Just before Thanksgiving, the IRS issued final regulations on the individual mandate under the Affordable Care Act (“ACA”). The individual mandate requires individuals to maintain health insurance (i.e., “minimum essential coverage”) or pay a penalty.

The regulations adopt in part, and clarify proposed regulations addressing how affordability of employer-sponsored coverage is determined for purposes of the regulations and certain types of exemptions from the individual mandate for individuals who cannot afford coverage. This matters to employers because it could impact whether they will be required to pay a play or pay penalty. If employer-sponsored coverage is unaffordable, and the employee does not enroll in it, then the employee may be eligible for a premium tax credit for ACA Marketplace/Exchange coverage. Receiving that tax credit could trigger a play or pay penalty for the employer.

We say “could” because the employer play or pay regulations do have safe harbors for determining affordability that we have discussed previously. If the employer’s coverage meets one of those safe harbors, it should not matter if the coverage is affordable under the individual mandate regulations. However, if the IRS determines that an employer’s coverage is not affordable under the individual mandate regulations, it may at least trigger an inquiry, and possibly an assessment, from the IRS regarding the employer’s play or pay penalty. Therefore, employers should be familiar with these rules if only to be able to understand the IRS’s position when it attempts to assess play or pay penalties.

Regarding affordability, the regulations say the following:

Employer Contributions to a Cafeteria Plan ( Flex Contributions)

In determining whether employer-sponsored coverage is affordable, cafeteria plan flex contributions will be treated as reducing an employee’s required contribution for employer-sponsored coverage if the contribution:

  1. May not be taken as a taxable benefit,
  2. May be used to pay for minimum essential coverage, and
  3. May be used to pay for medical care.

Health Reimbursement Arrangements

  • Amounts newly made available under a health reimbursement arrangement (“HRA”) count toward an employee’s required contribution for purposes of whether employer-sponsored coverage is affordable if the HRA would have been integrated with an eligible employer-sponsored plan if the employee had enrolled in an employer-sponsored health planof the same employer.
  • These include amounts that an employee may use to pay premiums for the employer-sponsored plan only, or to pay cost-sharing or benefits not covered by the plan in addition to premiums. HRA contributions that can only be used to pay for cost-sharing do not count toward affordability.
  • Employees who enroll in eligible employer-sponsored coverage cannot claim the premium tax credit for their coverage in an ACA Marketplace/Exchange plan. Also, employees must be able to determine the amount of their annual required contribution before deciding whether to enroll in eligible employer-sponsored coverage.
  • The employer HRA contributions only count in determining if the employer-sponsored coverage is affordable to the extent the amount of the annual contribution is required under the terms of the plan or is otherwise determinable within a reasonable time before the employee must decide whether to enroll.

Wellness Program Incentives

  • The only incentives from nondiscriminatory wellness programs that are treated as earned in determining affordability are those related to tobacco use. A nondiscriminatory wellness program is a wellness program that does not violate the wellness plan regulations issued by the IRS, DOL, and HHS.
  • The regulations clarify that where separate incentives are offered for completing a program unrelated to tobacco use and completing a program related to tobacco use, the incentive related to tobacco use may be treated as earned.

Hardship Exemptions

In addition, the regulations addressed hardship exemptions that would allow individuals not to pay the individual mandate penalty, even if they do not have coverage. The regulations no longer have a list of hardship exemptions, but now allow the IRS to list additional exemptions in other guidance. The most current list is in Notice 2014-76 which was issued around the same time as the final regulations.