Health Insurance Rebates to Church Plans

The Affordable Care Act (health reform law) mandated rebates from health insurance providers if they did not use at least 80% of premiums to provide health care services. The first of those rebates are due by August 1, 2012. Rebates to church plans exempt from ERISA will be divided equally among all participants and sent directly to them, unless the plan had previously sent a written statement to the insurance company. The church must then use the rebate to reduce premiums for the upcoming year or issue refunds to employees.

The rebates issued directly to plan participants (either from the insurance company or the Church) will generally be taxable to the employees. Since most health plans are deducted from employee wages on a pre-tax basis, the refund is considered taxable. On the other hand, if the Church chooses to reduce premiums for the upcoming year, the employees will simply have a smaller amount deducted from the paycheck. Thus a smaller amount is deducted pre-tax, resulting in an increase to the taxable portion of their wages. For more details on the taxability of the rebates, see the IRS article at http://www.irs.gov/newsroom/article/0,,id=256167,00.html .

For most other (non-church) employers, the rebate will be sent directly to the employer or plan sponsor. Health insurance companies have sent letters to the employer and the employees giving notice of the rebate. The letter encourages employees to contact the employer to find out what is going to happen to the rebate, and whether any will be refunded to the employees. The Department of Labor has issued technical guidance on how and when the rebate should be shared with employees (see at http://www.dol.gov/ebsa/newsroom/tr11-04.html). To the extent the rebate is considered to be a “plan asset”, the employer should use the rebate for the benefit of plan participants by reducing participant premiums, enhancing benefits, or issuing a refund. The rebate is generally a plan asset if the premiums were paid from trust assets. The rebate attributable to participant contributions is also considered a plan asset. On the other hand, if the employer is the policyholder, and the entire premium was paid from the employer’s general account, then the rebate belongs to the employer.