Blogs ACA

Under the ACA, people who do not have access to “affordable” health insurance through their employer may qualify for a premium tax credit to purchase coverage through the ACA’s health insurance marketplaces (CoveredCA in California). Current regulations define employer-based health insurance as “affordable” based solely on the lowest cost plan’s employee contribution, not on the full contribution to insure their family members. This has the consequence of deeming family members ineligible for premium tax credits, even though the cost of employer-sponsored coverage for family members could be well above the affordability threshold. This problem has been dubbed the “family glitch.”
 

Final Regulations Released

The Treasury Department and the IRS released proposed regulations in April to eliminate the family glitch. Those regulations have just been finalized. The new regulations allow family members of workers who are offered affordable self-only coverage, but unaffordable family coverage would no longer be disqualified from receiving premium tax credits to purchase ACA coverage.
 

Are we surprised by this?

No. This change is not a surprise. The regulations flow from an executive order on the ACA and Medicaid issued by President Biden in January 2021, which hinted at the possibility of fixing the family glitch. Critics have long argued that the family glitch interpretation is inconsistent with the text, structure, and goals of the ACA and unfairly penalizes family members of lower-income workers. In addition, it has long been the intention of the current administration to beef up the ACA where possible, with the goal of providing greater access to healthcare and to lower individuals’ costs were possible.
 

Fixing the Family Glitch

The proposed rule would reinterpret how affordability of employer health care coverage is determined for purposes of premium tax credits with respect to family members who are offered employer-sponsored coverage.

The Old Way: Employer coverage is defined as unaffordable for a single employee if the employee contribution for self-only coverage is more than the affordability threshold (9.61% in 2022 of household income, 9.12% in 2023). An oddity emerges in that calculation with respect to family coverage because affordability for family members is also determined with respect to the contribution for self-only coverage (not the contribution for family coverage).

The New Way: The affordability test for single employees will remain unchanged. Employees would still be barred from accessing marketplace subsidies if their employer offered affordable employee-only coverage. However, the calculation will change for employees with families. Under the new rules, affordability would be calculated separately for family coverage and would be deemed unaffordable for family members if the required family contribution is greater than the affordability threshold (9.61% of household income in 2022, 9.12% in 2023). When this affordability threshold is exceeded, family members would no longer be barred from accessing premium tax credits and thus could seek subsidized coverage through the Exchange.
 

Key Employer Takeaways

There is a lot in here . . . What do I really need to know as an employer? The good news is that there is little that is newly actionable for employers in these proposed regulations. It impacts access to premium tax credits for dependents who may have been previously disqualified. The following are the key takeaways for employers:

No Impact to Employer Shared Responsibility Penalties: The proposed rule will not affect Shared Responsibility liability under the employer mandate. Why? The employer mandate requires certain ALEs to offer coverage to employees and dependents. However, penalties for violating the mandate are triggered only when an employee receives premium tax credits through the marketplace. Therefore, extending marketplace tax credits to family members of employees (who are not offered affordable employer-sponsored family coverage) would not impact the eligibility of employees and thus would not trigger a shared responsibility payment.

No Impact to 1095 Reporting: These regulations have no impact on 1095 reporting. It is important to remember that affordability and minimum value for premium tax credit eligibility is different than for purposes of potential employer shared responsibility penalties. No doubt the new proposed rule will create some confusion given the similar terminology. However, the regulations do not change the affordability calculation or minimum value determination as it relates to annual ACA reporting or assessment of penalties.

Conforming Cafeteria Plan Change: A change was also made to allow an employee to make a mid-year election change to their health insurance coverage (not FSA coverage) when a dependent becomes newly eligible for a premium subsidy under the Exchange.

Marketplace Notice: Employers can expect the standard Marketplace Notice to be revised to reflect these changes and should plan on updating the version that is distributed to employees once a new version has been released.
 

Two Nitty Gritty Clarifications

The regulations also addressed two additional items as follows:
 

1. Minimum Value Rule: The minimum value rule is extended to dependent coverage. This means that employers must provide an offer of minimum value coverage to dependent children as well as to employees (to avoid Shared Responsibility penalties). The definition of minimum value coverage retains the requirement that plans provide 60% of the total allowed cost of benefits and newly adds the clarification that plan benefits must include substantial coverage of inpatient hospital and physician services. To the extent that minimum value coverage is not being offered to dependent children, employers will need to address this issue.
    
2. Marketplace Responsibilities: The marketplace would be required to assess:
   • Whether an employee has an offer of affordable employee-only coverage,
   • Whether family members have an offer of affordable family coverage, and
   • Whether any of those family members have an offer of affordable coverage from more than one employer (either as an employee or a dependent).

 

What is the effective date?

The new rule becomes effective for tax years beginning in 2023. This means that dependents who are offered unaffordable employer-sponsored family coverage would be eligible for premium tax credits beginning in 2023 (with enrollment to begin in November 2022).

In litigation involving the Affordable Care Act's (ACA's) preventive health services requirements, a Texas district court held that the coverage mandate for preexposure prophylaxis (PrEP) to prevent HIV infections violated an employer's rights under the Religious Freedom Restoration Act of 1993.

On September 7, 2022, U.S. District Judge Reed O’Connor ruled that the ACA’s requirement for employers and insurance companies to provide free coverage of HIV prevention drugs was unconstitutional. The judge’s rationale for his decision rested on the fact that he deemed it a violation of a Christian business owner’s freedom of religion.

For context, according to the U.S. Centers for Disease Control and Prevention, medications can reduce a person’s risk of getting HIV from sexual activity or intravenous drug use and is a highly effective preventive treatment for HIV. PrEP drugs reduce the risk of getting HIV from sex by 99% and from injectable drug use by 74%. The cost for a PrEP prescription can run as high as $22,000 annually.

The district court also found that the appointment process for the entities that determine which preventive services must be covered under the ACA is unconstitutional.
 

Background of Preventive Health Services Under the ACA

The ACA requires group health plans and health insurers to cover preventive care and screenings without cost-sharing. Plans and insurers must provide first-dollar coverage for the following four categories of preventive health services:
 

• Evidence-Based Services: Evidence-based items or services with a rating of "A" or "B" under current recommendations from the U.S. Preventive Services Task Force (USPSTF), including PrEP drugs to prevent HIV infections.
• Immunizations: Routine immunizations are recommended by the Advisory Committee on Immunization Practices (ACIP) of the Centers for Disease Control and Prevention (CDC), including the human papillomavirus (HPV) and the COVID-19 vaccine.
• Preventive Care and Screenings through Age 21: Preventive care and screenings for infants and children through age 21 under guidelines supported by the Health Resources and Services Administration (HRSA), including screenings and counseling related to tobacco use, obesity, alcohol abuse, and sexually transmitted infections.
• Preventive Care and Screenings for Women: Preventive care and screenings for women under HRSA guidelines, including contraceptives.

 

Details of the Case

Braidwood Management v. Becerra involved a small business owner who was joined by six individuals and one other business. The plaintiff objected on religious grounds to obtaining or providing health insurance coverage that included HPV vaccines, STI and drug-related screenings and counseling, PrEP, and contraceptives.

The plaintiff claimed that he did not want to “facilitate and encourage homosexual behavior, intravenous drug use, and sexual activity outside of marriage between one man and one woman” and that he felt he would be complicit in behaviors he believed to be immoral if he provided insurance coverage for PrEP medications to his employees under his self-insured plan. The business owner further claimed that this was due to his Christian beliefs and how he interpreted the Bible.

Government lawyers argued that it was wrong to assume that PrEP drugs “facilitated or encouraged” these behaviors. However, the Court found the argument to be irrelevant as the “correctness” of beliefs does not matter. Only the “sincerity” of those held beliefs matters. Ultimately, the Court ruled that this mandate imposed a substantial burden on the religious freedom of the small business owner that was not permitted under the Religious Freedom Restoration Act (RFRA). The RFRA requires that the government use the least restrictive means of promoting a compelling governmental interest when it burdens religious freedom. In this case, the Court determined that requiring coverage for PrEP was not the least restrictive means to promoting a compelling governmental interest.

Importantly, the Court also ruled that the appointment process for the USPSTF, ACIP, and HRSA (entities that determine which items and services must be covered under the ACA's preventive health services rules) is unconstitutional. In short, according to the rules, the appointees needed to be nominated by the President and confirmed by the Senate, and, without such a formal appointment process, they would not be permitted to make these authoritative binding decisions. The court found that ACIP and HRSA appointments were valid, however, the USPSTF appointment process was not, leaving the question of the legality of the decisions made by that entity.
 

The Potential Impact

This ruling is significant in that it shows the increasing tension between the public health of employees and society at large on the one hand and the religious rights of private employers on the other.

It is likely that this ruling will be challenged in a higher court. Notably, Judge O’Connor had previously faced off against the ACA when he ruled that the ACA was unconstitutional in 2018 based on the zeroed-out individual mandate penalty. That ruling was later overturned by the U.S. Supreme Court. Those disagreeing with the ruling would point out that Judge O’Connor’s reading of what is constitutional vs. not is likely seen through a biased filter.

Public health officials have expressed concerns that if this ruling stands, it could weaken the ACA mandate to provide no-cost preventive care such as vaccines or cancer screenings like colonoscopies or mammograms. Some have postulated that coverage for contraception and Plan B could stand next in line to be challenged under the religious freedom argument.

Opponents would argue that the religious freedom of an employer to deny lifesaving coverage to employees who have different beliefs is discriminatory. In addition, the Court failed to comment on the lack of factual support for the business owner’s statement that access to such medication could encourage behaviors like intravenous drug use and premarital sex.
 

A Crystal Ball

It is reasonable to wonder what we might see in response. Given the ongoing nature of the case, it is unlikely that insurers and group health plans will rush to drop coverage without cost sharing for 2023. However, should the ruling be finalized, it is likely that insurers and some group health plans would react by imposing copays and deductibles to many of the preventive services that are now required to be covered on a zero-cost basis. 

We also might see more liberal states choosing to be proactive and try to recreate preventive mandates for fully insured plans (similar to how we saw states recreate the individual mandate). Recall, however, that states cannot govern self-funded plans, which would only create a partial solution. That solution might also be problematic, since, if certain preventive care measures are restricted on a federal level but mandated on a state level, plans would face a conflict relative to providing first-dollar coverage under an HDHP plan and then running afoul of the restrictions for HSA contributions.

This is a complex issue, especially since the current mix in the high court would likely lean toward favoring the religious freedom argument. It is thus unlikely that challengers will rush to appeal the issue. Unfortunately, the crystal ball in this case is solidly cloudy. We think it is too early to say what we might expect in the future as this issue unfolds.

The IRS issued Revenue Procedure 2022-34 which announces the 2023 indexing adjustment percentage for determining the affordability threshold for employer-sponsored health insurance coverage under the ACA.

The percentage is adjusted annually for inflation, and the 2023 threshold decreased substantially from 9.61% to 9.12%. The new percentage applies for plan years beginning in 2023.
 

Impact on Employers

Recall that under the ACA provisions, employer-sponsored coverage will only be considered affordable if an employee’s required contribution of the lowest-cost self-only coverage does not exceed 9.12% of the employee’s household income for the tax year. The reduction in percentage will require higher employer contributions in order to keep plans affordable at the lower 9.12% rate. Neglecting to offer affordable, minimum value coverage to full-time employees could result in penalties under the Pay or Play provisions of the ACA.
 

How Does the Math Work?

There are two different safe harbor calculation methods that employers can use:

Federal Poverty Line Affordability Safe Harbor: Under the FPL method, the employee contribution for the lowest cost plan (for full-time employees) cannot exceed $103.28 per month. This reflects 9.12% of the Federal Poverty Level which is $13,590 in 2023 for one person. Using the FPL Affordability Safe Harbor automatically deems coverage affordable for all full-time employees and permits the employer to use the qualifying offer method for streamlined ACA reporting.

Rate of Pay Affordability Safe Harbor: Under the Rate of Pay method, employers must do the math to confirm that the employee contribution for lowest cost plan (for full-time employees) cannot exceed 9.12% of the lowest hourly rate of pay (x 30 hours per week) and the lowest monthly salary. States with higher minimum wage requirements will benefit from using the Rate of Pay method. For example, the California minimum wage of $15.00 creates a maximum contribution of $177.84 per month ($15/hour x 30 hours per week x 52 weeks x 9.12% ¸ 12).
 

Contribution Strategy

While the FPL method yields a lower required employee contribution, the calculation process is much simpler. The Rate of Pay method will often allow for a higher employee contribution (for the lowest cost plan). However, the calculations must be customized to actual employee rates of pay within each organization and within each region if different plans are made available to different populations. 

2023 Contribution Strategy Considerations: Consider the ACA affordability safe harbor requirements when designing 2023 employee contribution levels to avoid potential employer mandate “B Penalty” liability. Where possible within budgetary constraints, employers should prepare to offer at least one medical plan option to full-time employees in all regions with an employee share of the premium not exceeding $103.28/month for employee-only coverage to simplify affordability compliance under the federal poverty line safe harbor.

After broader attempts to repeal and replace the ACA stalled out in the summer of 2017, Congress passed the Tax Cuts and Jobs Act in December 2017 which included a provision to reduce the individual mandate penalty to $0.  The zero-penalty became effective on January 1, 2019. 

Efforts to get the constitutionality of the ACA back in front of the Supreme Court for reconsideration have been widely expected, now that the Court has a more conservative tilt.  As anticipated, several states took action to challenge the constitutionality of the ACA individual mandate given the new zero-penalty.  A recent federal court ruling held that the Affordable Care Act is unconstitutional.

The Court today finds the Individual Mandate is no longer fairly readable as an exercise of Congress's Tax Power and continues to be unsustainable under Congress's Interstate Commerce Power. The Court therefore finds the Individual Mandate, unmoored from a tax, is unconstitutional.” 

Back up . . . How did this all start? 

In the years directly after the ACA was passed, multiple challenges to the constitutionality of the individual mandate were waged.  Challenges were brought in numerous state courts, including New Jersey, Ohio, Tennessee, and two in Virginia.  These trial court rulings made their way up to the Supreme Court in 2012, which ruled on five different aspects of the constitutionality of the ACA, including the individual mandate. 

The crux of the issue addressed by the Supreme Court was whether the individual mandate was a proper exercise of Congress' power to regulate interstate commerce under the Commerce Clause and/or to levy taxes.  Importantly, the language of the law refers to the individual mandate penalty as a fee, not a tax.  One key argument was that Congress doesn’t have the express right to levy fees . . . only taxes.  In this ruling, the Supreme Court considered the fee sufficiently “tax-like” to affirm the constitutionality of the individual mandate, under Congress’ authority to levy taxes.

What is the basis of the new challenge? 

The argument centers on the previous Supreme Court ruling which upheld the constitutionality of the individual mandate on the basis of Congress’ power to tax.  The challengers argued that because the mandate will no longer trigger a tax in 2019 (because the penalty is $0), the shared responsibility payment will produce no revenue, thus it can no longer be sustained by Congress’ taxing power.  In short, we now have a mandate with a zero tax, therefore, it would potentially no longer be defensible on the grounds of Congress’ power to tax (since there is no actual tax). 

Challengers also argued that the mandate could not be severed from the rest of the ACA, so the entire ACA should be struck down.  

As the legal challenge moved through the courts process, intervening states counter-argued that the individual mandate was still constitutional after the Tax Cuts and Jobs Act under Congress’s powers to tax and to regulate interstate commerce, and that it was severable from the remainder of the ACA.

What exactly is Severability? 

The concept of severability addresses the question of whether the individual mandate can be “severed” from the law and leave the rest of the ACA to stand or whether the individual mandate is so essential to the greater body of the ACA that removing the individual mandate would render the entire ACA null and void.  One perspective is that if the individual mandate was considered unconstitutional, only those provisions which were directly dependent on the mandate would be invalidated, leaving the remainder of the law intact.  A second perspective is that if the individual mandate is found to be unconstitutional, the entire law would be invalidated . . . because it could not be independently “severed” without nullifying the rest of the law. 

Vita’s Take

What do we expect will happen on the constitutionality of the individual mandate?  This will likely be a subject of heated and intense legal debate. 

On the other hand, the issue of severability appears to have a clearer path.  Congress has confirmed the essential nature of the individual mandate (in legislative history).  The actual text of the law states multiple times that the mandate is not only essential, but the keystone of the law.  Lastly, the Supreme Court affirmed this as part of its prior decision, indicating that the upholding the ACA in the absence of its “signature provision” would change the effect of the law as a whole.  In fact, all nine Justices acknowledged this text and Congress' manifest intent to establish the individual mandate as the ACA's 'essential' provision.  We would suggest that these facts provide relative clarity on the issue of severability of the individual mandate. 

What is the expected impact? 

As a rule, employer plans will not be impacted by the sole fact of the individual mandate penalty being reduced to zero.  However, if the individual mandate is found to be not severable, and the entire ACA is rolled back, we can expect some mayhem at the national level, specifically in the individual marketplace. 

The most significant overall impact of the law potentially being rolled back will be in the repeal of subsidies for coverage in the individual marketplace.  Millions of previously uninsured individuals secured insurance under the ACA, primarily because it became more affordable via the subsidies.  Once those subsidies go away, the ability for lower-income individuals to afford non-subsidized coverage will be challenged.  The impact of a mass exodus from the individual marketplace is of concern to many.  This would potentially impact group insurance plan premiums as costs for uninsured care will rise, and those costs are typically shifted to private-sector group plans. 

How is this going to impact employers? 

The employer marketplace is poised to experience less instability, simply because plans are inherently contractually arranged between insurance carriers and employers.  Many will be concerned about some of the “fan-favorite” provisions of the ACA being rolled back.  However, we would argue that plan elements such as no pre-existing condition exclusions, free preventive care, and mandatory dependent coverage to age 26 have already become part of the fabric of employee benefits as we know them, thus insurance carriers will not rush to strip these provisions out of their contracts.  Remember, these provisions were mandated to be included in health policies as part of the ACA . . . but it is not mandatory that they be removed if the ACA is repealed. 

Two other important changes brought about by the ACA in the small group marketplace is member-level rating and metal-level coverage definitions.  While insurance carriers would certainly be able to change these if the law is repealed, the infrastructure investments made on the part of insurance carriers to comply with the law were monumental.  It is unlikely that, at least in the short term, insurance carriers will be racing to reinvest billions of dollars to change the chassis upon which small group plans currently run.  

What about all the mandates and reporting requirements?

A repeal of the full ACA would also take with it employer Pay or Play provisions as well as all the ACA-required reporting.  This would open the door for employers to reconsider coverage decisions in the following ways:

• Pay or Play: With no penalties for not providing minimum essential coverage, will coverage for some employees be eliminated (interns, temporary employees, certain classes, etc.)?
• Eligibility Tracking: No more look back eligibility rules or tracking of measurement periods, administrative periods, and stability periods.
• 30 hour eligibility threshold: Will the 30-hour threshold for coverage be maintained (or will some employers change to sync with a more traditional 40 hour work week)?
• Out of pocket maximums: Will OOP maximums stay in the vicinity of the current statutory limits?  Or will we see them creep higher in the name of potential cost savings? 
• Essential Health Benefits: For small groups, will employers maintain plans with EHB coverage levels?  Or will some of the newer, cost-increasing provisions (such as pediatric dental and habilitative care) be eliminated?
• FSA Max: Will employers maintain the old maximum election cap?  Or will some increase it to pre-ACA levels? 

Other areas of impact for employers would be a reduction in the administrative responsibilities that came with the ACA.  Requirements such as: 

• 1094/1095 reporting obligations
• W-2 reporting

…But don’t get too excited! 

We should all expect that if the ACA does end up getting repealed, many of these employer-specific provisions will likely get re-implemented through new legislation.  The timing of any such re-implementations is obviously unknown, and we can expect it to be a very political process.  So, watch and wait will be the word of the day. 

So, what do we do now?

The constitutionality of the individual mandate in the wake of the $0 penalty is definitely working its way up the ladder to the Supreme Court.  Notably, the federal court did not issue an injunction halting enforcement of the ACA.  Additionally, the HHS has issued a news release cautioning that the decision is not a final judgement and that the HHS “will continue administering and enforcing all aspects of the ACA.”  The ACA continues to be the law of the land as we wait for this to work its way through the courts.

Who: This applies to all employers offering company-sponsored health insurance.

Action: There is no immediate employer action required.

Overview

On December 14, a U.S. District Court in Texas issued a declaratory order that the individual mandate of the Patient Protection and Affordable Care Act (ACA) is unconstitutional and declared that the rest of the ACA is unconstitutional. The individual mandate of the ACA requires most people to have a certain level of health insurance coverage or pay a penalty.

Background

Earlier this year, twenty states filed a lawsuit asking the Court to strike down the ACA entirely after Congress passed the Tax Cuts and Jobs Act in December 2017 that reduced the individual mandate penalty to $0, starting in 2019.

The plaintiffs argued that, without the penalty, the individual mandate is unconstitutional, and argument that leveraged the Supreme Court’s prior ruling that the individual mandate was found to be constitutional on the basis of Congressional authority to tax. However, since there is no longer a tax, the constitutionality of the individual mandate cannot then rest on Congress’ authority to tax. In addition, they argued that the individual mandate is not severable from the rest of the ACA so if the individual mandate is unconstitutional, then the rest of the ACA is unconstitutional.

The U.S. Department of Justice (DOJ) argued that the individual mandate is unconstitutional without the penalty. They also argued that because the guaranteed issue and community rating provisions are inseverable from the individual mandate, the guaranteed issue and community rating provisions are also unconstitutional.

Court Ruling

The Court found that the individual mandate is unconstitutional without the penalty and that the individual mandate is inseverable from the rest of the ACA. Therefore, it declared that the individual mandate and the entire ACA – including its guaranteed issue and community rating provisions – are unconstitutional.

However, it didn't grant the plaintiffs' request for a nationwide injunction to prohibit the ACA's continued implementation and enforcement. 

On December 16, the Court issued an order that requires the parties to meet and discuss the case by December 21, and to jointly submit a proposed schedule for resolving the plaintiffs' remaining claims. The parties' proposed schedule for resolving these remaining claims is due to the Court by January 4, 2019.

Ruling's Impact

At this time, the case's status does not impact employers' group health plans. We will keep you informed with any updates in regards to the final decision in this case.

Who: All Applicable Large Employers (ALEs) who offer health coverage to their employees.

Action: Distribute form 1095-C to employees by the new deadline of March 4, 2019.

Background

Under the Affordable Care Act (ACA), Applicable Large Employers (ALEs) are responsible for reporting information about offers of health coverage and enrollment in health coverage to their employees and to the IRS.

Reporting in 2019 will be based on coverage in 2018. All reporting will be for the calendar year, even for non-calendar year plans.

New Deadline

On Thursday, November 29, 2018, the IRS issued Notice 2018-94, delaying the reporting deadline in 2019 for form 1095-C to individuals. There is no delay for form 1094-C.

Who Will Perform the Calculations?

Original Deadlines		Delayed Deadlines
DUE TO THE IRS:
Form 1094-C was originally due to the IRS by February 28, if filing on paper, or April 1, if filing electronically.		Deadline to the IRS for all   forms remains the same.
DUE TO EMPLOYEES:		DUE TO EMPLOYEES:
Form 1095-C was due to employees by January 31, 2019.		Form 1095-C is now due to employees by March 4, 2019.

 

This applies to Applicable Large Employers (ALEs) subject to the ACA. 

Overview

Recently, the Internal Revenue Service (IRS) has been sending out penalty letters (Letters 226-J, 227, and 5569) to ALEs to inform them of:

• Potential penalties
• Matters regarding an Employer Shared Responsibility Payment (ESRP)
• Issues with Forms 1094-C and 1095-C

Below we outline the purpose of each of these letters, and the necessary actions to take if you receive one of them. Importantly, if you receive such a letter, please contact your team at Vita for assistance

Letter 226-J

Letter 226-J is issued to ALEs to notify them that they may be liable for an Employer Shared Responsibility Payment (ESRP). The determination of whether an ALE may be liable for an ESRP and the amount of the proposed ESRP in Letter 226-J are based on cross-referenced information from Forms 1094-C and 1095-C filed by the ALE and the individual income tax returns filed by the ALE’s employees.

To reply to the letter, you must complete Form 14764 indicating your agreement or disagreement with the letter. If you disagree with the letter, you should collect supporting documentation to present with your response.

Letters 227

Letters 227 are acknowledgement letters sent to close an ESRP inquiry or provide the next steps to the ALE regarding the proposed ESRP. There are five different 227 letters:

• Letter 227-J
• Letter 227-K
• Letter 227-L
• Letter 227-M
• Letter 227-N 

To reply to the letter, you must complete Form 14764 indicating your agreement or disagreement with the letter. If you disagree with the letter, you should collect supporting documentation to present with your response.

Letter 5699

Letter 5699 is sent by the IRS if they have not received or received an incomplete filing for Forms 1094-C and 1095-C. Your filing is not considered sent until the IRS has either accepted the filing with revisions or accepted it outright.

If you received this letter, you will have the opportunity to either:

• Note that Forms 1094-C and 1095-C have been filed
• Provide the completed Forms 1094-C and 1095-C
• Commit to filing Forms 1094-C and 1095-C within 90 days of receiving the letter
• Make a case as to why you should not be considered an ALE in the noted calendar year or to provide an explanation as to why you have not filed

This applies to all employers with self-funded health plans who file Form 720.

Overview

Under the Affordable Care Act (ACA), all medical plans are responsible for paying the Patient-Centered Outcomes Research (PCORI) fee to the IRS from October 2012 through September 30, 2019. The fee is calculated based on the number of plan participants. For insured medical plans, your insurance carrier will pay the fee on your behalf.

If your company has a self-insured medical plan, you must file Form 720 and pay the fees directly to the IRS by July 31 of the calendar year immediately following the calendar year in which the plan year ends. This requirement for self-insured medical plans does generally apply to Health Reimbursement Arrangements (HRAs) and some employer-funded Health Flexible Spending Accounts (FSAs). 

If you provide a medical HRA alongside a fully insured medical plan, you must calculate and pay the PCORI fee for the HRA. If you provide a medical HRA that is integrated with another self-insured medical plan sponsored by the same employer, the HRA is not subject to a separate fee. 

The PCORI fee assessment only applies to Health FSAs if the employer contribution is greater than $500 and more than the employee’s contribution.

How Much did the PCORI Fee Increase? 

The IRS's Notice 2017-61 stated that the applicable dollar amount used to calculate the PCORI fee payable for plan years that end on or after October 1, 2017, and before October 1, 2018, including 2017 calendar year plans, increased from $2.26 to $2.39. 

Employer Action Item

Please note the PCORI fee increase when filing Form 720. For plan year 2017, the form is due on July 31, 2018. More information on the fee, including how to calculate number of plan participants, can be found via the IRS website here.

On Monday, January 22, Congress passed and President Trump subsequently signed bill H.R. 195 to fund the government through February 8, 2018. As part of the bill, the implementation of the Cadillac Tax on high-value health insurance plans will be delayed for two years, from 2020 to 2022. The bill also implemented a one-year moratorium of the Health Insurance Tax (HIT), effective for 2019 only. It's important to note that the HIT is in effect for 2018. 

In addition, funding for the Children's Health Insurance Program (CHIP) was renewed for six years and a two-year delay (2018-2019) of the Medical Device Tax was also implemented. 

 

The Internal Revenue Service (IRS) has started the process of levying penalties on employers under the Affordable Care Act (ACA) employer shared responsibility provision. Often called the employer mandate or play or pay, the ACA provides for the IRS to assess penalties on employers that do not offer adequate health coverage to their full-time employees. Although the mandate took effect in 2015, the IRS is just now starting to send penalty notices. This article explains the IRS process and the steps you can take if you receive a penalty notice. 

Looking Back to 2015

The first round of penalty notices pertains to calendar year 2015. Employers that receive a notice will only have 30 days to respond, so it is advisable for all employers to prepare in advance by reviewing what their situation was in 2015. 

Applicable Large Employer (ALE):

For 2015, the play or pay rules applied only to employers that had an average of 50 or more full-time employees, including full-time equivalents, in 2014. Related employers in a controlled group, such as parent-subsidiary groups and entities under common ownership, were counted together to determine whether they were ALEs. Non-ALEs were exempt from the mandate. 

Employer Mandate:

Penalties were triggered only if a full-time employee received a government subsidy to buy individual health insurance through a Marketplace. In that case, penalties for 2015 were based on a two-prong test: 

• Penalty A if the ALE failed to offer minimum essential coverage to at least 70% of its full-time employees; or
• Penalty B if the ALE failed to offer affordable minimum value coverage to its full-time employees.

If triggered, Penalty A is $2,080 times the total number of full-time employees minus the first 80 employees. Penalty B is $3,120 times the number of full-time employees who actually received a Marketplace subsidy due to employer’s failure to offer that employee affordable minimum value coverage. Amounts are pro-rated by month. To calculate the monthly amount, divide $2,080 and $3,120 by 12. Also, if Penalty A applies, then Penalty B is disregarded.

ACA Reporting Forms (1094-C/1095-C):

ALEs were required to prepare and distribute Form 1095-C to persons who were full-time employees for any month in 2015 and to file copies with transmittal Form 1094-C to the IRS. The forms reported whether each full-time employee was offered health coverage and, if so, whether the coverage was affordable.

Transition Relief:

Several transition relief provisions were available for 2015.

For example:

• ALEs that had an average of 50-99 full-time-equivalent employees in 2014, and did not materially reduce their workforce or health coverage through 2015, were exempt from penalties.
• ALEs with non-calendar year health plans generally were exempt from penalties for the months preceding their 2015 plan year start date.

To take advantage of a transition relief provision, the ALE’s completed 2015 Form 1094-C must indicate the specific provision.

IRS Penalty Process 

The IRS is using information from 2015 Forms 1095-C and 1094-C, and information about employees who received a Marketplace subsidy for any month in 2015, to determine which ALEs it believes are liable for penalties. It appears that a Form 1095-C on which line 16 is blank is one of the triggers the IRS is using to identify ALEs for penalty notices. The penalty process consists of the steps below.

1. The IRS sends Letter 226J (notice and instructions) along with Form 14765 (list of employees who received a Marketplace subsidy) and Form 14764 (employer response form). ALEs are instructed to review the information and respond within 30 days.

2. The ALE responds by completing and returning Form 14764. The ALE will check a box to indicate whether it agrees with the proposed penalty or disagrees with part or all of the proposed penalty. The form also requires the ALE’s contact information for additional follow-up.

3. If the ALE responds by agreeing with the proposed penalty, the ALE will complete the payment option section of the form.

4. If the ALE responds by disagreeing in whole or part with the proposed penalty, the IRS sends Letter 227 (not yet available). The follow-up letter will instruct the ALE on how to present supporting information for its case. The ALE also will have the option of requesting a pre-assessment conference with the IRS.

5. If the ALE fails to respond to Letter 226J or Letter 227 in a timely manner, the IRS will issue Notice CP 220J as a demand for payment.

Action Steps

Employers are advised to gather information now so they are prepared to respond quickly if they receive an IRS penalty notice. Again, the first notice will be Letter 226J and the employer will only have 30 days to respond. To prepare:

1. Alert all departments and staff to keep an eye out for any material from the U.S. Treasury or IRS. If part of a controlled group, confirm that subsidiaries or affiliated companies will notify each other if they receive any material.

2. Ensure that copies of all 2015 Forms 1095-C and 1094-C are readily available. Many ALEs used third-party vendors to prepare their forms, so it may be necessary to contact the vendor.

3. Identify staff and establish an audit process for comparing the IRS notice against employee data and benefits records.

4. Upon receipt of Letter 226J, refer to legal counsel for assistance in preparing a timely response. Lastly, note that the majority of employers will not receive an IRS notice, either because the employer was too small to meet the ALE definition or because the employer’s Forms 1095-C and 1094-C did not trigger any IRS action. In any case, an employer will not be on the IRS radar unless at least one of its employees received a Marketplace subsidy.

The IRS provides information about the penalty process in question-and-answer format on its Understanding your Letter 226-J webpage. Employers and their advisors should check the webpage periodically for updated information.

Questions about the Affordable Care Act (ACA) employer shared responsibility provision and associated penalties? Contact Vita at info@vitamail.com or (650) 968-8811.