As a result of the Affordable Care Act (ACA), some employers that sponsor group health plans have begun receiving Medical Loss Ratio (MLR) rebates from their health insurance carrier(s). Upon receipt of these rebate checks, employers have some decisions to make:
- How much of the rebate check relates to employer versus employee paid premiums? Only the portion of the rebate attributable to employee paid premiums is required to be passed on to the employees.
- Who is entitled to receive a portion of the rebate? Rebates can be passed on only to employees participating in the plan (insured by the carrier issuing the rebate) both in the year the premiums are paid and the year the rebates are provided; or only to employees participating in the plan the year the rebates are paid.
- How does the rebate get passed on to the employees? The rebate can be distributed directly to employees or can be used to offset future premiums “premium holiday.”
An employer’s decision on how to pass on the rebate will have some tax ramifications to employees. If the employees’ premiums are paid on a pre-tax basis, then any rebate that is passed on directly to the employee will be taxed as regular compensation. If premiums are paid post-tax, then the rebated amounts are not taxable. If the employer decides to apply the rebate as a premium holiday, then employees will have a lower premium for the year, thereby increasing their taxable income.
In the end, employers need to be smart and equitable in how they treat MLR rebates. The expectation is that not all employers will receive them and most of the time the individual rebate amounts will be small. A sensible, equitable approach that is well-documented should be the ultimate goal.
For further information, please contact your Aronson tax professional or Mark E. Flanagan, Director, Employee Benefit Plan Services Group at 301.231.5257.
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