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IRS Proposed Rule Excludes Non-Tobacco Rewards from Affordability Calculation

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The IRS released proposed regulations governing the calculation of affordability under ObamaCare for the purposes of determining whether an individual is subject to the penalties under the law.

The regulation would address the relationship between the health care plan premium affordability test and incentives employers offer employees to participate in wellness programs. Under the affordability test, coverage is considered “unaffordable” if premiums exceeds 9.5% of wages or household income for the individual. If the premium an employee pays exceeds that threshold, the employer is subject to a $3,000 penalty.

Under the proposed regulations, incentives for wellness program participation would not be considered in determining affordability. Until now, it wasn’t clear whether these incentives for wellness program participation would be included or excluded when running the affordability test. The proposed regulations contained one exception – incentives tied to smoking cessation would be considered as part of the affordability calculation.

For example, if an employer charged a monthly premium of $80 for single coverage if an employee participated in a wellness program and $100 for those that did not, employers would use the $100 premium in determining whether the coverage was affordable. However, if the program was tied to participation in tobacco cessation programs, employers would be allowed to use the lower premium paid by employees as part of the affordability test.

The IRS downplayed the significance of not allowing incentives for non-tobacco to be used when calculating whether the health care plan is affordable. “In many circumstances, these rules relating to the effect of premium-related wellness program rewards on affordability will have no practical consequences. They matter only when the employer sets the level of the employee’s required contribution to self-only premium, and establishes a wellness program that provides for a level of premium discount, in such a manner that the employee’s required contribution” would fail the 9.5% premium affordability test, except for the premium discount under the wellness program, the IRS said.

Many industry experts expressed concern over the proposed regulations.  Employee benefits experts did not seem to see a reason why corporate wellness programs were treated differently than tobacco cessation programs. “It’s not clear why the proposed rules would have one rule that applies to completing a wellness program that addresses tobacco use, and an entirely different rule for any other kind of wellness program. It seems as though the rules should be consistent and this will add one more wrinkle to what will already be a real challenge to communicate to employees,” said Paul Dennett, senior vice president, health policy, at the American Benefits Council in Washington.

“This is a step in the wrong direction. It would have a definite negative impact on wellness programs,” said Gretchen Young, senior vice president, health policy, with the ERISA Industry Committee in Washington.

While the inconsistency will certainly have challenges when it comes to communications, perhaps the greater question is the policy. If we want to encourage the use of wellness programs and incentives, why would we penalize employers by excluding incentives? After all, ObamaCare increased the allowable amount of incentives from 20 to 30 (and in the case of smoking cessation 50 percent). It would seem to make sense that to further encourage this policy, we would include incentives for all program participation – not just tobacco related – in the affordability determination.

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