[Federal Register Volume 79, Number 228 (Wednesday, November 26, 2014)]
[Rules and Regulations]
[Pages 70464-70470]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-27998]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9705]
RIN 1545-BL91


Minimum Essential Coverage and Other Rules Regarding the Shared 
Responsibility Payment for Individuals

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations relating to the 
requirement to maintain minimum essential coverage enacted by the 
Patient Protection and Affordable Care Act and the Health Care and 
Education Reconciliation Act of 2010, as amended by the TRICARE 
Affirmation Act and Public Law 111-173 (collectively, the Affordable 
Care Act). These final regulations provide individual taxpayers with 
guidance under section 5000A of the Internal Revenue Code on the 
requirement to maintain minimum essential coverage and rules governing 
certain types of exemptions from that requirement.

DATES: Effective Date: These regulations are effective on November 26, 
2014.
    Applicability Date: For date of applicability, see Sec.  1.5000A-
5(c).

FOR FURTHER INFORMATION CONTACT: Sue-Jean Kim or John B. Lovelace at 
(202) 317-7006 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains final regulations that amend the Income Tax 
Regulations (26 CFR part 1) under section 5000A relating to the 
individual shared responsibility provision. Section 5000A was enacted 
by the Affordable Care Act. Section 5000A generally requires 
individuals to have qualifying health care coverage (called minimum 
essential coverage), qualify for a health coverage exemption, or make a 
shared responsibility payment when filing a Federal income tax return. 
On January 27, 2014, a notice of proposed rulemaking (REG-141036-13) 
was published in the Federal Register (79 FR 4302).
    Written comments responding to the notice of proposed rulemaking of 
January 27, 2014, were received. The comments are available for public 
inspection at www.regulations.gov or on request. No public hearing was 
requested or held. After considering all the comments, the proposed 
regulations are adopted as revised by this Treasury decision. The 
comments and revisions are discussed in the preamble.
    As described in the Summary of Comments and Explanation of 
Revisions, in related guidance, Notice 2014-76, 2014-50 IRB (available 
at www.irs.gov) (see Sec.  601.601(d)), the Treasury Department and the 
IRS provide a comprehensive list of the hardship exemptions that may be 
claimed for 2014 on a Federal income tax return without obtaining a 
hardship exemption certification from a Health Insurance Marketplace 
(Marketplace).

Summary of Comments and Explanation of Revisions

I. Minimum Essential Coverage

A. Coverage for the Medically Needy

    The proposed regulations provide that certain categories of 
Medicaid coverage authorized under Title XIX of the Social Security Act 
(42 U.S.C. 1396 and following sections) that are not required to be 
comprehensive are not generally government-sponsored minimum essential 
coverage under section 5000A(f)(1). Specifically, under the proposed 
regulations, coverage offered to individuals with high medical expenses 
who would be eligible for Medicaid but for their income level 
(medically needy individuals) (see section 1902(a)(10)(C) of the Social 
Security Act (42 U.S.C. 1936a(a)(10)(C))) generally is not minimum 
essential coverage. Commenters agreed that Medicaid coverage for 
medically needy individuals that is not comprehensive should not be 
minimum essential coverage. The final regulations retain the rule in 
proposed regulations that Medicaid coverage for medically needy 
individuals is not government-sponsored minimum essential coverage 
under section 5000A(f)(1)(A).
    The preamble to the proposed regulations explains that although 
Medicaid coverage offered to medically needy individuals generally is 
not minimum essential coverage, the Secretary of Health and Human 
Services, in coordination with the Secretary of the Treasury, may in 
appropriate circumstances designate certain coverage for medically 
needy individuals as minimum essential coverage pursuant to section 
5000A(f)(1)(E). Some commenters suggested that the determination of 
whether a particular state's program for medically needy individuals is 
comprehensive, and therefore should be recognized as minimum essential 
coverage, should be based on whether the program offers the essential 
health benefits required by the Affordable Care Act for coverage in the 
individual and

[[Page 70465]]

group health insurance markets. The determination of whether coverage 
is designated as minimum essential coverage under section 
5000A(f)(1)(E) is under the jurisdiction of the Department of Health 
and Human Services (HHS). On November 7, 2014, the HHS provided 
guidance on the considerations that it intends to apply in recognizing 
Medicaid coverage for medically needy individuals as minimum essential 
coverage. HHS Centers for Medicare & Medicaid Services, Minimum 
Essential Coverage (SHO #14-002) (Nov. 7, 2014) (available at 
www.medicaid.gov/federal-policy-guidance/downloads/sho-14-002.pdf).

B. Section 1115 Demonstration Projects

    The proposed regulations provide that coverage authorized under 
section 1115(a)(2) of the Social Security Act (42 U.S.C. 1315(a)(2)) is 
generally not minimum essential coverage. One commenter recommended 
that the citation be changed to refer to section 1115(a) of the Social 
Security Act (42 U.S.C. 1315(a)(1)), because demonstration projects 
authorized under section 1115(a)(1) may limit the benefits available to 
individuals whose coverage is authorized under the approved state plan 
and limited-benefit coverage should not be treated as minimum essential 
coverage.
    A section 1115 demonstration project authorized under section 
1115(a)(1) of the Social Security Act may provide only limited 
benefits. Accordingly, the final regulations adopt the commenter's 
recommendation and provide that coverage authorized under section 
1115(a) of the Social Security Act is not government-sponsored minimum 
essential coverage under section 5000A(f)(1)(A).
    The preamble to the proposed regulations explains that certain 
coverage under a section 1115 demonstration project may be recognized 
as minimum essential coverage by the Secretary of HHS, in coordination 
with the Secretary of the Treasury, under section 5000A(f)(1)(E). On 
November 7, 2014, HHS released guidance on the considerations it will 
apply in recognizing a section 1115 demonstration project as minimum 
essential coverage under section 5000A(f)(1)(E). HHS Centers for 
Medicare & Medicaid Services, Minimum Essential Coverage (SHO #14-002) 
(Nov. 7, 2014) (available at www.medicaid.gov/federal-policy-guidance/downloads/sho-14-002.pdf).

II. Exemption for Individuals Who Cannot Afford Coverage

A. Employer Contributions to a Cafeteria Plan (Flex Contributions)

    The preamble to the proposed regulations requests comments on the 
treatment for purposes of section 5000A of employer contributions under 
a section 125 cafeteria plan to the extent employees may not opt to 
receive the employer contribution as a taxable benefit. Specifically, 
the preamble to the proposed regulations requests comments about how 
these contributions should be taken into account for purposes of 
determining the affordability of coverage.
    As described in this preamble after consideration of the comments 
received, the final regulations provide that, for purposes of 
determining the affordability of coverage, the required contribution is 
reduced by any contributions made by an employer under a section 125 
cafeteria plan that (1) may not be taken as a taxable benefit, (2) may 
be used to pay for minimum essential coverage, and (3) may be used only 
to pay for medical care within the meaning of section 213 (such 
contributions are referred to in this preamble as health flex 
contributions).
    One commenter suggested that the value of any benefit provided 
under a cafeteria plan should be included in the taxpayer's household 
income for purposes of determining eligibility for the exemption for 
unaffordable coverage, regardless of whether the benefit is taxable. 
The commenter noted that taxable benefits are included in an employee's 
household income, thereby increasing the likelihood that coverage 
offered by an employer will be affordable. Reasoning that a nontaxable 
benefit similarly provides an employee with a financial benefit, the 
commentator argued that nontaxable contributions should be considered 
available to purchase minimum essential coverage to eliminate any 
possible employee incentive under section 5000A for choosing a taxable 
or nontaxable benefit.
    The suggestion to include employer contributions to a cafeteria 
plan in an employee's household income is inconsistent with the 
definition of household income in section 5000A(c)(4)(B) and the 
increase to household income for the purposes of determining 
affordability provided in section 5000A(e)(1)(A). Household income as 
defined in section 5000A(c)(4)(B), while specifically including certain 
amounts otherwise excluded from gross income such as tax-exempt 
interest, does not include amounts excluded from gross income under 
section 125. Section 5000A(e)(1)(A) provides that, for purposes of 
determining the affordability of coverage, household income is 
increased by any portion of the required contribution paid through a 
salary reduction arrangement. Health flex contributions that can be 
received under a cafeteria plan, however, are not made pursuant to a 
salary reduction arrangement. Section 5000A does not direct that 
household income include all amounts excluded from gross income 
pursuant to a cafeteria plan. Accordingly, the final regulations do not 
incorporate the suggestion to include all benefits provided under a 
cafeteria plan in the taxpayer's household income.
    Another commenter recommended that contributions under a cafeteria 
plan should be taken into account in determining the employee's 
required contribution if the contributions could be used to purchase 
minimum essential coverage, regardless of whether the contributions 
could be used to purchase other benefits. The commenter suggested that 
a contrary rule could potentially cause employers to limit employee 
choice by structuring cafeteria plans so that contributions can be used 
only to pay for minimum essential coverage.
    Section 5000A(e)(1)(B) defines an employee's required contribution 
by reference to the portion of the annual premium that would be paid by 
the employee if the employee purchased coverage. The statute does not 
require an employee to treat amounts provided pursuant to a cafeteria 
plan as reductions to the employee's required contribution. If an 
employee may use nontaxable employer contributions to a cafeteria plan 
to pay for minimum essential coverage and only to pay for medical 
expenses, then that represents a real reduction in the cost to the 
employee of purchasing minimum essential coverage. In such a case, it 
is appropriate to treat the amounts as a reduction in the employee's 
required contribution. However, if an employee's use of nontaxable 
employer contributions to a cafeteria plan is not limited to medical 
expenses, then it cannot be assumed that the employee will use the 
contribution for purchasing minimum essential coverage.
    Accordingly, the final regulations provide that health flex 
contributions made available for the current plan year are taken into 
account for purposes of determining an individual's required 
contribution. As a result, health flex contributions reduce an 
employee's, or related individual's, required

[[Page 70466]]

contribution for employer-sponsored coverage.

B. Health Reimbursement Arrangements

    The proposed regulations provide that amounts newly made available 
in the current plan year under a health reimbursement arrangement (HRA) 
that is integrated with an eligible employer-sponsored plan are taken 
into account in determining the employee's or related individual's 
required contribution if an employee may use them to pay the employee's 
share of premiums for coverage under the plan. No comments were 
received on this proposed rule. However, this preamble addresses 
comments received in response to an identical rule provided in proposed 
regulations under section 36B (REG-125398-12, 78 FR 25909) (section 36B 
proposed regulations) published on May 3, 2013.
    Commenters requested guidance on the requirements for an HRA to be 
integrated with eligible employer-sponsored coverage. Notice 2013-54 
(2013-40 IRB 287) (see Sec.  601.601(d)), and for this purpose 
identical guidance issued by the Department of Labor and with which HHS 
concurred provides, however, that an HRA is integrated with another 
group health plan only if, among other things, an employee enrolls in 
the other group health plan. Because an employee who enrolls in 
eligible employer-sponsored coverage is not eligible for the premium 
tax credit subsidy, whether or not the eligible employer-sponsored 
coverage is affordable, requiring an HRA to be integrated with a 
primary group health plan for purposes of determining affordability 
would be meaningless. Therefore, the final regulations cross-reference 
Notice 2013-54 and clarify that amounts newly made available under an 
HRA count toward an employee's required contribution if the HRA would 
have been integrated with an eligible employer-sponsored plan if the 
employee had enrolled in the primary plan.
    Notice 2013-54 also provides that under certain circumstances an 
HRA offered by an employer may be integrated with a group health plan 
offered by a different employer, for example a plan offered by the 
employer of an employee's spouse. Notice 2013-54 indicated, however, 
that an HRA could not be integrated with a plan offered by another 
employer for purposes of determining affordability and minimum value 
under section 36B. Accordingly, the final regulations provide that, for 
purposes of determining an individual's required contribution, an HRA 
is taken into account only if the HRA and the primary eligible 
employer-sponsored coverage are offered by the same employer.
    Commenters suggested that HRAs should be considered integrated with 
any plan that provides minimum essential coverage, whether that plan is 
an employer plan or a plan purchased through a Marketplace. As 
explained in Notice 2013-54, the combination of an HRA and a plan 
purchased through a Marketplace may raise significant issues under the 
market reforms applicable to the group insurance market. For this 
reason, as well as to reduce complexity through consistent rules, the 
Treasury Department and the IRS have concluded that the rules for 
determining when an HRA is considered integrated with another group 
health plan for purposes of section 5000A should be consistent with the 
rules applicable for purposes of application of the market reforms, and 
the final regulations, therefore, cross-reference Notice 2013-54. The 
rules addressed in Notice 2013-54 are under the jurisdiction of the 
Departments of Labor and HHS as well as the Treasury Department and the 
IRS and are, therefore, outside the scope of these regulations.
    Under the section 36B proposed regulations, HRA amounts that may be 
used to pay premiums or to pay both premiums and cost-sharing are 
counted toward affordability. A commenter suggested that HRA amounts 
should not count toward affordability unless the amounts may be used 
only for premiums. The commenter observed that counting HRA amounts 
that may be used either for premiums or cost-sharing in determining 
affordability could lead to double counting for affordability and 
minimum value purposes under section 36B.
    The final regulations clarify that, in general, HRA contributions 
count toward affordability, and not minimum value, if an employee may 
use the HRA contributions to pay premiums for the primary plan only, or 
to pay cost-sharing or benefits not covered by the primary plan in 
addition to premiums. Under the section 36B proposed regulations, HRA 
amounts that may be used only for cost-sharing are counted for purposes 
of minimum value and not for affordability. Accordingly, HRA 
contributions that can be used only to pay for cost-sharing do not 
count toward affordability. The Treasury Department and the IRS 
anticipate that the section 36B proposed regulations addressing HRA 
contributions and minimum value will be adopted in section 36B final 
regulations and, thus, HRA contributions that can be used for premiums 
and cost-sharing will only count for affordability and there will be no 
double counting of these contributions.
    Commenters suggested that employers should be permitted to treat 
HRA contributions as made in particular months during a year, which 
could affect their potential liability under the employer shared 
responsibility requirement of section 4980H. Employees who enroll in 
eligible employer-sponsored coverage may not claim the premium tax 
credit for their coverage in a qualified health plan and must be able 
to determine the amount of their annual required contribution before 
deciding whether to enroll in eligible employer-sponsored coverage. 
Accordingly, the final regulations clarify that employer contributions 
to an HRA count towards an employee's required contribution only to the 
extent the amount of the annual contribution is required under the 
terms of the plan or is otherwise determinable within a reasonable time 
before the employee must decide whether to enroll. The Treasury 
Department and the IRS anticipate adopting the same rule when the 
section 36B proposed regulations are finalized.
    A commenter argued that health insurance issuers should not be 
required to determine if employers are making contributions to an HRA 
or HSA or otherwise determine limitations employers place on the use of 
funds in an HRA or HSA. Neither the proposed regulations under sections 
36B or 5000A nor the final regulations impose these requirements on 
health insurance issuers.
    A commenter stated that stand-alone HRAs for pre-Medicare eligible 
retirees should not be considered minimum essential coverage under 
certain circumstances. The final regulations do not address this issue, 
which is outside the scope of the regulations.

C. Wellness Program Incentives

    The proposed regulations provide that, in determining whether 
coverage under an eligible employer-sponsored plan is affordable for 
purposes of the affordability exemption in section 5000A(e)(1), 
nondiscriminatory wellness program incentives are treated as earned 
only if the incentives relate to tobacco use. For this purpose, a 
nondiscriminatory wellness program is a wellness program that does not 
violate the wellness plan regulations whether the program is 
participatory or outcome based. See Sec.  54.9802-1(f), 29 CFR 
2590.702(f), and 45 CFR 146.121(f) for regulations governing wellness 
program incentives issued by the Departments of

[[Page 70467]]

Labor and HHS, and the Treasury Department and the IRS (tri-agency 
regulations). The section 36B proposed regulations include an identical 
rule for counting wellness program incentives in determining an 
individual's required contribution. Comments were received on both the 
rule in the proposed regulations and the identical rule in the section 
36B proposed regulations. Both sets of comments were considered in the 
development of these final regulations.
    The proposed regulations provide that the affordability of eligible 
employer-sponsored coverage is determined by assuming that each 
employee fails to satisfy the requirements of a wellness program, 
except the requirements of a nondiscriminatory wellness program related 
to tobacco use. Thus, the affordability of coverage that requires a 
higher initial premium for tobacco users is determined based on the 
premium that is charged to non-tobacco users or to tobacco users who 
complete the related wellness program, such as attending smoking 
cessation classes.
    Some commenters requested that all wellness incentives, including 
those related to tobacco use, be treated as unearned when determining 
the affordability and minimum value of an offer of eligible employer-
sponsored coverage. These commenters asserted that wellness incentives 
could be used to discriminate based on health status or that certain 
individuals would be unable to complete the wellness program and earn 
the wellness incentives.
    Other commenters requested that all wellness incentives, including 
those related to tobacco use, be treated as earned when determining the 
affordability and minimum value of an offer of eligible employer-
sponsored coverage. These commenters asserted that wellness incentives 
are an effective way of encouraging healthy lifestyle adjustments and 
reducing health costs and that the consumer protections in the tri-
agency regulations that were finalized on June 3, 2013 (TD 9620, 78 FR 
33158), ensure that wellness incentives will not be used to 
discriminate based on health status or burdens to employees. Some of 
these commenters advised, however, that if the final regulations do not 
treat all wellness incentives as unearned, they favor the proposed rule 
as a reasonable alternative.
    After consideration of these comments, the final regulations retain 
the rules in the proposed regulations that wellness incentives 
unrelated to tobacco use are treated as unearned and wellness 
incentives related to tobacco use are treated as earned in determining 
affordability. These rules are consistent with policies related to 
tobacco use reflected in the Affordable Care Act, such as allowing 
issuers to charge higher premiums based on tobacco use. The Treasury 
Department and the IRS anticipate adopting the same rules when the 
section 36B proposed regulations are finalized.
    Commenters requested guidance on whether a wellness incentive is 
treated as earned or unearned when an employee must complete a wellness 
program related to tobacco use and a program unrelated to tobacco use 
to receive an incentive. The final regulations clarify that a wellness 
incentive that includes any component unrelated to tobacco use is 
treated as unearned. If, however, there is an incentive for completing 
a program unrelated to tobacco use and a separate incentive for 
completing a program related to tobacco use, then the incentive related 
to tobacco use may be treated as earned.
    A commenter requested clarification that programs that provide a 
discount or rebate and programs that impose a surcharge both provide 
wellness program incentives under the final regulations. Another 
commenter asked that the final regulations clarify that 
nondiscriminatory wellness programs include both participatory and 
health-contingent wellness programs. The final regulations clarify that 
the term wellness program incentives has the same meaning as the term 
reward in the tri-agency regulations. Thus, programs that provide a 
discount or rebate, programs that impose a surcharge, and participatory 
and health-contingent wellness programs are wellness program incentives 
under the final regulations.

III. Hardship Exemptions

    Under section 5000A(e)(5), an individual is exempt from section 
5000A if the individual has an exemption certification issued by the 
Marketplace stating that HHS has determined that the individual 
suffered a hardship with respect to the ability to obtain minimum 
essential coverage. The proposed regulations provide that, under 
certain circumstances, a taxpayer may claim a hardship exemption on a 
Federal income tax return without first obtaining a hardship exemption 
certification from a Marketplace. Specifically, the proposed 
regulations provide that an individual may claim a hardship exemption 
on the Federal income tax return if they are specifically described in 
45 CFR 155.605(g)(3) (relating to individuals with gross income below 
the filing threshold) or 45 CFR 155.605(g)(5) (relating to employed and 
related individuals whose combined cost of employer-sponsored coverage 
exceeds the required contribution percentage), or if the individual is 
described HHS guidance released on October 28, 2013 (relating to 
individuals who enrolled in a plan through a Marketplace before the 
close of the open enrollment period in 2014 but had a gap in coverage 
before the coverage was effective).
    Finally, the proposed regulations provide that a taxpayer may claim 
a hardship exemption on a Federal income tax return in any situation 
that is (1) described in published guidance issued by HHS permitting an 
individual to claim the exemption on a Federal income tax return, and 
(2) described in published guidance issued by the IRS that allows an 
individual to claim the exemption on a Federal income tax return 
without obtaining a hardship exemption certification.
    Commenters requested that taxpayers be allowed to claim other 
hardship exemptions without obtaining hardship exemption 
certifications. Specifically, commenters requested that taxpayers 
eligible for the hardship exemption described in 45 CFR 155.605(g)(6), 
for an Indian eligible for services through Indian Health Service (IHS) 
or through an Indian health care provider, be allowed to claim the 
exemption without obtaining a hardship exemption certification from a 
Marketplace. HHS issued guidance on September 18, 2014, that addresses 
this comment. In particular, the HHS guidance identified the hardship 
situation described in 45 CFR 155.605(g)(6) and indicated that an 
exemption for that hardship may be claimed on a Federal income tax 
return pursuant to guidance issued by the Treasury Department and the 
IRS. See HHS Centers for Medicare & Medicaid Services, Shared 
Responsibility Guidance--Exemption for Individuals Eligible for 
Services through an Indian Health Care Provider (Sept. 18, 2014) 
(available at http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/Downloads/guidance-exemption-certain-AIAN.pdf).
    Commenters also requested that a taxpayer be allowed to claim a 
hardship exemption without obtaining a hardship exemption certification 
if he or she is eligible for the hardship exemption described in 45 CFR 
155.605(g)(4), which applies to an individual who is determined 
ineligible for Medicaid for one or more months during a benefit year 
solely because the individual resides in a state that has not expanded 
Medicaid under section 2001(a) of the Affordable Care Act. HHS issued 
guidance on November 21, 2014,

[[Page 70468]]

addressing this comment. In particular, the HHS guidance provides that 
an individual is eligible for a hardship exemption for the taxable year 
if at any time during 2014 the individual resided in a state that did 
not expand Medicaid coverage and the individual's household income, 
within the meaning of section 36B, is below 138 percent of the 
applicable federal poverty level for the individual's family size. See 
HHS Centers for Medicare & Medicaid Services, Guidance on Hardship 
Exemptions for Persons Meeting Certain Criteria (Nov. 21, 2014) 
(available at www.cms.gov).
    To consolidate the list of circumstances described in the proposed 
regulations with any additional circumstances that have been or will be 
identified, Sec.  1.5000A-3(h)(3)(i) of the final regulations removes 
the references to specific hardship circumstances and instead provides 
that a taxpayer may claim a hardship exemption on a Federal income tax 
return without obtaining an exemption certification for any month that 
includes a day on which the taxpayer satisfies the requirements of a 
hardship for which HHS, and the Treasury Department and the IRS, issue 
published guidance. Notice 2014-76, 2014-50 IRB (available at 
www.irs.gov) (see Sec.  601.601(d)), released concurrently with these 
regulations, provides a comprehensive list of all hardship exemptions 
that may be claimed on a Federal income tax return without obtaining a 
hardship exemption certification. The list of hardship exemptions that 
may be claimed on a Federal income tax return without obtaining a 
hardship exemption certification includes the following: (a) The 
hardship exemptions described in 45 CFR 155.605(g)(3) and (g)(5); (b) 
the hardship exemption described in HHS guidance issued October 28, 
2013, relating to individuals enrolled in Marketplace coverage on or 
before March 31, 2014; (c) the hardship exemption described in HHS 
guidance released on March 26, 2014, relating to individuals ``in 
line'' to enroll in coverage through the Marketplace on March 31, 2013; 
(d) the hardship exemption described in HHS guidance released on March 
31, 2014, relating to individuals who applied for CHIP during the 2014 
open enrollment period and were found eligible; (e) the hardship 
exemption described in HHS guidance released on May 2, 2014, relating 
to individuals who enrolled outside the Marketplace in minimum 
essential coverage that is effective on or before May 1, 2014; (f) the 
hardship exemption described in HHS guidance issued September 18, 2014, 
relating to individuals eligible for services through an Indian health 
care provider; and (g) the hardship exemption described in HHS guidance 
issued November 21, 2014, relating to individuals with specified 
household incomes who reside in a state that did not expand Medicaid.
    Commenters requested that the IRS, in conjunction with HHS, adopt 
additional hardship exemptions to address specific situations. Other 
commenters requested that the transition relief provided in Notice 
2014-10, 2014-9 IRB 605, for individuals enrolled in limited benefit 
Medicaid programs that are not minimum essential coverage be extended 
to 2015. Some commenters specifically requested that no additional 
transition relief be provided.
    Authority to define circumstances giving rise to a hardship 
exemption, as well as authority to grant hardship exemptions in 
individual cases, resides with HHS. In guidance released on November 7, 
2014, HHS described additional circumstances that Marketplaces may use 
when determining what constitutes a hardship effective January 1, 2015. 
HHS Centers for Medicare & Medicaid Services, Minimum Essential 
Coverage (SHO #14-002) (Nov. 7, 2014) (available at www.medicaid.gov/federal-policy-guidance/downloads/sho-14-002.pdf). The additional 
circumstances include enrollment in Medicaid coverage for pregnant 
women and for medically needy individuals that is not minimum essential 
coverage. HHS provides additional guidance on the hardship exemption in 
regulations. See Patient Protection and Affordable Care Act: Exchange 
Functions: Eligibility for Exemptions; Miscellaneous Minimum Essential 
Coverage Provisions, 78 FR 39494 (codified at 45 CFR part 155).

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866, as 
supplemented by Executive Order 13563. Therefore, a regulatory 
assessment is not required. Section 553(b) of the Administrative 
Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, 
and, because the regulations do not impose a collection of information 
requirement on small entities, the Regulatory Flexibility Act (5 U.S.C. 
chapter 6) does not apply. Pursuant to section 7805(f), the notice of 
proposed rulemaking that preceded these final regulations was submitted 
to the Chief Counsel for Advocacy of the Small Business Administration 
for comment on its impact on small business, and no comments were 
received.

Drafting Information

    The principal authors of these final regulations are Sue-Jean Kim 
and John B. Lovelace of the Office of Associate Chief Counsel (Income 
Tax and Accounting). Other personnel from the Treasury Department and 
the IRS participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *



0
Par 2. An undesignated center heading is added immediately following 
Sec.  1.1563-4 to read as follows:
Individual Shared Responsibility Payment for Not Maintaining Minimum 
Essential Coverage

0
Par. 3. Section 1.5000A-0 is amended by:
0
1. Revising the entry for Sec.  1.5000A-2(b)(2).
0
2. Removing the entries for Sec.  1.5000A-2(b)(2)(i), (b)(2)(ii), and 
(b)(2)(iii).
0
3. Revising the entries for Sec.  1.5000A-3(e)(4)(ii)(C) and 
(e)(4)(ii)(D).
0
4. Adding a new entry for Sec.  1.5000A-3(e)(4)(ii)(E).
0
5. Revising the entry for Sec.  1.5000A-3(h)(3).
    The revisions and addition read as follows.


Sec.  1.5000A-0  Table of contents.

* * * * *


Sec.  1.5000A-2  Minimum essential coverage.

* * * * *
    (b) * * *
    (2) Certain health care coverage not minimum essential coverage 
under a government-sponsored program.
* * * * *


Sec.  1.5000A-3  Exempt individuals.

* * * * *
    (e) * * *
    (4) * * *
    (ii) * * *
    (C) Wellness program incentives.

[[Page 70469]]

    (D) Credit allowable under section 36B.
    (E) Required contribution for part-year period.
* * * * *
    (h) * * *
    (3) Hardship exemption without hardship exemption certification.
* * * * *

0
Par. 4. Section 1.5000A-2 is amended by:
0
1. Revising paragraphs (b)(1)(ii) and (b)(2).
0
2. Removing the language ``health insurance'' in paragraph (g).
    The revisions read as follows:


Sec.  1.5000A-2  Minimum essential coverage.

* * * * *
    (b) * * *
    (1) * * *
    (ii) Medicaid. The Medicaid program under Title XIX of the Social 
Security Act (42 U.S.C. 1396 and following sections);
* * * * *
    (2) Certain health care coverage not minimum essential coverage 
under a government-sponsored program. Government-sponsored program does 
not mean any of the following:
    (i) Optional coverage of family planning services under section 
1902(a)(10)(A)(ii)(XXI) of the Social Security Act (42 U.S.C. 
1396a(a)(10)(A)(ii)(XXI));
    (ii) Optional coverage of tuberculosis-related services under 
section 1902(a)(10)(A)(ii)(XII) of the Social Security Act (42 U.S.C. 
1396a(a)(10)(A)(ii)(XII));
    (iii) Coverage of pregnancy-related services under section 
1902(a)(10)(A)(i)(IV) and (a)(10)(A)(ii)(IX) of the Social Security Act 
(42 U.S.C. 1396a(a)(10)(A)(i)(IV), (a)(10)(A)(ii)(IX));
    (iv) Coverage limited to treatment of emergency medical conditions 
in accordance with 8 U.S.C. 1611(b)(1)(A), as authorized by section 
1903(v) of the Social Security Act (42 U.S.C. 1396b(v));
    (v) Coverage for medically needy individuals under section 
1902(a)(10)(C) of the Social Security Act (42 U.S.C. 1396a(a)(10)(C)) 
and 42 CFR 435.300 and following sections;
    (vi) Coverage authorized under section 1115(a) of the Social 
Security Act (42 U.S.C. 1315(a));
    (vii) Coverage under section 1079(a), 1086(c)(1), or 1086(d)(1) of 
title 10, U.S.C., that is solely limited to space available care in a 
facility of the uniformed services for individuals excluded from 
TRICARE coverage for care from private sector providers; and
    (viii) Coverage under sections 1074a and 1074b of title 10, U.S.C., 
for an injury, illness, or disease incurred or aggravated in the line 
of duty for individuals who are not on active duty.
* * * * *

0
Par. 5. Section 1.5000A-3 is amended by:
0
1. Revising paragraph (e)(3)(ii)(D).
0
2. Redesignating paragraph (e)(3)(ii)(E) as (e)(3)(ii)(F), revising 
newly redesignated paragraph (e)(3)(ii)(F), and adding a new paragraph 
(e)(3)(ii)(E).
0
3. Redesignating paragraphs (e)(4)(ii)(C) and (e)(4)(ii)(D) as 
(e)(4)(ii)(D) and (e)(4)(ii)(E), respectively, and adding and reserving 
a new paragraph (e)(4)(ii)(C).
0
4. Revising paragraphs (h)(1) and (h)(3).
    The revisions and additions read as follows:


Sec.  1.5000A-3  Exempt individuals.

* * * * *
    (e) * * *
    (3) * * *
    (ii) * * *
    (D) Employer contributions to health reimbursement arrangements. 
Amounts newly made available for the current plan year under a health 
reimbursement arrangement that an employee may use to pay premiums, or 
may use to pay cost-sharing or benefits not covered by the primary plan 
in addition to premiums, are counted toward the employee's required 
contribution if the health reimbursement arrangement would be 
integrated, as that term is used in Notice 2013-54 (2013-40 IRB 287) or 
in any successor published guidance (see Sec.  601.601(d) of this 
chapter), with an eligible employer-sponsored plan for an employee 
enrolled in the plan. The eligible employer-sponsored plan and the 
health reimbursement arrangement must be offered by the same employer. 
Employer contributions to a health reimbursement arrangement count 
toward an employee's required contribution only to the extent the 
amount of the annual contribution is required under the terms of the 
plan or otherwise determinable within a reasonable time before the 
employee must decide whether to enroll in the eligible employer-
sponsored plan.
    (E) Employer contributions to cafeteria plans. Amounts made 
available for the current plan year under a cafeteria plan, within the 
meaning of section 125, are taken into account in determining an 
employee's or a related individual's required contribution if:
    (1) The employee may not opt to receive the amount as a taxable 
benefit;
    (2) The employee may use the amount to pay for minimum essential 
coverage; and
    (3) The employee may use the amount exclusively to pay for medical 
care, within the meaning of section 213.
    (F) Wellness program incentives. Nondiscriminatory wellness program 
incentives, within the meaning of Sec.  54.9802-1(f) of this chapter, 
offered by an eligible employer-sponsored plan that affect premiums are 
treated as earned in determining an employee's required contribution 
for purposes of affordability of an eligible employer-sponsored plan to 
the extent the incentives relate exclusively to tobacco use. Wellness 
program incentives that do not relate to tobacco use or that include a 
component unrelated to tobacco use are treated as not earned for this 
purpose. For purposes of this section, the term wellness program 
incentive has the same meaning as the term reward in Sec.  54.9802-
1(f)(1)(i) of this chapter.
* * * * *
    (4) * * *
    (ii) * * *
    (C) Wellness programs incentives. [Reserved]
* * * * *
    (h) Individuals with hardship exemption certification--(1) In 
general. Except as provided in paragraph (h)(3) of this section, an 
individual is an exempt individual for a month that includes a day on 
which the individual has in effect a hardship exemption certification 
described in paragraph (h)(2) of this section.
* * * * *
    (3) Hardship exemption without hardship exemption certification. An 
individual may claim an exemption without obtaining a hardship 
exemption certification described in paragraph (h)(2) of this section 
for any month that includes a day on which the individual meets the 
requirements of any hardship for which:
    (i) The Secretary of HHS issues guidance of general applicability 
describing the hardship and indicating that an exemption for such 
hardship can be claimed on a Federal income tax return pursuant to 
guidance published by the Secretary; and
    (ii) The Secretary issues published guidance of general 
applicability, see Sec.  601.601(d)(2) of this chapter, allowing an 
individual to claim the hardship exemption on a return without 
obtaining a hardship exemption from an Exchange.
* * * * *

0
Par. 6. Section 1.5000A-4 is amended by revising paragraph (a) 
introductory text and paragraph (a)(1) to read as follows:

[[Page 70470]]

Sec.  1.5000A-4  Computation of shared responsibility payment.

    (a) In general. For each taxable year, the shared responsibility 
payment imposed on a taxpayer in accordance with Sec.  1.5000A-1(c) is 
the lesser of--
    (1) The sum of the monthly penalty amounts; or
* * * * *

 John Dalrymple,
Deputy Commissioner for Services and Enforcement.
    Approved: November 20, 2014.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2014-27998 Filed 11-21-14; 4:15 pm]
BILLING CODE 4830-01-P