Although most of the major rules necessary to implement the 2014 Affordable Care Act reforms are now in proposed or final form, gaps still remain to be filled. On April 30, 2013, the Internal Revenue Service released a notice of proposed rulemaking intended to answer some of the questions that remained open in the wake of May 2012 final regulations implementing the premium tax credit program.
Premium tax credits are not normally available to individuals who are offered health insurance coverage by their employer. Such individuals may, however, be eligible for premium tax credits if the employer coverage does not provide “minimum value” (MV) or if the employer coverage is “unaffordable” An employer that offers a health plan that fails to provide MV or that is unaffordable may also be assessed a penalty if one or more of its employees turns to the exchange for premium tax credits.
The primary focus of the proposed rule is defining the concept of MV, although it addresses several other issues as well. The proposed regulation follows up on an earlier notice requesting comment on MV and complements Health and Human Services regulations published in February of 2013 that also address MV.
Calculating minimum value. The ACA provides that an employer group health plan fails to offer MV if “the plan’s share of the total allowed costs of benefits provided under the plan is less than 60 percent of such costs.” The ACA further provides that in calculating MV, HHS rules for determining actuarial value shall apply. The HHS rules provide that the MV of a specific group health plan shall be calculated by dividing the anticipated covered medical spending for essential health benefits (EHB) coverage for the population covered by a typical self-insured group health plan — computed in accordance with the specific group health plan’s cost sharing — by the total anticipated allowed charges for EHB coverage for a typical self-insured group health plan population.
The HHS rules offer several options for calculating MV. Plans may use the HHS MV calculator, may apply a safe harbor developed by HHS and the IRS, or may, for nonstandard plans, provide an actuarial certification from a member of the American Academy of Actuaries. Small group plans also meet MV requirements if they provide a bronze level plan.
A difficulty with the HHS approach is that group health plans other than small group plans are not required to cover the EHBs. Some commentators contended that MV should be based on the plan’s share of the cost of all EHBs, including those the plan did not cover, while others argued that it should only be based on the categories of EHBs covered by the plan. The IRS rule proposes that a plan’s anticipated spending for benefits provided under any particular EHB benchmark plan for any state should count toward the numerator for MV, and that the denominator will total anticipated allowed charges for EHB coverage provided to the MV standard population.
HSA and HRA contributions. The proposed rule also addresses the question of how employer contributions towards health savings accounts or health reimbursement arrangements should count toward the plan’s share of costs in determining MV. Consistent with the HHS regulations, the IRS proposed rule would provide that all employer contributions for the current plan year to an HSA should be taken into account in determining the plan’s share of costs for MV and be treated like amounts available for first dollar coverage. Employer current-year contributions to HRAs integrated into the group health plan that can only be used for cost-sharing and not for premiums are treated the same way.
Wellness program cost-sharing reductions. The proposal also addresses the question left open by the HHS regulations as to how reduced cost sharing under wellness programs should be treated in calculating MV. Recognizing that “certain individuals inevitably will face barriers to participation [in wellness programs] and fail to qualify for rewards,” the proposal does not consider reduced cost-sharing in wellness programs as counting toward MV with one exception: MV may be calculated assuming that every individual satisfies the terms of a nondiscriminatory program aimed at the prevention or reduction of tobacco use.
Affordability. The ACA also provides that employees may be eligible for premium tax credits if employment-based coverage is “unaffordable”; that is, costs more than 9.5 percent of household income. The concept of affordability was addressed in detail in the final premium tax credit regulations, but they left open the questions of how employer HRA contributions and wellness program premium reductions should be treated. The proposed rule provides that amounts made newly available under an HRA for a current plan year that can either be only used for premium payment or that can be used either for premiums or for cost-sharing reduction can be considered as available to increase the affordability of employee coverage. Wellness incentives that reduce premiums, however, will not be considered as increasing affordability except, again, that the affordability of plans for tobacco users will be determined based on the premiums charged to tobacco users who complete a nondiscriminatory wellness program related to tobacco use.
The preface to the proposed rule further states that for purposes of the individual mandate penalty, health insurance will be considered to be unaffordable (and thus the penalty will not apply) if the insurance would be unaffordable (would cost more than 8 percent of household income) but for the availability of a reduction in premium for participation in a wellness program. For the year 2014, however, if an employee receives a premium tax credit because an employer health plan is unaffordable, but the employer coverage would have been affordable had the employee satisfied the requirements of a nondiscriminatory wellness program that was in effect at the time of the publication of the proposed rule, the employer will not be subject to the employer mandate penalty. Consumer advocates fought hard for a recognition that consumers should not be penalized by denial of access to tax credits or for failing to meet the individual mandate if they do not comply with wellness program requirements and will see this proposed rule as a major victory.
Safe harbors. The proposed rule proposes three safe harbors for determining MV for plans that cover all benefits included in the MV calculator. These include:
- A plan with a $3,500 integrated medical and drug deductible, 80 percent cost-sharing, and a $5,000 maximum out-of-pocket limit;
- A plan with a $4,500 integrated medical and drug deductible, 70 percent cost sharing, a $6,400 maximum out-of-pocket limit, and a $500 employer contribution to an HSA; or
- A plan with a $3,500 medical deductible, $0 drug deductible, 60 percent medical cost sharing, a $10/$20/$50 copay tiered drug plan, and a 75 percent coinsurance for specialty drugs.
Other issues. The IRS requests suggestions for other common plan designs that would satisfy minimum value as well. As in the HHS rules, a certification by a member of the American Academy of Actuaries is also a possibility for achieving MV for a nonstandard plan.
As already noted, the proposed rule addresses a number of other issues as well. The proposal:
- refuses to recognize a de minimis exception to the 60 percent MV requirement.
- clarifies that if a parent includes a child’s gross income in the parent’s income for tax reporting purposes, the child is treated as having no gross income for purposes of calculating household modified adjusted gross income.
- provides that the geographic rating areas used for determining premiums in the individual and small group market will also be used for defining the applicable benchmark silver plan used for determining premium tax credits.
- explains that former employees eligible for retiree coverage are excluded from eligibility for premium tax credits only if they enroll in such coverage. Active employees eligible for COBRA coverage because of reduced hours will have their eligibility for premium tax credits determined applying the same MV rules that apply to other active employees.
- clarifies that a child born or adopted during a month is treated as eligible for a premium tax credit as if the child were enrolled as of the first day of the month.
- provides that if a taxpayer’s coverage family either increases or decreases during a month, the family is to be treated as if all members were enrolled for the entire month.
- determines that if a qualified health plan is terminated during the middle of the month and the insurer reduces or refunds part of the premium, premium tax credits will be prorated appropriately.
- provides that if family members are geographically separated and enroll in separate qualified health plans, the premium for the applicable benchmark plan is the sum of the benchmark plans for all family members.
- clarifies that only premiums allocated to essential health benefits are considered in determining the premium of the benchmark silver plan.
- notes that a taxpayer who receives a premium tax credit must file a tax return for the year in which the tax credit is received.
Finally, the preface discusses a potential situation in which an employer failed to offer MV but required employees to accept a sub-MV plan, thus disqualifying the employee from receiving a premium tax credit since the employee was enrolled in employer coverage. The preface notes that an employer that imposed such a requirement would still be subject to the employer mandate penalty. It further suggests that such an employer may be in violation of the Fair Labor Standards Act for impermissibly interfering with an employee’s access to premium tax credits.