IRS Releases Proposed Rules Regarding the Individual Mandate On January 23, 2014, the Internal Revenue Service (“IRS”) issued a notice of proposed rulemaking further expounding on the individual mandate rules. The individual mandate is the requirement that all nonexempt individuals maintain minimum essential coverage (“MEC”) or face a penalty for every month they go without coverage beginning in 2014. The recent IRS guidance serves to fill in some of the gaps left by the final individual mandate rules released last year. The guidance adds certain types of coverage to a list of Medicaid and TRICARE coverage that are not considered MEC, provides clarification to determining unaffordability, guidance to claiming a hardship exemption, and guidance on the determination of the penalty. Although the individual mandate is not of direct concern to employers, it is of concern to employees who may have questions as they attempt to comply with the requirement and avoid any penalties. The proposed IRS guidance can be found here. Minimum Essential Coverage As mentioned, nonexempt individuals are required to maintain MEC in order to avoid a penalty. MEC generally includes, but is not limited to, employer-sponsored coverage, coverage purchased through a Marketplace, and coverage under certain government programs (such as Medicaid, Medicare, and TRICARE). To clarify, the categories discussed below are not considered MEC; therefore, individuals with such coverage would not comply with the requirement to maintain MEC. However, a transitional rule, addressed below, would consider these categories as MEC for 2014 only. The final regulations (released in August 2013) provide that certain types of Medicaid would not be considered MEC. Specifically, the types of Medicaid that would not be considered MEC are family planning services, tuberculosis coverage, pregnancy-related services, and coverage that is limited to the treatment of emergency medical conditions. The recent proposed guidance adds Medicaid medically needy coverage and Section 1115 demonstration projects to this list. Additionally, the rules propose to exclude certain limited-scope coverage because they fail to provide comprehensive care. First, the proposed rules exclude limited-scope “space available care,” which is provided for certain individuals who are excluded from TRICARE coverage for healthcare services from private sector providers and only eligible for space available care in a facility of the uniformed services. Second, the proposed rules exclude “line-of-duty care” that is provided for certain individuals who are not on active duty and are entitled to episodic care for an injury, illness, or disease incurred or aggravated in the line of duty. Excepted Benefits. The final regulations provided that coverage consisting solely of excepted benefits is not MEC. This is for the same reason as above, a lack of comprehensive coverage. Excepted benefits include fixed indemnity coverage, coverage that consists solely of dental or vision benefits, or Medicare supplemental coverage, among others.
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Transitional Rule In Notice 2014-10 (found here) published concurrently with the proposed rules, the IRS stated that because the guidance has yet to be finalized, the following forms of coverage will be considered MEC as far as the individual mandate is concerned for 2014 only: • • • • • • • •
Family planning services (Medicaid), Tuberculosis coverage (Medicaid), Pregnancy-related services (Medicaid), Coverage that is limited to the treatment of emergency medical conditions (Medicaid), Medicaid medically-needy coverage, Medicaid 1115 expansion demonstration program, Space-available care under TRICARE, and Line-of-Duty TRICARE.
Unaffordable Coverage Exemption PPACA allows for certain exemptions from the individual mandate. Among the exemptions is an unaffordability exception, which arises if an individual’s required contribution for MEC exceeds 8% of the individual’s household income 1. In determining whether employer coverage is affordable, the proposed regulations provide clarification on how to count an employer’s contributions towards a health reimbursement arrangement (“HRA”) and cafeteria plans, as well as, wellness program incentives. Health Reimbursement Arrangements. The proposed guidance provides that amounts newly made available for a current plan year under an HRA that is integrated with an eligible employer-sponsored plan and which the employee may use towards premiums are counted toward the employee’s required contribution. 2 Amounts in an HRA that may be used only for cost-sharing are not taken into account when determining affordability because they cannot affect the employee’s out-of-pocket cost of acquiring MEC. Cafeteria Plans. Under a cafeteria plan, employees may elect to make salary reductions towards nontaxable benefits or they may receive taxable cash. If the employee elects a salary reduction and has those amounts applied towards premiums, those contributions are treated as employee contributions, and the employee’s household income is increased by the amount of the contributions for the purposes of determining affordability. The IRS seeks comments on the treatment of employer cafeteria plan contributions that the employee may receive as a taxable benefit, such as cash, for purposes of determining the affordability of coverage. Wellness Programs. As with previous guidance, the proposed regulations provide that, for the purposes of determining the required contribution for coverage by an individual who is eligible for the employersponsored plan, wellness program incentives are treated as earned only if the incentives relate to tobacco use. In other words, only incentives from a tobacco-related wellness program are taken into consideration for purposes of affordability.
8% affordability threshold is used to determine eligibility for an individual mandate exemption. Please do not confuse with the eligibility threshold for obtaining a Premium Tax Credit through the Marketplace, which is 9.5% of household income. 2
The rules for counting employer HRA contributions are similar, but slightly different when determining Premium Tax Credit eligibility. P:\Graphics\GBS\Healthcare\Healthcare Reform Template.doc
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Identical language exists in proposed regulations for Premium Tax Credits released in June 2013 with the following illustrative example: Employer X offers an eligible employer-sponsored plan with a nondiscriminatory wellness program that reduces premiums by $300 for employees who do not use tobacco products or who complete a smoking cessation course. Premiums are reduced by $200 if an employee completes cholesterol screening within the first six months of the plan year. Employee B does not use tobacco and the cost of his premiums is $3,700. Employee C uses tobacco and the cost of her premiums is $4,000. Only the incentives related to tobacco use are counted toward the premium amount used to determine the affordability of X's plan. C is treated as having earned the $300 incentive for attending a smoking cessation course. Thus, the employee's required contribution to premium for determining affordability for both Employees B and C is $3,700. The $200 incentive for completing cholesterol screening is disregarded. Additionally, the recent IRS proposed guidance seeks comment as how to determine the required contribution for an individual that is not eligible for coverage under certain employer-sponsored coverage. Hardship Exemption Certain individuals may claim a hardship exemption from the individual mandate, for reasons such as the affordability of coverage or for reasons yet to be approved by Health and Human Services (“HHS”) or the IRS. Therefore, the proposed guidance provides that individuals may claim a hardship exemption on their tax filing pursuant to any published guidance from HHS. Conclusion As mentioned previously, the proposed individual mandate guidance does not apply directly to employers; however, complying with the individual mandate is of importance to employees. Employers should be aware of the rules surrounding the individual mandate to be prepared for questions from employees. Gallagher Benefit Services, through its compliance experts and consultants, will continue to monitor developments on healthcare reform legislation and regulation and will provide you with relevant updated information as it becomes available. In the interim, please contact your Gallagher Benefit Services Representative with any questions that you may have. The intent of this analysis is to provide general information regarding the provisions of current healthcare reform legislation and regulation. It does not necessarily fully address all your organization’s specific issues. It should not be construed as, nor is it intended to provide, legal advice. Your organization’s general counsel or an attorney who specializes in this practice area should address questions regarding specific issues.
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