Recently certain health insurance providers have begun issuing rebates to employers that sponsor insured group health plans, as well as individuals who purchase health insurance coverage in the individual market. The rebates are a result of the Patient Protection and Affordable Care Act, enacted on March 23, 2010. You will be contacted directly by your health insurance provider whether or not you will be receiving a rebate.

Rebates may have a tax impact both to plans receiving rebates and to consumers.  

For group health plans, a distribution such as the rebate will be a plan asset if a plan has a beneficial interest in the distribution under ordinary notions of property rights. Under ERISA section 401(b)(2), if the plan or its trust is the policyholder, the policy would be an asset of the plan, and in the absence of specific plan or policy language to the contrary, the employer would have no interest in the distribution. In this case, rebates will have to be allocated to employees covered under the plan, and these rebates may or may not be taxable depending several facts and circumstances.

On the other hand, if the employer is the policyholder and the insurance policy or contract, together with other instruments governing the plan, can fairly be read to provide that some part or all of a distribution belongs to the employer, then that language will generally govern, and the employer may retain distributions.

Absent language specifically stating that distributions belong to the employer, the rebate must be distributed to the employees. This brings about several issues. The amount distributed back to the employee is the portion of the rebate that is attributable to the participant’s contributions. Second, the amount distributed to the participant may be considered taxable income if the contributions were made pre-tax, via a section 125 cafeteria plan. Furthermore, the issue of distributing rebates to former employees, may also involve considering the materiality and cost associated with such distributions.

If you have been notified that you will be receiving a rebate from your health insurance provider, and if you have any questions on how to handle ownership and or tax issues regarding the rebate, please contact us.