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IRS Issues Rules on Minimum Value and Effect of Wellness Plans, HRAs and HSAs

Employee Benefits Law Alert John L. Barlament

On May 3, the Internal Revenue Service ("IRS") issued new, proposed rules for employers and individuals on whether a health plan provides minimum value. The new rules also address some other Affordable Care Act ("ACA") topics, such as how wellness plans, health reimbursement arrangement ("HRA") contributions and health savings account ("HSA") contributions are treated for these purposes.

Minimum Value

Under the ACA, a large employer that fails to offer minimally acceptable health plan coverage to full-time employees can be subject to a penalty tax. This "employer shared responsibility rule" (also known as the Pay or Play Rule) has several factors. One factor is whether the employer's health plan offers affordable self-only coverage. Another factor is whether the employer's plan offers minimum value (and which is affordable) generally complies with the Pay or Play rule.

How does an employer prove that its plan provides minimum value? There are four options, noted below.

Method Overview Comments
Minimum Value Calculator Federal government has posted online website in which terms of health plan can be described. Website then determines whether plan provides minimum value. Probably the easiest method for an employer to use. However, some plans with non-standard features cannot use the calculator and would need to select a different option.
Small, Fully Insured Plan

Certain small, fully insured health plans will satisfy a metal coverage tier (such as bronze, silver, gold or platinum) and will automatically be deemed to provide minimum value.

Presumably an employer would rely upon an insurer's statement that the plan satisfies a particular coverage tier.
Actuarial Certification An employer (or perhaps an insurer on behalf of an employer) can hire an actuary to certify that the plan provides minimum value. Will probably be the last resort for employers (if employer must hire the actuary) due to extra cost.
Safe Harbor Plan Design New guidance describes certain plan designs, which are likely to automatically provide minimum value.

The proposed safe harbor plan designs are not final and could change. We expect more guidance on this option.

Current proposed safe harbor offers three options:

1. A plan with a $3,500 integrated medical and drug deductible, 80% plan cost-sharing and a $6,000 maximum out-of-pocket limit for employee cost-sharing.

2. A plan with a $4,500 integrated medical and drug deductible, 70% plan cost-sharing, a $6,400 maximum out-of-pocket limit and a $500 employer contribution to a HSA.

3. A plan with a $3,500 medical deductible, $0 drug deductible, 60% plan medical expense cost-sharing, 75% plan drug cost-sharing, a $6,400 maximum out-of-pocket limit and drug co-pays of $10 / $20 / $50 for the first, second and third prescription drug tiers, with 75% coinsurance for specialty drugs.

Wellness Programs and Minimum Value

What if an employer offers a reward-based wellness plan where the reward is a reduction in the deductible or out-of-pocket maximum? How would an employer use the minimum value calculator in that situation?

The new regulations seem to provide an answer: The employer makes adjustments to the deductible and out-of-pocket maximums in some - but not all - situations. Specifically, an employer considers the wellness program and inputs information in the minimum value calculator only if wellness program reward relates to tobacco use. As noted in the three examples below, this can sometimes be easy to apply - and other times difficult and unclear.

Wellness Example (simple)    

Sample Co. offers a self-funded health plan. The plan has a $2,000 deductible but, if an employee participates in the wellness program, the deductible is decreased by $300 (to $1,700). The wellness program only focuses on tobacco use.

Sam, the Benefits Director for Sample Co., wants to know if the plan provides minimum value. Sam logs into the website, which contains the minimum value calculator. The calculator asks Sam to include the plan's deductible. Sam is uncertain on how to answer the question: Is it $2,000 (the general deductible) or $1,700 (the deductible for individuals who do not use tobacco or who complete a tobacco cessation course)?

It appears that, under the new regulations, Sam would list the deductible as $1,700. This is true because the wellness program provides a discount, which is based on not using tobacco. Note that Sam will list $1,700 even if some (or many) employees do not qualify for the discount and are subject to the full $2,000 deductible. Sample Co. is pleased to list the deductible as $1,700 (rather than $2,000) because it makes the plan look more valuable and results in the plan being more likely to provide minimum value.

Note that there would be a different result if the $300 deductible decrease related to a health factor other than tobacco use (such as acceptable blood glucose or cholesterol levels). In that case, the possible $300 discount is ignored, and Sam would list $2,000 (not $1,700) as the plan's deductible for minimum value purposes.

Wellness Example (moderate difficulty)

What if tobacco use is just one factor that can help an employee earn the $300 reward? For example, suppose Sample Co.'s wellness plan gives the $300 deductible discount to any employee who earns 100 wellness points. There are four ways to earn the 100 points (acceptable glucose levels are worth 25 points; acceptable cholesterol levels are worth 25 points; physical activity is worth 25 points; and not using tobacco is worth 25 points). Thus, everyone who earns the wellness reward will not use tobacco. Could the company apply 25% of the $300 (i.e., $75) reward when it inputs information on minimum value?

Perhaps -- it seems to be supported by the regulation. The new regulation states that the wellness program incentive is earned "to the extent" the incentive relates to tobacco use. This seems to mean that to the extent the wellness discount is not tobacco-related, it is ignored. If so, here $225 (that is, $300 - $75 = $225) would be ignored as the "non-tobacco discount," and $75 could apparently be "counted" as the "tobacco discount." While this seems logical, no examples or other language in the regulation supports the conclusion. So, this remains a bit unclear.

Wellness Example (difficult)

Suppose Sample Co. offers a wellness plan in which an employee earns a $300 deductible discount by earning five points. Sample Co. offers seven ways (similar to the ways noted in the prior example - for example, no tobacco use, exercise and cholesterol levels) to earn the five points. Each of the seven ways is worth one point. So, some employees who earn the $300 deductible discount will qualify, in part, because of not using tobacco. But, other employees will earn the $300 deductible discount even though they do use tobacco. Sample Co. does not know in advance (and may not know at all, because Sample Co.'s wellness vendor may not share the information with Sample Co.) how many employees qualified for the discount because of not using tobacco. When Sample Co. lists its deductible in the minimum value calculator, can Sample Co. include some portion of the $300 deductible discount?

This is very unclear. Unless Sample Co. has some data to support the amount it lists, it would seem to be risky to list any discount. Unfortunately, we will probably not know the answer to this question until the IRS issues further guidance. 

HRAs, HSAs and Minimum Value

In addition to wellness programs impacting minimum value, an employer's contributions to an HRA or HSA can also help the employer to demonstrate that its plan provides minimum value. For an HRA, the amounts which are considered are those amounts which are newly made available with respect to an HRA that is integrated with the employer's health plan, if the new amounts may be used only to reduce cost-sharing for covered medical expenses. For an HSA, the full amount an employer contributes is considered. However, for both amounts, it appears that the most that can be taken into account is the amount of expected spending for health care costs in a benefit year. It is not clear how an employer would determine this amount.

HRA Example    

As noted in the prior example, Sample Co. has a health plan. Sample Co. also offers an HRA and contributes $1,200 to the HRA for each individual who participates in the health plan. The HRA can only be used to reduce cost-sharing for covered medical expenses. Sam, the benefits director for Sample Co., sees that the minimum value calculator requests that Sam input the HRA Employer Contribution. Sam would like to include the full $1,200 HRA contribution, because it would make the health plan more likely to provide minimum value. Can Sam include the full $1,200 contribution?

It appears that Sam can include the entire $1,200. The HRA (presumably its plan document and summary plan description) limit eligible expenses to reducing cost-sharing for covered medical expenses. This is good - that is the first hurdle Sam must clear under the new regulations. Next, Sam would need to confirm that the HRA is integrated with the health plan. This is likely true here, assuming that all employees who receive an HRA contribution also are in the health plan (and that all employees in the health plan also receive an HRA contribution).

Finally, the regulations state that the amount of the HRA contribution that is taken into account is the amount of expected spending for health care costs in a benefit year. Suppose Sample Co. knows that, on average, HRA participants spend 70% of Sample Co.'s contribution each year (the remaining 30% rolls over to the following year). Would Sam put into the minimum value calculator 70% of $1,200 (i.e., $840)? Or does the calculator expect Sam to include the full $1,200 - and then the calculator will adjust this amount downward? The regulations are not clear on this point. However, other minimum value calculator guidance seems to indicate that Sam would include the full $1,200 amount. (Specifically, a document titled Minimum Value Calculator Methodology states that an employer will include an annual amount contributed by the employer [for HSAs] or in the case of HRAs, the amount first made available.) 

Affordability and Wellness Plans

As noted above, the Pay or Play Rule has an affordability test. This test generally is based on whether the plan charges more than 9.5% of an employee's wages for self-only coverage. The preamble to the new regulations state that affordability for these purposes will, like minimum value above, consider only tobacco-related wellness program discounts. Discounts for other wellness program activities (such as exercise or having acceptable blood sugar or cholesterol levels) will be ignored for affordability purposes.

Affordability and HRAs

Amounts an employer newly makes available for the current plan year under an integrated HRA will be considered - and will assist the employer - for affordability purposes. According to the preamble to the regulations, this rule applies only if the employee may use the amounts only for premiums or may choose to use the amounts for either premiums or cost-sharing.

Transition Rule

The preamble to the regulation provides transition relief from the Pay or Play Rule for plan years beginning before January 1, 2015 - but generally only with respect to the new, May 3, 2013 guidance. For example, suppose plan coverage is unaffordable because cholesterol-based wellness program discounts are (in accordance with the new regulation) not considered. But, if cholesterol-based wellness program discounts had been considered, the coverage would have been affordable. In that situation, the employer generally will not face a Pay or Play Rule penalty (if that is the only reason why the employer faces such a penalty). Note, though, that there are several requirements related to this relief (e.g., the wellness program must have been in effect on May 3, 2013).

Links to Guidance

The new IRS guidance can be found here. The Minimum Value Calculator Methodology document can be found here.

For more information contact the author of this alert, John Barlament, at (414) 277-5727 / john.barlament@quarles.com. You may also contact any of the following Quarles & Brady employee benefits attorneys: Marla Anderson at (414) 277-5453 / marla.anderson@quarles.com; Amy Ciepluch at (414) 277-5585 / amy.ciepluch@quarles.com; Alyssa Dowse at (414) 277-5607 / alyssa.dowse@quarles.com; Sarah Fowles, at (414) 277-5287 / sarah.fowles@quarles.com; David Olson at (414) 277-5671 / david.olson@quarles.com; Robert Rothacker at (414) 277-5643 / robert.rothacker@quarles.com or your Quarles & Brady attorney.