Health Reform WK-EDGE Flex contributions affect affordability of employer-sponsored coverage
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Friday, April 8, 2016

Flex contributions affect affordability of employer-sponsored coverage

By Tulay Turan, J.D.

An employee’s “required contribution” to health coverage under an employer-sponsored plan is an important factor in determining whether that plan offers affordable coverage. Figuring out what a required contribution is can be tricky when account-based plans, such as health flexible spending accounts (FSA), are in play. Here’s a look at IRS guidance that clarifies how employer flex contributions to a cafeteria plan are taken into account for purposes of determining whether an applicable large employer (ALE) has made an offer of affordable coverage.

Affordability. An applicable large employer may be subject to an assessable payment under Code Sec. 4980H(b) for any month for which a full-time employee has received a premium tax credit in connection with enrollment in a qualified health plan through the exchange. An employee is not eligible for the premium tax credit for any month for which the employee is eligible for coverage under an eligible employer-sponsored plan that provides minimum value and is affordable. For this purpose, an offer of coverage is affordable if the employee’s required contribution for coverage under the plan is 9.66 percent (for 2016) or less of the employee’s household income (see Safe harbors shore up employers’ ability to determine affordability, July 2, 2015).

Required contribution. The amount of an employee’s required contribution for purposes of determining affordability is determined under Code Sec. 5000A and the related regulations. Code Sec. 5000A(e)(1)(B)(i) provides that the term “required contribution” means, in the case of an individual eligible to purchase minimum essential coverage consisting of coverage through an eligible employer-sponsored plan, the portion of the annual premium that would be paid by the individual (without regard to whether paid through salary reduction or otherwise) for self-only coverage.

Nature of flex contributions. Under a cafeteria plan, the employee’s enrollment in a group health plan generally is funded by salary reduction but may also be funded by employer flex contributions. Whether these employer flex contributions reduce the amount of an employee’s required contribution depends on the nature of the available flex contribution. Specifically, the amount of the employer contribution reduces the employee’s required contribution if the amount constitutes a “health flex contribution” under IRS Reg. Sec. 1.5000A-3(e)(3)(ii)(E) and IRS Reg. Sec. 1.36B-2(c)(3)(v)(A)(6). Those regulations provide that an amount is a health flex contribution if the employee:

  • may not opt to receive the amount as a taxable benefit,
  • may use the amount to pay for minimum essential coverage, and
  • may use the amount exclusively to pay for medical care, within the meaning of Code Sec. 213.

For purposes of Code Sec. 4980H(b) and the related reporting under Code Sec. 6056 (Form 1095-C), a health flex contribution is treated as made ratably for each month of the period to which it relates.

Example (health flex contribution reduces dollar amount of employee’s required contribution): Employer offers employees coverage under a group health plan through a cafeteria plan. An employee electing self-only coverage under the health plan is required to contribute $200 per month toward the cost of coverage. Employer offers employer flex contributions of $600 for the plan year that may only be applied toward the employee share of contributions for the group health coverage or contributed to a health FSA.

The $600 employer flex contribution is a health flex contribution and reduces the employee’s required contribution for the coverage. Because the $600 employer flex contribution is a health flex contribution, the $600 is taken into account as an employer contribution (and therefore reduces the employee’s required contribution) regardless of whether the employee elects to apply the health flex contribution toward the employee contribution for the group health coverage or elects to contribute it to the health FSA. For purposes of Code Sec. 4980H(b) and the related reporting under Code Sec. 6056 (Form 1095-C), the employee’s required contribution for the group health coverage is $150 ($200 -$50) per month.

Not a health flex contribution. On the other hand, an employer flex contribution that is not a health flex contribution does not reduce an employee’s required contribution. Thus, if an employer flex contribution that is available to pay for health care is also available to pay for any non-health care benefits under cafeteria plan (such as dependent care or group term life insurance), that contribution is not a health flex contribution and, as a result, does not reduce the required employee contribution. Similarly, an employer flex contribution that is available to pay for health care but also could be received as cash is not a health flex contribution and does not reduce the employee’s required contribution.

Example (employer flex contribution does not reduce dollar amount of Employee’s required contribution): Employer offers employees coverage under a group health plan through a cafeteria plan. An employee electing self-only coverage under the health plan contributes $200 per month toward the cost of coverage. Employer offers employer flex contributions of $600 for the plan year that can be used for any benefit under the cafeteria plan (including benefits not related to health) but are not available as cash.

Because the $600 employer flex contribution is not usable exclusively for medical care, it is not a health flex contribution and therefore does not reduce the employee’s required contribution for the coverage. For purposes of Code Sec. 4980H(b) and the related reporting under Code Sec. 6056 (Form 1095-C), the employee’s required contribution is $200 per month.

Transition relief. The IRS indicates that, solely for purposes of Code Sec. 4980H(b) and solely for coverage for plan years beginning before January 1, 2017, an employer flex contribution that is not a health flex contribution because it may be used for non-health benefits (including non-taxable benefits and/or cash or another taxable benefit), but that may be used by the employee towards the amount the employee is otherwise required to pay for the health coverage, will be treated as reducing the amount of an employee’s required contribution.

This relief is not available with respect to a flex contribution arrangement offering non-health benefits that is adopted after December 16, 2015, or that substantially increases the amount of the flex contribution after December 16, 2015 (a “non-relief-eligible flex contribution arrangement”).

For this purpose, a flex contribution arrangement will be treated as adopted after December 16, 2015, unless (1) the employer offered the flex contribution arrangement (or a substantially similar flex contribution arrangement) for a plan year including December 16, 2015; (2) a board, committee, or similar body or an authorized officer of the employer specifically adopted the flex contribution arrangement before December 16, 2015; or (3) the employer had provided written communications to employees on or before December 16, 2015, indicating that the flex contribution arrangement would be offered to employees at some time in the future.

In addition, solely for coverage for plan years beginning before January 1, 2017, an employer may reduce the amount of the employee’s required contribution by the amount of a non-health flex contribution (other than a flex contribution made under a non-relief-eligible flex contribution arrangement) for purposes of information reporting under Code Sec. 6056 (line 15 of Form 1095-C).

Because treating a non-health flex contribution as reducing an employee’s required contribution may affect the employee’s eligibility for the premium tax credit, the IRS encourages employers not to reduce the amount of the employee’s required contribution by the amount of a non-health flex contribution for purposes of information reporting under Code Sec. 6056.

If an employee’s required contribution is reported in this manner (that is, without reduction for the amount of a non-health flex contribution) and the employer is contacted by the IRS concerning a potential assessable payment under Code Sec. 4980H(b) relating to the employee’s receipt of a premium tax credit, the employer will have an opportunity to respond and show that it is entitled to the relief described in IRS Notice 2015-87 (Q&A-8) to the extent that the employee would not have been eligible for the premium tax credit if:

  • the required employee contribution had been reduced by the amount of the non-health flex contribution or
  • to the extent that the employer would have qualified for an affordability safe harbor, the required employee contribution had been reduced by the amount of the non-health flex contribution.

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