Health care reform: Know the rules and penalties of the individual mandate

May 29, 2013

The individual mandate starts in January 2014 and is an important part of the Affordable Care Act. The individual mandate requires people legally living in the U.S. to buy a minimum amount of health coverage unless they are exempt. In general, people who don’t have to file taxes due to low income are exempt from the individual mandate.

But how does it work? And what are the penalties for people who don’t get coverage?

How the individual mandate works

When people file their 2014 taxes in 2015, they’ll need to report whether or not they had health coverage in 2014. If they did have coverage, they will need to report if they qualified for a tax credit or subsidy. Health coverage includes a group plan, an individual plan, Medicare or Medicaid. If they don’t have health coverage, they could face a tax penalty. Each year, the penalty increases.

What are the tax penalties?

If a person doesn’t have a health plan, he or she will pay a tax penalty as follows:.

  • 2014: Penalty is the larger amount – $95 or 1% of taxable earnings
  • 2015: Penalty is the larger amount – $325 or 2% of taxable earnings
  • 2016: Penalty is the larger amount – $695 or 2.5% of taxable earnings

What happens if your clients can’t pay for a plan?

People may qualify for a tax credit through the exchange based on their incomes. People earning between 100% and 400% of the federal poverty level can qualify if they are not eligible for other sources of minimum essential coverage, including government-sponsored programs such as Medicare and Medicaid.

This includes:

  • Individuals with modified adjusted gross incomes of $11,490 to $45,960 a year
  • Families of four with modified adjusted gross incomes of $23,550 to $ 94,200 a year.

People may qualify for cost-sharing subsidies based on their income. This includes:

  • Individuals with modified adjusted gross incomes of $11,490 to $28,725 a year.
  • Families of four with modified adjusted gross incomes of $23,500 to $58,875 a year.

To learn about other health care reform topics, check out the timeline and FAQs on our broker/employer health care reform website or visit our member website,

This article applies to:

  • California, Wisconsin, Virginia, Ohio, New York, Nevada, New Hampshire, Missouri, Maine, Kentucky, Indiana, Georgia, Connecticut,  and Colorado
  • Small Group, Large Group,  and Individual (under 65)

IRS Proposed Rules Address Exchange Minimum Value and Affordability Rules for HRAs, HSAs and Wellness

Resource type: Legal Update: archive

Jurisdiction:                                                     USA

The Internal Revenue Service (IRS) released proposed regulations addressing the health insurance premium tax credit under health care reform. The regulations provide guidance on determining whether health coverage under an eligible employer-sponsored plan provides minimum value and is affordable for purposes of determining health exchange-related penalties under health care reform.

PLC Employee Benefits & Executive Compensation


On April 30, 2013, the IRS released proposed regulations addressing health care reform’s premium tax credit for the health insurance exchanges …show full speedread

On April 30, 2013, the IRS released proposed regulations addressing health care reform’s premium tax credit for the health insurance exchanges. The proposed regulations provide guidance on determining whether coverage under an eligible employer-sponsored plan provides minimum value (MV), and include rules for health reimbursement arrangements (HRAs), health savings accounts (HSAs) and wellness program incentives. The regulations are proposed to apply for tax years ending after December 31, 2013.

Close speedread

On April 30, 2013, the IRS released proposed regulations addressing health care reform’s premium tax credit for the health insurance exchanges (see Practice Note, Health Insurance Exchange and Related Requirements under Health Care Reform ( The proposed regulations, which provide guidance on determining whether coverage under eligible employer-sponsored plans provides minimum value (MV), includes rules for health reimbursement arrangements (HRAs), health savings accounts (HSAs) and wellness program incentives. The proposed regulations would apply for tax years ending after December 31, 2013.

Calculating Minimum Value

Under health care reform, starting in 2014, individuals who purchase coverage under a qualified health plan through a health insurance exchange may receive a premium tax credit under Section 36B of the Internal Revenue Code (IRC). However, individuals may not receive a premium tax credit if they are eligible for affordable coverage under an eligible employer-sponsored plan that provides MV and is affordable. Certain large employers may be subject to a penalty under IRC Section 4980H if they do not offer their employees minimum essential coverage that is both affordable and provides MV (see Practice Note, Employer Mandate under Health Care Reform: Overview (

Under IRC Section 36B, a plan fails to provide MV if the plan’s share of the total allowed costs of benefits provided under the plan is less than 60% of the costs. This proportion of the total allowed costs of benefits paid by the plan is called the plan’s MV percentage. In general, the MV percentage is determined by:

  • Dividing the cost of certain benefits the plan would pay for a standard population by the total cost of certain benefits for the population, including amounts the plan pays and amounts the employee pays through cost-sharing.
  • Converting the result to a percentage.

Under the proposed regulations:

  • Employer-sponsored self-insured and insured large group plans need not cover every essential health benefit (EHB) category or conform their plans to an EHB benchmark that applies to qualified health plans.
  • For MV purposes, all amounts contributed by an employer for the current year to an HSA are:
    • taken into account in determining the plan’s share of costs; and
    • treated as amounts available for first dollar coverage.
  • Amounts that are newly made available under an HRA that is integrated with an eligible employer-sponsored plan for the current plan year are taken into account for MV purposes if the amounts may be used only for cost-sharing and not to pay insurance premiums.

According to the IRS, future guidance will provide that whether an HRA is integrated with an eligible employer-sponsored plan will be determined under rules that apply for purposes of health care reform’s restrictions on lifetime and annual limit (see Practice Note, Lifetime and Annual Limits and Cost-sharing Restrictions under Health Care Reform: Application of Annual Limit Rules to HRAs (

Minimum Value and Wellness Program Incentives

Under the proposed regulations, a plan’s share of costs for MV purposes is determined without regard to reduced cost-sharing (for example, deductibles or copayments) available under a nondiscriminatory wellness program. However, for nondiscriminatory wellness programs designed to prevent or reduce tobacco use, MV may be calculated assuming that every eligible individual satisfies the program’s terms relating to prevention or reduction of tobacco use.

An example in the proposed regulations illustrates these rules. The example involves an employer that offers an eligible employer-sponsored plan that reduces the deductible by $300 for employees who either:

  • Do not use tobacco products.
  • Complete a smoking cessation course.

The deductible is reduced by $200 if an employee completes cholesterol screening within the first six months of the plan year. One employee does not use tobacco and his deductible is $3,700. A second employee uses tobacco and her deductible is $4,000. Under this example, only the incentives related to tobacco use are considered in determining the plan’s MV percentage. The first employee is treated as having earned the $300 incentive for attending a smoking cessation course. As a result, the deductible for determining the MV percentage for both employees is $3,700. (The $200 incentive for completing cholesterol screening is disregarded.)

Determining Affordability

The proposed regulations also include rules for determining how HRAs and wellness program incentives are counted in determining the affordability of eligible employer-sponsored coverage. Amounts that are newly made available under an HRA that is integrated with an eligible employer-sponsored plan for the current plan year are taken into account only in determining affordability if the employee may either:

  • Use the amounts only for premiums.
  • Choose to use the amounts for either premiums or cost-sharing.

For wellness programs, an employer-sponsored plan’s affordability is determined by assuming that each employee fails to satisfy the wellness program’s requirements, except those of a nondiscriminatory wellness program related to tobacco use. This means the affordability of a plan that charges a higher initial premium for tobacco users is determined based on the premium charged to either:

  • Non-tobacco users.
  • Tobacco users who complete the related wellness program (for example, attending smoking cessation classes).

However, the proposed regulations include special transition relief, for IRC Section 4980H penalty purposes, for group health plan years beginning before January 1, 2015. Under this relief, certain employers are not subject to a Section 4980H penalty for employees who received a premium tax credit because the employer’s offer of coverage was unaffordable or did not provide MV if the coverage generally would have been affordable or satisfied MV based on required employee premium and cost-sharing applicable for the plan if the employee satisfied wellness program requirements in effect on May 3, 2013. The transition relief applies for rewards expressed as either:

  • A dollar amount.
  • A fraction of the total required employee premium contribution (or, if applicable, employee cost-sharing).

Additional Minimum Value Safe Harbors to Be Announced

Employers can use the MV Calculator provided by HHS and the IRS to determine whether a plan provides MV. In addition, the IRS anticipates that future guidance will include several safe harbors that are examples of plan designs that would clearly satisfy the 60% threshold if measured using the MV Calculator. In the preamble to the proposed regulations, the IRS proposed that plan designs meeting the following specifications would be safe harbors for determining MV, provided that the plans cover all the benefits included in the MV Calculator:

  • 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.
  • 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 an HSA.
  • 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.

The IRS requested comments on these and other common plan designs that would satisfy MV and should be designated as safe harbors.

We’re Not the Only Ones Worried about an Implementation “Train Wreck”

A top Senate Democrat changed his tune a little bit this week concerning PPACA. During a Senate Committee on Finance hearing, Senator Max Baucus (D-MT), the Committee’s chairman, expressed some serious concerns regarding the Obama Administration’s handling of the implementation of the health reform law he helped to draft.

HHS Secretary Kathleen Sebelius testified on behalf of her agency and the president’s budget proposals in front of the Senate Finance Committee on Tuesday. During Sebelius’ testimony, Senator Baucus questioned her on the implementation efforts of the law, state exchange preparedness and employer and small business knowledge. Despite the secretary’s efforts to reassure the committee that exchanges will in fact be set up and ready for open enrollment come October 1, 2013, Senator Baucus expressed his fears that unless the administration improves its outreach efforts to businesses in particular, health reform implementation will be a “huge train wreck.”

Baucus is the first top Democratic senator to publically voice such bold concerns regarding implementation of health reform. Many consumers, he told the committee, will not have enough information available to them to make informed healthcare decisions. Small businesses are going to struggle if the administration doesn’t provide them with more information and more assistance in the near-term future. Baucus also spoke to the confusing nature of the law and the influx of rules and regulations that have been quickly been coming down from the Administration.

Specifically, Baucus expressed his concern over navigators, stating that whenever he has asked the Administration a question about this program, he has received no answer. He went on to wonder out loud if a top Democratic United States senator is having difficulty getting answers from the Administration, how are businesses and consumers going to get that information? Sebelius informed the committee that, come summer, there will be many people on the ground in every state educating the American people on the law and what to expect in the months to come. Additionally, she promised that HHS will be holding webinars to educate people on the role of navigators and how they may be of help during this process. However, when Senator Baucus asked for concrete data on the people in each state who will be going around educating people, the secretary had no answer. Baucus, who seemingly became progressively more frustrated as the secretary spoke, noted, “We need data…you never give me any data. You give me concepts, frankly.”

Since making this statement, Baucus, who is up for reelection next year, has received heat from both sides of the aisle. Some of his fellow Democrats noted that they, unlike Chairman Baucus, were pleased with the law and members of the Tea Party have deemed him a hypocrite. Meanwhile, some Senate Republicans have welcomed him into the “anti-ObamaCare” club despite his questionable timing. Following the hearing, Baucus had an aide release the following statement: “There should be no confusion about this. As Senator Baucus said yesterday, he thinks this is a good law and he’s simply holding the Administration’s feet to the fire to make sure they do their job implementing it correctly and informing people about the benefits that are available to them, which will bolster the efforts of folks working to implement it at the state level.”

Meanwhile, after the hearing, Secretary Sebelius told reporters that the exchanges are on track to open for open enrollment in October and the marketplaces will be fully implemented come January 2014.

HHS is requesting from Congress an additional $554 million to be used for outreach and education related to implementation of PPACA. While HHS may have a concrete use in mind for the money, it is highly unlikely that a Republican-controlled House will approve the additional funding. Recent surveys have indicated that the majority of the American public do not have enough information and do not have a true understanding of how the health reform law will impact them. There is a clear need for more education and outreach of PPACA. The trillion-dollar question, however, is still: How is this actually going to happen?

Consumer Groups upset about delay

Consumer Groups Protest Delay Of ACA Out-Of-Pocket Expense Cap.

Kaiser Health News Share to FacebookShare to Twitter (4/10, Appleby) reports that several consumer groups are asking the Obama Administration to reconsider its decision not to enforce the Affordable Care Act provision capping out-of-pocket expenses an insurance plan can ask an individual to pay. Under the ACA, the “out-of-pocket cap…is estimated to be about $6,250 for an individual.” However, groups including the American Cancer Society warned that because of the delay, “insurers and employers may be able to keep offering health plans next year that include out-of-pocket caps for individuals of $12,500 or more.”

Premium Tax Credits for Low-Income

Premium Tax Credits for Lower-Income Individuals
In 2014, a “premium tax credit” will be available to help pay for coverage purchased through the Exchange for individuals and families:
  1. Who do not qualify for Medicare or Medicaid and
  2. Are not offered affordable, minimum value health insurance through an employer,
  3. Taxpayers, with income between 100% and 400% of the federal poverty line (FPL)
  4. Purchasing insurance through an Exchange.
% of FPL
Annual Income (family of 4)
Unsubsidized Annual Premium
Tax Credit
Annual Premium After Credit
Monthly Premium After Credit
Adjusted 2013 Federal Poverty Guidelines

48 Contiguous States and DC
Note: The 100% column shows the federal poverty level for each family size, and the percentage columns that follow represent income levels that are commonly used as guidelines for health programs.
Household Size
For each additional person, add
Source: Calculations by Families USA based on data from the U.S. Department of Health and Human Services
Determining eligibility for the premium tax credit
Modified” gross income is calculated which includes Social Security benefits that are not included in gross income for the taxable year.  In addition, some individuals and families will qualify for a cost-sharing reduction subsidy to help with deductibles and co-payments.
How will services be paid?
When an individual receives covered essential health benefits, the provider will collect only the amount of cost-sharing specified in the silver plan variation in which the individual is enrolled. The federal government will pay the insurer in advance the amounts estimated to cover the cost-sharing reductions associated with the specific silver plan variation. HHS intends to propose that this advance cost-sharing reduction payment to the insurer would occur monthly, and that, after the end of the calendar year, the federal government would reconcile the advance payments to actual cost-sharing reduction amounts.
The Exchange Determines Eligibility for Premium Tax Credit and Cost-Sharing Reductions.
Exchanges must have a coordinated system of eligibility so that an individual can simultaneously apply for enrollment, apply for premium tax credits and apply for cost-sharing reductions. Proposed IRS regulations would permit the disclosure of income and other specified information about an individual taxpayer to HHS for purposes of making eligibility determinations for advance payments of the premium tax credit or the cost-sharing reductions.
Ineligibility for the tax credit (groups with over 50 Full Time Equivalent Employees)
As a general rule, if an Applicable Large Employer’s plan constitutes “minimum essential coverage” in that it is both affordable and provides minimum value, merely being eligible for the plan will make an employee ineligible for the tax credit. The final regulations clarify that an eligible employee who declines enrollment in such a plan remains ineligible for the tax credit for each month in the coverage period related to the enrollment period (e.g., for the full plan year in the case of an annual enrollment period).
This information is subject to future guidance and regulations

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