The IRS has published final regulations addressing various aspects of the premium tax credit enacted as part of health care reform. The final regulations address a number of technical issues affecting eligibility for and calculation of the tax credit. Here are some highlights of significance for employer-sponsored plans:
• Guidance on Determining Tax Credit Eligibility
- As a general rule, if an eligible employer-sponsored plan meets the two conditions (affordability and minimum value), merely being eligible for the plan will make an employee ineligible for the tax credit.
- The regulations clarify that an eligible employee who declines enrollment in such a plan remains ineligible for the tax credit for each month in the coverage period related to the enrollment period (e.g., for the full plan year in the case of an annual enrollment period).
- As a corollary to the general rule, if an employee actually enrolls in an eligible employer-sponsored plan, the tax credit is not available—even if the plan does not meet the two conditions.
- If employees are automatically enrolled in an eligible employer-sponsored plan, they have a grace period to unwind the enrollment to maintain their eligibility for the tax credit.
- An employee is not considered eligible for minimum essential coverage (i.e., may qualify for the tax credit) during any required waiting period before coverage becomes effective under an eligible employer-sponsored plan. However, the IRS is expected to provide a safe harbor under which an employer would not have to pay the shared responsibility tax penalty for failing to offer coverage for at least the first three months after an employee’s hire date.
• Guidance on Determining Affordability
- Under the law, the determination of whether a plan is affordable is based on the cost of self-only coverage.
- Reiterating the statute, the regulations state that employer-sponsored coverage is considered unaffordable if the employee’s cost for self-only coverage exceeds 9.5% of the employee’s household income for the taxable year. (In Notice 2012-17, the IRS stated its intention to issue proposed regulations or other guidance that would allow employers to use an employee’s Form W-2 earnings (instead of household income) in assessing affordability).
- Employer contributions to a health savings account (HSA) do not affect the affordability calculation since HSAs cannot be used by employees to pay premiums for employer-sponsored health coverage.
- The preamble indicates that health reimbursement arrangement (HRA) contributions that may be used exclusively to reimburse medical expenses would not affect the affordability of employer-sponsored coverage.
- The regulations do not address how HRA contributions that can be used to offset the employee’s cost of coverage may impact affordability.
Note: The final regulations did not address how wellness incentives affect affordability. Also, the preamble notes that separate guidance will address how to determine minimum value.
The full text of the final regulations is available at: http://www.gpo.gov/fdsys/pkg/FR-2012-05-23/pdf/2012-12421.pdf
