On April 19, 2012, the Internal Revenue Service (IRS) issued a set of Frequently Asked Questions (FAQs) explaining the tax treatment of premium rebates under the Medical Loss Ratio (MLR) requirements imposed by the Patient Protection and Affordable Care Act (the Act).

The Act requires group health issuers in the individual and group markets to report plan costs for the purpose of calculating the insurers’ medical loss ratio (the percentage of insurance premium dollars spent on reimbursement for clinical services and activities to improve health care quality). Absent an express waiver, large group insurers must spend at least 85% of premium dollars on claims and activities to improve health care quality, and individual and small group insurers must spend at least 80% of premium dollars on claims and activities to improve health care quality. The calculations are based on each carrier’s aggregate experience by state. While these rules apply to virtually all carriers, there are some adjustments (e.g., to prevent market destabilization and for mini-med and expatriate plans).