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MLR Rebate on Marketplace Subsidized Policy


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Taxpayer purchased 2018 health insurance policy from ACA Marketplace costing $1,000/month but qualified for advance payment of Premium Tax Credits of $600/month which reduced his actual net premium to only $400/month.

Insurance company failed to meet Medical Loss Ratio and sent Taxpayer an MLR rebate of $1,800 (15% of total gross premiums of $12,000).

Doesn't seem right that the Taxpayer received 100% of the MLR rebate while he only paid 40% of the premiums.

Anybody have an opinion on how this will shake out from a tax/PTC perspective?

 

 

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Flyboyjohn, the statute says it goes to the policy holder, which here is only the individual. In the situation of an individual who bought a policy, that is only the individual insured. If the individual was self-employed and deducted the premium paid under Section 162(l) of the Code, it would be taxable because the deduction was overstated (tax benefit rule). In the more likely scenario that this was simply an individual purchase and premiums were not deducted, the rebate would not be taxable because would simply be a reduction in the nondeductible premiums paid.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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Luke I agree with your analysis on the income tax impact but now as more examples come in we're seeing situations where the amount of rebate exceeds the amount the individual actually paid (net of the PTC).

For example, an individual's actual premium payments were only $1,200 and they received an MLR rebate of $2,500, does this situation change your view on non-taxability of at least the $1,300 excess even if the individual didn't deduct the premiums?

 I still believe there will be some blow-back with respect to the PTC but can't fathom how that will occur, maybe we'll get some guidance from IRS.

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Flyboyjohn, the only guidance I am aware of is here https://www.irs.gov/newsroom/medical-loss-ratio-mlr-faqs . See Section B. The guidance does not use numerical amounts in the examples given. Your situation seems extreme. The insurer's G&A expenses must have been far greater than the applicable 20% or 25%.

Under Section 36B the PTC is not based on what the individual insured pays, but rather the cost of a hypothetical silver policy, so my off the cuff legal analysis is that the enrollee is entitled to the same credit amount. I guess the IRS could try to argue that where the amount received exceeds the individual's actual outlay, the excess is income under Section 61, but I am unaware of any guidance that would say that, or that would require 1099 reporting of the rebate amounts.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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2 hours ago, Flyboyjohn said:

 I think the IRS MLR FAQs require a 1099-MISC if the amount is over $600

IRS MLR FAQs 10-07-19_17830395(1).PDF 118.62 kB · 2 downloads

Only if the insurance co. can determine taxable amount. I think this is in there for the self-employed 162(l) situation I mentioned. Following quote is from the FAQ (emphasis supplied):

"For a cash rebate paid to an individual policyholder, Insurance Company is not required to file a Form 1099-MISC with respect to that payment or furnish a Form 1099-MISC to the individual policyholder unless (1) the total rebate payments made to that policyholder during the year total $600 or more, and (2) Insurance Company knows that the rebate payments constitute taxable income to the individual policyholder or can determine how much of the payments constitute taxable income. If Insurance Company is required to file a Form 1099-MISC with respect to the rebate payment, it must also furnish a copy to the individual policyholder. See Q&As 2 through 4 below for guidance on whether a cash payment or premium reduction constitutes taxable income to an individual policyholder."

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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  • 11 months later...

Since this is the most relevant conversation I've found to my situation, I have a follow-up question for this thread. My wife is self-employed and we recently (2020) received an MLR refund on premiums that we deducted from her business income in 2019. Obviously we will owe tax on that, but I can't find information on whether I should amend our 2019 return or (more likely) include the rebate as income in 2020. If the latter, is this "other income" which is Schedule 1, line 8 (on 2019 1040; not sure if line number will change for 2020)?

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