ACA News & Publications

IRS Proposed Regulations: More Guidance to Determine Minimum Value and Affordability Requirements for Wellness Programs, and HRA and HSA Contributions

May 2013

Proposed regulations by the Department of the Treasury were published on May 3, 2013 that included additional guidance to assist employers in determining whether the health coverage they offer their employees provides "minimum value." The regulations also address several miscellaneous issues of importance to employers, with respect to minimum value and affordability, most notably the impact of employer contributions to health reimbursement accounts ("HRAs") and health savings accounts ("HSAs"), as well as premium discounts and surcharges provided through wellness programs.

The concepts of minimum value and affordability are critical elements in determining whether a penalty tax could be assessed on employers beginning in 2014. This penalty is sometimes referred to as the "shared responsibility penalty," "the employer mandate," or "play or pay penalty." 

These proposed regulations come on the heels of, and build upon, the final regulations promulgated by the Department of Health and Human Services ("HHS") regarding minimum value that were published on February 25, 2013, as well as other previously issued guidance, including Internal Revenue Service ("IRS") Notice 2012-31, which requested comments on methods for determining minimum value. These comments were considered in developing these proposed regulations.

This Burnham bulletin provides a summary of the proposed guidance in a Q&A format. In addition, it also incorporates certain provisions of proposed regulations published by the IRS and Department of the Treasury on January 2, 2013 with respect to the employer's shared responsibility regarding health coverage.


Specifically, the proposed regulations provide that:

  1. Consistent with prior guidance, the minimum value percentage ("MV percentage") is to be determined using the anticipated spending for a "standard population" as developed by HHS based on typical self-insured plans, and takes into account plan benefits that are included in any one of the essential health benefit ("EHB") benchmark plans.
  2. Employer HSA contributions for the current plan year are taken into account in determining the MV percentage, as will be employer contributions to an integrated HRA to the extent that the amounts will be used to reduce cost-sharing and are not used to pay premiums.
  3. Employer contributions to an integrated HRA can be taken into account to determine affordability to the extent that they could be used to reduce premiums in addition to, or in lieu of cost sharing.
  4. Only incentives received as a result of participating in a nondiscriminatory smoking cessation program can be taken into account for purposes of determining the MV percentage or affordability, and not incentives received from other types of wellness programs.
  5. Employers must use the MV Calculator on the HHS website to measure minimum value unless its plan design contains features not reflected within the parameters of the calculator, in which case, the employer could obtain an actuarial certification, or use one of the permitted safe harbor plan designs.


Internal Revenue Code ("Code") Section 4980H was enacted as a result of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively referred to herein as the "Affordable Care Act" or "ACA"), and generally provides that an employer with 50 or greater full-time equivalent employees ("large employer") may be subject to one of two play or pay penalties should at least one of its full-time employees enroll for coverage through an Affordable Insurance Exchange ("Exchange") and qualify for a premium tax credit or cost sharing reduction ("subsidy").

The first potential penalty liability arises should a large employer fail to offer at least 95 percent of its full-time employees (and their dependents) minimum essential coverage (as defined in Code Section 5000A(f)). If so, and one of its full time employee enrolls in a qualified health plan in an Exchange and receives a subsidy, the general rule is that an employer would be assessed a penalty equal to $166.67 per month ($2,000 annually and adjusted for inflation after 2014) times the total number of employees (less 30 full-time employees) in its workforce, disregarding the employer aggregation rules under Code Sections 414 (b), (c), (m), and (o).

The second potential penalty liability arises if the employer offers these employees minimum essential coverage, as described above, but the coverage is not affordable, and doesn't provide minimum value. In this case, the general rule is that an employer would be assessed a penalty equal is equal to $250 per month ($3,000 annually and adjusted for inflation after 2014) times the number of fulltime employees who go to the Exchange, purchase coverage, and receive premium tax credits.

However, a full-time employee will not be eligible for a subsidy as long as the large employer offers him or her (and his or her dependents) the opportunity to enroll in minimum essential coverage and that the coverage offered to the employee is affordable and provides  minimum value, as such terms are defined in Code Section 36B.

Q&A: The following Q&As address the guidance as it relates to assisting employers in offering health coverage that is affordable and provides minimum value.

How is Affordability Determined?

Health coverage is considered affordable if the employee's portion of the self-only premium for the employer's lowest- cost coverage that provides minimum value does not exceed 9.5 percent of the employee's household income for the tax year. This determination applies regardless of whether the employee is eligible for another level of health plan coverage, such as family coverage. Thus, the cost of family coverage is not taken into account to determine whether an employer's health plan is affordable for purposes of the play or pay penalty.

Because employers are generally not aware of the income levels of their employees' family members, they would find it difficult to assess whether the coverage they offer would be considered affordable. To address this issue, the proposed regulations on employer shared responsibility include three affordability safe harbors for purposes of the play or pay penalty assessment (they would not affect an employee's eligibility for a premium tax credit), provided the employer offers its full-time employees minimum essential coverage with minimum value:

  • Form W-2 Safe Harbor:Under the Form W-2 safe harbor, an employer compares the cost of self-only health coverage to an employee's wages from that employer that are required to be reported in Box 1 of the employee's Form W-2 to determine whether the cost exceeds 9.5 percent of income.
  • Rate-of-Pay Safe Harbor:  Under the rate-of-pay safe harbor, affordability is determined by comparing the cost of self-only coverage to an employee's rate of pay. For salaried employees, the employer would use the employee's monthly salary to determine affordability. For hourly employees, the employer would multiply the employee's hourly rate of pay by 130 hours per month and determine affordability based on the resulting monthly wage amount.
  • Federal Poverty Line ("FPL") Safe Harbor:  The FPL safe harbor measures affordability based on the FPL for a single individual.

What is Minimum Value?

Under Code Section 36B, a plan fails to provide minimum value if its share of the total allowed costs of benefits provided under the plan is less than 60 percent of the costs. This is referred to as the plan's MV percentage. 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 standard population, including amounts the plan pays and amounts the employee pays through cost-sharing, and then converting the result to a percentage. "Standard population" for this purpose refers to the population covered by typical self-insured group health plans.

What Health Benefits are Measured in Determining the MV Percentage?

Consistent with previously issued guidance, unlike plans to be offered in the small group market, employer-sponsored large group plans are not required to cover every essential health benefit (" EHB") category or conform their plans to an EHB benchmark. The proposed regulations provide that minimum value is based on the anticipated spending for any standard population, and the plan's anticipated spending for benefits provided under any particular EHB-benchmark plan for any state will count towards minimum value.

Will Employer Contributions Made to HSAs be taken into Consideration in Determining the MV Percentage?

All amounts contributed by an employer for the current plan year to an HSA are taken into account in determining the plan's share of costs for purposes of minimum value and are treated as amounts available for first dollar coverage.

Will Employer Contributions Made to the HRAs of their Employees be taken into Consideration in Determining the MV Percentage and Affordability?

Amounts newly made available under an HRA integrated with an eligible employer-sponsored plan for the current plan year count for purposes of determining minimum value so long as the amounts may be used only for cost-sharing and may not be used to pay insurance premiums. Such contributions will be taken into account in determining affordability only if the employee is restricted to using the amounts for paying premiums or may choose to use the amounts for paying either premiums or cost-sharing.

Will Wellness Program Incentives be counted towards Determining Minimum Value and Affordability?

For purposes of determining minimum value, a plan's share of costs is determined without regard to reduced cost-sharing resulting from incentives received by participating in a nondiscriminatory wellness program, unless the program is designed to prevent or reduce tobacco use. If so, minimum value is to be calculated assuming that every eligible individual satisfies the terms of the program relating to prevention or reduction of tobacco use.

Like the rule for determining minimum value, the proposed regulations provide that the affordability of an employer-sponsored plan is determined by assuming that each employee fails to satisfy the requirements of a wellness program, except those requirements related to tobacco use. Thus, the affordability of a plan that charges a higher initial premium for tobacco users will be determined based on the premium that is charged to non-tobacco users, or tobacco users who complete the related wellness program, such as attending smoking cessation classes.

Affordability Example:  A large employer offers an eligible employer sponsored plan with a nondiscriminatory 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 within the first six months of the plan year. Employee B does not use tobacco and the cost of his premiums is $3,700. Employee C uses tobacco and the cost of her premiums is $4,000.

Conclusion: Only the incentives related to tobacco use are counted toward the premium amount used to determine the affordability of the employer's plan. Employee C is treated as having earned the $300 incentive for attending a smoking cessation course. Thus, the employee's required contribution to premium for determining affordability for both Employees B and C is $3,700. The $200 incentive for completing cholesterol screening is disregarded.

What Resources are Available for the Employer to Determine Minimum Value?

To determine whether a plan sponsored by a large employer meets the 60 percent threshold, plans may either use the calculator ("MV Calculator") on the HHS website, or, if the MV Calculator cannot be used to accurately compute minimum value (for example, if the plan has nonstandard features), an employer could engage an actuary to certify that the plan provides minimum value. Thus, the MV Calculator must be used to measure standard plan features (unless a safe harbor applies), but the percentage may be adjusted based on an actuarial analysis of plan features that are not included in the MV Calculator. The actuary must be a member of the American Academy of Actuaries and must perform the analysis in accordance with generally accepted actuarial principles and methodologies and any additional standards that subsequent guidance may require.

HHS has developed the MV standard population and described it through summary statistics (for example, continuance tables). MV continuance tables and an explanation of the MV Calculator methodology and the health claims data HHS has used to develop the continuance tables are available at

Is a De Minimis Exception Permitted in Determining Minimum Value?

There is no de minimis exception to the 60 percent threshold.

Are there Plan Design Safe Harbors that can be used to Assist Employers in Determining Minimum Value?

The Department of the Treasury has proposed that the following plan design options be used as safe harbors for determining minimum value to the extent that the plans cover all the benefits included in the MV Calculator, and has requested comments as well as additional plan design options that could be designated as safe harbor plan options:

  1. a plan with a $3,500 integrated medical and drug deductible, 80 percent plan cost sharing, and a $6,000 maximum out-of-pocket limit for employee cost-sharing;
  2. a plan with a $4,500 integrated medical and drug deductible, 70 percent plan cost sharing, a $6,400 maximum out-of-pocket limit, and a $500 employer contribution to an HSA; and
  3. a plan with a $3,500 medical deductible, $0 drug deductible, 60 percent plan medical expense cost-sharing, 75 percent 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 percent coinsurance for specialty drugs.

What Transitional Relief is Available?

For plan years beginning before January 1, 2015, an employer with a nondiscriminatory wellness program in place as of May 3, 2013, will not be subject to a play or pay penalty assessment if an employee receives a subsidy through an Exchange because an employer's offer of coverage was not affordable or did not satisfy minimum value, but would have been affordable or would have satisfied minimum value, had the employee satisfied the requirements of the wellness program under the terms in effect as of May 3, 2013.

Next Steps for Employers

  • Assess status of compliance with the play or pay requirements  to minimize exposure to the play or pay penalties
  • Take inventory of all employee classifications to assess potential exposure areas and identify potential strategies; review variable hour employee population and others who may not be currently eligible to participate in plan
  • Design plan eligibility rules to ensure compliance with the new look-back and stability period requirements; new full-time employee definition to ensure you offer coverage to substantially all (95 percent) of full-time employees
  • Determine whether at least one plan option is "affordable"; include impact of employer contributions to integrated HRAs and premium adjustments for incentives received for tobacco cessation programs; develop strategies for compliance; assess impact of potential penalty for noncompliance
  • Use MV calculator to compute minimum value; include employer contribution amounts to HSAs and integrated HRAs, as well as impact of reduced cost sharing resulting from incentives received by participating in a tobacco cessation program; develop strategies for compliance; assess impact of potential penalty for noncompliance

For More Information
For more information about this ACA Pathways or about any other health care reform-related provisions, please contact your Burnham Benefits consultant or Burnham Benefits at:

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This ACA Pathways is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.

The information contained in this ACA Pathways includes emerging health care news from a limited perspective and does not encompass all views. The information was selected from a wide range of sources selected on the basis of their potential impact on employers and/or their employee benefit plans. For more information, please contact Burnham Benefits.

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