Affordable Care Act Employer Mandate Penalties and Solutions, Individual Coverage HRAs and Health Plan Nondiscrimination Rules

CHARLES C. SHULMAN, ESQ.

The IRS has been issuing preliminary penalty calculations to employers relating to the Affordable Care Act Employer Shared Responsibility Mandate (the “Employer Mandate”). The following is a review of the issues and solutions for employers regarding the Employer Mandate, interaction with new individual coverage HRAs (ICHRAs), health plan nondiscrimination rules and related issues

1. Family Health Coverage Must be Offered to Substantially all Full Time Employees – But Most of the Premiums Can be Shifted to the Employees
2. Penalty on Each Full-Time Employee if Family Coverage not Offered to 95% of FTEs. Under the Employer Mandate rules contained in the Patient Protection and Affordable Care Act of 2010 (the “ACA”), if an employer employs 50 or more “full-time employees,” i.e., employees for 30+ hours a week on average, it must offer family health insurance coverage that meets the “minimum essential coverage” standards of the ACA to 95% or more of their full time employees. If it does not offer the family health insurance coverage to 95% of the full-time employees there would be a significant penalty under Code § 4980H(a) of $2,880 a year (for 2023) for each full time employee (minus the first 30 employees) even for those who have been offered or enrolled in the group health plan.
3. Coverage to 95% of FTEs Must Offer Minimum Essential Coverage. In order to avoid this significant penalty, an employer must offer to substantially all (95%) of the full-time employees health insurance coverage that meets the “minimum essential coverage” standards of the ACA or an individual coverage HRA (which is considered sufficient even without minimum essential coverage). However, as the rule is currently written, it should be permitted to shift the bulk of the premiums to the employees, because as long as it offers family health coverage, the coverage does not have to be “affordable.”
4. ICHRA Considered Offering of Coverage. With regard to individual coverage HRAs, the IRS, DOL and HHS FAQs on New Health Coverage Options for Employers and Employees, Q:7 states that: “An offer of an individual coverage HRA discussed below counts as an offer of coverage under the employer mandate.” Under 2019 regulations, those who are offered group coverage cannot also be reimbursed for individual premiums, but the 95% rule can be satisfied by offering, e.g., one identifiable group with individual coverage HRAs and the other identifiable group with group health coverage.
5. If Offered to 95% but the Coverage is not Affordable, a Smaller Penalty Would be Imposed (i.e., Only for the Number of FTEs receiving Exchange Coverage and a Premium Tax Credit). Even if 95% are offered group coverage (or an individual coverage HRA), it would not be considered “affordable” if the employees have to pay the bulk of the premiums. Thus, there would be a smaller penalty of $4,320 (for 2023) under Code § 4980H(b) for any full-time employees who, because the premiums are so high, buys individual Marketplace Exchange coverage and is entitled to a premium tax credit for all or a portion of cost of the Exchange premium. This penalty is not based on all employees but only on those employees who opt for Exchange coverage and receive a premium tax credit. In our experience only a minority of employees purchase their insurance through the Marketplace Exchange (especially in urban areas), because so few hospitals and doctors accept marketplace insurance. Thus, as long as 95% of the employees with 30+ hours a week are offered family coverage (even on an employee-pay-all basis), the penalty is likely to be very minor.
6. Report if Family Group Coverage was Offered to All Full Time Employees on Annual Form 1095-C to be given to Employees and Annual Form 1094-C to be Filed with the IRS

An employer or affiliated group with 50 or more full-time employees must provide the employees who were eligible for group health insurance an annual IRS Form 1095-C https://www.irs.gov/pub/irs-pdf/f1095c.pdf indicating which months in the year they were offered group health coverage and what the premiums for family coverage would be during that period, as set forth in the instructions to the form. Form 1095-C is for the employee’s records but need not be attached to the employees’ individual tax return.

IRS Form 1094-C https://www.irs.gov/pub/irs-pdf/f1094c.pdf is an annual return filed with the IRS indicating the number of employees who were eligible for group health coverage during each of the 12 months, whether these employees were offered group family health coverage (with minimum essential coverage – which your insurance plans most likely are), full time employee count and all employee count and list of affiliated employers.

Often, the insurance company will provide the information for these forms.

3. Determination of Full-Time Status of Employees for Purposes for Eligibility for Health Insurance Coverage

Determination of full time status for purposes of being eligible for health insurance coverage is made depending on whether the employee has worked an average of 30 hours per week (or 130 hours per month), during a “standard measurement period” which is a 3-12 month period that the employer chooses at its discretion (but on a consistent basis). At the end of the standard measurement period the employer must during an administrative period” (not more than 90 days) determine an employee’s eligibility, discuss the employee’s status with them, explain the premiums required to be paid by the employee and enroll them in the plan if they elect to do so. During a “stability period” (6-12 months and not shorter than the Standard Measurement Period), the employees’ enrollment  remains protected even if their hours drop below 30 per week until the Stability Period has ended and eligibility is determined again.

One example used by some companies is a 9 month period of the previous year (e.g., Jan. to Sept. of the previous year) for determining whether the employee average hours per month is over 130 hours. The administrative period (up to 90 days) could be Oct. to Dec. to determine an employee’s eligibility and offer to enroll them in the plan. For those who have over 130 hours a month, the “stability period” could be 9 months. Another alternative used by other companies is a 3 month determination period, a one month administrative period and a 6 month stability period.

4. Notice of Eligibility

A notice of eligibility should explain that the employees are eligible for group health insurance for their family with the cost (or where to obtain the cost) of the premiums.

A similar notice could be sent to the group offered the individual coverage HRA.

5. Nondiscrimination Testing for Insured Health Insurance Coverage Currently Only Affects the Ability of Highly Compensated Employees to Make Employee Contributions for Premiums on a Pre-tax Basis

In terms of nondiscrimination rules for health insurance coverage, unless the group health plan is self-insured, there are currently no nondiscrimination restrictions even if the higher paid employees receive a larger share of subsidized premiums. (This should be monitored from year to year, because there may be new regulations under the ACA that could apply § 105(h) to insured plans.)   If a health plan If it is self-insured, there are two nondiscrimination tests in Code § 105(h). The eligibility test of § 105(h) is based on whether enough non-highly compensation individuals are benefiting from the plan using the 70% test, the ratio percentage test and the nondiscrimination test based on facts and circumstances test of Code § 410(b). The benefits test determines if all participants are eligible for the same benefits, and requires that the plan’s terms as written do not discriminate and plan operation comply on a facts and circumstances basis. A Highly Compensated Individual is (i) one of the five highest-paid officers; (ii) a shareholder who owns more than 10% of the value of the employer’s stock; or (iii) among the highest-paid 25% of all employees.

6. Reimbursing Individual Coverage Premiums through an HRA and Restriction on Offering the Same Group the Individual Premiums HRA and Group Health Coverage

Historically, reimbursing employees for their individual health insurance premiums was problematic for various reasons, including (i) taxability to the employee for such reimbursement, and (ii) inadvertently creating a group health plan which would be subject to ACA requirements such as yearly dollar limits.

However, on June 20, 2019, the Trump administration finalized rules for “individual coverage Health Reimbursement Arrangements” or “ICHRAs” that could be used to allow employers to reimburse employees for individual health insurance premiums through an individual coverage HRA instead of offering a group health plan.

An employee reimbursed through the ICHRA should also be able to enroll in individual health insurance coverage through the Marketplace Exchange or through a private plan. However, if you opt to take the ICHRA coverage you would probably lose your ability to qualify for a premium tax credit to help pay for Marketplace coverage.

2019 rules in Treas. Reg. § 54.9802-4(c)(2), DOL Reg. § 2590.702-2 & HHS Reg. § 146.123(c)(2), 84 Fed. Reg. 28888, 28895 (June 20, 2019), provide that “To the extent a plan sponsor offers any class of employees … an individual coverage HRA, the plan sponsor may not also offer a traditional group health plan to the same class of employees.” The reason for this rule as explained in the Preamble 84 Fed. Reg. at  28895 is in order to prevent a plan sponsor from intentionally or unintentionally steering any participants or dependents with adverse health factors away from the plan sponsor’s traditional group health plan and into the individual market.

“Group of employees” is described in paragraph (d) of the above regulations as including, e.g., employees working in different locations, employees in or not in a unit covered by a specific union contract, employees who have or have not satisfied a waiting period, nonresident aliens and U.S. citizen employees, salaried and hourly employees, etc. Of course, the same person could not be offered group health coverage and decline and be offered reimbursement of individual premiums or vice versa, as one person could certainly not be two plans.

Thus, a separate identifiable group could be offered group coverage and another identifiable group could be offered the individual coverage HRA. Both satisfy the 95% substantially all requirement for 30+ hour employees who must be offered coverage under the firm’s group health plan or an individual coverage HRA in order to avoid the large penalty of Code § 4980H(a). For the group that is offered group health coverage, if individuals in that group decline coverage, they cannot then be offered reimbursement of individual premiums under an individual coverage HRA.

Additional issues arise in connection with these matters, and I would be happy to discuss them with you. If you have any questions, please contact me at number or email listed above.