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Recently, many employers have been receiving checks labeled
"rebates" from their healthcare insurers, and their first
question is, "Why am I receiving this?" Under the Patient
Protection and Affordable Care Act ("PPACA"), health
insurance issuers in the group or individual market must provide an
annual rebate to enrollees if the issuer's medical loss ratio
("MLR") fails to meet minimum percentages. These minimum
percentages are 85 percent in the large group market and 80 percent
in the small group or individual market. The rebates may either be
paid in cash or used to reduce the amount of an employee's
health insurance premium payment. Insurers must distribute the
rebates by August 1.
These rebate checks can pose a trap for employers. First, many
are unaware of the rebate provision in PPACA. Second, many are
unsure what to do with them. Because these checks represent a
rebate of premiums paid to the insurance company for the purchase
of health insurance, employers must be alert as to what they are
required to do with the checks. Unfortunately, many insurance
providers are leery of discussing how to handle distributions of
rebate due to legal considerations.
As a general rule, if the healthcare plan includes a trust or
other provisions dealing with assets that are returned to the plan,
the plan sponsor has a fiduciary obligation to treat the rebate as
plan assets and follow the terms of the plan. If the plan sponsor
is the policyholder, then determining the plan's portion, if
any, may depend on provisions in the plan or the policy or on the
manner in which the plan sponsor and the plan participants have
shared in the cost of the policy. If the employer is the
policyholder and the insurance policy or contract, together with
other instruments governing the plan, can fairly be read to provide
that some part or all of a distribution belongs to the employer,
then that language will generally govern. In that case, the
employer may retain distributions. In such an instance, it is
generally recommended that the employer use the rebate to reduce
its current year contribution.
However, if the plan document and other information regarding
the plan do not resolve the ownership interest, then the plan
sponsor must look to the person or entity that paid for the
insurance. As a result, to the extent that an employee pays for
their health insurance, the employee may be entitled to a portion
of the rebate check. Where the employer sponsors the insurance plan
and pays for 100 percent of the insurance premium, the employer may
be entitled to the check. Finally, where the employer and employee
share the cost of the insurance, the rebate should be allocated
between the two parties.
In the situation where the employee is entitled to the rebate,
the employer has the option to issue the rebate in cash or to use
the rebate to reduce the employee's current year contribution
for insurance. One complicating factor in issuing cash to the
employee is where the participant made their contribution on a
pre-tax basis is taxable in the year of receipt. In that case, to
the extent that the employer actually issues the rebate back to the
participant in lieu of using the rebate to reduce the current year
contribution, the employee should have taxable income subject to
withholding and FICA taxes.
The consequences of receiving a rebate check can be confusing.
Schnader's Tax Group can assist in determining what steps an
employer should take to insure proper distribution of rebate
proceeds.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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