Is your health insurance rebate taxable?

If you received a health insurance rebate check in the mail, don’t spend it all just yet. You may have to pay Uncle Sam his portion.

U.S. health insurance companies sent out about $1.1 billion in rebates to 12.8 million policyholders in August to comply with the 80/20 rule under the new health care reform law.

If you received a health insurance rebate check in the mail, don’t spend it all just yet. You may have to pay Uncle Sam his portion.

The Affordable Care Act requires health insurers to use at least 80 percent of premiums to cover the cost of healthcare and quality improvements, which means no more than 20 percent can go to overhead and profit. They must apply at least 85 percent of premiums toward healthcare and quality improvements for group plans covering more than 50 employees. Rebates are required when insurers’ percentages are out of line with this rule.

The average health insurance rebate is about $150, but how do you know if you will have to pay tax on that amount?

If you had an individual insurance policy in 2011, and you claimed the standard deduction on your taxes (like most taxpayers) instead of itemizing, you will not have to pay tax on the health insurance rebate. If you itemized, and did not deduct medical expenses, your rebate will also be tax free. However, if you did deduct medical expenses, at least partof the rebate will be taxed because the government has not collected tax on that amount, which is considered taxable income.

If you have a fully insured group health plan through your employer and paid the premium with pre-tax dollars as most employees do, the rebate will generally be taxable. If you happen to have paid your insurance premium with after-tax dollars, you will not have to pay tax again on the rebate amount.

While individual plan holders should have received their rebate checks by now, those with group plans may still be waiting. Under the law, employers who receive health insurance rebates for group plans have discretion to choose how to spend the employees’ money, but it must somehow be used to benefit insurance plan participants. Employers have up to three months to decide if they are going to return the money directly in paychecks, reduce next year’s premium, apply the refund toward wellness programs for workers or other options.

Not all employees who participate in group health plans are entitled to rebates. If your employer’s plan is self-insured (the company provides health benefits directly to employees rather than going through an insurance company), you are not entitled to a refund.

If you have received a health insurance rebate and are unsure about the tax implications, contact a financial professional.

David Merzel, EA, is an accounting principal at Kaufman Rossin, one of the top CPA firms in the country. He can be reached at dmerzel@kaufmanrossin.com.

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