Final Individual Mandate Regulations Explain How Employer Contributions Affect Affordability of Employer-Sponsored Coverage

Posted December 4, 2014 by Megan DiMartino

From EBIA

The IRS has issued final regulations on health care reform’s individual mandate—the requirement for individuals to either maintain minimum essential coverage (MEC) or pay individual shared responsibility penalties, unless an exemption applies. The regulations provide further guidance on the exemption that applies when employer-sponsored MEC is considered unaffordable. For this purpose, affordability is based on whether the employee’s “required contribution” for coverage would exceed 8% (subject to indexing adjustments) of household income. (The 8% standard is related to, but distinct from, the affordability threshold that applies under Code § 36B when determining eligibility for premium tax credits and liability for employer shared responsibility penalties.) Largely following proposed regulations that were published earlier this year, the final regulations address how the following employer contributions factor into employees’ required contributions:

HRA Contributions. Amounts newly made available for the current plan year under an HRA will reduce an employee’s required contributions if (1) the HRA would be “integrated,” as provided in IRS Notice 2013-54, with a primary plan sponsored by the same employer if the employee enrolled in that plan; (2) the amounts can be used for premiums for the primary plan or for premiums plus cost-sharing or benefits not covered under the primary plan; and (3) the amounts are required under the plan’s terms or otherwise determinable within a reasonable time before the employee must decide whether to enroll. According to the preamble, the IRS anticipates adopting this same rule under Code § 36B. Thus, for employer shared responsibility purposes, HRA amounts that can be used only for cost-sharing will count only for minimum value purposes, while amounts that can be used only for premiums (or premiums and cost-sharing/benefits) will count only for affordability.

Wellness Incentives. Nondiscriminatory wellness program incentives that affect premiums (whether through discounts, rebates, or surcharges) are treated as earned if they relate exclusively to tobacco use. If a wellness incentive is unrelated to tobacco use—or if an employee must complete a wellness program related to tobacco use and a program unrelated to tobacco use to receive an incentive—the incentive is treated as unearned. The IRS also anticipates adopting these rules under Code § 36B.

Cafeteria Plan Contributions. The employee’s required contribution is reduced by any employer contributions made available for the current plan year under a cafeteria plan that (1) may not be taken as a taxable benefit, (2) may be used to pay for MEC, and (3) may be used only to pay for Code § 213 medical care. The preamble explains that it is appropriate to treat these amounts as reducing employees’ required contributions because they represent a real reduction in the cost of purchasing MEC. In contrast, where use of the employer’s contribution is not limited to medical expenses, “it cannot be assumed that the employee will use the contribution for purchasing [MEC].” [EBIA Comment: The preamble does not indicate whether the IRS anticipates adopting this rule under Code § 36B, but we do not see a reason why a different interpretation would apply. Further guidance on this issue would be welcome.]

The final regulations also address when certain non-comprehensive government-sponsored coverage will not qualify as MEC, and the process for claiming exemptions from the individual mandate. Separately, the IRS has issued Notice 2014-76 to identify the hardship exemptions that individuals may claim on their federal tax returns without obtaining a hardship exemption certification from an Exchange.