Starting in 2014, most individuals must maintain minimum essential health coverage or pay a penalty.  (Please see our post here for a description of the health coverage mandates that apply to individuals and their families.)  The Internal Revenue Service recently issued a proposed regulation clarifying the minimum essential coverage rules and other aspects of the individual mandate.  Several points addressed in the proposed regulation will be of interest to employers that offer group health coverage to their employees.

Excepted Benefits Are Not Minimum Essential Coverage

Employers might wish to structure programs providing limited health benefits—such as dental and vision coverage or employee assistance—as “excepted benefits” so that these programs will avoid the group health plan requirements.  Final regulations issued last year explained that minimum essential coverage does not include “health insurance coverage” consisting only of excepted benefits.  The proposed regulation clarifies that no coverage (whether insured or self-insured) consisting solely of excepted benefits will qualify as minimum essential coverage.

This clarification confirms that coverage consisting solely of excepted benefits will not satisfy the employer’s obligation to offer minimum essential coverage to at least 95% of its full-time employees or the individual’s obligation to maintain minimum essential coverage.  Employers must offer, and individuals must maintain, other group health coverage in order to satisfy these shared-responsibility mandates.

On the positive side, however, a lower-income employee who is covered by a plan that offers only excepted benefits will not be prevented from receiving premium tax credits.  The tax credits help lower-income individuals purchase individual health coverage on an exchange.  An employee who has minimum essential coverage from an employer health plan is not eligible for premium tax credits; but employer coverage consisting solely of excepted benefits will not affect the employee’s eligibility.

Affordability Exemption

A person is exempt from the individual mandate if the person does not have access to affordable minimum essential coverage.  The affordability exemption has an important relationship to employer group health plan coverage, since an employee’s eligibility for coverage under an employer’s plan, and the cost of the coverage, often determine whether the exemption applies.

An employee’s coverage under an employer group health plan is “affordable” if the employee’s required contribution for the lowest-cost coverage does not exceed 8% of the employee’s household income.  The proposed regulation explains how the affordability test applies to certain employer-sponsored arrangements.

Effect of HRA Contributions on Affordability

If a health reimbursement account (“HRA”) is integrated with an employer-sponsored group health plan, and the employee may draw on the HRA to pay the employee’s required contribution under the group health plan, amounts newly made available under the HRA reduce the employee’s required contribution for purposes of determining whether the employer’s health coverage is affordable.  For example, if the employee’s required contribution for health coverage is $5,000 per year, but the employee receives an annual $2,000 HRA credit that the employee may apply toward the required contribution, the required contribution is deemed to be $3,000 for purposes of the affordability test.

The employee is not required to consider an HRA balance carried forward from a prior year, or an HRA balance that is not available to pay employee contributions for group health coverage, as part of the affordability calculation.

These rules mirror the HRA rules that were proposed last May in a regulation addressing the premium tax credit.

Effect of Cafeteria Plan Contributions on Affordability

If an employee elects to pay required contributions for group health coverage by means of salary reduction contributions under a cafeteria plan, the salary reduction contributions are treated as employee contributions for purposes of the affordability test, even though they are regarded as employer contributions for most other purposes under the Internal Revenue Code.  The salary reduction contributions are added back to the employee’s salary to determine the employee’s household income.  Accordingly, an employee who pays required health plan contributions on a pre-tax basis through a cafeteria plan is generally treated in the same way, for purposes of the affordability test, as an employee who pays required health plan contributions on an after-tax basis.

The proposed regulation does not explain how the affordability test applies to employer flex credits, which the employee may apply to the cost of health coverage but may not receive as salary or taxable benefits.  Instead, the proposed regulation asks for comments on the proper treatment of flex credits, employer subsidies, and other pre-tax benefits provided under a cafeteria plan.

Effect of Wellness Program Incentives on Affordability

Many employers reduce an employee’s required contribution for group health coverage if the employee participates in the employer’s wellness program.  The proposed regulation clarifies that these wellness incentives are disregarded in determining the affordability of the group health coverage, with one exception: the employee is treated as having earned a wellness incentive related to tobacco use.

Accordingly, for example, suppose that the employee’s group health plan contribution is $500 per month; the contribution is reduced by $200 per month if the employee participates in a smoking-cessation program, and the contribution is reduced by $100 per month if the employee participates in other wellness activities.  For purposes of determining the affordability of the employee’s group health plan coverage, the employee’s required contribution is deemed to be $300 per month, regardless of whether the employee participates in the wellness program: the employee is deemed to have earned the $200 incentive related to tobacco use, but he is deemed not to have earned the additional $100 incentive related to other wellness activities.

The treatment of wellness incentives also mirrors the rules that were proposed last May in a regulation addressing the premium tax credit.

The new rules are proposed to apply beginning in 2014.