Key Development: Payroll may need to withhold employment taxes from
certain health premium rebates made to employees.
Potential Impact: The level of payroll's involvement can depend on how
the rebates are paid.
Employers distributing health insurance premium rebates directly to employees
are required to withhold employment taxes on the amounts when the rebates are
for pre-tax premium contributions, the Internal Revenue Service said.
The health insurance rebates to employers and participants of
employer-sponsored health plans are required to be disbursed by Aug. 1 under a
provision of the Patient Protection and Affordable Care Act (Pub. L.
The law requires health insurance companies that issue policies to do this
when spending less than 80 percent of premiums on medical care and quality (or
less than 85 percent in the large group market) the prior year. The medical loss
ratio rebate amount is the portion of premium dollars that exceed these
As a result, employer-sponsored plans could receive more than $700 million in
rebates this year for appropriate distribution between the employer contribution
amount and employee contributions, according to the Department
of Health and Human Services.
While there is some flexibility in how the rebates are passed on to
employees, several scenarios covered in a
question-and-answer format by IRS said that 2012 rebate amounts to employees
for pre-tax premiums, such as premiums paid under a qualified Internal Revenue
Code Section 125 plan, are subject to employment taxes.
How the rebate is paid to employees determines the level of involvement for
payroll, said Martin Armstrong, CPP, senior director of payroll shared services
for Time Warner Cable and a member of Bloomberg BNA's Payroll Library Advisory
Rebates applied in a manner to reduce the amount of pre-tax employee premium
payments would correspondingly increase taxable wage amounts. In this scenario,
no special effort is necessary to account for the rebated amounts for payroll
However, if employers determine that the rebates would be distributed as cash
payments to employees who have pre-tax premium amounts deducted from pay, then
those cash payments are to be included in employee taxable wages, with
additional employment taxes withheld.
As employer plan administrators determine how to distribute the rebates to
the affected employees, payroll professionals should collaborate with their
counterparts in benefits to discuss various scenarios, Armstrong said. In
addition, transparent communication should be provided to affected employees so
that they understand what makes the rebates subject to federal income tax and,
from an employer's perspective, wages subject to employment taxes, he said.