On May 3, the IRS issued proposed regulations on minimum value and affordability of employer-sponsored health plans under the Affordable Care Act (ACA), and on other rules regarding the health insurance premium tax credit. Specifically, the proposed regulations will help large employers determine whether their employer-provided health coverage is affordable and provides minimum value for purposes of determining whether the “pay-or-play” penalties will apply. The three primary areas addressed by the proposed regulations are:
- How to calculate minimum value (MV)
- Special rules on how Health Reimbursement Arrangements (HRAs), Health Savings Accounts (H.S.A.s) and “results-oriented” wellness program incentives are counted in determining MV and affordability
- Three proposed safe harbors for determining MV
As of January 2014, a large employer may be liable for potential penalties under the “employer shared responsibility” provisions if a full-time employee receives a premium tax credit for purchasing health insurance through an individual exchange. Individuals are NOT eligible to receive a premium tax credit if they are eligible for affordable coverage under an eligible employer-sponsored plan that provides minimum value (MV). The proposed regulations provide guidance to help employers determine if their plans provide MV and are affordable.
MINIMUM VALUE REQUIREMENTS
Under Code section 36B(c)(2)(C)(ii), a plan provides MV if the plan’s share of the total allowed costs of benefits provided under the plan is at least 60% of the costs. The proposed regulations define the MV percentage as:
(a) The plan’s anticipated covered medical spending for benefits provided under a particular EHB benchmark plan for the MV standard populations based on the plan’s cost-sharing provisions
(b) Divided by the total anticipated allowed charges for EHB coverage provided to the MV standard population; and
(c) Expressed as a percentage.
The standard population used to compute the MV percentage reflects the populations covered by typical self-insured group health plans.
For purposes of determining whether a large employer will be liable for a penalty if a full-time employee receives a premium tax credit for buying coverage in an exchange, employer-sponsored health coverage is deemed affordable if the employee cost for self-only coverage is not more than 9.5% of the employee’s income. Prior guidance provides three safe harbors an employer can use to make this determination.
HOW HRAs, HSAs AND WELLNESS PROGRAM INCENTIVES AFFECT MV AND AFFORDABILITY
The following matrix summarizes how the MV and affordability determinations are affected by employer credits to HRAs, employer contributions to HSAs, and by financial incentives under “results-oriented” wellness programs. Additional detail is provided following the matrix. The numbers in the matrix correspond to the numbered explanations following the matrix.
|How this counts toward MV||How this counts toward Affordability|
|HSA: Employer current-year contributions||1—Count in the MV calculation||2—Do not count in the affordability calculation|
|HRA: Employer credits for the current year to HRA integrated with eligible group health plan||3—Count in the MV calculation only if the amounts may be used only for cost-sharing and not to pay insurance premiums||4—Count only in determining affordability (and do not also count toward MV) if either: Employer amounts may be used only to pay insurance premiums, or Employees can elect to use the amounts either for cost-sharing or to pay premiums.|
|Incentives for Tobacco cessation/ reduction wellness program||5—Assume all employees meet the terms of the program, so the reduced cost-sharing they receive counts toward MV calculation||6—Assume all employees meet the program requirements, so premium amount used in affordability calculation is the lower premium for non-smokers, not the higher premium that smokers must pay|
|Incentives for other Wellness programs||7—Assume all employees fail to meet the terms of the program, so the higher cost-sharing they have counts toward MV calculation *||8—Assume all employees fail to meet the terms of the program, so the premium amount used in the affordability calculation is the higher premium paid by those who fail to meet the requirement *|
- Employer current-year contributions to an employee’s HSA are counted in calculating the plan’s share of total allowed costs for purposes of MV and are treated as amounts available for first-dollar coverage.
- Employer contributions to HSAs do not count toward affordability because HSA amounts cannot be used to pay premiums, but can only be used toward the participant’s (or his/her tax dependents’) medical costs (i.e., cost-sharing expenses under the group health plan, or other medical expenses under code section 213(d) that are not covered under a group health plan).
- Employer amounts credited for the current year to HRAs that are integrated with an underlying employer-sponsored major medical plan (not a plan that provides only “exempt” benefits) are counted in calculating the plan’s share of total allowed costs for purposes of MV, only if the amounts may be used only for cost-sharing and not to pay insurance premiums.
- Employer amounts credited for the current year to HRAs that are integrated with an underlying employer-sponsored major medical plan (not a plan that provides only “exempt” benefits) are counted only in determining affordability (and do not also count toward MV) in either of the following two circumstances:
- A. The employer amounts credited may be used only to pay insurance premiums, or
- B. Employees can elect to use the amounts either for cost-sharing or to pay premiums.
- This prevents double counting of these HRA amounts toward both MV and affordability.
- Wellness programs: Under a nondiscriminatory “results-based” wellness program, the financial incentives to employees to satisfy the terms of the wellness program might be lower premiums and/or reduced cost-sharing. The ACA increased the maximum incentive for wellness programs from 20% to 30% of the total cost of coverage under the group health plans, and regulations issued November 20, 2012 increased the maximum percentage to 50% for tobacco cessation or reduction programs. How these wellness program incentives are counted in determining MV and affordability differs for tobacco cessation/reduction wellness programs versus all other types of “results-oriented” wellness programs.
- If an employer has a nondiscriminatory “results-oriented” tobacco cessation or reduction wellness program, and the reward for meeting the standard is reduced cost-sharing, the employer may assume that all employees meet the terms of the program. This means the reduced cost-sharing they receive counts toward the MV calculation, and the plan will not have a lower MV because some individuals do not meet the smoking cessation program requirements and thus must pay higher cost-sharing amounts.
- If an employer has a nondiscriminatory “results-oriented” tobacco cessation or reduction wellness program, and the reward for meeting the standard is a premium reduction, the determination of whether the employer plan meets the affordability test must assume that employees will meet the program requirements. This means that the plan’s affordability will be calculated based on the lower premium charged to non-tobacco users or to those who have satisfied the tobacco cessation/reduction program.
- Under a nondiscriminatory wellness program, employees’ cost-sharing amounts might be reduced if they meet the terms of the wellness program. For purposes of determining if the plan provides MV, the employer must assume employees will fail to meet the program requirements, which means the higher cost-sharing amounts will be attributed to employees, making it harder for the plan to meet MV.
- If an employer has a nondiscriminatory wellness program, and the reward for meeting the standard is a premium reduction, the determination of whether the employer plan meets the affordability test must assume that employees fail to meet the program requirements. This means the higher premium amount will apply in determining if a plan meets the affordability test. This makes it more likely the plan will fail the test and the employer will be subject to a penalty if the affected employee buys health insurance in the exchange and receives a subsidy.
* For the non-tobacco use wellness programs, a transition rule in the proposed regulations provides relief for plan years beginning before January 1, 2015. It provides that an employer will not be liable for the employer mandate penalty if an employee purchases coverage in an exchange and receives a premium tax credit or cost-reduction subsidy because the employer coverage was not affordable or did not provide minimum value if the employer coverage would have been affordable or provided MV if the employee had met the requirements of a nondiscriminatory wellness program that was in effect on May 3, 2013.
NEW SAFE HARBORS FOR DETERMINING MINIMUM VALUE
Future guidance will specify several safe harbor plan designs that will provide MV. Large employers can compare their plan designs to these safe harbors to determine if their plans provide MV without having to use the MV calculator. The proposed regulations offer the following plan designs as safe harbors to determine minimum value (MV) if the plans cover all of the benefits included in the (HHS) MV Calculator. The benefits in the MV Calculator include the 10 categories of essential health benefits (EHB), plus preventive care/screening/immunization and skilled nursing facility benefits. Large employer plans are not required by the ACA to provide EHBs; so this means if they want to use these safe harbors they will have to provide all categories of EHBs.
|Safe Harbors||Deductible||Cost-Sharing||Out-of-Pocket Maximum|
|Plan #1||$3,500 integrated medical and drug deductible||80%||$6,000 maximum OOP|
|Plan #2||$4,500 integrated medical and drug deductible||70%||$6,400 maximum OOP & $500 ER contribution to an H.S.A.|
|Plan #3||$3,500 medical deductible & $0 drug deductible||60% for medical & 75% for drug expenses; drug co-pays of $10/$20/$50 for the first, second & third Rx drug tiers, and 75% coinsurance for specialty drugs||$6,400 maximum OOP|
The proposed regulations also include guidance on other issues, including the definition of modified adjusted gross income (MAGI); how retiree coverage is counted; rating areas; coverage for newborns and adopted children; how the monthly premium is adjusted for family members who are enrolled for a partial month, and how the premium tax credit is calculated for such individuals; coverage for family members at different geographic locations; and additional benefits and applicable benchmark plans.