Care Act Employer Mandate Penalties and Solutions, Individual Coverage HRAs and Health Plan Nondiscrimination
The IRS has been issuing preliminary penalty
calculations to employers relating to the Affordable Care Act Employer Shared
Responsibility Mandate (the "Employer Mandate"). The following is a
review of the issues and solutions for employers regarding the Employer Mandate,
interaction with new individual coverage HRAs (ICHRAs), health plan nondiscrimination
rules and related issues
1. Family Health Coverage Must be Offered to Substantially
all Full Time Employees – But Most of the Premiums Can be Shifted to the
on Each Full-Time Employee if Family Coverage not Offered to 95% of FTEs. Under
the Employer Mandate rules contained in the Patient Protection and Affordable
Care Act of 2010 (the "ACA"), if an employer employs 50 or more "full-time
employees," i.e., employees for 30+ hours a week on average, it must offer
family health insurance coverage that meets the "minimum
essential coverage" standards of the ACA to 95% or more of
their full time employees. If it does not offer the family health insurance
coverage to 95% of the full-time employees there would be a significant penalty
under Code § 4980H(a) of $2,880 a year (for 2023) for each full time
employee (minus the first 30 employees) even for those who have been
offered or enrolled in the group health plan.
to 95% of FTEs Must Offer Minimum Essential Coverage. In order to avoid
this significant penalty, an employer must offer to substantially all (95%) of
the full-time employees health insurance coverage that meets the "minimum
essential coverage" standards of the ACA or an individual coverage
HRA (which is considered sufficient even without minimum essential coverage). However,
as the rule is currently written, it should be permitted to shift the bulk of
the premiums to the employees, because as long as it offers family health
coverage, the coverage does not have to be "affordable."
Considered Offering of Coverage. With regard to individual coverage HRAs,
the IRS, DOL and HHS FAQs on New Health Coverage Options for Employers and
Employees, Q:7 states that: "An offer of an individual coverage HRA discussed
below counts as an offer of coverage under the employer mandate." Under
2019 regulations, those who are offered group coverage cannot also be
reimbursed for individual premiums, but the 95% rule can be satisfied by
offering, e.g., one identifiable group with individual coverage HRAs and the
other identifiable group with group health coverage.
Offered to 95% but the Coverage is not Affordable, a Smaller Penalty Would be
Imposed (i.e., Only for the Number of FTEs receiving Exchange Coverage and a
Premium Tax Credit). Even if 95% are offered group coverage (or an
individual coverage HRA), it would not be considered "affordable" if
the employees have to pay the bulk of the premiums. Thus, there would be a smaller
penalty of $4,320 (for 2023) under Code § 4980H(b) for any full-time
employees who, because the premiums are so high, buys individual Marketplace Exchange
coverage and is entitled to a premium tax credit for all or a portion of cost
of the Exchange premium. This penalty is not based on all employees but
only on those employees who opt for Exchange coverage and receive a premium tax
credit. In our experience only a minority of employees purchase their insurance
through the Marketplace Exchange (especially in urban areas), because so few
hospitals and doctors accept marketplace insurance. Thus, as long as 95% of the
employees with 30+ hours a week are offered family coverage (even on an
employee-pay-all basis), the penalty is likely to be very minor.
2. Report if Family Group Coverage was Offered to All
Full Time Employees on Annual Form 1095-C to be given to Employees and Annual
Form 1094-C to be Filed with the IRS
An employer or affiliated group with 50 or more
full-time employees must provide the employees who were eligible for group
health insurance an annual IRS Form 1095-C https://www.irs.gov/pub/irs-pdf/f1095c.pdf indicating
which months in the year they were offered group health coverage and what the
premiums for family coverage would be during that period, as set forth in the
instructions to the form. Form 1095-C is for the employee's records but need
not be attached to the employees' individual tax return.
IRS Form 1094-C https://www.irs.gov/pub/irs-pdf/f1094c.pdf is
an annual return filed with the IRS indicating the number of employees who were
eligible for group health coverage during each of the 12 months, whether these
employees were offered group family health coverage (with minimum essential
coverage - which your insurance plans most likely are), full time employee
count and all employee count and list of affiliated employers.
Often, the insurance company will provide the information
for these forms.
3. Determination of Full-Time Status of Employees for
Purposes for Eligibility for Health Insurance Coverage
Determination of full time status for purposes of
being eligible for health insurance coverage is made depending on whether the
employee has worked an average of 30 hours per week (or 130 hours per month),
during a "standard measurement period" which is a 3-12 month period
that the employer chooses at its discretion (but on a consistent basis). At the
end of the standard measurement period the employer must during an
administrative period" (not more than 90 days) determine an employee’s
eligibility, discuss the employee’s status with them, explain the premiums
required to be paid by the employee and enroll them in the plan if they elect
to do so. During a "stability period" (6-12 months and not shorter
than the Standard Measurement Period), the employees' enrollment remains
protected even if their hours drop below 30 per week until the Stability Period
has ended and eligibility is determined again.
One example used by some companies
is a 9 month period of the previous year (e.g., Jan. to Sept. of the previous
year) for determining whether the employee average hours per month is over 130
hours. The administrative period (up to 90 days) could be Oct. to Dec. to
determine an employee’s eligibility and offer to enroll them in the plan. For
those who have over 130 hours a month, the "stability period" could
be 9 months. Another alternative used by other companies is a 3 month
determination period, a one month administrative period and a 6 month stability
4. Notice of Eligibility
A notice of eligibility should explain that the
employees are eligible for group health insurance for their family with the
cost (or where to obtain the cost) of the premiums.
A similar notice could be sent to the group offered the individual
5. Nondiscrimination Testing for Insured Health
Insurance Coverage Currently Only Affects the Ability of Highly Compensated
Employees to Make Employee Contributions for Premiums on a Pre-tax Basis
In terms of nondiscrimination rules for health
insurance coverage, unless the group health plan is self-insured, there are
currently no nondiscrimination restrictions even if the higher paid employees
receive a larger share of subsidized premiums. (This should be monitored from
year to year, because there may be new regulations under the ACA that could
apply § 105(h) to insured plans.) If a health plan If it is self-insured, there
are two nondiscrimination tests in Code § 105(h). The eligibility test of § 105(h) is based on whether enough
non-highly compensation individuals are benefiting from the plan using
the 70% test, the ratio percentage test and the nondiscrimination test based on
facts and circumstances test of Code § 410(b). The benefits test determines if all participants
are eligible for the same benefits, and requires that the plan’s terms as
written do not discriminate and plan operation comply on a facts and
circumstances basis. A Highly Compensated Individual is (i) one of the five
highest-paid officers; (ii) a shareholder who owns more than 10% of the value
of the employer’s stock; or (iii) among the highest-paid 25% of all employees.
6. Reimbursing Individual Coverage Premiums through
an HRA and Restriction on Offering the Same Group the Individual Premiums HRA
and Group Health Coverage
Historically, reimbursing employees for their
individual health insurance premiums was problematic for various reasons,
including (i) taxability to the employee for such reimbursement, and (ii)
inadvertently creating a group health plan which would be subject to ACA
requirements such as yearly dollar limits.
However, on June 20, 2019, the Trump administration
finalized rules for "individual coverage Health Reimbursement Arrangements"
or "ICHRAs" that could be used to allow employers to reimburse
employees for individual health insurance premiums through an individual coverage
HRA instead of offering a group health plan.
An employee reimbursed through the ICHRA should also
be able to enroll in individual health insurance coverage through the
Marketplace Exchange or through a private plan. However, if you opt to take the
ICHRA coverage you would probably lose your ability to qualify for a premium
tax credit to help pay for Marketplace coverage.
2019 rules in Treas. Reg. § 54.9802-4(c)(2), DOL Reg.
§ 2590.702-2 & HHS Reg. § 146.123(c)(2), 84 Fed. Reg. 28888, 28895 (June
20, 2019), provide that "To the extent a plan sponsor offers any class of
employees ... an individual coverage HRA, the plan sponsor may not also offer a
traditional group health plan to the same class of employees." The reason
for this rule as explained in the Preamble 84 Fed. Reg. at 28895 is in order to prevent a plan sponsor
from intentionally or unintentionally steering any participants or dependents
with adverse health factors away from the plan sponsor’s traditional group
health plan and into the individual market.
"Group of employees" is described in
paragraph (d) of the above regulations as including, e.g., employees working in
different locations, employees in or not in a unit covered by a specific union
contract, employees who have or have not satisfied a waiting period,
nonresident aliens and U.S. citizen employees, salaried and hourly employees,
etc. Of course, the same person could not be offered group health coverage and
decline and be offered reimbursement of individual premiums or vice versa, as
one person could certainly not be two plans.
Thus, a separate identifiable group could be offered group coverage
and another identifiable group could be offered the individual coverage HRA.
Both satisfy the 95% substantially all requirement for 30+ hour employees who
must be offered coverage under the firm's group health plan or an individual
coverage HRA in order to avoid the large penalty of Code § 4980H(a). For the
group that is offered group health coverage, if individuals in that group
decline coverage, they cannot then be offered reimbursement of individual
premiums under an individual coverage HRA.
Additional issues arise in connection with these
matters, and I would be happy to discuss them with you. If you
have any questions, please contact me at number or email listed above.