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Wellness Plans Incentivizing COVID-19 Vaccinations Could Trigger ACA Penalties – Be Careful

September 1, 2021

Delta Air Lines created national headlines last week when it announced that it would charge $200 extra in premiums per month for its unvaccinated employees participating in its health plan. Any employer looking to implement a similar strategy should do so with extreme caution due to provisions in the Affordable Care Act (ACA). All employers are grappling with ensuring the safety of their workforce in an environment where COVID-19 is prevalent. Unfortunately, for employers wishing to incentivize employees to receive a COVID-19 vaccine through a wellness program, there could be a steep Affordable Care Act penalty to pay. The remainder of this article will explain why a wellness program centered around employees receiving a COVID-19 vaccination may be costly to the employer.

Before diving into the details of how a wellness program interacts with the ACA it is important to review some basic ACA concepts. There are two potential penalties an employer could be exposed to under Internal Revenue Code (IRC) section 4980H. First, an applicable large employer (ALE) could be subject to the section 4980H(a) penalty if it fails to offers 95 percent of its full-time employees (and their dependents) the opportunity to enroll in an eligible employer plan that offers minimum essential coverage. Alternatively, an ALE could be subject to the section 4980H(b) penalty if the minimum essential coverage provided to their full-time employees is not affordable or does not provide minimum value. Each penalty can only be triggered by a full-time employee receiving a premium tax credit. A wellness program that incentivizes employees to get vaccinated for COVID-19 could cause affordability issues for an employer leading to section 4980H(b) penalties.

An individual is only eligible for a premium tax credit if the individual is, among other things, not eligible for minimum essential coverage under an eligible employer-sponsored plan that provides minimum value and is affordable. For premium tax credit purposes an employer’s coverage is considered affordable if the employee’s contribution level for self-only coverage does not exceed 9.5 percent (as adjusted for years after 2014) of the employee’s household income. This 9.5 percent number is indexed for years after 2014. In 2022 the indexed number is 9.61 percent which is down significantly from the 9.83 percent number from 2021.

There are extensive regulations that clearly set forth how an employer’s wellness program incentive impacts affordability for ACA purposes. The final regulations state “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 section 54.9802-1(f)(1)(i) of this chapter (see 26 CFR 1.36B-2(c)(3)(v)(A)(4)).” A wellness program includes a program of health promotion or disease prevention (see 26 CFR section 54.9802-(1)(f)). Furthermore, a wellness incentive program includes both “providing a reward (such as a discount or rebate of a premium or contribution, a waiver of all or part of a cost-sharing mechanism, an additional benefit, or any financial or other incentive) and imposing a penalty (such as a surcharge or other financial or nonfinancial disincentive) (emphasis added) (see 26 CFR section 54.9802-(1)(f)(1)(i)).”

The clear language of the existing regulations discussed in the paragraph above would result in any wellness program incentivizing a COVID-19 vaccination to increase the amount the employer must report to the IRS on line 15 of the Form 1095-C by the amount of the penalty being imposed on employees who are not vaccinated. Alarmingly, even a fully vaccinated employee would have to have his/her amount that is to be reported by the employer on line 15 of the Form 1095-C increased by the amount of the penalty as the wellness program would not relate to tobacco use!

An example may help flesh out the concepts discussed in this article. Let’s assume an employer offers its employees minimum value coverage for self-only coverage at a price of $150. Furthermore, the employer implements a wellness program that charges $200 extra for employees enrolled in health insurance who are unvaccinated. As a result of the wellness program not being related to tobacco use, the employer would have to assume all of the employees were not vaccinated and would be charged $350 per month as opposed to $150 (see 26 CFR 1.36B-2(c)(3)(v)(A)(4)). The employer would have to report the $350 amount on line 15 and not the $150 amount even for the employees who are fully vaccinated! This would have a dramatic impact on who would be eligible to receive a premium tax credit as a result of the employer’s offer of coverage not meeting the ACA’s affordability definition. As our previous article discussed, the IRS is closely examining line 15 amounts to determine who is eligible to utilize the affordability safe harbors.

If the employer charges $150 per month for a self-only plan that provides minimum value, the coverage would be affordable under the ACA’s affordability standard for any employee with a household income of $18,730.49 or more. However, if the employer charges $350 per month for a self-only plan that provides minimum value as a result of a COVID-19 vaccination wellness program, the coverage would only be affordable under the ACA’s affordability standard for any employee with a household income of $43,704.47 or more. That’s a dramatic difference in the number of employees who could trigger a section 4980H(b) penalty.

It is almost always cheaper for employees who are eligible to receive a premium tax credit to go to the State exchange to purchase health insurance rather than accept an employer’s offer of coverage. And, remember, in 2021 and 2022 individuals who make up to 600 percent of the federal poverty line could be eligible for a premium tax credit. Also, it is worth mentioning State exchanges are restricted by a provision in the ACA from varying rates only on the basis of:

  1. Whether such plan or coverage covers an individual or family;
  2. The rating area of a particular State (based on different locations throughout the State);
  3. Age but in no case more than 3 to 1 for adults; or
  4. Tobacco use except that such rate shall not vary by more than 1.5 to 1

(see 42 U.S. Code § 300gg(a)(1)(A)(i-iv)). Therefore, State exchanges are not allowed by the clear language of the ACA to penalize individuals who are not vaccinated for COVID-19. If an employer makes coverage unaffordable because of a wellness program incentivizing COVID-19 vaccinations, the employees making below a certain income level could go to the exchange and a receive a premium tax credit. If this occurs, the employer could be responsible for a section 4980H(b) penalty with respect to those employees. Any employer implementing a wellness program incentivizing a COVID-19 vaccination must do so with extreme caution and only after thorough research.

While the letter of the law appears to go against the Biden administration’s push for Americans to get vaccinated, many of the provisions discussed in this article require an act of Congress to change the law. We are skeptical this will happen. And, remember the IRS is way behind in its enforcement of ACA penalties. Currently, the IRS is still issuing penalty notices for 2017 and 2018. By the time the IRS gets around to issuing penalties for 2022 a new administration could be in the White House which could be a precarious position for employers who implemented wellness programs incentivizing COVID-19 vaccines.

The current pandemic has created myriad challenges for employers to create a safe workplace. Unfortunately, a wellness program incentivizing employees to get vaccinated may cause the employer to incur section 4980H(b) penalties. Given the challenges employers are currently facing with the COVID-19 pandemic, we would encourage the appropriate government agencies to provide employers greater clarity in this extremely nuanced area of the law. Accord Systems is not an expert on how to create a safe COVID-19 work environment. However, we are the industry leader in helping employers navigate the complexities of the ACA and reporting the proper information accurately, timely, and efficiently to the IRS. To date we have an impeccable record in assisting our clients avoid IRS penalties related to the ACA. If you have any questions regarding Affordable Care Act reporting or would like to learn more about our services, please contact us.

About the author – Ryan Moulder serves as General Counsel at Accord Systems, LLC and is a Partner at Health Care Attorneys P.C. Ryan received his LL.M. from Georgetown University Law Center and his J.D. from Saint Louis University School of Law. He has distinguished himself as a leader in the Affordable Care Act arena and has written and spoken on a variety of ACA topics as it relates to compliance for companies.

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