health insurance rebate

[Mike12321]

How does a health insurance rebate affect your income tax when a client receives a rebate due to the 80/20 rule? Doesn't the subsidy have to be repaid somehow?

[qbteachmt]

I found this:

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

"E. Effect of MLR Rebate on Taxpayers Who Claimed a Premium Tax Credit

Q15. Hanna enrolled in a qualified health plan through a Health Insurance Marketplace for coverage in 2018.  She did not deduct any of the premiums for her coverage on her 2018 Form 1040.  When filing her 2018 federal income tax return, Hanna correctly completed Form 8962, Premium Tax Credit (PTC). Based on her Form 8962, Hanna was entitled to, and claimed, a premium tax credit for the coverage. In July of 2019, Hanna received an MLR rebate based on her enrollment in 2018.  What are the federal income tax consequences to Hanna for the receipt of the MLR rebate?

A15. Because Hanna received her rebate in 2019, Hanna is not required to amend her 2018 tax return to report the rebate.  Also, because the rebate Hanna received in 2019 is merely an adjustment to the premiums for her 2018 insurance and Hanna did not deduct the premium payments on her 2018 Form 1040, she is not required to include the rebate in her 2019 income.  The Treasury Department and the IRS are considering the issuance of guidance applicable to future tax years that will address whether a taxpayer must increase his or her tax liability for the year of the receipt of the MLR rebate to the extent the taxpayer was allowed a premium tax credit for the portion of the taxpayer’s prior-year premium that was refunded."

You should read all the scenarios in that article. Example:

The subsidy is related to their income, not their premium. So, if a taxable rebate puts you above the 400%, then you would need to repay the subsidy for that year your income is too high.

[TaxGuyBill]

As was pointed out, that is zero guidance in this regards.  So as it is, I would say "no".

Even if/when the IRS does issue guidance in this regards, in MANY cases there won't be a repayment anyways.  That is because the potential credit is NOT based on the cost of insurance (which was partially refunded).  It is based on the Second Lowest Cost Silver Plan (SLCSP).   Because of that, in most cases the credit would not change due to partially refunded premium.

However, the credit is reduced if the potential credit is higher than the actual cost of insurance.  So in those cases, then there hypothetically should be a repayment due to the MLR rebate.  But as I said above, there is zero guidance from the IRS about it, so I would not do anything until the IRS issues guidance about it.

[Mike12321]

Thanks for your response to my post. I did see where they stated that the IRS had not issued any guidance. It seems like by now they should have some guidance because it looks to me like people have been getting these rebates for several years now. 

In this case the insurance co said there was a $3000 credit, so that is a lot of money to leave on the table. I am wondering if there will be some kind of form issued by the government or insurance company in regards to that. Surely this would have to go back to the government somehow. I just don't understand why it isn't a line item on one of those healthcare tax forms to work in to a calculation for repayment.

I don't even know if I can get an appointment with the local IRS office to see if they know anything. I may just have to wait and see what comes up in the next year.

Thanks again.

[TaxGuyBill]

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@Mike12321 wrote:

In this case the insurance co said there was a $3000 credit, so that is a lot of money to leave on the table.

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But as I pointed out above, would it even change the Premium Tax Credit?  In many cases it would NOT, and even if there was guidance, the guidance in those cases would say that nothing needs to be done.

There is almost no point in asking the IRS about it.  They have specifically said there is no guidance yet.

[BobKamman]

Those FAQs were last revised by IRS on April 2, 2012. The IRS mission is to "provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all."

I like the advice on a Cigna website: “Talk with your tax preparer to determine if you need to report your rebate as income when you file your next tax return.”

[qbteachmt]

While the guidance was provided back in 2012, nothing seems to have changed about it.

"It seems like by now they should have some guidance because it looks to me like people have been getting these rebates for several years now."

The rebate going to the insurance policy holder hasn't changed since that guidance was issued, because the rebate provision requires that it goes to the policy owner (not who pays). Yes, it even has been known to exceed the policy premiums paid. That has only changed in these years, in that the insurers have been able to get closer to the "80/20" requirement, so less is going out as rebates.

The scenario seems to sum up as:

The rebate is like a penalty to the insurers and it has to be returned to those who were impacted by this lack of responsible cost management (not the same as who paid). That's why it doesn't go back to the Treasury.

If you deducted the premium through one of the available options, the rebate is then taxable income to you for the year you got that rebate, the same as other tax regulation applies for deductions that you take and then later you get the money returned, afterall.

There would be nothing to amend for the year of the premiums and this has nothing to do with the subsidy. Getting a rebate in 2020 for coverage in year 2019 simply requires you to examine if there is a credit or deduction for it in 2019. If so, it is taxable in 2020. If not, it also is not taxable in 2020. It does not change 2019, so no amendment.

The qualification for the subsidy is based on the table for poverty levels and on the income computation. The Rebate is not used to compute against the Premium; they are not part of that computation for the year of the rebate nor the year you get the rebate. If it is part of income in the year it was issued, it affects if there is qualification for a subsidy for that same new year.

I've never seen anything that states an insurance rebate gets returned to the Treasury.

[TaxGuyBill]

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@qbteachmt wrote:

The qualification for the subsidy is based on the table for poverty levels and on the income computation. The Rebate is not used to compute against the Premium; they are not part of that computation for the year

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Not entirely true.  As I mentioned above, besides income/poverty percentage, the Premium Tax Credit is based on the Second Lowest Cost Silver Plan (SLCSP). 

BUT when the credit ends up being higher than the actual premiums paid, the credit is limited to the amount of premiums paid.  So the amount of premiums CAN be part of the computation.  It is those situations where "guidance" should be issued from the IRS.

[qbteachmt]

My point, applicable to the topic, is that when the rebate becomes income, it has bearing on the qualification for the subsidy. That's the only way it impacts the subsidy.

[TaxGuyBill]

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@qbteachmt wrote:

That's the only way it impacts the subsidy.

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Not necessarily.  Logic, reason and the principal of balancing things dictate that when the premiums are partially refunded, it potentially SHOULD retroactively affect the previous year's Premium Tax Credit because lower premiums have the potential to have reduced that credit.  If the refunded premiums had been done in the year of the Premium Tax Credit, the credit could have been smaller.  Logic and reason says there should be an offsetting to that in the current year by recalculating the previous year's credit.

That is what the OP asked about, and that is why that Q&A says the IRS is considering issuing guidance.

But because there is currently no guidance, we are left hanging, which typically means we ignore the situation.   🙂

[qbteachmt]

"Logic and reason"

Ha ha ha ha ha; that made my day.