On June 26, 2013, the Department of Health and Human Services released a final rule on Exchange Functions:  Eligibility for Exemptions:  Miscellaneous Minimum Essential Coverage Provisions.   This rule finalizes a proposed rule published on January 30, 2013, and addresses the role of the exchanges in determining exemptions from the individual responsibility requirement of the Affordable Care Act.  It will operate in tandem with a rule from the Internal Revenue Service implementing the individual mandate itself.

Although the IRS proposed rule was also published on January 30, 2013, the IRS has not yet issued a final rule.  The IRS did, however, publish two notices on June 26, 2013, addressing issues raised by the HHS rule.  On the same date, HHS also published a fact sheet explaining the new rule, addressing criteria for determining when a hardship exists supporting the grant of an exemption from the individual mandate and when a person who ceases to be eligible for an exemption should qualify for a special enrollment period to enroll in qualified health plan (QHP) coverage.

The final rule makes an exceptional number of modifications to the proposed rule.  While few of these changes are radical, they do demonstrate a serious attempt by HHS to take into account the myriad circumstances in which individuals should not be penalized for not purchasing health insurance, as presented by the 220 comments they received on the proposed rule.  While the HHS recognizes at various points that the terms of the ACA limits its discretion to excuse compliance with the mandate, in general HHS interprets the statutory exceptions liberally so as to avoid unfairly penalizing the uninsured.  Although the Congressional Budget Office estimates that 24 million Americans will qualify for exemptions, HHS expects only about 12 million applications to the exchanges for exemptions, as many persons eligible for an exemption, such as those who have incomes below the tax filing limit, will not need to apply for an exemption certificate.

The individual responsibility requirement imposes a penalty if an individual fails to be covered by “minimum essential coverage.”  In most instances it will be obvious whether an individual has minimum essential coverage: the person will be on Medicaid, Medicare or some other government program; have employer coverage or have individual coverage through or outside of the exchange; or be covered by a grandfathered plan.  In some instances, however, it will not be clear whether the coverage a person has is in fact “minimum essential coverage.”  The rule addresses the situations where this question might arise.

The individual responsibility provision of the ACA lists a number of circumstances in which an individual either is not an “applicable individual” to whom the requirement applies or is exempt from the mandate penalty.  Since the Supreme Court held that the individual mandate has no force independent of the tax that enforces it, the rule’s definition of “exemption” recognizes that there is no distinction between exceptions to the applicable individual definition or the tax penalty exemptions, and subsumes all exceptions and exemptions under the term “exemption.”

The definition section adopts the statutory definition of “health care sharing ministry.”  Concern was expressed by some commenters on possible abuse of the health care sharing ministry exception, since sharing ministries are not licensed insurers and do not need to comply with ACA insurance reforms.  HHS notes, however, that the exception only applies to sharing ministries continuously in existence since 1999, which means that new ministries cannot form simply to evade the statute. To date, four ministries have been identified that meet this definition.

The definition section of the rule also defines “application filer” separate from “applicant” to clarify that an individual can file an exemption application for himself or herself or for family members, but an application can also be filed by an authorized representative or someone acting responsibly for an incapacitated or minor applicant.

The statute recognizes nine exemptions from the individual responsibility requirement.  Eligibility for two of these exemptions — the hardship exemption and religious conscience exemption — will be determined exclusively by the exchange.  The exchanges can also issue certificates of exemption for members of health care sharing ministries, members of Indian tribes, or persons who are incarcerated, although individuals who qualify for these categories can forgo obtaining a certificate from the exchange and claim the exemption at the time they file their taxes.

For applicants who qualify for the four remaining exemptions — lack of affordable coverage (premiums for a bronze policy cost more than 8 percent of income), income below the tax filing limit, unlawful presence in the United States, or short term (under 3 months) gaps in coverage — the exchange will not issue a certificate of exemption, but the exemption will rather be claimed at the time of filing for taxes (if at all).  An applicant can apply for multiple exemptions simultaneously.

In states with a federally facilitated exchange, exemption certificates will be granted by the federally facilitated exchange.  In states with a state-based exchange, exemption certificates will be granted by the state-based exchange or through contracted arrangements.  If a state exchange chooses to do so, however, it may, for applications received prior to October 15, 2014, cede responsibility for determining exemptions to HHS.  After October 25, 2014, an exchange may rely on HHS to make a determination, but must receive the exemption application and issue an eligibility notice.

The religious conscience objection.  Applicants are eligible for the religious conscience exemption if they are members of, and subscribe to the tenets of, religious groups that object to having insurance coverage (including Medicare and Social Security) on religious grounds.  Parents can apply for their families as well as themselves.  The proposed rule had provided that children of families with an exemption certificate would have to apply on their own behalf at age 18.  The final rule raises the age to 21, recognizing that most of the groups covered by this exemption — mainly Mennonite and Amish groups — base membership on an adult decision to join the group and understand 21 to be the age at which that decision is generally made.  The exchange will send individual family members eligible for this exemption notice, upon their turning 21, of their need to apply for themselves.  Nothing precludes family members covered by the exemption from obtaining coverage on their own.

The exemption for members of Indian tribes.  The ACA defines “Indian” for purposes of the exemption in terms of membership in a federally recognized Indian tribe.  Recognizing that this definition is quite limited, but that HHS cannot rewrite the statutory definition, the final rule creates a separate hardship exemption for Indians who do not meet this definition but are eligible for services through the Indian Health Service or through Indian health care providers.  Concerns had been expressed recently that many Native Americans were going to be excluded from the benefits of health reform because they do not belong to a recognized tribe.  This rule begins to address this problem.

The hardship exemption.  The open-ended statutory “hardship” exemption category affords HHS broad discretion to excuse compliance with the individual mandate where strict enforcement would in fact cause hardship.  HHS has used this discretion creatively and generously in the final rule.  Exchanges must grant an exemption to applicants who have “experienced financial or domestic circumstances, including an unexpected natural or human-caused event, such that he or she had a significant, unexpected increase in essential expenses that prevented him or her from obtaining coverage;” if “the expense of purchasing a qualified health plan would have caused [the applicant] to experience serious deprivation of food, shelter, clothing or other necessities;” or if other circumstances have prevented the applicant from obtaining coverage.  The guidance published with the rule lists eleven circumstances that exchanges may consider in finding such a hardship, including homelessness, eviction, domestic violence, death of a close family member, bankruptcy, substantial recent medical debt, and disasters that substantially damaged the individual’s property.

A specific hardship exemption is available for individuals in states that refuse to expand Medicaid who would have been eligible for Medicaid had their state participated in the expansion.  Under the final rule this is available for households up to 138 percent of poverty, even though those over 100 percent of poverty may qualify for premium tax credits.

The IRS may allow a hardship exemption for applicants who are exempt because their income is below the filing limit even if they in fact filed a return if they claimed a dependent with income above the filing limit and thus had household income above the filing limit.  The IRS may also allow an exemption for an applicant who can afford self-only employment coverage for 8 percent or less of MAGI, but who are part of a household that includes other members who are also eligible for employer-sponsored coverage where the aggregate cost of employer-sponsored coverage for all members of the household exceeds 8 percent of MAGI.  Both of these hardship exemptions can only be granted by the IRS at tax-filing time.

Other hardship exemptions may be granted by the exchange based on projected income.  An applicant may qualify for a hardship exemption prospectively even though the applicant’s employer  offers coverage that is affordable — that is, does not cost the individual more than 8 percent of MAGI — if the coverage does not meet a 60 percent “minimum value” requirement.  In this situation, the employee need not purchase the coverage and is exempt from the penalty unless the employer offers other plans that are affordable and do offer minimum value, or the employee can afford a bronze plan offered through the exchange after applying a premium tax credit.

In determining affordability for granting a certificate of exemption prospectively, the exchange shall determine the cost of employer-sponsored coverage without considering wellness incentives, including those related to participation in tobacco cessation programs, that could reduce the cost of coverage.  An employee, that is to say, does not have to pay the individual responsibility penalty because he or she fails to participate in a wellness program.

If an employee is eligible to purchase employer-sponsored coverage, the cost of coverage for determining affordability is the cost of self-only coverage. If an employee has a family, the cost of coverage is the lowest-cost family coverage that would cover all nonexempt members of the employee’s family.  If a member of the household is ineligible for employer-sponsored coverage (for example, a spouse not covered under family coverage) the cost of coverage for that household member through the exchange is also considered.  If the total cost of coverage for the household exceeds 8 percent of household income, the household is exempt from the coverage requirement for the remainder of the year if the applicant applies prior to the last date on which he or she could enroll in a QHP through the exchange, that is, as late as November.

Exemption certificates for membership in a health care sharing ministry and for incarceration can only be granted retrospectively, since the exchange cannot know prospectively how long the applicant will remain with the sharing ministry or incarcerated.  Applicants are generally required to apply for an exemption during each year that they claim an exemption.  The exchanges will not send applicants who are granted a certificate of coverage notice of their obligation to reapply.  Certificates for the religious conscience exemption and for members of Indian tribes can be applied for prospectively and retrospectively and last indefinitely, since presumably qualification for these exemptions persists from year to year.  Hardship exemptions must be granted for the month before, months during, and month after the hardship, and can be granted for additional months after the hardship if necessary.  Exchanges will grant certificates of exemption regardless of whether the applicant seeks coverage through the exchange or not.

Processing exemption applications.  The rule lays out with some specificity how the exchange should process applications for exemptions.  Exchanges will use an application form supplied by HHS unless they receive approval for an alternative application form. The application will be separate from the form used to apply for insurance affordability programs, but if an individual submits an application for an insurance affordability program and then an application for exemption, the exchange shall use the information previously collected for the coverage application if relevant to the exemption application.

The exchange must require an applicant with a Social Security number to provide it, but may not require it from an individual not filing for him or herself.   Prior to October 15, 2014, the exchange must at a minimum accept paper applications filed by mail. (Other channels may be required after that time in future rulemaking).   The exchange must determine exemption eligibility “promptly and without undue delay,” but no explicit timing standard is imposed.  Exchanges may only receive applications after the end of a calendar year for exemptions based on Indian, religious conscience, or hardship status, and hardship applications must be filed within three years after the month or months during which the hardship occurred.

Qualification for the religious conscience exception can be established by proof of Social Security and Medicare tax exemption or by attestation of membership in a group recognized by the Social Security Administration as exempt, unless the attestation is incompatible with information otherwise available to the exchange.  Membership in a health care sharing ministry can also be established by attestation.  The exchange will have access to lists of religious groups recognized by the SSA as conscientiously opposed to Social Security taxes and of recognized health care sharing ministries.  If an entity is not on these lists, the applicant will be provided with information on how the entity can pursue recognition.

The exchange must verify claims of application, membership in an Indian tribe, and hardship.  If the exchange is unable to resolve inconsistent information, it must give the applicant 90 days (or longer if necessary) to resolve the inconsistency, but the applicant is not eligible for the exemption until the inconsistency is resolved.

Individuals with exemption certificates are required to report changes in their eligibility status (except eligibility based on lack of affordable coverage because of projected income, which is valid for the rest of the year in any event) within 30 days of the change.  The exchange must then do an eligibility redetermination and notify the individual regarding continuing eligibility.  Under the HHS guidance, an applicant no longer qualified for an exemption is eligible for a special enrollment period if otherwise eligible for a QHP.

The exchanges must report exemption certifications to the IRS.  Individuals denied an exemption will have the right to appeal.

Minimum Essential Coverage

The rule concludes with several provisions regarding minimum essential coverage, which individuals are required to have if they do not qualify for an exemption.  The proposed rule had proposed to recognize self-insured student health plans as minimum essential coverage.  This proposal drew substantial criticism, as some student health plans offer seriously inadequate coverage.  The final rule only recognizes self-insured student plans as minimum essential coverage through December 31, 2014.  After that date, they must independently qualify under procedures described below.

State high-risk pools are also only recognized as minimum essential coverage through December 31, 2014.  Eligibility for student health plans or high-risk pools does not disqualify an individual for premium tax credits.  Foreign health coverage, AmeriCorps coverage, and multishare plans are not recognized as minimum essential coverage unless they qualify under specified procedures.  Medicare Advantage and Refugee Medical Assistance are recognized as minimum essential coverage.

Finally, coverage that does not otherwise qualify as minimum essential coverage, including self-insured student plans, foreign health coverage, AmeriCorps coverage, multishare plans, and other coverage can qualify if it meets specific criteria set out in the rule.  These include “substantially” complying with the insurance reform requirements of the ACA that pertain to non-grandfathered, individual coverage.  Although the rule does not specify which insurance reform requirements are included, it is to be hoped that they include guaranteed availability, lest this provision become a back door for bringing back cherry-picking association plans.

IRS Notices

The two IRS notices issued on June 26 address very specific issues.  Notice 2013-41 identifies situations in which an individual eligible for a form of coverage will be considered to have minimum essential coverage and thus be ineligible for premium tax credits.  Specifically:

  • An individual who is disenrolled from CHIP or Medicaid for nonpayment of premiums is eligible for minimum essential coverage and therefore not for premium tax credits.
  • An individual who may not enroll in CHIP during a pre-enrollment waiting period is not eligible for minimum essential coverage.
  • An individual awaiting a Medicare or Medicaid eligibility determination based on blindness or disability is not eligible for minimum essential coverage until eligibility is actually determined.
  • An individual is only considered to have minimum essential coverage to the extent the individual is actually enrolled in and not merely eligible for:
    • Medicare Part A if the individual must pay premiums to be eligible;
    • a state high risk pool;
    • a self-funded student health plan; or
    • certain TRICARE programs.

Notice 2013-42 provides that individuals and their families who are eligible to enroll in employer-sponsored coverage with plan years that begin in 2013 and run into 2014 are not required to enroll in that coverage to avoid the individual responsibility payment until a new coverage year begins in 2014.