IRS Proposed Rules Address Exchange Minimum Value and Affordability Rules for HRAs, HSAs and Wellness

Practical Law Legal Update 8-527-2505 (Approx. 5 pages)

IRS Proposed Rules Address Exchange Minimum Value and Affordability Rules for HRAs, HSAs and Wellness

by PLC Employee Benefits & Executive Compensation

Calculating Minimum Value

Under the ACA, starting in 2014, individuals who purchase coverage under a qualified health plan through a health insurance exchange may receive a premium tax credit under Section 36B of the Internal Revenue Code (Code). However, individuals may not receive a premium tax credit if they are eligible for affordable coverage under an eligible employer-sponsored plan that provides MV and is affordable. Certain large employers may be subject to a penalty under IRC Section 4980H if they do not offer their employees minimum essential coverage that is both affordable and provides MV (see Practice Note, Employer Mandate Under the ACA: Overview).

Under IRC Section 36B, a plan fails to provide MV if the plan's share of the total allowed costs of benefits provided under the plan is less than 60% of the costs. This proportion of the total allowed costs of benefits paid by the plan is called the plan's MV percentage. In general, the MV percentage is determined by:

Dividing the cost of certain benefits the plan would pay for a standard population by the total cost of certain benefits for the population, including amounts the plan pays and amounts the employee pays through cost-sharing.
Converting the result to a percentage.

Under the proposed regulations:

Employer-sponsored self-insured and insured large group plans need not cover every essential health benefit (EHB) category or conform their plans to an EHB benchmark that applies to qualified health plans.
For MV purposes, all amounts contributed by an employer for the current year to an HSA are:
- taken into account in determining the plan's share of costs; and
- treated as amounts available for first dollar coverage.
Amounts that are newly made available under an HRA that is integrated with an eligible employer-sponsored plan for the current plan year are taken into account for MV purposes if the amounts may be used only for cost-sharing and not to pay insurance premiums.

According to the IRS, future guidance will provide that whether an HRA is integrated with an eligible employer-sponsored plan will be determined under rules that apply for purposes of the ACA's restrictions on lifetime and annual limit (see Practice Note, Lifetime Limits, Annual Limits, and Essential Health Benefits Under the ACA).

Minimum Value and Wellness Program Incentives

Under the proposed regulations, a plan's share of costs for MV purposes is determined without regard to reduced cost-sharing (for example, deductibles or copayments) available under a nondiscriminatory wellness program. However, for nondiscriminatory wellness programs designed to prevent or reduce tobacco use, MV may be calculated assuming that every eligible individual satisfies the program's terms relating to prevention or reduction of tobacco use.

An example in the proposed regulations illustrates these rules. The example involves an employer that offers an eligible employer-sponsored plan that reduces the deductible by $300 for employees who either:

Do not use tobacco products.
Complete a smoking cessation course.

The deductible is reduced by $200 if an employee completes cholesterol screening within the first six months of the plan year. One employee does not use tobacco and his deductible is $3,700. A second employee uses tobacco and her deductible is $4,000. Under this example, only the incentives related to tobacco use are considered in determining the plan's MV percentage. The first employee is treated as having earned the $300 incentive for attending a smoking cessation course. As a result, the deductible for determining the MV percentage for both employees is $3,700. (The $200 incentive for completing cholesterol screening is disregarded.)

Determining Affordability

The proposed regulations also include rules for determining how HRAs and wellness program incentives are counted in determining the affordability of eligible employer-sponsored coverage. Amounts that are newly made available under an HRA that is integrated with an eligible employer-sponsored plan for the current plan year are taken into account only in determining affordability if the employee may either:

Use the amounts only for premiums.
Choose to use the amounts for either premiums or cost-sharing.

For wellness programs, an employer-sponsored plan's affordability is determined by assuming that each employee fails to satisfy the wellness program's requirements, except those of a nondiscriminatory wellness program related to tobacco use. This means the affordability of a plan that charges a higher initial premium for tobacco users is determined based on the premium charged to either:

Non-tobacco users.
Tobacco users who complete the related wellness program (for example, attending smoking cessation classes).

However, the proposed regulations include special transition relief, for IRC Section 4980H penalty purposes, for group health plan years beginning before January 1, 2015. Under this relief, certain employers are not subject to a Section 4980H penalty for employees who received a premium tax credit because the employer's offer of coverage was unaffordable or did not provide MV if the coverage generally would have been affordable or satisfied MV based on required employee premium and cost-sharing applicable for the plan if the employee satisfied wellness program requirements in effect on May 3, 2013. The transition relief applies for rewards expressed as either:

A dollar amount.
A fraction of the total required employee premium contribution (or, if applicable, employee cost-sharing).

Additional Minimum Value Safe Harbors to Be Announced

Employers can use the MV Calculator provided by HHS and the IRS to determine whether a plan provides MV. In addition, the IRS anticipates that future guidance will include several safe harbors that are examples of plan designs that would clearly satisfy the 60% threshold if measured using the MV Calculator. In the preamble to the proposed regulations, the IRS proposed that plan designs meeting the following specifications would be safe harbors for determining MV, provided that the plans cover all the benefits included in the MV Calculator:

A plan with a $3,500 integrated medical and drug deductible, 80% 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% plan cost-sharing, a $6,400 maximum out-of-pocket limit and a $500 employer contribution to an HSA.
A plan with a $3,500 medical deductible, $0 drug deductible, 60% plan medical expense cost-sharing, 75% 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% coinsurance for specialty drugs.

The IRS requested comments on these and other common plan designs that would satisfy MV and should be designated as safe harbors.

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