The Supreme Court’s recent King v. Burwell decision upheld the availability of the Code Sec. 36B refundable credit for premiums paid for health insurance purchased on Federal Exchanges. In doing so, the decision not only helps preserve the immediate viability of Federal Exchanges, but also the necessary mechanisms that make the continued imposition of the so-called individual mandate feasible. Indirectly, it also helps small businesses and their employees better cope with health care costs, although possessing some traps of their own.

In many ways, the fate of the Sec. 36B credit, the individual mandate, and small businesses in coping with health care costs are now more intertwined than ever, with certain tensions among them becoming more readily apparent. In this month’s column, we review some of the fundamentals of those relationships, as well as some recent developments, with a particular focus on small businesses and their employees.

 

INDIVIDUAL MANDATE

While the employer mandate is phased in based upon workforce size, the individual mandate has been in place for everyone since 2014. And although a small business with fewer than 50 employees may never be subject to the employer mandate, its employees are generally nevertheless subject to the individual mandate.

Enforcement of the individual mandate is accomplished through an incremental penalty structure. The amount of the penalty is generally the greater of a flat dollar amount or a percentage of the taxpayer’s income, but it cannot exceed the annual average premium the taxpayer would pay for health insurance.

The flat dollar amount and the applicable percentage associated with computing the individual mandate are both phased in during 2014 through 2016. The flat dollar amount is $95 for 2014, $325 for 2015, and $695 for 2016; it is then adjusted each year for inflation. The percentage of income is a phased-in percentage of the amount of the taxpayer’s household income that exceeds the taxpayer’s filing threshold (1 percent in 2014, 2 percent in 2015 and 2.5 percent thereafter). The penalty is imposed on applicable individuals for each month that they fail to have minimum essential health coverage for themselves and their dependents.

  • Payment. The individual mandate penalty is paid with the taxpayer’s tax return, but the Internal Revenue Service cannot use liens, levies or criminal prosecutions to collect it. The penalty is coordinated with the premium assistance credit, which is intended to help defray the cost of health insurance purchased on the individual market by taxpayers with household incomes between 100 percent and 400 percent of the federal poverty line.
  • Grandfathered plans. Grandfathered plans are generally unaffected by health care reform. A grandfathered health plan is generally any group health plan or health insurance coverage in which an individual is enrolled on March 23, 2010 (the date the Patient Protection and Affordable Care Act was enacted). The covered individual’s family members can generally continue to enroll in the grandfathered plan, and an employer’s grandfathered plan can continue to enroll new employees.

 
CODE SEC. 36B CREDIT

The penalty that enforces the individual mandate is coordinated with the Code Sec. 36B premium assistance credit, which is intended to help defray the cost of health insurance purchased on the individual market by taxpayers with household incomes between 100 percent and 400 percent of the federal poverty line. The Sec. 36B credit allows those who cannot otherwise “afford” premiums on a basic ACA-compliant health plan a way to do so.

An employee who qualifies for the Sec. 36B credit to buy insurance on an exchange may trigger an employer-mandate penalty, but only if the employer is an applicable large employer (generally, a business with 50 or more full-time and full-time-equivalent employees).

For 2015, employers with at least 50 but fewer than 100 full-time employees, including full-time-equivalent employees, may be eligible for transition relief (TD 9655). The IRS imposed a number of requirements that employers must satisfy before they may be eligible for the transition relief. Under the transition relief employers with 100 or more full-time employees, including full-time-equivalent employees, may only be required to provide coverage to 70 percent, instead of 95 percent, of qualified employees in 2015.

The government may pay an advanced Code Sec. 36B credit amount directly to the insurer to reduce the taxpayer’s out-of-pocket premium cost, in which case the advance credit payments and the annual credit amount must be reconciled on the taxpayer’s return. Individuals refer to the information on Form 1095-A to complete Form 8962. On that form, individuals will calculate the amount of their credit and subtract the total amount of advance payments received.

 

SMALL EMPLOYER TAX CREDIT

The IRS finalized regulations last year on the Code Sec. 45R small-employer health insurance credit (TD 9672), another benefit to small businesses that indirectly helps their employees comply with the individual mandate. Generally, a qualified employer must have no more than 25 full-time-equivalent employees for the tax year; pay average annual wages of no more than $50,000 per FTE (indexed for inflation after 2013); and maintain a qualifying health care insurance arrangement. The tax credit is subject to a reduction (but not reduced below zero) if the employer’s FTEs exceed 10, or if average annual FTE wages exceed $25,000.

The credit is 50 percent of the eligible small employer’s premium payments made on behalf of its employees under a qualifying arrangement (35 percent for small tax-exempt employers).

 An employer claiming the Code Sec. 45R credit must obtain coverage through the Small Business Health Options Program Marketplace or be eligible for an exception. Amounts made available by an employer under, or contributed by an employer to, health reimbursement arrangements, health flexible spending arrangements, and health savings accounts are not taken into account for purposes of determining premium payments by the employer when calculating the credit.

 

INDIVIDUAL MANDATE EXEMPTION

Most individuals are applicable individuals, but there are several exceptions based on the taxpayer’s status, religious objections, and income. Transition relief was available for some individuals for 2014.

The individual mandate applies to applicable individuals, also known as “non-exempt individuals.” Applicable individuals do not include prisoners, foreign citizens and nationals, members of health care sharing ministries, and individuals with religious objections to health insurance. Exceptions also apply to Native Americans, short lapses in coverage, individuals who cannot obtain affordable coverage, and individuals whose household income falls below their tax return filing threshold.

Dependents and certain persons outside the United States are also effectively exempt from the penalty.

The exemptions, whether or not they were received through the Health Insurance Marketplace, are reported or claimed on Form 8965, Health Coverage Exemptions. A partial list of the exemptions includes: unaffordable coverage, short coverage gap, general hardship, income below the filing threshold, certain noncitizens, residents of states that did not expand Medicaid, and members of Indian tribes.

The IRS’s Web site has a complete list of exemptions, including information on how to obtain them, as recently advised in FS-2015-14.

 

HRAs

A controversy has been brewing over what tax-favored assistance a small employer may provide to employees in maintaining health care benefits. Although not subject to the employer mandate now or in the future as long as the 50-employee-threshold is not crossed, some small employers may be currently unaware of the $100-per-employee-per-day excise tax ($36,500 per year) under Code Sec. 4980D for which they may now be liable for running pre-tax health reimbursement arrangements for employees.

The controversy has its origins in Notice 2013-54, which held that employers’ use of standalone HRAs to reimburse employees for health-care-related expenses may not satisfy the Affordable Care Act’s minimum benefit and annual dollar cap requirements for health insurance plans offered by employers. As a result, the IRS warned that employers that continued to offer such HRAs would be subject to a $100-per-day, per-employee penalty, up to $36,500 for the year per employee. The IRS also implied that reimbursements for premiums to non-ACA-compliant health plans, whether pre-tax or not, would be subject to the penalty if tied to compensation.

Although small businesses were not exempt from this dis-allowance rule, the consensus was that this posed a hidden trap for many small businesses that did not exactly have Affordable Care Act compliance on their radar, especially since the employer mandate did not apply to them. As an accommodation, Notice 2015-17 was issued earlier this year to provide transition relief from the excise tax through June 30, 2015, for employers that were not applicable large employers, or ALEs. Once June 30 rolled by, however, concern continued to be voiced that many small businesses were still unaware of their non-compliance, especially as it involved such a draconian penalty.

A bipartisan group of lawmakers recently introduced companion legislation in both chambers, the Small Business Healthcare Relief Bill (HR 2911; Senate 1697), that would roll back an IRS rule imposing fines on small businesses providing HRAs. The legislation would ensure that small businesses and local municipalities with fewer than 50 employees are allowed to continue using pre-tax dollars to give employees a defined contribution for health care expenses. It would also protect employers from being financially penalized for providing HRAs to employees. In addition, the measure would allow employees to use HRA funds to purchase health coverage on the individual market.

 

EXPATRIATE HEALTH COVERAGE

Notice 2015-43, issued last month, provides interim guidance and continuation of transition relief issued in March 2013 from the application of the Affordable Care Act with respect to expatriate health plans. Under the guidance, pending the issuance of proposed regulations, employers, plan sponsors, and individuals may apply the requirements of the Expatriate Health Coverage Clarification Act of 2014 using a reasonable good-faith interpretation. At year-end 2014, Congress passed and President Obama signed the EHCCA. Under the new law, expatriate health plans are generally exempt from the ACA. Additionally, the EHCCA treats coverage under an expatriate plan as minimum essential coverage for ACA purposes. The EHCCA applies to expatriate health plans issued or renewed on or after July 1, 2015. This new law applies whether the plan is sponsored by any employer, large or small.

* Minimum essential coverage. Coverage provided under an expatriate group health plan is a form of minimum essential coverage that satisfies the individual shared responsibility requirements under the individual mandate of Code Sec. 5000A. For purposes of the relief, an “expatriate health plan” is an insured group health plan with respect to which enrollment is limited to primary insureds who reside outside of their home country for at least six months of the plan year and any covered dependents, and its associated group health insurance coverage.

 

CONCLUSION

The Supreme Court decision in King v. Burwell preserves nationwide use of the Affordable Care Act’s Sec. 36B credit. However, it does not end questions of interpretation and applicability of certain rules. Particularly for small businesses and their employees, additional guidance from the IRS is anticipated, both to lessen the negative impact of those provisions and to help coordinate them as Congress intended. AT

George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at Wolters Kluwer, CCH Tax and Accounting.

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