MLR guidelines impact broker commission, make employee rebates non-taxable

The Department of Health and Human Services issued final regulations in December for the Medical Loss Ratios (MLRs) mandated by health care reform. The final regulations count broker commissions as part of a health insurer’s administrative costs, rather than allowing them to be paid from the benefits side of the budget, as brokers had hoped. As a result, insurance companies have reduced agent commissions, in many cases by 50%.

Some groups feel strongly that broker assistance is vital for employers and individuals who need personal advocates when choosing health coverage. They continue to lobby Congress to change the law, and bipartisan bills have been introduced in both the House and the Senate.

Driving major industry change
As it stands now, the MLR rules on broker commissions may accelerate a move to new models of broker compensation, such as fee-based consulting, and may compel more brokers to broaden their portfolios with other valuable, non-medical benefits.

For more background on the MLR ruling to count broker fees as overhead read our article from December.

Making employee rebates non-taxable
The MLR mandates require health insurers to issue rebates to consumers if they do not spend the required percentage of premium dollars on medical care and health care quality improvement during each plan year. The percentage amount varies by case size:

• 80% (small groups)
• 85% (large groups)

The rebate to consumers may be issued as a premium credit, a lump-sum check or a lump-sum reimbursement to the same account that the enrollee used to pay the premium.

During the comment period on the MLR regulations, HHS noted that these rebates made to consumers would be considered taxable income, which was not the intent of the law. The final regulations address this issue by changing the method of rebate delivery in group markets. Rather than providing rebates directly to consumers, health insurers are required to pay them to the group policyholder — typically the employer — so the rebates become plan assets, which are then distributed to individuals within the plan. This keeps the rebates from being taxable income for individuals.

When rebates are paid to a group policyholder that is an ERISA plan sponsor, the rebates may be plan assets, and are subject to rules under Title I of ERISA relating to fiduciary responsibilities.

Additional MLR regulations
The final regulations also:

• Address the treatment of “mini-med” and expatriate policies under the MLR regulations for years after 2011
• Modify the way the regulations treat ICD-10 conversion costs
• Change the rules on deducting community benefit expenditures

An update on MLR waivers
Some states have requested temporary waivers from the MLR requirements. In order to qualify for a waiver, a state must show that meeting the MLR required percentage for benefits dollars would likely destabilize the individual market in that state and result in fewer choices for consumers. The Kaiser Family Foundation is tracking the states that have applied for and been granted waivers on this website.

Impact on brokers — The MLR requirements may limit the ability of brokers to serve the needs of individuals and small employers who need assistance choosing health insurance coverage. Unless Congress passes legislation to change the MLR portion of the law, these regulations will mean a groundswell of change as brokers seek other forms of revenue.

Impact on employers — Employers offering group health insurance plans will need to be aware of their duties as policyholders when it comes to handling any rebates due to employees under the MLR rules. ERISA plan sponsors will need to understand their fiduciary responsibilities under Title I of ERISA regarding these rebates.

Employers may be able to continue to seek valued assistance from brokers under new compensation models.

Impact on employees — Employees who are due rebates from group health insurers will not have to pay a tax on this income, regardless of whether it is delivered as a premium credit, a lump-sum check or a lump-sum reimbursement to the same account that the enrollee used to pay the premium.

One important note: Self-insured health plans are not “health insurance issuers” as defined by the Public Health Service Act. This means employers who self-insure their medical plans are not subject to the MLR regulations.