August 28, 2013 – Final Regulations Regarding Individual Mandate Leaves Door Open for Employer-Sponsored Individual Policy Arrangements

August 28, 2013 – Final Regulations Regarding Individual Mandate Leaves Door Open for Employer-Sponsored Individual Policy Arrangements

This Friday, August 30th, the Internal Revenue Service (IRS) is scheduled to publish final regulations regarding the requirement that individual taxpayers maintain “minimum essential coverage” (“MEC”) or pay a penalty.  An advance copy of the regulations was released on August 28, 2013.

To a large extent, these final regulations do not directly impact employers; they are focused upon the individual mandate. However, the preamble to the final regulations contains information of interest to employers that sponsor, or are considering implementing, individual policy arrangements.   

Note:  The phrase “individual policy arrangements” can mean a number of different things, but generally it involves an employer providing pre-tax funding for example though a Section 125 cafeteria plan or a health reimbursement arrangement (HRA).  Eligible employees use the pre-tax funding to purchase individual health insurance policies.  In some cases, these arrangements are referred to as “private exchanges.”

The regulations define MEC for purposes of Section 5000A of the Internal Revenue Code (the “Code”).  One type of MEC is coverage under an “eligible employer-sponsored plan.”  This type of MEC is relevant to both the individual mandate and the employer mandate (also referred to as the Play or Pay requirements or the employer shared responsibility provision).  An individual l avoids a penalty if he/she has MEC under an eligible employer-sponsored plan.  The preamble to the final regulations leaves open the possibility that certain pre-tax funded arrangements through which individual policies are reimbursed may qualify as MEC.  An individual with this type of coverage through its employer would be treated as having satisfied the individual mandate. 

This possibility also impacts large employers.  The preamble to the final regulations also leaves open the possibility that these same pre-tax funded arrangements through which individual policies are reimbursed may qualify as MEC for purposes of the Play or Pay requirements as well.   To date, the IRS has not formally addressed this issue.

Although the IRS could have taken this opportunity to rule that individual policy arrangements cannot be MEC, it did not do that.  Rather, in the preamble to the regulations, the IRS acknowledged receiving comments arguing that individual policy arrangements should be treated as eligible employer-sponsored plans.  Instead of rejecting those arguments, the IRS indicated it anticipates issuing guidance in the future that will address the application of Section 5000A (and other provisions of the ACA) to such arrangements.  We are encouraged by this development and hope that it signals the IRS’ intention to formally recognize at least some types of individual policy arrangements as being MEC under an eligible employer-sponsored plan for purposes of the ACA.

If you have any questions about the application of various ACA requirements to individual policy arrangements, please contact us.

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The information contained in this ALERT is intended for general information purposes only and does not constitute legal advice relative to a specific situation.