Introduction
On November 24, the IRS published TD 9705, which issues final regulations relating to the requirement for an individual to maintain minimum essential health coverage under the Affordable Care Act (“ACA”). Concurrent with the issuance of the regulations, the Service issued Notice 2014-76, identifying hardship situations that exempt an individual from the individual mandate. This allows taxpayers to claim an exemption on their federal income tax returns instead of obtaining an exemption certification from the Health Insurance Marketplace (“Marketplace”).

TD 9705
The final regulations retain the rules in proposed regulations stating that neither Medicaid coverage for medically needy individuals nor coverage through demonstration projects under section 1115 of the Social Security Act constitute minimum essential coverage under the ACA.

Additionally, an individual’s required contribution for employer sponsored coverage is reduced by any health flex contribution made by an employer to a section 125 cafeteria plan. The final regulations define a health flex contribution as a contribution made to a section 125 cafeteria plan that (1) may not be taken as a taxable benefit, (2) may be used to pay for minimum essential coverage, and (3) may be used only to pay for medical care within the meaning of section 213.

The final regulations also state that amounts newly made available under a Health Reimbursement Arrangement (“HRA”) count toward an employee’s required contribution if the HRA would have been integrated with an eligible employer-sponsored plan if the employee had enrolled in the primary plan. The regulations further clarify that for purposes of determining the required contribution, an HRA is only taken into account if the HRA and the primary eligible employer sponsored coverage are offered by the same employer. Further, HRA contributions count toward affordability, and not minimum value, if an employee may use the HRA contributions to pay premiums for the primary plan only, or to pay cost sharing or benefits not covered by the primary plan in addition to premiums.

The regulations retain the rule in the proposed regulations that treat wellness incentives unrelated to tobacco use as unearned and wellness incentives related to tobacco use as earned in determining affordability. For example, if an employer charges employees a monthly premium of $150 if they participated in a wellness program and $200 if they did not, the $200 premium is used in determining if an employee had access to affordable health coverage. However, if the wellness incentive relates to cessation of tobacco use, the discounted premium is used in determining whether an employee had access to affordable health coverage.

Lastly, the final regulations remove references to specific hardship circumstances and provide that a taxpayer may claim a hardship exemption on a federal income tax return without obtaining an exemption certification from the Marketplace for any month that includes a day on which the taxpayer satisfies the requirements of a hardship for which guidance is issued. Concurrent with TD 9705, the IRS published Notice 2014-76, which lists several such hardship exemptions that a taxpayer may claim on a federal income tax return.

The final regulations are effective on November 26, 2014.

Notice 2014-76
The Notice lists several hardship exemptions from the individual mandate that an individual may claim on a federal income tax return instead of obtaining a certification of exemption from the Marketplace:

  • -two or more members of a family whose combined cost of employer-sponsored coverage is considered unaffordable;
  • -individuals whose gross income falls below the applicable return filing threshold;
  • -individuals who obtained minimum essential coverage during the 2014 open enrollment period;
  • -certain individuals who applied for coverage under the Children’s Health Insurance Program during the open enrollment period for 2014;
  • -individuals eligible for services through an Indian Health Care Provider; and
  • -certain individuals residing in a state that did not expand Medicaid eligibility under section 2001(a) of the ACA.

The Notice applies to taxable years beginning after December 31, 2013.