Background
The Affordable Care Act (ACA) requires individuals who do not qualify for an exception to have minimum essential coverage or pay a tax. To help people with incomes between 100 and 400 percent of the federal poverty level (FPL) afford coverage, the ACA offers them (if they do not have minimum essential coverage through a public program or an employer) advance premium tax credits (PTC) if they purchase coverage through the ACA exchanges or marketplaces.
The value of the PTC is set at the lesser of A) the actual cost an individual or family pays for coverage or B) the difference between the premium of a “benchmark” plan and the contribution toward the cost of coverage that the individual or family is required to make depending on their modified adjusted gross household income. The benchmark plan is the second-lowest-cost silver level plan available to the family or individual (subject to complications discussed below) in their marketplace.
Finally, the ACA imposes a tax on large employers that do not offer their full-time employees affordable and minimum value coverage if a full-time employee obtains PTCs to purchase individual coverage.
Rules implementing these ACA provisions (which are here, of course, greatly simplified) were promulgated by the Internal Revenue Service in 2012 (PTCs), 2013 (individual responsibility), and 2014 (employer responsibility). These rules have been updated by guidance, and in some cases by amendments, several times since. With two and a half years of experience under its belt, the IRS has concluded that these rules need further attention.
The New Proposed Rules
On July 6, the IRS released a notice of proposed rulemaking proposing a number of clarifications and technical amendments to its earlier regulations, in particular its PTC regulations. Some of these changes incorporate into rules earlier guidance, but others are in fact changes in current practice. Most are quite technical, and none seem fundamental to the program.
The proposed rules will generally take effect for taxable years beginning after December 31, 2016, although taxpayers may usually rely on rules in their favor for years ending after December 31, 2013 and the proposed rules governing benchmark plans (see below) will only apply for years beginning after December 31, 2018.
First, the proposed rules clarify when a couple of existing “safe harbors” apply. Under current rules, if an exchange determines at enrollment that a taxpayer’s household income will be at least 100 percent of the FPL but will not exceed 400 percent, and unexpectedly household income turns out to be below 100 percent of FPL, the taxpayer will not lose PTC eligibility and have to pay back the advance PTC. The proposed rule clarifies that this is not true if the applicant provided incorrect information intentionally or with reckless disregard for the facts. It defines reckless disregard of the facts to occur when “the taxpayer makes little or no effort to determine whether the information provided to the Exchange is accurate under circumstances that demonstrate a substantial deviation from the standard of conduct a reasonable person would observe.”
Similarly, if an individual is determined by an exchange to be eligible for PTCs because the individual is not eligible for Medicaid, CHIP, or a similar government-sponsored program (such as the Basic Health Program), but the individual is later determined to have been eligible for such a program, the individual does not have to pay back the advance PTC paid on his or her behalf. Again, this would be true only if the individual did not provide incorrect information to the exchange intentionally or with reckless disregard for the facts.
Three of the proposed regulatory provisions deal with technical employer coverage issues. The first clarifies that coverage under the Defense Department Nonappropriated Fund Health Benefits Program would be considered minimum essential coverage for purposes of determining eligibility for PTCs if it provides minimum value (60 percent actuarial value and substantial hospital and physician services coverage).
Second, the proposed rules would clarify that if an individual declines an opportunity to enroll in affordable minimum value employer coverage for a year (and thus is ineligible for PTCs for that year) but is not given an opportunity to enroll in employer coverage for one or more succeeding years, the individual is not disqualified from PTCs for the succeeding year or years (and a large employer may be treated as not having offered coverage for those years for purposes of the employer mandate).
Third an individual offered only excepted benefit coverage by an employer is not considered to have been offered minimum essential coverage that would disqualify the individual from PTC eligibility.
Unconditional Opt-Out Payments
The most extensive and complex parts of the proposed rules deal with “opt-out arrangements.” Some employers offer employees a cash opt-out payment if the employee declines health coverage offered by the employer. In some instances, the offer is unconditional; in others it is conditional on the employee having coverage from another source, such as a spouse or parent.
An individual offered employer coverage is ineligible for PTC if the employee is offered minimum value coverage that is “affordable,” that is, that costs less than a certain percentage (9.66 percent for 2016) of the employee’s modified adjusted gross household income. If employer-sponsored coverage is paid for through a salary reduction, the amount by which the employee’s salary is reduced is considered as an employee contribution in determining the affordability of coverage.
Opt-out payments are the economic equivalent of salary reductions, and the IRS stated in a 2015 noticethat it would treat them the same. The proposed rules would codify into regulation the position stated in the earlier guidance: an unconditional offer of an opt-out payment is treated as a required employee contribution for coverage for purposes of determining the affordability of employer-sponsored coverage for PTC eligibility.
The earlier notice provided that for purposes of the large employer responsibility tax and employer reporting purposes, only opt-out payments adopted after December 16, 2015 would be treated as required employee contributions toward the cost of coverage. The proposed rules clarify that unconditional opt-out arrangements adopted pursuant to a collective bargaining agreement in effect before December 16, 2015 would not be treated as affecting affordability of coverage for purposes of the employer mandate and employer reporting until the first plan year following the expiration of the agreement or, if earlier, the effective date of the regulation.
Conditional Opt-Out Payments
Considerations affecting opt-out payments that are conditional on an employee having coverage from another source are more complex than those affecting unconditional opt-out payments. Under the proposed rule, amounts offered under a conditional opt-out arrangement are disregarded if the arrangement is an “eligible opt-out arrangement.”
An opt out arrangement is “eligible” if it is conditioned on 1) the employee declining enrollment in employer-sponsored coverage, and 2) the employee providing at least annually (no earlier than the start of open-enrollment) reasonable evidence (including attestation by the employee) that the employee and all other individuals for whom the employee reasonably expects to claim a personal exemption have minimum essential coverage for the taxable year other than in the individual market.
If an eligible opt-out arrangement is offered, the taxpayer would not be eligible for marketplace coverage with PTC as he or she would already have minimum essential coverage. The employee would presumably, therefore, not owe the employer the responsibility penalty for not providing affordable coverage for its full-time employees, as employees eligible for conditional opt-out payments would be ineligible for PTC because they had minimum essential coverage.
If the reasonable evidence requirement is met, the opt-out payment can continue to be excluded from consideration even if the employee terminates minimum essential coverage mid-year as long as the employer does not know or have reason to know the employee has terminated coverage. The rules applying to unconditional and conditional opt-out payments would also apply for determining affordability of employer coverage for applying the individual responsibility unaffordable coverage exemption. The IRS declined requests to make permanent exceptions from its opt out rule for collectively bargained or de minimis payments.
The proposed rule provides that an individual who is eligible to enroll in minimum essential coverage because of a relationship to another person (such as an under-age-26 adult child of an employee with coverage) is not treated as having minimum essential coverage for purposes of determining PTC eligibility if the other person does not claim a personal exemption for the related individual, unless the individual is in fact enrolled in the minimum essential coverage.
If an individual becomes eligible to enroll in minimum essential coverage, other than individual coverage outside of the marketplace, the individual must notify the marketplace to terminate PTC eligibility. The same is true for an individual who becomes eligible for Medicaid or CHIP.
Under the proposed regulations, however, if an individual notifies the marketplace that he or she is eligible for minimum essential coverage or for coverage through a government program, but the marketplace does not discontinue coverage for the first calendar month following the notification, the individual would be treated as not having been enrolled in minimum essential coverage or the government program until the first day of the second following month and does not have to pay back the advance PTC for the first month.
In general, an individual is only eligible for advance PTC if the individual’s share of the premium is paid no later than the unextended due date of the individual’s income tax return for the year of coverage (or, alternatively, the individual’s premiums are entirely covered by advance PTC). If an individual is denied advance PTC and appeals, prevails, and is granted retroactive coverage, the individual may instead have up until the 120th day following the date of the appeals decision for paying his or her share of the premiums due for the retroactive coverage.
Current regulations provide that if a qualified health plan is terminated part way through a month (for example, because the enrollee dies), the PTC amount due for the month is the lesser of A) the premiums for the month minus any refunds or B) the excess of the full benchmark plan premium over the full contribution amount for the month. The proposed regulation would extend this rule to situations where an individual is not enrolled for an entire month but the plan is not terminated because other individuals in the coverage group remain covered.
The Benchmark Plan Premium And Pediatric Dental Benefits
Since the amount of PTC which eligible individuals or families may receive often depends on the benchmark plan premium, the determination of the benchmark premium is a key issue under the ACA. The proposed rules would further refine the definition of the benchmark plan premium, with the changes applicable for taxable years beginning after December 31, 2018. The proposed rule includes 15 examples of how its benchmark premium rules operate.
First, qualified health plans (QHPs) offered through marketplaces must include all essential health benefits, including pediatric dental benefits. However, under the ACA a plan that does not offer pediatric dental benefits may still be a QHP if standalone dental plans (SDP) are offered through the marketplace that offers pediatric dental benefits. Existing regulations provide that if an individual enrolls in both a QHP and a separate SDP, the amount of the individual’s premium used for calculating the PTC for which the individual is eligible will be determined by adding to the QHP premium the portion of the SDP premium attributable to pediatric dental benefits.
The proposed rules would extend this principle to determining the premium of the benchmark plan. Currently the second-lowest-cost silver plan could be a plan that does not offer pediatric dental benefits. Individuals who enroll in such a plan would not get all essential health benefits, as they would not receive pediatric dental coverage.
For coverage years beginning after December 31, 2018, the second-lowest-cost silver plan would be determined by ranking 1) the premiums for silver plans that include pediatric dental coverage and 2) the aggregate of the premiums for the lowest-cost silver plans excluding pediatric dental coverage plus the cost of pediatric dental benefits of the lowest-cost SDPs that are available for enrollment. The second-lowest-cost plan from the combined ranking would be the benchmark plan.
If there is only one silver level QHP available, it would become the benchmark plan. If only one SDP is available, its premium for pediatric dental coverage would be added to the premiums of available QHPs without dental coverage for benchmark plan ranking purposes.
Geographically Split Families And Other Issues
Currently, when members of a covered family reside in different locations, the benchmark plan is the second-lowest-cost plan offered in the rating area where the taxpayer resides. But family members may reside in other rating areas in a state or in other states — for example, a child in college.
Under the proposed rule, the benchmark plan premium would be determined by summing the premiums for the applicable benchmark plans for each family member or group of family members offered in the rating area in which the individual or group resides. If all members of the covered group live in a different rating area from where the taxpayer resides, the benchmark premium would be based on the rating area where the coverage family resides.
Where one or more silver plans offered through a marketplace will not cover all the members of a taxpayer’s coverage family (for example, the taxpayer and a dependent parent), the benchmark premium may be the premium for a single policy or the combined premiums for more than one policy, whichever costs less. Under the proposed rule, the benchmark plan would be the second-lowest-cost single plan that would cover all coverage family members, or, if none were available, the second-lowest-cost sum of the premiums for self-only coverage for each member of the coverage family who resides in the same location. Alternatively, the IRS requests comments on instead simply using the sum of the premiums of self-only plans.
If a taxpayer enrolls another individual (for example, a child) in coverage attesting that he or she (the parent) will claim the other individual as a tax dependent, but fails to do so, and the individual enrolled in coverage does not file a tax return, the question arises as to whether the taxpayer or the covered individual is responsible for filing and reconciling ATPC and actual PTC due. The proposed rule clarifies that it is the responsibility of the taxpayer, and not the individual who was covered as a putative dependent, to file and reconcile.
The proposed rule clarifies that when multiple families are covered under the same policy (for example a taxpayer and a non-dependent adult child), the marketplace must allocate enrollment premiums for reporting purposes based on the proportion of each family’s applicable benchmark plan premiums.
The proposed rule also clarifies that for reporting purposes, if an individual is enrolled in a plan after the first day of a month, no enrollment or benchmark premiums should be reported for that month. If, however, an individual is enrolled in coverage after the first day of a month and enrollment is effective on the date of the individual’s birth, adoption, or placement in foster care or on the date of a court order, or if coverage is terminated before the end of the month, the exchange must report the benchmark premium for the full month and the full amount of the enrollment premium for the month minus any amount refunded due to termination of coverage.
Finally, the proposed rule clarifies that form 1095-A should not have been listed on a list of forms that must be submitted on magnetic media.