Are ACA Rebates Taxable

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by Samantha B.
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Insurance providers are required under the Affordable Care Act (ACA) to spend a minimum percentage of their revenue on healthcare and quality improvement costs. When they don’t meet that standard, policyholders under their plans are entitled to a rebate – a partial refund for those who have essentially been overcharged for their monthly premium payments. In most cases, rebates are taxable, but it all depends on the state you live in and the Medical Loss Ratio provisions of your insurance provider.

What is a Medical Loss Ratio?

Under the ACA, health insurance providers are required to submit data on how they spend the revenue from their clients’ monthly premium payments. The Medical Loss Ratio (MLR), also called the 80/20 Rule, requires insurance providers to spend at least 80% of premium revenue directly on healthcare costs. The other 20% is reserved for administrative, marketing, and overhead costs. Companies that provide insurance to large groups, often workplaces with 50+ employees, must allocate 85% of their premium revenue to healthcare costs. If your health insurance provider does not meet this requirement, you may be eligible for a rebate on part of the premiums you paid.

How To Receive an ACA Rebate

Suppose your insurance company doesn’t meet the 80/20 standard –– what happens next? If you are eligible for a rebate, your insurance provider will inform you by August 1st of the current year. has introduced an online tool that allows individuals to find basic information on their insurance provider, including their MLR percentage for the previous year and the average rebate amount.

There are various ways an individual can receive an ACA rebate depending on their health plan and insurance provider. They are most commonly distributed via a check in the mail, but rebates may also show up as a reimbursement deposited on your credit card or a price reduction on future premium payments. Call your insurer directly if you have questions about when and how you’ll receive your rebate if eligible.

Who Receives These Rebates?

Certain guidelines are in place to determine who is eligible to receive a rebate. It mainly depends on whether or not your premium payments were spent directly on healthcare and quality improvement. 

Premium prices are set by an estimated number of claims that an insurance provider expects to pay in a year. If similar claims for a group of policies in your state are lower than the 80% or 85% MLR requirement, you will receive a rebate. If claims are higher, you will not receive a rebate because your insurance provider spent more than the minimum amount directly on healthcare costs.

Those with medical coverage through an employer should expect their employer to receive the rebate directly. Employers can use rebates to enhance benefits, reduce the price of future premiums, or issue rebate checks. If you work for a large employer that’s self-insured, you will not receive a rebate. 

How Exactly Are These Rebates Determined?

Rebates are not determined by independent claims, and are instead based on a collective of premiums and claims for a group of policies issued by an insurance provider in the previous calendar year. Determining who gets a rebate is contingent on three factors:

  1. Your health insurance provider 
  2. The state where you reside and the state where the policy was issued
  3. How many people are covered under your policy – large group, small group, individual

Refund Amount Varies Between States

Although there is an average dollar amount for rebates per insurance provider, there is no guarantee that you will receive that exact amount. The rebate amount varies widely across states due to various MLR provisions determined by each state. In some states, there may not be any rebates issued at all. This is a sign that every insurance provider within that state met the MLR standard and are adequately spending their clients’ premium payments directly on healthcare.

ACA Rebates Are Taxable (and Have a Tax Impact on Insurance Companies)

ACA rebates are taxable if you pay your health insurance premiums with pre-tax dollars or you/your employer receive tax benefits after deducting premiums on your tax return. If you did receive tax benefits in the previous year, the rebate must be included in your gross income. If you did not deduct premiums in the previous year, your rebate won’t be subject to federal income tax.

Regardless of whether or not rebates are distributed via checks or price reductions, insurance companies have reduced taxable income when they refund premium payments. For cash or premium reduction rebates, insurance companies are required to file Form 1099-MISC if any of the following rules apply:

  • The total rebate amount issued to a policyholder in a year is greater than $600
  • The rebate payments issued will count as taxable income for the policyholder
  • The group policyholder (for rebates that show up as premium reductions) is not exempt from Form 1099 reporting

Tax Treatment of Rebates

Rebates paid to group policyholders are split between employers and employees based on the proportion of premiums paid. The tax treatment for the employees differs depending on whether the rebates are given to all current plan members or only to those who were also plan members during the previous year. Rebates can generate compensation subject to an employer’s plan and whether it allows for pre-tax or post-tax premium payments.

Pre-Tax Plans

When an employee pays premiums with pre-tax dollars and receives a portion of the rebates, the rebate is considered taxable income and is subject to employment taxes. When a rebate is distributed as a premium price reduction rather than a cash balance, their individual taxable income increases.

Post-Tax Plans

When an employee pays taxes from their compensation and uses their post-tax income to pay for their premiums, their rebate is not taxable. Those who did not deduct premiums on their last tax return will receive their rebate tax-free.

What Should You Do After Receiving a Rebate

If you receive an ACA rebate, you may want to seek a benefits consultant. A benefits consultant is an experienced professional who helps businesses select and implement employee benefits. Using a variety of tools and experience, a benefits consultant can help you understand how your rebate will be distributed and whether or not it will be tax-free.

Choosing The Right Benefits Consultant

When choosing the right benefits consultant, it’s important to search for someone who is knowledgeable about the type of insurance and benefits relevant to you. Some may focus exclusively on ACA Marketplace plans, others on retirement plans, and so on. It’s vital that your benefits consultant is up to date on the tax implications and regulations associated with your benefits, including how to report to the IRS, how to minimize tax burdens, and what federal or state laws are relevant to your case.


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