The Affordable Healthcare Act: The Individual Mandate

One of the most controversial elements of the Affordable Care Act has been the requirement that substantially all Americans obtain health insurance.  I find this controversy a bit curious.

People become ill, suffer diseases, and experience accidents and other trauma whether they are insured or not.  Those without insurance often go to a hospital emergency room for treatment.  Under the Emergency Medical Treatment and Active Labor Act (EMTALA) (42 U.S.C. § 1395dd (2006)), anyone who seeks emergency treatment in a hospital which participates in Medicare and which has an emergency department must be examined.  Nearly all hospitals are affected.  If an emergency medical condition exists, the hospital must treat and stabilize the patient, either in its own facilities or by transfer to an outside facility.

Examination and treatment in the emergency room is expensive.   The only way a hospital can recover such costs is by passing them on to self-pay patients and those with insurance.  The result is that paying patients help subsidize the uninsured.

Under the Affordable Care Act, beginning January 1, 2014, the individual shared responsibility provision of the law (the “Individual Mandate”) requires each individual to have minimum level of healthcare coverage (known as “Minimum Essential Coverage”) Certain persons may be exempt from the requirement.  Those who fail to comply will be required to make a payment to the IRS when filing federal income tax returns.

Who is subject to the individual shared responsibility provision?

The Individual Mandate applies to individuals of all ages, including children. Adults or married couples who can claim a child or another individual as a dependent for federal income tax purposes are responsible for making the payment if their dependent does not have coverage or an exemption.

What counts as minimum essential coverage?

The Affordable Care Act does not require anyone to terminate group or individual health plan coverage which he has in effect.  Most individuals in the United States have health coverage today that will count as minimum essential coverage and they will not need to do anything more than continue the coverage that they have.

Any one of the following types of coverage meets the requirement of the Individual Mandate:

  • Employer-sponsored coverage (including COBRA coverage and retiree coverage)
  • Insurance coverage purchased by and individual directly from the provider
  • Medicare coverage (including Medicare Advantage)
  • Medicaid coverage
  • Children’s Health Insurance Program (CHIP) coverage
  • Certain types of Veterans health coverage
  • TRICARE

Minimum Essential Coverage does not include specialized coverage, such as vision care, dental care, workers’ compensation, disability policies, or coverage only for a specific disease or condition, e.g., cancer coverage.

The Department of Health and Human Services has proposed that student health plans and coverage provided by foreign governments qualify under the Act, and other programs may also be deemed to qualify.

Exemptions from the Individual Mandate

The following persons are exempt from the Individual Mandate:

Religious conscience: Persons who are members of a religious group that is recognized as conscientiously opposed to accepting any insurance benefits are exempt.

Health care sharing ministry: Members of a recognized health care sharing ministry.

Indian tribes: Members of a federally recognized Indian tribe.

No filing requirement: Persons whose household income is below the minimum threshold for filing a tax return.

Short coverage gap: Persons who have gone without coverage for less than three consecutive months during the year.

Hardship: Persons certified to have suffered a hardship that makes the individual unable to obtain coverage.

Unaffordable coverage options: Persons who cannot afford coverage because the minimum amount for premiums, e.g., an employee’s share of premiums, is more than eight percent (8%) of household income.

Incarceration: Persons in a jail, prison, or similar penal institution or correctional facility after the disposition of charges against them.

Not lawfully present: Persons who are not U.S. citizens, U.S. nationals, nor aliens lawfully present in the U.S.

Penalties for Non-Compliance

Individuals who are subject to the Individual Mandate, but who fail to comply are subject to penalties to be paid to the Internal Revenue Service.

Annual penalties for individuals and their dependents over age 18 are the lesser of:

  • Premium equivalent.  An amount equal to the national average premium payment for the applicable tax year for “bronze level” qualified health plan coverage (bronze level coverage provides the equivalent of 60 percent of the full actuarial value of plan benefits); or
  • Percentage of income or flat penalty.  A percentage of individuals’ income or the annual flat penalty amount, whichever is greater

Annual penalties for those under age 18 are one-half of the amount for those over 18

Given the cost of healthcare premiums, most persons subject to the penalty will likely pay the flat penalty or a percentage of income. The penalties are phased in over three years.

Year

Percentage of Income

Flat Penalty
2014 1.0% $95.00
2015 2.0% $325.00
2015 2.5% $695.00
2016 and beyond 2.5% $695.00 subject to COLA

Individuals will not be subject to penalties if:

  • Premiums are too high.  Their annual required health care coverage premiums exceed 8% of their household income for the taxable year;
  • Income is too low.  Their income for the taxable year is low enough that they are not required to file an income tax return;
  • Not qualified due to hardship.  They are unable to obtain qualified health plan coverage due to a hardship as determined by the federal Secretary of Health and Human Services; or
  • Certain Indian tribes.  They are members of certain Indian tribes.

Persons who fail to comply cannot, however, be made subject to criminal prosecution by the IRS.

Published in: on February 3, 2013 at 6:33 am  Leave a Comment  
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The Affordable Care Act: Obligations of Large Employers

Which Employers Are Covered?

Beginning January 1, 2014, employers with at least 50 full-time employees or a combination of full-time and part-time employees equivalent to at least 50 full-time employees, e.g., 100 half­time employees, will be subject to the Employer Shared Responsibility provisions under the Affordable Care Act. A full-time employee is one who works on average at least 30 hours per week.  A half-time employee is one who works at least 15 hours per week.

In determining whether an employer is subject to the Employer Share Responsibility requirements on January 1, 2014, the IRS will look to employment during 2013.  Employers whose number of employees fluctuates throughout the year will use averages to determine whether they will fall within the definition of Applicable Large Employer.  The proposed regulations provide additional information about how to determine the average number of employees for a year, including information about how to take account of salaried employees who may not clock their hours and a special rule for seasonal workers.

It is not uncommon for a small employer to own more than one company.  The IRS has long treated certain companies under common ownership as one company in determining application of certain rules and regulations.  The same approach will apply with the Employer Shared Responsibility Provisions.  For example, if Joan Smith owns both the ABC Widget Company and the XYZ Widget Installation Company, each with 25 employees, it is possible that the companies will be treated as one and both will be subject to the new regulations.

What Is the Employer Shared Responsibility Requirement?

The Employer Share Responsibility obligation requires an employer to make payments to the IRS if it fails to comply with the mandates of the Act.  This particular provision of the Act falls within the Internal Revenue Code.

Covered employers who do not offer affordable health coverage that provides a minimum level of coverage to their full-time employees may be subject to Employer Shared Responsibility payments if at least one of their full-time employees receives a premium tax credit for purchasing individual coverage on one of the new Affordable Insurance Exchanges.

How Do Employers Comply and Avoid the Shared Responsibility Payment?

A covered employer will not be subject to an Employer Shared Responsibility payment if the employer offers affordable health coverage that provides a minimum level of coverage to its full-time employees.

An employer is liable for the payment only if

  • The employer does not offer health coverage at all or offers coverage to less than 95% of its full-time employees, and at least one of the full-time employees receives a premium tax credit to help pay for coverage on an Insurance Exchange; or
  • The employer offers health coverage to at least 95% of its full-time employees, but at least one full-time employee receives a premium tax credit to help pay for coverage on an Exchange, because the coverage the employer offered that employee was either unaffordable to the employee or did not provide minimum value.

Premium Tax Credits are provide to help pay for coverage for employees of limited means.  Credits are available to employees

  • Whose family income is between 100% and 400% of the federal poverty level and who enroll in coverage through an Affordable Insurance Exchange.  (The federal poverty level for 2012 for a family of four was $23,050, meaning that any employee whose family income for a family of four was between $23,050 and $92,200, who enrolls in coverage in an Affordable Insurance Exchange, would be eligible for the Credits.)
  • Who are not eligible for coverage through a government-sponsored program like Medicaid or CHIP, and
  • Who are not eligible for coverage offered by an employer or are eligible only for employer coverage that is unaffordable or that does not provide minimum value.

Determining Whether Coverage Is Affordable

If an employee’s share of the premium for employer-provided healthcare coverage for the employee lone (as opposed to family coverage) would cost the employee more than 9.5% of that employee’s annual household income, the coverage is not considered affordable for that employee. If an employer offers more than one healthcare coverage option, the affordability test applies to the lowest-cost option available to the employee that also meets the established minimum value requirement.  For example, if the employee’s annual household income were $50,054, the median family income as of 2011, the premium paid by the employee could not exceed $4755.

Recognizing that employers are not likely to know the household income for each of their employees, the regulations provide some safe harbors.  The first safe harbor provides that the plan is deemed affordable if the cost to the employee of self-only coverage does not exceed 9.5% of the W-2 wages paid by the employer to the employee during the relevant year.

In determining whether the plan meets the minimum value standards, employers may use an actuarial value calculator which the Department of Health and Human Services has made available.  To meet the minimum value criteria, the plan must cover at least 60% of the total allowed cost of benefits expected to be incurred under the plan.

How is the Employer Shared Responsibility Payment Determined?

If a covered employer does not offer coverage to at least 95% of its full-time employees, and at least one full-time employee receives the premium tax credit, the employer will owe an Employer Shared Responsibility payment equal to the number of full-time employees the employer employed for the year (minus 30) multiplied by $2,000.  For purposes of calculating the payment, only full-time employees are counted, not full time equivalents.

For an employer that actually offers coverage to at least 95% of its full-time employees in 2014, but has one or more full-time employees who receive a premium tax credit, the payment will be computed separately for each month. The amount of the payment for the month will be the number of full-time employees who receive a premium tax credit for that month multiplied by 1/12 of $3,000. The amount of the payment for any calendar month will be capped at the number of the employer’s full-time employees for the month (minus up to 30) multiplied by 1/12 of $2,000.  This cap ensures that an employer that offers coverage will never owe more than an employer who does not offer coverage.

Conclusion

There are a number of variables that may impact final decisions of employers.  Among those are (i) whether Congress modifies current tax law to tax the value of health insurance benefits; (ii) whether high deductible plans and other options which are less expensive than traditional healthcare will meet the affordability and value criteria of the law; and (iii) what new insurance options will be available in 2014 in light of the requirements of the new law.

Published in: on January 19, 2013 at 6:00 pm  Leave a Comment  
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