Many Massachusetts employers are receiving a welcome surprise from their health insurance companies this month – a rebate for health care premiums paid in 2011.

The rebates are being made under a Massachusetts law passed in 2010 that requires health insurance companies to spend a minimum percentage of premium dollars on medical claims, clinical services and activities designed to improve health care quality. When this minimum “Medical Loss Ratio (MLR)” is not met, then the health insurance company must issue a rebate.

Rebates are coming from Fallon Community Health Plan, Harvard Pilgrim Health Care, Nerighborhood Health Plan and Tufts Health Plan.

Here are some important facts for employers whose checks are “in the mail.”

Employers in the merged market (companies with 50 or fewer insurance eligible employees and individual customers)are eligible to receive rebates.

Employers due a rebate will receive a notice from their health insurance carrier.  The carrier has several payment options, including a check or a reduction in future premiums.  The first rebates under the law are in the process of being issued and AIM has fielded a number of calls through its Employer Hotline regarding how the funds should be handled.

Companies that contribute 100 percent of the cost of health insurance premiums for their employees will not have to distribute the rebate to their employees.  However, if employees contributed to the cost of premiums, they are entitled to a percentage share of the rebate equal to the percentage of their contribution to the total premiums paid.

Who is entitled to a rebate – the employees who participated in the plan in 2011 or the current employees?  To what extent must an employer go to track down former employees?

Your plan document might identify how to distribute any rebates to which employees are entitled.  If not, then company plan administrators should meet with their benefits advisors and insurance carriers to incorporate a process into the plan documents.  Just as the carriers have options for issuing the rebates, employers have options for allocating funds to employees. The plan is permitted to weigh the costs and benefits, and the competing interests, in making its decision.

The allocation method need not reflect the premium activity of the individual participants provided that it is reasonable, fair and objective.  For example, the company need not provide a rebate to each prior year plan participant according to his or her contributions.  Instead, the company can distribute the rebate to current year participants in the plan.

In addition, employers who offer multiple plans might receive a rebate for one plan but not others.  In this case, the rebate should be applied for the benefit of the participants and beneficiaries who are covered by the plan to which the rebate applies, provided it would be prudent and solely in the interest of the plan to do so.

Plan administrators are encouraged to consult with their tax advisors to explore various distribution options and their tax implications.  As a general rule, if the employee contributed to the plan on a pre-tax basis, then the rebate, whether in cash or in the form of a premium reduction, may be taxable.  The opposite would likely hold if the employee contributed to the premiums on a post tax basis.  A rebate could be taxable even if it is given as a reduction in a current year premium.

Look for your rebate and make sure to discuss your options with your broker, your health insurance carrier and your tax and benefits advisors.  Whatever you decide to do, the best practice is to document your decision and communicate with your employees.