What are Medical Loss Ratio (MLR) rebates?

Under the Affordable Care Act, the MLR rule (which became effective in 2011) requires health care companies to spend a certain percentage of the premiums they receive on health care services. If the health care company does not fulfill the MLR rule, the health care company then owes rebates to their insurers. Health care companies send out notices in July, to plan participants (employer and employees), communicating whether they will or will not be issuing rebates with respect to their plan. For the majority, health care companies will provide the rebate owed to the policyholder of the plan, which is usually the employer sponsoring the plan. Health care companies must distribute rebates by August 1st, and are based on the health care company's MLR for the previous year.

If you receive a MLR rebate from your health care company, you will need to decide how the rebate will be used and distributed, as there are a couple of options depending on whether insurance premium payments were made with pre or after tax dollars.

Paying Insurance Premium Amounts with Pre-Tax Dollars

MLR rebates are considered taxable income and subject to employment taxes when rebates originate from pretax premium payments. The IRS guidance provides employers with a couple of options:

  • Providing health plan insurance premium credits to plan participants, which is considered a reduction in the pre-tax amount due by the employee under the cafeteria plan and, therefore, increases wage income.
  • Or distributing employees' proportional share of rebate within three months from the date the rebate is received, which is considered additional wage income.

The IRS has posted a set of FAQ's describing tax consequences for MLR rebates. To read it, please click here.

Paying Insurance Premium Amounts with After-Tax Dollars?

MLR rebates for insurance premium payments made with after-tax dollars are not taxed again. The IRS guidance provides employers with a couple of options.

  • Providing tax free insurance premium credits to plan participants
  • Or, distributing employees' proportional share of rebate (tax free) within three months from the date the rebate is received

The IRS has posted a set of FAQ's describing tax consequences for MLR rebates. To read it, please click here.

How to enter Medical Loss Ratio (MLR) rebates into QuickBooks Desktop?