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Health Insurance Rebate: taxable?
Old 09-30-2019, 10:40 AM   #1
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Health Insurance Rebate: taxable?

I just got my "Medical Loss Ratio Rebate" from 2018. Over $500!

Does anyone know if that's reported to the IRS?

I'm sole proprietor, and so deduct the premiums. So, I suppose that
the rebate is taxable. Any idea on how that would be handled? is it off 2018 return or on to 2019 return?
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Old 09-30-2019, 11:14 AM   #2
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Old 09-30-2019, 11:15 AM   #3
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I looked this up the other day when I received my rebate. Based on this FAQ, since I received a tax credit last year my understanding is mine will be taxable this year and will be reported as Misc Income.

https://www.irs.gov/newsroom/medical...ratio-mlr-faqs
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Old 09-30-2019, 11:28 AM   #4
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Oh, thanks. so no 1099 because it's less than $600..
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Old 09-30-2019, 11:29 AM   #5
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Originally Posted by karen1972 View Post
I looked this up the other day when I received my rebate. Based on this FAQ, since I received a tax credit last year my understanding is mine will be taxable this year and will be reported as Misc Income.

https://www.irs.gov/newsroom/medical...ratio-mlr-faqs
Could you post the section of that document that states the rebate is taxable if you receive a premium tax credit?
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Old 09-30-2019, 01:31 PM   #6
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Quote:
Originally Posted by jetpack View Post
I just got my "Medical Loss Ratio Rebate" from 2018. Over $500!

Does anyone know if that's reported to the IRS?

I'm sole proprietor, and so deduct the premiums. So, I suppose that
the rebate is taxable. Any idea on how that would be handled? is it off 2018 return or on to 2019 return?
This may help... not directly on point but analogous.

https://www.irs.gov/newsroom/medical...ratio-mlr-faqs

Quote:
In Questions 5 through 7, assume that the MLR rebates are provided only to employees participating in a group health plan both in the year employees paid the premiums being rebated (in these examples, 2011) and the year the MLR rebates are paid (in these examples, 2012).

Q5. In 2011, Daniel participated in his employerís group health plan and received health coverage under the group health insurance policy purchased directly by his employer under the plan. The plan provides that Danielís employer pays for 60% of the premium for each employee, and the employee pays for 40% of the premium on an after-tax basis. Daniel does not deduct the premiums on his 2011 Form 1040.

On July 1, 2012, Danielís employer receives a MLR rebate of part of the 2011 group health insurance policy premiums. The MLR rebate is made in the form of a reduction in the current year premium for coverage under the group health insurance policy. In accordance with the terms of the group health plan and consistent with applicable Department of Labor (DOL) guidance, 60% of the rebate is used to reduce the employer portion of the premium due for 2012, and 40% of the rebate is used to reduce the employee portion of the premium due for 2012, but only for participants under the plan who also were participants under the plan during 2011.

Because Daniel participated in the plan during 2011 and 2012, he is entitled to a MLR rebate. As a result of the rebate and corresponding premium reduction, Danielís premium for 2012 coverage under the group health plan is reduced.

Is Danielís MLR rebate income subject to federal income tax?

A5. No. The MLR rebate that Daniel receives in 2012 is a rebate of part of his 2011 insurance premiums (a purchase price adjustment). Daniel paid taxes on his compensation as an employee and used part of the after-tax income to pay his portion of the 2011 premiums. He did not deduct the premiums; therefore, the rebate is not taxable when applied as a reduction in the amount of premiums due for 2012. In addition, because the MLR rebate is a return of amounts that have already been subject to federal employment taxes, the rebate is not subject to federal employment taxes.

Q6. Would Danielís MLR rebate be subject to federal income tax if the insurance company had paid the MLR rebate in cash and then the employer distributed the MLR rebate in cash to Daniel (consistent with applicable Department of Labor (DOL) guidance) rather than reducing the premiums due for 2012?

A6. No. If Daniel receives a cash distribution because of the MLR rebate, the cash also is a reduction in the cost of his 2011 insurance premiums (a purchase price adjustment) and is not taxable. In addition, because the MLR rebate payment is a return of amounts that have already been subject to federal employment taxes, the payment is not subject to federal employment taxes.

Q7. Would Danielís MLR rebate be subject to federal income tax if Daniel had deducted his premium payment on his 2011 Form 1040?

A7. Yes. If Daniel deducted the premium payments on his 2011 Form 1040 and receives a MLR rebate in 2012, the MLR rebate is taxable to the extent that he received a tax benefit from the deduction, regardless of whether the rebate is provided as a cash payment or a reduction in the premium due for 2012. For more information on determining whether there is a tax benefit from the deduction, see Itemized Deduction Recoveries in Publication 525, Taxable and Nontaxable Income. Because the MLR rebate is a return of amounts that have already been subject to federal employment taxes, the rebate (whether applied to reduce Danielís 2012 premium or provided as a cash payment) is not subject to federal employment taxes.
It sounds like it would be treated similar to a state income tax refund where state income taxes were deducted in the prior year.... I think I would simply reduce your 2019 premiums paid by the amount of the rebate... that way you will also get a corresponding reduction for SE taxes.
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Old 09-30-2019, 02:25 PM   #7
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Could you post the section of that document that states the rebate is taxable if you receive a premium tax credit?
Are you talking about PTC for ACA?
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Old 09-30-2019, 02:33 PM   #8
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Originally Posted by jimbee View Post
Could you post the section of that document that states the rebate is taxable if you receive a premium tax credit?
See here https://www.irs.gov/newsroom/medical...ratio-mlr-faqs
Quote:
Q2. In 2011, Aaron purchased and paid premiums for a health insurance policy for himself. Aaron does not deduct the premium payments on his 2011 Form 1040 and does not receive any reimbursement or subsidy for the premiums. Based on his enrollment during 2011, Aaron receives a MLR rebate on July 1, 2012.

Is Aaronís MLR rebate subject to federal income tax?

A2. No. The MLR rebate that Aaron receives on July 1, 2012, is a rebate of part of his 2011 insurance premiums (a purchase price adjustment). Because Aaron did not deduct the premium payments on his 2011 Form 1040, the rebate is not taxable whether received as a cash payment or applied as a reduction in the amount of premiums due for 2012.

Q3. The facts for Beatrice are the same as the facts for Aaron in Question 2 except that she deducts the premium payments on Schedule A of her 2011 Form 1040.

Is Beatriceís MLR rebate subject to federal income tax?

A3. Yes. The MLR rebate that Beatrice receives on July 1, 2012, is a rebate of part of her 2011 insurance premiums (a purchase price adjustment). Because Beatrice deducted the premium payments on Schedule A of her 2011 Form 1040, the MLR rebate that Beatrice receives on July 1, 2012, is taxable to the extent that she received a tax benefit from the deduction, whether the rebate is received as a cash payment or applied as a reduction in the amount of premiums due for 2012. For more information on determining whether there is a tax benefit from the deduction, see Itemized Deduction Recoveries in Publication 525,
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Old 09-30-2019, 02:37 PM   #9
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Originally Posted by kaneohe View Post
Are you talking about PTC for ACA?
Yes.
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Old 09-30-2019, 02:48 PM   #10
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MichaelB, the section you bolded does not mention the ACA premium tax credit. It discusses the MLR rebate being taxable if the insurance premiums were deducted.
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Old 09-30-2019, 02:52 PM   #11
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Could you post the section of that document that states the rebate is taxable if you receive a premium tax credit?
The document doesn't actually talk about premium tax credits as it isn't used in the logic for whether it is taxable or not. It only matters if you took a deduction on your 1040 for premiums paid and whether it was an individual or group plan. The OP indicated they were sole proprietor and took the deduction and thus I believed they fell under Q4 of the link.
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Old 09-30-2019, 03:10 PM   #12
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From discussions on other blogs the consensus seems to be that receiving a subsidy either in advance or after the fact (APTC or PTC) does not make the MLR automatically taxable. It is only taxable if you deducted the premiums as the OP did.

Even if you paid $0 after the APTC you may still receive a MLR if your insurance company underspent on claims. Congress evidently did not anticipate the situation where someone can actually be paid to have health insurance.
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Old 09-30-2019, 03:19 PM   #13
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Originally Posted by jimbee View Post
MichaelB, the section you bolded does not mention the ACA premium tax credit. It discusses the MLR rebate being taxable if the insurance premiums were deducted.
Right. The IRS makes no mention of MLR rebate impacting the PTC. The PTC is calculated on modified AGI, which is before taking deductions. The rebate is a return of premium, which was deducted from income, so it doesnít affect the calculation of the PTC in any way.

The IRS is not likely to make a statement on that, because they typically clarify questions only where tax is or might be due, and they donít comment on situations where tax is never due.
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Old 09-30-2019, 03:19 PM   #14
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Originally Posted by karen1972 View Post
The document doesn't actually talk about premium tax credits as it isn't used in the logic for whether it is taxable or not. It only matters if you took a deduction on your 1040 for premiums paid and whether it was an individual or group plan. The OP indicated they were sole proprietor and took the deduction and thus I believed they fell under Q4 of the link.
Thanks karen1972, I wanted to make sure I wasn't missing something.
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Old 09-30-2019, 03:20 PM   #15
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Right. The IRS makes no mention of MLR rebate impacting the PTC. The PTC is calculated on modified AGI, which is before taking deductions. The rebate is a return of premium, which was deducted from income, so it doesnít affect the calculation of the PTC in any way.

The IRS is not likely to make a statement on that, because they typically clarify questions only where tax is or might be due, and they donít comment on situations where tax is never due.
Thank you MichaelB.
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Old 09-30-2019, 05:43 PM   #16
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I'm not sure why posters are getting hung up on PTC.... the OP said nothing about PTC... but that they had deducted the premiums paid as an expense on Schedule C.

That said, since subsidies are premiums in excess of a sliding scale percentage of the taxpayer's income, one would think that the feds should get the entire rebate if the policy was subject to PTC.

For example, let's say that unsubsidized premiums were $12,000 and that based on the taxpayer's income that any premiums in excess of x% of income was subsidized and the subsidies paid were $7,000 and the taxpayer paid $5,000. If the premiums are $1,000 lower, then the taxpayer still pays $5,000 since the subsidized cost is a percentage of income and the taxpayer's income hasn't changed... but if the premiums had been $11,000 then the subsidy would have been $6,000.... so the premium rebate is due to the government and not the taxpayer.

I suspect that since premium rebates are rare and not hugely significant in the whole scheme of things that they just let it go.

Quote:
Total rebate amounts so far have been:

$1.1 billion in 2012 (based on 2011 MLR, as the rule became effective that year)
$504 million in 2013
$332 million in 2014
$469 million in 2015
$397 million in 2016
$447 million in 2017
$707 million in 2018
2019 data hasn’t yet been published by CMS, but rebates being sent out in September 2019 amount to an all-time high*(a Kaiser Family Foundation estimate pegs the total at $1.28 billion; Gaba’s calculation puts it at $1.37 billion).

Source: https://www.healthinsurance.org/obam...-rules-impact/
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Old 09-30-2019, 06:02 PM   #17
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^^ I misread some of the OP due to a different situation.
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Old 09-30-2019, 06:12 PM   #18
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I think it was a sensible question, it would have been on my mind if we had PTC, and I would have assumed there might be a reconciliation. Not sure why not.

IIRC, when the ACA was first introduced, there was limited recovery of PTC, so perhaps this was deliberate.
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Old 09-30-2019, 06:31 PM   #19
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I'm curious too I got a letter saying I would be getting around a 6% rebate, don't have the money yet. Is it 6% of the amount I paid after ACA credits or 6% of the entire yearly premium. They said checks would be mailed by Sept 30...
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Old 09-30-2019, 10:34 PM   #20
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That's interesting.... I wonder if the insurer pays 6% of the net premiums to the insured and 6% of any APC's to the feds.
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