IRS Issues Final Rules on Premium Tax Credits

On Dec. 19, 2016, the IRS published final rules pertaining to premium tax credit (PTC) eligibility for those enrolling in exchange coverage as well as certain affordability implications. The final rules adopt most, but not all, of the IRS proposed rules published in July 2016. Some provisions were delayed. Most notably delayed are the affordability implications of opt-out payments for employees who decline employer-sponsored health coverage (the IRS expects to finalize opt-out rules separately after examining issues raised).

The final rules primarily affect individuals who enroll in exchange coverage and receive a PTC, including family members who live in different states and enroll in different qualified health plans. Under the employer mandate, if a large employer fails to offer affordable coverage to a full-time employee, the employee may qualify for a PTC in the exchange, which in turn may trigger an employer mandate penalty for the employer.

For employers, the rules address several areas of interest:

First, under the final rules, if an individual declines an opportunity to enroll in affordable minimum value coverage for a year (thus making the individual ineligible for a PTC), but the individual is not given an opportunity to enroll in employer coverage in one or more subsequent years, the individual is not PTC-ineligible for the subsequent year or years. Thus, in those subsequent years, the employer may be treated as failing to satisfy their employer mandate responsibilities with respect to that individual. This confirms our prior understanding that employers should offer employees an effective opportunity to enroll in coverage each year.

Second, the final rules address advanced payment of a PTC based upon inaccurate affordability information. According to the rules, the IRS will enforce the intentional or reckless disregard standard during the evaluation of an individual’s tax return. The IRS will apply this standard where the individual knowingly provides incorrect information to the Exchange or makes little or no effort to determine whether the information provided is accurate. However, an individual is not responsible for inaccurate data provided by a third party, such as their employer.

Third, the rules also clarify that if an employer offers only excepted benefit coverage to an individual, that individual is not considered as having been offered MEC that would make the individual PTC ineligible. Therefore, offering only excepted benefit coverage could also trigger an employer mandate penalty (if the employee is a full-time employee).

Regarding the individual mandate, the final regulations address several issues relating to advance payment of the PTC and the reconciliation process. The IRS Form 8962 instructions, listed in 2016 Publication 974, discuss the reconciliation process, and instruct those receiving an advanced PTC to file Form 8962 so that the IRS can compare the advanced PTC paid with the actual PTC. The regulations also address the PTC amount and its interaction with the benchmark premium, and contain many examples of how those rules will operate. However, because those rules are more specific to the individual mandate, we will not address them in detail. Thus, interested employers may find more information in the regulations themselves.

As mentioned above, the final rules discuss a few topics that the IRS will address at a later date. Specifically, the IRS delayed final rules addressing the effect of opt-outs on the determination of affordability under the employer mandate. Until opt-outs are addressed in their own final rules, employers should follow the guidelines set forth in Notice 2015-87 (addressed in the Dec. 22, 2015, edition of Compliance Corner).

The final rules took effect Dec. 19, 2016. Therefore, employers should review their coverage offer and affordability strategies with their advisor to ensure compliance with the employer mandate for the 2017 plan year.

IRS Final Rules »
IRS 2016 Premium Tax Credit Publication 974 »