The two key percentages you need to know to avoid free-rider penalties under the Affordable Care Act (ACA) health care reform law are 60% and 9.5%.
Your health plan must offer minimum value by picking up at least 40% of the cost (i.e., full-time employees can’t pay more than 60% out-of-pocket) and be affordable (i.e., employees’ premiums can’t exceed 9.5% of their household income).
Proposed regulations from the IRS provide methods for calculating minimum value, including how wellness discounts figure into minimum value and affordability. These regs are proposed to apply for tax years ending after Dec. 31, 2013, but you may apply them for tax years ending before Jan. 1, 2015. (78 F.R. 25909, 5-3-13)
To determine whether your plan meets the 60% mark, these proposed regs adopt final regulations issued by the Department of Health and Human Services (HHS). Under the HHS’ regs, employees cost-sharing (e.g., co-pays) is figured into the 60% minimum value calculation.
Special rules apply regarding employer contributions into employees’ health savings accounts (HSAs) and health reimbursement accounts (HRAs), and the IRS has picked up those rules, as well. (See “Health care reform: Regs, regs, regs and more regs.”)
The HHS’ regs, however, didn’t cover wellness programs, which often reward employees with lower premiums or cost-sharing. Under these regs, employees’ cost-sharing is determined without regard to wellness plan discounts, except for tobacco cessation programs. And smokers get a break. Under these regs, smokers are treated as having earned the discount when determining the minimum value percentage.
As for actually figuring the minimum value percentage, these regs give a pass to plans in the small group market if they meet the requirements for any “medal level” of coverage. (ACA medal levels are based the percentage of costs covered: 60% bronze, 70% silver, 80% gold, 90% platinum.) Other plans have three options: they may determine minimum value by using the HHS’ minimum value calculator, which is available at the Centers for Medicare & Medicaid Services website. Plans must use the calculator to measure standard plan features (unless a safe harbor applies), but the percentage may be adjusted based on an actuarial analysis of plan features that are outside the parameters of the calculator.
In lieu of the calculator, plans that offer nonstandard features can hire an actuary. Finally, plans that cover all the benefits included in the calculator can use one of these safe harbors for plan design:
- A plan with a $3,500 integrated medical/drug deductible, 80% cost-sharing and a $6,000 out-of-pocket limit for employee cost-sharing.
- A plan with a $4,500 integrated medical/drug deductible, 70% cost-sharing, $6,400 out-of-pocket limit and a $500 employer contribution to an HSA.
- A plan with a $3,500 medical deductible, $0 drug deductible, 60% medical expense cost-sharing, 75% drug cost-sharing, $6,400 out-of-pocket limit and drug copays of $10/$20/$50 for the first, second and third prescription drug tiers, with 75% co-insurance for specialty drugs.
Employees’ contributions toward premiums can’t exceed 9.5% of their household income or 9.5% of the applicable optional safe-harbor figure—W-2, Box 1 income; employees’ hourly rates of pay; or the federal poverty line.
Under these regs, amounts newly made available to employees in an HRA that’s integrated with a group plan for the current plan year may be counted in determining affordability, if employees can use those amounts only for premiums or may choose to use the amounts for either premiums or cost-sharing. Similar to the rule for determining minimum value, affordability is determined without regard to wellness discounts, except for discounts for tobacco cessation.
For plan years beginning before Jan. 1, 2015, you won’t be subject to a free-rider penalty if your plan would have met minimum value/affordability standards, after taking into consideration wellness discounts that were available on May 3, 2013. This applies to employees who receive a premium tax credit, but who were eligible to participate in the wellness plan, regardless of whether they were hired before or after May 3.
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