On November 21, 2014, the IRS issued final regulations entitled Minimum Essential Coverage and Other Rules Regarding the Shared Responsibility Payment for Individuals. The final rules, effective as of November 26, 2014, address the requirement that individuals must maintain “minimum essential coverage” (MEC) to satisfy the Individual Mandate provisions of the Affordable Care Act (ACA). Since the beginning of 2014, Code section 5000A has required an individual to pay the individual “shared responsibility payment” (often referred to as the “individual mandate tax”) if the individual does not have MEC for him or herself and her dependents. Several exemptions and exceptions apply, however.
The final rule addresses several of these exemptions and exceptions. It is important to note that these regulations provide guidance for individual taxpayers, not for employers. Many terms under the ACA apply for individuals as well as for employers, and it is easy to get them confused. For example, the term “affordability” applies to the employer mandate as well as the individual mandate. The clarifications in the November 21, 2014 regulations apply only to the determination of whether an employee is exempt from the individual mandate tax because the employee’s required contribution for coverage (from the employer or in the Exchange) would be more than 8% of the employee’s household income. This is a different test than the 9.5% “affordability” test that affects whether an employee qualifies for a subsidy under the individual mandate and whether an employer may be subject to a penalty under the employer mandate.
For additional information, see the Leavitt article on the different “household income” tests, at https://news.leavitt.com/health-care-reform/confused-about-the-different-household-income-tests-heres-why/ In addition to affordability, the November 21 final regulations also address two other areas, which are summarized at the end of this article:
- Certain government-sponsored programs that will not qualify as “minimum essential coverage” as of 2015, and
- “Hardship exemptions” that may be claimed without an exemption certificate from the Exchange.
One of the exemptions from the Individual Mandate tax is that an individual will not be subject to the tax for failure to have “minimum essential coverage” (MEC) if the employee would have to pay more than 8% of household income either for employer-sponsored coverage or for the lowest-priced bronze policy available in the Marketplace to the individual (and to the family, if the individual has a family). In such case, coverage is deemed to be “unaffordable.” The “affordability” or “un-affordability” provisions in these final regulations address the extent to which the following amounts are counted in “household income” in calculating the employee’s required contribution for other group health coverage:
- Employer “health flex contributions” to the individual’s cafeteria plan
- Current year employer credits to certain Health Reimbursement Arrangements (HRAs) in which the individual is participating
- Wellness program incentives for which the individual qualifies and participates
Employer “health flex contributions” to Cafeteria Plans
For purposes of determining whether an employee is required to pay more than 8% of his/her “household income” for employer or exchange coverage, household income is increased by any amount an employee paid toward coverage via salary reduction. However, household income does not include any employer contributions made under a section 125 cafeteria plan that:
- May not be taken as a taxable benefit, and
- May be used to pay for minimum essential coverage, and
- May be used only to pay for medical care within the meaning of Code section 213.
Such contributions are referred to as “health flex contributions.” These amounts are not included in the definition of “household income” even though they are excluded from gross income pursuant to a cafeteria plan.
Health Reimbursement Arrangements (HRAs)
These regulations confirm what was provided in the proposed regulations under Code section 36B (May 3, 2013). For purposes of determining whether an employee is required to pay more than 8% of household income, employer contributions to an HRA that are newly made available in the current plan year count toward an employee’s required contribution if:
- the HRA would have been integrated with an eligible employer-sponsored plan if the employee had enrolled in the primary plan, and
- the HRA and the underlying employer plan are offered by the same employer.
That is, if an employee enrolls in his spouse’s employer’s plan and also participates in an HRA from his own employer, that HRA amount does not count as part of the employee’s contribution when determining whether the employee paid more than 8% of household income for coverage under the spouse’s plan.
Wellness Program Incentives
These regulations confirm what was provided in the proposed regulations under Code section 36B (May 3, 2013). If an employer offers a nondiscriminatory wellness program that imposes a premium surcharge on tobacco users, the additional amount (premium surcharge) paid by any tobacco user will not count in calculating whether the employee is required to pay more than 8% of household income toward coverage. However, if a nondiscriminatory wellness program imposes a premium surcharge on employees who do not meet other wellness factors (e.g., biometric screening, body fat index, exercise or weight loss activities), the additional amount paid by those employees will count when calculating whether the employee’s contribution for coverage is more or less than 8% of household income.
“Minimum Essential Coverage” (MEC) provisions
As noted initially, the regulations also address two areas other than “affordability:” MEC and hardship exemptions. The MEC provisions list certain types of government-provided health coverage that will not qualify as MEC beginning in 2015:
- Certain Medicaid coverage that is not intended to be comprehensive – for example, optional coverage of family planning services or of tuberculosis-related services, coverage of only pregnancy-related services, and coverage limited to treatment of emergency medical conditions.
- Certain “demonstration projects” under section 1115(a) of the Social Security Act.
Hardship Exemption Provisions
The November 21st regulations also provide that taxpayers may claim a hardship exemption from the individual mandate tax (under Code Section 5000A) on their Federal income tax returns — without obtaining an exemption certification from the Exchange — if the taxpayers meet the requirements of a hardship for which the IRS and HHS have issued guidance. Concurrent with the November 21st final regulations, the IRS issued Notice 2014-76, which provides a comprehensive list of all such hardship exemptions an individual may claim without obtaining a hardship exemption certification from the Exchange. Regulators say more detail will be listed in separate future IRS and HHS guidance.
- The combined cost of employer-sponsored coverage for two or more family members would cost more than 8% of household income (i.e., is considered “unaffordable”).
- An individual’s gross income is below the applicable return filing threshold, and the individual may not be claimed as a dependent by another individual.
- Individuals who enrolled outside the Exchange in minimum essential coverage that was effective on or before May 1, 2014..
- Individuals who enrolled in or were “in line” to enroll in Exchange coverage on or before March 31, 2014, or who applied for CHIP coverage during the 2014 open enrollment period and were found eligible.
- Individuals who are eligible for services through an Indian Health Care Provider.
- Individuals whose household income is below 138% of the Federal Poverty Level and who reside in a state that did not expand Medicaid eligibility under section 2001(a) of the Affordable Care Act.
In addition to the exemptions listed above, there are also other hardship exemptions at 45 CFR 155.605(g) for which an individual still must obtain an exemption certificate in order to claim the exemption.