by Michael Blitstein, CPA, and Donald J. Schaffer, CPA/ABV, CVA, CFF
Insurance companies have begun to issue rebates to policyholders on premiums resulting from final rules on the calculation and payment of medical loss ratio.
As a quick summary, workers are entitled to the same share of the rebate as they pay for their health insurance. If an employer pays 80 percent and the worker pays 20 percent, then the rebate should be split 80/20, respectively. The rebates may be paid back to the workers in cash or applied to reduce premiums. The workers receiving the benefit can be either the actual workers who paid the premiums in 2011 or can be those who are currently employed in 2012.
The tax treatment of the rebate or credit has lots of variables. Treatment will differ depending on whether the plan is a pre-tax or an after-tax plan. It further varies depending on whether it is paid to current employees or to 2011 employees. Finally, it may depend on whether or not the employee deducted the payment on a 2011 return.
In a pre-tax plan, the employee would have to pay income taxes and possibly, but not always, employment taxes on any rebates they receive. In an after-tax plan the employee would not have to pay tax on the rebate unless the employee deducted premiums and received a tax benefit for the deduction. The employee may not receive any money if the employer decides to use it to lower future premiums or add benefits, but the “pre-tax” employee would have an increase in taxable wages and perhaps a larger fringe benefit reduction for the amount of refund applied to premiums.
The rebates are not taxable if received from or applied to premiums in an “after tax” (unless deducted) plan, but the rebates reduce current year medical expenses for the purpose of itemized deductions if paid to the employees participating in 2011, but perhaps not if distributed based on 2012 employment. Treatment of the rebate is extremely fact specific, and is discussed in detail at: http://www.irs.gov/newsroom/article/0,,id=256167,00.html
CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail Michael Blitstein at or Don Schaffer at if you have any questions about this posting or if we may be of assistance in any way.