Proposed Regulation on PPACA Premium Tax Credit – Part II

In general, the Proposed Regulation clarifies which individuals are eligible for federal premium assistance to enroll in a qualified health plan through an Exchange and how that assistance will be calculated.  Importantly, it also provides guidance as to the circumstances under which employers will be subject to the “shared responsibility” penalty (which some have referred to as the “play or pay” or “employer mandate” penalty). 

We discussed these new rules in last week’s column (see Proposed Regulation on PPACA Premium Tax Credit at http://www.plansponsor.com/Proposed_Regulation_on_PPACA_Premium_Tax_Credit.aspx), and continue with more frequently asked questions this week and next.

For purposes of the PPACA employer “play or pay” penalty, is the affordability of employer-sponsored coverage calculated based on the employee’s contribution to self-only coverage or family coverage?

An individual is treated as eligible for minimum essential coverage from an employer-sponsored plan only if the coverage is affordable.  Under PPACA, employer-sponsored coverage is deemed to be unaffordable if the contribution for self-only coverage exceeds 9.5 percent of household income.  The Proposed Regulation confirms that the affordability of employer-sponsored coverage for purposes of the employer mandate is calculated based on the employee’s contribution to self-only coverage, not family coverage.  In addition, it clarifies that an employer-sponsored plan is also affordable for dependents if the employee’s contribution for self-only coverage does not exceed 9.5 percent of household income.  The preamble notes, however, that future regulations regarding the individual mandate requirement (i.e., the provision that will penalize individuals who fail to obtain health care coverage) are expected to provide that “affordability” for purposes of the individual mandate will be based on the required contribution for family coverage.

Could an employer be subject to the employer “play or pay” penalty because the coverage it offers to employees is considered to be unaffordable, even if the employer has no way of knowing an employee’s household income?

The preamble to the Proposed Regulation provides that future regulations are expected to provide employers with a safe harbor for purposes of triggering the employer mandate penalty with respect to the affordability of employer-sponsored coverage.  Under the expected safe harbor, employers could calculate affordability based on the employee’s W-2 wages from the employer (not household income).  The safe harbor is expected to provide that if an employer offers its full-time employees (and dependents) the opportunity to enroll in employer-sponsored minimum essential coverage, the employer would not be penalized if an employee receives a premium tax credit because the coverage was determined to be “unaffordable” by the Exchange, so long as the employee’s required contribution does not exceed 9.5 percent of the employee’s current W-2 wages from the employer.  Treasury and IRS recently requested comments on this proposed safe harbor in Notice 2011-73.

Are there any other safe harbors in the Proposed Regulation that might affect employers?

The Proposed Regulation provides generally that if an individual's employer coverage is determined by an Exchange to be unaffordable at the time of the individual's enrollment in the Exchange, it is treated as unaffordable for the entire plan year (and thus the individual remains eligible for the tax credit), even if the individual's income changes during the year.  According to the preamble, future regulations under the employer mandate are expected to provide that an employer will not be penalized if an employee receives a premium tax credit for "unaffordable" coverage in these circumstances, so long as the employer otherwise offered affordable coverage that meets the employer mandate requirements.

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You can find a handy list of Key Provisions of the Patient Protection and Affordable Care Act and their effective dates at http://www.groom.com/HCR-Chart.html