Minimum Essential Coverage and Shared-Responsibility Penalty Rules Provide Transitional Relief for Individuals

Proposed regulations issued by the IRS on Friday answer a number of questions regarding the Sec. 5000A “individual mandate” under 2010’s health care reform legislation, including the definition of those government programs that do not provide minimum essential health care coverage (REG-141036-13). They also provide a hardship exemption for individuals who obtained coverage through an exchange for 2014 during the open enrollment period. Such individuals may claim an exemption for the period before their coverage is effective without obtaining an exemption certificate.

Under Sec. 5000A, starting this year, a taxpayer is liable for a shared-responsibility payment if the taxpayer or any nonexempt individual whom the taxpayer may claim as a dependent for a tax year does not have minimum essential health care coverage in a month included in that tax year. Married taxpayers filing a joint return are jointly liable for the payment.

Last August, the IRS issued final regulations on the Sec. 5000A shared-responsibility payment (T.D. 9632), but those regulations left a number of issues unaddressed, which the proposed regulations cover. The regulations are proposed to apply to months beginning after Dec. 31, 2013.

Government programs

Generally, the Medicaid program (42 U.S.C. §1396 et seq.) is considered to provide minimum essential health care coverage, but some Medicaid coverage that provides limited benefits does not. These limited-coverage programs include coverage of individuals with high medical expenses who would otherwise be ineligible for Medicaid because of their income, optional coverage of family planning services, coverage of tuberculosis-related services, coverage of pregnancy-related services, and coverage that is limited to providing emergency medical care.

However, since each state is allowed to determine what type of coverage to extend to individuals with high medical expenses who would otherwise be ineligible for Medicaid because of their income, the regulations permit the secretary of Health and Human Services (HHS) and the IRS to recognize a state’s Medicaid coverage for such individuals as minimum essential coverage if it is comprehensive enough to qualify.

Care provided under Section 1115 demonstration projects, which are experimental, pilot, or demonstration projects under Section 1115 of the Social Security Act that promote the Medicaid program’s goals, are also not considered minimum essential coverage. Medical care provided under the military health system that is limited to care that will be provided in federal medical facilities on a space-available basis and care provided to individuals who are not on active duty and who are entitled to episodic care for an injury, illness, or disease incurred or aggravated in the line of duty is also not minimum essential coverage.

Notice 2014-10, issued at the same time as the proposed rules, provides a waiver for 2014 for individuals who are enrolled in any of the programs outlined above from the shared-responsibility penalty. Because individuals enrolling in these programs for 2014 may not know that they are not considered minimum essential coverage, the IRS has decided not to apply the penalty for any month that an individual has coverage under one of those types of plans.

The proposed regulations also clarify that minimum essential coverage excludes any coverage, whether insurance or otherwise, that consists solely of excepted benefits.

Health reimbursement arrangements (HRAs)

In the preamble to last year’s final regulations, the IRS stated that the rules for determining how an employer’s contributions to HRAs are counted in determining an employee’s or related individual’s contribution would be consistent with the final Sec. 36B premium tax credit rules. Those rules provide that amounts newly made available for the current plan year under an HRA that is fully integrated with an eligible employer-sponsored plan are counted toward the affordability of coverage if the employee is permitted to use the amounts only for premiums or may use them for premiums or cost-sharing.

The proposed rules under Sec. 5000A depart from this rule by permitting these amounts to be counted only to the extent they are used to pay premiums. It is not appropriate, the IRS says, to include cost-sharing amounts in the affordability computation because cost-sharing payments will not affect an individual’s out-of-pocket costs for obtaining minimum essential coverage.

Cafeteria plans

The IRS requested comments on how amounts employers make available to employees under cafeteria plans should be counted in determining the affordability of coverage.

Wellness programs

Proposed regulations under Sec. 36B issued last year (REG-125398-12) treat reductions in premiums for not using tobacco as the only wellness incentives that are permitted to be considered in determining the Sec. 36B premium tax credit. Likewise, Friday’s proposed regulations provide that, for determining an individual’s required contribution under Sec. 5000A, wellness program incentives are treated as “earned” (included in the amount) only if they relate to tobacco use. However, the proposed regulations reserve comment on how the wellness program rules will be applied to determine affordability for individuals who are ineligible for employer-sponsored coverage and must obtain insurance on state exchanges.

Hardship exemptions

Individuals who fall below certain income thresholds or whose employer-provided coverage is not affordable are exempt from the Sec. 5000A penalty. In response to the difficulties in the health care website rollout, the proposed regulations adopt the rule released by HHS on Oct. 28, 2013, providing that individuals who obtain coverage through an exchange for 2014 during the open enrollment period may claim an exemption for the period before their coverage is effective without obtaining an exemption certificate. The proposed regulations also give HHS and the IRS authority to issue guidance if they determine there are other situations that warrant exemption from the requirement for an exemption certificate.

Simplified method for determining premium

For determining whether an individual who is not eligible for coverage under an employer-sponsored plan is exempt from the shared-responsibility payment because the individual cannot afford minimum essential coverage, the final regulations require individuals to calculate the cost of coverage for a bronze-level health insurance plan in an exchange for the individual and all covered family members. When no bronze plan is available that would cover all family members, the final regulations require adding together the premiums for coverage for each individual. In the preamble to the proposed regulations, the IRS is asking for alternative methods for determining the cost of the premiums for family coverage.

Calculating the monthly penalty

The proposed regulations would amend the final regulations on how to calculate the Sec. 5000A penalty. The final regulations provide that the penalty is imposed on the lesser of (1) the sum of monthly penalty amounts “for each individual in the shared responsibility family” (i.e., all nonexempt individuals for whom the taxpayer is liable for a shared-responsibility payment) or (2) the sum of the national average bronze plan premiums for the shared responsibility family. Because the monthly penalty amount is intended to apply only to the individual, and not to the entire family, the proposed regulations amend (1) above to remove the clause “for each individual in the shared responsibility family.” The second part of the formula is unchanged.