Texas School Districts receiving MLRs

January 13th, 2021

If your District received a credit on your December 2020 invoice from TRS and were notified by TRS that this credit is the result of a Medical Loss Ratio Rebate (MLR), please continue reading.  

This Memorandum is not to be considered Legal or Tax Advice nor advice specific to Your District’s situation with respect to the MLR Rebates.  Instead, the information below is provided as general guidance only.  Because each District may have different situations with respect to the MLR Refunds, we HIGHLY encourage Districts to seek Legal and Tax Advice before acting.  

FIRST and MOST IMPORTANTLY:  The MLR Rebate funds need to be distributed within three (3) months of receipt of these funds.  Our Recommendation is to distribute the funds as soon as possible as your District does not necessarily know when the funds were distributed to TRS.  Therefore, we do not really know if a District has until March 2021 to distribute the funds.  What we DO know is that if a District does nothing by March, the District could face ACA Penalty assessments.  
Second:  The MLR Rebate is not to be shared with ALL employees or all employees on other plans.  This rebate is only to be distributed/used to benefit persons on the Plan for which the MLR Rebate was issued.

There are several options on how these Plan Assets can be distributed:

1. a cash refund to participants currently on the Plan issuing the MLR Rebate at the time the rebate was received;
   1. If the employee paid his/her portion of the insurance premium on pre-tax basis (e.g. through a cafeteria plan) the distribution of the rebate as cash will generally be taxable to the employee and withholding rules will apply.  The amount of the rebate must be reported on Form W-2.   
   2. The Rebate monies can be split evenly across all participants OR can be split up based on the participants’ actual contributions to the premiums in a manner that reasonably reflects each eligible participants’ contributions to premiums (ie Jane Doe has employee only coverage and John Smith has Employee Plus Family coverage so John receives more in Rebate monies.
   3. The Rebate monies should only be shared with participants enrolled in the plan issuing the Rebates
2. a reduction in current participants’ share of future premiums (ie premium credit) for the Plan issuing the MLR Rebate (“Premium Holiday”);
   1. This is an option we have seen used more often by other public entities in other states receiving MLR Rebates.
   2. The Rebate monies are not taxable to the active participants on the plan.
   3. The Premium Holiday can be limited to the Current participants of the plan issuing the Rebate OR can be shared across the District and all Plans for current participants.
3. a cash refund to participants of the Plan in the plan year for which the MLR rebate was had (ie list of participants provided to the District by TRS for 2019).
   1. If the employee paid his/her portion of the insurance premium on pre-tax basis (e.g. through a cafeteria plan) the distribution of the rebate as cash will generally be taxable to the employee and withholding rules will apply.  The amount of the rebate must be reported on Form W-2. 
   2. Most likely the Rebate should be refunded to both employees actively employed in the plan year AS WELL AS Cobra Participants.

There has been another method of distributing the funds considered and that is to use the assets to enhance plan benefits but we do not believe that is allowed in this situation and more importantly, REMEMBER the District can only enhance benefits for the Plan issuing the Refund so this option (even if it is an option) does not work for most Texas Districts.  PLEASE UNDERSTAND that the District is considered the Fiduciary of these monies and those persons handling the health plan, finances and payroll for the District could find themselves in breach of their fiduciary obligations if the plan assets are NOT handled appropriately.

Again, we highly encourage Districts to seek specific legal and tax advice before making the decision on how to handle the MLR Rebates but hope this memorandum gives some general guidance on options available.

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