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Forthcoming regs: plans lacking hospitalization coverage don’t provide minimum value

Notice 2014-69, 2014-48 IRB

In a Notice, IRS advises employers and other taxpayers that employer-sponsored health plans that fail to provide substantial coverage for in-patient hospitalization services or physician services do not provide minimum value (MV) for purposes of the Code Sec. 36B premium tax credit, and that it intends to propose regs to this effect soon. In addition, the Notice raises concerns over the government’s on-line MV Calculator, which apparently may produce invalid actuarial results for plans that exclude these types of coverage, and warns employers against relying solely on the MV Calculator to demonstrate that such plans provide MV for any portion of any tax year ending on or after Jan. 1, 2015 and that follows finalization of the regs.

Background. The Patient Protection and Affordable Care Act (ACA; P.L. 111-148) and the Health Care and Education Reconciliation Act of 2010 (HCERA; P.L. 111-152) provide a Code Sec. 36B premium tax credit that is designed to make health insurance affordable to individuals with modest incomes who are not eligible for other qualifying coverage, such as Medicare, or “affordable” employer-sponsored health insurance plans that provide MV. Under Code Sec. 4980H, an applicable large employer may be liable for an assessable payment if one or more full-time employees receives a premium tax credit.

Under Code Sec. 36B(c)(2)(C)(ii), a plan fails to provide MV if the plan’s share of the total allowed costs of benefits provided under the plan is less than 60% of the costs. §1302(d)(2)(C) of the ACA provides that, in determining the percentage of the total allowed costs of benefits provided by a group health plan or health insurance coverage under the Code, as well as under the Public Health Service Act (PHSA), regs promulgated by the Secretary of Health and Human Services (HHS) under §1302(d)(2), addressing actuarial value, apply.

In February of 2013, HHS published final regs under ACA §1302(d)(2) (final HHS regs), effective on Apr. 26, 2013, that, for plans required to cover the essential health benefits (EHB), define the percentage of the total allowed costs of benefits as (1) the anticipated covered medical spending for EHB paid by a health plan for a standard population, (2) computed in accordance with the plan’s cost-sharing, and (3) divided by the total anticipated allowed charges for EHB coverage provided to a standard population. The preamble to the final HHS regs provides that employer-sponsored group health plans are not required to offer EHBs unless they are insured health plans offered in the small group market subject to PHSA §2707(a). It further states that MV is measured based on the provision of EHBs to a standard population based on typical self-insured group health plans and that, in determining MV, plans may take into account those benefits covered by the employer that are covered in any one of the state EHB-benchmark plans.

In May of 2013, IRS issued proposed Code Sec. 36B regs on MV that apply these rules in defining the standard population for MV purposes and the MV percentage. (See Weekly Alert ¶  34  05/09/2014 for more details.) The proposed regs provide that the MV percentage is determined by dividing the plan’s anticipated spending (based on the plan’s cost-sharing) for EHB under any one state benchmark plan by the total cost of EHB for the standard population and converting the result to a percentage. Neither the final HHS regs nor the proposed Code Sec. 36B regs require employer-sponsored self-insured and insured large group plans to cover every EHB category or conform their plans to an EHB benchmark that applies to individual and small group market plans.

The final HHS regs allow MV to be determined using an MV Calculator (available at http://cciio.cms.gov/resources/regulations/index.html ) or a safe harbor established by HHS and IRS. Under the final HHS regs, plans with “nonstandard” features that are incompatible with the MV Calculator or a safe harbor may determine MV through an actuarial certification from a member of the American Academy of Actuaries. A plan in the small group market provides MV if it meets the requirements for any of the levels of “metal coverage” defined in the final HHS regs (bronze, silver, gold, or platinum).

The proposed Code Sec. 36B regs require plans to determine MV by using either a safe harbor or the MV Calculator. Employers using the MV Calculator may, however, supplement the MV Calculator by obtaining actuarial valuation of a plan’s nonstandard features.

Issue. HHS and IRS have become aware that certain group health plan benefit designs that do not provide coverage for in-patient hospitalization services are being promoted to employers. A plan that fails to provide substantial coverage for these services would fail to offer fundamental benefits that are nearly universally covered, and historically have been considered integral to coverage, under typical employer-sponsored group health plans. Promoters of these plans contend that the plans satisfy MV within the meaning of the ACA (including Code Sec. 36B(c)(2)(C)(ii)) and the final HHS regs, as determined through use of the MV Calculator.

Questions have been raised as to whether these plans should satisfy the requirements for providing MV, and concerns have been raised as to whether the continuance tables underlying the MV Calculator (and thus the MV Calculator itself) produce valid actuarial results for these types of plans. Such concerns include that the standard population and other underlying assumptions used in developing the MV Calculator and associated continuance tables are based on typical self-insured employer-sponsored plans, essentially all of which historically have included coverage for these services, and that designing a plan to exclude such coverage could substantially affect the composition of the population covered by discouraging enrollment by employees who have, or anticipate that they might have, significant health issues.

Forthcoming amended regs. HHS and IRS believe that plans that fail to provide substantial coverage for in-patient hospitalization services and/or for physician services (“Non-Hospital/Non-Physician Services Plans”) do not provide MV. HHS intends to promptly propose amending the final HHS regs to provide that such a plan will not provide MV, and IRS intends to issue proposed regs that apply these proposed HHS regs under Code Sec. 36B. Under the HHS and IRS regs, which are intended to be finalized during 2015 and applicable upon finalization, an employer will not be permitted to use the MV Calculator (or any actuarial certification or valuation) to demonstrate that a Non-Hospital/Non-Physician Services Plan provides MV.

Accordingly, the Notice warns employers to consider the consequences of the inability to rely solely on the MV Calculator (or any actuarial certification or valuation) to demonstrate that a Non-Hospital/Non-Physician Services Plan provides MV for any portion of any tax year ending on or after Jan. 1, 2015, that follows finalization of such regs, and states that employers should not adopt such a plan (other than a Pre-Nov. 4, 2014 Non-Hospital/Non-Physician Services Plan; see below) for the 2015 plan year.

Transition relief. In the case of an employer that has entered into a binding written commitment to adopt, or has begun enrolling employees in, a Non-Hospital/Non-Physician Services Plan prior to Nov. 4, 2014 based on the employer’s reliance on the results of use of the MV Calculator (a Pre-Nov. 4, 2014 Non-Hospital/Non-Physician Services Plan), HHS and IRS anticipate that final regs, when issued, will not apply for purposes of Code Sec. 4980H (i.e., the employer shared responsibility payment) with respect to the plan before the end of the plan year (as in effect under the terms of the plan on Nov. 3, 2014) if that plan year begins no later than Mar. 1, 2015.

However, pending issuance of final regs, an employee will not be required to treat a Non-Hospital/Non-Physician Services Plan as providing MV for purposes of an employee’s eligibility for a premium tax credit under Code Sec. 36B, regardless of whether the plan is a Pre-Nov. 4, 2014 Non-Hospital/Non-Physician Services Plan.

Employer’s duty to inform employees. An employer that offers a Non-Hospital/Non-Physician Services Plan (including a Pre-Nov. 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 plan precludes an employee from obtaining a premium tax credit, if otherwise eligible; and (2) must timely correct any such prior disclosures, including a statement that a Non-Hospital/Non-Physician Services Plan provides MV. 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 MV 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.

References: For low-income individuals allowed premium assistance credit after 2013 for health insurance purchased on Exchange, see FTC 2d/FIN ¶  A-4241  ; United States Tax Reporter ¶  36B4  ; TaxDesk ¶  569,450  ; TG ¶  1381  .

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