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IRS Proposes Regulations on "Play or Pay" Rules

The proposed "play or pay" Internal Revenue Service (IRS) regulations provide long-awaited guidance on the excise tax under the employer "shared responsibility" provisions of the Patient Protection and Affordable Care Act ("ACA"). Specifically, the proposed regulations address how to determine if an employer is subject to the tax and how much tax is to be paid to the IRS. The proposed regulations, published January 2, 2013, would be effective for years after 2013. The "play or pay" regulations apply to all employers regardless of the Grandfathered status of any plan offered.

The "play or pay" regulations are complex and introduce concepts and computations not necessarily part of regular business operations. The IRS stated that employers may rely upon the proposed regulations pending the issuance of final regulations. Final regulations will not be effective earlier than the date they are published in the Federal Register. If the final regulations are more restrictive than the proposed regulations, the final regulations will be applied without retroactive effect and employers will be given sufficient time to comply with the final rules. Final regulations will take into account the comments received by March 18, 2013.

Action Needed Now: Employers should determine how the proposed regulation would affect them, and decide if they want to submit comments, which are due by March 18, 2013.

Cheiron health consultants can assist plan sponsors with the review and consideration of the impact of the proposed regulations under options of interest.

Background and Overview

The ACA added Section 4980H to the Internal Revenue Code, which generally imposes non-deductible excise taxes on large employers as follows:

If the large employer (does not "play")

Tax that can apply ("pay")

1.      Does not offer minimum essential health coverage to full-time employees and dependents, or

 

$2,000* per full-time employee (excluding the first 30 employees) per year

2.      Offers coverage that is either unaffordable or does not provide minimum value

Lesser of

a)      $3,000* per impacted full-time employee per year or

b)      $2,000* per full-time employee (excluding the first 30 employees) per year (the tax for not offering coverage)

*This is the 2014 assessment amount. Future years increase with health care inflation for a premium adjustment percentage defined by ACA 1302(c)(4). The health care inflation ties to the average per capita costs of health insurance in the U.S. as determined by the Secretary and announced by 10/1 for the next year.

However, if no full-time employee enrolls in a qualified health plan through an Exchange and/or does not receive a premium tax credit or a cost-sharing reduction (under ACA section 1402), then there is no tax to the employer for either failure (#1) to offer coverage , or for failure (#2) to make coverage affordable and provide minimum value. To be eligible to receive a premium tax credit, a full-time employee must (among other requirements) have household income more than or equal to the federal poverty level, but not exceeding 4 times the federal poverty level for their family size (e.g., for CY2013, $45,960 for the first person and $16,080 for each additional person) and not be eligible for minimum essential health coverage that is affordable and provides minimum value. Also, if the employer is not a large employer, then there is no employer tax.

In summary, failure to offer (#1) minimum essential health coverage results in a monthly tax of $166.67 ($2,000 divided by 12) times the number of full-time employees less 30. Failure (#2) to make the minimum essential health coverage affordable, and to provide minimum value, results in a tax equal to the lesser of "failure to offer" tax or a monthly tax of $250 ($3,000 divided by 12) times the number of full-time employees actually going to the Exchange and receiving a tax credit and/or cost-sharing reduction (but limited to the tax that would apply if no coverage was offered). Regardless, taxes only apply if at least one full-time employee receives a tax credit or cost-sharing reduction through the Exchanges.

The proposed regulations make it clear that the tax is calculated monthly. The preamble to the regulations indicates that the tax is payable upon notice and demand, and is assessed in the same manner as a penalty. Starting in 2015, large employers will have to report information on employer-provided health coverage under IRC section 6056. See IRS Notice 2012-33 for more information on the reporting requirements.

Summary of Key Definitions in Proposed Regulations

The key terms are defined in the regulations for the underlined italic words in the chart above.

Key items requiring a definition to determine if a tax is owed:

Large Employer is determined only one time for each year, but involves calculating averages from the prior calendar year. It is any employer who employs an average of at least 50 full-time or full-time equivalent employees in the prior calendar year. The number of full-time or full-time equivalent employees is summed for each calendar month and then divided by 12 to yield the average. Decimals are then deleted.

Full-time employee is defined as working over 130 hours during the month. (These regulations retain the 130 hours/month as equivalent to 30 hours/week).

Full-time equivalent employee is calculated by summing the hours of the employees who work under 130 hours in the month and dividing by 120. For anyone who works over 120 but less than 130, only 120 hours should be counted. Decimals are taken into account.

Hours worked reflect the actual records of employee hours, with Paid Time Off counted as hours worked. Additional rules exist to simplify counting hours for "non-hourly" employees, i.e., work in one day = 8 hours and work in one week = 40 hours. However, these simplifying rules cannot be used with the intent to lower the number of hours.

Large Employers in multiemployer plans will not be taxed on employees covered by a multiemployer to which they contribute if the plan offers covered full-time employees and their dependents minimum essential health coverage that is affordable and provides minimum value.

Dependents do not include spouses or domestic partners. They do include children (i.e., natural, adopted, legal guardian, step, or eligible foster children) up to age twenty-six regardless of whether they have other coverage.

"Offer(ing)" is defined as giving the lesser of i) 95% of the full-time employees or ii) all full-time employees less five (5), the option to enroll themselves and their dependents in affordable minimum essential health coverage. Coverage must be offered to a full-time employee and their dependents within 90 administrative days of determining that they are a full-time employee.

Cheiron Comment: Not offering 95% of full time employees coverage could potentially result in failure (#1) triggering a $2000 tax on 100% (less 30) of all full time employees, even on employees already offered minimum essential coverage. Checking compliance with the 95% is important to avoid any unintended penalty tax. Each situation will vary and should be reviewed in depth.

Minimum essential coverage is defined in proposed regulations issued on February 1, 2013, providing "play or pay" rules with respect to employees' responsibilities. Under the proposed regulation, coverage under a self-insured group health plan is considered minimum essential coverage. The proposed regulations do not require that the group health plan provide essential health benefits (ambulatory patient services, emergency services, hospitalization, maternity and newborn care, mental health and substance abuse disorder services, prescription drugs, rehabilitative and habilitative services and devices, laboratory services, preventive and wellness services and chronic disease management, pediatric services, including oral and vision care).1

"Affordable" (with respect to coverage under a group health plan) means the employee contribution must not exceed 9.5% of household income. Since household income is difficult for an employer to determine, three safe harbor options are offered as a replacement for using household income.

  1. The employee's W-2 earnings for the calendar year as determined after the end of the year.
  2. For hourly employees, the hourly rate of pay as of the first day of the coverage period multiplied by 130 hours per for each month in the coverage period. For salaried employees, the first monthly salary rate times the number of covered months in the coverage period. Note this cannot be used if the hourly/salary rate decreases during the year.
  3. The Federal poverty level (i.e., $11,490 for CY 2013) for a single individual for the calendar year divided by 12 times numbers in the coverage period.

Minimum Value is defined as the plan's share to the total allowed cost of benefits being at least 60 percent. The U.S. Department of Health and Human Services (HHS) issued a minimum value calculator last week and we will be issuing a separate Cheiron Alert about that release.

To determine the amount of tax an employer owes, employers must select one of two methods to count full-time employees. Note that for calculating tax owed, full-time equivalents are not counted.

Option 1: Count the number of full-time employees each month in the calendar tax year. A full-time employee is defined as someone who works either 30 hours per week or over 130 hours for the month.

Option 2: Use a "look-back measurement" period. This rule is complex. It allows for 3 to 12 month look-back periods and 90 day administrative days for calculating the number of hours. It is intended to be flexible to allow plans with complex look-back methods for determining eligibility to continue their current methodologies and allows for special treatment of teacher, seasonal and new employees.2

Cheiron Comment: Option 2 allows the employer to determine who is a full-time employee in advance. Note, the definition of "full-time" employee may differ from what is used operationally for many industries. Workforces today comprise a range of work schedules not considered "full-time" (varied or uncertain schedules of hours, part-timers, per diem, multiple shifts, on call, changes in status or other). Employees not considered "full-time" (absent these proposed 4980H regulations) could be counted as full-time equivalents (to determine if a large employer) and/or full-time employees (to calculate the tax) under Section 4890, depending upon actual hours worked. Each situation will vary and requires careful study.

EMPLOYEE "Play or Pay" Rules

The picture is not complete without understanding the "play or pay" rules for the employees or unemployed. First, an employee must either be enrolled in minimum essential coverage, or be subject to a tax (unless the employee is exempt). Second, an employee who obtains minimum essential coverage through an Exchange may be eligible for a premium tax credit. Third, an employee who obtains minimum essential coverage through an Exchange may be eligible for a cost-sharing reduction. Consider the two situations that follow:

A. Offered minimum essential health coverage that is affordable and provides minimum value and could be covered by their employer-sponsored plan. If the employee chooses to opt out of the employer-sponsored plan, then the employee may purchase insurance through the Exchanges but will not receive a tax-credit. In this instance, the employee will not be subject to any "play or pay" tax.

B. Not offered minimum essential health coverage that is affordable and provides minimum value. If the employee chooses to opt out of the employer-sponsored plan, then the employee may purchase insurance through the Exchanges and will receive a tax-credit if their household income is below four times the federal poverty level (for CY2013, $45,960 for the first person and $16,080 for each additional person in the household).

The tax credit the employee can receive is the lesser of: i) the Exchange premium rate for the Plan (Bronze, Silver, Gold, or Platinum) they select or ii) the excess of the premium of the second lowest cost Silver plan premium in their rating area over the percent of household income shown in the table below.

Household Income

Grades Linearly between

percentage of Federal Poverty line:

Initial %

Final %

Less than 133%

2.00%

2.00%

At least 133% but less than 150%

3.00%

4.00%

At least 150% but less than 200%

4.00%

6.30%

At least 200% but less than 250%

6.30%

8.05%

At least 250% but less than 300%

8.05%

9.50%

At least 300% but less than 400%

9.50%

9.50%

The cost-sharing reduction3 applies if an individual has enrolled in a qualified health plan through an Exchange in the silver level of coverage, and the household income exceeds 100 percent but does not exceed 400 percent of the poverty level for the family size involved. In general, the reduction in cost-sharing is first achieved by reducing the out-of-pocket maximum for essential benefits, which are generally $6,250 per year for an individual and $12,500 per year for a family (using the 2013 figures)4. These amounts are lowered for households with income under 400% of the federal poverty level. However, the reduction is not to result in the plan's share of the total allowed cost of benefits provided increasing above a specified percentage. Specifically,

Household Income as a Percent of Federal Poverty Level:

Reduction in Out-of-Pocket Maximum

Single/Family Maximum

Out-of-Pocket

Maximum % of Plan's Share of Costs

100% to 200%

2/3

$2,083/$4,167

90%

200% to 300%

1/2

$3,125/$6,250

80%

300% to 400%

1/3

$4,167/$8,333

70%


Employees or unemployed opting out of all coverage are subject to a federal tax. Also, employees or unemployed adults are subject to a tax if they are not enrolled in a plan that is considered to provide minimum essential coverage. The tax will increase as time goes on and is complex. The tax amount is the lesser of i) the national average premium for a bronze plan or ii) the greater of a) a flat dollar amount or b) a percent of income amount. The flat dollar amount and percent of income amounts are as follows:

a) For CY2014, the flat dollar amount is $95 times the number of adults in the household plus the dependents in the household below the age of 18 divided by 2, or if lower, $285 (300% of the $95). The $95 increases to $325 for 2015 and $695 for 2016 and later;

or

b) For CY2014, the percentage of income amount is 1% times the excess of the household income over the applicable filing threshold to file a Federal income tax return. The 1% increases to 2% for 2015 and 2.5% for 2016 and later.

Small Employer "Play" Incentives

For employers with under 25 full-time employees during 2014 and 2015, their tax credit increases from up to 35% (in effect during 2010-13) to up to 50% for purchasing affordable minimum essential health coverage through the Small business Health Options Program (SHOP) offered through the Exchanges or Private Insurer. There are additional requirements to get the tax credit under IRC section 45R such as wage limits and lower credits for non-profits. Employers with up to 50 employees (pending the exact definition set by HHS for this purpose) can get coverage through the Exchanges. Note that HHS is considering future rulemaking for determining an employer's size. Thus, it is not clear how the 50 employee threshold is determined.

Large Employer Options

Defined contribution plans for healthcare programs appear to be acceptable if full-time employees can purchase affordable minimum value coverage. Recently the government clarified that stand alone Health Reimbursement Accounts (HRAs) would not satisfy the rules pertaining to lifetime and annual limits, even if the HRA was offering Exchange products. While this is a separate issue from the tax penalties, essentially it appears to require an HRA to be combined with a group health plan other than on the Exchange, in order to avoid a Play or Pay penalty tax. (To be clear, an HRA is not required. The other group health plan is what is needed.)

By 2016, all Exchanges must offer employers with 50 to 100 employees the option to purchase their affordable minimum essential health coverage through the Exchanges. After 2017, States may offer coverage through the Exchanges to employers with 100 or more employees.

This Cheiron Alert is a summary of proposed regulations and is not intended to address all issues and approaches. Final regulations and additional guidance will modify initial interpretations and approaches. Such final regulations and guidance supersede any summaries provided herein. Each plan and employer situation can generate varied and different results. Cheiron consultants can assist in the range of options and developing cost impact scenarios to study what these regulations can mean for a particular plan sponsor.

Cheiron is an actuarial consulting firm that provides actuarial and consulting advice. However, we are neither attorneys nor accountants. Therefore, we do not provide legal services or tax advice.


1 Of course, other law and regulations (such as Public Health Service Act section 2713 and the regulations pertaining to preventive services) may require that a health plan provide benefits that are in the list of essential health benefits.

2 Separate methods are provided for determining whether a new employee is a full-time employee, and employers are not subject to tax for failure to offer coverage until the testing period for those employees has been completed.

3 See ACA section 1402.

4 The ACA refer to IRC 233, which provides for indexed amounts. The 2013 figures are from Revenue Procedure 2012-2.

 
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