• Rules under the Federal Health Care Law Apply to Employers That Receive Medical Loss Ratio Rebates
  • August 2, 2012 | Authors: Allison De Tal; Isabel Cesanto Safie; John D. Wahlin
  • Law Firm: Best Best & Krieger LLP - Riverside Office
  • Employers that receive medical loss ratio rebates from their health insurance companies must take steps to ensure that the rebates are properly handled. Government and private sector employers are subject to different rules that dictate the use of the rebates and what percentage of the rebate, if any, must be passed along to employees. If all or a portion of the rebate is passed along to employees, the tax and reporting obligations, however, are generally the same for all employers.

    To increase transparency, the Patient Protection and Affordable Care Act, recently upheld by the U.S. Supreme Court, requires health insurance companies to publicly report how premium dollars are spent. In an effort to ensure that individuals receive value for their premium dollars, the Act also requires insurance companies to issue a rebate if insufficient premium revenue is spent on medical care and activities that improve health care quality. Health insurance companies required to issue rebates for 2011 must do so no later than August 1, 2012. The rebate will be paid to the entity, often an employer, that paid the insurance premiums. Rebates owed to employers may be paid in the form of a premium credit or a lump-sum payment or reimbursement to an account if the premium was paid with a debit or credit card.

    Employers must be prepared if they receive a medical loss ratio rebate in the form of a lump-sum payment. If a state or local government employer receives a rebate, a portion of the rebate may have to be used for the benefit of its employees. For private sector employers receiving a rebate, the Department of Labor has issued guidance on how to allocate the rebate.

    Finally, if employers pass all or some of the rebate to employees, the employer must understand its tax and reporting obligations. Most employees will pay their portion of health insurance premiums on a pre-tax basis through the employer’s cafeteria plan. These employees will be subject to federal income and payroll taxes on the portion of the medical loss ratio rebate they receive - regardless of whether it is paid in cash or in the form of reduced health insurance premiums. Thus, the employer will not only need to withhold from such payments and pay the employer share of payroll taxes, but will also have to report such payments as wages. However, medical loss ratio rebates paid to employees who contribute to health insurance premiums on an after-tax basis will not typically be subject to federal income or payroll taxes.