IRS Releases Guidance On Hardship Exemptions From ACA Individual Shared Responsibility Payment And Minimum Essential Coverage

The IRS has released final regulations relating to the requirement to maintain minimum essential coverage enacted by the Patient Protection and Affordable Care Act (ACA). Notice 2014-76, released concurrently with the regulations, provides a comprehensive list of all hardship exemptions that may be claimed on a federal income tax return without obtaining a hardship exemption certification. The final regulations were published in the November 26 Federal Register.

The final regulations provide individual taxpayers with guidance under Code Sec. 5000A on the requirement to maintain minimum essential coverage and rules governing certain types of exemptions from that requirement. The regulations address three general areas: (1) employee contributions to a cafeteria plan; (2) health reimbursement arrangements (HRAs); and (3) wellness program incentives. In addition, the final regulations remove the references to specific hardship circumstances and, instead, provide that a taxpayer may claim a hardship exemption on a federal income tax return without obtaining an exemption certification for any month that includes a day on which the taxpayer satisfies the requirements of a hardship for which the Department of Health and Human Services (HHS), the Treasury Department and the IRS, issue published guidance.

Employer contributions to cafeteria plan. The final regulations retain the rule in the proposed regulations that Medicaid coverage for medically needy individuals is not government-sponsored minimum essential coverage under Code Sec. 5000A(f)(1)(A). In addition, coverage authorized under Section 1115(a) of the Social Security Act is not government-sponsored minimum essential coverage under Code Sec. 5000A(f)(1)(A).

For purposes of determining the affordability of coverage, the final regulations provide that the required contribution is reduced by any contributions made by an employer under a Code Sec. 125 cafeteria plan that: (1) may not be taken as a taxable benefit, (2) may be used to pay for minimum essential coverage, and (3) may be used only to pay for medical care within the meaning of Code Sec. 213 (such contributions are referred to in this preamble as health flex contributions). The final regulations provide that health flex contributions made available for the current plan year are taken into account for purposes of determining an individual’s required contribution. As a result, health flex contributions reduce an employee’s, or related individual’s, required contribution for employer-sponsored coverage.

HRAs. The final regulations clarify that amounts newly made available under an HRA count toward an employee’s required contribution if the HRA would have been integrated with an eligible employer-sponsored plan if the employee had enrolled in the primary plan. For purposes of determining an individual’s required contribution, an HRA is taken into account only if the HRA and the primary eligible employer-sponsored coverage are offered by the same employer. In addition, the final regulations clarify that, in general, HRA contributions count toward affordability, and not minimum value, if an employee may use the HRA contributions to pay premiums for the primary plan only, or to pay cost-sharing or benefits not covered by the primary plan in addition to premiums.

Wellness program incentives. The final regulations retain the rules in the proposed regulations that wellness incentives unrelated to tobacco use are treated as unearned, and wellness incentives related to tobacco use are treated as earned, in determining affordability. These rules are consistent with policies related to tobacco use reflected in the ACA, such as allowing issuers to charge higher premiums based on tobacco use.

The final regulations clarify that the term wellness program incentives has the same meaning as the term reward in the tri-agency regulations. Thus, programs that provide a discount or rebate, programs that impose a surcharge, and participatory and health-contingent wellness programs are wellness program incentives under the final regulations.

Hardship exemptions. Reg. Sec. 1.5000A-3(h)(3)(i) removes the references to specific hardship circumstances and, instead, provides that a taxpayer may claim a hardship exemption on a federal income tax return without obtaining an exemption certification for any month that includes a day on which the taxpayer satisfies the requirements of a hardship for which HHS, the Treasury Department and the IRS issue published guidance.

Notice 2014-76 identifies the hardship exemptions from the individual shared responsibility payment of the ACA that a taxpayer may claim on a federal income tax return without obtaining a hardship exemption certification from the Health Insurance Marketplace. Individuals seeking a hardship exemption that is not on this list can apply for an exemption through the Marketplace.

The notice recognizes the following hardships and allows a qualifying individual (or the taxpayer who may claim a qualifying individual as a dependent) to claim a hardship exemption on a federal income tax return without obtaining a hardship exemption certification from the Marketplace:

1. Two or more members of a family whose combined cost of employer-sponsored coverage is considered unaffordable. an individual is eligible for a hardship exemption if the individual satisfies the following requirements: (a) the individual’s required contribution for self-only coverage does not exceed the required contribution percentage of household income in Code Sec. 5000A(e)(1)(A); (b) the combined required contribution for self-only coverage for two or more employed members of the individual’s family exceeds the required contribution percentage of household income; and (c) the required contribution for family coverage that the employed members of the individual’s tax household could enroll in through an employer exceeds the required contribution percentage of household income.

2. Gross income below the applicable return filing threshold (as specified in Code Sec. 6012(a)(1)).

3. Individuals who obtained minimum essential coverage during the 2014 open enrollment period. This includes certain individuals who were “in line” to enroll in coverage through the Marketplace on March 31, 2013 and certain individuals who enrolled outside the Marketplace in minimum essential coverage for 2014 that is effective on or before May 1, 2014.

4. Certain individuals who applied for Children’s Health Insurance Program (CHIP) coverage during the open enrollment period for 2014.

5. Individuals eligible for services through an Indian Health Care Provider.

6. Certain individuals residing in a state that did not expand Medicaid eligibility under ACA Sec. 2001(a). An individual is eligible for a hardship exemption for 2014 if at any time during 2014 the individual resided in a state that did not expand Medicaid coverage and the individual’s household income, within the meaning of Code Sec. 36B, is below 138 percent of the applicable federal poverty level for the individual’s family size.

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