The Affordable Care Act’s Reporting Requirements for Carriers and Employers (Part 17 of 24): Reporting for Offers of Coverage and Auto-enrollment
The recently enacted Bipartisan Budget Act of 2015 repealed Section 1511 of the Affordable Care Act (ACA), which generally would have required employers with more than 200 full-time employees to automatically enroll new full-time employees in one of the employer’s health benefits plans (subject to any waiting period authorized by law). The provisions were originally slated to take effect in 2014. In Technical Release No. 2012-01 (Feb. 9, 2012), the Department of Labor announced that compliance would not be required “until final regulations under FLSA section 18A are issued and become applicable.” Final regulations were never issued.
Despite that auto-enrollment is no longer required under the ACA, some carriers are insisting on it as a precondition to offering their products. This approach lends itself to boosting enrollment in instances where coverage was not previously widely offered—e.g., industries with large cohorts of variable and contingent workers—and in which anticipated take-up rates are low and the expectation of adverse selection is high.
This post explores the impact of carrier-required auto-enrollment on reporting.
Background
Generally, if an applicable large employer makes an offer of group health plan coverage that provides minimum value (e.g., major medical coverage) and is affordable, then the employee is barred—or “firewalled”—from obtaining a premium tax credit from a public insurance exchange even if he or she would otherwise qualify for the subsidy. This is important because, where any particular employee cannot qualify for a subsidy, there can be no penalty under Code § 4980H(b) with respect to that employee. Here, it is the mere offer of coverage that results in the employee being firewalled.
If an applicable large employer makes an offer of group health plan coverage that qualifies as minimum essential coverage but fails to provide minimum value (e.g., major medical coverage) and/or is unaffordable, then the employee is firewalled only if he or she accepts the employer’s offer of coverage. Thus, an employer could, at least in theory, auto-enroll an employee in such a plan and thereby avoid penalties. Because each auto-enrolled individual would have minimum essential coverage, he or she would be ineligible for premium subsidies.
In the preamble to a notice of proposed rulemaking issued May 3, 2013 relating to minimum value, the Treasury Department and IRS rejected auto-enrollment of employees into a plan that was either unaffordable or failed to provide minimum value, or both, saying:
Any arrangement under which employees are required, as a condition of employment or otherwise, to be enrolled in an employer-sponsored plan that does not provide minimum value or is unaffordable, and that does not give the employees an effective opportunity to terminate or decline the coverage, raises a variety of issues. . . . Such an arrangement would also raise additional concerns. For example, it is questionable whether the law permits interference with an individual’s ability to apply for a section 36B premium tax credit by seeking to involuntarily impose coverage that does not provide minimum value. . . . If an employer sought to involuntarily impose on its employees coverage that did not provide minimum value or was unaffordable, the IRS and Treasury, as well as other relevant departments, may treat such arrangements as impermissible interference with an employee’s ability to access premium tax credits, as contemplated by the Affordable Care Act.
The final Code § 4908H regulations formally adopt this approach in the context of the ACA’s employer shared responsibility rules:
An applicable large employer member will not be treated as having made an offer of coverage to a full-time employee for a plan year if the employee does not have an effective opportunity to elect to enroll in the coverage at least once with respect to the plan year, or does not have an effective opportunity to decline to enroll if the coverage offered does not provide minimum value or requires an employee contribution for any calendar month of more than 9.5 percent of a monthly amount determined as the federal poverty line for a single individual for the applicable calendar year, divided by 12. For this purpose, the applicable federal poverty line is the federal poverty line for the 48 contiguous states and the District of Columbia. Whether an employee has an effective opportunity to enroll or to decline to enroll is determined based on all the relevant facts and circumstances, including adequacy of notice of the availability of the offer of coverage, the period of time during which acceptance of the offer of coverage may be made, and any other conditions on the offer.
Treas. Reg. § 54.4980H-4(b)(1).
And the 2015 final Instructions to Form 1094-C and 1095-C are in accord:
Offer of health coverage. An employer makes an offer of coverage to an employee if it provides the employee an effective opportunity to enroll in the health coverage (or to decline that coverage) at least once for each plan year. An employer makes an offer of health coverage to an employee for the plan year if it continues the employee’s election of coverage from a prior year but provides the employee an effective opportunity to opt out of the health coverage. If an employer provides health coverage to an employee but does not provide the employee an effective opportunity to decline the coverage, the employer is treated as having made an offer of health coverage to the employee only if that health coverage provides minimum value and does not require an employee contribution for the coverage for any calendar month of more than 9.5 percent of a monthly amount determined as the mainland federal poverty line for a single individual for the applicable calendar year, divided by 12. (Emphasis added).
Thus, automatic enrollment in an employer’s group health plan would qualify (and is reported as) an offer of coverage for purposes of the employer shared responsibility rules only if the coverage provides minimum value and is affordable based on “the mainland federal poverty line for a single individual for the applicable calendar year.” This means affordability for this purpose is being measured under an even more restrictive standard than is required under the federal poverty line affordability safe harbor. The federal poverty line safe harbor set out in Treas. Reg. § 54.4980H-5(e)(2)(iv) requires that the employee’s required contribution not exceed “9.5 percent of a monthly amount determined as the federal poverty line for a single individual for the applicable calendar year, divided by 12.” The regulation provides that the “applicable federal poverty line is the federal poverty line for the State in which the employee is employed.” (Emphasis added). For purposes of assessing offers of coverage, the standard that applies is the mainland federal poverty line for a single individual for the applicable calendar year.
The carrier-imposed auto-enrollment requirements that we have encountered are generally couched in the form of an opt-out election. That is, the employee is provided with a form that explains that he or she will be automatically enrolled, and that he or she may decline coverage. One supposes that, done right and in good faith, this approach should result in the employee receiving an “effective opportunity to decline the coverage.” Whether this is the case, however, is determined based on all the relevant facts and circumstances, “including adequacy of notice of the availability of the offer of coverage, the period of time during which acceptance of the offer of coverage may be made, and any other conditions on the offer.”
Reporting on Form 1095-C
If an auto-enrollment feature is properly structured to furnish the employee with an effective opportunity to decline the coverage, then the proper 1-series indicator code entered on Form 1095-C, Part II, Line 14 will disclose that an offer of coverage was made. The proper code will be 1A though 1E. Where the coverage is accepted, the proper 2-series indicator code entered on Form 1095-C, Part II, Line 16 is 2C (employee enrolled in coverage offered). If the coverage is declined, the proper 2-series indicator code entered on Form 1095-C, Part II, Line 16 would be the appropriate safe harbor code, if the coverage is intended to be affordable.
But if the auto-enrollment feature fails to provide an effective opportunity to decline the coverage, then the proper 1-series code is 1H (no offer of coverage) unless the coverage provides minimum value and is affordable based on the mainland federal poverty line for a single individual. The proper 2-series code on Form 1095-C, Part II, Line 16 in this instance would not be 2C (employee enrolled in coverage offered), since there was no “offer of coverage” for Code § 4980H(b) purposes that the employee could accept. Lines 15 and 16 would be left blank.
Conclusion
It does not take too much imagination to anticipate the problems with automatic enrollment under the scenarios described above. An employee might not return the form declining coverage for months (he or she may not have paid any attention to it). He or she might then apply and even qualify for subsidized coverage from a public insurance exchange. It may be some time before the employee realizes that he or she was not entitled to the subsidy. This will prove most troublesome to an employee who first discovers that he or she was not subsidy-eligible at the end of the year when he or she receives a Form 1095-C.