March 12, 2013
New Rules Define Minimum Essential Coverage and Affordability Under the Affordable Care Act
On February 1, 2013, the Treasury Department and the Department of Health and Human Services (HHS) published three proposed and final rules under the Affordable Care Act1 addressing several issues that are important to plan sponsors of group health plans. Two of those rules (one proposed rule from Treasury and one proposed rule from HHS) implement the individual shared responsibility payment, commonly referred to as the individual mandate, and the various exemptions from it.2 The third rule from Treasury (a final rule) addresses the affordability test that will apply to employees’ family members who seek coverage in the health insurance Exchanges.3 This Capital Checkup focuses on how these rules affect plan sponsors of group health plans, including plans that provide coverage to retirees.
Now that the key terms that apply to the individual mandate, the employer penalty, and the premium assistance tax credit have been defined, plan sponsors can finally begin to put the pieces together. Generally, being covered under a group health plan providing medical benefits, whether insured or self-insured, will allow individuals to satisfy their individual requirement to have minimum essential coverage. Offering such coverage to full-time employees and their children under age 26 will allow large employers to avoid or minimize the employer penalty (provided the coverage meets the 60 percent test and employee-only coverage is affordable, as defined by the Affordable Care Act).
Comments on the proposed Treasury rule are due by May 2, 2013. Comments on the proposed HHS rule are due by March 18, 2013.
Background on the Individual Mandate
Effective January 1, 2014, the Affordable Care Act requires nonexempt individuals to have “minimum essential coverage” in place or pay a penalty when they file their federal income tax return.4 The proposed Treasury rule explains the individual mandate and sets out the requirements for qualifying for various exemptions from the mandate. Those exemptions include being a member of certain recognized religious sects, being a member of certain Indian tribes, and not having access to “affordable” coverage. The proposed HHS rule lays out the process by which the Exchanges will certify whether individuals qualify for the exemptions. The HHS rule also explains what coverage will qualify as minimum essential coverage.
Minimum Essential Coverage
Minimum essential coverage that satisfies the individual mandate includes the following types of coverage:
- Coverage under an “eligible employer-sponsored plan,” which the proposed Treasury rule defines generally to mean coverage under a group health plan, whether insured or self-insured, including coverage under a federal or non-federal governmental plan;
- Coverage under an employer-sponsored retiree health plan;
- Coverage under certain government programs, such as Medicare, Medicaid, the Children’s Health Insurance Program (CHIP) and TRICARE;
- Coverage in the individual insurance market, including a plan offered by an Exchange; and
- Other coverage recognized by HHS, including self-funded student health coverage and coverage under Medicare Advantage plans.
Coverage that consists of “excepted” benefits (as defined in regulations issued under the Health Insurance Portability and Accountability Act) does not qualify as minimum essential coverage. This means that limited-scope dental and vision coverage and most health Flexible Spending Arrangements by themselves will not qualify.
Why Minimum Essential Coverage Matters
Minimum essential coverage is important to various aspects of the Affordable Care Act. The definitions set out in the proposed Treasury and HHS rules will apply across the board in all of these contexts.5
Employers seeking to minimize or avoid the employer penalty must offer minimum essential coverage to 95 percent of their full-time employees and their children under age 26.6 Based on the proposed Treasury rule, this means offering a group health plan (other than one consisting solely of “excepted” benefits) to these employees and their children. Coverage does not have to be offered to a spouse. To avoid or minimize the employer penalty, that group health plan needs to meet a 60 percent minimum value test and be affordable for employee-only coverage. (Guidance is expected soon on a minimum value calculator and design-based safe harbors that employers will be able to use to determine if the plan meets the 60 percent test.)
As discussed above, an individual must have minimum essential coverage in place or pay a tax penalty.
An individual who is eligible for minimum essential coverage will generally not qualify for a premium assistance tax credit (unless their coverage is individual insurance bought in an Exchange).7 An exception to this rule relates to group health plans. An employee may be eligible for a premium assistance tax credit if the group health plan for which he or she is eligible is either not affordable or does not meet a 60 percent minimum value test.
Measuring “Affordability” for Employees
There are two different contexts in which affordability of group health plan coverage will be measured. Affordability will be measured if an employee applies for a premium assistance tax credit. Affordability will also be measured if an employee is calculating whether he or she is exempt from the individual mandate (and thus could decline coverage without paying a penalty). These different situations are discussed below. (Affordability as it relates to family members is addressed below.)
Premium Assistance Tax Credit
Employers only pay the employer shared responsibility penalty if at least one full-time employee receives a premium assistance tax credit. To minimize or avoid that penalty, an employer will want to ensure that self-only coverage is affordable for all employees. Because employers will generally not know an employee’s household income, employers may rely on certain affordability safe harbors when they design their contribution strategies. For example, employers may look at an employee’s W-2 wages (Box 1). Coverage will be deemed affordable for purposes of the employer penalty if the employee’s required contribution for self-only coverage is not more than 9.5 percent of his or her W-2 wages.8
If an employee goes to an Exchange and applies for a premium assistance tax credit, he or she will only qualify if his or her group health plan coverage is either unaffordable or does not meet the 60 percent minimum value test. In this context, the group coverage is unaffordable if the employee’s required contribution for self-only coverage is more than 9.5 percent of his or her household income.
These different measures of affordability (wages vs. household income) mean that it is possible for employers to avoid the employer penalty in some situations where an employee qualifies for the tax credit. This could happen if household income (which is based on adjusted gross income) is lower than the employee’s W-2 wages.
Exemption from Individual Mandate
As discussed above, there are many exemptions from the individual mandate. One exemption is available to individuals who lack access to affordable health coverage. The purpose of the exemption is to avoid making an individual pay a tax penalty if his or her only health coverage option is unaffordable.
The exemption provides that group health plan coverage is not affordable for an employee if the employee’s required contribution for the lowest cost self-only coverage exceeds 8 percent of his or her household income.9 That employee would be exempt from the individual mandate. He or she could apply for Exchange coverage using the premium assistance tax credit, enroll in the employer’s health plan despite the cost, or remain uninsured without paying a penalty.
There are also different measures of affordability for family members. One relates to eligibility for the premium assistance tax credit and one relates to the individual mandate exemption.
The new final Treasury rule addresses affordability for employees’ family members who are applying for a premium assistance tax credit in the Exchange. If the employee’s required contribution for self-only coverage is affordable under the 9.5 percent test just mentioned, the employee’s family members will not qualify for tax credit. The Exchange will not look at the cost of family coverage and assess whether family coverage is affordable.
However, a different test applies in determining if a family member is exempt from the individual mandate penalty. For this purpose, group health plan coverage is unaffordable if the required contribution for family coverage exceeds 8 percent of household income. This means that family members who do not qualify for the tax credit (because employee-only coverage is affordable) would at least qualify for an exemption from the individual mandate penalty if the cost of family coverage made family coverage unaffordable.
|Tests for Determining whether Employer-Sponsored Coverage is Unaffordable under the Affordable Care Act
|Test for Determining an Individual’s Eligibility for the Premium Assistance Tax Credit||
Test for Determining an Individual’s Exemption from the Individual Mandate Penalty
|Employees||Employee’s required contribution for employee-only coverage exceeds 9.5% of household income||Employee’s required contribution for employee-only coverage exceeds 8% of household income|
|Family Members||Same as the above test for employee-only coverage||Employee’s required contribution for family coverage exceeds 8% of household income|
The Affordable Care Act does not expressly address whether retirees are treated the same as active employees with respect to whether they are able to apply for and receive the premium assistance tax credit in the Exchange. The proposed Treasury rule clarifies that retirees will be treated the same as active employees in determining eligibility for the premium assistance tax credit, including the affordability and minimum value tests. However, as retirees are not full-time employees, employers need not offer them coverage in order to avoid or minimize the employer penalty, and their receipt of a premium assistance tax credit will not trigger the employer penalty. Retirees who are enrolled in Medicare, including Medicare Advantage plans, would satisfy the individual mandate by having that coverage.
Implications for Plan Sponsors
Understanding the rules discussed in this Capital Checkup, including the various ways that affordability will be measured, will help plan sponsors determine their approach to offering coverage to employees, as well as to spouses and/or children, and in setting required employee contributions.
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As with all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their legal counsel for authoritative advice on the interpretation and application of the Affordable Care Act and related guidance, including the new guidance summarized in this Capital Checkup. Sibson Consulting can be retained to work with employers and their attorneys on compliance issues.
- The Affordable Care Act is the shorthand name for the Patient Protection and Affordable Care Act (PPACA), Public Law No. 111-48, as modified by the subsequently enacted Health Care and Education Reconciliation Act (HCERA), Public Law No. 111-152. (Return to the Capital Checkup.)
- The Treasury Department’s proposed rule and the proposed rule from HHS were published in the February 1, 2013 Federal Register. (Return to the Capital Checkup.)
- This final rule was published in the February 1, 2013 Federal Register. (Return to the Capital Checkup.)
- This requirement is codified at Section 5000A of the Internal Revenue Code (IRC). (Return to the Capital Checkup.)
- The final tax credit rule defines minimum essential coverage as the coverage defined under regulations issued under IRC § 5000A(f). See 26 CFR § 1.36B-2(c). The proposed rule on the employer penalty also defines minimum essential coverage as the coverage defined under regulations issued under IRC § 5000A(f). See proposed rule 26 CFR § 54.4980H-1(a)(23). The proposed Treasury rule discussed in this Capital Checkup is that set of regulations (i.e., the regulations issued under IRC § 5000A(f)). (Return to the Capital Checkup.)
- For more information about the employer penalty, see Sibson Consulting’s January 25, 2013 Capital Checkup, “IRS Proposes Rule on Employer Penalty Under the Affordable Care Act.” (Return to the Capital Checkup.)
- A premium assistance tax credit helps certain lower income individuals buy health insurance coverage in the Exchanges. (Return to the Capital Checkup.)
- Additional affordability safe harbors are discussed in the Capital Checkup referenced in footnote 6. (Return to the Capital Checkup.)
- Additional affordability safe harbors are discussed in the second Capital Checkup referenced in footnote 5. (Return to the Capital Checkup.)
Capital Checkup is Sibson Consulting’s periodic electronic newsletter summarizing activity in Washington with respect to health care and related subjects. Capital Checkup is for informational purposes only and should not be construed as legal advice. It is not intended to provide guidance on current laws or pending legislation. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice.