Medical loss ratio rebates are not free cash: most of the money belongs to plan participants, and a three-month clock is running
That health insurance rebate in the company account is probably not all the employer’s to spend. Under the Employee Retirement Income Security Act (ERISA), plan sponsors that received a medical loss ratio (MLR) rebate this fall have about three months from the day it arrived to distribute or apply the participant share. For employers whose rebate landed on September 30, that points to roughly December 30.
Insurers that missed the Affordable Care Act (ACA) MLR standard for 2025 had to issue rebates to group health plan sponsors by September 30. Fully insured large-group plans must spend at least 85 percent of premiums on clinical services and quality improvement, and small-group plans must spend at least 80 percent. Self-funded and level-funded plans fall outside the MLR rules, so they generate no rebates.
The pot is smaller this year. A KFF analysis of preliminary insurer-reported data compiled by Mark Farrah Associates estimates carriers issued about $759 million in MLR rebates in 2026, down from $1.6 billion in 2025 and $958 million in 2024. Rebates rest on a three-year average, so a carrier’s 2026 payout reflects its 2023 through 2025 results.
Who owns the rebate money?
ERISA treats a slice of most MLR rebates as plan assets, not company income, and the dividing line is who paid the premiums. Where employees contributed, the matching share must be used only for the benefit of plan participants and beneficiaries. Employers that paid 100 percent of premiums can keep the entire rebate. Where employees paid 100 percent, the whole rebate is a plan asset.
The split is proportional. If employees paid 30 percent of premiums in the MLR reporting year, 30 percent of the rebate is a plan asset. That share is measured against premium contributions for the year the rebate covers, not the current plan year.
The three-month window exists because plan assets generally have to be held in trust. The Department of Labor’s Technical Release 2011-04 on MLR rebates and plan assets relieves plans of that trust requirement when the money is used promptly. The release also cites de minimis amounts as a reason to use a route other than cash, but it does not define the term. The plan fiduciary has to decide what counts as de minimis and write down why.
What can employers do with the participant share?
Three routes satisfy ERISA’s exclusive-benefit standard. The plan-asset portion can go to participants through a reasonable, fair and objective allocation method, be applied as a premium reduction in the next plan year, or fund benefit enhancements. Employers with more than one benefit option must also keep each option’s share separate, because a rebate attributable to one option cannot be used to benefit enrollees in another.
Cash checks are the least popular route. Jay Kirschbaum, senior vice president and director of benefits compliance at World Insurance Associates, said in the firm’s 2026 year-end compliance roundup that giving employees a pro rata share is always permitted but “typically very burdensome,” which is why employers look for alternatives. He advised keeping the plan-asset analysis, the allocation method and proof of how the money was used.
A premium holiday has obvious appeal. Marsh projects that employer health costs will climb 8.2 percent per employee in 2027, the steepest increase since 2003, and fully insured small employers are already absorbing hits such as New Mexico’s approved 19.8 percent average rise in small group premiums for 2027. Segal’s 2027 survey projects a median medical trend of 9.9 percent for open-access preferred provider organization (PPO) plans, so any offset to participant premiums will be noticed.
The pressure point is employees
Carriers typically notify covered employees directly when a rebate is generated, which creates an awkward gap. Employees who learn a rebate exists often expect their share before the employer has finished the fiduciary analysis. Plan sponsors that received a rebate this fall should confirm that the analysis is complete, an allocation method has been chosen and the records are in place well before the end of December.
The December 30 date assumes a September 30 receipt. The clock starts on the day the rebate arrives, so employers that received it later have later cutoffs, and those that received it earlier have less time.
