A Health Insurance Refund, Really? Yes!
By Kayla Northrup, Senior Account Manager
Self-funded health plans are a staple in the large employer market, but over the last few years, a health plan concept called Level Funded has become very popular for small employers. Level Funded plans give small employers an option for coverage outside of the heavily-regulated ACA market. We encourage our clients to look into Level Funded plans and find that most employers who qualify choose to move to a level funded plan due to the cost savings and benefit customization that’s available. For the most part, once active, level funded plans operate like a traditional health plan for both the employer and the employees. However, one surprising aspect of a level funded plan is the potential for a refund. Here’s how this works. A portion of premiums paid each month goes towards funding an account from which claims are paid. If the plan experiences lower claims than expected, the insurance company typically refunds a portion of that surplus to the employer in the form of a check or credit on a future billing statement.
We receive a lot of questions from employers on how to disburse this refund. The guidelines below will provide you with a general overview. Please consult with your tax or legal advisor for specific questions.
Dividing and distributing refund: Employers should divide and distribute refund money based upon who paid for the insurance. If the employer paid for the entire premium, then no part of the rebate is due to employees. If the employer and employees shared premium costs, then the refund should be split pro-rata according to contribution. The portion of the rebate that is attributable to employer contributions belongs to the employer and can be used for whatever purposes they choose.
Refund allocation to employees: Employers can calculate and distribute rebates based upon current enrollees of the plan or enrollees who were on the plan during the time period that the refund was based upon. It is not necessary to send a refund to former employees. We find that most employers choose to use the funds to reduce an employee’s future premium costs, basically as a credit against their payroll deductions, but it is allowable to pay out funds with a cash refund to employees.
Tax requirements for refund: There are tax requirements for this refund. If employee premiums were paid with pre-tax dollars, such as through a Section 125 plan, then the refund is taxable income to the employee. Employers must also pay taxes on their share of the refund since the premium payments were a deduction when paid out.
Our clients frequently receive refunds and they can often be a significant amount. A level funded plan will require some extra work, but if you take a step back and think about the idea of a health insurance plan that can refund you money, it’s so worth it!
Learn more at comproins.com or call (402) 488-5100.