On January 27, 2014, the Internal Revenue Service (IRS) issued proposed regulations (“Proposed Regulations”, available here) clarifying the penalties imposed on nonexempt persons who fail to maintain minimum essential coverage as required by Internal Revenue Code (Code) Section 5000A. Very generally, Code Section 5000A requires nonexempt persons to either (1) maintain minimum essential coverage, or (2) make a shared responsibility payment. The Proposed Regulations:
- explain which government-sponsored programs do not qualify as “government-sponsored minimum essential coverage”;
- clarify that “minimum essential coverage” excludes health plans and programs that consist solely of “excepted benefits”;
- clarify—for purposes of the “lack of affordable coverage” exemption—the required contribution for individuals eligible to enroll in an eligible employer-sponsored plan that provides employer contributions to health reimbursement arrangements (HRAs) or wellness program incentives;
- expand the definition of hardship exemptions that may be claimed on a federal income tax return and provide additional guidance; and
- clarify the computation of the monthly “shared responsibility payment” penalty amount.
Comments with respect to the Proposed Regulations are due by April 28, 2014, and a public hearing is scheduled for May 21, 2014.
Government-Sponsored Programs Not Qualified as “Minimum Essential Coverage”: As a general rule, non-qualifying government-sponsored programs are those that consist solely of “excepted benefits,” loosely defined as benefits that are conditional or limited in scope. In addition to these excepted benefits, the Proposed Regulations propose that the following government-sponsored programs would also fail to qualify as “minimum essential coverage”:
- Coverage for the Medically Needy: Medicaid coverage for certain medically needy individuals, as outlined in 42 U.S.C. Section 1396a(a)(10)(C) and 42 C.F.R. Section 435.300, would not qualify unless such coverage in a particular state is “comprehensive,” in which case such coverage could then be recognized as minimum essential coverage under Code Section 5000A(f)(1)(E).
- Section 1115(a)(2) Demonstration Projects: Section 1115(a)(2) projects—which are experimental, pilot, or demonstration projects approved by the Department of Health and Human Services (HHS) that promote the objectives of the Medicaid program, but do not require comprehensive Medicaid coverage—would not qualify as “minimum essential coverage” unless such coverage in a particular state is “comprehensive,” in which case such coverage could then be recognized as minimum essential coverage under Code Section 5000A(f)(1)(E).
- Space Available and Line-of-Duty Care: Military Health System eligibility limited only to space available care and/or line-of-duty care would not be “minimum essential coverage.” Space available care is a limited-benefit program under 10 U.S.C. Sections 1079(a), 1086(c)(1) and (d)(1) that provides private-sector health care services for certain TRICARE-excluded individuals, subject to the availability of space and facilities, and the capabilities of the medical and dental staff. Line-of-duty care is a limited-benefit program under 10 U.S.C. Sections 1074a and 1074b that provides non-active duty individuals with episodic care for an injury, illness, or disease incurred or aggravated in the line of duty.
In 2014, a taxpayer will not be liable for the shared responsibility payment for any month during the year for family members who are enrolled in any of the aforementioned government-sponsored programs.
“Excepted Benefits”: The Proposed Regulations reaffirm and clarify that minimum essential coverage excludes any coverage (whether insurance or otherwise), that consists solely of “excepted benefits.”
Required Contribution Under “Lack of Affordable Coverage” Exemption:
- HRAs: The IRS proposes to take into account an employer’s new contributions to an HRA in determining an employee’s required contribution if: (1) the HRA is integrated with an employer-sponsored plan, and (2) the employee may use the amounts to pay premiums. These Proposed Regulations are to be read in tandem with the May 3, 2013 proposed regulations (available here) regarding Code Section 36B, which address the treatment of employer contributions to HRAs.
- Wellness Program Incentives: The IRS proposes that, under Code Section 5000A, and for purposes of determining an individual’s required contribution for coverage under an employer-sponsored plan, wellness program incentives are treated as earned only if the incentives relate to tobacco use.
Expansion of “Hardship Exemptions” Definition: The IRS proposes that an individual who enrolls in a health plan through an Exchange during the open enrollment period for coverage for 2014 may claim a hardship exemption for months in 2014 prior to the effective date of the individual’s coverage without obtaining a hardship exemption certification from an Exchange. However, the IRS also recognizes that additional situations may arise where an individual should be allowed to claim a hardship exemption without obtaining a hardship exemption certification. Thus, in an effort to facilitate further guidance on the issue, the Proposed Regulations also provide that a taxpayer may claim a hardship exemption on a return if: (1) the Secretary of HHS issues published guidance of general applicability describing the hardship and indicating that the hardship can be claimed on a Federal income tax return pursuant to guidance published by the Secretary of the Treasury; and (2) the Secretary of the Treasury issues published guidance of general applicability allowing an individual to claim such hardship exemption on a Federal income tax return without obtaining a hardship exemption from an Exchange.
Computing the “Shared Responsibility Payment” Penalty Amount: The August 30, 2013 final regulations regarding Code Section 5000A (available here) provide that, for each taxable year, the shared responsibility payment is the lesser of: (1) the sum of monthly penalty amounts for each individual in the shared responsibility family, or (2) the sum of the monthly national average bronze plan premiums for the shared responsibility family. The monthly penalty amount should be computed for the taxpayer, and not for each individual in the shared responsibility family. To avoid any confusion about this computation, the Proposed Regulations remove from Treasury Regulations Section 1.5000A-4(a) the clause “for each individual in the shared responsibility family,” and add a reference to the taxpayer with respect to whom the shared responsibility payment is imposed under Treasury Regulations Section 1.5000A-1(c).