A handful of comments submitted in response to proposed rules implementing the Affordable Care Act's health insurance premium tax credits for low-income individuals have exposed a rift between consumer and industry groups concerning the "affordability" of, and the "minimum value" provided by, employer-sponsored group health insurance. Both affect the circumstances under which access to employer-sponsored group health plan coverage will bar individuals and their families from qualifying for premium tax credits. This advisory examines this rift and its consequences.

Background

Beginning in 2014, the Patient Protection and Affordable Care Act (the "Act") provides premium tax credits to assist low-income individuals and families who cannot obtain affordable health insurance through their employers to purchase coverage through state-based insurance exchanges. (The rules governing premium assistance tax credits are set out in new Internal Revenue Code § 36B.) "Low-income" for this purpose generally means and refers to individuals with household income between 100% and 400% of the federal poverty level.¹ A low-income individual who is eligible for employer-sponsored group health plan coverage is generally ineligible for a premium tax credit, unless the employer coverage for which he or she is eligible is either "unaffordable" or fails to provide "minimum value."

The Act also requires U.S. citizens and legal residents to obtain and maintain health insurance coverage or pay a tax. This requirement is referred to as the Act's "individual mandate."

Under rules governing "employer shared responsibility," the Act separately subjects "applicable large employers" (those with 50 or more full-time equivalent employees) to a requirement to make "assessable payments" in instances where any full-time employee qualifies for a premium tax credit and the employer either (1) fails to offer group health plan coverage to all its full-time employees, or (2) offers coverage to all its full-time employee that is either "unaffordable" or does not provide "minimum value."

The rules governing premium tax credits and employer shared responsibility are interrelated. The ability of a low-income individual to qualify for the premium tax credit depends on whether the employer offers group health plan coverage to its full-time employees and, if so, whether such coverage is both affordable and provides minimum value. On August 17, 2011, the Internal Revenue Service issued a notice of proposed rulemaking under Code § 36B. (For a discussion of the notice of proposed rulemaking, please click here.)

Specifically, the two issues raised by the notice of proposed rulemaking are:

• Affordability: An employer's group health plan coverage is deemed to be affordable if the employee premiums cost is less than 9.5% of household income. But, is the proper measure 9.5% of employee-paid premium for self-only coverage under the employer's group health plan, irrespective of whether the employee elects family coverage? At stake here is the cost to employers who choose to offer affordable coverage as a means to avoid having to make assessable payments. Simply put, it is less expensive for an employer to offer affordable self-only coverage than affordable family coverage.
• Minimum Value: To provide minimum value, a plan must cover "60% of total allowed costs." Must an employer-sponsored group health plan also provide an essential health benefits package in order to be deemed to provide minim value (or will it suffice that the plan cover 60% of total allowed cost of benefits without regard to what benefits the plan otherwise provides)?

Affordability: Code § 36B(c)(2)(C)(i)

Code § 36B denies access to premium assistance tax credits to an individual who would otherwise qualify where the individual "is eligible for minimum essential coverage (other than coverage in the individual market)." The term "minimum essential coverage" is defined with reference to Code § 5000A(f) to include coverage under an "eligible employer-sponsored plan." The term "eligible employer-sponsored plan," in turn, means, "with respect to any employee, a group health plan or group health insurance coverage offered by an employer to the employee which is ... [a] plan or coverage offered in the small or large group market ...."

The denial of access to the premium assistance tax credit is qualified, however, by Code § 36B(c)(2)(C), which provides as follows:

(C) SPECIAL RULE FOR EMPLOYER-SPONSORED MINIMUM ESSENTIAL COVERAGE.—For purposes of subparagraph (B)—

(i) COVERAGE MUST BE AFFORDABLE.—Except as provided in clause (iii), an employee shall not be treated as eligible for minimum essential coverage if such coverage—

(I) consists of an eligible employer-sponsored plan (as defined in section 5000A(f)(2)), and

(II) the employee's required contribution (within the meaning of section 5000A(e)(1)(B)) with respect to the plan exceeds 9.5 percent of the applicable taxpayer's household income.

This clause shall also apply to an individual who is eligible to enroll in the plan by reason of a relationship the individual bears to the employee. (Emphasis added).

Code § 5000A(e)(1)(B) provides, in pertinent part, as follows:

(B) REQUIRED CONTRIBUTION.—For purposes of this paragraph, the term "required contribution" means—

(i) in the case of an individual eligible to purchase minimum essential coverage consisting of coverage through an eligible-employer-sponsored plan, the portion of the annual premium which would be paid by the individual (without regard to whether paid through salary reduction or otherwise) for self-only coverage, .... (Emphasis added).

Based on the reference to "self-only" coverage in Code § 5000A(e)(1)(B)(i), the Joint Committee on Taxation has concluded that test for "affordability" for Code § 36B purposes relating to access to the premium tax credit must be based on self-only coverage. The Service's reasoning, as explained in the preamble to its notice of proposed rulemaking, is worth quoting at some length:

In the case of an employee, under section 36B(c)(2)(C)(i), an employer-sponsored plan is not affordable if "the employee's required contribution (within the meaning of section 5000A(e)(1)(B)) with respect to the plan exceeds 9.5 percent of the applicable taxpayer's household income" for the taxable year... In the case of an individual other than an employee, section 36B(c)(2)(C)(i) provides that "this clause shall also apply to an individual who is eligible to enroll in the plan by reason of a relationship the individual bears to the employee." The cross-referenced section 5000A(e)(1)(B) defines the term ''required contribution'' for this purpose as "the portion of the annual premium which would be paid by the individual * * * for self-only coverage." Thus, the statutory language specifies that for both employees and others (such as spouses or dependents) who are eligible to enroll in employer-sponsored coverage by reason of their relationship to an employee (related individuals), the coverage is unaffordable if the required contribution for ''self-only'' coverage (as opposed to family coverage or other coverage applicable to multiple individuals) exceeds 9.5 percent of household income. See Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 111th Congress, JCS–2–11 (March 2011) at 265 (stating that, for purposes of the premium tax credit provisions of the Act, '[u]naffordable is defined as coverage with a premium required to be paid by the employee that is more than 9.5 percent of the employee's household income, based on the self-only coverage''). Consistent with these statutory provisions, the proposed regulations provide that an employer-sponsored plan also is affordable for a related individual for purposes of section 36B if the employee's required contribution for self-only coverage under the plan does not exceed 9.5 percent of the applicable taxpayer's household income for the taxable year, even if the employee's required contribution for the family coverage does exceed 9.5 percent of the applicable taxpayer's household income for the year.

The Service's position in the matter has drawn summary praise from industry groups and withering and detailed criticism from consumer groups. On the industry side, an October 31, 2011 submission by the American Benefits Council is representative: "The Council fully supports the clarification provided in the NPRM that the Code section 4980H(b) 'affordability test' will be based on the employee's premium cost for self-only or individual coverage ...." The views of consumer groups are illustrated by a letter submitted by The Center on Budget and Policy Priorities dated November 16, 2011. The Center notes that applying the affordability standard on the basis of self-only coverage leads to inconsistent results, since it is clear that compliance with the individual mandate will be tested based on the cost of family coverage. The Center's comment also criticizes the Service for not taking account of Code § 5000A(e)(1)(C), which furnishes a rule of interpretation for Code § 5000A(e)(1)(B)(i). That section reads:

(C) SPECIAL RULES FOR INDIVIDUALS RELATED TO EMPLOYEES.—For purposes of subparagraph (B)(i), if an applicable individual is eligible for minimum essential coverage through an employer by reason of a relationship to an employee, the determination under subparagraph (A) shall be made by reference to required contribution of the employee.

It's not clear, however, how this changes the result. The reference to "subparagraph (A)" is to the penalty under the individual mandate. Nevertheless, the commenters assert that the better reading, and the one the Congress likely intended, is for affordability to be based on the level of coverage actually selected.

The National Women's Law Center, in their comment dated October 31, 2011 takes a slightly different tact, based on the flush language after Code § 36B(c)(2)(C)(i)(II) ("This clause shall also apply to an individual who is eligible to enroll in the plan by reason of a relationship the individual bears to the employee"). Their comment asserts that the meaning of this provision is less than clear.² What is also less than clear is the extent to which this provision can be relied on to get to the commenter's preferred result of basing affordability on family coverage for individuals that are eligible for and elect that coverage.

On balance, the industry groups appear to have the more supportable argument, though it is far from a clear winner. Consumer advocates appear to have the substantially better policy argument, if "policy" is understood to measure access to health insurance coverage by low-income individuals without concern over the costs to employers.

Minimum Value: Code § 36B(c)(2)(C)(ii)

Because the notice of proposed rulemaking did not address the issue of what constitutes minimum value, this issue is not technically ripe for comment. But a single sentence in the preamble to the notice has triggered responses from industry, consumer, and other groups with opposing views, thereby making this issue contentious even before the regulators stake out a formal position.

Code § 36B(c)(2)(C)(ii) provides as follows:

(ii) COVERAGE MUST PROVIDE MINIMUM VALUE.—Except as provided in clause (iii), an employee shall not be treated as eligible for minimum essential coverage if such coverage consists of an eligible employer sponsored plan (as defined in section 5000A(f)(2)) and the plan's share of the total allowed costs of benefits provided under the plan is less than 60 percent of such costs.

Coverage under and employer-sponsored group health plan is deemed to provide "minimum value" if it pays for at least 60% total plan costs. This is generally thought to mean and refer to an actuarial standard that is based on the anticipated costs of a hypothetical or "standard" population. A plan that pays 100% of total plan costs has no co-pays, deductibles, co-insurance or other cost-sharing features. To say that a plan pays 60% of total plan costs means that the employee pays the remaining 40% through co-pays, deductibles, co-insurance, etc. The minimum value requirement says nothing about who pays what portion of the premium: a plan that is fully contributory (i.e., 100% employee-paid premiums) could still pay 60% of total plan costs, and thereby be deemed to provide minimum value. But is minimum valued based solely on actuarial equivalence, or is there more to it?

Act § 1302 requires the Secretary of Health and Human Services (HHS) to establish the "essential health benefits" that must be included in insurance products sold in the individual and small group health insurance markets. Health insurance coverage sold through state-based insurance exchanges must include an "essential health benefits package" covering essential health benefits coupled with limits on co-pays and deductibles. Individual and small group products sold outside state-based exchanges are also subject to these rules. Newly added Public Health Service Act § 2707 is clear that the essential health benefits standards apply only in the individual and small group markets.

A statement in the preamble to the notice of proposed rulemaking has caused some confusion on this score. The applicable section of the preamble reads, in pertinent part, as follows:

Section 36B(c)(2)(C)(ii) provides that an eligible employer-sponsored plan generally provides minimum value if the plan's share of the total allowed costs of benefits provided under the plan is at least 60 percent of those costs. Under section 1302(d)(2) of the Affordable Care Act (42 U.S.C. 18022(d)(2)), regulations to be issued by the Secretary of Health and Human Services will apply in determining the percentage of ''the total allowed costs of benefits'' provided under a group health plan or health insurance coverage that are covered by that plan or coverage. The regulations under section 1302(d)(2) are expected to be proposed later this year and to reflect the fact that employer-sponsored group health plans and health insurance coverage in the large group market are not required to provide each of the essential health benefits or each of the 10 categories of benefits described in section 1302(b)(1) of the Affordable Care Act. It is also anticipated that the regulations will seek to further the objective of preserving the existing system of employer-sponsored coverage, but without permitting the statutory employer responsibility standards to be avoided.

It is the highlight language that has garnered the attention of both sides of the issue. For example, in filing dated October 31, 2011, the Consumers Union urged that, to be deemed to provide minimum value, coverage would need to include the scope of services required of a bronze-level plan offered through a state-based insurance exchange. A comment letter from the National Restaurant Association takes the opposite view, arguing that "Actuarial value is a summary measure of the cost-sharing provisions of the plan for the services that it covers, but it does not mean that plans of the same actuarial value offer identical benefits or have the same cost-sharing structure."

While it may make for good policy, it is difficult to read into the Act any requirement beyond actuarial equivalency when establishing minimum value. Nothing in the statute appears to support reading an "essential health benefits" requirement into the minimum value standard.

Conclusion

Questions of affordability and minimum value are not easy, both because the statute is less than clear and because whatever rules are finally adopted have important macroeconomic and policy consequences. These are moreover only two, isolated issues that just happened to surface sooner rather than later by virtue of the order in which the regulators saw fit to propose rules. Other issues, including what constitutes "essential health benefits" will likely prove far more daunting and contentious. As with any major piece of legislation, there will be net winners and net losers. In the author's view, those charged with interpreting the Act's various provisions have acquitted themselves admirably to date. As the Act's more important details are fleshed out, however, any assessment of their performance will become increasingly subjective. Only the winners are likely to applaud.

Footnotes

1 But see Act § 2002, as added by Health Care and Education Reconciliation Act § 1004(e)(2) (disregarding five percentage points in applying the income test). Under the Act, states must expand Medicaid eligibility to include individuals with modified adjusted gross income at or below 133% of the FPL. Act § 2002(a)(14)(I)(i) adds a five percentage point deduction from the FPL, however, thereby effectively raising this figure to 138% of FPL. Thus, as a practical matter, premium tax credits under Code § 36B are generally available to individuals with household incomes between 138% and 400% of the FPL.

2 Editorial note: we agree.

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