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IRS Proposed Regs Require Healthcare Plans to Provide Hospital Coverage.

(Parker Tax Publishing September 19, 2015)

The IRS has issued proposed regulations reflecting its determination that plans lacking coverage for in-patient hospitalization services or for physician services do not meet the Affordable Care Act's minimum value (MV) requirement; large employers adopting such a plan may be exposed to penalties under the healthcare law's employer mandate regardless of whether the plan passes muster with IRS's online MV Calculator. REG-143800-14.


Under Code Sec. 36B(c)(2)(C)(ii), an eligible employer-sponsored plan provides minimum value only if the plan's share of the total allowed costs of benefits provided under the plan is at least 60 percent. Code Sec. 4980H(b) imposes a penalty on applicable large employers (generally those with 50 or more employees) that offer minimum essential coverage under an eligible employer-sponsored plan that is not affordable or does not provide minimum value for one or more full-time employees who receive a premium tax credit subsidy.

In November 2014, the IRS, in conjunction with the Department of Health and Human Services (HHS), concluded that certain group health plans that do not provide coverage for in-patient hospitalization services or for physician services (Non-Hospital/Non-Physician Services Plans) do not meet the minimum value requirements under Code Sec. 36B. According to the IRS, such plans had been designed by their promoters to garner favorable determinations from the online minimum value (MV) calculator even though the plans do not provide minimum value as envisioned under Code Sec. 36B. Accordingly, the IRS stated in Notice 2014-69 that such Non-Hospital/Non-Physician Services Plans are not considered to meet the Code Sec. 36B minimum value requirement, even if the MV calculator indicates otherwise. The notice also advised taxpayers of the IRS's intent to propose regulations reflecting its determination in Notice 2014-69.

Employer Sponsored Plans Must Provide Hospital and Physician Services

The IRS has issued proposed regulations as REG-143800-14 (9/1/15) that provide that an eligible employer-sponsored plan provides minimum value only if the plan's share of the total allowed costs of benefits provided to an employee is at least 60 percent and the plan provides substantial coverage of inpatient hospital and physician services.

OBSERVATION: The penalties for employers offering coverage that fails the MV requirement can be as high as $3,000 per year ($250 per month) for each employee who is offered coverage under an employer-sponsored healthcare plan and instead purchases health insurance on an exchange and qualifies for a Code Sec. 36B premium assistance tax credit. Generally, an employee who is eligible to enroll in an employer-sponsored plan that meets the MV requirement will not qualify for a premium assistance tax credit.

The IRS notes that treating plans that fail to provide substantial coverage of inpatient hospital or physician services as providing minimum value would adversely affect employees who may find this coverage insufficient by denying them access to a premium tax credit, while at the same time avoiding the employer shared responsibility payment under section 4980H.

The proposed regs. apply for plan years beginning after November 3, 2014. However, for purposes of the large employer penalty in Code Sec. 4980H(b), the proposed regs. do not apply before the end of the plan year beginning no later than March 1, 2015 to a plan that fails to provide substantial coverage for in-patient hospitalization services or for physician services (or both), provided that the employer had entered into a binding written commitment to adopt the noncompliant plan terms, or had begun enrolling employees in the plan with noncompliant plan terms, before November 4, 2014. This transition relief does not apply to an applicable large employer that would have been liable for a payment under Code Sec. 4980H without regard to the proposed regulations.

For a discussion of the large employer healthcare mandate and related penalties, see Parker Tax ¶191,100. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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