Medical Loss Ratio (MLR) rebates

[fiona1]

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[Guest Alonzo Church III]

I think you may be making this too complicated. If the MLR payment is derived from the premiums paid by the employee on an after-tax basis, it is not compensation at all. If the employee is making pre-tax contributions, the IRS appear to charactarize an MLR cash payment as a refund of deferrals made under section 125, and therefore subject to withholding taxes. A premium holiday, of course, already works to reduce pre-tax deferrals.

For purpoes of 415 and most 401(k) and retirement plan definitions of compensation, the MLR should be a non-event, as the amount of any 125 deferral is included as part of compensation. Therefore, the shift of a few dollars from 125 deferral to cash compensation should make no difference.

The IRS explanation of all this -- a series of 12 Q&As -- can be found here:

http://www.irs.gov/newsroom/article/0,,id=256167,00.html.

[dcoderre]

What about when the "shift" involves two tax years? If 2012 MLR is a refund of a 2011 pre-tax health insurance premium, then it seems to me the amount may be included in plan comp for both 2011 and 2012. Let's say plan comp is W-2 plus deferrals with no adjustment for fringe benefits. In 2011, the pre-tax premium is included in plan comp because we add back pre-tax Sec. 125. In 2012, it's in plan comp again because it's included in W-2 taxable wages. Agree?

If plan comp were defined to exclude taxable fringe benefits, then I can see an argument to treat the rebate as a fringe benefit and thus exclude it from 2012 compensation.

Other thoughts?