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From Health Law Daily, January 24, 2014

IRS proposes regulations governing penalties for failure to maintain a minimum level of health insurance

By Harold M. Bishop, JD

On Monday, January 27, 2014, the Internal Revenue Service (IRS) will formally publish in the Federal Register a proposed rule and notice of public meeting regarding the shared responsibility payment that individual taxpayers may have to pay if they fail to maintain minimum essential coverage as required by the Patient Protection and Affordable Care Act (PPACA) (P.L. 111-148) and the Health Care and Education Reconciliation Act of 2010 (HCERA) (P.L. 111-152), as amended by the TRICARE Affirmation Act of 2010 (P.L. 111-159) and Public Law 111-173. The publication will also provide a notice of a public hearing on these proposed regulations.

Statutory background. PPACA and HCERA (collectively, the Affordable Care Act), added section 5000A to the Internal Revenue Code. Section 5000A was subsequently amended by the TRICARE Affirmation Act of 2010 and Public Law 111-173. Section 5000A provides that, for months beginning after December 31, 2013, a nonexempt individual must maintain minimum essential coverage or make a shared responsibility payment.

Regulatory background. Final regulations under section 5000A (also see IRS Bulletin 2013-39, September 23, 2013, TD 9632) were published on August 30, 2013 (78 FR 53646). These final regulations provide guidance to individual taxpayers on the liability under section 5000A for the shared responsibility payment for not maintaining minimum essential coverage. The August 30, 2013 final regulations also indicated that these subsequent proposed regulations would provide that coverage under certain government-sponsored programs (such as Medicaid-medical needy coverage, section 1115demonstration programs, and limited military coverage) are not always considered minimum essential coverage. The final regulations also described subsequent rules for determining the required contribution for individuals eligible to enroll in an eligible employer sponsored plan that provides employer contributions to health reimbursement arrangements (HRAs) or wellness program incentives.

The new proposed regulations address these issues and provide and clarify rules under section 5000A by addressing the minimum essential coverage determination for the Medicaid-medically needy, those in demonstration programs, those in the military with limited benefit coverage, those with excepted benefits. The proposed rule also provides guidance on hardship exemptions, wellness incentives, and monthly payment amounts.

Minimum essential coverage. The proposed rule provides guidance to individuals enrolled in several coverage programs with regard to determining whether minimum essential coverage exists. These categories include Medicaid-related medically needy coverage and demonstration programs, limited benefit coverage for the military, and excepted benefits.

  • Medically needy. The proposed regulations provide that coverage for medically needy individuals generally is not government-sponsored minimum essential coverage. However, to the extent such coverage in a particular state is comprehensive coverage, such coverage may be recognized as minimum essential coverage by HHS, in coordination with the IRS, under section 5000A(f)(1)(E).

  • Demonstration programs. The proposal would also allow comprehensive coverage for expansion populations under certain Soc. Sec. Act section 1115 demonstration programs to be recognized as minimum essential coverage by HHS, in coordination with the IRS, under section 5000A(f)(1)(E).

  • Limited benefit coverage. The proposed regulations provide that Military Health System eligibility limited only to space available care and line-of-duty care are not government-sponsored programs providing minimum essential coverage.

  • Excepted benefits. In the rulemaking process under section 5000A, the IRS has provided that minimum essential coverage does not include plans or programs that do not provide a comprehensive scope of benefits. As such, the proposed regulations clarify that minimum essential coverage excludes any such coverage, whether insurance or otherwise, that consists solely of excepted benefits.

In addition, because individuals receiving medically needy coverage, those enrolled in demonstration programs, and those limited to space available and line-of-duty military care may not know at the time of open enrollment for the 2014 plan year that coverage under these programs is not minimum essential coverage, IRS Notice 2014-10, released concurrently with these proposed regulations, provides that they are not liable for the shared responsibility payment for any month in 2014 that they are enrolled in these types of coverage.

Exemptions for persons who cannot afford coverage. The proposed rule clarifies when an individual is exempted from paying the shared responsibility payment. One of these situations includes when an employee makes contributions to employer health reimbursement arrangements (HRAs). The IRS also is requesting comments on an exemption for contributions to a section 125 cafeteria plan.

  • HRAs. Under the proposed regulations, an employer's new contributions to an HRA are taken into account in determining (in other words, they reduce) an employee's required contribution if the HRA is integrated with an employer-sponsored plan and the employee may use the amounts to pay premiums. Amounts in an HRA that may be used only for cost-sharing are not taken into account when determining affordability because they cannot affect the employee’s out-of-pocket cost of acquiring minimum essential coverage.

  • Section 125 cafeteria plan. The proposed rule requests comments on the treatment of employer contributions under a section 125 cafeteria plan, for purposes of section 5000A, to the extent employees may not opt to receive the employer contributions as a taxable benefit, such as cash. Specifically, comments are requested regarding how these contributions should be taken into account for purposes of determining the affordability of coverage.

Wellness program incentives. The proposed regulations provide that, for purposes of determining an individual’s required contribution for coverage under an employer-sponsored plan, wellness program incentives are treated as earned only if the incentives relate to tobacco use.

Hardship exemptions. Final regulations currently specify that an individual who meets the requirements of 45 C.F.R. sec. 155.605(g)(3), relating to individuals with gross income below the applicable return filing threshold who filed a return, or 45 C.F.R. sec. 155.605(g)(5), relating to the affordability of coverage under an eligible employer-sponsored plan for family members, may claim a hardship exemption for a calendar year on their Federal income tax return. The proposed regulations provide that an individual who enrolls in a plan through an Exchange during the open enrollment period for coverage for 2014 may claim a hardship exemption for months in 2014 prior to the effective date of the individual’s coverage without obtaining a hardship exemption certification from an Exchange.

Monthly penalty amounts. The current regulations provide that, for each taxable year, the shared responsibility payment is the lesser of the sum of monthly penalty amounts for each individual in the shared responsibility family or the sum of the monthly national average bronze plan premiums for the shared responsibility family. The monthly penalty amount is computed for the taxpayer, not for each individual in the shared responsibility family. To avoid any confusion about policy, the proposed rule would amend the regulations to meet this policy.

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