Form 1095-A is a tax form that will be sent to consumers who have been enrolled in health insurance through the Marketplace in the past year. Just like employees receive a W-2 from their employer, consumer who had a plans on the Marketplace will also receive form 1095-A from the Marketplace, which they will need for taxes. Similar to how households receive multiple W-2s if individuals have multiple jobs, some households will get multiple Form 1095-As if they were covered under different plans or changed plans during the year. The 1095-A forms will be mailed direct to consumer’s last known home address provided to the Marketplace and will be postmarked by February 2, 2015.
Form 1095-A provides information to consumers that is needed to complete Form 8962, Premium Tax Credit (PTC). The Marketplace has also reporting this information to the IRS. Consumers will file Form 8962 with their tax returns if they want to claim the premium tax credit or if they received premium assistance through advance credit payments made to their insurance provider.
The Department of Labor has just published a series of FAQs regarding premium reimbursement arrangements. Specifically, the FAQs address the following arrangements:
Situation #1: An arrangement in which an employer offers an employee cash to reimburse the purchase of an individual market policy.
When an employer provides cash reimbursement to the employee to purchase an individual medical policy, the DOL takes the position that the employer’s payment arrangement is part of a plan, fund, or other arrangement established or maintained for the purpose of providing medical care to employees, regardless of whether the employer treats the money as pre or post tax to the employee. Therefore, the arrangement is considered a group health plan that is subject to the market reform provisions of the Affordable Care Act applicable to group health plans and because it does not comply (and cannot comply) with such provisions, it may be subject to penalties.
Situation #2: An arrangement in which an employer offers employees with high cost claims a choice between enrollment in its group health plan or cash.
The DOL takes the position that offering a choice between enrolling in the group health plan or cash only to employees with a high claims risk would be discriminatory based on one or more health factors. The DOL states that such arrangements will violate such nondiscrimination provisions regardless of whether (1) the cash payment is treated by the employer as pre-tax or post-tax to the employee, (2) the employer is involved in the selection or purchase of any individual medical policy, or (3) the employee obtains any individual health insurance. The DOL also notes that such an arrangement, depending on facts and circumstances, could result in discrimination under an employer’s cafeteria plan.
Situation #3: An arrangement where an employer cancels its group policy, sets up a reimbursement plan (like an HRA) that works with health insurance brokers or agents to help employees select individual insurance policies, and allows eligible employees to access the premium tax credits for Marketplace coverage.
The DOL takes the position that such an arrangement is a considered a group health plan and, therefore, employees participating in such arrangement are ineligible for premium tax credits (or cost-sharing reductions) for Marketplace coverage. The DOL also takes the position that such arrangements are subject to the market reform provisions of the ACA and cannot be integrated with individual market policies to satisfy the market reforms. Thus, such arrangements can trigger penalties.
Key Takeaway
There has been quite a bit of banter regarding whether any of the foregoing arrangements could be an effective way for employers to avoid complying with the market reforms and other provisions of the Affordable Care Act applicable to group health plans. These FAQs are a strong indication that the DOL will be forceful in its interpretation and enforcement of these provisions.
On November 4, 2014, the IRS released Notice 2014-69 which outlines that health plans that fail to provide substantial coverage for in-patient hospitalization services or for physician services (or both) referred to as Non-Hospital/Non-Physician Services Plan) are now not considered as providing the minimum value coverage as intended by the minimum value plan requirements for the employer mandate under ACA.
For employers who have already entered into a binding written commitment to adopt, or have begun enrolling employees in, a Non-Hospital/Non-Physician Services Plan prior to November 4, 2014, they will not be penalized for not meeting the employer mandate for the 2015 plan year if that plan year begins no later than March 1, 2015. This is based on the employer’s reliance on the results of the Minimum Value Calculator (a Pre-November 4, 2014 Non-Hospital/Non-Physician Services Plan) as outlined in previous guidance.
For employers who have not entered in to a written commitment to adopt, have not begun enrolling employees in a Non-Hospital/Non-Physician Services Plan on or after November 4, 2014, or have a plan year that begins after March 1,2015, no relief will be given under the employer mandate.
Pending final regulations, employees will not be required to treat a Non-Hospital/Non-Physician Services Plan as providing minimum value coverage for purposes of determining their eligibility for a premium tax credit “aka premium subsidy” in the Marketplace.
An employer that offers a Non-Hospital/Non-Physician Services Plan (including a Pre-November 4, 2014 Non-Hospital/Non-Physician Services Plan) to an employee:
(1) must not state or imply in any disclosure that the offer of coverage under the Non-Hospital/Non-Physician Services Plan prevents an employee from obtaining a premium tax credit, if otherwise eligible, and
(2) must timely correct any prior disclosures that stated or implied that the offer of the Non-Hospital/Non-Physician Services Plan would prevent an otherwise tax-credit-eligible employee from obtaining a premium tax credit.
Without such a corrective disclosure, a statement a Non-Hospital/Non-Physician Services Plan provides minimum value will be considered to imply that the offer of such a plan prevents employees from obtaining a premium tax credit/subsidy. However, an employer that also offers an employee another plan that is not a Non-Hospital/Non/-Physician Services Plan and that is affordable and provides minimum value is permitted to advise the employee that the offer of this other plan will or may preclude the employee from obtaining a premium tax credit.
The deadline for submitting the required information and scheduling the requirement payment, which must be done through www.pay.gov is November 15, 2014.
The Affordable Care Act (ACA) provides for a transitional reinsurance program to help stabilize premiums for coverage in the individual health insurance marketplace during the first 3 years of operation (2014-2016). The program is designed to primarily transfer funds from the group market to the individual market, where high risk individuals are more likely to be covered.
Payments under the reinsurance program are funded by “contributions” (aka fees) payable by health insurance carriers for fully funded groups and third party administrators on behalf of self-insured group health plans. However, under ACA regulations, the self insured group is ultimately responsible for the payment.
The transitional reinsurance fee requirement applies on a per capita basis with respect to each individual covered by a plan that is subject to the fee. The total amount of the fee for 2014 is $63 per covered life and will decrease to $44 per covered life in 2015. The amount of the fee in 2016 has not yet been established by CMS, but will be lower than the 2015 amount. The fee applies to major medical coverage, retiree medical coverage, and COBRA coverage. Plans that are not subject to the reinsurance fee include FSAs, HSAs, Dental & Vision coverage, coverage that fails to provide minimum value, and EAP programs to name a few.
The transitional reinsurance fee is imposed on the “contributing entity”, defined as an insurer/carrier for fully-insured coverage or the group for self insured coverage. Third -party administrators (TPAs), administrative service only entities (ASO) and others may submit on behalf of the contributing entity, though CMS has specified that the TPA or ASO is not required by law to do so.
Because the fee is imposed on the self insured plan and not the plan sponsor, plan assets may be used to pay the assessment/fee. The IRS has also noted that plan sponsors can treat the fee as an ordinary and necessary business expense for tax purposes.
The term covered lives includes everyone under the plan, including spouses, dependents, and retirees. CMS has named several options for counting covered lives, depending on if the plan is fully insured or self funded. The methods of counting covered lives for the reinsurance fee are similar to, but not exactly the same, as the Patient Centered Outcomes Research Institute (PCORI) count methods. A full description of each counting method can be found on the CMS website here.
Regardless of the counting method chosen, plans must maintain documentation of the count, including all materials provided by TPAs in arriving at the figure, for at least 10 years. CMS may audit a plan to assess its compliance with the program requirements and it will be crucial to be able to produce this information.
The entire reinsurance fee process takes place on www.pay.gov. This process is separate from the Health Insurance Oversight System (HIOS) which is used, for example, to obtain a Health Plan Identifier (HPID). The applicable form became available on October 24, 2014. While this leaves somewhat limited time for plan sponsors to submit the applicable form and schedule the fee by the November 15, 2014 deadline, CMS has yet to issue guidance that the submission date will be delayed.
In order to successfully complete the reinsurance fee submission, plan sponsors (or their representatives) need to:
After registering on Pay.gov, the submitter will select the Transitional Reinsurance program Annual Enrollment and Contribution Submission Form. The form requires basic company and contact info, payment type, benefit year, and the annual enrollment count. After the information is entered on the form, plan sponsors will need to upload their supporting documentation CSV file. After the enrollment and supporting documentation is submitted, the form will auto-calculate the amount owed. Plans then need to schedule payment(s) for this amount . The form cannot be submitted without payment information. Plans can choose to remit payment for the entire benefit year once (the full $63 per covered life) or plans can submit two separate payments for the year. If the separate payment method is used, the first payment ($52.50 per covered life) is due by January 15, 2015 and the second payment ($10.50 per covered life) is due by November 15, 2015. Regardless of the option chose, all payments MUST be scheduled by November 15, 2014.
With Congress in its summer recess, now is a good time to reflect on the top ACA issues worth monitoring as 2015 quickly approaches. Here are a handful of key issues to watch:
Dueling Court Cases on Federal Subsidies
One issue grabbing national headlines is the dueling decisions coming out of the U.S. Court of Appeals for the District of Columbia (Halbig v. Burwell) and the U.S. Court of Appeals for the Fourth Circuit (King v. Burwell) on missing language in the ACA that would have authorized the federal government to provide premium subsidies to individuals who sign up for health plans through the federal Exchanges. The legal issue in these court cases is whether the ACA premium tax credit (aka subsidy) is available to those individuals who enroll in qualified health plans (QHP) through state operated Exchanges or if it is available only to those to enroll in a QHP through a federally funded Exchange.
A primary concern is that a significant number of people in about two-thirds of the states (who did not set up a state-run Exchange) rely on the subsidy to purchase a plan in the federal Exchange. Specifically, the ACA’s employer mandate penalty of $3000 is based upon an employer having an employee seek coverage through an Exchange and receive the federal premium subsidy. In general, the employer mandate requires that “applicable large employers” offer their full-time employees minimum essential coverage or potentially pay a tax penalty. However, according to the statutory text of the ACA, the penalties under the employer mandate are triggered only if an employee receives a subsidy to purchase coverage through an Exchange established by the states. Both cases are being appealed to higher courts and will likely be consolidated into one case to be heard by the U.S. Supreme Court in the not so distant future.
In an interesting development, a video surfaced last week featuring one of the ACA’s chief architects (John Gruber) saying that health insurance subsidies should only be available in those states who opt to build and implement state-based Exchanges to gain participation. The idea was to create an incentive to have states actively involved in the hosting of an Exchange, rather than relying on the federal government to operate the Exchanges in each state. Whether this video will be used as evidence to uphold the argument that subsidies can only be offered by state-based Exchanges remains to be seen.
Lack of Back End Software for Federal Exchange
Of course, one of the big news stories in 2013 and early 2014 was the substandard launch of the federal Exchange, which led to many Americans having to wait to be enrolled in an ACA-compliant health plan. Although some technical snafus have been addressed, there are many that still remain. For example, a top White House official recently told Congress that the automated system that is supposed to send premium payments to insurance companies is still under development, and they did not have a completion date for it yet. The lack of an electronic verification process is only one part of the “backend” software that is still problematic five years after PPACA was passed.
Future of Navigators in Comparison with the Value of Brokers
Several recent studies have touted the benefits of using third parties, such as Brokers, to help consumers find coverage under the ACA. Some of these studies have focused on the usefulness of using Brokers/Agents over the benefits of using Navigators. A recent Urban Institute study found that health insurance Brokers were the most helpful in providing health insurance Exchange information when compared to other types of resources, including Navigators and website content. However, there are other published studies showcasing how Navigators have been useful to consumers. That being said, Brokers have assumed an integral role supporting millions of Americans in securing and maintaining coverage for many decades, and continue to be knowledgeable resources, as they are licensed in the states they operate in, whereas Navigators are not required to meet the same licensing standards as Brokers/Agents. It will be interesting to see what the future holds for Navigators, who are not as experienced and who are, in the end, dependent upon federal grants to provide their services.
Provider Access Issues & Emergency Room Over-Usage
A number of public policymakers have raised concerns recently about the fact that there are shortages of key physicians and other providers and as a result is causing a increase in non-emergent patient visits to expensive ER departments. A recent story in the New York Times highlighted similar concerns, saying the ACA cannot change the fact that visiting an emergency room may be easier than seeing a primary care physician in some instances or locations. Other stories and studies highlight how the ACA and health care reform initiatives can affect access to providers in many different ways, such as changing reimbursement levels, improving the availability of certain types of specialists, or re-educating the patient to move from visiting the ER department to either making an appointment ahead-of-time or visiting a less expensive Urgent Care center for care.
Premium Rate Increases
Another critical issue to monitor are premium increases that might be occurring in spite of the initial promises that the ACA would lower health care costs. Health plans have begun publishing proposed rates for 2015, resulting in a recent flurry of news articles and reports addressing the impact of the ACA on insurance premiums.
The Wall Street Journal published a front page report discussing the ACA’s impact on premium increases earlier this summer, saying, “Hundreds of thousands of consumers nationwide, who bought insurance plans under the Affordable Care Act, will face a choice this fall: swallow higher premiums to stay in their plans or save money by switching.”
The Journal goes on to say that a new picture is emerging in 10 states where 2015 premium insurance rates for individual plans have been filed, “In all but one (state), the largest health insurer is proposing to increase premiums between 8.5% to 22.8% next year.” Ironically, smaller health plans are reducing their 2015 rates in the same market in an attempt to gain market share.
The significance of this trend is underscored in a statement released earlier this summer by Karen Ignagni, president & CEO of America’s Health Insurance Plans (AHIP), in which she expressed concerns about keeping health insurance affordable for patients. “Affordability remains a top priority for consumers when it comes to their health care,” she said.
Bonus: Be Sure To Watch The Political Races
With the ACA’s continued challenges, the ups and downs of the U.S. economy, key world events in the Middle East, and other confounding variables, one has to wonder what will happen during the mid-year elections this fall. As reported by CNN and other news outlets, the ACA became an key issue in Obama’s 2012 re-election victory as well as Democrats picking up seats in the Senate and House in that election.
As November 3, 2015 approaches, many different messages could be sent back to the White House and Congress. If Republicans take over the Senate and retain control of the House, how will this impact the ACA over the next several years? If the congressional houses remain split, we may have less going on by either political party. How will the state-level elections impact the ACA and state-run Exchanges? Only time will tell.
Under the Patient Protection and Affordable Care Act (PPACA), beginning in 2015, certain large employers who do not offer affordable health insurance that provides minimum value to their full-time employees may be subject to significant penalties.
In a nutshell, in 2015, “applicable large employers” will be subject to an annualized employer “shared responsibility” penalty of $2,000 (indexed) per full-time employee (minus the first 80 full-time employees in 2015) if the employer does not offer health insurance to at least 70% of their full-time employees and their dependents. This amount will be increase from 70% to 95% after 2015. This is commonly referred to as the “Pay or Play” penalty.
Even if an applicable large employer offers insurance coverage to full-time employees, the employer still could be subject to an annualized penalty of $3,000 (indexed) per employee who receives an Exchange subsidy if the offered employer-sponsored health coverage does not meet minimum value standards or is not affordable. This $3000 penalty is capped at the amount that would apply if the $2,000 penalty described above were to apply.
What should an employer do now to prepare for these penalties?
(A) Determine if they are an “applicable large employer” -To do this, employers should count both full-time employees and part-time employee hours as follows:
1) Count the full-time employees for each month in the prior year.
2) Count the full-time equivalents for each month in the prior year.
a) Add total hours for non-full-time employees but count no more than 120 hours per month for any one non-full-time employee.
b) Divide the number obtained in (a) by 120. This is the full-time equivalent number.
3) Add the numbers obtained in (1) and (2) above (i.e., the full-time employee and full-time equivalent numbers) for each month.
4) Add the 12 sums obtained in (3) and divide by 12. This is the average number of full-time employees and full-time equivalents.
5) If this number obtained in (4) is under 50 (or under 100 for the 2015 determination for certain employers), the employer is not an applicable large employer for the year being determined.
Note: The applicable large employer is determined on a controlled group basis. For example, if there are three companies, each of which is wholly owned by the same parent company, the companies are all considered one employer for this calculation. Also note that, special transition rules apply in determining applicable large employer status for 2015 and that a special seasonal employee exception may apply even if the threshold in (5) is exceeded.
(B) If an employer will be an applicable large employer in 2015, it should determine whether it could be subject to penalties in 2015. For example, the employer should review its group health plan to determine if the insurance coverage is “offered” to full-time employees meets minimum value standards and is considered affordable to employees.
© An employer also will need to address how it will determine the full-time status of employees – will it use the “monthly measurement period” or the “look back measurement period.” This is particularly important for employers who have many variable-hour employees or seasonal employees.
(D) If the employer’s group health plan does not meet the threshold tests to avoid the penalties noted above, the employer should evaluate whether it wants to restructure its health care offerings or pay the penalties (which are non-deductible).
(E) Finally, employers should review their data collection procedures to ensure that they will be able to report the healthcare information required to be reported for 2015 (the actual reporting will occur in 2016 for the 2015 calendar year). Insurers, sponsors of self-insured plans, and other entities that provide minimum essential coverage during a calendar year will be required to report certain information to the IRS and to participants. In addition, applicable large employers will be required to report about the coverage they provide to both the IRS and to their employees. Drafts of the IRS forms to be used in reporting this information have recently been published (Form 1095-B, Form 1095-B Transmittal, Form 1095-C, Form 1095-C Transmittal). Employers should review these forms to understand the data that will need to be reported.
It is not too late for employers to take action now to avoid penalties in 2015.
The Affordable Care Act (ACA) imposes significant information reporting responsibilities on employers starting with the 2015 calendar year. One reporting requirement applies to all employer-sponsored health plans, regardless of the size of the employer. A second reporting requirement applies only to large employers, even if the employer does not provide health coverage. The IRS is currently developing new systems for reporting the required information and recently released draft forms, however instructions have yet to be released.
Information returns
The new information reporting systems will be similar to the current Form W-2 reporting systems in that an information return (Form 1095-B or 1095-C) will be prepared for each applicable employee, and these returns will be filed with the IRS using a single transmittal form (Form 1094-B or 1094-C). Electronic filing is required if the employer files at least 250 returns. Employers must file these returns annually by Feb. 28 (March 31 if filed electronically). Therefore, employers will be filing these forms for the 2015 calendar year by Feb. 28 or March 31, 2016 respectively. A copy of the Form 1095, or a substitute statement, must be given to the employee by Jan. 31 and can be provided electronically with the employee’s consent. Employers will be subject to penalties of up to $200 per return for failing to timely file the returns or furnish statements to employees.
The IRS released drafts of the Form 1095-B and Form 1095-C information returns, as well as the Form 1094-B and Form 1094-C transmittal returns, in July 2014 and is expected to provide instructions for the forms in August 2014. According to the IRS, both the forms and the instructions will be finalized later this year.
Health coverage reporting requirement
The health coverage reporting requirement is designed to identify employees and their family members who are enrolled in minimum essential health coverage. Employees who are offered coverage, but decline the coverage, are not reported. The IRS will use this information to determine whether the employees are exempt from the individual mandate penalty due to having health coverage for themselves and their family members.
Insurance companies will prepare Form 1095-B (Health Coverage) and Form 1094-B (Transmittal of Health Coverage Information Returns) for individuals covered by fully-insured employer-sponsored group health plans. Small employers with self-insured health plans will use Form 1095-B and Form 1094-B to report the name, address, and Social Security number (or date of birth) of employees and their family members who have coverage under the self-insured health plan. However, large employers (as defined below) with self-insured health plans will file Forms 1095-C and 1094-C in lieu of Forms 1095-B and 1094-B.
Large employer reporting requirement
“Applicable large employer members (ALE)” are subject to the reporting requirement if they offer an insured or self-insured health plan, or do not offer any group health plan. ALE members are those employers that are either an applicable large employer on their own or are members of a controlled or affiliated service group with an ALE (regardless of the number of employees of the group member). ALEs are those that had, on average, at least 50 full-time employees (including full-time equivalent “FTE” employees) during the preceding calendar year. Full-time employees are those who work, on average, at least 30 hours per week. Employers with fewer than 50 full-time employees and equivalents are not applicable large employers and, thus, are exempt from this health coverage reporting requirement.
As referenced above, an employer’s status as an ALE is determined on a controlled or affiliated service group basis. For example, if Company A and Company B are members of the same controlled group and Company A has 100 employees and Company B has 20 employees, then A and B are both members of an ALE. Consequently, Company A and Company B must each file the information returns.
Each ALE member must file Form 1095-C (Employer-Provided Health Insurance Offer and Coverage) and Form 1094-C (Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns) with the IRS for each calendar year. The IRS will use this information to determine whether (1) the employer is subject to the employer mandate penalty, and (2) an employee is eligible for a premium tax credit on insurance purchased through the new health insurance exchange. ALEs with fewer than 100 full-time employees are generally eligible for transition relief from the employer mandate penalty for their 2015 plan year. Nonetheless, these employers are still required to file Forms 1095-C and 1094-C for the 2015 calendar year.
The employer mandate penalty can be imposed on any ALE member that does not offer affordable, minimum value health coverage to all of its full-time employees starting in 2015. Health coverage is affordable if the amount that the employer charges an employee for self-only coverage does not exceed 9.5 percent of the employee’s Form W-2 wages, rate of pay, or the federal poverty level for the year. A health plan provides minimum value if the plan is designed to pay at least 60 percent of the total cost of medical services for a standard population. In the case of a controlled or affiliated service group, the employer mandate penalties apply to each member of the group individually.
ALE members must prepare a Form 1095-C for each employee. The return will report the following information:
An ALE member will file with the IRS one Form 1094-C transmitting all of its Forms 1095-C. The Form 1094-C will report the following information:
As noted above, each ALE member is required to file Forms 1095-C and 1094-C for its own employees, even if it participates in a health plan with other employers (e.g., when the parent company sponsors a plan in which all subsidies participate). Special rules apply to multiemployer plans for collectively-bargained employees.
Action required
In light of the complexity of the new information reporting requirements, it is recommended that employers should begin taking steps now to prepare for the new reporting requirements:
Starting in 2015, the Affordable Care Act (ACA) requires applicable large employers to offer affordable, minimum value health coverage to their full time employees (and dependents) or pay a penalty. The employer penalty rules are also known as the employer mandate or the “pay or play” rules.
Effective in 2014, affordability of health coverage is used to determine whether an individual is:
On July 24, 2014, the IRS released Revenue Procedure 2014-37 to index the ACA’s affordability percentages for 2015.
For plan years beginning in 2015, an applicable large employer’s health coverage will be considered affordable under the pay or play rules if the employee’s requires contribution to the plan does not exceed 9.56 percent of the employee’s household income for the year. The current affordability percentage for 2014 is 9.5 percent.
Applicable large employers can use one of the IRS’ affordability safe harbors to determine whether their health plans will satisfy the 9.56 percent requirement for 2015 plan years, if requirements for the applicable safe harbor are met.
This adjusted affordability percentage will also be used to determine whether an individual is eligible for a premium tax credit for 2015. Individuals who are eligible for employer-sponsored coverage that is affordable and provides minimum value are not eligible for a premium tax credit in the Exchange.
Also, Revenue Procedure 2014-37 adjusts the affordability percentage for the exemption from the individual mandate for individuals who lack access to affordable minimum essential coverage. For plan years beginning in 2015, coverage is unaffordable for purposes of the individual mandate if it exceeds 8.05 percent of household income.
Employer Mandate
The pay or play rules apply only to applicable large employers. An “applicable large employer” is an employer with, on average, at least 50 full-time employees (including full-time equivalents) during the preceding calendar year. Many applicable large employers will be subject to the pay or play rules starting in 2015. However, applicable large employers with fewer than 100 full-time employees may qualify for an additional year, until 2016, to comply with the employer mandate.
Affordability Determination
The affordability of health coverage is a key point in determining whether an applicable large employers will be subject to a penalty.
For 2014, the ACA provides that an employer’s health coverage is considered affordable if the employee’s required contribution to the plan does not exceed 9.5 percent of the employee’s household income for the taxable year. The ACA provides that, for plan year beginning after 2014, the IRS must adjust the affordability percentage to reflect the excess of the rate of premium growth over the rate of income growth for the preceding calendar year.
As noted above, the IRS has adjusted the affordability percentage for plan years beginning in 2015 to 9.56 percent. The affordability text applies only to the portion of the annual premiums for self-only coverage and does not include any additional cost for family coverage. Also, if an employer offers multiple health coverage options, the affordability test applies to the lowest-cost option that also satisfies the minimum value requirement.
Affordability Safe Harbors
Because an employer generally will not know an employee’s household income, the IRS created three affordability safe harbors that employers may use to determine affordability based on information that is available to them.
The affordability safe harbors are all optional. An employer may choose to use one or more of the affordability safe harbors for all its employees or for any reasonable category of employees, provided it does so on a uniform and consistent basis for all employees in a category.
The affordability safe harbors are:
Individual Mandate
Beginning in 2014, the ACA requires most individuals to obtain acceptable health insurance coverage for themselves and their family members or pay a penalty. This rule is often referred to as the “individual mandate”. Individual may be eligible for an exemption from the penalty in certain circumstances.
Under the ACA, individuals who lack access to affordable minimum essential coverage are exempt from the individual mandate. For purposes of this exemption, coverage is considered affordable for an employee in 2014 if the required contribution for the lowest-cost, self-only coverage does not exceed 8 percent of household income. For family members, coverage is considered affordable in 2014 if the required contribution for the lowest-cost family coverage does not exceed 8 percent of household income. This percentage will be adjusted annually after 2014.
For plan years beginning in 2015, the IRS has increased this percentage from 8 percent to 8.05 percent.
Following the recent Supreme Court ruling regarding contraceptives in the Hobby Lobby Stores case, a new circuit decision now sets the stage for another possible Supreme Court decision on the ACA. On Tuesday (July 22, 2014), the U.S. Court of Appeals for the District of Columbia (in Halbig v. Burwell) and the U.S. Court of Appeals for the Fourth Circuit (in King v. Burwell) issued conflicting opinions regarding the IRS’ authority to administer subsidies in federally facilitated exchanges.
In general, the employer mandate requires that “applicable large employers” offer their full-time employees minimum essential coverage or potentially pay a tax penalty in 2015. However, according to the statutory text of the ACA, the penalties under the employer mandate are triggered only if an employee receives a subsidy to purchase coverage “through an Exchange established by the State under section 1311…” of the ACA. If a state elected not to establish an exchange or was unable to establish an operational exchange by January 1, 2014, the Secretary of HHS was required to establish a federal-run exchange under section 1321 of the ACA.
The appellants in each of these cases are residents of states that did not establish state run exchanges. Consequently, the appellants argue that the IRS does not have the authority to administer subsidies in their states because the exchanges were set up by HHS under section 1321 of the ACA and not under section 1311 as is the clear prerequisite for IRS authority to administer the subsidies.
In regulations implementing the subsidies, the IRS recognized this discrepancy and noted that “[c]ommentators disagreed on whether the language [of the ACA] limits the availability of the premium tax credit only to taxpayers who enroll in qualified health plans [QHPs] on State Exchanges."
The IRS, however, rejected these comments and stated that, “[t]he statutory language of section 36B and other provisions of the Affordable Care Act support the interpretation that credits are available to taxpayers who obtain coverage through a State Exchange, regional Exchange, subsidiary Exchange, and the Federally-facilitated Exchange. Moreover, the relevant legislative history does not demonstrate that Congress intended to limit the premium tax credit to State Exchanges. Accordingly, the final regulations maintain the rule in the proposed regulations because it is consistent with the language, purpose, and structure of section 36B and the Affordable Care Act as a whole.”
In Halbig v. Burwell, the D.C. Circuit disagreed with the IRS’ interpretation and, in a 2-1 decision, held that the IRS regulation authorizing tax credits in federal exchanges was invalid. The court focused heavily on the text itself and concluded, “that the ACA unambiguously restricts the …subsidy to insurance purchased on Exchanges established by the state.”
In an opinion issued only hours following the D.C. Circuit decision, the 4th Circuit, in King v. Burwell, agreed with the IRS’ interpretation and upheld the subsidies by permitting the IRS to decide whether the premium tax credits should be available over the federal exchange. The justices argued that the text did not intend to create two unequal exchanges. Additionally, they argue that the ambiguous text of the act intended that the exchanges be operated as appendages of the Bureaucracy, and so under the directives of the IRS.
Currently, 36 states are using federally facilitated exchanges, including Florida. Further, roughly 85% of enrollees who signed up for health insurance receive subsidies allowing them to purchase coverage that would be otherwise unaffordable. If the subsidies allocated over the federal exchange were declared invalid, those individuals’ ability to receive subsidies to purchase coverage could be jeopardized. As a result, the average price of a health plan is projected to rise from $82 per month to $346 per month, making it more difficult to afford for approximately 5.4 M enrollees.
While the Halbig decision is a major setback to the ACA, it is almost certainly not the final word on this issue. Given the fact that two courts have reached different outcomes, the Supreme Court is more likely to weigh in on the decision. However, the Halbig decision is likely to be reviewed by the entire D.C. Circuit prior to any potential review by the Supreme Court.
For tax years 2010 to 2013, the maximum credit is 35% of medical premiums paid for small business employers and 25% of medical premiums paid for small tax-exempt employers, such as charities.
For tax years beginning in 2014 or later, there are changes to the credit:
Here’s what this means for you: If you pay $50,000 a year toward health care premiums for employees — and if you qualify for a 15% credit, you save… $7,500. If you save $7,500 a year from tax year 2010 through 2013, that’s total savings of $30,000. If, in 2014, you qualify for a slightly larger credit, say 20%, your savings go from $7,500 a year to $10,000 a year.
Even if you are a small business employer who did not owe tax during the year, you can carry the credit back or forward to other tax years. Also, since the amount of the health insurance premium payments is more than the total credit, eligible small businesses can still claim a business expense deduction for the premiums in excess of the credit. That’s both a credit and a deduction for employee premium payments.
There is good news for small tax-exempt employers too. The credit is refundable, so even if you have no taxable income, you may be eligible to receive the credit as a refund so long as it does not exceed your income tax withholding and Medicare tax liability. Refund payments issued to small tax-exempt employers claiming the refundable portion of credit are subject to sequestration. For more information on sequestration, click here.
And finally, there may still be time to file an amended return to benefit from the credit this year. Generally, a claim for refund must be filed within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later, or if no return was filed by the taxpayer, within 2 years from the time the tax was paid.
Can you claim the credit?
Now that you know how the credit can make a difference for your business, let’s determine if you can claim it.
To be eligible for the credit, you must:
How do you claim the credit?
You must use IRS Form 8941, Credit for Small Employer Health Insurance Premiums, to calculate the credit. For detailed information on filling out this form, see the Instructions for Form 8941.
If you are a small business, include the amount as part of the general business credit on your income tax return.
If you are a tax-exempt organization, include the amount on line 44f of the Form 990-T, Exempt Organization Business Income Tax Return. You must file the Form 990-T in order to claim the credit, even if you don’t ordinarily do so.