On November 26, 2014, the Internal Revenue Service (IRS) issued final regulations, as published in the Federal Register, addressing the Affordable Care Act's (ACA's) individual mandate, under which individuals must have minimum essential coverage (MEC), qualify for an exemption or pay a "shared responsibility" penalty to the government when filing their federal income taxes (26 U.S.C. § 5000A). MEC includes:

The regulations, which finalize proposed regulations issued in January 2014 (see Legal Update, IRS Proposed Rules Address Minimum Essential Coverage, Wellness Programs and HRAs), address an exemption under the MEC rules applicable for individuals who cannot afford MEC consisting of coverage through an employer-sponsored plan. For this purpose, coverage is considered unaffordable if the individual's required contribution for a month is more than 8% of the individual's household income for the tax year.

In determining the affordability of coverage, the final regulations provide that an employee's required contribution is reduced by employer contributions made under a cafeteria plan if the employee may:

In explaining this rule, the IRS reasoned that if an employee may use nontaxable employer contributions to a cafeteria plan to pay for MEC and only to pay for medical expenses:

In contrast, if an employee's use of nontaxable employer contributions to a cafeteria plan is not restricted to medical expenses, it cannot be assumed that the employee will use the contribution to buy MEC.

Under the final regulations, amounts that are newly made available for the current plan year under a health reimbursement arrangement (HRA) that an employee may use to pay premiums (or to pay cost-sharing or benefits not covered by the primary plan in addition to premiums) are counted toward the employee's required contribution if the HRA would be integrated (under IRS Notice 2013-54) with an eligible employee-sponsored plan for an employee enrolled in the plan. The employer plan and the HRA must be offered by the same employer. For a discussion of the Notice 2013-54 integration rules, see Legal Update, Guidance Addresses the ACA's Impact on EAPs, HRAs and Health FSAs.

Employer contributions to an HRA count towards an employee's required contribution only to the extent that the annual contribution amount is either:

The proposed regulations provided that, in determining whether coverage under an employer-sponsored plan is affordable for purposes of the individual mandate's affordability exemption, nondiscriminatory wellness program incentives are treated as earned only if the incentives relate to tobacco use (see Practice Note, Wellness Programs). In general, a nondiscriminatory wellness program is one that satisfies standards addressing whether the program is participatory or outcome-based.

The final regulations retain the proposed regulations' rules. As a result, wellness incentives that are:

The final regulations specifically address the treatment of an incentive when an employee must complete both a wellness program related to tobacco use and one unrelated to tobacco use to receive an incentive. The final regulations clarify that a wellness incentive that includes any component unrelated to tobacco use is treated us unearned. However, if there is an incentive for completing a wellness program unrelated to tobacco use and a separate incentive for completing a program related to tobacco use, then the incentive related to tobacco use may be treated as earned.

Also, the final regulations clarify that wellness program incentives include: