IRS releases guidance on health insurance premium tax credit, affecting when employers will owe “play or pay” penalties

The IRS has issued proposed regulations implementing the health insurance premium tax credit created by the Patient Protection and Affordable Care Act of 2010. The guidance is significant to businesses because, under the act’s shared responsibility provisions, also known as “play or pay,” beginning in 2014 certain employers may be subject to penalties if just one employee receives the credit.

The credit helps eligible taxpayers purchase individual coverage through a health insurance exchange. The regulations provide additional guidance to employers on how to determine whether their employer-sponsored plans satisfy the requirements to disqualify employees for the credit, which, in turn, will allow them to avoid play-or-pay penalties.


Beginning on Jan. 1, 2014, the health care act requires “large” employers to offer a “minimum value” of “affordable” health coverage to their full-time employees or risk a penalty if at least one of their full-time employees receives a premium tax credit for purchasing individual coverage through one of the new affordable insurance exchanges.

A large employer is one with at least 50 full-time employees (defined as employees working on average at least 30 hours per week) or a combination of full-time and part-time employees that’s “equivalent” to at least 50 full-time employees. For a given calendar month, this requires totaling the hours of service for all part-time employees, dividing that figure by 120, and then adding the resulting number to the number of full-time employees.

To be eligible for the premium tax credit, an employee must not be offered a “minimum value” of “affordable” health coverage from his or her employer and must be an “applicable taxpayer.” An applicable taxpayer is one whose household income for the taxable year is between 100% and 400% of the federal poverty line for the taxpayer’s family size.

An employer that offers health coverage could be liable for penalties if just one full-time employee receives a premium tax credit because the coverage offered the employee either was unaffordable or didn’t provide minimum value. The IRS earlier released regulations addressing the affordability issue (please contact us to request the article “IRS releases guidance on health care act’s ‘play or pay’ provisions” for more information); the new regulations lay down the rules for minimum value.

Calculating minimum value

Under the health care act, a health plan provides minimum value only if the plan’s share of the total allowed costs of benefits provided to an employee (minimum value percentage) is at least 60%.

The minimum value percentage is the ratio of the share of total costs paid by the plan to the total costs of covered services.

Earlier this year, proposed regulations defined the minimum value percentage as the anticipated covered medical spending for benefits (accounting for the plan’s cost sharing, such as deductibles and co-pays) provided under a particular essential health benefits (EHB) benchmark plan for the standard population, divided by the total anticipated allowed charges for EHB coverage provided to the standard population. “Standard population” is the population of individuals covered by typical self-insured group health plans, as determined by the Department of Health and Human Services (HHS).

Those regulations provide that a plan can determine whether it provides minimum value by:

• Using the minimum value calculator available at (adjustments are permitted based on an actuarial analysis of plan features that are outside the parameters considered by the calculator),

• Complying with one of the safe harbors established by the HHS and the IRS (generally, plans that provide certain benefits within specific deductible, co-pay and other cost-sharing limits),

• For a plan with nonstandard features that are incompatible with the minimum value calculator and the safe harbors, obtaining actuarial certification of minimum value, or

• For a plan in the small group market, meeting the requirements for any of the levels of “metal coverage” (bronze, silver, gold or platinum), which are based on the level of cost-sharing.

Until now, employers were uncertain about exactly which health benefits would be considered in calculating minimum value, specifically for determining the share of benefit costs paid by a plan.

The uncertainty led to concern that employer-sponsored self-insured plans and insured large group plans would need to cover every type of benefit. The proposed regulations clarify that minimum value is based on only the anticipated spending for a standard population.

HSA and HRA contributions

The proposed regulations also address the question of whether employer contributions to health savings accounts (HSAs) and health reimbursement arrangements (HRAs) count toward the plan’s share of benefit costs for purposes of determining minimum value. Under the proposed regulations, all amounts contributed for the current plan year to an HSA are taken into account.

Amounts newly made available under an HRA that’s integrated with an eligible employer-sponsored plan for the current plan year also count toward the plan’s share of costs if the amounts may be used for only cost sharing and not to pay insurance premiums.

The effect of HRA contributions on affordability also is covered in the proposed regulations. They provide that amounts made newly available for a current plan year — that can be used for only premiums or for either premiums or cost-sharing reduction — are treated as the employee’s earnings and can be considered as available to him or her to increase the affordability of health coverage.

Wellness programs

Unfortunately, reduced cost-sharing in most wellness programs doesn’t count toward minimum value under the proposed regulations. The exception is a nondiscriminatory wellness program designed to prevent or reduce tobacco use. For employers with such a program, a plan’s share of benefit costs may be calculated assuming that every eligible individual satisfies the terms of the program and therefore qualifies for reduced cost-sharing.

The proposed regulations also disregard most wellness program incentives that reduce premiums when assessing the affordability of coverage.

Additional provisions

The proposed regulations address a number of other issues relevant to the premium tax credit, including:

• The definition of “modified adjusted gross income,”

• The definition of “rating area,” as used to determine the costs of plans in the employee’s area,
• Retiree coverage,

• Coverage months for newborns and new adoptees,
• The adjusted monthly premium for family members not enrolled a full month,
• The premium assistance amount for partial months of coverage,

• Determining the premium for the applicable benchmark plan if family members reside in different locations, and

• The allocation of premiums to additional, nonessential health benefits.

The proposed regulations also impose income tax return filing requirements on employees who receive advance credit payments.

Achieving compliance

The proposed regulations are effective for periods starting after Dec. 31, 2013, and taxpayers may apply them to taxable years ending before Jan. 1, 2015. We’d be pleased to help you determine the best path forward for your organization as additional provisions of the health care act take effect.