IRS Final Regulations on 10/13/22 – Eligibility for the PTC

On Oct 13, 2022, the IRS released the final regulations regarding Affordability of Employer Coverage for Family Members of Employees and how this affects eligibility for the Premium Tax Credit (PTC). 

Background

The final regulations amend the Income Tax Regulations (26 CFR part 1) under section 36B of the Code. 

The IRS and Treasury Department announced the proposed regulations in a notice on Apr 7, 2022 in the Federal Register (87 FR 20354) under section 36B and a hearing was held on Jun 27, 2022. 

For the purposes of determining eligibility for the PTC, these final regulations provide that the employee’s share of the family plan is used for determining affordability of employee coverage for family members.

The affordability rule in the final regulations interprets the relevant statutes more accurately, and complies with Congress’ intention to increase access to affordable health insurance through the Affordable Care Act.

Additionally, the final regulations amend the minimum value determination, conform the changes to existing , and clarify how premium refunds will be handled.

Important Definitions

  • Affordability – This is the highest percentage of household income an employee can be required to pay for monthly health coverage based on the lowest-cost employer-sponsored plan that meets the ACA requirements. 
  • Family Members – A taxpayer’s family consists of the taxpayer, the taxpayer’s spouse (if filing jointly), and any dependents of the taxpayer. 
  • Minimum Essential Coverage (MEC)- This is coverage that is considered affordable and that provides minimum value based on ACA requirements. 
  • Minimum Value (MV) – This is a standard of minimum coverage that applies to health plans. 
  • Premium Tax Credit (PTC) – This is a tax credit that can be used to lower the monthly health insurance payment when enrolled in certain plans. 

Eligibility for Employer Coverage Under Section 36B

Section 36B provides a PTC for applicable taxpayers that meet certain eligibility requirements. An individual may be allowed a PTC if: 

  • The individual or their family member enrolled in health insurance coverage through the Marketplace for at least one month of a calendar year in which they were not eligible for affordable employer-sponsored plans that provide MV or government health coverage. 
  • The health insurance premium for at least one of those months are paid by the original due date of the individual’s tax return. 
  • The individual is within certain household income limits.
    • If the individual or their spouse (if filing jointly) receive, or is approved to receive, unemployment compensation for any week of the year, then they may be considered within these limits.
  • The individual does not file a ‘married filing separately’ tax return. There are certain exceptions to this rule. 
  • The individual cannot be claimed as a dependent by another person. 

When the IRS and Treasury Department issued regulations regarding affordability in 2013, the employee share of the premium for family coverage was not considered in determining whether employer coverage is affordable for family members. 

This meant that family members were not eligible for PTCs, even if the offered family health coverage was not affordable. 

Executive Order 14009, Strengthening Medicaid and the ACA

On Jan 28, 2021 President Biden issued Executive Order (EO) 14009, Strengthening Medicaid and the Affordable Care Act. This instructed the Secretary of Treasury to review regulations to determine whether they are inconsistent with policy to protect and strengthen the ACA. They were to examine policies or practices that may reduce affordability or financial assistance for coverage for everyone, including dependents. 

Proposed Regulations

The IRS and Treasury Department announced the proposed regulations in a notice on Apr 7, 2022 in the Federal Register (87 FR 20354) under section 36B. The proposed regulations: 

  1. Would amend § 1.36B–2(c)(3)(v)(A)(2) and change the affordability rule for employer coverage for related individuals.
    1. For PTC, the affordability of employer coverage for related individuals is determined based on the cost to cover the employee and those related individuals.
      1. Although some related individuals who are not family members may be offered coverage, the cost of covering those individuals is not considered when making this determination.
    2. This would not change the affordability rule for employees. 
  2. Would provide a separate MV rule for related individuals that is based on the level of coverage offered to them. 
  3. Would provide that an eligible employer-sponsored plan would provide MV only if the plan covers at least 60% of the total allowed costs of benefits provided to an employee under the plan and the plan benefits include substantial coverage of inpatient hospital and physician services.
    1. This rule was originally proposed in 2015, but never finalized. The 2015 proposal was withdrawn and this new rule was proposed. 
  4. Would amend § 1.36B–3(d)(1)(i) to clarify how PTCs are computed.

Explanations of Revisions

The Treasury Department and IRS received almost 4,000 comments in response, which were overwhelmingly in support of the proposed regulations. 

A few rules were finalized in the final regulations with no modifications, because commenters supported the proposed rules and did not want any modifications. These were: 

  • The minimum value rule for employees 
  • The clarification to how PTCs are computed

Some commenters had concerns regarding the affordability and minimum value rules for related individuals, but the Treasury Department and the IRS are adopting them as proposed. 

It was concluded that the new affordability rule is a better reading of the original statute, it promotes consistency between the affordability rules in Section 36B and 5000A, and is consistent with the ACA goal to provide affordable, quality health care to all Americans. 

It was also determined that having a separate MV rule for related individuals would be consistent with the goals of the ACA, therefore the final regulations state that an eligible employer-sponsored plan would provide MV for related individuals only if the plan covers at least 60% of the total allowed costs of benefits provided to them under the plan and the plan benefits include substantial coverage of inpatient hospital and physician services. 

Rationale for Change

Although there has been significant progress toward meeting the ACA goal of providing all Americans with the opportunity to enroll in comprehensive, affordable health coverage. For some, it is still unaffordable; almost 8% of the American population is still uninsured. Healthcare premium costs can be particularly challenging for families and the annual premium costs for families is only increasing over time. 

In alignment with the goals of the ACA, these final regulations are projected to increase the number of individuals with PTC-subsidized Exchange coverage. The affordability rule will increase affordability and accessibility of healthcare insurance and allow more individuals to become enrolled in affordable coverage. 

Outreach

These final regulations will present individuals and families with additional coverage options that they will need to understand and evaluate before determining what is right for them. Due to this, the IRS and Treasury Department have been working with the Department of Health and Human Services (HHS) to ensure that the agencies communicate this new information in an accessible ways, such as: 

  • HHS to revise the Exchange application to include new information.
  • HHS will provide training to agents, brokers, and assisters to ensure that applicants are knowledgeable of options prior to enrollment. 
  • IRS to implement new rules for 2023 tax year. 
  • IRS to update any relevant instructions, forms, publications, and documentation on site before the 2023 filing season. 
  • IRS, HHS, DOL, and Treasury Department will make outreach materials available and accessible to individuals and employers who wish to share the materials.

Issues for Employers

Information reporting

It is clarified that there is nothing within the final regulations that affect ACA information reporting for employers. 

The final regulations do not amend regulations under sections 6055 or 6056, nor do the final regulations require any additional data related to the new rules for ACA reporting using Forms 1095-B and 1095-C. 

The same safe harbor codes will also still be available for employer use. 

Non-Calendar Year Plans

Employees (and their family members) who are enrolled in employer plans associated with cafeteria plans should be able to discontinue their employer coverage during a plan year and enroll in a Qualified Health Plan (QHP). PTCs should be allowed for their Exchange coverage if other requirements of section 36B are met.

Due to this, IRS Notice 2022-41 was released concurrently with the final regulations to allow employees to revoke coverage in these plans to allow them to enroll in a QHP. 

Section 4980H Liability

An Applicable Large Employer’s liability for an Employer Shared Responsibility Payment (ESRP) with respect to its employees will not be directly affected by the final regulations.

An ESRP is typically triggered by the allowance of a PTC for an ALE’s full-time employee. Since the final regulations affect the PTC eligibility for related individuals and not for the employee, there will be no effect on the ESRP liability in that regard. 

However, the final regulations may have an indirect impact on an ALE’s liability for an ESRP if they do not offer affordable MEC to some of its full-time employees, but by not offering the appropriate coverage this is a risk that the ALE knowingly accepts. 

Other Comments

Some commenters had requests for changes and amendments, but ultimately the IRS did not implement any other changes.

Some commenters argued that the new regulations would be too costly, but the Treasury Department and the IRS disagree that the benefits are insufficient to justify the cost. 

Some commenters suggested that the regulations would have an adverse effect on the employer insurance market, but the Treasury Department and the IRS do not expect that the final regulations will have any meaningful effect on average premiums for employer plans. 

Conclusion

The final regulations are effective on Dec 12, 2022 and will have a huge impact on a huge portion of people. This rule is intended to provide individuals and families with more choices for health coverage by making more options affordable. 

The new affordability rule for family members does not change the availability of coverage for individuals or any aspect of their offered coverage. Nor does it affect family members who are offered coverage that is less than 9.5% of household income, because it is already affordable. Similarly, it does not affect family members whose offered coverage is more than 9.5% of household income, as the affordability status of their offer is unchanged and is considered unaffordable.

In contrast, the final regulations only affect family members (other than the employee) for whom the employee’s cost for the offered employer coverage does not exceed 9.5% of the household income for a self-only plan, but does exceed 9.5% for a family plan OR family coverage that is affordable, but does not offer Minimum Value. 

The new rule only affects family members of employees for whom may now qualify for a PTC, by making more options, specifically more affordable options, available. 

Finally, we recommend that employers always stay up to date on the latest tax news and keep up with their ACA compliance efforts year round. Doing so will help in avoiding filing penalties for ACA filings. This is incredibly important, now more than ever, as fine amounts and tax enforcement is increasing. 

If you’d like to learn more about Form 1095-C, check out our Essential Guide for Form 1095-C, or download our PDF Guide below: 

BoomTax, The Boom Post, and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors prior to engaging in any transaction.

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