Garrett Fenton Comments on Medical Loss Ratio Rebates in Federal Tax Weekly

"Current Medical Loss Ratio (MLR) Rebates Have Varied Tax Consequences"
Federal Tax Weekly

Garrett Fenton comments on medical loss ratio (MLR) rebates recently paid out under the Patient Protection and Affordable Care Act (PPACA).  “The perception based upon some media reports is that employers, employees, and individuals who purchase coverage in the individual health insurance market all will be receiving rebate checks,” Fenton said, adding, “While this may occur in some situations, U.S. Department of Health and Human Services (HHS) guidance allows insurance companies to issue rebates in a variety of forms, including credits against future premium payments or even pre-paid debit or credit cards in certain situations.”  Moreover, with respect to group health insurance coverage, even where an employer receives a rebate check from its insurer, that doesn't necessarily mean the employer will pass through the rebate directly to its employees, Fenton explained. “In the context of ERISA plans, U.S. Department of Labor (DOL) guidance provides employers with some discretion as to how to use or dispose of their MLR rebates, as long as they "act prudently, solely in the interest of the plan participants and beneficiaries, and in accordance with the terms of the plan.”

In terms of federal tax consequences of MRL rebates, IRS guidance indicates that if a tax benefit was previously gained on the premiums now being refunded, the rebate is taxable; otherwise, the premiums are usually tax free to the recipient.  According to Fenton, the guidance confirmed that where employees make premium contributions with pre-tax dollars through a cafeteria plan, any MLR rebates that the employer passes through to those employees will be subject to federal income and employment taxes, and related employer wage withholding obligations, in the year that they are paid. "This is true regardless of whether the rebates are distributed in the form of cash or future credits against premiums (for example, credits produce more taxable wages)," Fenton said.

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