B. Policies Purchased on the Individual Market
Q2. In 2011, Aaron purchased and paid premiums for a health insurance policy for himself. Aaron does not deduct the premium payments on his 2011 Form 1040 and does not receive any reimbursement or subsidy for the premiums. Based on his enrollment during 2011, Aaron receives a MLR rebate on July 1, 2012.
Is Aaron’s MLR rebate subject to federal income tax?
A2. No. The MLR rebate that Aaron receives on July 1, 2012, is a rebate of part of his 2011 insurance premiums (a purchase price adjustment). Because Aaron did not deduct the premium payments on his 2011 Form 1040, the rebate is not taxable whether received as a cash payment or applied as a reduction in the amount of premiums due for 2012.
Q3. The facts for Beatrice are the same as the facts for Aaron in Question 2 except that she deducts the premium payments on Schedule A of her 2011 Form 1040.
Is Beatrice’s MLR rebate subject to federal income tax?
A3. Yes. The MLR rebate that Beatrice receives on July 1, 2012, is a rebate of part of her 2011 insurance premiums (a purchase price adjustment). Because Beatrice deducted the premium payments on Schedule A of her 2011 Form 1040, the MLR rebate that Beatrice receives on July 1, 2012, is taxable to the extent that she received a tax benefit from the deduction, whether the rebate is received as a cash payment or applied as a reduction in the amount of premiums due for 2012.
IRS
Medical Loss Ratio (MLR) FAQs
http://www.irs.gov/uac/Medical-Loss-Ratio-%28MLR%29-FAQs
(retrieved 10/4/13)