Wellness Incentives, HRAs, Minimum Value and Affordability

The IRS has released proposed regulations that address how wellness incentives or penalties are applied to premium affordability (for purposes of the employer shared responsibility/play or pay requirements) and to minimum value.

The proposed regulations provide that when deciding if the employee's share of the premium is affordable (less than 9.5% of the employee's safe harbor income), the employer may not consider wellness incentives or surcharges except for a non-smoking incentive. In other words, the premium for non-smokers will be used to determine affordability (even for smokers). Any other type of wellness incentive must be disregarded, except for a special rule for 2014.

Example: Acme has a wellness program that reduces premiums by $300 for employees who do not use tobacco products or who complete a smoking cessation course. Premiums are reduced by $200 if an employee completes cholesterol screening during the plan year. The annual employee premium is $4,000. Employee B does not use tobacco and completed the cholesterol screen so the cost of his actual premiums is $3,500 [$4,000 - 300 - 200]. Employee C uses tobacco and does not do the cholesterol screen, so the cost of her actual premiums is $4,000. For purposes of affordability, Acme will use $3,700 as the cost of coverage for both Employee B and Employee C [$4,000 less the available $300 non-smoker discount].

For the 2014 plan year only, employers who had a wellness program in place on May 3, 2013 may also take the wellness incentives for targets other than non-use of tobacco into account when determining premium affordability. So, for 2014 only, using the example, Acme would use $3,500 as Employee B's and Employee C's cost of coverage (since the employer can assume all available incentives were earned).

If an employer makes HRA contributions that the employee may use to pay premiums, the employer may reduce the employee's cost of coverage by the HRA contribution for the current year when determining affordability.

When calculating minimum value, if incentives for nonuse of tobacco may be used to reduce cost-sharing (i.e., the deductible or out-of-pocket costs), those incentives may be taken into account when determining minimum value. (Other types of wellness incentives that affect cost-sharing may be considered for 2014 if the employer had a wellness program that provided cost-sharing incentives on May 3, 2013; they may not be considered after 2014.)   Current year contributions to an integrated HRA that may only be used for cost sharing (and not to pay premiums) or to an HSA may be considered first dollar benefits when calculating minimum value.

The proposed regulation also includes three proposed "safe harbor" plan designs that would meet the 60% minimum value threshold. (The safe harbor designs could be used instead of testing the plan through the calculator supplied by HHS; the safe harbor is just a convenience and not a limit on permitted plan designs.) The IRS says that these designs meet minimum value:

• A plan with a $3,500 integrated medical and drug deductible, 80 percent cost-sharing, and a $5,000 maximum out-of-pocket limit;
• A plan with a $4,500 integrated medical and drug deductible, 70 percent cost sharing, a $6,400 maximum out-of-pocket limit, and a $500 employer contribution to an HSA; or
• A plan with a $3,500 medical deductible, $0 drug deductible, 60 percent medical cost sharing, a $10/$20/$50 copay tiered drug plan, and a 75 percent coinsurance for specialty drugs.

It is possible that more safe harbor designs will be provided later.

The proposed regulation is here: Minimum Value - Proposed Rule

Summary of Benefits and Coverage

The agencies have released an updated Summary of Benefits and Coverage (SBC) template that plans will need to use for 2014. The updated template has very few changes from the version used for 2013.