PPACA Regulatory Updates
As the effective date (January 1, 2014) of significant provisions of the Patient Protection and Affordable Care Acts (“PPACA”) nears, federal regulatory agencies have been hard at work issuing extensive guidance to help employers and individuals comply with the new health care laws. While the new regulations and guidance are lengthy and often complicated, this article briefly summarizes some of the more recent PPACA regulatory updates.
Agencies Issue New FAQs on Implementation of Affordable Care Act
On January 24, 2013, the Department of Labor (“DOL”), along with Health and Human Services (“HHS”) and the Treasury Department (collectively, the “Agencies”), issued a new set of FAQs with the intent of clarifying several miscellaneous issues under the Affordable Care Act (“ACA”). The highlights of the FAQ are as follows:
The Agencies have extended the March 1, 2013 deadline for applicable employers to provide employees with notices of Exchanges. Generally, the ACA provides that applicable employers must provide their employees with written notice informing them of, among other things: the existence of Exchanges; that an employee may be eligible for a premium tax credit under certain circumstances if the employee purchases coverage through an Exchange; and that if an employee purchases coverage through an Exchange, the employee may lose the employer’s contribution to health benefits. While the FAQ did not provide a specific deadline, the Agencies estimate that the new deadline will be in late summer or early fall of 2013. The DOL is considering publication of a model notice.
In prior guidance, the Agencies stated that in order for health reimbursement arrangements (“HRA”) to comply with the ACA, the HRA must be “integrated” with other employer coverage that by itself satisfies ACA requirements. Therefore, an HRA which is sponsored by an employer and used to purchase individual coverage in the market (instead of an HRA which is integrated with other coverage that, standing alone, is ACA-compliant) does not comply with the ACA. Furthermore, an HRA provided to employees who did not elect to enroll in ACA-compliant coverage offered by the employer likewise does not comply with the ACA. Lastly, any amounts credited to an HRA prior to January 1, 2014 under terms that were in effect on January 1, 2013 may be used after December 31, 2013, to reimburse an employee for medical expenses without causing the HRA to be out of compliance.
The Agencies have clarified that in order for a fixed indemnity insurance plan to qualify for its exemption from ACA requirements, the policy must pay a fixed amount per day or per period, regardless of expenses actually incurred. Thus, the amount may not differ depending on the types of surgical procedures received, the types of drugs prescribed, etc.
Proposed Regulations Provide Safe Harbor Methods for Determining Affordability of Coverage
Generally, in order for an employer to avoid a penalty for failure to offer employees affordable coverage, the requisite employee contribution to the premium must not be more than 9.5% of an employee’s household income for a taxable year. On December 28, 2012, the IRS issued proposed regulations which outline three different safe harbor methods that an employer may use in determining an employee’s “household income”:
W-2 Safe Harbor. Under this method, an employee’s required contribution toward the premium for self-only coverage for the employer’s lowest cost coverage that satisfies the minimum value requirements must not exceed 9.5% of the employee’s Form W-2 (Box 1) wages for that calendar year. Generally, this safe harbor test is performed on an employee-by-employee basis at the end of each calendar year. However, the W-2 safe harbor method may be used prospectively if adjusted throughout the year for any wage changes. Lastly, Form W-2 Box 1 wages exclude any amounts that an employee may have contributed to cafeteria plans, qualified retirement plans, etc.
Rate of Pay Safe Harbor. Under this method, an employee’s monthly required contribution toward self-only coverage must not exceed 9.5% of the employee’s computed monthly wages. To compute an hourly employee’s monthly wages, an employer would multiple the hourly rate of pay for each hourly employee by 130 hours per month. For a salaried employee, the employee’s monthly salary rate is used. This rate of pay safe harbor method may not be used if the employer reduced the wages of hourly or salaried employees, respectively, at any time during the year.
Federal Poverty Line Safe Harbor. Under this method, an employee’s required contribution toward self-only coverage must not exceed 9.5% of the federal poverty line for a single individual ($11,170 in 2012 for all states except Hawaii and Alaska).
These safe harbor methods only apply for determining the affordability of coverage for an employee. These methods do not apply in determining penalties or an employee’s eligibility for a premium tax credit. Employers may use one or all of the safe harbor methods for all employees or categories of employees, but the methods must be applied on a uniform and consistent basis.
IRS Provides Some Relief from Penalty for Failure to Provide Coverage
In previous guidance, the IRS stated that where an employer offers affordable coverage to “substantially” all of its full-time employees but fails to offer coverage to a few of its full-time employees, such failure will not necessarily result in a penalty. In its proposed regulations issued on December 28, 2012, the IRS issued further guidance on the meaning of the term “substantially all.” The proposed regulations adopt a 95% standard in order to address any errors in offering coverage to full-time employees. In other words, an applicable employer will be deemed to have satisfactorily offered coverage to its full-time employees for a calendar month if it offered coverage to all but 5% or less of its full-time employees in that month. Thus, for applicable large employers of less than 100 full-time employees, the employer will be deemed to have satisfactorily offered coverage to its full-time employees for a calendar month if it offered coverage to all but five (5) or fewer full-time employees in that month. Interestingly, the proposed regulations do not limit the 95% standard only to inadvertent failures to offer coverage.