Wednesday, January 16, 2019

Medical Loss Ratio Rebates

One provision of the Patient Protection and Affordable Care Act (Pub. L. No. 111-148, as amended) requires insurance companies spending less than 80% of the premiums on health care to return a portion of the premiums to policyholders.  When these health insurance rebates for employer-sponsored health plans are based on employee pre-tax 125 contributions, the rebates are taxable when repaid through payroll. It subjects both the employee and employer to taxes.


Employers have two ways to return the portion of the rebate that was based on employee contributions, some of which were based on pre-tax contributions and others on after-tax contributions (such as domestic partner):

1)  Reduce the employee's portion of the current health insurance premiums. Reducing the pre-tax deduction increases the employee's taxable wages by the amount of the taxable portion of the rebate. Rebates based on after-tax contributions would need to be returned by reducing an after-tax contribution.  This is the easiest and recommended approach.

2) Pay the employee a cash rebate. You will need to tax the portion of the rebate that is based on contributions that were originally pretax. Rebates based on after-tax contributions, such as domestic partner, would not be taxable. This requires the use of taxable and nontaxable earnings codes. Keep in mind that while cafeteria 125 pre-tax health insurance contributions are not taxable  for state withholding in all states other than New Jersey, they are taxable for unemployment insurance in about half of the states.



Here is the action for each of the two options:

Reduce current premiums - Reduce your employee's pretax and after-tax medical premiums to give your employees their rebate on a regular payroll.

Cash rebate - Set up a taxable earnings payroll item for the taxable portion of the rebate and a nontaxable earnings payroll item for the nontaxable portion of the rebate, and then pay it on a regular payroll.

You may wish to communicate with your employees so that they understand that the rebate is now subject to federal, state, and local taxes to the extent the rebate is based on pre-tax deductions made last year.

Note: There are companies who absorb or pay for the health insurance premiums of their employees thus, no rebate to employees is needed.

Sources : For the most current information, please see (,,id=256167,00.html) or contact your accountant/tax consultant or call the tax agency.

Note:  All of the information above was sent in a communication last September 23, 2012 to all Premier Payroll Users.

This article is written with the undertaking that tax rules and laws are constantly changing and is intended for informational purposes only. The topic is updated up to the Publish Date found at the top portion of SuiteAnswers (below the Subject Title). We are not providing tax consulting or legal advice. If you have any questions concerning your situation or the information provided, please contact your tax consultant, accountant or attorney.


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