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Prepare now for the next round of MLR rebates

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in Office Management,Payroll Management

Group health insurers that don’t spend between 80 and 85 cents of every premium dollar on medical care and health care quality improvement must make medical loss ratio (MLR) rebates to employees. This year’s rebates are due by Aug. 1. Take these steps now to prepare.

Taxes and pretax contributions

Insurers don’t have to pay rebates in cash; they may lower employees’ premium contributions for the remainder of the year. Last year, the IRS clarified that rebates that are attributable to employees’ pretax contributions are taxable wages. And this is true regardless of whether employees receive cash rebates or their share of contributions is lowered. Rebates are also taxable to new employees who weren’t on the plan last year if their current year’s contribution is lowered.

PAYROLL PRACTICE TIP: Since rebates attributable to employees’ pretax contributions are fully taxable, good coordination with the Benefits department and the insurer are essential. What to avoid: You don’t want the insurer to issue cash rebates directly to employees. Should that happen, you will have to make up the withholding from other payments to employees.

Terminated employees

Employees on COBRA are entitled to the same treatment as active employees, so their premiums would be reduced, as well. Reach out now to your COBRA administrator for the names and addresses of COBRA-covered employees. Watch it: COBRA-covered employees who pay with  pretax dollars (for example, out of severance) will have more income to report on their W-2s.

If you can’t find your COBRA-covered employees, and you determine that the cost of distributing their rebates equals their rebates, you may allocate their rebates to active employees using a reasonable, fair and objective allocation method. Again, good coordination with your Benefits department is key.

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