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Guest Article

(From the May 29, 2012 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Premium Tax Credits: Final Regulations Are Issued, Some Issues Remain Open

On May 23, final Treasury regulations were issued and became effective regarding how individuals who enroll in a qualified health plan (QHP) through an Exchange may obtain advance payment of a premium tax credit to facilitate the purchase. Future guidance is expected on certain aspects of the process that still remain unclear, including how the affordability of an employer-sponsored plan will be determined for family members of the employee, how it will be impacted by wellness incentive programs that increase or decrease employee premiums, and how it may be affected by employer contributions to health reimbursement arrangements.

For tax years ending after December 31, 2013, Code section 36B provides a refundable tax credit for any month an "applicable taxpayer" (or spouse or dependent) is enrolled in a QHP through an Exchange and is not eligible for "minimum essential coverage" (other than coverage in the individual market). An "applicable taxpayer" is generally one whose household income is at least equal to (but not more than four times) the Federal poverty level. For this purpose, the household generally includes the taxpayer and any other individual for whom he or she may claim a personal exemption (e.g., the taxpayer's spouse and tax dependents).

"Minimum essential coverage" refers to government-sponsored programs (such as Medicare, Medicaid or CHIP), eligible employer-sponsored plans, grandfathered health plans, and certain other health benefit coverage. Eligible employer-sponsored plans provide "minimum essential coverage," however, only if they provide minimum value (i.e., the plan's share of the total allowed costs of benefits provided under the plan is at least 60 percent) and are affordable (i.e., the annual premium the employee must pay for self-only coverage does not exceed 9.5 percent of the employee's household income for the year).

An employer with 50 or more employees offers health coverage that fails to provide minimum value or be affordable is generally subject to a Shared Responsibility penalty if an employee enrolls in coverage through an Exchange and receives a premium tax credit. Under Code section 4980H(b)(1) the penalty is $250 per month ($3,000 per year) for each full-time employee who declines enrollment in such an employer-sponsored plan, enrolls in a QHP through an Exchange, and is eligible for the premium tax credit.

The formidable task of determining whether an individual is eligible for advance payment of the premium tax credit, and the amount of the payment, falls to the Exchange. In August 2011, regulations were proposed on how the process would be structured. Final regulations and the related preamble, issued on May 23, generally confirm the process proposed and provide additional clarity on certain aspects that may be of interest to employers, including the following:

Health Savings Accounts (HSAs) and Health Reimbursement Arrangements (HRAs): The preamble explains that HSAs do not affect the affordability of employer-sponsored coverage because HSA contributions generally cannot be used by active employees to pay premiums. Additional guidance will address the impact of HRA amounts that can be used to pay premiums on the affordability of employer-sponsored plans.
Wellness Programs: Wellness programs that increase or decrease an employee's share of premiums may impact the affordability of an employer-sponsored plan. Additional guidance is expected to be issued on the subject, and the IRS is now requesting comments on wellness programs. At issue is how certain an employee can be of qualifying for the incentive at the time his or her eligibility is being examined for advance payment of the premium credit.
Waiting Periods and Continuation Coverage: Individuals are treated as not eligible for minimum essential coverage under an employer-sponsored plan during a waiting period to become eligible for coverage (e.g., 90 days after hire). For that period the individual would potentially be eligible for premium tax credits to purchase a QHP through the Exchange. Similarly, individuals are to be treated as eligible for minimum essential coverage under an employer-sponsored plan by reason of continuation coverage only for months the individual is actually enrolled in the continuation coverage.
Automatic Enrollment: Despite being automatically enrolled, an employee or individual will be treated as not enrolled in an employer-sponsored plan for those months if he or she timely terminates the coverage. (The automatic coverage must be terminated before the first day of the second full calendar month, or the last day of any opt-out period, whichever is later.) Automatic enrollment, therefore, will not preclude an individual from being eligible for a premium tax credit for those months if the automatic coverage is timely terminated.
Domestic Partners and Adult Children: Individuals who may enroll in employer-sponsored coverage based on their relationship to the employee—but who are not tax dependents of the employee (e.g., adult children, domestic partners)—are considered eligible for minimum essential coverage only if (and for the time) they are actually enrolled in the plan. The preamble explains that the individual is part of a different "family" with different "household income" for purposes of the premium tax credit, so coverage available through another person would not create an obstacle to claiming a premium tax credit.
Affordability for Family Members: For purposes of eligibility for the premium tax credit, an employer-sponsored plan is affordable for an employee if the employee's portion of the premium for self-only coverage does not exceed 9.5 percent of household income. (The 9.5 percent may be adjusted for years after 2014 to reflect the rate of premium growth relative to income growth.) The regulations do not provide how affordability will be determined for family members, however. That section is "reserved" for future guidance.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact:

Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.220.2692, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955.

BenefitsLink is an independent national employee benefits information provider, not formally affiliated with the firms and companies who kindly provide much of the content and advertisements published on this Web site, including the article shown above.