Health Reform WK-EDGE New IRS regulations define the lines of the ACA’s premium tax credits
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Wednesday, January 6, 2016

New IRS regulations define the lines of the ACA’s premium tax credits

By Bryant Storm, J.D.

Final regulations on the health insurance premium tax credit under the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) were issued by the IRS. The regulations amend the income tax regulations to clarify or make changes to the relationship between premium tax credits and (1) the definition of modified adjusted gross income (MAGI); (2) tobacco-related wellness program incentives; (3) employer contributions to health reimbursement arrangements (HRAs); (4) employer contributions to cafeteria plans; (5) post-employment coverage; (6) newborns and others enrolled in plans midmonth; and (7) partial months of coverage (Final rule, 80 FR 78971, December 18, 2015).

Modified adjusted gross income. Internal Revenue Code (Code) Sec. 36B, which was added by the ACA, defines a taxpayer’s household income to include the MAGI of the taxpayer and the taxpayer’s family members who file an income tax return. Under the May 23, 2012 Final regulations (77 FR 30377) interpreting Sec. 36B, whether a family member must file a tax return—for the purposes of calculating household income—is determined “without regard to Section 1(g)(7).” That section—Sec.1(g)(7)—provides that a parent may elect to include a child’s gross income in the parent’s gross income under certain circumstances. The new Final regulations remove the “without regard to section 1(g)(7)” language from the 2012 regulations. Now, when a parent makes an election under Sec. 1(g)(7), household income includes the child’s gross income included on the parent’s return only. Thus, the MAGI of a parent who makes a Sec. 1(g)(7) election includes the child’s MAGI.

Wellness program incentives. The regulations change the affordability determinations for employer-sponsored plans. Under the Final rule, the affordability and minimum value of eligible employer-sponsored coverage is determined by assuming that an employee fails the requirements of an employee wellness program, except with respect to certain requirements related to the use of tobacco. In other words, affordability and minimum value determinations for a plan that charges a higher premium to tobacco users is based upon the premium and cost sharing charged to non-users.

Employer contributions to HRAs. The Final rule clarifies the amounts counted towards an employee’s required contribution for the purposes of determining affordability. Specifically, contributions made available to an employee under an HRA that the employee can use to pay premiums are counted toward the employee’s required contribution. If an HRA contribution can only be used to reduce cost sharing for medical expenses covered by the primary plan, the employer contribution counts toward a plan’s minimum value percentage.

Flex contributions. The Final rule adopts new regulations related to how employer contributions under a Code Sec. 125 cafeteria plan (flex contributions)—which employees may not receive as a taxable benefit—are treated for purposes of determining affordability under Sec. 36B. The regulations provide that an employee’s required contribution is reduced by an employer’s contributions under a Sec. 125 cafeteria plan when 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 only to pay for medical care as it is defined in Code Sec. 213.

Continuation coverage. Under Code Sec.1.36B-2(c)(3)(iv), an individual who enrolls in continuation coverage only has minimum essential coverage for months that the individual is enrolled in the continuation coverage. The Final regulations clarify that the continuation rule only applies to former employees and extend the rule to retiree coverage.

Midmonth enrollees. Issuers are obligated, under 45 C.F.R. Sec. 155.420(d)(2)(i), to provide coverage to newborn children enrolled in a qualified health plan effective at birth. Under the new regulations, for purposes of premium tax credit calculation, a child enrolled in a qualified health plan in the month of the child’s birth, adoption, or placement in foster care is treated as though enrolled as of the first day of the month. The Final rule clarifies that the treatment only applies to the premium assistance determinations and does not require issuers to provide coverage for newborns as of the first day of the month. The regulations also use the term “individual” instead of “child” in order to coordinate with the HHS regulations for midmonth enrollments.

Partial months of coverage. Although the IRS proposed in a May 3, 2013, Proposed rule (78 FR 25909) to prorate the amount of premium assistance by the number of days of coverage provided when a qualified health plan is terminated before the last day of a month, the Final regulations abandoned that proposal due to the complexity and difficulty of administration. Instead, the Final regulations state that the premium assistance amount for the month in which coverage is terminated is the lesser of: (1) the enrollment premiums, minus the amount refunded; and (2) the difference between the benchmark plan premium and the contribution for the full month. The computation rule also applies to a month an individual is enrolled in coverage that becomes effective on the date of the individual’s birth, adoption, placement in foster care, or the effective date of a court order.

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