The IRS has published a proposed rule relating to the requirement imposed by the ACA on individuals to maintain minimum essential coverage. While this proposal will primarily affect individuals, employers will want to familiarize themselves with the rule as it discusses how various employer contributions are treated in determining whether individual coverage is affordable.
In general, individuals are required to pay a penalty for failure to maintain minimum essential coverage for a given month, unless an exemption applies. There are several such exemptions; however, the one that is important here is the exemption for individuals who cannot afford to pay the required contribution for coverage because it exceeds 8% (for 2014) of the individual’s household income.
In the case of an employee who is eligible to purchase coverage under an eligible employer-sponsored plan sponsored by the employee’s employer, the required contribution is the portion of the annual premium that the employee would pay (whether through salary reduction or otherwise) for the lowest cost self-only coverage.
In the case of an individual who is ineligible for coverage under an eligible employer-sponsored plan, the required contribution is the premium for the applicable plan, reduced by the maximum amount of any allowable premium tax credit. The applicable plan will generally be the lowest cost bronze plan available to the individual that would cover the individual and his or her non-exempt family members.
Under the proposed rule, if an employer makes new contributions to an HRA and the HRA is integrated with an employer sponsored health plan and the HRA can be used to pay health insurance premiums, then the amount of the contribution will reduce the employee’s required contribution for purposes of the individual mandate.
In the case of a cafeteria plan under which employees are given the option of making salary reduction contributions toward the cost of non-taxable benefits or receiving an equivalent amount in taxable cash, if an employee elects to make salary reduction contributions and to have those amounts applied towards the cost of premiums, those contributions are treated as employee contributions, and the employee’s household income is increased by the amount of the contributions for purposes of calculating affordability.
Some cafeteria plans include available employer contributions that employees can use for various pre-tax benefits or take in cash on a taxable basis. In the preamble to the proposed rule, the IRS has asked for comments regarding the treatment of employer contributions under a section 125 cafeteria plan account for purposes of determining the affordability of coverage to the extent employees may not opt to receive the employer contributions as a taxable benefit, such as cash.
Finally, the proposed rule provides that wellness incentives are considered for purposes of determining an individual’s required contributions only if they relate to tobacco use.