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Proposed regs would modify rules on eligibility for and amount of premium tax credit

Preamble to Prop Reg 07/06/2016; Prop Reg § 1.36B-1, Prop Reg § 1.36B-2, Prop Reg § 1.36B-3, Prop Reg § 1.36B-5

IRS has issued proposed regs, some of which may be relied upon pending their finalization, relating to the Code Sec. 36B premium tax credit and the individual shared responsibility provision under Code Sec. 5000A (commonly referred to as the individual mandate). The proposed regs would modify rules relating to, among other things, taxpayers’ eligibility for the credit and the treatment of “opt-out” payments for purposes of determining whether employer-sponsored coverage is affordable.

Background—individual mandate. The individual mandate under Code Sec. 5000A requires that, for tax years ending after Dec. 31, 2013, non-exempt U.S. citizens and legal residents must maintain minimum essential health insurance coverage (e.g., government-sponsored programs, eligible employer-sponsored plans, and plans purchased in the Exchange—see below) or pay a penalty. However, there are a number of situations in which individuals are exempt from the penalty, including where there is no affordable health insurance coverage option available.

Background—premium tax credit. The Code Sec. 36B credit is a refundable tax credit for coverage purchased through “Affordable Insurance Exchanges” (also called Marketplaces or simply Exchanges) designed to make health insurance affordable for “applicable taxpayers” with modest incomes (i.e., between 100% and 400% of the federal poverty level, or FPL) who are not eligible for other qualifying coverage, such as Medicare, or “affordable” employer-sponsored health insurance plans that provide “minimum value.” “Affordability” for this purpose means that the amount of the employee’s required contribution for self-only coverage doesn’t exceed a specified percentage of household income.

Here is how the Code Sec. 36B credit is designed to work:

  • . . . An eligible individuals purchases affordable coverage through an Exchange that offers qualified health insurance plans.
  • . . . The Exchange makes subsidy payments to the qualified health plan on behalf of the individual. The subsidy payments take the form of an advance credit payment under Code Sec. 36B (unless the individual chooses not to get the credit in advance). Using information available at the time of enrollment, the Exchange determines (1) whether the individual meets the income and other requirements for advance credit payments, and (2) the amount of the advance payments.
  • . . . At tax return time, the eligible individual reconciles the actual credit for the tax year computed on his tax return with the amount of advance payments paid on his behalf. Special rules apply if the advance payments exceeded or were insufficient to cover the taxpayer’s actual credit amount.

The amount of the credit is based on a number of factors, including how much premiums for the selected qualified health plan cost in relation to the second lowest cost silver plan offered through the Exchange for the rating area where the taxpayer resides that would provide coverage to the taxpayer’s family. That silver plan is referred to as the “benchmark plan.” Complex rules apply to aggregate multiple policies when one or more silver-level plans offered through an Exchange do not cover all members of a taxpayer’s coverage family under one policy.

A qualified health plan must offer the “essential health benefits package” as described in §1302 of the Affordable Care Act, which includes pediatric services, including oral and vision care. For an individual who enrolls in both a qualified health plan and a stand-alone dental plan, the portion of the premium for the dental plan that is properly allocable to pediatric dental benefits is added to the premium for the benchmark plan in computing the premium tax credit. (Code Sec. 36B(b)(3)(E))

Under Code Sec. 36B(f)(3), Exchanges must report to IRS and to taxpayers certain information relating to the computation and administration of the premium tax credit, including: (1) the level of coverage, (2) identifying information for the primary insured and each enrollee, (3) the amount of premiums and advance credit payments for the coverage, (4) information provided to the Exchange necessary to determine eligibility for and the amount of the credit, and (5) other information necessary to determine if a taxpayer has received the appropriate advance credit payments.

New proposed regs. The new proposed regs, which are generally proposed to apply for tax years beginning after Dec. 31, 2016 (except as otherwise provided), include the following new provisions:

Eligibility determinations based on taxpayer misinformation. The existing regs provide that if an Exchange determines at enrollment that a taxpayer’s household income will fall within the 100-400% of FPL range, the taxpayer won’t lose his status as an “applicable taxpayer” because household income turns out to be below 100% of FPL. (Reg. § 1.36B-2(b)(6)) Similarly, the existing regs don’t require repayment of advance credit payments for taxpayers that an Exchange erroneously determines are ineligible for government-sponsored coverage, like Medicaid. The proposed regs would modify these rules by providing that a taxpayer whose household income is below 100% of FPL isn’t treated as an applicable taxpayer, and an individual who was determined or considered by an Exchange to be ineligible for Medicaid, CHIP, or a similar program (such as a Basic Health Program) may be treated as eligible for coverage under the program if, with intentional or reckless disregard for the facts, the provided incorrect information to the Exchange. (Prop Reg § 1.36B-2(b)(6)(i), Prop Reg § 1.36B-2(b)(6)(ii), Prop Reg § 1.36B-2(c)(2)(v))

Nonappropriated Fund Health Benefits Program. The proposed regs would provide that the Nonappropriated Fund Health Benefits Program is treated as an eligible employer-sponsored plan for purposes of determining if an individual is eligible for minimum essential coverage under Code Sec. 36B. (Prop Reg § 1.36B-2(c)(3)(i))

Limited enrollment opportunities. In light of the fact that some individuals may not have an annual opportunity to enroll in employer-sponsored coverage, the proposed regs would clarify that if an individual declines to enroll in employer-sponsored coverage for a plan year and does not have the opportunity to enroll in that coverage for one or more succeeding plan years, for purposes of Code Sec. 36B, the individual is treated as ineligible for that coverage for the succeeding plan year or years for which there is no enrollment opportunity. (Prop Reg § 1.36B-2(c)(3)(iii)(A))

Excepted benefits. The proposed regs clarify that for purposes of Code Sec. 36B, an individual is considered eligible for coverage under an eligible employer-sponsored plan only if that plan is minimum essential coverage, and thus an individual enrolled in or offered a plan consisting solely of excepted benefits is not denied the premium tax credit by virtue of that excepted benefits offer or coverage. Taxpayers may rely on this rule for all tax years beginning after Dec. 31, 2013.

Treatment of “opt-out” payments. In determining whether employer-sponsored coverage is affordable, an employee’s required contribution includes the amount by which the employee’s salary would be reduced to enroll in the coverage. (Reg. § 1.36B-2(c)(3)(v)) IRS reasoned that if an employer makes an “opt-out” payment (i.e., for an employee that declines coverage) available to an employee, the choice between cash and health coverage is analogous to the option to pay for coverage by salary reduction, in that both are functionally cash that the employee would otherwise receive, and thus the employee’s required contribution should be determined similarly regardless of the type of payment that the employee must forgo. Accordingly, the proposed regs, generally adopting the approach previously set out in Notice 2015-87 (see Weekly Alert ¶  4  12/24/2015), would provide that the amount of an opt-out payment made available to an employee under an unconditional opt-out arrangement increases the employee’s required contribution. (Prop Reg § 1.36B-2(c)(3)(v)(A)(7)) However, the proposed regs would provide that amounts made available under an “eligible opt-out arrangement” (in general, one that is conditioned on the employee providing “reasonable evidence” that he and all individuals for which he reasonably expects to claim a personal exemption deduction have or will have minimum essential coverage) are disregarded in determining the required contribution if certain requirements are met. Although these provisions are generally proposed to apply upon their publication as final regs, for periods before they are applicable (and, if later, through the end of the most recent plan year beginning before Jan. 1, 2017), an individual who can demonstrate that he meets the conditions for an opt-out payment under an eligible arrangement is nonetheless entitled to treat the payment as increasing his required contribution. Special transition relief also applies for opt-out arrangements contained in collective bargaining agreements in effect before Dec. 16, 2015. (Notice 2015-87; Preamble to Prop Reg ) Similar provisions concerning opt-out arrangements would also be added to Prop Reg § 1.5000A-3(e)(3).

Delayed discontinuance of advance credit payments. Under the proposed regs, if an individual who is enrolled in a qualified health plan for which advance credit payments are made informs the Exchange that he is or will soon be eligible for other minimum essential coverage and that advance credit payments should be discontinued, but the Exchange does not discontinue advance credit payments for the first calendar month beginning after the month the individual notifies the Exchange, the individual is treated as eligible for the other minimum essential coverage no earlier than the first day of the second calendar month beginning after the first month the individual may enroll in the other minimum essential coverage. Taxpayers may rely on this rule for all tax years beginning after Dec. 31, 2013. (Prop Reg § 1.36B-2(c)(4)(ii))

Premium assistance amount. A month in which an individual who is enrolled in a qualified health plan is a coverage month for the individual only if the taxpayer’s share of the premium for the individual’s coverage for the month is paid by the unextended due date of the taxpayer’s income tax return for the year of coverage, or the premium is fully paid by advance credit payments. (Reg. § 1.36B-3(c)(1)(ii)) However, if an Exchange determines that an individual who enrolls in a qualified health plan is not eligible for advance credit payments, and the individual does not enroll at that time but appeals and is later determined to be eligible, the individual may elect to be retroactively enrolled from the date on which he would have enrolled had he been initially determined eligible. This may result in the deadline for paying premiums for retroactive coverage occurring after the unextended due date for filing an income tax return for the year of coverage. Consequently, the proposed regs provide that such a taxpayer is considered to have satisfied Reg. § 1.36B-3(c)(1)(ii) for a month if the taxpayer pays the taxpayer’s share of the premium for coverage under the plan for the month on or before the 120th day following the date of the appeals decision. (Prop Reg § 1.36B-3(c)(4)) Taxpayers may rely on this rule for all tax years beginning after Dec. 31, 2013.

Short coverage months. When a covered individual disenrolls in a qualified health plan before the last day of a month but the plan is not terminated, the proposed regs provide that the premium assistance amount for a month is the lesser of: (i) the enrollment premiums for the month (reduced by any amounts that were refunded), or (ii) the excess of the benchmark plan premium over the contribution amount for the month. Taxpayers may rely on this rule for all tax years beginning after Dec. 31, 2013. (Preamble to Prop Reg )

Benchmark plan premium. Proposed to apply for tax years beginning after Dec. 31, 2018, for purposes of computing the benchmark plan premium, the proposed regs would include: (i) a method for reflecting the cost of pediatric dental benefits in cases where the second-lowest cost silver plan doesn’t provide them; (ii) a method for calculating the cost for a benchmark health plan where the taxpayer’s family members reside in different locations; (iii) a new rule to clarify and simplify the benchmark premium determination for situations in which a silver-level plan does not cover all the members of a taxpayer’s coverage family under one policy; (iv) consistent treatment of qualified health plans and stand-alone dental plans that are closed to enrollment or that terminate during the tax year; and (v) clarification that, if only one silver-level plan is available, that plan would be used for purposes of the applicable benchmark plan. (Prop Reg § 1.36B-3(f))

Reconciliation of advance credit payments. To clarify which individual must reconcile advance credit payments, the proposed regs would provide that if advance credit payments are made for coverage of an individual for whom no taxpayer claims a personal exemption deduction, the taxpayer who attests to the Exchange to the intention to claim a personal exemption deduction for the individual, and not the individual for whose coverage the advance credit payments were made, must file a tax return and reconcile the advance credit payments. (Prop Reg § 1.6011-8(a))

Information reporting. With respect to information reporting rules, the proposed regs would: (i) clarify that, when multiple families enroll in a single qualified health plan and advance credit payments are made for the coverage, the enrollment premiums reported by the Exchange for each family is the family’s allocable share of the enrollment premiums, which is based on the proportion of each family’s applicable benchmark plan premium; and (ii) clarify how enrollment premiums and benchmark plan premiums are reported where one or more individuals is enrolled or disenrolled in coverage mid-month. (Prop Reg § 1.36B-5(c)(3)(iii))

References: For premium tax credits, see FTC 2d/FIN ¶  A-4241  ; United States Tax Reporter ¶  36B4  ; TaxDesk ¶  138,700  ; TG ¶  1381  .

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