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Medical Loss Ratio (MLR) Rebates

What are Medical Loss Ratio (MLR) rebates?

Under the Affordable Care Act, the MLR rule (which became effective in 2011) requires health care companies to spend a certain percentage of the premiums they receive on health care services. If the health care company does not fulfill the MLR rule, the health care company then owes rebates to their insurers. Health care companies send out notices in July, to plan participants (employer and employees), communicating whether they will or will not be issuing rebates with respect to their plan. For the majority, health care companies will provide the rebate owed to the policyholder of the plan, which is usually the employer sponsoring the plan. Health care companies must distribute rebates by August 1st, and are based on the health care company's MLR for the previous year.

If you receive a MLR rebate from your health care company, you will need to decide how the rebate will be used and distributed, as there are a couple of options depending on whether insurance premium payments were made with pre or after tax dollars.

Paying Insurance Premium Amounts with Pre-Tax Dollars

MLR rebates are considered taxable income and subject to employment taxes when rebates originate from pretax premium payments. The IRS guidance provides employers with a couple of options:

  • Providing health plan insurance premium credits to plan participants, which is considered a reduction in the pre-tax amount due by the employee under the cafeteria plan and, therefore, increases wage income.
  • Or distributing employees' proportional share of rebate within three months from the date the rebate is received, which is considered additional wage income.

The IRS has posted a set of FAQ's describing tax consequences for MLR rebates. To read it, please click here.

Paying Insurance Premium Amounts with After-Tax Dollars?

MLR rebates for insurance premium payments made with after-tax dollars are not taxed again. The IRS guidance provides employers with a couple of options.

  • Providing tax free insurance premium credits to plan participants
  • Or, distributing employees' proportional share of rebate (tax free) within three months from the date the rebate is received

The IRS has posted a set of FAQ's describing tax consequences for MLR rebates. To read it, please click here.

How to enter Medical Loss Ratio (MLR) rebates into QuickBooks Desktop?

Rebate in the form of a one-time taxable refund to employee:

Create addition item with tax tracking type of Compensation, then enter amount on the paycheck.

  1. From Lists on the top menu bar, click Payroll Item List.
  2. Click the Payroll Item button, and select New.
  3. Click the Custom Setup option, click Next.
  4. Select the Addition item type, click Next.
  5. Enter a name such as Taxable MLR Refund.
  6. Select an expense account or leave at Payroll Expenses.
  7. Leave the Tax Tracking type at Compensation because the amount is taxable and should report on tax forms, click Next.
  8. In Taxes, do not make any changes and leave the default checkmarks, click Next.
  9. In Calculate based on quantity, choose Neither, click Next.
  10. In Default rate and limit leave the fields blank and click Finish.
  11. On the next paycheck add the new payroll item under Other Payroll Items and add the MLR rebate amount to the Rate column.

Rebate in the form of rate reduction:

Depending on the amount of credit you may want to enter a one-time reduction or space it out for the rest of the year.  If you choose to space that out for the rest of the year, calculate the amount of reduction then enter the reduced amount in the employee profile.  Be sure to keep track of when the credit expires to avoid corrections down the road.

Example: Your MLR amount was $3000 from the insurance company and you have 10 employees eligible for the reduction.  There are 15 pay periods left this calendar year.  The calculation is as follows: ($3000/10)/15= 20. In this example, each employee gets a $20 reduction per pay period. Using the same insurance deduction payroll item on the paycheck, reduce the amount by $20.

Rebate in the form of a one-time non-taxable refund to employee:

Create addition item with tax tracking type of None, then enter amount in the paycheck.

  1. From Lists on the top menu bar, click Payroll Item List.
  2. Click the Payroll Item button and select New.
  3. Click the Custom Setup option, click Next.
  4. Select the Addition item type, click Next.
  5. Enter a name such as Non-Taxable MLR Refund.
  6. Select an expense account or leave at Payroll Expenses.
  7. Change the Tax Tracking type to None so the amount does not report on tax forms, click Next.
  8. In Taxes, do not make any changes.  No taxes should be checked, so leave the default checkmarks, click Next.
  9. In Calculate based on quantity, choose Neither, click Next.
  10. In Gross vs. Net choose net pay, click Next.
  11. In Default rate and limit leave the fields blank and click Finish.
  12. On the next paycheck add the new payroll item under Other Payroll Items and add the MLR rebate amount to the Rate column.

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