IRS Finalizes Rules for Individual Mandate and Minimum Essential Coverage

Practical Law Legal Update 8-539-4205 (Approx. 4 pages)

IRS Finalizes Rules for Individual Mandate and Minimum Essential Coverage

by Practical Law Employee Benefits & Executive Compensation

Minimum Essential Coverage

Under the ACA, most nonexempt individuals must either maintain MEC or make a shared responsibility payment. MEC includes:

Coverage under certain government sponsored programs (for example, Medicare coverage).
Coverage under an eligible employer-sponsored plan.
Coverage under a grandfathered health plan (see Practice Note, Grandfathered Health Plans under the ACA).
Other health coverage, as determined by HHS.

The shared responsibility payment is generally the sum of monthly penalty amounts for all months in a tax year in which any nonexempt individual for whom the taxpayer is liable did not have MEC.

Liability for Shared Responsibility Payments

Under the proposed regulations, taxpayers were liable for the shared responsibility payment for another individual without MEC for any month during the tax year in which the individual was the taxpayer's dependent under Section 152 of the Internal Revenue Code (IRC). In the preamble to the final regulations, the IRS rejected a request to extend this liability to non-custodial spouses who are required, under a divorce decree, to provide a child's health care but fail to do so. However, the IRS noted that the HHS regulations permit the health insurance exchanges to grant a hardship exemption to a custodial parent for a child in this situation if the child is ineligible for Medicaid or the Children's Health Insurance Program (CHIP).

Scope of Eligible Employer-sponsored Coverage

The final regulations include several clarifications generally involving the scope of eligible employer-sponsored coverage.

Self-insured health plans

The proposed regulations included self-insured group health plans as an eligible employer-sponsored plan. However, in response to commenters, the final regulations clarify that a self-insured group health plan is an eligible employer-sponsored plan regardless of whether it could be offered in a given state's large or small group markets.

Retiree Coverage

The proposed regulations' definition of employee includes former employees, meaning that coverage provided by an employer to former employees is coverage under an eligible employer-sponsored plan. The final regulations provide that, for purposes of the lack of affordable coverage exemption (see Minimum Essential Coverage), an individual is ineligible for retiree coverage unless he enrolls. As a result, an individual who is eligible for retiree coverage, but does not enroll, disregards that eligibility in determining whether the individual qualifies for the lack of affordable coverage exemption.

Plans Offered on Behalf of Employers

In response to the proposed regulations, some commenters were uncertain whether the following arrangements were eligible employer-sponsored plans:

Health coverage offered to employees by an organization acting on behalf of an employer (for example, a multiemployer plan or a single employer collectively bargained plan).
A plan offered to an employer's employees by a third party (for example, a professional employer organization (PEO) or leasing company).

The final regulations clarify that an eligible employer-sponsored plan includes plans offered to an employee on an employer's behalf.

Exempt Noncitizens

An "applicable individual" subject to the MEC requirement does not include an individual for any month if the individual is not a US citizen or national or an alien lawfully present in the US. Although the final regulations do not adopt a particular reporting method for claiming the "not lawfully present" exemption, the IRS indicated that guidance on claiming the exemption will be provided in future forms, instructions, publications and related materials.

Cafeteria Plans and Affordability of Coverage

In determining if coverage is affordable, individuals must increase household income by the portion of a contribution made through a salary reduction arrangement and excluded from gross income. This includes amounts that an employee pays out of his salary on a pre-tax basis for minimum coverage under a cafeteria plan that is an eligible employer-sponsored plan. According to the IRS, although this information may not be readily available:

It is generally possible for an employee to identify amounts paid through a salary reduction arrangement (and excluded from gross income).
Individuals seeking this exemption must adjust their projected household income by the amount paid through a salary reduction arrangement for MEC excluded in the prior year.

Employee Required Contributions and HRAs

Under proposed regulations addressing exchange-related premium tax credits (see Legal Update, IRS Final Regulations Clarify Premium Tax Credit Rules and Practice Note, Health Insurance Exchange and Related Requirements under the ACA), amounts newly made available for the current plan year under a health reimbursement arrangement (HRA) that is integrated with an eligible employer-sponsored plan are counted toward the employee's required contribution in determining the affordability of coverage. This is the rule if the employee can either:

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

In the preamble to the final regulations, the IRS indicated that future regulations will:

Provide a similar rule, with respect to determining the affordability of MEC, regarding the effect of amounts newly made available under an HRA.
Address the treatment of employer contributions to HRAs in determining the required contribution.

IRS Finalizes Rules for Individual Mandate and Minimum Essential Coverage | Practical Law