Healthcare Rebate: What do you do with that check?

Holly Breuer, CPA

Because some health insurance providers were deemed to have "overspent" on their 2011 overhead expenses by the Patient Protection and Affordable Care Act (Obamacare), some health insurance policyholders have received rebates of a portion of the premiums they paid or they will be getting that rebate soon.  Getting a check in the mail is always nice, but then the question comes up:  what do you do with it once it arrives?  Well, if you're a business owner, that will depend on several things:   

·         How much of the premium did you, as the employer, pay for your employees?

·         How many of your employees were part of your plan in 2011?

·         Were the original premium payments paid pre-tax or post-tax?

If you as the  employer paid all of the health insurance premiums as part of your benefit package for employees, then really nothing needs to be done except to cash the check.  If, though, as is generally the case, the employees pay for some part or percentage of their monthly premiums, then you have the responsibility to make sure that the employees’ share of the rebate is allocated to them in a fair manner and then paid either through a direct refund or through reduction  of their share of future premium costs. 

Example:  You paid 50% of the health insurance premiums for your ten employees and they paid the other 50%.  If you receive a rebate check for $5,000, then the business will keep $2,500 of the rebate and the remaining $2,500 is allocated to the employees.  Assuming there has been no employee turnover, it should not be burdensome to either refund the amount using a formula relative to what each employee paid in premiums; or use the total to reduce their future premiums.

What if the amounts allocable to each employee are negligible or what if they had paid for their insurance premiums on a pre-tax basis and the rebate would be a taxable item to them?  You could decide to forgo the refund route and  instead use that rebate money to lower your current employees' future health insurance premiums.  This is also a good option for a business with a high turnover of employees since you will not be required to find employees that paid premiums in 2011 who may no longer be with your company.

If you want more information, the IRS has an FAQ sheet regarding these rebates, called "Medical Loss Ratio" rebates.  You will find that information here: http://www.irs.gov/newsroom/article/0,,id=256167,00.html

Of course, you can also call me if you have any questions.