On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (hereinafter “IRA”).This new law only has an indirect impact on employer sponsored health plans. Following is a summary of relevant provisions:
HSA COMPATIBLE HIGH DEDUCTIBLE HEALTH COVERAGE
The law codifies previously provided informal guidance allowing reimbursement of insulin and related products with low or no deductible without jeopardizing HSA eligibility. As a reminder, to be HSA eligible an individual must be covered by a high deductible health plan with no disqualifying coverage.
For 2022 and 2023 the individual and family deductible and out-of-pocket limits are:
The out-of-pocket (OOP) limits applicable to a high deductible health plan used in conjunction with an HSA differ slightly from the ACA-imposed OOP limits (below). For a family plan, no individual can be subject to an OOP greater than the individual OOP limit.
MARKETPLACE PREMIUM ASSISTANCE
The IRA further extends a temporary expansion of premium assistance through a tax credit originally provided by the American Rescue Plan Act (hereinafter “ARP”).This temporary extension supersedes and replaces the premium assistance as set out in IRS Rev. Proc. 2022-34 and as described in Health Reform Bulletin 164. .
Premium assistance is available to individuals, including those earning above 400% of poverty if the cost of health coverage exceeds 8.5% of income. The following contribution percentages are used to determine whether an individual is eligible for a premium tax credit for health coverage purchased through the marketplace through December 31, 2025.
This does not change the 9.12% affordability metric used to determine whether applicable large employers (“ALEs”) offer adequate affordable coverage.
As background, employers subject to the ACA’s employer shared responsibility mandate who fail to offer minimum essential coverage to their full-time employees or fail to offer adequate and affordable coverage may be subject to an excise tax if at least one of its employees qualifies for premium assistance through a marketplace. If an employer does not know an individual’s household earnings, it can use one of three safe harbors for purposes of determining affordability; they are:
- A Form W-2 determination in which the employer’s lowest cost self-only coverage providing minimum value does not exceed 9.12% (for 2023 plan year; 9.61% in 2022), of the employee’s Form W-2 wages (Box 1) for the calendar year.
- A rate of pay method in which the minimum value cannot exceed 9.12% (for 2023 plan year; 9.61% in 2022), of an amount equal to 130 hours, multiplied by the employee’s hourly rate of pay as of the first day of the coverage period. For salaried employees, the monthly salary is used instead of the 130 hour standard. An employer can apply this method to hourly employees if they experience a reduction in pay during the year; however, this methodology cannot be used for commissioned sales people.
- A Federal poverty line (FPL) standard in which cost of single coverage does not exceed 9.12% (for 2023 plan year; 9.61% in 2022) of the individual federal poverty line rate for the applicable calendar year, divided by twelve. While we do not know the FPL guidelines for 2023, we do know that a plan can use the poverty guideline in effect six months prior to plan’s effective date, hence for a 2023 calendar year plan the affordability limit is $103.28.
Penalty Assessments. If an ALE fails to offer adequate coverage one of two excise taxes could be imposed. There is the ‘no coverage’ excise tax, and the ‘inadequate or unaffordable’ excise tax.
- The first penalty, in accordance with IRC Section 4980H(a), is the “no coverage” penalty. It would apply if the employer fails to offer minimum essential coverage (MEC) to its full time employees (those working 30 or more hours per week). The penalty is avoided if no more than 5%, or 5 employees, if greater (the “margin of error” rule) are not offered coverage. Said another way, as long as the employer offers MEC to at least 95% of its full-time employees, then the “no coverage” penalty is avoided; however, the IRC Section 4980H(b) penalty described below could apply. MEC includes most types of employer coverage, as well as government-sponsored coverage, among others.
- The second penalty, in accordance with IRC Section 4980H(b), is the “inadequate or unaffordable coverage” penalty. This penalty would apply if the coverage offered does not meet minimum value standards or is unaffordable, as more fully described below. It also applies in instances where individuals who fall within the ‘margin of error’ rule (described above) qualify for premium assistance.
The chart below reflects the amount of penalties for purposes of calculating the ‘no coverage’ excise tax pursuant to Code Section 4980H(a), and the ‘inadequate or unaffordable’ excise tax pursuant to Code Section 4980H(b) for 2022 and 2023.
MEDICARE CHANGES
The IRA requires the Centers for Medicare & Medicaid Services (CMS) to negotiate the prices of certain prescription drugs under Medicare beginning in 2026.
Specifically, the CMS must negotiate maximum prices for brand-name drugs that do not have other generic equivalents and that account for the greatest Medicare spending. The CMS must negotiate the prices of 10 drugs in 2026, 15 drugs in 2027 and 2028, and 20 drugs in 2029 and each year thereafter. Drug manufacturers that fail to comply with negotiation requirements are subject to civil penalties and excise taxes.
In addition, the IRA caps cost-sharing under the Medicare prescription drug benefit for a month's supply of covered insulin products at (1) for 2023 through 2025, $35; and (2) beginning in 2026, $35, 25% of the government's negotiated price, or 25% of the plan's negotiated price, whichever is less.
The IRA eliminates beneficiary cost-sharing above the annual out-of-pocket spending threshold under the Medicare prescription drug benefit beginning in 2024 and caps annual out-of-pocket spending at $2,000 in 2025 (with annual adjustments thereafter). It also establishes a program under which drug manufacturers provide discounts to beneficiaries who have incurred costs above the annual deductible beginning in 2025.
The IRA also establishes a process through which certain beneficiaries may have their monthly out-of-pocket costs capped and paid in monthly installments beginning in 2025.
What impact these Medicare changes will have on employer health plans remains to be seen.
About the Author
Karen McLeese is Vice President of Employee Benefit Regulatory Affairs for CBIZ Benefits & Insurance Services, Inc., a division of CBIZ, Inc. She serves as in-house counsel, with particular emphasis on monitoring and interpreting state and federal employee benefits law.
Ms. McLeese is based in the CBIZ Kansas City office.
The information contained herein is not intended to be legal, accounting, or other professional advice, nor are these comments directed to specific situations. The information contained herein is provided as general guidance and may be affected by changes in law or regulation. The information contained herein is not intended to replace or substitute for accounting or other professional advice. Attorneys or tax advisors must be consulted for assistance in specific situations. This information is provided as-is, with no warranties of any kind. CBIZ shall not be liable for any damages whatsoever in connection with its use and assumes no obligation to inform the reader of any changes in laws or other factors that could affect the information contained herein.