Beginning this year, a health insurer whose medical loss ratio (MLR) does not meet minimum requirements must provide annual rebates to its policyholders. The IRS has posted FAQs which explain the tax treatment of these rebates to issuers and policyholders.
Medical loss ratios essentially reflect an insurer’s profit margin. Under the new health care act, health insurers are required to spend 80 percent of their premiums on payment for medical services or on activities that improve health care quality, in the individual and small group market. If insurers fall short of this target, they must give rebates to their enrollees. For large group markets, the requirement is 85%. The rebate requirement begins this year.
Tax Treatment of Rebates
If in 2011 a taxpayer deducted premiums paid for a health insurance policy as either an itemized deduction or as a self-employed health insurance deduction, any rebate must be included in the taxpayer’s 2012 gross income to the extent a tax benefit was received.
This treatment applies whether the rebate is received in cash or as a premium reduction. If the taxpayer did not deduct the premiums, the rebate is not subject to federal income tax. For insurance companies, rebates paid reduce the insurance company’s taxable income.
For Q&As on the rebates, see http://www.irs.gov/newsroom/article/0,,id=256167,00.html.