Proposed Premium Tax Credit Regs Address Opt-Out Payments, Credit Eligibility

(Parker Tax Publishing July 2016)

The IRS has issued proposed regulations relating to the health insurance premium tax credit and the individual shared responsibility provision. The proposed regulations (1) clarify that an employer's payments to an employee under an unconditional opt-out arrangement will increase an employee's required contribution for purposes of Code Secs. 36B and 5000A; (2) address the reconciliation of advance credit payments; (3) provide a new rule for determining benchmark plans where a taxpayer's family is not covered under one policy; and (4) provide for consistency in calculating premium assistance amounts where a taxpayer has a short coverage month. REG-109086-15.

Background

The individual mandate of Code Sec. 5000A generally requires taxpayers to have minimum essential coverage each month, and imposes a penalty for months in which the taxpayer does not have such coverage. Under Code Sec. 36B(c)(2)(C), an individual is treated as eligible for minimum essential coverage under an eligible employer-sponsored plan only if the employee's share of the premium is affordable and the coverage provides minimum value. Reg. Secs. 1.36B-2(c)(3)(v) and 1.5000A-3(e)(3)(ii)(A) provide that, in determining whether employer-sponsored coverage is affordable to an employee, an employee's required contribution for the coverage includes the amount by which the employee's salary would be reduced to enroll in the coverage

In Notice 2015-87, the IRS issued guidance on how to determine the affordability of an employer's offer of eligible employer-sponsored health care coverage if an employer also makes available an opt-out payment, which is a payment that (1) is available only if the employee declines coverage (which includes waiving coverage in which the employee would otherwise be enrolled) under the employer-sponsored plan, and (2) cannot be used to pay for coverage under the employer-sponsored plan. The IRS stated that it is generally appropriate to treat an opt-out payment that is made available under an unconditional opt-out arrangement in the same manner as a salary reduction contribution for purposes of determining an employee's required contribution under Code Secs. 36B and 5000A and any related consequences to the employer under the penalty provisions of Code Sec. 4980H(b) and the information reporting provisions of Code Sec. 6056.

On July 8, the IRS issued proposed regulations that adopt the guidance in Notice 2015-87, and provide additional clarification on conditional and unconditional opt-out arrangements. The proposed regulations also provide clarification on eligibility for, and the amount of, the premium tax credit, and provide guidance on determining the taxpayer's benchmark plan premium. Except as otherwise noted, the proposed regulations are generally applicable for tax years beginning after December 31, 2016.

Unconditional Opt-Out Arrangements Treated as Salary Reduction Contributions

For purposes of the proposed regulations, an unconditional opt-out arrangement refers to an arrangement providing payments conditioned solely on an employee declining coverage under employer-sponsored coverage and not on an employee satisfying any other meaningful requirement related to the provision of health care to employees, such as a requirement to provide proof of coverage through a plan of a spouse's employer. By contrast, conditional opt-out arrangements are arrangements under which payments are conditioned not only on the employee declining employer-sponsored coverage but also on satisfaction of one or more additional meaningful conditions (such as the employee providing proof of enrollment in coverage provided by a spouse's employer or other coverage).

The IRS stated that because forgoing an unconditional opt-out payment is economically equivalent to forgoing salary pursuant to a salary reduction election, and because Reg. Sec. 1.36B-2(c)(3)(v) and Reg. Sec. 1.5000A-3(e)(3)(ii)(A) provide that the employee's required contribution includes the amount of any salary reduction, the proposed regulations provide that the amount of an opt-out payment made available to the employee under an unconditional opt-out arrangement increases the employee's required contribution.

With regard to conditional opt-out arrangements, the proposed regulations provide that amounts made available under such arrangements are disregarded in determining the required contribution if the arrangement satisfies certain conditions (an "eligible opt-out arrangement"), but otherwise the amounts are taken into account. The proposed regulations define an "eligible opt-out arrangement" as an arrangement under which the employee's right to receive the opt-out payment is conditioned on (1) the employee declining to enroll in the employer-sponsored coverage, and (2) the employee providing reasonable evidence that the employee and all other individuals for whom the employee reasonably expects to claim a personal exemption deduction for the tax year to which the opt-out arrangement applies (employee's expected tax family) have or will have minimum essential coverage (other than coverage in the individual market) during the period of coverage to which the opt-out arrangement applies.

For example, if an employee's expected tax family consists of the employee, the employee's spouse, and two children, the employee would meet this requirement by providing reasonable evidence that the employee, the employee's spouse, and the two children, will have coverage under the group health plan of the spouse's employer for the period to which the opt-out arrangement applies.

Reconciliation of Advance Credit Payments Where Taxpayer Doesn't Take Dependency Exemption

Reg. Sec. 301.6011-8 provides that a taxpayer who receives the benefit of advance credit payments must file an income tax return for that tax year on or before the due date for the return and reconcile the advance credit payments. In addition, the regulations under Code Sec. 36B provide that if advance credit payments are made for coverage of an individual for whom no taxpayer claims a personal exemption deduction, the taxpayer who attests to the Exchange to the intention to claim a personal exemption deduction for the individual must reconcile the advance credit payments. Practitioners have raised questions concerning how these two rules apply, and which individual must reconcile advance credit payments, when a taxpayer (a parent, for example) attests that he or she will claim a personal exemption deduction for an individual, the advance payments are made with respect to coverage for the individual, the taxpayer does not claim a personal exemption deduction for the individual, and the individual does not file a tax return for the year.

To address this scenario, the proposed regulations clarify that if advance credit payments are made for coverage of an individual for whom no taxpayer claims a personal exemption deduction, the taxpayer who attests to the Exchange to the intention to claim a personal exemption deduction for the individual, not the individual for whose coverage the advance credit payments were made, must file a tax return and reconcile the advance credit payments.

Determining Benchmark Plans When All Members of a Taxpayer's Family are Not Covered Under One Policy

Under Reg. Sec. 1.36B-3(f), a taxpayer's applicable benchmark plan is the second lowest cost silver plan offered at the time a taxpayer or family member enrolls in a qualified health plan through the Exchange for the rating area where the taxpayer lives. Reg. Sec. 1.36B-3(f)(3) provides that if one or more silver-level plans offered through an Exchange do not cover all members of a taxpayer's coverage family under one policy, the premium for the applicable benchmark plan may be the premium for a single policy or for more than one policy, whichever is the second lowest-cost silver option. The IRS noted that this rule does not specify which combinations of policies must be taken into account, suggesting that all such combinations must be considered thereby imposing administrative complexities; as such, the proposed regulations replace this rule.

Under the proposed regulations, if a silver-level plan offers coverage to all members of a taxpayer's coverage family who live in the same location under a single policy, the plan premium taken into account for purposes of determining the applicable benchmark plan is the premium for that policy. In contrast, if a silver-level plan would require multiple policies to cover all members of a taxpayer's coverage family who live in the same location, the plan premium taken into account for purposes of determining the applicable benchmark plan is the sum of the premiums for self-only policies under the plan for each member of the coverage family who lives in the same location.

Premium Assistance Amounts Where Coverage Month Is Shorter than Calendar Month

Reg. Sec. 1.36B-3(d)(2) provides that if a qualified health plan is terminated before the last day of a month, the premium assistance amount for the month is the lesser of the enrollment premiums for the month (reduced by any amounts that were refunded), or the excess of the benchmark plan premium for a full month of coverage over the full contribution amount for the month. Current regulations do not explicitly address how the premium assistance amount is computed if a covered individual disenrolls before the last day of a month but the plan is not terminated because other individuals remain enrolled. To provide consistency for all individuals who have a coverage month that is less than a full calendar month, the proposed regulations provide that the premium assistance amount for a month is the lesser of the enrollment premiums for the month (reduced by any amounts that were refunded), or the excess of the benchmark plan premium over the contribution amount for the month. Taxpayers can rely on this rule for all taxable years beginning after December 31, 2013.

Additional Clarifications Regarding Premium Credit Eligibility

The proposed regulations clarify that if an individual declines to enroll in employer-sponsored coverage for a plan year and does not have the opportunity to enroll in that coverage for one or more succeeding plan years, for purposes of Code Sec. 36B, the individual is treated as ineligible for that coverage for the succeeding plan year or years for which there is no enrollment opportunity.

In addition, the proposed regulations provide that an individual enrolled in or offered a plan consisting solely of excepted benefits is not denied the premium tax credit by virtue of that excepted benefits offer or coverage. Taxpayers can rely on this rule for all tax years beginning after December 31, 2013.

For a discussion of the health insurance premium tax credit, see Parker Tax ¶102,600.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!

Sincerely,

James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com