WHAT PROPOSED EXCHANGE AND PREMIUM TAX CREDIT RULES MEAN FOR EMPLOYER-SPONSORED PLANS

September 2011

INSIGHTS
The Department of Health and Human Services (HHS) has been issuing a series of proposed regulations regarding the establishment of the insurance Exchanges required under the Affordable Care Act (ACA). HHS recently published proposed guidance on how individuals and small employers may purchase health insurance on the Exchanges beginning in 2014. At the same time the Treasury Department issued separate rules describing how to determine federal subsidies for lower income individuals who access coverage from the Exchange. The Treasury rules also clarify how large employers (who offer coverage) can avoid penalties when employees decline employer-sponsored coverage to purchase federally subsidized insurance from the Exchange. Both HHS and Treasury are seeking public comment on various issues by October 31, 2011. More information about the proposed rules can be found on the CCIIO Website.

IMPLICATIONS
Much work still needs to be done before the state insurance Exchanges open for business in 2014. The proposed guidance offers useful insight into how the regulators envision the Exchanges may operate and how small employers may select and be billed for Exchange-based coverage. The rules recognize the need to streamline and coordinate the flow of information among consumers, employers, and government agencies; however these details will be addressed in future regulations.

The Treasury proposed regulations describe how individuals may qualify for the federal subsidies (such as a premium tax credit) beginning in 2014 and provide numerous examples of how the credit may be calculated. The premium tax credit reduces the cost for lower income individuals who purchase coverage on the Exchange.

Under the ACA, large employers (50 or more full-time equivalent employees) who offer coverage may face penalties when a full-time employee elects to purchase coverage from the Exchange and qualifies for a federal subsidy. However, penalties will not be imposed when the employer-sponsored coverage is considered to be “affordable” and of “minimum value”.

The proposed rules along with anticipated future guidance state that an employer-sponsored plan will be considered “affordable” when an employee’s contribution for self-only coverage for the lowest cost option made available does not exceed 9.5% of household income. Furthermore, a proposed safe harbor would allow an employer to substitute current W-2 wages paid to the employee in lieu of the household income benchmark to determine plan affordability. This proposed safe harbor should come as welcome relief to employers who will have the ability to design a salary-based contribution strategy to avoid penalty assessments (assuming the plan design is also of “minimum value”).

We expect future guidance will address the determination of “minimum value”, described in the law as a plan having an actuarial value of at least 60%.

Exchange Rules
Each state is required to establish an insurance Exchange for individuals (American Health Benefit Exchange) and an Exchange for employers (Small Business Health Operations Program [SHOP]). States must submit an Exchange Plan to HHS by January 1, 2013 and begin enrolling individuals and small businesses starting October 1, 2013 (coverage effective January 1, 2014). States have considerable flexibility with regard to:

The design and operation of their Exchanges,
The eligibility criteria for carriers to participate in the Exchanges, and
Creating regional Exchanges with other states.

In general, any non-incarcerated individual who is a U.S. citizen, national or a lawfully present non-citizen, who intends to reside in the Exchange service area for the duration of the enrollment period, is eligible to purchase coverage from the Exchange. HHS will be responsible to collect data from the Social Security Administration, Department of Homeland Security and the IRS for this purpose.

The SHOP will initially be open to small employers (up to 100 employees), although each state may limit eligible employers to those with up to 50 employees until 2016. States can open the Exchanges to large employers beginning in 2017.

States may establish rules for how employers select SHOP coverage for their employees. A state may apply a limited approach requiring employers to select a single Qualified Health Plan (QHP) for all employees or alternatively, may opt to allow employees complete access to all available QHPs (Bronze, Silver, Gold, and Platinum). An employer would not be responsible to pay multiple carriers each month, instead it is anticipated that an employer will receive a single bill from the SHOP who would then remit payment to the various QHPs selected by their employees.

Other features of the proposed Exchange rules that impact employers and their employees include:

Employers would be able to offer coverage through the SHOP based on either (a) the employer’s principle address or (b) the employee’s primary worksite (which could potentially involve multiple state Exchanges).
Employers will continue to be responsible to provide all required state and federal notices as well as information about the Exchanges to employees.
A small employer who initially qualifies for SHOP coverage may continue to participate in the SHOP if the employee population later expands beyond the 100 (or 50) eligibility benchmark.

Treasury Rules
The Exchanges will determine and certify the federal subsidies to which an individual may be entitled.

A premium tax credit reduces a taxpayer’s required premium for coverage.
A cost-sharing subsidy lowers out-of-pocket costs that an individual would be required to pay.

A taxpayer’s “advance” premium tax credit and cost-sharing subsidy will be determined by the Exchange at the time of enrollment based on expected income and residency requirements for the upcoming tax year. The Exchange will pay the subsidy amounts directly to the QHP. To be eligible for the advance premium tax credit the taxpayer must file a tax return and:

Demonstrate that expected household income for the upcoming tax year is between 100% and 400% of the Federal Poverty Level (FPL),
Not be claimed as a tax dependent by another taxpayer,
File a joint tax return if married, and
Certify whether employer-sponsored coverage is made available. HHS is soliciting comment on how to capture and verify employer plan and census data.

Taxpayers will be required to reconcile the difference between the amount of advance premium tax payments received (based on the estimate of household income) to the actual tax-year credit (based on household income reported on their tax return). Any difference between the estimated advance payments received and the actual allowance determined at the end of the year would result in either a tax credit (the annual estimate was lower than the actual determination) or tax liability (the annual estimate was higher than the actual determination) for that calendar year.

Large employers, those with 50 or more full-time equivalent employees, would be required to offer coverage to full-time employees (or be subject to an annual “assessable penalty” of $2,000 per full-time employee less 30 employees). Large employers who offer coverage to full-time employees would also be subject to an annual “assessable penalty” (the lesser of the amount described above or $3,000 for each subsidy-eligible full-time employee) if:

A full-time employee purchases coverage from the Exchange,
Is certified for a premium tax credit based on the criteria noted above, and
The employer plan does not provide “minimum value” (plan pays at least 60% of the costs) or is considered to be “unaffordable” (the employee’s share of the cost is greater than 9.5% of household income).

The proposed rules suggest that future guidance will provide a safe harbor affordability determination for employers. An employer would determine “affordability” using the employee’s W-2 wages as the benchmark instead of household income. According to the proposed rules, an employer would not be assessed a penalty if an employee’s share of the self-only cost of coverage for the lowest cost option offered by the employer does not exceed 9.5% of the employee’s current W-2 wages paid by that employer. This provision would relieve employers from the penalty uncertainty associated with the lack of knowledge concerning household income and allows employers the ability to develop contribution strategies to avoid these penalties, regardless of whether an employee is actually certified by the Exchange to receive an advance premium tax credit.

A few other points of interest:

HHS will issue “minimum value” proposed regulations later in the year to help determine what 60% actuarial value may mean and how employers may satisfy this requirement.
At this time, large group plans are not required to offer “essential health benefits” which are the ten benefit categories stated in the law found on the HHS Website. We expect HHS to address this along with the “minimum value” proposed regulations.

There are still many unanswered questions, including how the required employer-sponsored plan data and census information will be reported and transmitted to monitor and calculate applicable assessable penalties. We will keep you apprised of developments as they become available.

ADDITIONAL INFORMATION
For specific questions concerning information contained in this INSIGHTS & IMPLICATIONS, please contact your Chernoff Diamond consultant.

Information contained in this INSIGHTS & IMPLICATIONS is not intended to render tax or legal advice. Employers should consult with qualified legal and/or tax counsel for guidance with respect to matters of law, tax and related regulation.

Chernoff Diamond provides comprehensive consulting and administrative services with respect to all forms of employee benefits, risk management, qualified and non-qualified retirement plans, private client services, and compensation and human resources.

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