Insurance Law

Purchasing Health Insurance Through an Exchange: Implications for Large Employers

By Vanessa A. Scott and Carol A. Weiser, Sutherland Asbill & Brennan LLP

The Departments of Health and Human Services (HHS) and Treasury, respectively, have issued guidance on (1) the ability of individuals and small employers to purchase health insurance through an exchange, and (2) the premium tax credits for individuals who buy that coverage and whose income is between 100% and 400% of the federal poverty level (FPL).  Click here for the HHS proposed regulations and here for the Treasury proposed regulations, which were published in the Federal Register on August 17, 2011.

This article focuses on the implications of these rules for "large" employers, i.e., generally, employers that employ an average of at least 50 full time employees.  Though neither set of rules has a direct impact on large employers, they have some implications for the manner in which the so-called "employer shared responsibility" requirements will apply to large employers.  In addition, the preamble to the proposed Treasury regulations includes several comments regarding rules that are expected to be included in forthcoming guidance on the employer shared responsibility rules and related rules.


The Patient Protection and Affordable Care Act (PPACA) established an integrated set of rules that require uninsured Americans to obtain health coverage and provide mechanisms designed to make that coverage available and affordable.

Section 1501 of PPACA amended the Internal Revenue Code (Code) to add section 5000A implementing the individual mandate effective for taxable years after 2013.  The individual mandate requires individual taxpayers to obtain health coverage that provides minimum essential coverage for themselves and their dependents or pay a penalty.  (This provision of PPACA has been subject to a number of challenges in court alleging that it exceeds Congressional authority under the Constitution.  With conflicting decisions having been reached in the Sixth Circuit Court of Appeals, which held the enactment of the individual mandate did not exceed Congressional authority, and the Eleventh Circuit, which held it did, it is likely that the Supreme Court will decide the constitutionality of this aspect of PPACA.)

Under section 1311, et seq. of PPACA, states may establish an insurance exchange by 2014.  A state may elect to operate the exchange applying Federal standards set forth in PPACA, as further defined in HHS regulations, or adopt its own standards that comply with the requirements of PPACA.  Section 1321 of PPACA gives HHS the authority to operate a federal exchange in any state that does not make an election to establish an exchange or that fails to meet certain conditions.  The exchanges are to offer qualified health plans, as described in section 1301 of PPACA, which are to be issued by insurance carriers and are to cover essential health benefits in 10 categories with specified limits on cost-sharing for covered individuals.  Specifically, the plans are to pay an average of at least 60% of the cost of covered services for bronze plans, 70% for silver plans, 80% for gold plans and 90% for platinum plans.

Code section 36B, which was added by section 1401 of PPACA, provides for a refundable premium tax credit to help individuals buy coverage in an exchange if they meet certain income and other requirements.  The exchanges are to determine individuals' eligibility for the premium tax credits, and the tax credits generally are to be advanced by Treasury to the insurers who provide coverage to these individuals.  The Treasury regulations proposed to implement these tax credits effective for taxable years after 2013 are discussed below.

Section 1402 of PPACA provides for certain reductions in cost-sharing under a qualified health plan for individuals whose income is between 100% and 400% of the FPL and who buy silver coverage through an exchange.  Generally, using the FPL for 2011, this would include individuals whose annual gross income is between $22,350 and $89,400 for a family of four.

The shared responsibility provisions of Code section 4980H, which was added by section 1513 of PPACA, apply to large employers.  Code section 4980H specifies that large employers that do not offer minimum essential health coverage to employees generally must pay a tax of up to $2,000 per full time employee if any employee enrolls in an exchange plan and the exchange certifies that the employee is eligible for the premium tax credit or reduced cost-sharing under section 1402 of PPACA.  This section of the Code also provides that any large employer that offers health coverage that is unaffordable or does not provide minimum value must pay a tax of up to $3,000 per full time employee who elects coverage through an exchange and qualifies for a premium tax credit or reduced cost-sharing.

Phased Guidance on Exchanges

HHS and Treasury have been issuing guidance related to the exchange in phases. The guidance issued to date includes:

  • A request for comments on the development of standards for exchanges on August 3, 2010;
  • Initial guidance to states on the establishment and operation of exchanges on November 18, 2010;
  • A proposed regulation on the application, review and reporting processes for waivers from PPACA's exchange requirements for states implementing alternative comprehensive healthcare programs on March 14, 2011;
  • Two sets of proposed regulations that set forth requirements for states that elect to establish exchanges, outline minimum requirements for participating issuers, outline standards for employers that elect to participate in the Small Business Health Options Program (SHOP), and describe health insurance premium stabilization policies in PPACA on July 15, 2011; and
  • Three sets of proposed regulations on the premium tax credits (summarized below); the process of determining eligibility for enrollment in an exchange plan (also summarized below); and coverage under Medicaid, the Children's Health Insurance Program (CHIP) and state health coverage programs.

Premium Tax Credits

The Congressional Budget Office estimates that, when PPACA is fully phased in, 20 million Americans will receive premium tax credits with an average subsidy of over $5,000 per year.  The proposed Treasury regulations establish rules regarding the individuals eligible for a premium tax credit, the amount of the credit and the requirements for individuals who receive a credit to reconcile on their tax returns the credits received and the credits to which they are ultimately entitled.  The regulations also require exchanges to report to covered individuals information on credits received on their behalf so that they will be able to complete the reconciliation on their tax returns. 

Who Is Eligible?  The general rule is that individuals can obtain a premium tax credit if they (1) buy coverage in an exchange, (2) have household income between 100% and 400% of the FPL for the family's size, (3) are not eligible for minimum essential coverage under another plan, other than in the individual insurance market, (4) may not be claimed as a dependent of another taxpayer, and (5) file a tax return, which must be a joint return if they are married.  In addition, the individuals must be lawfully present in the U.S., which all citizens are, and not be in jail.  The tax credit is generally not available to individuals whose household income is less than 100% of the FPL since those individuals are generally eligible for Medicaid.

Individuals Eligible for Minimum Essential Coverage Under an Employer Plan.  As indicated above, individuals are not eligible for premium tax credits if they are eligible for minimum essential coverage under another plan, such as an employer-sponsored plan.  The regulations provide that individuals are treated as eligible for an employer-sponsored group health plan providing minimum essential coverage only if (1) that coverage is both affordable and has at least a minimum value, or (2) the individual enrolls in the employer plan.  The coverage is considered affordable only if the employee contribution for self-only coverage under the plan would be no more than 9.5% of the individual's household income, as further defined in the proposed rules.  The rules clarify that this affordability test is always based on the employee premium for self-only coverage for employees and related individuals the employees are eligible to cover; the employee cost for family coverage is not used.  A plan has a minimum value under these rules only if it covers 60% of the costs of medical care.  An individual who becomes eligible for an employer plan that is determined by an exchange to be affordable and to have a minimum value but who chooses not to enroll in that plan during an applicable open enrollment or special enrollment period will generally be treated as eligible for that coverage (and, thus, not eligible for the premium tax credit) for the balance of the plan year.  In contrast, an individual who becomes eligible for COBRA or other continuation coverage is treated as eligible for that coverage only if he or she chooses to enroll in it.

Exceptions to the Eligibility Rules.  The proposed regulations include several exceptions to the general rule that are favorable to individuals seeking to benefit from the premium tax credit who might not qualify for a credit if the rules were strictly applied.  Specifically:

  • If an exchange determines an employer plan is not affordable to an individual but his or her income changes so that the plan ultimately is affordable, the plan is treated as not being affordable for the year based on the exchange's initial determination.
  • If an exchange determines an individual will meet the income rules but the individual's income ultimately is less than 100% of the FPL and the individual has gotten a premium tax credit, the individual is treated as eligible for the months for which the tax credit was provided.
  • Because aliens are not eligible for Medicaid even if they are lawfully present in the U.S., a special rule provides that an alien who is lawfully present in the U.S. and whose income is less than 100% of the FPL is treated as eligible for the premium tax credit.
  • Under the general rule, an individual's eligibility for minimum essential coverage is determined on the first day of the first full month of coverage. However, a special rule provides that an individual who becomes entitled to retroactive coverage (e.g., for Medicaid) is treated as eligible for that coverage only after approval so as not to cut off his or her eligibility for the premium tax credit retroactively.

Calculating the Credit.  The premium tax credit for an eligible individual and his or her family is determined on a monthly basis and is equal to the lesser of (1) the actual premium paid for coverage in the exchange, or (2) an adjusted premium for the second lowest cost silver plan available to the individual and his or her family (the benchmark plan) minus a percentage of his or her income, which represents the individual's required contribution for coverage.  This percentage of income or required contribution is determined under a table in the proposed regulations that applies on a sliding scale based on the individual's income as a percentage of the FPL.  For an individual whose income is 133% of the FPL, the required contribution is 2% of income; it is 9.5% of income for an individual at 400% of the FPL.  The actual amount an individual pays for coverage will be less than that if he or she chooses a plan that is less costly than the benchmark plan.

Mechanics.  The premium tax credit will be advanced to the insurer for the plan in which an individual has enrolled.  The individual must complete a reconciliation on his or her tax return to determine the final amount of the premium tax credit to which he or she is entitled for the year.  Unless one of the exceptions described above applies, if the reconciliation shows that an individual received greater tax credits than he or she should have, the individual will have to repay the excess, subject to certain caps based on percentages of the FPL.  The regulations include a number of examples illustrating the calculation of the reconciliation if an individual's income increases or decreases, his or her family size changes or there are changes in his or her health coverage during the year.  In addition, the rules address the impact of changes in filing status during the year as a result of marriage or divorce.       

Implications for Large Employers.  As noted above, though these rules have no direct impact on large employers, the rules have significant implications for employers, and the preamble to the proposed regulations includes several statements regarding positions Treasury currently intends to take on related rules in forthcoming guidance.

  • As discussed above, affordability of an employer plan for an employee and any related individual is tested on the basis of the employee contribution for self-only coverage, even if the contribution for family coverage exceeds the affordability threshold of 9.5% of income. This rule makes it less likely a plan will be considered unaffordable, which would subject the employer to the $3,000 shared responsibility tax.
  • Although the affordability test for the premium tax credit is based on the cost of self-only coverage, the preamble says future regulations are expected to apply the similar affordability test for the individual mandate under Code section 5000A to an employee's family members based on the employee's required contributions for family coverage under the employer plan.
  • In the preamble, it is noted that future regulations on the employer shared responsibility rules are expected to include a safe harbor under which employers can determine affordability of employee contributions under their plans based on employees' W-2 wages. This test of affordability is in contrast to the test based on household income on which eligibility for the premium tax credit is based. This alleviates employers' concerns as to how they would obtain information on employees' household incomes. The preamble also says IRS and Treasury intend to request comments on this safe harbor.
  • In addition, the preamble says that regulations defining minimum essential coverage are expected to provide that an employer plan will not fail to be considered minimum essential coverage solely because it is self-insured.
  • Regulations defining essential health benefits under section 1302 of PPACA are expected to be proposed later this year. The preamble indicates the regulations:
  • are not expected to require either employer plans or health insurance in the large group market to provide each of the essential health benefits or even benefits in each of the 10 identified categories; and
  • will seek to foster the preservation of the current system under which health coverage is primarily provided by employer plans without allowing the employer responsibility standards under PPACA to be avoided.

On a related note, the preamble says the agencies writing the regulations are considering whether employers need transition relief regarding the minimum value requirement.

Comments on the proposed Treasury regulations are due by October 31, 2011.  Once they are final, the rules will be effective on January 1, 2014, the effective date for the exchanges.

Eligibility for Participation in, and Subsidies under, Exchanges

While the proposed Treasury rules address the tax credits for certain individuals purchasing coverage through an exchange, the HHS proposed regulations address eligibility for participation in, and subsidies under, the exchanges, as well as standards for small employer participation in SHOP, which provides access to exchange-based health plans to employers with up to 100 employees.  The proposed rules say that future HHS guidance will address additional exchange-related issues, including exemptions from the individual mandate, benefits design standards for plans offered through the exchange (including the definition of essential health benefits), and quality standards for exchanges and issuers.

The proposed rules provide that, upon an individual's application to an exchange for coverage, the exchange will use a single, streamlined system to determine the individual's eligibility for (1) participation in the exchange, (2) any premium tax credit and discount programs, and (3) any state Medicaid or CHIP programs.  The exchange will also take responsibility for enrolling the individual in the program(s) for which he or she is determined to be eligible to the extent permitted under state Medicaid or CHIP laws.  In conjunction with these rules, HHS has also proposed simplified eligibility rules for Medicaid and CHIP that align the new Medicaid eligibility process with eligibility rules for premium tax credits and cost-sharing reductions under the exchanges based on an individual's modified adjusted gross income.

An individual seeking participation in an exchange must (1) be a citizen or be lawfully present in the United States, (2) not be incarcerated, and (3) meet certain residency standards for participation in an exchange program in the individual's "service area."  Under the proposed rule, individuals will be eligible to participate in the exchange that covers the service area where they reside, intend to reside, or where the primary taxpayer resides (in the case of a spouse or a dependent).  The proposed rules also outline the procedure for the acceptance of applications by the exchange, standards for making eligibility determinations and notifying individuals, and the process for providing advance payments of premium tax credits to eligible exchange participants.  Under the regulations, the exchange will be responsible for notifying individuals of their eligibility status and will also notify state Medicaid or CHIP programs regarding individuals' eligibility for those programs.  In addition, if an individual is determined to be eligible to receive premium tax credits or cost-sharing reductions because his or her employer's coverage is not affordable or does not have minimum value, the exchange will notify the employer.  The preamble to the HHS regulations indicates that future guidance will include additional information on the content of this notice.  Presumably that guidance will clarify how a determination of affordability of employer coverage by an exchange based on an individual's household income is to be coordinated with an employer's determination based on the employee's W-2 wages. 

The proposed rules also provide for processes that will require exchanges to verify information needed to determine eligibility for exchange participation and for premium tax credits and cost-sharing reductions (i.e., citizenship status, income, eligibility for employer coverage, etc.) at least annually.

Finally, the regulations also propose standards for small employer participation in SHOP, including a provision that will allow employers that initially qualify for the program to continue to participate if the number of employees surpasses the 100-employee limit, provided the employer continues to meet other SHOP eligibility criteria.  In addition, the proposed regulations include rules on certain notice and reporting requirements applicable to SHOP employers.

Comments on the proposed HHS rules are due by October 31, 2011.  Once finalized, the rules will be effective on January 1, 2014, the effective date for the exchanges.

© 2011 Sutherland Asbill & Brennan LLP. All Rights Reserved. This communication is for general informational purposes only and is not intended to constitute legal advice or a recommended course of action in any given situation. This communication is not intended to be, and should not be, relied upon by the recipient in making decisions of a legal nature with respect to the issues discussed herein. The recipient is encouraged to consult independent counsel before making any decisions or taking any action concerning the matters in this communication. This communication does not create an attorney-client relationship between Sutherland and the recipient.

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