A White House email captioned, “Did you get your check,” and dated August 1, 2012, states that “nearly 13 million Americans will receive more than $1 billion from insurance companies this summer.” The email, sent from info@messages.whitehouse.gov, explained that, under the Patient Protection and Affordable Care Act (ACA), health insurance companies are now required to spend at least 80 percent of premiums directly on health care as opposed to advertising, administrative costs and executive salaries. If they do not meet this standard, health care premium rebates to customers are required. Large group plans have an 85-percent requirement. The White House anticipates that more than $1 billion in rebates will be paid out during the summer of 2012 as a result of some health insurance companies falling short of the standard.

The ACA requires the payment of medical loss ratio (MLR) rebates to health insurance policyholders. The Department of Health and Human Services (HHS) issued final rules in December 2011 on the calculation and payment of MLRs (RIN 0938-AR35; Federal Register, December 7, 2011). The first round of rebates under the ACA on insurance issued both in the individual and group markets during 2011 requires payments by insurance providers to be made by August 1, 2012. HHS has reported that about 14 percent of all insurers are paying out rebates in 2012.

“There may be many employees who are expecting to receive a rebate check in the near future, but will receive nothing in hand,” Garrett Fenton, Miller & Chevalier Chartered, Washington, D.C., told CCH. With respect to group health insurance coverage, even where an employer receives a rebate check from its insurer, that does not necessarily mean the employer will pass through the rebate directly to its employees, Fenton observed. He added, “In the context of ERISA plans, Department of Labor guidance provides employers with some discretion as to how to use or dispose of their MLR rebates, as long as they “act prudently, solely in the interest of the plan participants and beneficiaries, and in accordance with the terms of the plan.”

“Despite what some have said, the MLR is not simply a cap on health plans’ profits, salaries, and marketing costs,” Robert Zirkelbach, America’s Health Insurance Plans, Washington, D.C., told CCH. Because of a narrow, pre-approved list of activities that improve health care quality, many programs and services that in fact improve the quality and safety of patient care are unreasonably excluded in determining the MLR rebate, he added.

Federal tax consequences. In April 2012, the IRS posted FAQs addressing the federal tax consequences of MLR rebates (http://www.irs.gov/newsroom/article/0,,id=256167,00.html). The FAQs explain that rebates are generally taxable if the individual policyholder previously deducted them on 2011 Form 1040, either on Schedule A or on line 29 as a self-employed individual. Rebates are also taxable if previously pre-tax premium payments are refunded to an employee participating in a group health plan, whether in a check from the insurance company, in a check paid through the plan’s administrator, or in the form of a premium reduction for the current 2012 year. The MLR rebates in those cases are considered a return to the employee of part of untaxed compensation that is no longer being used to pay for health insurance. MLR rebates are not taxable in cases of 2012 premium reductions based on 2011 premiums that had been paid on an after-tax basis. In such cases, the MLR rebate is considered a purchase price adjustment that reduces the cost of the participant’s 2012 insurance premiums.

Source: CCH Washington News Bureau.