IRS Adopts Individual Mandate Final Regulations Addressing the Effect of Employer Contributions on the Affordability of Employer-Sponsored Coverage

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Health Care Reform Update: Week of December 8
IRS Adopts Individual Mandate Final Regulations Addressing the Effect of Employer Contributions on the Affordability of Employer-Sponsored Coverage
On November 26, 2014, the Internal Revenue Service (IRS) published final regulations governing the requirement under the Patient Protection and Affordable Care Act (PPACA) that individuals subject to the individual mandate maintain minimum essential coverage (MEC). In addition to discussing when certain non-comprehensive government-sponsored coverage does not qualify as MEC (including Medicaid coverage for “medically needy individuals”) and the process for claiming exemptions from the individual mandate, the final regulations addressed how certain employer contributions made in conjunction with an employee’s coverage under the employer’s health plan factor into determining the affordability of that employer-provided coverage and correspondingly whether the employee is eligible for an exemption from the individual mandate based on having coverage that is not affordable. Please note, however, that this guidance does not specifically apply to employer Pay or Play obligations, although it may provide some insight as to how the IRS interprets Pay or Play affordability or will be issuing guidance on that subject.
Background
Under the PPACA individual mandate requirements, an employee is exempt from having to obtain MEC or pay a penalty if the cost of the employee’s employer-sponsored health coverage exceeds 8% of the employee’s household income (subject to indexing), based on the lowest cost self-only coverage for the employee and the lowest cost family coverage for the employee’s spouse and dependents. On January 27, 2014, the IRS issued proposed regulations which, among other things, discussed how certain “collateral” employer contributions to employee health benefits affect the affordability of an employee’s health plan contributions for individual mandate purposes. For the most part, the IRS adopted those proposed rules in the final regulations and established criteria for determining whether and how employer contributions to cafeteria plans, health reimbursement arrangements, and wellness programs are credited when evaluating if an employee is eligible for the affordability exemption from the individual mandate, as discussed below.
Employer Cafeteria Plan Contributions
If an employer contributes to a cafeteria plan, the amount of those contributions is viewed as lowering the amount of the employee’s contribution to the employee’s health coverage under the employer’s primary health plan for purposes of determining the affordability of that coverage, if:
• the employee cannot take those employer contributions as a taxable benefit (either as cash or a benefit provided under the cafeteria plan that is taxable to the employee);

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• the employer contributions may be used by the employee to purchase MEC; and
• the employee may only use the employer contributions to pay for medical care (within the meaning of IRC Section 213).
In the view of the IRS, if an employee’s nontaxable employer contributions to a cafeteria plan are not limited to medical expenses, it cannot be assumed that the employee will use those contributions to purchase MEC.
Employer HRA Contributions
To the extent an employer contributes to an employee’s HRA account, those contributions are credited as reducing the amount of the employee’s contribution to the employee’s health coverage under the employer’s primary health plan for purposes of determining the affordability of that coverage, if:
• the HRA is “integrated” with the employer’s primary health plan in which the employee is enrolled (as provided in IRS Notice 2013-54 and discussed in Willis’ Health Care Reform Update for the Week of September 23, 2013);
• the employer HRA contributions can only be used to pay for
o premiums under the employer’s primary health plan, or
o either employer health plan cost-sharing or health benefits not covered by the employer’s health plan (or both), in addition to paying for employer health plan premiums; and
• the amount of the employer HRA contributions is either required under the terms of the HRA plan or is otherwise determinable within a reasonable period of time before the employee must decide whether to enroll in the employer’s primary health plan.
HRA amounts that can only be used for cost-sharing are not counted towards affordability, but such HRA amounts are counted for purposes of determining minimum value.
The IRS indicated that it anticipates adopting this same rule under final regulations for IRC Section 36B, which governs the PPACA premium tax credit. Presumably that would make this rule applicable to affordability under the Pay or Play rules as well.
Employer Wellness Program Contributions
For an employer who has implemented a wellness program in connection with its primary health plan that includes a tobacco surcharge or incentive, the tobacco incentive is credited towards lowering the

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amount of the employee’s contribution to the employee’s health coverage under the employer’s primary health plan for purposes of determining the affordability of that coverage, regardless of whether the employee has earned that credit by being “tobacco-free,” if the wellness incentive applies solely to tobacco use. To the extent the wellness incentive is unrelated to tobacco use or the wellness incentive is based on the employee fulfilling both a tobacco-related wellness program and a wellness program unrelated to tobacco use, the tobacco incentive does not reduce the cost of the employee’s health plan coverage for purposes of determining the affordability of that coverage.
The IRS indicated that it anticipates also adopting this rule under final regulations for IRC Section 36B, which again would presumably make this rule applicable to affordability under the Pay or Play rules.
Conclusion
These final IRS individual mandate regulations provide important guidelines for determining whether employer collateral contributions made through a cafeteria plan, HRA or wellness program affect the affordability of the employer’s primary health plan for purposes of determining the employee’s eligibility for exemption from the individual mandate. As previously noted, however, these regulations are not specifically applicable to employer obligations under Pay or Play. Until the IRS issues further guidance it is uncertain whether and to what extent the principles discussed in these regulations will become a part of the Pay or Play rules and such employer collateral contributions affect the affordability of employer-provided health coverage for Pay or Play purposes.
Willis’ National Legal & Research Group will continue to review and provide timely updates on these and other related changes in Health Care Reform that affect employers.
This information is not intended to represent legal or tax advice and has been prepared solely for informational purposes. You may wish to consult your attorney or tax adviser regarding issues raised in this publication.