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A Quick Look: Final IRS Regs Minimum Essential Coverage Requirement for Individual Mandate. (Parker Tax Publishing December 16, 2014)

The IRS released final regulations clarifying the requirement to maintain minimum essential coverage under the individual healthcare mandate and the rules governing certain types of exemptions from the mandate. T.D. 9705.


Under the Affordable Care Act (ACA), nonexempt U.S. citizens and legal residents must maintain minimum essential healthcare coverage or pay a penalty in the form of a "shared-responsibility payment" imposed by Code Sec. 5000A.

Minimum essential health coverage includes eligible employer-sponsored health insurance, health coverage under government sponsored programs such as Medicare and Medicaid, plans offered through a state health insurance exchange, grandfathered health plans, and certain other coverage recognized by the Secretary of the Treasury and the Secretary of Health and Human Services.

OBSERVATION: On November 7, 2014, the Department of Health and Human Services (HHS) provided guidance on the considerations that it intends to apply in recognizing minimum essential coverage. HHS Centers for Medicare & Medicaid Services, Minimum Essential Coverage (SHO #14-002). Many of the modifications and clarifications made in the final regulations reference this publication.

In January 2014, proposed regulations addressing various issues relating to the requirement to maintain minimum essential coverage were published in the Federal Register as REG-141036-13. After consideration of comments, minor changes and clarifications were made and the IRS released the final regulations in T.D. 9705.

The regulations are effective as of November 26, 2014.

Coverage for Medically Needy

The final regulations retain the rule that Medicaid coverage offered to individuals with high medical expenses who would be eligible for Medicaid but for their income level (medically needy individuals) is not government-sponsored minimum essential coverage under section 5000A(f)(1)(A). However, the Department of Health and Human Services (HHS) may in appropriate circumstances designate certain coverage for medically needy individuals as minimum essential coverage pursuant to section 5000A(f)(1)(E).

Employer Contributions to a Cafeteria Plan

The final regulations address comments about how employer contributions under a Code Sec. 125 cafeteria plan to the extent employees may not opt to receive the employer contribution as a taxable benefit should be taken into account for purposes of determining the affordability of coverage. The final regulations provide that, for purposes of determining the affordability of coverage, the required contribution is reduced by any contributions made by an employer under a Code Sec. 125 cafeteria plan that (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 within the meaning of section 213.

Additionally, the final regulations provide that health flex contributions made available for the current plan year are taken into account for purposes of determining an individual's required contribution. As a result, health flex contributions reduce an employee's or related individual's required contribution for employer-sponsored coverage.

Health Reimbursement Arrangements

The final regulations clarify that amounts newly made available under a health reimbursement arrangement (HRA) count toward an employee's required contribution if the HRA would have been integrated with an eligible employer-sponsored plan if the employee had enrolled in the primary plan. Additionally, the final regulations provide that, for purposes of determining an individual's required contribution, an HRA is taken into account only if the HRA and the primary eligible employer-sponsored coverage are offered by the same employer.

The final regulations also clarify that, in general, HRA contributions count toward affordability and not minimum value for purposes of determining minimum essential coverage, if an employee may use the HRA contributions to pay premiums for the primary plan only, or to pay cost-sharing or benefits not covered by the primary plan in addition to premiums. Accordingly, HRA contributions that can be used only to pay for cost-sharing do not count toward affordability.

HRA contributions that can be used for premiums and cost-sharing will only count for affordability and there will be no double counting of these contributions. Accordingly, the final regulations clarify that employer contributions to an HRA count towards an employee's required contribution only to the extent the amount of the annual contribution is required under the terms of the plan or is otherwise determinable within a reasonable time before the employee must decide whether to enroll.

Wellness Program Incentives

The final regulations retain the rule that, in determining whether coverage under an eligible employer-sponsored plan is affordable for purposes of the affordability exemption in Code Sec. 5000A(e)(1), nondiscriminatory wellness program incentives are treated as earned only if the incentives relate to tobacco use. Additionally, wellness incentives unrelated to tobacco use are treated as unearned.

The final regulations clarify that a wellness incentive that includes any component unrelated to tobacco use is treated as unearned. If, however, there is an incentive for completing a program unrelated to tobacco use and a separate incentive for completing a program related to tobacco use, then the incentive related to tobacco use may be treated as earned.

Hardship Exemptions

The final regulations provide that, under certain circumstances, a taxpayer may claim a hardship exemption on a Federal income tax return without first obtaining a hardship exemption certification from a Marketplace. To consolidate the list of such circumstances described in the proposed regulations with any additional circumstances that have been or will be identified, the final regulations removed the references to specific hardship circumstances and instead provides that a taxpayer may claim a hardship exemption on a Federal income tax return without obtaining an exemption certification for any month that includes a day on which the taxpayer satisfies the requirements of a hardship for which HHS and the IRS have issued published guidance.

Notice 2014-76, released concurrently with the regulations, provides a comprehensive list of all hardship exemptions that may be claimed on a Federal income tax return without obtaining a hardship exemption certification.

For a discussion of Penalty for Failure to Maintain Minimum Essential Health Coverage, see Parker Tax ¶190,100. (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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