IRS Issues Rules on Small Employer Health Insurance Credit

IRS guidance addresses Affordable Care Act’s individual mandate and employer reporting requirements

During the past several weeks, the IRS has released a spate of guidance on the Patient Protection and Affordable Care Act (the Affordable Care Act). This has included final regulations (meaning regulations that have undergone the public comment process and which are effective) on the requirement that all individuals obtain health care coverage. It also includes proposed regulations clarifying the reporting requirements for health insurance issuers, sponsors of self-insured health plans, and government agency that administers government-sponsored insurance programs, and other entities that provide minimum essential coverage (MEC) with respect to the annual returns due under Code Sec. 6055. (The annual reporting requirements were originally set to become effective on January 1, 2014, but were delayed one year until January 1, 2015.)

The IRS also provided clarification relating to high-deductible health care plans that provide coverage for certain preventative care services as required by the Affordable Care Act. The guidance, issued in Notice form as Notice 2013-57, clarifies that such high-deductible health plans (HDHP) can comply with the Affordable Care Act and provide preventative care services without losing their status as HDHPs.

Individual mandate

The IRS has issued final regs on the individual shared responsibility provision under Code Sec. 5000A, also known as the “individual mandate,” which becomes effective on January 1, 2014. The requirement is designed to expand health care coverage to millions of Americans who currently lack coverage or who do not have adequate coverage. The individual mandate requires each individual to have basic health insurance coverage, which the Affordable Care Act refers to as minimum essential coverage (MEC). An individual who lacks MEC and who does not qualify for an exemption from the coverage requirement must make a shared responsibility payment.

One of the key issues under the individual mandate is whether an individual has access to health insurance coverage and whether that coverage qualifies as MEC. The IRS has provided extensive guidance on whether or not particular coverage is MEC.

The IRS final regulations specify that MEC includes certain employer-sponsored coverage, Medicare and Medicaid, and other government-provided coverage. Another feature of the Affordable Care Act is the establishment of affordable insurance marketplaces, or exchanges, designed to provide access to cheaper insurance for individuals and small employers. Insurance from a marketplace is MEC.

In addition, self-insured group health plans are eligible employer-sponsored plans and generally will be MEC. Plans offered by a third-party on behalf of an employer are treated as eligible employer-sponsored plans and qualify as MEC. Third-party arrangements include multi-employer plans, collectively-bargained plans, and plans offered by a professional employer organization or leasing company.

Exemption from the mandate. Another key issue addressed in the Tax Code and the final regulations is the application of statutory exemptions that exempt individuals from the mandate even though they do not have health insurance. Exemptions can be for religious grounds, hardship, lack of affordable coverage, membership in an Indian tribe, or a short coverage gap, among others. Some exemptions must be claimed through an Exchange; others must be claimed on a tax return. The Department of Health and Human Services issued regulations to address how to request an exemption from an Exchange. However, the IRS’s final regulations do not address this topic.

Information reporting

Under the Affordable Care Act, every health insurance issuer, sponsor of a self-insured health plan, government agency that administers government-sponsored insurance programs, and other entities that provide their employees with a health care plan that offers minimum essential coverage (MEC) must file annual returns reporting that MEC for plan years beginning on or after January 1, 2015.

The IRS proposed guidance on the health coverage information reporting obligations for insurers and large employers explain a number of key elements. These elements include:

  • Who is responsible for reporting;
  • Which forms must be used to report information (Forms 1095-B and 1095-C, which are still pending, or certain substitute forms);
  • The filing deadlines and delivery methods; and
  • Examples of the required content.

The Affordable Care Act and Code Sec. 6056 also require an applicable large employer (ALE)-defined as an employer that employed an average of at least 50 full-time employees on business days during the preceding calendar year-that is required to meet the employer shared responsibility requirements of Code Sec. 4980H to file an annual return reporting health coverage provided to qualified employees.

Under the proposed regs, an ALE would report items to the IRS on a Code Sec. 6056 return, including:

  • Information about coverage (including contact information for the employer and the number of full-time employees).
  • A list of full-time employees and information about coverage offered to each, by month, including the cost of self-only coverage.

Code Sec. 6056 returns must be filed with the IRS no later than February 28 (March 31 if filed electronically) of the year immediately following the calendar year to which the return relates. Electronic filing of Code Sec. 6056 returns is required except for an ALE filing fewer than 250 returns during the calendar year.

Because of the one-year delay of the effective date, the first Code Sec. 6056 returns will be required to be filed for calendar year 2015. The returns must be filed no later than March 1, 2016 (February 28, 2016 falls on a Sunday) or March 31, 2016, if filed electronically.

High-deductible health plans

IRS guidance clarifies that a health plan attached to a health savings account (HSA) will not fail to qualify as a high deductible health plan (HDHP) merely because it provides preventive care services that are required by the Affordable Care Act without charging a deductible. Preventive care services described in earlier guidance and under the Affordable Care Act will be treated as qualified preventive services, the agency explained.

An HDHP generally involves a low premium charged for health coverage in exchange for higher deductibles. A taxpayer must therefore foot the bill for a greater portion of his or her medical costs than he or she would under a health care plan with higher premiums. An HDHP is generally paired with an HSA, which is a tax-exempt trust or custodial account. The HSA allows an individual covered by a high deductible health plan to make tax-favored contributions that can later be used to pay or reimburse the taxpayer for the cost of qualified medical expenses.

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