Now that the Supreme Court has upheld the Health Care Reform legislation, several of our employers have been receiving their MLR Rebate Checks. So, what do you do with them?
There are tax consequences for the rebates. Here is an abbreviated idea of how to treat those rebates.
If it’s a Group Policy and the employee purchased health insurance with pre-tax dollars, the MLR Rebate is limited to employees participating in a group health insurance plan both in the year the employee paid the premiums being rebated and the year the MLR rebates are paid. Because the MLR Rebate is distributed as a premium reduction, the amount the employee pays for premiums through a salary reduction contribution in the subsequent year is decrease by $X. As a consequence, there is a corresponding increase of $X in his or her taxable income. The result is similar if the MLR Rebate is paid in cash: The employee has an $X increase in taxable income for the year in which the rebate is paid.
The Department of Labor, in it’s Technical Release 2011-04, provided a roadmap on apportioning MLR rebates where premium contributions come from both employers and employees. The guidance generally supports the apportionment of MLR rebates by way of a premium reduction regardless of whether employees participated in the plan during the plan year covered by the MLR rebate. This is good news for employers, since it will minimize additional administrative effort.
As always, if you have questions, please call Kelly at 270-663-6253.