By Amy M. Gordon, Susan M. Nash, Maureen O'Brien and Jamie A. Weyeneth The Internal Revenue Service has issued proposed regulations
implementing health insurance premium tax credits. The proposed
regulations clarify the eligibility criteria for health insurance
premium tax credits. In addition the proposed regulations provide
guidance regarding determining the affordability of employer-sponsored
coverage and calculating the premium tax credit. The preamble to the
proposed regulations offers previews of anticipated future guidance
relating to the employer affordable coverage mandates and pay-or-play
penalties. Health insurance premium tax credits will go into effect
concurrent with the establishment of the state insurance exchanges and
employer pay-or-play mandate in 2014.
On August 12, 2011, the Internal Revenue
Service issued proposed regulations implementing health insurance
premium tax credits under Code Section 36B of the federal Patient
Protection and Affordable Care Act. The tax credits are
designed to enable low income individuals to purchase insurance on
state-based Affordable Insurance Exchanges (Exchanges), which are
scheduled to be up and running by January 2014, assuming they are not
struck down by the Supreme Court of the United States as
unconstitutional. As set forth in the proposed
regulations, the Exchange determines whether an individual meets the
income and other requirements for the tax credit based in part on the
availability of affordable employer-sponsored group health plan
coverage. Each month, the credits will be paid directly to
the insurer that provides coverage to the eligible individual through
the Exchange. This credit will reduce the premium amount owed by the individual.
Under the employer pay-or-play mandates that
will take effect in 2014, assuming they are not struck down by the
Supreme Court as unconstitutional, if an employer offers coverage to all
full-time employees, penalties will be assessed if any full-time
employee with a household income below 400 percent of the federal
poverty line opts out of the employer's group health plan to obtain
coverage through the Exchange and, for this particular employee, the
available employer-sponsored plan coverage is unaffordable.
Employer group health plan coverage is considered unaffordable if it
requires an employee premium contribution that exceeds 9.5 percent of
the employee's household income or provides coverage where the group
health plan's share of the total cost of benefits is less than 60
percent. The penalty is equal to $3,000 for each full-time
employee per year who meets the criteria above (but not more than the
penalty that would have applied if the employer had not provided any
group health plan coverage).
Below is a brief description of the major provisions of the proposed premium tax credit regulations.
The preamble to the proposed regulations
offers previews of anticipated future guidance relating to the employer
affordable coverage mandates and pay-or-play penalties. In
addition to the affordability safe harbor described above, the proposed
regulations suggest future guidance will offer a safe harbor for
employers wishing to avoid the penalty for providing unaffordable
coverage to an employee who ultimately purchases coverage on an Exchange
and receives the premium tax credit. Although the
availability of the credit is based on household income, under the safe
harbor, an employer will be permitted to assume that an employee's
household income is the same as the employee's W-2 wages from the
employer. Therefore, if an employer sets the employee
portion of the cost of self-only coverage based on W-2 wages, the
preamble indicates that the employer will not be subject to a penalty if
the coverage turns out to be unaffordable because the employees'
household income is lower than W-2 wages. The preamble
acknowledges that this safe harbor could result in an employee receiving
the premium credit without a penalty applying to the employee's
employer but recognizes that this is not likely to happen.
The preamble also indicates that future
guidance relating to the individual mandate requirement will clarify
that a self-insured employer group health plan can be considered minimum
essential coverage. Health care reform provisions
currently define minimum essential coverage to include an
employer-sponsored plan only if it is a government plan or an insured
plan (including a grandfathered plan offered in the group market).
The McDermott Difference
McDermott Will & Emery will continue to monitor and alert clients
about health care reform guidance, as it is released. Please contact
your regular McDermott lawyer or an author if you have any questions
regarding the proposed regulations or employer pay-or-play mandates.
content of this article is provided solely for informational purposes.
It is not intended as, and does not constitute, legal advice. The
information contained herein should not be relied upon or used as a
substitute for consultation with legal, accounting, tax, career, and/or
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