documents allow it.
2. **Pick a method.** Employee contributions run $25,000 a month. A 50% reduction in one month's contributions uses exactly $12,500, and it automatically scales to what each person pays, so family enrollees get more than employee-only enrollees.
3. **Check timing.** The rebate arrived September 15, so the premium reduction should land in a payroll by mid-December.
4. **Former participants.** Ten people who were enrolled during the reporting year have left. Their shares would average about $125 each, and reissuing payments would take address searches, payroll runs and tax reporting. The fiduciary decides to apply the full share to current participants and records why.
5. **Taxes.** Contributions were pre-tax, so each employee's lower deduction for that month shows up as higher taxable wages. No separate tax step is needed.
6. **Keep the file.** Save the carrier notice, the calculation, the allocation method and the payroll records.

If the plan had been a city government plan, step 4 would follow the CMS rule instead: amounts tied to former subscribers are pooled for current subscribers.

## A short checklist.

- Confirm which policy the rebate relates to and who the policyholder is.
- Read the plan documents for any rebate language.
- Work out the participant share from the premium split for the reporting year.
- Choose a reasonable, fair and objective allocation method.
- Use the participant share within three months of receipt.
- Run cash through payroll with the right tax treatment.
- Document every decision and keep it with your plan records.

MLR rebates are one of the items on the Ethos Benefits [compliance calendar](https://ethosbenefits.com/services/compliance), along with the other federal filings and deadlines a health plan carries each year.

## Frequently asked questions

### What is an MLR rebate?

An MLR rebate is a refund a health insurer must pay when it spends less than 80 percent of premiums in the small group market, or 85 percent in the large group market, on medical care and quality improvement. For group coverage the insurer usually pays the employer as policyholder, by September 30 of the year after the reporting year.

### Do employers have to share an MLR rebate with employees?

Usually, yes. If employees paid part of the premium, the share of the rebate that matches their contributions is generally a plan asset under ERISA and must be used for their benefit. The employer can keep only the share its own contributions paid for, and only if the plan documents and policy allow it.

### How long does an employer have to distribute an MLR rebate?

The DOL's guidance points employers to using the participant share within three months of receiving it. Insurers pay rebates by September 30, so a check that arrives in September should generally be used by the end of December. Holding the participant share longer generally brings in ERISA's trust requirement.

### How do you calculate the MLR rebate share for employees?

Employers multiply the rebate by the percentage of the premium employees paid during the reporting year. If employees paid 25 percent of the premium, 25 percent of the rebate is theirs and is a plan asset. The employer then allocates that amount with a reasonable, fair and objective method, such as an even split or one weighted by each person's contributions.

### Do self-funded or level-funded plans get MLR rebates?

No. The MLR rule applies only to insurance carriers, so only fully insured coverage produces MLR rebates. A level-funded plan may return a surplus under its own contract terms, but that is not an MLR rebate. Fully insured employers see rebates when the carrier falls below 80 percent in the small group market or 85 percent in the large group market.

### What if our plan is a government or church plan?

Those plans are not subject to ERISA, so the CMS rule at 45 CFR 158.242 applies instead. A governmental employer must pass the subscriber share to subscribers within three months of receipt, and late payments carry interest. For a church plan, the insurer pays the employer only with a written assurance it will follow the same rules, or else pays subscribers directly.

## Sources

1. [Technical Release 2011-04: Guidance on Rebates for Group Health Plans Paid Pursuant to the Medical Loss Ratio Requirements](https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/technical-releases/11-04), U.S. Department of Labor, Employee Benefits Security Administration
2. [45 CFR § 158.210, Minimum medical loss ratio](https://www.law.cornell.edu/cfr/text/45/158.210), Legal Information Institute, Cornell Law School
3. [45 CFR § 158.240, Rebating premium if the applicable medical loss ratio standard is not met](https://www.law.cornell.edu/cfr/text/45/158.240), Legal Information Institute, Cornell Law School
4. [45 CFR § 158.242, Recipients of rebates](https://www.law.cornell.edu/cfr/text/45/158.242), Legal Information Institute, Cornell Law School
5. [45 CFR § 158.243, De minimis rebates](https://www.law.cornell.edu/cfr/text/45/158.243), Legal Information Institute, Cornell Law School
6. [Medical Loss Ratio (MLR) FAQs](https://www.irs.gov/uac/medical-loss-ratio-mlr-faqs), Internal Revenue Service