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IRS cuts slack under final health premium tax credit regs

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in Compensation and Benefits,Human Resources

While the legality of the Affordable Care Act health care reform law was pending before the Supreme Court, the IRS issued final regulations on the premium tax credit. Since the dust has settled, it’s time to take a closer look at the regs.

The regs provide some penalty relief to employers of 50 or more full-time employees when even one employee enrolls in coverage through an individual health insurance exchange (scheduled to begin operating in 2014) and receives a premium tax credit because the group coverage doesn’t provide minimum value and his or her contribution isn’t affordable.

The final regs apply to tax years ending after Dec. 31, 2013. (77 F.R. 30377, 5-23-12)

Penalty relief

Employees whose household income is between 100% and 400% of the federal poverty line, and who obtain health benefits through an individual exchange because their group plan is unaffordable and doesn’t offer minimum value, will be eligible for premium tax credits. A group health plan is affordable if employees don’t contribute more than 9.5% of their household income for single-only coverage, even if they opt for family coverage. A plan provides minimum value if the employer pays at least 60% of the cost.

Under the regs, you won’t be liable for penalties for employees who are actually enrolled in the plan, regardless of whether the plan meets the affordability/minimum value requirements. Penalties will also not apply if employees could have enrolled in the plan, either through an open enrollment period or a special enrollment period, but didn’t enroll, provided the plan meets the affordability/minimum value requirements.

However, employees who can’t enroll in the plan because of waiting periods will not be considered to have group coverage during that time. They may be able to obtain coverage and premium tax credits through the exchange. Upshot: You may be liable for penalties.

Affordability

Under the regs, the exchange determines whether group coverage is affordable, based on documentation employees provide. Employees must provide updated documentation when new or different group coverage becomes available. If later coverage meets the affordability/minimum value requirements, you would not be liable for penalties. Affordability can be determined on a part-year basis for fiscal year plans or on the employee’s enrollment date for the entire calendar year.

The IRS has clarified that employer contributions into health savings accounts (HSAs) don’t affect affordability because HSA contributions can’t be used to pay premiums. Likewise, amounts available in health reimbursement accounts (HRAs) that can only be used to reimburse employees’ medical expenses (other than employees’ premiums) don’t affect affordability.

Auto enrollment

Under the regs, employees who are automatically enrolled into the plan, either through the automatic enrollment provisions contained in the health care reform law or under current IRS guidance, can opt out of the coverage by the first day of the second full calendar month of the plan year or the last day of the opt-out period, whichever comes later. You will be liable for penalties if those employees obtain coverage and premium tax credits through an exchange.

Open questions

These regs aren’t the final word on your liability. Since you don’t have a way of determining employees’ household income, the IRS had previously indicated that it will issue another set of regs providing a safe harbor for employers by basing the affordability determination on 9.5% of an employee’s W-2, Box 1 income.

In addition, the IRS indicated that additional regs covering these areas will be issued:

  • Final regs on determining affordability for individuals who are related to employees and proposed regs for determining minimum value for those individuals
  • Guidance on how employees’ participation in wellness programs that increase or decrease premiums will affect affordability
  • How other HRAs are treated for purposes of determining affordability.

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