HRB 72 - Minimum Value and Affordability; Shortened Exchange Application
Released May 7, 2013I Download as a PDF May 7, 2013 --
As the first week of May is upon us, so are additional regulations implementing the Affordable Care Act (ACA). The Internal Revenue Service has just issued proposed regulations
offering guidance on minimum value and affordability. While these regulations are only proposed, they can be relied on until further guidance is issued.
As background, the ACA requires large employers - those employing 50 or more employees - to offer minimum essential coverage (MEC) that is both adequate and affordable, or risk a shared responsibility excise tax.
One of the burning questions has been what impact will certain employer plan design features, such as health reimbursement accounts and wellness incentives, play in the minimum value and affordability determinations? This guidance offers some insight into what the government is thinking.
To meet minimum value, the plan covers at least 60% of the value of medical expenses. There are three methodologies to measure minimum value with a fourth methodology available for small employers. They are:
- A minimum value calculator;
- Minimum value safe harbor plan designs (see details below)
- A determination made by an actuary (must be a member of the American Academy of Actuaries); and
- For small employer plans: a plan that meets any of the metal tiers (below) will be deemed to meet minimum value.
- Bronze (actuarial value 60%)
- Silver (actuarial value 70%)
- Gold (actuarial value 80%)
- Platinum (actuarial value 90%)
The preamble to these proposed regulations suggests the following as potential safe harbor plan designs (assuming the plan includes the benefits described in the calculator referred to above):
- A plan with a $3,500 integrated medical and drug deductible, 80 percent plan cost-sharing, and a $6,000 maximum out-of-pocket limit for employee cost-sharing
- A plan with a $4,500 integrated medical and drug deductible, 70 percent plan cost-sharing, a $6,400 maximum out-of-pocket limit, and a $500 employer contribution to an HSA; and
- A plan with a $3,500 medical deductible, $0 drug deductible, 60 percent plan medical expense cost-sharing, 75 percent plan drug cost-sharing, a $6,400 maximum out-of-pocket limit, and drug co-pays of $10/$20/$50 for the first, second and third prescription drug tiers, with 75 percent coinsurance for specialty drugs.
The guidance provides that in determining minimum value, employer contributions to an HSA can be used. First year contributions to an integrated HRA can be used but only if HRA funds are available for cost–sharing such as deductibles, co-pays and the like, but not for premium.
Wellness incentives, with the exception of tobacco incentives, cannot be factored in determining minimum value. For purposes of these regulations, an integrated HRA is expected to be defined as an HRA used in connection with a specific health plan and where participation in the HRA is contingent on participation in the health plan.
To mitigate the risk of a shared responsibility penalty, a plan must meet minimum value standards and must be affordable. To be affordable, the plan cannot cost an individual more than 9.5% of income. Three safe harbors are available to make this calculation, as follows:
- Box 1 of W-2
- Average wage method, or
- A federal poverty level method.
The regulations propose that affordability is determined without regard to wellness incentive with two exceptions. Any tobacco incentive can be taken into account in determining affordability. In other words, affordability is determined after applicability of the tobacco incentive without regard to whether the individual actually receives the tobacco incentive. Other wellness incentives are not taken into account in determining affordability except that for 2014 only, a wellness incentive in place as of May 3, 2013, can be taken into account. This is true for then existing employees as well as individuals who become newly eligible thereafter. Again this only applies for the first year (2014) of shared responsibility compliance.
The proposed regulations include a few other points of note. Generally, for the employer to avoid the risk of shared responsibility tax, the employer must simply offer adequate coverage at an affordable rate. As long as the employee is eligible for the coverage, the employee would be ineligible for government assistance.
The regulations clarify that in the case of an individual on COBRA, as long as the employee is no longer currently employed, the standard is raised to actual coverage and the same is true for retiree coverage. In other words, only if the inactive employee is actually covered by COBRA or retiree health coverage, will the individual be declined access to government assistance. Conversely, if the individual is actively working and entitled to COBRA, such as due to reduction in hours, the mere eligibility for COBRA would disqualify the person from premium assistance.
The regulations also caution that an employer cannot abate its shared responsibility risk by forcing an employee to participate in a health plan, and specifically, if the health plan does not meet adequacy and affordability standards. Forcing an employee onto a plan could also raise potential whistleblower challenges under the law.
Shortened Marketplace/exchange application
One of the premises behind the ACA is that an individual can use a single application to apply for coverage through the marketplace that will be used to determine available coverage options as well as, availability of the advanced tax credit and eligibility for Medicaid (see CBIZ Health Reform Bulletin, 90 Day Wait and Other Updates, 3/26/13).
The 21 page application has been significantly shortened and divided into three segments:
- An application specifically for individuals seeking marketplace coverage that do not have access to employer-provided coverage;
- An application specific to individuals and families looking for options under the marketplace who do have access to employer-provided coverage; and
- An application for individuals seeking coverage in the marketplace but not seeking government assistance.
Of particular interest to employers is the Employer Coverage Tool, which is on page 10 of the family application. Employers will want to be prepared to provide information about coverage available including whether the plan meets ACA’s minimum value and affordability standards. Note, the application measures affordability after any tobacco discount has been applied without regard to whether the individual actually receives the discount.
Presumably, there will be a way for the employer to reflect affordability, after other compliant wellness discounts as permitted, during this first year of compliance, as described above. The employer may also be asked to share any plan changes that will take effect in the next year. The application continues to need additional tweaking but certainly provides guidance about the direction the single source application is going.
About the Author: Karen R. McLeese is Vice President of Employee Benefit Regulatory Affairs for CBIZ Benefits & Insurance Services, Inc., a division of CBIZ, Inc. She serves as in-house counsel, with particular emphasis on monitoring and interpreting state and federal employee benefits law. Ms. McLeese is based in the CBIZ Leawood, Kansas office.
The information contained herein is not intended to be legal, accounting, or other professional advice, nor are these comments directed to specific situations. The information contained herein is provided as general guidance and may be affected by changes in law or regulation. The information contained herein is not intended to replace or substitute for accounting or other professional advice. Attorneys or tax advisors must be consulted for assistance in specific situations. This information is provided as-is, with no warranties of any kind. CBIZ shall not be liable for any damages whatsoever in connection with its use and assumes no obligation to inform the reader of any changes in laws or other factors that could affect the information contained herein. As required by U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained herein is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.