IRS Proposes Regulations On Minimum Value Of Employer-Sponsored Health Plans

The Internal Revenue Service has issued proposed regulations on determining whether health coverage under an eligible employer-sponsored plan provides a minimum value (MV), as required under the Patient Protection and Affordable Care Act (ACA). The proposed regulations also explain how health reimbursement arrangements (HRA) and wellness incentives will be counted in determining if a plan meets the affordability provisions of the ACA. The proposed regulations are effective for taxable years ending after Dec. 31, 2013, and were published in the May 3 Federal Register.

Under the ACA, beginning in 2014, eligible individuals who purchase coverage through a health insurance exchange may receive a premium tax credit unless they are eligible for other minimum essential coverage, including coverage under an employer-sponsored plan that is affordable to the employee and provides at least MV. An employer-sponsored 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 percent of such costs. If the coverage offered by the employer fails to provide MV, an employee may be eligible to receive a premium tax credit. If any full-time employee of an applicable large employer receives the premium tax credit, the employer may be liable for an assessable shared responsibility payment for the coverage purchased under the exchange.

Minimum value. The proposed regulations refer to the proportion of the total allowed costs of benefits provided to an employee that are paid by the plan as the plan’s MV percentage. 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 standard population, including amounts the plan pays and amounts the employee pays through cost-sharing, and then converting the result to a percentage.

The IRS noted that the proposed regulations do not require employer-sponsored self-insured and insured large group plans to cover every essential health benefit (EHB) category, or to conform their plans to an EHB benchmark that applies to qualified health plans. The proposed regulations provide that MV is based on anticipated spending for a standard population. The plan’s anticipated spending for benefits provided under any EHB-benchmark plan for any state counts toward MV, according to the IRS.

The proposed regulations provide that when calculating MV, all amounts contributed by an employer to a health savings account (HSA) can be used in determining the plan’s share of costs. However, contributions to an HRA can only be counted for MV purposes if the money may only be used for cost-sharing, and may not be used to pay insurance premiums.

The proposed regulations specify that a plans share of costs for MV purposes will be determined without regard to reduced cost-sharing under a nondiscriminatory wellness program. The only exception to this is for wellness programs designed to prevent or reduce tobacco use. For these kinds of wellness plans, MV may be calculated assuming that every eligible individual satisfies the terms of the program relating to prevention or reduction of tobacco use.

Affordability. Under the ACA, eligible employer-sponsored coverage is only affordable if an employee’s required contribution for individual coverage does not exceed 9.5 percent of household income. The proposed regulations deal with determining how HRA and wellness program incentives are counted in determining the affordability of eligible employer-sponsored coverage.

For HRAs, the proposed regulations provide that contributions to an HRA can be used to determine affordability if the employee may use the amounts for premiums or cost-sharing. The IRS noted that treating amounts that may be used either for premiums or cost-sharing only towards affordability will prevent double counting the HRA amounts when assessing MV and affordability of eligible employer-sponsored coverage.

For wellness incentives, the proposed regulations provide that the affordability of an employer-sponsored plan is determined by assuming that each employee fails to satisfy the requirements of a wellness program, except the requirements of a nondiscriminatory wellness program related to tobacco use. Therefore, surcharges based on smoking cessation that are part of a wellness plan arrangement (that satisfies the wellness plan rules) can be excluded from the annual premium calculation for purposes of affordability. In other words, the premium that applies to non-tobacco users is used for testing affordability for all employees regardless of tobacco use.

The proposed rules also specify that for any plan year beginning prior to Jan. 1, 2015, surcharges for any wellness plan arrangement (that satisfies the wellness plan rules) can be excluded from the annual premium calculation for purposes of affordability, but only to the extent of the terms of the wellness arrangement in effect on May 3, 2013. This transition rule applies to both current employees and employees hired after May 3, 2013.

Comments should be sent within 60 days of publication in the Federal Register and may be sent via; or mailed to CC:PA:LPD:PR (REG-125398-12), Room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044.

For more information, contact Andrew S. Braden at (202) 622-4960, concerning the proposed regulations; or Oluwafunmilayo Taylor at (202) 622-7180, concerning the submission of comments.

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