Beginning in August, 2012 health insurance companies are required to issue consumer rebates for non-compliance with the Affordable Care Act. The Kaiser Foundation estimates that in New Jersey, four health care companies will pay an average range of $54-$75 to nearly 600,000 plan participants (employees). With employer-purchased plans, employers will receive the rebates directly on behalf of the plan participants and then must be responsible for payments.
Insurance companies will notify former and current participants for the 2011 and 2012 calendar years of the rebates. Thereafter, employers are responsible to make allocation decisions, respond to questions from former and current employees, and to make and document the payments.
Employers must decide how much of the rebate belongs to the Plan (employer) and how much belongs to the participant (employee). In a simple case, this allocation can be based on the manner in which the employer and employee have shared in the cost of health care. The portion retained by the employer is not considered a plan asset and may be used at the discretion of the employer.
Employers may choose to allocate the rebates to participants in both 2011 and 2012 plan years or only to those in plan year 2012. In either case, employers will have 90 days from receipt of the rebates to make payments to participants.
Payments to participants will be taxable income according to the IRS guidance. Accordingly, rebates will be wages for purposes of withholding taxes and compensation under most retirement plans.
As an alternative to issuing a check to participants, employers may reduce an employee’s health care premium contribution for a payroll period. This approach has the same effect as the issuance of a check, resulting in an additional wages for withholding purposes.
Employers must decide whether to issue checks to employees or to utilize the offset approach.
If the amount of a premium rebate is minimal, an employer may determine that the cost of issuing checks will exceed the amount of the checks. In these situations, employers must determine the manner in which to use the rebates, such as for wellness or other health programs.