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IRS Issues Final Regulations on Individual Mandate Provision

Internal Revenue Service Building SignOn August 27, 2013, the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) issued final regulations on the individual mandate provision of the Affordable Care Act (ACA) and a corresponding fact sheet, which highlights key provisions included in the final regulations.  Starting in 2014, section 5000A of the Internal Revenue Code (Code), as added by the ACA, requires individuals who are not exempt by law to maintain “minimum essential coverage” (MEC) for themselves and certain family members or pay a “shared responsibility” payment with their federal income tax return.1 The requirement to obtain and maintain MEC, starting in 2014, is known as the “individual mandate.”  An individual taxpayer is liable, under the “individual mandate,” for any nonexempt individual whom the taxpayer may claim as a dependent.

Proposed regulations under Code section 5000A were previously issued last February.  The final regulations, issued on August 27, keep the provisions included in the proposed regulations largely intact. They also clarify certain rules regarding which healthcare coverage options qualify as MEC and provide further guidance to individuals who may qualify for an exemption from the individual mandate.

Minimum Essential Coverage (MEC)
The final regulations clarify that MEC includes the following statutory categories of coverage:2

•   Employer-sponsored coverage (including COBRA coverage and retiree coverage)

•   Coverage purchased in the individual market (including through the Health Insurance Marketplace and plans offered in U.S. territories)

•   Medicare Part A coverage and Medicare Advantage plans

•   Most Medicaid coverage

•   Children’s Health Insurance Program (CHIP) coverage

•   Certain types of veterans health coverage administered by the Veterans Administration

•   TRICARE (healthcare program for uniformed service members, retirees, and their families)

•   Coverage provided to Peace Corps volunteers

•   Coverage under the Nonappropriated Fund Health Benefit Program

•   Refugee Medical Assistance supported by the Administration for Children and Families

•   Self-funded health coverage offered to students by universities for plan or policy years that begin on or before December 31, 2014

•   State high-risk pools for plan or policy years that begin on or before December 31, 2014

MEC does not include specialized coverage, such as coverage that is limited only to dental or vision care or to a specific disease or condition.  With respect to employer-sponsored coverage, the regulations clarify that a plan offered “on behalf of” an employer may qualify as MEC.  Language in the preamble to the final regulations indicates that this coverage may include both multiemployer and single employer collectively bargained plans and plans offered by a professional employer organization (PEO) or leasing company.  With respect to a PEO or leasing company plan, the preamble also indicates that this rule does not have any impact on which entity should be treated as the employer under other tax or related laws.

Individual Mandate Exemptions
Beginning in 2014, the Small Business Healthcare Tax final regulations outline nine categories of individuals who are exempt from the individual mandate. These include:

•   Individuals who cannot afford coverage;

•   Taxpayers with income below the filing threshold;

•   Members of federally recognized Indian tribes;

•   Individuals who have experienced a hardship;

•   Individuals who experience short coverage gaps;

•   Individuals who object due to religious conscience;

•   Members of a healthcare-sharing ministry;

•   Incarcerated individuals; and,

•   Individuals who are not lawfully present in the United States.

The preamble to the final regulations clarifies that the authority to define circumstances giving rise to a hardship exemption from the individual mandate, as well as the authority to grant hardship exemptions in individual cases, resides with the U.S. Department of Health and Human Services (HHS). HHS regulations also provide that the IRS may permit an individual to claim a hardship exemption under two additional circumstances:

•   A taxpayer may claim a hardship exemption if the taxpayer is not required to file an income tax return because his or her gross income is below the applicable filing threshold, but the individual files a return claiming a dependent with a return filing requirement and, as a result, had household income that exceeds the applicable filing threshold.

•   A taxpayer may claim a hardship exemption for employed family members, who are eligible for affordable employer-sponsored coverage, but for whom the aggregate cost of employer-sponsored coverage for all employed members of the family is unaffordable.

As the information required to determine eligibility for the above-listed hardship exemptions is available only at the time of tax filing, the final regulations provide that individuals may claim these two hardship exemptions through the IRS tax filing process.
The religious conscience exemption and the hardship exemption must be certified through a Health Insurance Marketplace/Exchange.  Exemptions that are to be claimed through the IRS tax return filing process include: individuals who are not lawfully present in the United States, taxpayers with household income below the filing threshold, individuals who cannot afford coverage, and individuals who experience short coverage gaps.  Treasury and the IRS have indicated that the remaining three exemptions (members of a healthcare-sharing ministry, individuals who are incarcerated, and members of federally recognized Indian tribes) may be claimed through either the Health Insurance Marketplace/Exchange or through the IRS tax return filing process.  HHS regulations address how to request certification for an exemption from a Marketplace/Exchange.  The IRS has indicated that it will address how to claim an exemption via the tax return filing process through the issuance of forms, instructions or other publications.

Partial-Month Coverage and Short Coverage Gaps
The final regulations also clarify that an individual is treated as having coverage for a month if he or she has coverage for any one day of that month.  Also, an individual who is eligible for an exemption for any one day of a month is treated as exempt for the entire month.  The preamble to the final regulations indicates that Treasury and the IRS chose the one-day rule, because it provides administrative convenience for both taxpayers and the IRS.  The IRS further indicates in the preamble, however, that it may reconsider this rule if it is found that the rule is being abused – for example, if individuals obtain coverage for a single day in a month over the course of several months in a year.

Section 5000A also provides an exemption for short coverage gaps that are less than three (3) months in duration.  The statute generally provides that a coverage gap be measured without regard to the calendar year in which the gap occurs.  The final regulations generally adopt the rules that were included in the proposed regulations, which state that for the earlier taxable year the coverage gap terminates at the end of the earlier taxable year.  For the later taxable year, the coverage gap continues from the earlier taxable year and terminates when the individual obtains MEC.

The final regulations contain an example where an individual loses coverage on October 15 and does not obtain MEC until February 15 of the following year.  The individual would not owe a payment on the income tax return that is filed for the first taxable year since November and December of that taxable year are treated as a short coverage gap.  November and December will be included, however, in the continuous period that includes January of the following taxable year for the federal tax return filed by the individual for the second taxable year.  Because the coverage gap is not less than three (3) months (it includes November, December and January) a payment will be applicable unless the individual is otherwise exempt from the individual mandate.  The final regulations clarify that gaps in coverage prior to January 1, 2014, are not taken into account when measuring the length of a coverage gap in 2014.

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Additional Guidance
On June 27, 2013, the IRS issued Notice 2013-42, which provides transitional relief to individuals who are eligible to enroll in employer-sponsored coverage with a plan year that runs on a non-calendar year basis.  For more information on IRS Notice 2013-42, please refer to our August 21st Eye on Washington.

Treasury and the IRS have indicated that future guidance will be issued to address other issues not addressed in the final regulations, such as:

•   How arrangements in which an employer provides subsidies or funds a pretax arrangement for employees to use to obtain coverage through the individual market should be treated

•   How individuals may claim the exemption for being not lawfully present in the United States

•   Guidance that may provide individuals an exemption from the individual mandate payments for certain coverage received through governmental plans in 2014, which currently do not qualify as MEC.

For More Information
1. IRS Questions & Answers on the Individual Shared Responsibility Provision is available at http://www.irs.gov/uac/Affordable-Care-Act-Provisions-for-Small-Employers
2. Department of Treasury Fact Sheet: Individual Shared Responsibility for Health Insurance Coverage and Minimum Essential Coverage Final Rules is available at http://www.treasury.gov/press-center/press-releases/Pages/jl2152.aspx
3. Additional information for employers regarding the Affordable Care Act (ACA) is available at www.healthcare.gov and www.dol.gov/ebsa/healthreform.

1 For purposes of the Individual Mandate, “minimum essential coverage” under an eligible employer-sponsored plan includes coverage under a group health plan offered by an employer to the employee that is (i) a governmental plan, (ii) any other plan or coverage offered in the small or large group market within a state (including for this purpose a self-insured group health plan), or (iii) a grandfathered health plan offered in a group market.
2 Department of the Treasury Fact Sheet: Individual Shared Responsibility for Health Insurance Coverage and Minimum Essential Coverage Final Rules (August 27, 2013).



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