Shared-Responsibility Payment: Minimum Value Requirement 

    TAX CLINIC 
    by Benjamin Pruett, J.D., Cohen & Co. Ltd., Cleveland 
    Published August 01, 2013

    Editor: Anthony S. Bakale, CPA, M. Tax.


    Employee Benefits & Pensions

    Beginning Jan. 1, 2015, the Patient Protection and Affordable Care Act, P.L. 111-148 (PPACA), and the Health Care and Education Reconciliation Act, P.L. 111-152, potentially subject large employers to shared-responsibility payments. Sec. 4980H(c)(2)(A) defines a large employer as one that employed at least 50 full-time employees during the preceding calendar year. To avoid substantial penalties, large employers must provide their employees an opportunity to enroll in minimum essential health care coverage that is affordable and provides minimum value. Treasury announced in July that it plans to postpone enforcement of the penalty until 2015.

    Minimum Essential Coverage

    Minimum essential coverage includes coverage under certain government programs including Medicare and Medicaid (Sec. 5000A(f)(1)(A)) and eligible employer-sponsored plans (Sec. 5000A(f)(1)(B)). An eligible employer-sponsored plan is a group health plan or group health insurance coverage offered to an employee by his or her employer that is (1) a government plan within the meaning of Section 2791(d)(8) of the Public Health Service Act (PHSA) (42 U.S.C. §300gg-91(d)(8)); or (2) any other plan offered in a state small or large group market (Secs. 5000A(f)(2)(A)–(B)). Sec. 5000A(f)(2) does not define “group health plan” and “group health insurance,” but Sec. 5000A(f)(5) provides that any term used in that section that is also used in the PPACA assumes the meaning provided by the PPACA.

    The PPACA provides that the term “group health plan” has the same meaning as in Section 2791(a) of the PHSA (42 U.S.C. §301gg-91(a)(1)). According to Section 2791(a), a group health plan is an employee benefit welfare plan as defined in Section 3(1) of the Employee Retirement Income Security Act of 1974 (ERISA) to the extent the plan provides medical care (as defined in Section 2791(a)(2) of the PHSA) to employees and their dependents. ERISA states that an employee welfare benefit plan is any plan, fund, or program established or maintained by an employer or by an employee organization, or both, to the extent it is established or maintained for the purpose of providing various medical benefits for its participants or their beneficiaries (29 U.S.C. §1002(1)).

    The Affordability Requirement

    Three safe-harbor rules are provided in proposed regulations issued in January (on which employers can rely) for determining affordability for minimum essential coverage: the W-2 safe harbor, the rate-of-pay safe harbor, and the federal poverty line safe harbor.

    The W-2 safe harbor allows a large employer to determine affordability for purposes of shared-responsibility payments under Sec. 4980H(b) by reference to box 1 of the employee’s Form W-2, Wage and Tax Statement (Prop. Regs. Sec. 54.4980H-5(e)(2)(ii)). The employee’s required contribution for the self-only premium of the employer’s lowest-cost plan that provides minimum value may not exceed 9.5% of the employee’s wages shown in box 1.

    Under the rate-of-pay safe harbor, the employee’s monthly contribution to his or her employer’s lowest cost, self-only coverage plan that provides minimum value may not exceed 9.5% of the employee’s hourly rate multiplied by 130 (Prop. Regs. Sec. 54.4980H-5(e)(2)(iii)). If the employee is salaried, the amount is 9.5% of the employee’s monthly salary, using any reasonable method for converting payroll periods to monthly salary. The federal poverty line safe harbor provides that coverage is affordable if the employee’s monthly cost does not exceed 9.5% of the annual federal poverty line for a single individual divided by 12 (Prop. Regs. Sec. 54.4980H-5(e)(2)(iv)).

    The Minimum Value Requirement

    The IRS and U.S. Department of Health and Human Services (HHS) have issued guidance to help clarify the minimum value requirement. Pursuant to Sec. 36B(c)(2)(C)(ii), an eligible employer plan fails to provide minimum value if the plan’s share of its total allowed costs of benefits is less than 60%. But what exactly are the costs, and how is the percentage calculated? HHS issued final regulations (45 C.F.R. §156.145, published in 78 Fed. Reg. 12834 (Feb. 25, 2013)) that describe how to determine minimum value and released a minimum value calculator.

    The Minimum Value Calculator

    The HHS regulations describe a few ways to determine if a plan provides minimum value. The minimum value calculator allows employers to enter data about the plan to determine the percentage of employer-provided costs (A document describing the calculator's methodology is available here.) The calculator allows users to input different plan parameters such as integrated medical and drug deductibles and inpatient copays per day. It also allows for specific benefit types, such as emergency room services, inpatient hospital services, imaging, and rehabilitative speech therapy.

    Use of an Actuary

    When a plan contains nonstandard features and minimum value cannot be ascertained with the minimum value calculator, an actuary may be used to determine minimum value. The determination must be conducted by a member of the American Academy of Actuaries in accordance with generally accepted actuarial principles and methodologies. Additionally, if a group health plan uses the minimum value calculator and offers a health benefit outside the calculator’s parameters, the plan may request that a member of the American Academy of Actuaries ascertain the value of the benefit and adjust the calculator’s results. The HHS regulations also established that employer contributions to a health savings account and amounts made available under certain health reimbursement arrangements may be considered when determining if a plan provides minimum value.

    In addition to the above, the IRS and HHS intend to release safe-harbor checklists. Employers may use these checklists to determine minimum value in lieu of the calculator or an actuary.

    Calculating the Payment

    Large employers are subject to different shared-responsibility payments depending on whether they offer minimum essential coverage to at least 95% of their full-time employees (and their dependents). For a large employer offering minimum essential coverage to less than 95% of its full-time employees, the assessable payment is $2,000 divided by 12, multiplied by the number of full-time employees it has that month minus 30 (Secs. 4980H(a) and (c)(2)(D); Prop. Regs. Sec. 54.4980H-4(a)). For example, if a large employer is subject to this payment and has 100 employees, its payment is ([$2,000 ÷ 12] × [100 30]), resulting in a monthly payment of approximately $11,666.

    If a large employer offers minimum essential coverage to at least 95% of its full-time employees, but at least one employee receives a premium tax credit or cost-sharing reduction because he or she is not offered coverage, or coverage is not affordable or does not provide minimum value, the payment is $3,000 divided by 12, multiplied by the number of full-time employees receiving a premium tax credit or cost-sharing reduction (Secs. 4980H(b) and (d)(2)(D); Prop. Regs. Sec. 54.4980H-5(a)). For example, if five full-time employees receive a premium tax credit or cost-sharing reduction, the large employer’s assessable payment is ([$3,000 ÷ 12] × 5), resulting in a monthly payment of $1,250. However, this amount is subject to an overall limitation of the applicable payment amount under Sec. 4980H(a) times the employer’s total number of full-time employees for the month reduced by 30.

    Avoiding the Penalty and Unnecessary Expenses

    As demonstrated, the penalty for failing to comply with Sec. 4980H can rise quickly. Plan coordinators should become familiar with its provisions and methods, especially the minimum value calculator and, when they are released, the minimum value safe-harbor checklists, to avoid any surprises. As an alternative, large employers may engage an actuary to help determine minimum value. Large employers that choose to provide minimum essential coverage for their employees must be careful when choosing their plan benefits so they are not unintentionally subject to the shared-responsibility payment and can avoid unanticipated costs.

    EditorNotes

    Anthony Bakale is with Cohen & Co. Ltd., Baker Tilly International, Cleveland.

    For additional information about these items, contact Mr. Bakale at 216-774-1147 or tbakale@cohencpa.com.

    Unless otherwise noted, contributors are members of or associated with Baker Tilly International.




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