Vernoia, Enterline + Brewer, CPA LLC

Posts tagged ‘refund’

12.8 million get Medical Loss Ratio rebates

Is your Medical Loss Ratio (MLR) rebate check taxable? The U.S. Department of Health and Human Services (HHS) estimates that nearly 12.8 million Americans received more than $1.1 billion in MLR rebates during August 2012 based on insurance company shortfalls in cutting overhead during 2011. If you received a rebate, either as an individual policyholder or as an employer or employee, is it taxable?

The first round of annual MLR rebates payable under the Patient Protection and Affordable Care Act (PPACA) (aka ObamaCare) were required to be disbursed to health insurance policyholders by insurance companies on or before August 1, 2012. MLR premium rebates were designed to persuade health insurance companies to spend at least 80 percent of premiums directly on health care as opposed to advertising, certain administrative costs and executive salaries.

The average rebate per household is $151, but with averages ranging from $807 for Vermont to $0 for New Mexico and Rhode Island. Examples of other average household rebates reported by HHS include Calif. ($65), Fl. ($168), N.Y. ($138), Ill. ($380) and Texas ($187). Therefore, while the majority of those estimated 80 million individuals covered by health insurance will not be entitled to the MLR rebates, enough are to raise questions.

Whether a particular MLR rebate paid out this summer is taxable will depend upon a number of variables. Some individuals are receiving their premium rebate checks directly from the health insurance provider. Many more are receiving the rebate payments indirectly from their employers, either as cash payments or in the form of 2012 premium offsets. Some employers are using the rebates to cover plan expenses.

Labor Department rules

Department of Labor Technical Release 2011-04 provides guidance to employers on whether the portion of any rebate attributable to previous employer-paid premiums constitutes plan assets or whether they belong to the employer. Distinctions are made between situations in which the group health plan is considered the policyholder and when the employer is the policyholder, as well as whether contractual terms and the parties’ understandings and representations allow the employer to retain the distribution. DOL guidance also provides employers with some discretion as to how to use or dispose of their MLR rebates, as long as they “act prudently, solely in the interest of the plan participants and beneficiaries, and in accordance with the terms of the plan.”

Federal tax consequences

The basic rule of thumb in determining whether your MLR rebate is taxable is fairly straightforward: if a tax benefit was previously gained on the premiums now being refunded, the rebate is generally taxable; otherwise, the premiums are usually tax free to the recipient.

Individually-purchased policies. An individual who purchased and paid premiums for health insurance for himself or herself in 2011, without receiving any reimbursement or subsidy for the premiums, will not be taxed on any rebate received in 2012, provided the individual did not receive a tax benefit from deducting the 2011 premiums on 2011 Form 1040, Schedule A or, if self-employed, on line 29 of 2011 Form 1040. The same result applies whether the rebate is received in cash or as a reduction in the amount of premiums due for 2012.

Group policies—after-tax premium payments by employee. As is the case for individually-purchased policies, employees who in 2011 paid their share of the premiums on group policies with after-tax wages (income already taxed and subject to employment taxes) generally will not recognize income on 2012 MLR rebates. For employees who participated in the plan during 2011 and 2012 by paying after-tax premiums, the rebates—whether paid in cash or as a reduction in 2012 premiums—will be income tax free to them, except to the extent they benefited from deducting the premium on 2011 Form 1040.

One important exception: If the employer pays out the rebate based on the employee’s after-tax share of 2012 premiums irrespective of whether the individual was an employee in 2011, the employee receives the rebate as a tax-free purchase price adjustment to 2012 premiums paid. This tax-free treatment applies both to 2012 employees who were employees in 2011 and those who were not and, therefore, irrespective of whether any 2011 premiums were deducted on Form 1040, Schedule A.

Group policies—pre-tax premium payments by employee. MLR rebates are generally taxable if distributed to 2012 participants who pay premiums on a pre-tax basis under the employer’s cafeteria plan. If a 2011-2012 employee who paid in pre-tax premiums receives a rebate check, it is considered a return of wages that have not yet been taxed or subject to employment tax. If that employee receives the rebate in the form of a 2012 premium reduction, the employee’s payment of premiums through a salary reduction contribution in 2012 is decreased by that amount and therefore taxable salary is increased by that amount.

If an employer pays out rebates in 2012 irrespective of whether an employee under the cafeteria plan had worked for the employer in 2011, the MLR rebate is likewise considered additional income and subject to employment taxes. If paid in cash, it is considered additional wage income. If paid as a premium reduction, it is considered a reduction in the pre-tax amount due by the employee under the cafeteria plan and, therefore, increases wage income.

Information reporting
Rebate payments passed along by employers to employees under a cafeteria plan, either as cash or premium reductions, will normally be reflected on each employee’s Form W-2 as increased wage income, subject to income tax withholding and employment taxes.

Rebates that are not considered wage payments generally will only be subject to Form 1099-MISC information reporting if the payment equals or exceeds $600. Payments that are considered taxable must be reported by the individual policyholder irrespective of information reporting requirements.

Offset a tax refund to pay debt

The Treasury Department is authorized to offset a taxpayer’s tax refund to satisfy certain debts. A spouse who believes that his or her portion of the refund should not be used to offset the debt that the other spouse owes may request a refund from the IRS.


If an individual owes money to the federal government because of a delinquent debt, the Treasury Department’s Financial Management Service (FMS) can offset that individual’s tax refund (and certain other federal payments) to satisfy the debt. The debtor will be notified in advance of the offset.

A taxpayer’s refund may be reduced by FMS and offset to pay:

  • Past-due child support
  • Federal agency non-tax debts
  • State income tax obligations, or
  • Certain unemployment compensation debts owed a state.

FMS advises taxpayers by written notice of an offset. FMS has explained that the notice will reflect the original refund amount, the taxpayer’s offset amount, the agency receiving the payment, and the address and telephone number of the agency. FMS will notify the IRS of the amount taken from your refund.

Form 8379

If a taxpayer filed a joint return and is not responsible for the debt of his or her spouse, the taxpayer may request his or her portion of the refund by filing Form 8379, Injured Spouse Allocation, with the IRS. Form 8379 may be filed with the original return or by itself after the taxpayer is aware of the offset.

The IRS has instructed taxpayers filing Form 8379 by itself to attach a copy of all Forms W-2 and W-2G for both spouses, and any Forms 1099 showing federal income tax withholding to Form 8379. Failure to attach these items may result in a delay in processing by the IRS.

The IRS has reported on its website that it generally processes Forms 8379 that are filed after a joint return has been filed in approximately eight weeks. The timeframe for processing a Form 8379 that is attached to a joint return is approximately 11 weeks (14 weeks if the joint return is filed on paper).

NJ – Information provided on changes to UEZ exemption, refund procedure

The New Jersey Division of Taxation has issued a notice regarding recently enacted legislation which provided that all qualified Urban Enterprise Zone (UEZ) businesses will be eligible to receive a sales tax exemption at the point of purchase regardless of annual gross receipts generated in the prior annual tax period, effective April 1, 2011. The new changes permit any duly certified qualified UEZ business to claim a sales tax exemption at the point of purchase for eligible exempt purchases of tangible personal property and services that are used or consumed exclusively at the UEZ business location when an Urban Enterprise Zone Exempt Purchase Certificate (Form UZ-5-SB or Form UZ-5) is issued to its sellers.

Application process: As all UEZ businesses will be eligible for the exemption, there will no longer be a need to complete Form UZ-5-SB-A as part of the UEZ certification application or renewal procedures. Also, the division will no longer need to verify a business’s gross annual receipts from the previous calendar year. However, the division will continue to check an entity’s tax compliance status on an annual basis for the application and recertification approval process.

Certificates: UEZ businesses that were formerly classified as “small qualified businesses” may continue to issue valid UZ-5-SB certificates to their suppliers, until such certificates expire. As the UZ-5-SB certificates expire, they will be replaced with UZ-5s. Large certified UEZ businesses that did not previously qualify for the exemption certificates and newly certified UEZ businesses will receive UZ-5 certificates with effective dates beginning April 1, 2011. The point-of-purchase exemption cannot be applied retroactively. Therefore, the UZ-5 exemption certificates can only be used for purchases for which the invoice date is on or after April 1, 2011.

Extension of refund procedure for large businesses: The refund procedure for those businesses not considered “small qualified businesses” will be eliminated effective April 1, 2011. However, UEZ refund requests may still be filed for purchases having an invoice date up through March 31, 2011. Refund claims may be filed one year following the invoice date or invoice payment date, whichever is later.

Refund process for pre-certification purchases: The law also allows a qualified UEZ business to apply for refunds of sales and use taxes paid on exempt property or services purchased and used in the initial building or equipping of a business in a zone prior to the business becoming certified. A qualified business may file a claim for refund of sales or use tax associated with eligible purchases made during the UEZ application process, only after the business has become certified as a qualified business. Under the law, claims for refunds associated with eligible purchases must be made and filed with the Division of Taxation after the business is certified as a qualified business, but within one year of the date that the purchase is made.

Businesses making such a claim will be required to file Form A-3730-UEZ within one year of the date of purchase as indicated by the invoice date or invoice payment date, whichever is later.

Refund process when exemption certificate is not received: As of April 1, 2011, if a UEZ business does not have its exemption certificate and is charged tax on an eligible exempt purchase, the business may file a regular refund claim using Form A-3730 within four years of payment of the tax.

Use tax: As of April 1, 2011, qualified UEZ businesses will no longer have to self-assess use tax for UEZ-eligible exempt purchases that were from out-of-state sellers where tax was not collected or was collected at a lesser tax rate than New Jersey’s, or for items removed from inventory. Notice, New Jersey Division of Taxation, March 22, 2011