IRS Reminds Plan Sponsors of Cafeteria Plan Claims Substantiation Requirements

By Jessica Waltman, Principal, Forward Health Consulting

The federal Section 125 “cafeteria plan” regulations permit health plans to reimburse participants for qualifying medical and dependent care expenses on a pre-tax basis through health flexible spending accounts (FSAs) and dependent care assistance plans (DCAPs) if those claims are properly and fully substantiated.  If claims are improperly substantiated, any contributions participants make into these reimbursement accounts can lose their tax-favored status and may instead become subject to taxation as gross income for participants.

Two items are required to substantiate health FSA and DCAP claims for reimbursement: (1) information, such as a receipt or bill, from a third party independent from the employee, the employee’s spouse, and the employee’s dependents (e.g., the party that provided the care) describing the service/product provided, the date of the service/sale, and the amount of the expense and (2) a statement from the participant explaining that the expense has not yet been reimbursed and that the participant will not also seek reimbursement for the same expense under another health plan.  Claims cannot be reimbursed through FSAs or DCAPs prospectively—participants can only be reimbursed for expenses through these accounts after the expense has occurred and the care/service provided.

A recent memorandum from the Internal Revenue Service reminds employers of these requirements and reiterates procedures that do not qualify as full, complete claims substantiation.  Specifically, the IRS emphasizes that:

  • Every claim must be substantiated with information from an independent third party;
  • Every claim must be fully substantiated, regardless of the amount of the claim and/or the provider;
  • Adopting a policy of expense “sampling,” wherein a plan sponsor only substantiates a selection of claims incurred, is not compliant;
  • Employees cannot self-certify expenses;
  • Dependent care expenses cannot be reimbursed before they are incurred; and
  • Improperly substantiated expenses must be included in participants’ gross income and will be subject to taxation.

Considering these recent reminders, we encourage plan sponsors to review their claims substantiation procedures and make any necessary adjustments to ensure they are following the existing regulations.

2024 Limits Announced for HSAs, High Deductible Health Plans, and Excepted Benefit HRAs

By: Megan Diehl, Manager, Compliance Consulting, MZQ Consulting

On May 16, 2023, the Internal Revenue Service released updates to the maximum annual 2024 contribution limits for health savings accounts (HSAs) under high deductible health plans (HDHPs). These limits, which have increased slightly from 2023, apply to both individual and family coverage. The updates also include deductible minimums and out-of-pocket (OOP) expense limits for HDHPs and an increase to the maximum amount that may be made newly available for excepted benefit health reimbursement arrangements (HRAs). Of note, the HSA, HDHP, and out-of-pocket thresholds apply for the 2024 calendar year, while the HRA maximum applies to the 2024 plan year.

The 2024 limits are summarized below in comparison to the 2023 limits:

Annual HSA Contribution Limits
Self-only coverage$4,150$3,850
Family coverage$8,300$7,750
Annual Minimum Deductibles for HDHPs
Self-only coverage$1,600 or more$1,500 or more
Family coverage$3,200 or more$3,000 or more
Annual Maximum Out-of-Pocket Expense Limits for HDHPs
Self-only coverage OOP expenses may not exceed$8,050$7,500
Family coverage OOP expenses may not exceed$16,100$15,000
Plan Year Excepted Benefit HRA Maximum
 2024 2023
Maximum amount for a plan yearMay not exceed $2,100May not exceed $1,950

Employer Plan Guidance Issued on the End of the COVID-19 Emergency Periods

By Jennifer Berman, CEO, MZQ Consulting

On April 10, 2023, President Biden signed H.J. Res. 7 into law, thereby ending the national state of emergency related to COVID-19 that was declared under the National Emergencies Act.  

Separately, the Biden Administration has announced that May 11, 2023 will be the last day of the National Public Health Emergency (the “PHE”) declared by the Department of Health and Human Services and its target date for wrapping up other COVID-19-related emergency actions. 

Furthermore, on April 1, 2023, state governments resumed conducting Medicaid eligibility determinations, a routine process that was halted in the spring of 2020 due to COVID-19. 

On March 29, 2023, the Departments of Labor, Health and Human Services, and Treasury issued FAQs explaining the impact that the end of these emergencies and the resumption of these Medicaid determinations will have on health plans.  The key takeaways from this new guidance are outlined below.

End of the “Outbreak Period”

During the COVID-19 National Emergency, many of the timeframes related to plan administration were suspended as a result of the “Outbreak Period.”  Under the related guidance, these timeframes were generally paused for one year or until 60 days after the end of the COVID-19 National Emergency (otherwise known as the end of the Outbreak Period), if sooner.  The FAQs refer to this period during which the otherwise applicable timeframes were paused as “disregarded periods.”  Currently, legal clarification is needed as to what official date will be used to calculate the end of the COVID-19 National Emergency Period, but we believe it to be May 11, 2023.  If this is the case, the Outbreak Period will end and all otherwise applicable timeframes will begin applying again on July 10, 2023.

The key timeframes suspended during the Outbreak Period are those for:

  1. Making elections and paying premiums under COBRA;
  2. Requesting special enrollment in a group health plan; and
  3. Filing claims and appeals under a plan’s claims procedures.

The FAQs lay out the following general principles with respect to the end of the Outbreak Period and the reinstitution of previously existing timeframes:

  • These timeframes are statutory minimums; health plans are legally permitted to allow more time for participants to complete these actions.  In fact, the guidance explicitly encourages health plans to do so.  We note, however, that plan sponsors should consult with their carriers and stop loss carriers prior to offering any benefit beyond what is legally required.
  • With respect to COBRA election notices for individuals who lose group health plan coverage before the Outbreak Period ends, their election notice is due no earlier than September 8, 2023 (60 days after July 10th).  Notably, depending on the date the COBRA election notice is provided, it is possible for an election to be due after September 8, 2023 for an individual who loses coverage prior to the end of the Outbreak period.  The guidance also emphasizes that whether an individual loses coverage before or after the end of the COVID-19 National Emergency is not relevant for purposes of this analysis.  As long as the loss of coverage occurs on or before the end of the Outbreak Period, the individual will have at least until September 8, 2023 to submit their election notice.
  • Any COBRA premiums due for coverage through July 2023 are due by August 24, 2023.
  • The extension to special enrollment rights applies to any triggering event that takes place during the Outbreak Period (i.e., until July 10, 2023). Participants who experience triggering events within this timeframe have until August 9, 2023 (30 days after the end of the Outbreak Period) to request special enrollment in a group health plan.

Reminder Regarding Medicaid/CHIP Special Enrollment Rights

During the public health emergency, state Medicaid agencies have generally not terminated the enrollment of any Medicaid beneficiary who was enrolled on or after March 18, 2020.  The FAQs note that these programs will resume performing  their standard enrollment practices effective April 1, 2023, including auditing eligibility for existing participants.  This will likely cause many ineligible individuals to lose Medicaid and seek other coverage.  The guidance specifically reminds employers that an individual is eligible for special enrollment in an employer-sponsored plan if:

  • They are otherwise eligible to enroll in the plan;
  • The employee or dependent was enrolled in Medicaid or CHIP coverage; and
  • The Medicaid or CHIP coverage was terminated as a result of loss of eligibility for that coverage.

Generally, the applicable special enrollment period in these circumstances is 60 days.  However, in many cases, the loss of coverage will occur during the Outbreak Period, so participants would presumably have until September 8, 2023 to enroll (i.e., 60 days from July 10th).

COVID-19 Diagnostic Testing and Preventive Services

After the PHE ends on May 11, 2023, plans will no longer be required to provide COVID-19 diagnostic testing, including over-the-counter tests, to participants at no charge.  Plans will be permitted to impose cost-sharing requirements, prior authorization requirements, and other medical management at their discretion.  Notably, however, the guidance reminds plans that claims should be administered based on the date an item or service was rendered (i.e., the date a COVID-19 test was purchased), not the date a claim was processed for purposes of administering this rule.  If the service was rendered during the PHE, it should not be subject to any cost-sharing, prior authorization, or other medical management requirements.  Additionally, the guidance strongly encourages plans to notify participants of any changes made in this regard prior to implementing any such changes. 

The guidance further emphasizes that, unlike diagnostic tests, plans must continue to cover in-network COVID-19 preventive services, including vaccines, without cost-sharing once the PHE ends.  If COVID-19 preventive services are not available in-network, then the plan must cover services when furnished out-of-network at no cost to the participant.

HSA-Qualified HDHPs

Temporary guidance under the PHE allowed high deductible health plans (HDHPs) to cover both COVID-19 diagnostic testing and treatment prior to the deductible without jeopardizing a plan’s HSA compatibility.  The FAQs provide that HDHPs may continue to cover both testing for and the treatment of COVID-19 prior to the satisfaction of an applicable deductible pending future guidance on the topic.  Any future guidance will not require plans to make changes midyear so that participants can remain eligible to make HSA contributions for the remainder of the plan year.

Final Thoughts

The unwinding of the changes brought about during the PHE and COVID-19 National Emergency will bring a unique set of challenges in the months to come.  The most significant, however, may come in the fall when the “old” rules begin applying again.  Over the past several years, plans have faced unprecedented challenges, but there has also been unprecedented flexibility with respect to established laws such as COBRA.  As that flexibility wanes and the Department of Labor renews its focus on issues such as participant communications (even with the many challenges of new laws still at play), it is important to remain focused on compliance basics as well.  We will continue to monitor developments related to this unwinding and keep you informed if and when more information becomes available.

Telehealth Relief Included in End-Of-Year Omnibus Bill

By: Jessica Waltman, Principal, Forward Health Consulting

On December 23, 2022, the Consolidated Appropriations Act, 2023 (CAA23) was signed into law.  While this legislation does not include as many health provisions as the CAA of 2021, it does include the anticipated relief on telehealth coverage offered through qualified High Deductible Health Plans (HDHPs) that pair with Health Savings Accounts (HSAs).

Typically, HSA-qualified HDHPs cannot pay for covered services, except for specified preventive care, until the participant meets the plan’s deductible.  The CAA23 extends a protection that originated with the Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act) which allows people who have coverage through a HDHP to receive telehealth care at no cost, regardless of the plan’s annual deductible, without impacting their eligibility to contribute to an HSA.  This protection was set to expire on December 31, 2022.  However, the CAA23 creates a safe harbor for first-dollar telehealth coverage offered through an HDHP for plan years beginning after December 31, 2022, through December 31, 2024.

The wording of this extension creates a small gap in relief for non-calendar year plans.  The old relief will expire on December 31, 2022, and plan sponsors can only begin taking advantage of this new relief once their plan renews after that date.  This means that groups with plans renewing on January 1, 2023 can offer the relief immediately, whereas groups with plans that renew in a different month of the year will need to wait until the start of their 2023 plan year to begin offering it.  For example, a group plan year that begins on April 1, 2023 cannot offer this relief until that date.  Similarly, groups with non-calendar year plans that have already been offering the relief available under previous legislation will have to cease allowing participant access to telehealth on a first-dollar basis from January 1, 2023 until the start of their 2023 plan year.

This relief is optional for plan sponsors.  Group plan sponsors are not required to offer their participants access to telehealth coverage at all, nor do they have to offer it on a first-dollar basis for any type of plan offering, including HDHPs.  If a group decides to adopt this relief, they also need to make sure their plan documents are amended accordingly.  Specifically, the definition of care that can be accessed pre-deductible for purposes of HDHPs should reflect this latest relief offered by the CAA23.

Administration Extends RxDC Reporting Deadline and Provides Other Limited Reporting Relief

By: Jessica Waltman, Principal, Forward Health Consulting

Late in the afternoon on December 23, 2022, the Administration issued Affordable Care Act FAQ #56, and in doing so gave a little holiday gift to all group health plans nationwide.  The guidance establishes limited deadline and enforcement relief for the 2020 and 2021 Prescription Drug Data Collection (RxDC) submissions that were due by December 27, 2022.  There will be a compliance safe harbor for all group health plans and health insurance issuers that use a good faith, reasonable interpretation of the regulations and reporting instructions when making data submissions.  There will also be a submission grace period through January 31, 2023, meaning the federal government will not consider a plan or issuer to be out of compliance with these requirements provided that a good faith submission of 2020 and 2021 data is made on or before that date.   

The guidance also includes the following relief for 2020 and 2021 data submissions to make the reporting process easier:

  1. E-mail Submissions Allowed for Certain Types of Data –Originally, all group data submissions needed to be through the Centers for Medicare and Medicaid Services’ Health Insurance Oversight System (HIOS) and getting a HIOS ID to be able to submit can take up to two weeks. Now, if a group health plan or its reporting entity is submitting only the plan list, premium and life-years data, and a narrative response and is not submitting any other data, it may submit the file by email to  The emailed submission must include the plan list file, premium and life-years data (data file D1), and a narrative response.  The name of each file should include the reference year of the submission, the plan list or data file type (e.g., P2, D1), and the name of the group health plan sponsor.
  2. Reporting Entities May Make Multiple Submissions—When the submission rules were first released, they indicated that entities helping plans with RxDC reporting were only allowed to make one submission in HIOS.  That submission could include data for many health plans aggregated together, but each reporting entity was limited to one submission per HIOS account per applicable reporting or reference year (2020 or 2021).  However, the new guidance clarifies that when a reporting entity submits on behalf of more than one plan or issuer for a reference year, the reporting entity may create more than one submission for that reference year.
  3. Multiple Entities May Submit Reports for the Same Group Plan—If a group plan has multiple vendors preparing data for submission on their behalf, instead of making all reporting entities work together to consolidate the plan’s or issuer’s data into a single data file for each type of data, now the data can be reported by each entity separately.
  4. Less Aggregation Required—Initially, the reporting guidance specified that if health insurance issuers, PBMs, third-party administrators, or other service providers reported on behalf of one or more plans or issuers in a state and market segment, the data submitted by each of these reporting entities needed to be aggregated to at least the aggregation level used by the reporting entity that submits data on the total annual spending on health care services on behalf of those plans or issuers.  For 2020 and 2021 data only, a reporting entity submitting the required data may, within each state and market segment, aggregate at a less granular level than that used by the reporting entity that is submitting the total annual spending data.
  5. Optional Vaccine Reporting—Entities need to report pharmaceutical data using the CMS drug name and therapeutic class crosswalk.  This crosswalk was updated on October 3, 2022, to include National Drug Codes (NDCs) for vaccines.  Reporting entities may, but are not required to, incorporate these vaccine NDCs in their data files.
  6. Amounts Not Subject to the Deductible or Out-of-Pocket Maximum—Entities do not have to report the amount of any Rx spending that was not applied to a deductible or out-of-pocket maximum.  There are columns for this spending on the D2 and D6 data file templates.  Plans that do not include this data should leave the data fields in these columns blank.

This deadline and enforcement relief is transitional and only applies to the 2020 and 2021 calendar year submissions that were originally due on December 27, 2022.  All group health plans of all sizes and funding structures still need to complete RxDC reporting.  Put another way, this guidance does not exempt any entity from ultimately completing their reports, and all affected entities are expected to continue to work in good faith toward full compliance with these requirements.  This guidance does not apply to the 2022 calendar year RxDC reporting, which must be completed on or before June 1, 2023.  The Administration indicated it will monitor stakeholder efforts to comply with the 2020 and 2021 reporting requirements and issue additional guidance as needed in advance of the next reporting deadline.

2024 Out-of-Pocket Limits Released

By: Megan Diehl, Manager, Compliance Consulting, MZQ Consulting

The Department of Health and Human Services has announced the new out-of-pocket (OOP) limits that will apply to group and individual health plans during the 2024 plan year.  To comply with the ACA, non-grandfathered health plans cannot require a participant to pay more out-of-pocket during the plan year than the amounts listed below.  The limits apply to cost-sharing items like copayments, deductibles, and coinsurance expenditures.  Premiums and spending for non-covered services do not count towards the out-of-pocket limits.  The 2024 limits are listed below in comparison to the 2023 limits:

Out-of-Pocket Limits
Coverage Type20232024
Self-Only Coverage$9,100$9,450
Family Coverage$18,200$18,900

Under the ACA, the OOP limitation requirement directly applies to essential health benefits.  As a reminder, essential health benefits as defined by the ACA fall within ten categories: (1) ambulatory patient services, (2) emergency services, (3) hospitalization, (4) pregnancy, maternity, and newborn care, (5) mental health and substance use disorder services, (6) prescription drugs, (7) rehabilitative and habilitative services and devices, (8) laboratory services, (9) preventive and wellness services, including chronic disease management, and (10) pediatric services, including oral and vision care.

Of note, the IRS has not yet released the 2024 out-of-pocket limits for HSA-qualified high deductible health plans.  We will share these limits as soon as they become available.

End-of-Year Compliance Deadlines and Reminders

By: Megan Diehl, Manager, Compliance Consulting, MZQ Consulting

The end of the 2022 calendar year is fast approaching, and with it come numerous deadlines that can directly or indirectly impact employer group health plans.  Below is an overview of several items that plan sponsors should be mindful of this season.

The Affordable Care Act’s Employer Mandate

  • The IRS recently formalized the automatic 30-day extension for employers to furnish Forms 1095-B/C to recipients that the department first introduced in 2021.  With this extension, employers need to make sure that 2022 forms are distributed to employees by March 2, 2023.
  • 2022 Forms 1095-B/C and Form 1094-B/C must be successfully e-Filed with the IRS by March 31, 2023.  The good faith transition relief that formerly shielded employers from penalties for incorrect and/or incomplete ACA filings is no longer available.  Employers must successfully e-File complete, accurate ACA filings by this deadline or risk exposure to information return penalties and employer mandate penalties.
  • As a reminder, the affordability percentage as adjusted for inflation has decreased significantly from 9.61% in 2022 to 9.12% in 2023.  This means that, effective the first day of the 2023 plan year, the lowest cost, employee-only plan option providing minimum value cannot exceed 9.12% of a full-time employee’s income to be considered affordable.  Applicable large employers should carefully analyze affordability for their 2023 plan year in advance of open enrollment.

 Premium Tax Credits and Cafeteria Plan Changes

  • Beginning January 1, 2023, dependents can start qualifying for government subsidized health insurance if they are not offered affordable coverage through an employer-sponsored plan, even if the coverage offered to their parent or spouse (who is the employee) is affordable for that employee.  This does not mean that employers are required to offer affordable family-level coverage; rather, the measure seeks to expand access to subsidized coverage from the dependent’s perspective without changing any requirements under the ACA’s employer mandate.  Employers may see decreased enrollment in their group plans as qualifying individuals switch to Marketplace coverage.
  • In conjunction with this change, the IRS revised the Section 125 cafeteria plan rules so that any employer, if they so choose, can begin allowing employees to drop family-level medical coverage midyear in order to enroll in exchange-based coverage.

The Consolidated Appropriations Act (CAA) & COVID-19 Relief

  • RxDC reports for both the 2020 and 2021 calendar years are due to CMS by December 27, 2022 (2022 reports are due by June 1, 2023).  Employers must report to the federal government information about medical care spending and premiums, overall spending on prescription drugs, prescription drugs that account for the most spending, the most frequently prescribed drugs, and drug manufacturer rebates.  In most cases, carriers will be submitting these reports on behalf of fully insured groups.  Employers with self-insured or level-funded plans will need to work in conjunction with their vendors to complete these reports, as they will not be able to collect all the data required without assistance.
  • Carriers and group health plan sponsors are required to publish an internet-based, self-service price comparison tool that will allow individuals to estimate their cost-sharing responsibility from different providers for a list of 500 items and services that CMS has identified.  This tool must be available when a plan either takes effect or renews in 2023; the information must also be made available in paper form upon request.  This tool is designed to allow participants to obtain cost sharing amounts by service and provider prior to receiving care.  Groups should coordinate with their vendors to ensure that this tool will be available for their participants as required.
  • Early COVID-19 legislation included provisions allowing sponsors of high deductible health plans to offer telemedicine services at no cost to participants, regardless of the plan’s annual deductible, without impacting HSA eligibility.  After initially expiring at the end of 2021, this relief was reinstated effective April 1, 2022.  The relief is currently scheduled to expire once again on December 31, 2022, pending any last-minute congressional action.
  • Employers with calendar year plans that first took advantage of various cafeteria plan changes permitted under COVID-19 relief (eased midyear election change rules, enhanced FSA carryovers, etc.) during their 2021 plan year must amend their Plans no later than December 31, 2022.  MZQ Consulting, LLC has already taken care of these amendments on behalf of our Compass and Compass Plus groups.

2022-2023 PCORI Fee Released

By: Megan Diehl, Manager, Compliance Consulting, MZQ Consulting

The Patient-Centered Outcomes Research Institute (PCORI) fee established by the Affordable Care Act helps fund research to evaluate and compare health outcomes, clinical effectiveness, risks, and benefits of medical treatment and services.  The fee is currently in place through 2029.  In Notice 2022-59, the IRS announced that the PCORI fee for plan years ending between October 1, 2022 and September 30, 2023 is $3.00.  This is an increase from the $2.79 payment for policy or plan years that ended between October 1, 2021 and September 30, 2022.  Employers and plan sponsors with self-funded plans are typically responsible for submitting IRS Form 720 and paying the PCORI fee by July 31 of the calendar year immediately following the last day of the plan year, meaning that payments for plan years that end in 2022 will be due in July of 2023.

PCORI fees for self-funded plans are assessed on all covered lives, not just on employees.  Plan sponsors are permitted to use one of three methods to calculate the average number of covered lives for the fee: the actual count method, the snapshot method, and the Form 5500 method.  The fee for employers with fully insured plans is assessed per employee, as opposed to per covered life.  Many employers that are fully insured do not need to take any action, as the insurer will submit the payment on their behalf.  Keep in mind, however, that fully insured employers with self-funded HRAs are required to pay the fee on each employee covered under the account.

2022 PCORI Filing Fee Calendar
Plan or Policy YearPCORI Filing Fee
February 2021 – January 2022$2.79
March 2021 – February 2022$2.79
April 2021 – March 2022$2.79
May 2021 – April 2022$2.79
June 2021 – May 2022$2.79
July 2021 – June 2022$2.79
August 2021 – July 2022$2.79
September 2021 – August 2022$2.79
October 2021 – September 2022$2.79
November 2021 – October 2022$3.00
December 2021 – November 2022$3.00
January 2022 – December 2022$3.00

2023 Health FSA Inflation Adjustments

By Jessica Waltman, Principal, Forward Health Consulting

On October 18, 2022, the Internal Revenue Service issued Revenue Procedure 2022-38 that sets forth various 2023 tax-related limits that have been adjusted for inflation.  The table below identifies updates to the 2023 health and fringe benefit plan limits addressed in the notice.

Maximum Annual Employee Contribution to a Health Flexible Spending Account (Health FSA)$2,850$3,050
Health FSA Carryover Limit$570$610
Adoption Assistance Programs$14,890$15,950
Maximum Annual Employer Contribution to Qualified Small Employer HRA (QSEHRA)$5,450 (self-only coverage) $11,050 (family coverage)$5,850 (self-only coverage) $11,800 (family coverage)
Maximum Monthly Benefit for Qualified Transit Passes, Van Pool Services, and Qualified Parking$280$300

Biden Administration Issues Final Rule to End the “Family Glitch”

By Jessica Waltman

The Biden Administration issued a final regulation and a new IRS notice on October 11, 2022, which eliminate the Affordable Care Act’s (ACA) “family glitch” beginning on January 1, 2023.  The “glitch” refers to the fact that the ACA’s current affordability standard is based on what a single person pays for employer-sponsored coverage in all circumstances.  This results in many people with employer-sponsored group health insurance paying far more for family coverage than the ACA’s coverage affordability threshold (9.5% of their household income, as adjusted annually for inflation).

Under this final regulation, if the employee’s cost for dependent coverage exceeds the ACA’s affordability threshold, then the affected dependents may be eligible for subsidized coverage through an exchange.  The accompanying IRS notice allows employers to amend their Section 125 Cafeteria Plans to permit eligible dependents to drop their group coverage midyear in favor of subsidized individual exchange coverage.

Importantly, the final rule makes it clear that this change will not affect the coverage affordability requirements for applicable large employers (ALEs) subject to the ACA’s employer shared responsibility provisions (i.e., the employer mandate).  The general rule that ALEs offer their full-time employees affordable coverage and the associated affordability safe-harbors remain in place.  ALEs will NOT be required to offer affordable coverage to dependents. 

The preamble to the final rule also explicitly states that the policy change will not impact ACA reporting for either ALEs or health insurance issuers.  It remains unclear how the IRS and the health insurance exchanges will verify the cost of employer-sponsored dependent coverage or if an employee has an affordable offer of employer-sponsored coverage based on their family income.

The regulation does explain that the Biden Administration intends to:

  • Revise the Exchange application on in advance of Open Enrollment for the 2023 plan year to include new questions about employer-sponsored coverage for family members;
  • Revise the list of information consumers need to gather from an employer about the coverage being offered;
  • Provide resources and technical assistance to State Exchanges that will need to make similar changes on their websites and Exchange application experiences;
  • Provide training on the new rules to agents, brokers, and others who assist applicants so applicants will better understand their options before enrolling, including the trade-offs if applicants are considering splitting their family between exchange-based and employer-sponsored coverage; and
  • Consider direct outreach to specific consumers who previously applied for subsidized coverage, were denied, but might benefit from the new rules.

Who Could Qualify for Subsidized Exchange Coverage?

The regulation provides several examples of who could now qualify for a premium tax credit based on the new formula for assessing affordability of employer-sponsored coverage.  The examples cover multiple complex situations, and we have summarized the most relevant scenarios in the following chart:

Scenario 1: Carrie is married to John, and they file a joint tax return.  John does not have access to employer-sponsored coverage, but Carrie does.  Carrie’s employer offers them coverage as a couple that is unaffordable based on their household income.  However, the coverage would be affordable for Carrie if she joined the plan as a single individual.
Who Has Affordable Coverage?Who Qualifies for Subsidized Individual Coverage?Does the Employer Have Penalty Liability?
Carrie has an offer of affordable employer coverage.John qualifies for subsidized coverage because he does not have an affordable offer from either his or Carrie’s employer.Carrie’s employer does not.  If John’s employer is an ALE, then they are at risk of receiving a penalty for not offering him affordable employee-only coverage.
Scenario 2: The facts of Scenario 1 remain the same, except that John gets a job at a company that offers him affordable coverage based on the single premium rate.
Who Has Affordable Coverage?Who Qualifies for Subsidized Individual Coverage?Does the Employer Have Penalty Liability?
Carrie and John now both have affordable employer offers of employee-only coverage.NobodyNo
Scenario 3: The facts of Scenario 2 remain the same; however, John and Carrie now have three children ages 10, 12, and 14.  The cost to insure their whole family together under either employer plan would be unaffordable based on their family income.
Who Has Affordable Coverage?Who Qualifies for Subsidized Individual Coverage?Does the Employer Have Penalty Liability?
Carrie and John both have affordable employer offers of employee-only coverage.Their three children qualify for subsidized coverage because they do not have affordable employer-sponsored coverage.No
Scenario 4: The facts of Scenario 3 remain the same, but Carrie’s company instead offers affordable family-level coverage.
Who Has Affordable Coverage?Who Qualifies for Subsidized Individual Coverage?Does the Employer Have Penalty Liability?
The whole family now has access to affordable coverage through Carrie’s employer.  John continues to also have an offer of affordable employee-only coverage through his own employer.NobodyNo
Scenario 5: The facts of Scenario 4 remain the same, except John and Carrie no longer claim their oldest child, Catherine, as their tax dependent because she is now 23 and working.  The cost of employer coverage through John’s work remains unaffordable to anyone in the family except for him. The cost to insure John and the two younger children on Carrie’s employer-sponsored plan is affordable.  When they add in the cost of insuring Catherine, though, the coverage becomes unaffordable.
Who Has Affordable Coverage?Who Qualifies for Subsidized Individual Coverage?Does the Employer Have Penalty Liability?
John, Carrie, and the two younger children continue to have access to affordable coverage through Carrie’s work.  John continues to also have an offer of affordable employee-only coverage through his own employer.  The fact that adding Catherine to Carrie’s coverage would make it unaffordable for the whole family is not a consideration, as Catherine is not a tax dependent.Catherine may be eligible for subsidized coverage if she chooses not to enroll in Carrie’s coverage.  If she has an offer of affordable single coverage through her own employer, then she will not qualify for subsidized coverage.Carrie and John’s employers do not.  If Catherine’s employer is an ALE, then they are at risk of receiving a penalty for not offering her affordable coverage.

Additional Provisions of the Rule

The final regulation also makes related changes to the definition of “minimum value” coverage.  As with the affordability rules, these revisions will consider family coverage when determining if a plan provides minimum value for dependents.  The rules also codify long-standing guidance establishing that if a plan does not provide substantial coverage for inpatient hospital care and physician services, then it does not meet the minimum value standard. 

Finally, the preamble to the final rule addresses concerns about how consumers will determine if coverage offered through a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) or through an employer-based Individual Coverage Health Reimbursement Arrangement (ICHRA) is affordable according to the new standards.  The regulation states that because the affordability standard for QSEHRAs is set by federal statute, change here cannot be made without Congressional action.  The IRS does intend to work with HHS on new guidance concerning ICHRA affordability assessments.

Related IRS Guidance

If an employer’s open enrollment period aligns with the annual exchange open enrollment period, then it will be simple for qualified individuals to decline group coverage and enroll in subsidized individual coverage through an exchange.  However, the IRS has published Notice 2022-41 to address the complications that could arise under this final rule when an employer’s plan year does not correspond with the exchange’s open enrollment period.

In most cases, individuals who enroll in an employer-sponsored medical plan can only drop their coverage midyear if they have a “qualifying event.”  This is due to the Section 125 Cafeteria Plan regulations that allow employees to pay for medical coverage on a pre-tax basis.  Right now, a spouse and/or dependent children realizing they may be eligible for subsidized exchange coverage is not a qualifying event.  This IRS Notice amends the existing Section 125 rules related to qualifying events so that employers with non-calendar plan years can now include this scenario as a qualifying event within their Section 125 plan documents.  Of note, the existing Section 125 regulations already permit employees to prospectively revoke their election for employer-sponsored coverage midyear in order to enroll in exchange-based coverage during the annual open enrollment or if they become eligible for a special enrollment period.

According to the new guidance, employers with non-calendar year plans can now allow employees to revoke their family-level (non-health FSA) medical coverage as long as:

  1. At least one of their dependents wants to enroll in exchange-based coverage, either during the exchange’s open enrollment period or because the dependent is eligible for a special enrollment period through the exchange.
  2. And, the dependent(s) intend to enroll in exchange-based coverage that starts no later than the day after their coverage under the employer-sponsored plan ends.  If the employee doesn’t also enroll in exchange-based coverage, they cannot revoke their own employer-sponsored coverage midyear.  They, and any other individuals they’re covering who don’t enroll in coverage through an exchange, will need to maintain enrollment in the employer’s plan.

Employers can rely on an employee’s attestation as proof that their relative has enrolled or will enroll in exchange-based coverage.  Employers are not required to allow these election changes.  However, if they wish to permit the changes, they must:

  1. Inform employees of their right to make a change in accordance with the new rule, and
  2. Adopt a formal plan amendment on or before the last day of the plan year in which the election changes are allowed.  This amendment may be made retroactively to the first day of the plan year[1]—meaning that election changes can technically be permitted before an amendment to the Cafeteria Plan document is made.  Plans cannot be amended to allow an actual election of coverage to be revoked on a retroactive basis.

What Employers Need to Do

Moving forward, employers need to be aware of the change to the affordability standard for family coverage, be prepared to communicate with employees about the new rule, and be very clear about the exchange’s open enrollment deadline.

Additionally, it is more imperative than ever that ALEs ensure they are offering affordable, minimum value coverage to their full-time employees.  While the ACA’s affordability requirements under the employer mandate (and associated penalty liability) continue to only apply to the employer’s lowest-cost offer of self-only, minimum value medical coverage, the existence of the new regulation means that more employees will seek exchange-based coverage.  With more employees participating in the exchange, the likelihood that an ALE will receive a penalty when they fail to offer employees affordable coverage increases, too.

Finally, employers with non-calendar plan years should consider adopting the changes to their Section 125 Cafeteria Plan that this new IRS guidance permits.  MZQ will help all our Compass and Compass Plus clients adopt these changes in advance of the regulated deadline.

[1] For plan years beginning in 2023, an extra year is permitted to complete the amendment (e.g., if a plan year begins April 1, 2023, the plan has until March 31, 2025 to complete the amendment).

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