UNITED STATES DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
PUBLIC HEARING ON PROPOSED REGULATIONS
26 CFR PART 1
"HEALTH INSURANCE TAX CREDIT"
Thursday, November 17, 2011
CATHERINE E. LIVINGSTON
Health Care Counsel
Office of Chief Counsel
DONNA M. CRISALLI
Senior Level Counsel
Office of Associate Chief Counsel
(Income Tax and Accounting)
STEPHEN J. TOOMEY
Office of Associate Chief Counsel
(Income Tax and Accounting)
FRANK W. DUNHAM III
Assistant to the Branch Chief
Office of Associate Chief Counsel
(Income Tax and Accounting)
SHAREEN S. PFLANZ
General Attorney (Tax)
Office of Associate Chief Counsel
(Income Tax and Accounting)
Deputy Benefits Tax Counsel
Office of Tax Policy
Office of Tax Policy
MICHELLE R. NEBLETT
National Restaurant Association
Georgetown University Health Policy Institute
Center for Children and Families
National Women's Law Center
The Center on Budget and Policy Priorities
The State Employees Association of North Carolina, Inc.
American Academy of Pediatrics
ROSE VAUGHN WILLIAMS
North Carolina Commissioner of Insurance, Wayne Goodwin
The Service Employees International Union
Health Care for America Now
Employers for Flexibility in Health Care
Employers for Flexibility in Health Care
Employers for Flexibility in Health Care
Employers for Flexibility in Health Care
MS. LIVINGSTON: Good morning. We still have a number of people that are getting cleared in from downstairs and we'll bringing them up as expeditiously as possible, but as we've reached the 10 o'clock hour and we know people's time is important, we thought we would get started.
This is the hearing on the Proposed Regulations under Section 36(b) of the Internal Revenue Code on Health Insurance Premium Tax Credit. I'm Cathy Livingston and I am Health Care Counsel in the IRS's Office of Chief Counsel and I'd like my other panelists to introduce each of themselves starting on my far left.
MS. PFLANZ: I'm Shareen Pflanz and I'm in the Income Tax and Accounting Division, Branch IV, and I'm a General Attorney there.
MS. CRISALLI: Donna Crisalli, Senior Level Counsel, Income Tax and Accounting. MR. DUNHAM: Frank Dunham, attorney in Branch V, Income Tax and Accounting.
MR. TOOMEY: I'm Steve Toomey and I'm an attorney in Branch IV of Income Tax and Accounting.
MS. SIMONS: Carrie Simons, Attorney Adviser, Office of Tax Policy at Treasury.
MS. MORRISON: Helen Morrison, Deputy Benefits Tax Counsel, Treasury Department.
MS. LIVINGSTON: We have 13 individual speakers scheduled to speak this morning and then a group that makes up our fourteenth speaker. Each speaker will have 10 minutes to make a presentation and that includes the group. They will have 10 minutes as a group combined. There is a system of lights on the podium. The light will be green when the speaker starts. When there are 3 minutes left, the light will turn to yellow. Then when time is up, the light will turn red and at that point we ask that speakers conclude their remarks. At the end of the hearing if time permits, there will be an opportunity for those who have not scheduled in advance to speak, to speak, but if you wish to end if time permits, we ask that you go to the receptionist outside and provide your name promptly so that we will know if we have anyone else waiting to speak.
The panel will have an opportunity to ask questions, and during that question-and-answer time, that will not count against each speaker's 10 minutes. There is no official transcript kept of the proceedings. The Service does not take them and does not record them. However, there are tax services present and they record the proceedings, and they are often able to provide unofficial transcripts for those who would want to follow their procedures. I think that concludes all of the formalities and we will start with our first speaker. If for any reason we hit a speaker who is not here, we will just take people out of order. Our first speaker is Michelle R. Neblett with the National Restaurant Association.
MS. NEBLETT: Good morning. My name is Michelle Ranke Neblett, and I am the Director of Labor and Workforce Policy for the National Restaurant Association. Thank you for the opportunity to present oral comments on behalf of the restaurant and food service industry here today regarding the Notice of Proposed Rulemaking on Health Insurance Premium Tax Credit.
The industry is comprised of 960,000 restaurant and food service outlets employing 12.8 million people, roughly 9 percent of the U.S. workforce, serving 130 million guests daily. We believe the healthcare law will impact our industry more than most for several reasons. We are an industry dominated by small businesses with more than 7 out of 10 eating and drinking establishments being single-unit operators. We are an employer of choice for our workers seeking flexible work schedules and are employers with a high proportion of part-time, seasonal, and temporary workers. In addition, our workforce is typically young and we experience a high average turnover rate relative to other industries. These characteristics result in a workforce that can be fluid at times and leading to unique compliance challenges for the industry.
Restaurant and food service establishments operate on thin profit margins so that cost compliance with new laws and regulations is always a top concern for restaurateurs. As a result, we consider compliance requirements a burden and all the new healthcare regulations collectively in how they will impact the everyday operation of a regulation. Throughout the implementation of the law, we strongly urge you and your colleagues and your sister departments to promulgate employer compliance rules in the context of all of the requirements being placed on employers. For example, we support your proposal regarding the calculation of full-time hours of service in Notice 2011-36 and your consideration that is also linked to waiting periods in the determination of who is an applicable large employer. We also suggest that the affordability and minimum value of plans employers are required to offer full-time employees intersects with the nondiscrimination of the law and the application of the rules to fully insured plans. We thank the Department of the Treasury and the IRS for your consideration and acknowledgment of flexibility as you promulgate the regulations. We ask that you consider the collective impact of the employer regulations from the perspective of a restaurateur, in our case trying to offer quality healthcare coverage that is affordable and useful for their employees but also affordable to them as employers.
For restaurateurs, compliance with the law in totality in its impact depends greatly on full-time hours of service and how that is defined and calculated. Our members continue to believe that full-time should be defined as 40 hours a week. However, we do understand that the statute limits the flexibility the department and IRS have in implementing the section and appreciate the proposal that hours of service be considered 130 hours per calendar month in Notice 2011-36. We continue to strongly support the look-back measurement period and stability periods safe harbor method proposed in that same notice, and due to the variable nature of our workforce, restaurateurs may not know upon hire if some of their employees will work full-time hours needed to qualify them for an offer of coverage. We urge Treasury and the IRS to allow employers the choice of a measurement period that fits their business model as was proposed at the range of 3 to 12 months. We appreciate the acknowledgement that this is a critical issue by addressing it early in the regulatory process, and we very much look forward to the next iteration of the proposals that were included in Notice 2011-36 because for restaurateurs, compliance with the entire law hangs on that definition.
In the Notice on Proposed Rulemaking on Health Insurance Premium Tax Credit, the department and IRS examined the affordability test, for an employer's plan to qualify as minimum essential coverage. We urge you to also consider minimum value in conjunction with that affordability test as all changes that impact employer plans will have an impact on those plans as contemplated in the law. Insurance reform such as prohibitions on annual and lifetime limits and cost-sharing for preventative services are examples that will impact the affordability of an employer's plan. Treatment of other employer offered benefits should be considered such as employer contributions to wellness programs, which the law encourages employers to adopt or expand, and to health savings accounts and health reimbursement accounts. These products garner a lot of interest and growing use in the regulation and food service industry.
In addition, we believe that the minimum value of an employer's plan is inextricably linked to the affordability of that plan. The minimum value calculation for employer-sponsored coverage must include employer contributions or incentives regardless of how they are paid and that would include wellness programs, HSAs and HRAs, employer contributions as they should under the affordability test. Minimum value should take into account flexibility in benefit design and cost-sharing structures for employer plans. The NPRM clarified for large applicable employers that minimum value should not be tied to essential health benefits. A prescribed benefit package or a rigid cost-sharing structure would be contrary to this concept and, we believe, the intent of the law. The minimum value test is commonly thought to be a 60 percent actuarial value test but that does need plans with the same actuarial value offer identical benefits or have the same cost-sharing structures. In the NPRM, transition relief for the minimum value requirement is contemplated. We urge you to move forward with that transition relief in general or in a phased-in approach because we do not know if we will be able to determine what minimum essential coverage looks like until 2014, when federal poverty level and other key data will be available. We also do not know if minimum essential coverage will be affordable for restaurateurs operating on thin profit margins so that they can make the choices regarding coverage and penalties. To prevent churn, it would be beneficial to employers and the federal government to allow for a dry run, so to speak, in 2014.
Again, we look at these issues as a whole and for restaurateurs we see minimum value of a plan tied to the affordability measure of that plan as well as potential penalties in the nondiscrimination rules. Hence, we urge you to consider a broader transition than one proposed on the minimum value requirements.
Finally, I want to reiterate our support for the affordability safe harbor for employers based on W-2 wages that was proposed in the NPRM. Since the law passed, restaurateurs have been asking how they will and should comply with an affordability test based on household income for their employees. It is information that they do not know and do not wish to know for privacy reasons, and as a result we believe the household income test is flawed but again understand that the statute limits what can be done in this area. Safe harbor is a good option because in most cases, an affordability test based on W-2 wages will be more restrictive than one based on household income. The employer affordability safe harbor will also allow for a similar comparison of wages and employee levels to coverage for the same period of time. We would like employers to be allowed to use this mechanism prospectively at the beginning of the compliance timeline to give the added benefit to employers of also being able to predict their costs and potential penalty liabilities. The NPRM also makes clear that the broader affordability test based on household income does not go away with this safe harbor proposal.
We also believe that employer reporting requirements and the look back measurability stability period in the safe harbor method can be coordinated with this affordability safe harbor with prospective reporting. Again, we look at these requirements from the perspective of a restaurateur trying to comply with all employer requirements and establishing when and how they need to do what they need to do under the law.
Thank you again for the opportunity to present these comments before you today on behalf of the National Restaurant Association and our members. We thank you for your consideration of our concerns regarding the impact of the law and its implementing regulations on our industry. We look forward to seeing the department's subsequent proposal or rule on the definition of full-time employee. We reiterate our support for the employer affordability safe harbor and urge consideration of its interaction with the minimum value requirements as well addressed by the NPRM.
The National Restaurant Association also serves as an executive committee member of the Employers for Flexibility and Healthcare Coalition whose members will later be presenting comments today and we support those comments that will also be made by those members of the coalition. Thank you.
MS. LIVINGSTON: Thank you very much. Does anyone have any questions? Thank you very much.
MS. NEBLETT: Thank you.
MS. LIVINGSTON: Our next speaker is Joe Touschner from the Georgetown University Health Policy Institute Center for Children and Families.
MR. TOUSCHNER: Good morning. Thanks for the opportunity to testify. I am Joe Touschner. I am with the Georgetown Center for Children and Families. Georgetown CCF is an independent, nonpartisan policy and research center whose mission is to expand and improve health coverage for America's children and families. We conduct research and analysis to inform federal and state policymakers about issues impacting children and families, healthcare reform and to improve Medicaid and CHIP particularly around streamlining enrollment and renewal systems.
This morning I'd like to use my time to highlight a few of the issues that we think are of particular importance to children and their families in the proposed rules. First, the proposed rule creates a family penalty in the affordability test. We are concerned that the proposed rule excludes families from advance premium tax credits if anyone in the family has access to affordable, single-only employer-based coverage even when family coverage would cost more than 9.5 percent of income. In essence, the proposed policy would leave many families unable to benefit from the Affordable Care Act's key affordability provisions as they will be kept out of employer-based coverage because it is too expensive and yet they will not be able to procure subsidies to purchase insurance through the exchanges. Nearly all employers offering health coverage provide a dependent coverage option but often at much greater cost to the employee than for single-only coverage. In fact, in 2011 the average worker covered by single-only plans pays 18 percent of the premium for a total cost of $920, but for family coverage they pay 28 percent of the premium or $4,130 annually. For a family of three, this consumes more than 9 1/2 percent of income until the earnings reach $43,400 or 235 percent of the federal poverty level. While the preamble to the proposed rule does indicate that these families will not be subject to additional penalties under the individual responsibility requirement, this is likely to be small consolation to those families who continue to lack affordable insurance.
TCF particularly focused on the impact of the single-only affordability test on children. Some have argued that children are protected against the effects of the single-only policy because they can enroll in CHIP when they're excluded from subsidies, but we think that this is not sufficient protection for families for a number of reasons. First, a large body of research anchored by a 2002 IOM study entitled "Health Insurance is a Family Matter" has concluded that the health and wellbeing of children is directly affected by the health insurance status of their parents and the financial stability of their families. If we have millions of uninsured parents, that's a major problem for America's children. Secondly, while it's outside the purview of the IRS's proposed rule, it is important to highlight that there is no concrete assurance yet that CHIP can indeed serve as a reliable source of coverage for all children adversely affected by the single-only test. Most notably, CHIP is funded only through fiscal year 2015. Moreover, HHS has left unanswered many questions about how CHIP will interact with the Exchanges and IRS tax credits and this includes whether children can be subject to a waiting period prior to enrolling in CHIP and, finally, even under the best-case scenario with the waiting period and reauthorization of CHIP, a number of children will be adversely affected by the single-only test because they're not eligible for CHIP. Based on a 50-state survey that CCF has conducted for the Kaiser Commission on Medicare and the Uninsured, the median income threshold for CHIP and Medicaid for children is 241 percent of the federal poverty level, so that that leaves many children and families whose income is above the state's threshold but below 400 percent of the federal poverty level without an affordable option. In four states, in fact, the income threshold is below 200 percent of poverty so that that range is even larger in some states.
The Urban Institute has estimated that there are some 6.3 million children in families that are affected by the single-only affordability test, and of these many might be eligible for CHIP if it remains in place, but others will remain uninsured, and as already noted, even those who can secure coverage through CHIP will be adversely affected if their parents don't have coverage.
We expect other witnesses today to testify in more detail but we believe that IRS does have the legal authority to adopt a family-based test that makes it possible for families with children to secure affordable coverage under the ACA. From a child's health perspective, it is imperative to adopt a family-based affordability test.
Moving on to my next topic. IRS officials should coordinate closely with the Department of Health and Human Services to assure that tax credits work for families with children. There are a number of issues affecting children and families in the proposed IRS rule that arise from an intersection of policies that are proposed by HHS. While issues are not exclusively IRS issues, I'd like to raise them here because of the reality that families will deal with the confluence of the decisions made by the two agencies.
The first of these issues is what's been termed premium stacking. Taken together, the HHS and IRS rules leave major gaps in affordable coverage for families with complex coverage situations. Those are situations in which family members are enrolled in more than one source of coverage. Both the IRS and HHS rules fail to take steps that prevent families from facing multiple, cumulative and ultimately unaffordable premium obligations. For example, a family that's at 200 percent of the federal poverty level could end up having to pay one premium for its children in CHIP, another premium for a working parent in employer-based coverage and a third premium for a stay-at-home parent who is enrolled in Exchange coverage. As a result, the family would face total premium obligations that are well in excess of the affordability limits established by ACA. Unfortunately, a significant number of low- and moderate-income families are likely to find themselves in this situation. The Urban Institute has estimated that there will be approximately 20 million families with some type of complex coverage situation. More specifically, there will be some 16.7 million families in which parents are potentially eligible for Exchange coverage even while their children remain eligible for Medicaid or CHIP. This is because Medicaid and CHIP continue to cover children further up the income scale than the Exchange subsidies so that parents must secure insurance elsewhere. Put another way, the Urban Institute estimates that some 75 percent of parents who receive premium tax credits will have children who qualify for Medicaid or CHIP. While families generally don't pay premiums for Medicaid coverage, most CHIP programs do charge premiums. In fact, families in some states may be required to spend up to $100 a month to cover their child in CHIP in addition to any premium contribution required from employer coverage or from Exchange coverage.
We believe that this result is not what's intended by the ACA and encouraged the IRS to work with HHS to adjust the amount the families are expected to pay either for qualified health plan coverage or for Medicaid or CHIP coverage to assure that families total premium cost fall within the affordability limits that are established by ACA.
Next, quickly, rating categories. We're concerned that the advanced premium tax credits will be virtually impossible to administer if, as HHS has proposed, insurance issuers, not Exchanges can decide which rating categories or tiering they will use. And by rating categories I mean the choice of how to offer coverage to different family structures like 1 adult plus dependent, 1 adult and 2 children family coverage, that kind of thing. If the HHS interpretation prevails we could have Exchanges in which different issuers use a different number of rating categories, making it virtually impossible to calculate the applicable benchmark premium. And then further complicating this issue is that HHS's rating categories don't include child only plans and those are required to be offered by ACA, and they're addressed elsewhere in the HHS proposals but not among the rating categories.
The best solution for this issue is to require that all issuers in an Exchange use the same rating categories. We've asked HHS to make that change in their rules, and we've also asked IRS to work proactively with HHS on this issue since it bears directly on the calculation of the premium tax credit.
Another issue at the nexus of HHS and IRS rulemaking is the use of IRS data to evaluate eligibility for advanced premium tax credits. Particularly, we're concerned that the proposed HHS rule appears to require that states use income data previously filed with IRS even if a family attests that their circumstances have changed and that the data are no longer accurate. States are allowed to use updated information only if the family has experienced a decline of income of 20 percent or more or filed a claim for unemployment. For low- and moderate-income families, the decline of 10 or 15 percent is substantial and significantly changed the amount of advanced premium tax credit that they require. It could also move them from ineligibility for cost-sharing reduction to eligibility for those cost-sharing subsidies. Now, shortfall and cost-sharing subsidies can't be reconciled at year's end. So we encourage HHS and Treasury to work together to allow families to rely on more up-to-date information and a broader range of circumstances than just when that 20 percent threshold is reached.
So moving on to two final issues. We believe IRS should retain its proposed special rule for taxpayers with income under 100 percent of the federal poverty level. Estimates from the Urban Institute indicate that more than 1 in 4 people who start off the year eligible to receive tax credits will become eligible for Medicaid over the course of the year, meaning their income has dropped into that range. Without this special rule, those who properly enrolled but experienced a decline in income that leaves them in poverty would be subject to unaffordable repayment obligations as their annual income would be below the range for tax credit eligibility.
And finally, IRS should retain its proposed employee safe harbor for circumstances when an employer-sponsored coverage is determined to be unaffordable but becomes affordable during the year. This could happen when an employee receives a bonus during the year and their annual income ends up causing coverage to be less than 9 percent -- 9.5 percent of annual income.
So I'll conclude my testimony there and be happy to take questions from the panel.
MS. LIVINGSTON: Thank you very much, Mr. Touschner. We should say that all of the speakers today have also submitted formal written comments, and all of the comments submitted with respect to this proposed regulation are available publically on the Internet at regulations.gov. Our next speaker is Joan Entmacher from the National Women's Law Center.
MS. ENTMACHER: I'm Joan Entmacher; thank you for this opportunity to testify on behalf of the National Women's Law Center. We appreciate the efforts that Treasury and HHS made to coordinate the implementation of the Affordable Care Act and support in many of the provisions of this proposed rule. However, there are areas where the rule needs to be improved to ensure that women and their families don't lose out on the tax assistance the act is intended to provide.
Women generally have lower-incomes than men and are the large majority of single heads of household. They're more likely to rely on government sponsored health coverage and coverage linked to a spouse's employment, and they make most of the healthcare decisions for their families. Thus, for women, it's especially important that the premium credit rule enhances coordination between government-sponsored programs and the Exchanges, reduces the risk that low-income individuals and families will fall through the cracks, promotes access to affordable coverage for families, minimizes the risk of financial penalties due to changes in family status, and protects victims of domestic violence and others who may be unable to satisfy the joint filing requirement. I will address each of these issues in my remarks today.
Regarding the coordination of eligibility for the premium tax credit with government-sponsored coverage, I have three comments. First, the rule must make it clear that government-sponsored minimum essential coverage does not include Medicaid coverage that is limited to family-planning services. Not all government-sponsored health programs referenced in Section 5000A provide minimum essential coverage. The proposed rule recognizes this and includes a special rule for certain veterans' programs, but it makes no such exception for different types of Medicaid coverage. Thus, the proposed rule could be construed to mean that individuals who are eligible only for Medicaid family-planning services but not for Medicaid services because they're incomes are too high are nevertheless considered eligible for government-sponsored minimum essential coverage. This interpretation would make such individuals, overwhelmingly women, ineligible for premium credits. We have recommended the Treasury add a second special rule to avoid this result.
Second, we support the special rule allowing taxpayers with household income below 100 percent of poverty to qualify for premium credits if an Exchange estimates that they would be income eligible and support the provision calculating the credit amount based on actual household income.
Third, regarding the time of eligibility for government-sponsored coverage, we want to make sure that people don't fall through the cracks while they are making transitions from the exchange to a government-sponsored program. Our written comments recommend an eligibility grace period and also recommend allowing individuals in the midst an acute or specialized episode of care to remain eligible for premium credits during the duration of that episode of care.
I'll turn now to the way the rule determines whether employer-sponsored family coverage is affordable, which the previous witness also talked about. Under the proposed rule, so long as coverage for the employee only costs no more than 9.5 percent of household income, the plan will be deemed affordable for the entire family regardless of the actual cost. This interpretation would undermine the coverage goals of the act for women as well as children. Forty percent of women with employer-sponsored coverage are covered as a dependent compared to just 25 percent of men. Fortunately, the language of the statute does not compel this result.
When it comes to interpreting a related provision, the affordability exemption from the individual mandate, Treasury would correctly consider whether the total required contribution for family coverage exceeds 9.5 percent of income based on this special rule in section 5000A(e)1(c) for related individuals who are eligible to enroll in, but not purchase, coverage. But in determining affordability of an employer-sponsored plan, the proposed rule would ignore this special rule and focus narrowly on the cost of self-only coverage. It's unlikely that Congress intended this inconsistency, or intended to leave millions of people for whom coverage is unaffordable without access to premium credits. Indeed, Congress directed the Comptroller General to study whether the 9.5 percent threshold for employees is too high. So we strongly recommend that the final rule base the determination of affordability on whether the total contribution to cover all eligible family members exceeds 9.5 percent of income.
We also have a recommendation to facilitate computing the premium assistance tax credit in complex family situations. A number of complications regarding the benchmark plan premium and credit amount that are addressed in the Treasury proposed rule could be avoided if HHS requires that qualified health plans extend coverage to all dependents in the taxpayer's family, as well as the rating category recommendation that was previously discussed. We've asked HHS to make that change and we hope that Treasury encourages them to do that.
This is especially important for women because 3 out of 4 dependents other than the taxpayer's own children such as nieces and nephews, grandchildren, and elderly parents who do not live with the married couple, live in families headed by women. In situations when multiple plans are needed, we support retaining the method proposed in subsection 1.36(b)-3(f)3 which determines a family's benchmark premium based on the sum premium cost of all of the benchmark plans needed to cover the entire family. Complications also arise in reconciling the premium tax credit with advanced credit payments when circumstances change. My testimony will focus on marital status but -- and other witnesses will be addressing other issues. When individuals marry during the year, to avoid creating a marriage penalty at reconciliation we recommend the Treasury modify the proposed rule to prorate the premium credit based on, 1) each spouse's separate incomes, family sizes, advanced payment receives, and applicable benchmark plans from the months prior to marriage; and, 2) the spouses joint household income and family size, advanced payment received, and applicable benchmark plan for the months of the marriage. A reasonable estimate of the household income allocable to each spouse for the coverage months before and after marriage may be ascertained from the jointly filed information.
Regarding divorce, we support the provision allowing divorced taxpayers to decide how to allocate qualified health plan premiums, benchmark plan premiums, and advanced credit payments. However, we recommend that the default allocation be based on household income using the method demonstrated in example 3 of section 1.36(b), subsection 4(b)4. This is more accurate and equitable and is consistent with the income based allocation we recommend for newly married couples.
Finally, I want to recommend creating exceptions to the joint filing requirement for vulnerable spouses. As the preamble recognizes, unless the rule provides relief from the joint filing requirement, victims of domestic violence and others for whom it would not be possible or prudent to file a joint return and their children may be disqualified from premium assistance altogether. We strongly recommend the Treasury exercise its broad regulatory authority to incorporate exceptions to the joint filing requirement in cases involving physical or mental abuse, incarceration, or abandonment, as well as situations where spouses are in the process of a divorce or separation. The IRS could capture the reason for an exception with a check-off box signed under penalties of perjury similar to Form 8857 for request for innocent spouse relief.
We do not think that prior years' filing status and expressed intention to file jointly should be determinative. Family situations may change without notice and complicated divorce or separation proceedings may take more than a year to resolve. We believe that limiting exceptions to three consecutive years reasonably balances tax administration with the need to protect vulnerable women and families.
Thank you, and I'm happy to take questions.
MS. LIVINGSTON: Our next speaker is Dana Cope with the State Employee's Association of North Carolina.
MR. COPE: Good morning. I don't usually volunteer to be in front of seven tax attorneys from the IRS but I am here today. And nevertheless I want to thank you for conducting this public hearing. I will focus my remarks on the health insurance premium tax credit associated with the Affordable Care Act or, quite frankly, if this rule stands, the unaffordable healthcare family care act.
My name is Dana Cope and I'm the executive director of the State Employees Association of North Carolina, also known as SEANC. SEANC is a local affiliate of the Service Employees International Union and the largest public employees association in the south. I'm here today to speak on behalf of our 55,000 members who are comprised of employees across the spectrum of North Carolina state agencies, including the governor, nurses, correctional officers, public school janitors. And all of them are eligible for healthcare coverage as part of the state health plan of North Carolina. Currently, this plan -- our plan -- services 663,000 active public employees and their dependents. Who is eligible for health insurance tax credits is of critical importance in determining affordable healthcare coverage for North Carolinians.
Currently, the proposed rule determines affordability of employer-sponsored health insurance based solely on the cost of premiums for self-only coverage. This is a fatal flaw. It's fatal because as currently proposed it makes healthcare unaffordable for the average North Carolina state employee and their family. I would strongly urge this body to amend this proposed rule to base affordability on the cost of self-only health insurance coverage for employees and make a separate determination for the cost of family and dependent coverage.
SEANC has a long record of support for quality affordable healthcare coverage at both the state and national level. We've participated in a five-year initiative to promote national healthcare reform. We've partnered with our allies inside of North Carolina to pass a law in 2009 that led to landmark legislation from the North Carolina General Assembly banning smoking in all bars and restaurants in the No. 1 tobacco producing state in the nation. And we also advocate successfully for the conversion for the North Carolina state health plan to provide preferred provider organization. And just this past legislative year we've reformed our state health plan and moved it as much as practical from the politics of the General Assembly, invested it in a board of trustees of eight plan members with healthcare experts who will make all decisions in the plan benefit design.
SEANC stands strongly against the proposed rule -- Section 1.36(b)-2(c)3(v) titled "employer sponsored minimum essential coverage" and its definition of affordable coverage based solely on the cost of premiums for self-only coverage. Unless amended, this rule would leave an estimated 250,000 family members of North Carolina state employees without access to affordable healthcare. The rule would effectively deny state employees the premium tax credits available through health benefit Exchanges.
In short, this proposed rule would nullify the major goals of the affordable healthcare act to expand the equal access to healthcare. Let me be clear: This proposed rule is contrary to the Affordable Care Act's intent. If this proposed rule stands, I predict this law will go down in history as one of Washington's greatest empty promises. SEANC believes that the correct interpretation of affordability must be based on two things: the first, the cost of self-only healthcare coverage, and number two, separately for the cost of family or dependent coverage.
The state health plan of North Carolina is a self-funded PPO which ensures 486,000 active and retired state employees and over 177,000 dependents. It is currently grandfathered under provisions of the Affordable Care Act. In accordance with the long-standing promise made to employees, health insurance was premium free for active and retired North Carolina state employees until recently when a premium of $260 per year was instituted for self-only coverage. That self-only coverage is, therefore, affordable under the 9.5 percent rule.
Unfortunately, there is no subsidy for dependent premiums in the state health plan. An employee who chooses a family policy is charged $7,714 in premiums per year in addition to co-pays and co-insurances. As a result, state employees in North Carolina who earn on average $41,000 cannot afford to cover their dependents under the state health plan. This would come to 20.5 percent of their gross family income just to provide health insurance for the entire family. This is far in excess of the 9.5 percent rule for affordability.
More significantly, after deductions for federal and state income taxes which equal 21 percent, 7.65 percent for the Social Security Administration, and a 6 percent mandatory state retirement contribution, an employee would have $19,537 or less than 47 percent of their gross income for all other living expenses. This would mean that an employee would have less than $20,000 to pay for life's basic necessities such as housing, food, child care, and clothing.
Even these statistics do not capture the true adverse impact of this proposed rule. Since 75 percent of North Carolina state employees earn less than $38,000 per year, these employees would spend 23 percent or more of their gross family income on health insurance premiums and preventative medical treatment which would be provided under the Affordable Care Act but not covered by the grandfathered state health plan.
In this example, a minimum of 55 percent of that family's total income would go toward health insurance premiums, taxes, and mandatory deductions leaving only $17,119 for all other living expenses. Let's not forget all of the out-of-pocket medical expenses for deductibles, co-payments, and co-insurances I mentioned earlier.
In North Carolina, 75 percent of employees do not elect dependent coverage. Let me say that again: 75 percent of our state employees in North Carolina cannot afford and do not elect dependent coverage, opting instead for no health insurance at all, which makes us one of the states in the country with the highest uninsured rate. Sometimes in some cases they do find insurance on the private market.
Anecdotal evidence indicates that the primary deterrent to affordable family coverage is the lack of a subsidy for dependent premiums or affordable premiums. As a result, dependents comprise only 27 percent of the total plan membership. Affordable dependent coverage was the primary reason that we in SEANC supported the Affordable Care Act. Unfortunately this proposed rule would deny state employees' families across the spectrum in North Carolina access to affordable healthcare by blocking the premium tax credits for which they would otherwise qualify.
Alternatively, many career professionals and other state employees in North Carolina could be forced to abandon public service in order to have their dependents qualify for premium tax credit subsidies and health benefit Exchanges. This would adversely, obviously, impact public services to North Carolinians in the areas of education, health, public safety, transportation, and the environment.
Right now affordable healthcare is being used as a campaign slogan by presidential candidates. SEANC is calling on the Obama administration to fulfill its promise that affordable healthcare tax credits will be made available to working families in North Carolina. Therefore, we in SEANC respectfully urge President Obama's administration to amend the proposed rule to base affordability of health insurance costs on two separate measures: one, the cost of self-only insurance; and two, the cost of family and dependent coverage. And again, I want to thank you for the opportunity to represent our working families in the state of North Carolina.
MS. LIVINGSTON: Thank you. Any questions?
MR. COPE: Thank you.
MS. LIVINGSTON: My apologies, I reversed the order on this list of speakers. Judith Solomon for the Center on Budget and Policy Priorities is next.
MS. SOLOMON: Thank you, good morning. I actually was happy to go after Mr. Cope because I think he really set the stage for some of what I want to say. My name is Judith Solomon, I'm a vice president for health policy at the Center on Budget and Policy Priorities. The first issue I would like to address is the test for determining affordability. I think what you just heard really spelled out most vividly what the potential impact, the potential harm, how this could thwart the coverage goals of the ACA. I'm going to really talk about the reader analysis, and Joan Entmacher talked a little bit about this, but I really want to spell out or lay out the relevant provisions of the ACA.
Starting with the premium code of statute itself 36(b)-(c)2(c) of the Internal Revenue Code states that the employees required contribution, which is compared to household income to decide whether coverage is affordable, should be determined within the meaning of section 5000(a)-(E)1(b) of the Internal Revenue Code. That section is part of the individual responsibility requirement and it provides the method for determining whether people who lack access to affordable coverage should be exempt from the penalty from not having coverage. It states that in calculating whether coverage is affordable the required contribution of the employee for self-only coverage should be compared to household income and if the contribution is greater than 8 percent of family income the coverage is considered unaffordable.
The following subsections are capital C qualifies B. It states that the determination of affordability for an individual who is eligible for minimum essential coverage by a relationship to someone else through an employer, that that should be made by reference to the required contribution of the employee.
Now, going back, the Joint Committee on Taxation interpreted subsection (c) to require the same test but use of the self-only test in determining affordability. And its report, which we don't think is due any deference -- it came out after the enactment of the statute -- stated that the employee contribution for self-only coverage should be used both for the firewall, the affordability of employer coverage for the purpose of premium credits, and for the individual responsibility requirement, so in feeling that it failed to really give any meaning at all to subsection (c) it essentially read it out of the law. So, we clearly disagree with that.
Now, the preamble of the Treasury rule actually correctly interprets (c), we believe, because it states that the employee's contribution for family coverage will be used in determining affordability for purposes of the individual responsibility requirement and thinks that later rulemaking will do that. So, we definitely agree that this is the correct interpretation of (c).
The problem, now, is that the proposed rule ignores (c) in talking about how you determine affordability for purposes of the firewall, and it relies on what we think is a cramped reading of the statute that ignores the qualifying rule, so that in determining whether coverage is affordable for the family and to see whether the family members can get premium credits, the cost only to the employee will be considered.
And then of course if coverage costs less for the family -- it costs less than 9.5 percent of household income -- it won't matter how much it would cost to cover the family, and the family would stay uninsured and there's no penalty, which is good, but the end result is not good.
So, we think the far better, much more straightforward reading is that Congress intended that the same test apply to both the firewall and the individual responsibility requirement, and that the test take the cost of family coverage into account when considering whether coverage is affordable for the family.
Our next issue is a technical one that I think can easily be fixed. We're hoping it was a simple mistake. The proposed rule defines a rating area, and the rating area is used in determining what the benchmark premium is as an Exchange service area with reference to a proposed rule issued by HHS.
In that proposed rule, an Exchange service area is the area that the Exchange operates in. In most states, it will be the entire state. In contrast, a rating area is a geographic area within a state where premiums are the same, and most states will likely have more than 1 rating area.
The definition in the proposed rule, therefore, creates problems for many consumers, because premiums will vary among rating areas, but the second-lowest-cost silver plan, which is the benchmark, would be determined on this broader Exchange service area under the proposed rule.
So, for example, take the situation of a family in a state with three rating areas. If that family lived in the most expensive rating area, the second-lowest-cost silver plan that would be used as the benchmark would clearly cost more where they live, and might even not be available where they live, so that the premium assistance that that family got would actually be less than a similarly situated family living in the least expensive rating area.
This problem is easily fixed by defining a rating area with reference to the rating areas that will be established and approved by the HHS Secretary pursuant to Section 2701(a)(2) of the Public Health Service Act.
Well, before getting to our final issue, which is reconciliation, I'm going to slip in an issue where we agree with Treasury. We didn't actually cover this in our comments, but it has come up again in the press, and I think, you know, clearly, this is where Treasury got it right. The issue is whether premium credits can be paid in states with federal Exchanges.
It is true, there's a reference in 36B to state Exchanges, but there's also a reference to reporting of information by federal exchanges.
But what's more important in looking at this issue, though, is that the overall structure of the law, particularly the authority for the federal Exchange itself in Section 1321, clearly puts the federal exchange in the shoes of this data Exchange in non-electing states. Taking the act as a whole rather than a laser beam focus on that one position makes it clear that the proposed rule is correct in extending premium assistance to consumers in non-electing states. Congress clearly intended that people be able to get premium credits throughout the country, and that's why they allowed for a federal exchange when a state does not opt for one, and the result would be ludicrous, and we strongly support your interpretation.
So, turning to our final issue, which is reconciliation, in the short time I just want to make a -- the real key point is that the final rule needs to address the circumstances of families that experience major changes in household income and other circumstances, such as marriage, in the course of a year. If these changes aren't taken into account, families that correctly receive premium credit -- they go in the Exchange, the have a determination made, based on their income that determination is correct. But then something happens -- something good maybe, that they get a better job or a raise -- and they could end up owing thousands of dollars at tax time. We're concerned that the risk of repayment could discourage people from participating, and that that could create some adverse selection risk -- that those that are healthiest would be the ones that might not purchase coverage.
We think that the ACA provides legal authority to -- it clearly states that there is legal authority to coordinate the final premium credit with the advance payment. And in our testimony we allowed several suggestions for how this could be used to mitigate the potential harm of large repayment by people who correctly availed themselves of premium credits for part of the year based on their income and circumstances during that period -- and then stopped receiving credits when they're not eligible but really can't protect themselves otherwise.
And there are three things that we go through. One is to prorate the caps on liability based on the number of months that the household received premium credits. So, for example, if a family whose annual income ended up being 375 percent of the poverty line and that family got credits for six months when its income was 200 percent of the poverty line, you would just say that the maximum repayment for that family is $1,250. We would actually like some way of prorating income. We know that that's really difficult, so this was a sort of practical circumstance.
The second is to do a similar thing for people who correctly receive for part of the year but their annual income goes over $400, to treat them as if they were at $400 and prorate the cap that would apply to a family at that income level.
And then, finally, for couples that marry during the year, I think the solution that Joan Entmacher set out is what we were suggesting, that you would basically allocate the income based on the circumstances during the time.
So, thanks again for the opportunity to testify and happy to answer questions now or any time over the coming weeks.
MS. LIVINGSTON: Thank you very much. Questions? Thank you. Our next speaker is David Bromberg from the American Academy of Pediatrics.
MR. BROMBERG: Good morning. My name is David Bromberg, and I join you today on behalf of the 60,000 primary care pediatricians, pediatric subspecialists, and pediatric surgical specialists of the American Academy of Pediatrics. I'm a practicing pediatrician in the state of Maryland.
Let me begin by thanking you for the opportunity you've afforded the AAP to respond to the Health Insurance Premium Tax Credit Notice of Proposal Rulemaking -- or the NPRM. I understand we've asked to be brief, and I intend to limit my comments to 10 minutes.
The essential message that I would ask the Committee to take away from my testimony is the American Academy of Pediatrics is deeply concerned that the IRS has decided to interpret the ACA in a way that would cut access to quality health insurance for millions of children unless the families find coverage for their children in the Children's Health Insurance Program, also known as CHIP.
CHIP is a good program, but it's not fully funded after 2014, and while pediatricians are not tax lawyers, we are clinicians who see the impact of inadequate insurance on patients every day. Insurance is designed for adults, and often children are treated as little versions of the adult population from a clinical perspective and even the perspective of insurance design. This creates large problems for pediatricians and other clinicians who try to help children develop into their full potential.
For instance, the No. 1 cause of death in children is not heart disease; it's not cancer or chronic disease but injury. Insurance plans that offer coverage for prostate tests and mammograms are nevertheless legion.
Additionally, the cost of addressing children's health needs is quite low in comparison with the adult population. The main government insurance program for children, Medicaid, spends just $2,422 per year on average for each Medicaid-eligible child compared to the average cost per adult Medicaid enrollee of $7,683. In private insurance, it's common knowledge that risk pools hope to attract young and healthier populations, and most plans charge a family the same premium for family sizes as 4 or 10.
Finally, the outcomes of pediatric clinical interventions, due to their preventative nature, do not provide savings immediately. The goal of the medical home I've established for my patients is to coordinate care for a population of children to establish health across their life span. It is very challenging to do that when insurance is inadequate.
And let me add the opposite of that. What a joy it is when I know somebody comes in with children and families that have adequate coverage and I know that their needs are going to be taken care of, their medications will be covered, and that we can give them the care that they need to keep them healthy. Quality health insurance for these families is essential in helping me to do my job. And that certainly was the hope of the ACA -- to broaden that coverage.
The AAP has adopted access principles that have, their core the goal of providing quality health insurance for infants, children, adolescents, and young adults -- and eventually for everyone. The Academy's principles also conclude that access to quality care is a right. The interpretation the IRS has adopted essentially bases the right to health insurance for millions of children on further funding of the CHIP block grant, which as I have stated is not included in the current law.
An Urban Institute report notes that the stakes for children of the single-only test are particularly high and intercect with the fate of CHIP coverage for children. Urban reports that a federal funding for CHIP is not extended beyond 2015, and the single-only test prevails. Some 6.3 million children would be in families that would have to pay more than the benchmark 9.5 percent of their income for family coverage. A significant share of these, 1.7 million, are currently uninsured and would likely remain that way under reform.
As a result, the IRS's interpretation could unravel much of the progress that has been made in covering children in recent years. And the progress really has been very impressive. Insurekidsnow.gov reports that fewer than 10 percent of children are insured for the first time ever. This is a result of both CHIPRA -- the CHIP Reauthorization Act -- and the economic downturn in which parents lost their job. Medicaid and CHIP did their jobs in catching children in those families who also lost employer-sponsored insurance.
Taking a step back from this goal of covering all children in the United States because of one interpretation of the law would be a tragic misstep for our shared future.
As I've noted, the IRS chooses to stand by its interpretation of the single-only test as set forth in the NPRM. Many children and other family members of working Americans who are not now enrolled in quality insurance are likely to remain uninsured. The Kaiser Family Foundation estimates that there are 3.9 million children and other dependents who do not live in families where coverage is under 9.5 percent of family income for the worker but not for other family members. There are likely even more people in families where both spouses are working but only one has an offer of employer-sponsored coverage, and that offer is over 9.5 percent of family income for the family coverage.
Many of the children, spouses, and other dependents of these individuals will be left without access to affordable coverage in 2014. As a result, even with the passage of the ACA, some will remain uninsured. More uninsured children and other individuals means continued stress on the U.S. healthcare system and pediatric practices to provide charity care. Uninsured children will continue to need healthcare, but many families will be unable to pay for that care. The result will be continued uncompensated care, and state and local governments will continue to need to provide funding to help pay for the cost of uninsured children. Insurance premium rates will continue to be higher in order to cover costs of care to the uninsured that are not compensated elsewhere. As uninsured children and other Americans become disabled due to lack of access to health care, there will be continued pressure on Medicaid to pick up the cost of serious health conditions that could have been prevented if the individuals had had access to healthcare.
For children in particular, strong scientific evidence exists to show that adult disease begins in childhood and that the antecedents of cancer, diabetes, and other highly expensive and debilitating adult illnesses have their roots in inadequate healthcare for children, and adequate insurance allows us to make prevention possible in the early stages of these problems.
In light of these serious issues, the Academy urges the IRS to use the discretion it has under the ACA to adopt an alternative interpretation of the affordability test, one that is family based and includes the cost of dependent coverage. Specifically, we urge the IRS to revise applicable sections to make it clear that a family would be potentially eligible for subsidized Exchange coverage if the cost of family coverage, not just single-only coverage, exceeds 9.5 percent of household income.
Another issue that the Health Insurance Premium Act Credit rule has proposed will also leave many families with children facing a double premium if the family happens to have a child eligible for CHIP or Medicaid. The issue, sometimes known as premium stacking, arises from the statutory formula used to calculate the advanced premium tax credit, which establishes a specific dollar amount that families are expected to contribute to their Exchange coverage without any variation allowed, even if a family must also pay CHIP premiums. Unfortunately, the number of families subject to this type of double premium is likely to be significant. Estimates from the Urban Institute indicate that three out of four parents who are eligible for the Exchange will have one or more children who are eligible for CHIP or Medicaid and must enroll in these programs.
It is unknown how many of these families must pay premiums to enroll their children in public coverage. But 30 states charge a premium or annual enrollment fee to children in CHIP. So, this is a serious concern. While the fundamental issue arises from the statute, the NPRM does not acknowledge the problem, nor does it provide states with any options or advice for addressing it. If the IRS chooses to maintain its current definition, the practical effect of using the affordability test as proposed in the NPRM means that families will be forced to either (1) pay a larger part of their income for coverage and similarly situated families without an employer offer, or (2) leave children without coverage. Such a choice should not be the consequence of the ACA, the clear intent of which is to provide affordable care to nearly everyone in the United States. A more comprehensive and accurate assessment of families' premium obligations is consistent with the intent of the Affordable Care Act, which would lead to more children having health coverage and would be less disruptive to the employee-sponsored insurance market.
Other solutions to lessen the burden of multiple premium costs on families should also be explored in the final rule, such as continuing CHIP premiums to the tax credit calculation or modifying CHIP rules in some way to not penalize families with children in CHIP.
In summary, the American Academy of Pediatrics appreciates the opportunity to testify before you today. As noted, we have strong concerns regarding the impact of family penalty and premium stacking and urge you to solve these problems with what is otherwise an excellent regulation. It should work well for children in the United States.
MS. LIVINGSTON: Thank you, Mr. Bromberg. Any questions? Our next speaker is Rory O'Sullivan, representing The Young Invincibles.
MR. O'SULLIVAN: Good morning and thank you for the opportunity to comment today.
I wanted to start out with a hypothetical example of a young adult, someone who is a typical kind of person that Young Invincibles represents. And so for a moment, think with me about a young woman named Molly. She's 25 years old, she lives in Maryland, she's a tax independent. She's been that way for 7 years, ever since she moved out of her mom's house, who lives in California.
She earns about twice the federal poverty level working at a series of temp and contracting jobs, which is pretty typical for a lot of young adults right now, particularly during the recession. It's often hard for us to get a full-time job, and often very difficult to get a job with benefits. So Molly doesn't have benefits provided through an employer.
It's after 2014, and Molly's heard about, you know, health insurance Exchanges and goes onto the Web portal and thinks that she can get credits that will make, you know, health insurance, individual insurance, more affordable for her, you know, someone who doesn't make a lot of money. We're worried that Molly could get denied coverage if her mom has an offer of employer-sponsored insurance all the way out in California. And basically, you know, as we know for premium tax credits, if you have an offer of an employer-sponsored insurance under 5000A(f) because of a relation to an individual, that you'd be denied premium tax credits. And with the extension of dependent coverage provision, which we definitely support, but that expansive provision could force a young woman like Molly to pick a plan or her mother's plan, whose network out in California does not cover her in Maryland, and would essentially prevent her from getting actual affordable access to real medical care.
We think there's other problems with this situation as well. It may very well be unenforceable, and there could be certain privacy concerns for Molly, who is, again, a tax independent and would prefer to provide or purchase her own coverage.
It seems like an absurd result from our reading of the way the regulation works and contrary to the intent of the ACA. It seems like all of these provisions -- both the extension of dependent coverage, supreme tax credits, the requirement of purchasing minimum essential coverage -- are designed to get young people -- or people into the system. And particularly, as we know, young people are key to making all of these various pieces of the law work well. We think there are a couple options to essentially fix this interaction between these provisions that could allow young people, like our example Molly, to be able to purchase coverage and have a little bit more flexibility to afford coverage through the Exchange.
One of the main ones as far as drawing a line, we think that -- you know, thinking about how we define related individuals, we could give tax-independent children a bit more flexibility to use premium tax credits, and particularly if they live in another state. If that doesn't work as well for the department, we would urge them to work with HHS and to think about the broad flexibility that HHS has under 2714, the Dependent Coverage Extension. Even though we definitely prefer the expansive definition of dependent, HHS has a lot of flexibility under that provision and may be able to work with the department to make sure that some of these young adults that we've talked about here are able to purchase affordable coverage and aren't forced onto a plan that is otherwise ineffective.
And as I said, we think this is really important to get as many parts of this population into the health insurance system. And it seems like that's definitely the intent of all these provisions, and that there's enough room within the statute for the department to make that work.
There's just two other issues that I wanted to touch on briefly. One is just to put it out there that there's going to be some confusion, we think, around dependent coverage, generally among young adults. So as we all know, the extension of dependent coverage applies to young adults up to the ages of 26, but that's for employers. And we've done a lot of work in Young Invincibles, and we know the federal government has done a lot of work to get the word out. And you know, over a million people have joined their parents' plan up to this point.
We're concerned that once the Exchanges go into effect, that there's going to be slightly different rules, particularly for low-income families who are purchasing coverage premium tax credits. So, tax dependents under the age of 26 -- or really under the age of 25 the way the 152 works -- will be able to join their parents' plan on the Exchange. But there's going to be tax independents -- or 25 year olds are going to have -- who are low-income, won't be able to join their parents' plan. They're going to have to use their own credit to purchase insurance, even though their friends whose parents may have an employer-sponsored plan can join their parents' plan. So, we just think it's important as we implement the Exchanges going forward to make sure that young adults know that there's going to be a slight discrepancy here, that they can get the premium credits that they need to buy affordable care.
And finally, I'd just like to say that Young Invincibles definitely joins the many groups up here who have spoken in opposition to the -- excuse me -- the self-employment affordability test. We definitely are strong supporters of a family affordability test for purchasing minimum essential coverage.
Thank you, and I'll take your questions.
MR. O'SULLIVAN: Thank you.
MS. LIVINGSTON: Our next speaker is Rose Vaughn Williams representing the North Carolina Commissioner of Insurance.
MS. WILLIAMS: Good morning. My name is Rose Vaughn Williams and I'm an attorney licensed in North Carolina, and I serve as legislative counsel to North Carolina Commissioner of Insurance Wayne Goodwin.
Before coming to the department, I served as a litigator and a trial judge in rural Eastern North Carolina. So, the opportunity to speak to you today is quite new to me, and I'm very honored to speak to you on behalf of the commissioner.
My sole purpose in being here today is to expand on the written comment the commissioner filed on one part of this proposed regulation regarding the affordability of employer-sponsored coverage, I think 36B(c)(2)(C)(i). The commissioner is concerned that the proposed regulation goes against the intent of the Affordable Care Act, which was to provide affordable healthcare coverage for all Americans. This regulation will exclude a sizeable portion of North Carolina's working families from being able to benefit from subsidies inside the Health Benefit Exchange.
North Carolina provides significant subsidies for health insurance for self-only coverage for its self-employees and -- for its state employees and teachers. There's no cost for self-only coverage in the state's basic plan, which covers roughly 70 percent of total costs and only about $20 a month for coverage in the standard plan, which covers about 80 percent of the total cost.
Unlike many states and other large employers, however, North Carolina does not pay for coverage for the dependents of its state employees and teachers. There are over 315,000 active state employees and teachers in our state health plan right now, and more than 600,000 folks if you include the Medicare and non-Medicare retirees, RIFs, and COBRA.
Active state employees are estimated by our state health plan to have an average family size of 1.5 covered through the plan. And that means for each employee covered by the plan, an average of 0.5 family members are covered according to the state health plan data. This is far less than the national average of about 9 family members per covered employee. In addition, we're informed that some municipalities and counties in our state pay for health insurance coverage for their employees but not for dependents.
The proposed regulation, if we're interpreting it correctly -- and we would not mind at all if you tell us we're not -- says that the question of whether coverage is affordable is based solely on whether the employees' required contribution for self-only coverage exceeds 9.5 percent of the taxpayer's household income. And that affordability calculation, as you know, applies to the whole family, even if the cost of dependent coverage would exceed 9.5 percent of the taxpayer's household income.
That would mean that dependents could not get subsidized coverage through the Health Benefit Exchange, even if the total cost of dependent coverage was even 25 percent of household income, which many would not consider to be affordable. The average state employee's salary in North Carolina -- and that includes high-paid employees like actuaries, Supreme Court judges, and other higher-paid state employees, of course -- is just over $40,000. The monthly cost for our lower plan, the 70/30 plan, is $516.26 per month. That's over $6,000 a year, well more than the 9.5 percent of the average salary. The 80/20 plan cost is $632.74 per month.
So, the employee's cost of healthcare will always be considered affordable, and it is. But because the employees' healthcare is affordable for self-only coverage, the entire family would be prohibited from accessing subsidies from the Exchange, even though the cost of their coverage would not be affordable and more than 9.5 percent of the household income.
Roughly 70 percent of uninsured North Carolinians are in a family with 1 or more full-time worker, and that's based on data from the U.S. Census Bureau from 2008/2009 and a study done by North Carolina's Institute of Medicine. We believe that some of these uninsured are dependents of state employees who cannot afford to pay $6,000 a year for coverage. Based on the proposed reg, there would be no relief provided to these dependents, which is an extremely disappointing result for legislation intended to provide affordable healthcare to all Americans.
We believe that this issue extends to other employees and employers across the state. Of the 50 states, North Carolina has the second-lowest number of covered family members per covered employee, or 0.76 compared to 0.93. We're hearing in our state that many large employers may opt not to offer dependent coverage so that their dependents of their employees may access insurance in the Exchange and the subsidies offered through the Exchange. Though this action may help some families, it may hurt others, putting employers in a difficult position and possibly resulting in some unintended consequences.
Our request would be that the regulation be changed to consider the cost of family coverage in the calculation of affordability. And if that's not acceptable, we would ask that states who did not offer subsidies for employee dependents as of the date the law is enacted be allowed to have the cost of their dependent's coverage included in the calculation of affordability under this provision.
There is some precedent for this type of waiver. When the Children's Health Insurance Program, or CHIP, was created, the federal law said that children of state employees could not be covered under CHIP. North Carolina reacted to that law, and as a result the federal government made an exception for North Carolina and one other state, and we would hope that maybe that could happen here.
Thank you very much.
MS. LIVINGSTON: Thank you. Any questions?
MS. WILLIAMS: Thank you very much.
MS. LIVINGSTON: Our next speaker is Rick Grafmeyer speaking on behalf of H&R Block.
MR. GRAFMEYER: Good morning. I'm Rick Grafmeyer. I'm partner at Capital Tax Partners here in Washington, D.C., and I'm here to represent the views of H&R Block, the nation's largest tax preparer with 11,000 offices and 97,000 tax preparers. Unlike many of the folks you've listened to today, we're here and I'm here just to talk a little bit about tax compliance issues for individual taxpayers.
We took a little unusual approach in submitting our comments, and the fact that we put together a list of questions -- six pages of questions -- that we thought at least could be used as a checklist of at least issues that we thought were raised by the proposed regulations and maybe issues that need to be at least touched upon or at least you need to think about them. If you decide not to address them, that's fine, also.
And how do we come up with that list of questions? Block convened a group of subject matter experts who have a background in client experience, how their clients interact with the tax preparers and things they've seen there. People who run franchise operations, people who run their software operations, and actually people who have been out in the field doing tax preparation, they call all those people together. There's a couple different meetings that went on, and they took their experiences from things like earned income tax credit, child tax credits, you know, the homebuyer tax credit issues, and a lot of those types of experiences they have to put together their list of questions that, you know, basically came up with our written testimony. So that's sort of how they came up with this, and they actually gave it a lot of thought.
I also expressed to them: all this is reminiscent of when back in the day we did the definition of 'child' from a legislative perspective, and that took years to get that right. So, you know, I can't say enough that you all have a tough job and you have my sympathies because it's very difficult to put together these regulations.
In general, H&R Block's concerned with the premium tax credit just because it does something that we haven't done really in the tax code a lot, which is merge tax concepts, health insurance concepts, and different government agencies' opinions and rulings all together to try to come up with a compliance mechanism to implement this premium tax credit. We think that the regulations need to have greater details and examples than generally you do because taxpayers are going to not be able to understand the merging of these different concepts, and it's going to confuse them.
I'll give you an example that I think someone else wrote in their written comments, but I thought it was a good example and I wanted to raise it, which is a multi-state family who is trying to figure out what their benchmark plan is. And so generally what's done for EITC and other things is you look at the primary taxpayer, the taxpayer who has the highest AGI or something. That becomes the primary taxpayer, and you'd look at what the benchmark plan is in that area.
But in this case, it may make more sense to look at the primary insurer because it's the Exchange who is looking at this stuff and defining what the benchmark plan is, and so maybe the primary insurer is the person you focus on. Well, that's a different concept because that may be a different person than the person with the highest AGI. I'm not telling you things you don't already know, but, again, I think it's important to understand the taxpayers won't understand this. I know you all do, but it's something we need to think about, at least.
Let's see, what else did I want to raise to you all? There's also -- we also have a concern that there needs to be a clear understanding of the law's obligations on taxpayers of when they need to provide updated information when their circumstances change because we're really concerned about inadvertent noncompliance by taxpayers. I use an example -- I think we just saw this last week -- Cal Berkeley did a study where they said that they're estimating at least 17 percent of the folks who may qualify for these subsidies in the first year or two, 17 percent of those people will have income that will exceed 400 percent of poverty in a subsequent year. So we're talking about a lot of people who may be going in and out of the system, and you need to take that into account.
We're also very concerned that the regs don't really address very much the due diligence requirements that are going to be required on tax preparers when they interview clients who have these unusual family situations or when they may suspect they may be willfully omitting information because they want to have an adjustment in their advance payment credit.
It's a real concern because out in the field currently, we see situations where tax preparers are going to extra lengths to do greater due diligence, that they actually lose customers to other tax preparers who do the bare minimum possible when they interview their clients because people get bigger refunds or won't owe an overpayment. And so, I just raise that to you as something that's of real great concern from a preparer's standpoint is that people will shop preparers, and so I think you need to say something about due diligence.
Other issues. Standard documentation obligations. What are the documentation obligations on taxpayers in general? Are you going to require tax returns? Are you going to require at least W-2s or 1099s? Or can Exchanges look at alternative documentation of income?
The concern is the risk of fraud probably gets greater the more you get away from government filings and government documentation and you start relying on letters from employers and things like that. It's a real concern from a fraud standpoint. Also regarding, again, documentations and things like that, the question becomes if you're going to rely on government documentation, that's going to be the primary default, so to speak. You should have a tax return so we can see and the Exchanges will know. There's going to have to be a communication program to encourage people to file 2012 tax returns, because there's millions of people who don't file, and those are going to be the people who are going to be eligible for the subsidies. So just in general, it needs to be thought about.
Other things in general. You know, we list a lot of different questions in there on who's lawfully present, all the different family situations, which I think many have been brought up today, and so I just raise those kind of things. Again, I harped several times in my testimony on fraud. It's important that taxpayers have an incentive to provide accurate information, even if it causes a change in their advance payment of the credit. And a thought at least would be maybe there should be a burden on Exchanges to require them to do a mailing to each of their enrollees every quarter just to say, 'hey, we want to remind you, you need to let us know if you have family circumstances that change.' You know, it's a burden, but somehow we need to encourage people and make them aware of the fact they need to let folks know when they have changed family circumstances. So, I raise that.
Bottom line is we appreciate your taking our comments. We really believe the complexity of these issues may require the IRS to reach out to folks in the tax preparation industry, and also just out in the community, who deal in these unusual family situations, to maybe talk about how to address some of these things. Because many times unless you're talking to the people who really deal with these people in unusual family situations, it's hard to really know the problems these people experience when they're trying to comply with these issues and stuff.
So, I encourage you to maybe reach out. And I can say from my client's perspective, H&R Block, we would be more than willing to convene that same group of experts that we have to brainstorm with the IRS about things we've seen in the field before in other areas, like EITC, that could be helpful to you.
With that I stop and will take questions.
MS. LIVINGSTON: Thank you very much. Questions? We thank you very much for the comments and the offer.
Our next speaker is Lynn Quincy from Consumer's Union.
MS. QUINCY: I brought copies of my testimony if you'd like them. It contains an exhibit.
MS. LIVINGSTON: I think we certainly have --
MS. QUINCY: You have our outline.
MS. LIVINGSTON: Yes.
MS. QUINCY: (inaudible)
MS. LIVINGSTON: We have your outline and we have your full written comment. We're happy to take it if you'd like to give it to us.
MS. QUINCY: You know, it might be helpful. Maybe not, because you've certainly heard quite a bit.
MS. QUINCY: I'll wait until you're ready. When I get to the exhibit, I'll mention the page number so you can flip it open. So good morning. I commend you on your efficient process. And you're bearing up very well. And the good news is, I'm going to talk about some things in addition to the affordability considerations.
My name is Lynn Quincy and I am with Consumers Union, which is the nonprofit publisher of Consumer Reports magazine. We're the Policy and the Advocacy Division of Consumer Reports. I'm a senior health policy analyst there, and I have over 20 years of experience doing policy analysis and research.
Thank you for the opportunity to talk today. If I use my time correctly, I will talk about five topics: the affordability of employer-sponsored coverage, but also the calculation of the tax credit under a revised affordability standard, the minimum value considerations associated with employer-sponsored coverage, consumer education and notice, and a little bit about continuation coverage.
So everyone, you've heard quite a bit about the affordability standard, and I'm going to make my remarks here fairly brief. But we agree with the other speakers who have reported that creating affordable coverage options for Americans is a key goal of the Affordable Care Act. And if we base the definition of affordability for families on the cost of the employer's self-only coverage, then the proposed rule will potentially leave millions of dependents uninsured or struggling for a way to afford their employer insurance coverage and possibly leaving them underinsured.
We also have concerns that I didn't hear mentioned yet that if the rule is left in place as is currently worded, that it would undermine another goal in the Affordable Care Act, which is to build on the existing employer-based coverage system.
Once families become aware of the trade off they're facing, they might actually seek out employers that don't offer health coverage because that would allow them to get the tax credits and the Exchange, which they might view as more affordable to them. Whereas, of course, we would prefer that they continue to demand coverage from employers. It's better for our system as a whole.
We're also concerned, as other speakers have already addressed, that dependents may go uninsured. That's what happens in today's economy. North Carolina has very eloquently talked through that. And that is, obviously, not a goal of the Affordable Care Act. As has already been brought up, but I'd like to emphasize, the proposed rule as currently written is inconsistent with the interpretation of affordability for purposes of determining whether a dependent is exempt from the individual responsibility penalty. It's a double standard, and that is both unfair and confusing for consumers.
As was mentioned by others, it's not sufficient to merely not penalize families because coverage was unaffordable. What we want to do is make it affordable and get them into coverage.
The proposed rule is expected to fall particularly hard on families that are between 203 percent of the federal poverty level, this affordability dimension. That's for a couple of reasons. One, as has been already brought up, many families don't have access to CHIP coverage in the states where they live. Secondly, an analysis by I think it was Kaiser Family Foundation found that over 50 percent of the people that would be harmed by this affordability provision fell into that income range.
We know that healthcare is a very high-cost expenditure for people in this range. Even the ACA's provision, the standard of 8.1 percent of income that they're expected to comply with if they purchase in the Exchange, is still a big reach for these families. And to have it go even higher outside in the realm of employer coverage is really probably asking more than these families can do, again, as evidenced by what we see in today's market.
On page 3, I just have an example of how this affects a family. You've already heard some examples. But this example is based on a family who faces employer coverage options where self-only coverage is only 20 percent of the premium, but the family coverage is 54 percent of the premium. And based on employer surveys, roughly one-third of workers in smaller firms, that would be firms of 3 to 199 workers, fall into this situation, where family coverage -- the contribution to family coverage is really very high.
And in the example I have here, it's a family that earns -- has 4 family members, they earn $60,000 a year, that's roughly 272 percent of federal poverty level. But using a typical family cost for the premium and that contribution rate, they'd have to contribute 13 percent of their income in order to get into that coverage, which would be very, very difficult. It would be an extreme financial burden.
We recommend, as others have, that the rule be changed to adopt a different standard for the determination of whether or not coverage for the family is affordable. We also recommend that families be allowed to consider a combination of coverage options, whatever is best for them, and that the tax credit be adjusted accordingly. And I'm going to go into a little bit of detail about that. We believe we would be fine with adjusting the rule to make family coverage more affordable, but not changing the penalty assessed by employers and just having that continue to be assessed on whether or not they meet that standard for self-only coverage.
So if we do allow families to choose the best coverage combination for them, this could be a combination of employer coverage and CHIP coverage, it could be a combination of Exchange in CHIP, Exchange in employer coverage, or even all three.
That does complicate the calculation of the tax credit, we acknowledge that. We think it's worth it in terms of the benefits -- the improved benefits to consumers, and we'd like to suggest a couple of guiding principles.
One would be that you look at the overall cost of coverage for the family and ensure that it is not prohibitive. A second guiding principle, because as we were trying to do our own modeling around this we realized this could be a problem, is to ensure that the size of the tax credit paid to families doesn't exceed what they would have gotten inside of the Exchange if everybody purchased in there.
So here's the reason I wanted to hand this out. In Exhibit 2, there's quite a few scenarios that helped us think about this problem. The first scenario for those in the audience who can't see it is just a scenario whereby everybody enrolls. It's that same family as before. They enroll in the employer coverage and the family coverage would cost them 13 percent of income. And the second scenario is where the family all enroll in the Exchange. That would cost this family, a 272 percent of poverty, 8 percent of family income. I'm rounding here.
If you put the family -- if the family splits their coverage, the employee takes the employer coverage and everybody else is in the exchange, and we just give them the tax credit they would have otherwise gotten so we haven't reduced their tax credit in any way, that would bring the cost down to 4 percent. Very nice for the family, but we also have to consider the taxpayers that are funding that tax credit, and so we might want to look at some other scenarios.
If we keep the family whole and reduce the size of the tax credit so that they pay no more than 8 percent in terms of -- when you look at both the premium they pay to the employer and the premium they pay in the Exchange, well, that's good for the family. We've made it more affordable than the employer-only option, but we also haven't really given them an incentive to take employer coverage.
And so I would encourage the panel here and the IRS to consider the final scenario, which is to not make the family pay more than they would have if they had gone into the Exchange, but perhaps provide a modest incentive to take their employer coverage under certain circumstances as a way of reducing the cost of the tax credit to the final -- the taxpayers that are funding it. We're not advocating any specific approach to this calculation, but we hope that you will, the IRS, the experts, will look at this closely and consider that.
I'd like to move on and talk about the other side of the coin for consumers, which is whether or not an employer offers minimum value. This is going to be really important. There were congressional hearings back in the spring that looked at the type of plan offered by McDonald's to its crew or line workers, and this was very revealing. Even though these employees are offered coverage, the annual benefit limit was only -- was $2,000 per year. It was extremely limited coverage.
And if you calculated the actuarial value of that plan -- so a typical employer plan would offer an actuarial value of 87 percent. If you calculated actuarial value for the McDonald's plan, but you made it based on a standard population and a comprehensive set of benefits, that plan only offered a 16 percent actuarial value.
So this minimum value calculation is very important to consumers. We want them to not only have an affordable premium, but get them into a product that doesn't leave them underinsured. We would encourage you to -- we believe that for that minimum value -- and we realize this is an area where you have to work with HHS, but we think that that minimum value calculation has a 60 percent bar; but that 60 percent of allowed cost bar must be tied to a fixed -- I've run out of time. Sorry.
MS. LIVINGSTON: If you'd just like to bring your comments to a close.
MS. QUINCY: If I could have a -- I'll take 30 seconds. That minimum value -- that 60 percent bar should be tied to a fixed basket of medical services to reduce consumer confusion and to ensure some consistency in what we're actually measuring, because we want consumers who are similarly situated with respect to the premium cost and their income to be treated similarly with respect to the tax credits that they can get. I'll stop there. Thank you.
MS. LIVINGSTON: Thank you. And I just want to assure you that we have your complete written comments and we'll take them all into account, notwithstanding the pressures of time today.
Does anyone have any questions? Thank you very much.
Our next speaker is Dania Palanker from the Service Employees International Union.
MS. PALANKER: Thank you for the opportunity to provide comments today. My name is Dania Palanker. I work in Health Care Policy for SEIU and have also previously worked in Benefits
Administration for multi-employer plan and union plans within SEIU aimed at serving low-income workers, many of whom have income under 400 percent of poverty. The Service Employees International Union represents 2.1 million workers in healthcare, state and local government services, and property services.
SEIU actively supported passage of health reform, and we support implementation of the Affordable Care Act, because we believe the law will expand access to healthcare, strengthen employment-based coverage, and improve quality of care for all working Americans. Our comments today are focused on two promises of the Patient Protection and Affordable Care Act, which is protecting patients and making care affordable. First I will discuss the need for the affordability test of employer-sponsored coverage to fulfill the promise of access to affordable care. And second, I will discuss the need to calculate minimum value in a way that protects workers' access to care.
As others have stated, the proposed rule fails to fulfill the promise of affordable care using just a self-only test when looking at the coverage for related individuals. There was overwhelming opposition in the comments to the proposed self-only test for families. Well over 90 written comments were submitted from states, consumer advocates, healthcare providers, unions, and, albeit in a footnote, an organization representing Fortune 500 companies. This response occurred because the proposed rule is in contradiction with the intent of the law. We believe the correct interpretation would base affordability for the employee on the cost of self-only coverage and base affordability for eligible dependents on the cost of family coverage.
For purposes of the employer penalty, the analysis would always look at whether the employee and not the family members receive a premium tax credit. So this interpretation does not increase employer liability.
Imagine a family with two adults and one child. The mother has an offer of employer-sponsored coverage with a self-only cost of 5 percent of household income. So the mother has access to affordable coverage. But the cost of covering the full family is 20 percent of household income. That family coverage would be deemed unaffordable, and the father and child may be eligible for the premium tax credit assuming they meet other criteria. The employer would not -- or the mother would not be paying a penalty because the employee is not eligible for the premium tax credit.
We've provided a detailed legal analysis in our written comments. You've already heard some of that legal analysis, so I won't go through it. But I do want to sort of emphasize that a commonsense reading of the statute supports this interpretation. The heading of the section within the statute says coverage must be affordable. The cost of self-only coverage available to an employee has no association to the affordability of family coverage. Dependents cannot enroll in coverage by paying that self-only cost, but the employee can pay.
The only logical interpretation is that affordability for family members be based on the cost of coverage available to the family members. This interpretation makes sense with how the employer-sponsored insurance system is structured. You have a self-only coverage for the employee and a separate cost for adding dependents. This interpretation also makes sense from a policy standpoint. Employers already subsidize a greater percentage of self-only coverage compared to family coverage, and this is in both the private and the public sector.
I was once told by a county manager that it was not his or the county's responsibility to provide coverage to the family members. He said it was his responsibility to provide coverage to the employees. And in that county, the employees, many of them were unable to afford coverage for their dependents. And this was actually a county that has some estimates of uninsurance rates above 30 percent. There are many other employers within the private and the public sector have similar thoughts about what their responsibility to employees are. And we are particularly concerned that low-wage workers, those who may be eligible for the premium tax credit, generally have to pay a greater share of the family premium. So the proposed rule would leave millions of family members without access to affordable coverage.
We also believe and are very concerned that many employers, particularly employers of low-wage workers, over time will drop coverage if there's no separate affordability test based on family coverage. And the reason is that the offer of coverage will be more detrimental to the employee and the employee's family than no offer. And this may not happen immediately in January of 2014, but as lower-income workers realize that that offer keeps the rest of their family away from coverage, they're going to start looking for jobs that actually don't offer any healthcare coverage.
Employers offer health insurance to attract and retain employees. If there's no longer a benefit offer, employers will stop offering coverage, and they may find that it's more beneficial to just pay the penalty, which is going to be less than the cost of a comprehensive plan and also less administrative burden.
A recent analysis that just was done by the UC Berkeley Labor Center and UCLA Center for Health Policy Research suggests the additional population and the Exchange from using our proposed family affordability determination will actually be a lower-cost population than the general population. In large part this is because, in looking at the California population, it's a younger population. They found about 45 percent of the additional enrollees would be children, and their tax credit would be lower because the premium costs for children are generally lower. And also they're -- assuming CHIP is going to continue, they're going to be only the people -- the children whose family income is above the CHIP eligibility.
You've also heard mentioned today that the self-only test creates a family penalty. I want to share a story with you. A few years ago I met one of our members whose wife was dying. It was his wife of less than two years, and I believe she had pulmonary fibrosis.
Her current coverage was going to not be able to pay for her care much longer. And he was telling me he wasn't sure what to do because their last option was divorce, and he didn't want to divorce the wife he loved. I don't think anyone would read the Affordable Care Act as intending people to ever have to make this decision or have this decision offered. It was actually in many ways working to try to stop these decisions.
Some quick other issues on affordability just to note. We oppose recommendations and some written comments to include contributions to health savings accounts, reimbursement accounts, and wellness incentives in affordability determination. We believe it should be based on the premium of health insurance and not vary based on wellness. We also support the employee safe harbor, and we support the special rule for continuation of coverage, but we ask that it be clarified, that individuals remain eligible for the premium tax credit if they have enrolled in the continuation of coverage and terminate that coverage.
I would now like to switch to the issue of the minimum value in determining whether an employer-sponsored plan provides minimum value. We urge the IRS and Treasury to work with HHS to have a strong definition and calculation of minimum value. It is vital for the premium tax credit to work correctly.
The minimum value should be based on the cost of providing essential health benefits or something similar. This does not mean our large employers and self-funded plans have to provide the essential health benefits. It will retain a flexibility to design plans and choose what benefits are covered, but there will be a strong floor.
If minimum value is based on only the benefits an employer chooses to cover, we are very concerned this creates a huge back door for limited plans that are actually not supposed to be allowed in 2014 to come back in under a new benefit design. For example, could an employer provide a plan with no hospital or surgery coverage and that be considered to have minimum value because it provides over 60 percent of doctor visits, prescription drugs, and others? Could an employer offer a plan that just covers the required free preventative services and actually be deemed to have 100 percent value?
We believe it's much more likely that Congress intended the 60 percent minimum value to provide a floor that's comparable to the Bronze Plans, and that then allows employers and plans flexibility to choose the exact benefits they cover.
While there are concerns that some comments raised about increase in premiums, we're also concerned about the cost to the people enrolled in those plans to actually access healthcare. If a premium is low, but you can't actually go and get any healthcare or very limited healthcare, what benefit is that to the workers? And that also could result in uncompensated care costs that reverberate throughout the system.
Employer groups are asking for flexibility, and we believe that this can be done with a strong minimum value. And I also want to note that the Affordable Care Act provides flexibility for employers to choose not to offer coverage or choose to offer coverage below the minimum value. It is just that there is a penalty that goes along with that if there are employees that enroll and receive premium tax credits. And the Affordable Care Act also provides flexibility to workers. If their employer offers coverage that is under a minimum value, then those employees can choose to choose that coverage or they can choose to go into an Exchange.
We also want to note that we do oppose that wellness incentives be included in that minimum value. There are a lot of concerns around discriminatory issues within wellness incentives not only related to health conditions, but other socioeconomic conditions that relate to access of those programs.
We're concerned about health savings accounts and health reimbursement accounts contributions being included. We do support certain clinics that truly provide medical care would be included, but not a clinic that, say, is just providing workers compensation services or something like an annual physical that's required for the job. And we just ask that, you know, the law work to help increase the insurance for the 25 million underinsured in America.
MS. LIVINGSTON: Thank you very much. Our next speaker is Kim Bailey from Families USA.
MS. BAILEY: Good morning. I'm Kim Bailey, Senior Policy Analyst at Families USA. Thank you for providing the opportunity to comment today.
Families USA is a national nonprofit organization, committed to securing quality, affordable coverage for all Americans. In light of this, the way in which the premium tax credits are operationalized is of paramount interest to us. Our written comments reflect a number of areas where we feel modifications to the proposed rule are necessary to achieve the Affordable Care Act's intent to provide access to affordable coverage to lower- and middle-income families.
I will focus my comments today on three areas that are of great concern to us: the affordability test for employer-sponsored coverage, reconciliation, and the treatment of premium variation under wellness programs.
First, as many of my colleagues today have already noted, we are deeply concerned that the proposed rule excludes families with an offer of employer-based coverage from premium tax credit eligibility when they would be required to spend more than 9.5 percent of their income to participate in their employer's plan. If the affordability test functions in this way, millions of families would be barred from receiving premium tax credits. Some of the children in these families might qualify for CHP coverage, but many would be left without any other coverage option. These families would face a difficult choice: Pay an unaffordable share of their income toward the cost of premiums or go without coverage. For many middle-income families, the cost of coverage would simply be too great and the nonemployee family members would remain uninsured. This runs counter to the intent of the ACA to extend access to affordable coverage. To ensure that the final rule is consistent with the statute and achieves the coverage goals of the ACA, it must state that the affordability test is based on the employee's cost for family, not self-only coverage. My colleagues have noted the legal analysis to support this interpretation of the statute.
Second, we are concerned about the process of reconciling advance credit payments with the amount of credit due at tax filing. As described in the proposed rule, reconciliation may place an undue burden on lower- and middle-income families that experience a change of circumstances over the course of the year. Under the proposed rule, any of those who receive the correct amount of credit for each month during the year and who accurately report changes in income or family circumstances may face a liability at the time of tax filing. As my colleague at the Center on Budget and Policy Priorities has noted, the ACA can be reasonably read to allow the Secretary to develop a method of reconciliation that takes such midyear changes of circumstances into account. At a minimum, the final rule should allow de minimis changes in income, including those that push annual income slightly above 400 percent of poverty, to be disregarded and should allow the caps on liability to be prorated based on the number of months that an individual or family received advance payments during the year.
Finally, we are very concerned about the potential for premium variation under wellness plans to undermine access to affordable coverage. We are concerned about this both from the context of the affordability test for employer-sponsored coverage and for the purposes of calculating premium tax credits. Beginning in 2014, employers will be able to vary premiums by up to 30 percent of the total cost of coverage under health outcome contingent wellness programs. Given the high cost of coverage, a 30 percent premium surcharge would present a substantial financial burden for an individual or family. In 2011, the average premium for employer-sponsored coverage is $5,429 for an individual and $15,073 for a family. This means that a wellness surcharge of 30 percent would result in an individual or family having to pay an additional $1,629 or $4,522, respectively, to participate in their employer's plan. When these sums are combined with existing contributions towards coverage, they quickly become even more unaffordable.
On average an individual's contribution to coverage, plus a 30 percent wellness surcharge, would be $2,550. For an individual at 200 percent of poverty, this sum is equal to 11.7 percent of income. For families, the situation is potentially even worse. A family's contribution to coverage with surcharge would be $8,651, 19.4 percent of household income for a family of four at 200 percent of poverty.
Moreover, the Secretary of HHS has the authority to increase the maximum premium variation under wellness programs to 50 percent. If the Secretary exercises this authority, the magnitude of this problem will be exacerbated. Contributions of this magnitude far exceed the ACA's definition of affordable coverage and would result in individuals and families being unable to participate in employer-based coverage. As such, it is essential that the final rule clarifies that employer-sponsored coverage is deemed affordable only if the employee share of the premium, including the cost of any wellness surcharge, is no more than 9.5 percent of household income.
In addition, we are concerned about the affordability implications of premium variation under wellness programs within the exchanges. The proposed rule does not address how premium variations under wellness plans in the wellness program demonstration project will be factored into the value of qualified health plan premiums for the purposes of calculating premium tax credits. If qualified health plans are allowed to use wellness incentives to vary premiums, and premium tax credits are not adjusted to reflect this, the share of household income that an individual or family is required to contribute towards premiums could far exceed the income-related standards outlined in the statute. For example, a family of four at 200 percent of poverty in a rating area with a benchmark premium of $12,000 and a wellness surcharge of 30 percent would be required to contribute 14.4 percent of their income, more than double the maximum amount outlined in the statute toward premiums.
In order to ensure that the statute's definition of affordable coverage is not violated and that families receive adequate premium assistance based on their income level, it is crucial that the final rule states the premium tax credits will be calculated based on an individual's or family's applicable benchmark plan premium, including the cost of wellness incentives applied to that benchmark plan.
Although employers can vary premiums based on wellness incentives, the statute is clear that employer-sponsored coverage is only considered affordable if the employee share of the premium does not exceed 9.5 percent of household income. Similarly, the statute clearly limits the percent of income the individual or family eligible for the premium tax credit is required to spend on health insurance premiums. These affordability criteria were established to ensure that all lower- and middle-income families have access to affordable coverage. It is crucial that the treatment of wellness incentives is clearly articulated in the relevant regulations, and that they are treated in a way that does not violate the statute's definition of affordable coverage.
Moreover, Section 2705L(3) of the Public Health Services Act, as modified by Section 1201 of the ACA, explicitly states that the Secretary of HHS in consultation with the Secretary of the Treasury and the Secretary of Labor must not approve wellness programs that will result in any decrease in coverage. If affordability tests do not consider the costs associated with wellness incentives in the value of an enrollee's premium contribution, premium surcharges would place the cost of coverage out of reach for middle-income families and would violate this section of the statute.
In addition, the Affordable Care Act bans medical underwriting in the private health insurance market with the clear intent of protecting individuals and families with preexisting conditions from discrimination. Wellness incentives that vary an individual's premium, based upon their achieving certain health outcomes such as a benchmark cholesterol level or body mass index, are tantamount to medical underwriting. A wellness program that discriminates against individuals based on health status is in direct violation of Section 2705 of the Public Health Services Act as modified by the ACA (Affordable Care Act). Moreover, the statute goes so far as to say that insurance issuers must document that wellness incentives are not subterfuge for discrimination. In order for such incentives to comply with the statute, they must not result in discrimination when determining the amount of premium tax credit due. To this end, affordability tests must be equitably applied to all individuals based on their actual premium cost, including any wellness-based incentives.
In summary, Families USA feels strongly that the final rule must reflect the changes and clarifications that I have outlined in order to ensure that lower- and middle-income families have access to affordable coverage as intended by the ACA.
Thank you again for the opportunity to comment today.
MS. LIVINGSTON: Thank you very much. Our next speaker is Tara Straw from Health Care for America Now.
MS. STRAW: Good morning. You're in the home stretch. Thank you so much for holding this hearing. Health Care for America Now is the nation's leading grassroots healthcare advocacy organization, but I also have a personal interest in this as a practitioner. As a volunteer, I manage the second largest VITA site in DC, and so I have a lot of hands-on experience with the tax returns of low-wage workers. And I expect that the majority of the 1,200 tax returns that we prepare each year will require a calculation of this credit. I also train several hundred volunteers every January, so I'm looking forward to explaining this credit to them.
In general we believe that the IRS can do more within the legal authority granted by the Affordable Care Act to make the premium tax credit more responsive to real-life circumstances. First, I'll echo the comments of so many of my colleagues about the problems with the family affordability; the point bears repeating. The final rule must measure the affordability of employer-sponsored family coverage against the 9.5 percent standard rather than assuming that such coverage is affordable if self-only coverage costs less than 9.5 percent of family income. Otherwise the dependents of workers with an offer of employer coverage would be barred from receiving subsidies in the Exchange even if their coverage offer is clearly unaffordable. This would force too many working families to either pay a large portion of their household income toward family coverage or to become uninsured. We believe the IRS's interpretation of this provision undermines the coverage goals of the ACA and runs counter to the intent of the law.
The rule should also consider the tax consequences of life changes. Determining the credit based only on the household's income and family size at the end of the year may subject a substantial number of families to hundreds or even thousands of dollars in repayment even though they reported income and family changes to the exchange in a timely manner. While liability for excess advance payments is capped, the level is still significant for many families. As seen during the years of the advanced EITC, the threat of repayment is a big fear for families. Uncertainty about calculating the credit and the repayment obligations may deter people from accessing the credit they are entitled to, leading many to remain uninsured. And since relatively sicker people will be the most likely to purchase policies despite those uncertainties, adverse selection will result and premiums will rise for everyone in the Exchange.
To mitigate these concerns, the IRS should consider a safe harbor when the advance credit is correctly determined on a monthly basis. For example, if a family member loses a job and employer coverage in May, she may need extra help paying for coverage while she searches for new employment. If she accepts new employment and gets new employer coverage in November, she will likely owe money back to the Treasury even though the premium tax credit was calculated correctly each step of the way. If families do a timely and accurate reporting of changes, they should not face repayment.
Couples getting married during the tax year also face special challenges in calculating their tax credits. The proposed rule would reconcile advance payments made to two single people who marry during the year based on their filing status as a married couple and their joint annual income. There are several ways to revise the proposed rule to remove some of these challenges. One option is to allocate the couple's annual income based on whether they were married or single during each coverage month. And there is some experience in allocating income by month, of course, because if someone moves, on state tax returns we're always allocating income. So it's not an unfamiliar concept to allocate by month. In this case, the credit for the months in which they were single could be based either on each spouse's actual income or on a 50-50 division of their total combined income. If this kind of thing can't be done, the IRS should consider having a one-year waiver of reconciliation that applies to newly married couples. We'll call it a marriage safe harbor since we have so many other safe harbors in this rule. The statute clearly gives the IRS the ability to fix this problem; 36B(g)2 asks the IRS to give particular consideration to taxpayers whose filing status changes during the year.
In addition, you should apply special rules for certain people who are married but cannot file a joint return, and this is very common. Under the ACA, married couples filing separately cannot claim premium credits, which is also the rule for the earned income tax credit, for certain education credits. However, the premium tax credits are different because they will be issued in advance to purchase health coverage that will be required beginning in 2014. There are several legitimate reasons it may be inadvisable or impossible for married taxpayers to file jointly. One obvious circumstance is in the case of domestic violence. Domestic violence was a condition that was discussed extensively during the healthcare debate. People were horrified to learn how insurers discriminated against women with a history of domestic violence by considering them uninsurable and not offering policies. As a result, the ACA expressly prohibits discrimination by insurers against conditions arising out of acts of domestic violence. It's appropriate for the IRS to make a similar distinction for this class of individuals and allow an exception from the joint filing requirement for victims of domestic violence.
Abandoned spouses also warrant special protection. Some individuals have no choice but to file a separate return when they cannot locate their spouse. This is a foreign concept in a lot of communities, but I see this case at least once a week at my tax site. Incarceration is another possible barrier to joint filing if a tax filer has not obtained power of attorney for the incarcerated spouse.
Tax payers can be asked to certify other premium credits scheduled whether one of these conditions applies. They should also be allowed to make such a certification when applying for advance credits in the case where this condition is expected to persist. For instance, a divorce that takes longer because there may be criminal charges pending and custody as is often the case in domestic violence circumstances.
In other areas dealing with complex family situations, the regulation hits the right note. We support the proposed method in Subsection F3 to determine a family's benchmark premium based on the sum premium cost of all benchmark plans needed to cover the entire family. For example, if a woman is caring for her two nieces for the entire year, they may be her tax dependents, but under insurance rules may not be included under the same insurance policy. In this case, the family's only option is to purchase two plans, one single adult polity for the aunt and the child-only policy for her nieces. So it makes sense for her benchmark to be the sum of two benchmark plans needed to cover the entire family, so we definitely support that.
Two final brief notes: Making the kinds of improvements we recommend would improve the perceived fairness of the credit. And that in turn I think improves compliance, which is an important IRS goal. Responding to the question of there's always a consideration for how are we mitigating against fraud? I think that the Exchange will be doing so much verification that I think that there is a lot of protection against fraud already built into this and other related rules.
Second, the IRS should work with HHS to further consider the information flow between employer Exchanges and families. It's important that the Exchange deliver all necessary information to each Exchange enrollee in a W-2-type reporting by January 30th of the following year. This is absolutely necessary for the tax preparation process -- have it all in one form. Otherwise that information will be impossible to gather from a client in the spring. Similarly, IRS, HHS, and DOL should work together to develop appropriate materials to help new employees understand how to figure out whether their employer-provided benefits, if offered, are affordable and whether they may qualify for premium tax credits. A preliminary worksheet that could be provided to every new employee, everyone who starts a new job, along with all the other things you're given about your benefits and your employment can help people understand when they need to contact an Exchange for a special predetermination and can give people a list of materials they should have on hand when calling the Exchange to again facilitate this process of mitigating problems that can happen in these important life transitions.
Thank you for your efforts to administer these credits and for this hearing.
MS. LIVINGSTON: And thank you for your participation in VITA.
Our last scheduled speaker is actually a group of speakers -- Anne Phelps, Christine Pollack, Robert Rosado, and Neil Trautwein -- from Employers for Flexibility in Health Care.
MS. POLLACK: Good morning. I'm Christine Pollack, vice president of government affairs for the Retail Industry Leaders Association. We're a trade association of retail companies, product manufacturers, and service suppliers. On behalf of the Employers for Flexibility in Health Care Coalition, Rob Rosado, Anne Phelps, Neil Trautwein, and I welcome this opportunity to speak to you today.
The EFHC Coalition was formed earlier this year. We are a group of trade associations, organizations, and employers in the retail, restaurant, hospitality, construction, temporary staffing, and other service-related industries as well as employer-sponsored plans. We are working to ensure that employer-sponsored coverage, which is the backbone of the U.S. healthcare system, remains a competitive and affordable option for millions of American families and employers both large and small.
The employer requirements under the ACA pose unique challenges and administrative complexities for employers of all sizes. The coalition is focused on developing regulatory and legislative policy recommendations on key employer issues under the ACA.
MR. ROSADO: Good morning. I'm Rob Rosado with the Food Marketing Institute. The Food Marketing Institute represents food retailers and wholesalers. FMI's members operate approximately 26,000 retail food stores, including large multi-store chains, regional firms, and independent supermarkets employing 3.4 million people throughout the United States. Many of these employees work part time or have fluctuations based on seasonal needs, variable customer demand, and/or their own livelihood. Our workforce and their schedules ebb and flow.
We are an active member of the Employers for Flexibility in Health Care and support the comments made today by Anne Phelps at Washington Council Ernst & Young. As Ms. Phelps will discuss in further detail it is important for the administration to examine the employer provisions as a whole, not only with the help Exchanges but for other areas such as determining who is a full-time employee. In addition, maintaining flexibility for employers throughout these rules is critical, as Ms. Phelps will explain.
MS. PHELPS: Good morning, everyone. I am Anne Phelps, principal at Washington Council Ernst & Young and administrator of the Employers for Flexibility in Health Care Coalition. I'm pleased to provide this testimony today on behalf of the coalition. Many of our members are here today. And I'd also like to express our appreciation to the department, not only for holding this hearing today but for the months that you have spent listening to the employer community about their concerns of the implementation of the law, and we very much appreciate that.
For a quick reference, the coalition has submitted two comprehensive sets of comments to the department and the federal agencies: One on June 17th in response to your Treasury notice request for comments on the definition of "full-time employee"; and second, on October 31st, a comprehensive letter responding to the issues of the hearing that we're having today on the premium insurance tax credit, the Request for Comments on the affordability safe harbor, and as well as HHS's proposed rule on eligibility determinations and employers interactions with Exchanges. We've also provided a brief slide deck today summarizing our key recommendations.
But before I get started into the specific recommendations, I would like to make a couple of points. Many people are not happy with some of the provisions in the ACA, and it's no secret that employers have major concerns about some of the provisions in the underlying law, that it creates disincentives for employers or an inability for employers to offer affordable coverage. However, the law is the law. And Treasury has correctly interpreted that law that the affordability test is based on a self-only coverage determination. Congress did recognize this and scored it appropriately, because they felt that many people would be staying inside of employer coverage. So this was recognized by the drafters.
However, I want to make it clear, very clear, today that our coalition represents many, many employers who represent millions of workers and they are trying very hard to provide affordable coverage to their full-time employees, their part-time employees, and their dependents. We have talked to countless benefit managers that are struggling very hard to provide affordable coverage to their families as well as their employees.
We also are operating with a very transitional workforce, thousands of part-time employees, people coming in and out of the system, very transitionary. And this group is working very hard to say "how are these rules going to work for us?" Many, many of our workers are low-income.
Finally, we have to look at the provisions in the law as a whole. We cannot single out 1 test or only 1 aspect of 1 test. The hallmark of our coalition is looking at the provisions as a whole, because that's the way we have to look at it as benefit managers: the definition of "full-time employees," the full aspect of the affordability test, and minimum value standards, the fact that low-value plans or minimum-value plans can no longer be offered because of the other provisions in the law, and the lifting of lifetime and annual limits. We are already under new restrictions in the law. But we have to look at all of these, including the reporting mechanisms and the administrative burden, to ascertain if we can provide affordable coverage in 2014.
So let me take a few minutes on a couple of the major provisions that we have commented on. First, the affordability test and the proposed safe harbor. We actually proposed as a coalition this proposed safe harbor in our June 17th comments, this idea of a predictable method for an employer to determine: am I providing affordable coverage to my employees? We actually proposed a stricter test to say: let's see if we can meet this affordability test based on current wages, which is many times a stricter test than household income. Can I as an employer, on information that I know, look at my employees' premiums, what I'm contributing, and their wages and say I think I can meet that 9.5 percent test based on current wages? That is actually a stricter test, but it's information that employers know because they do not and cannot have access to household income. However, because it is actually a stricter test, we have been running and we have submitted to the agencies our estimates on what an affordability safe harbor would look like based on current wages. So we have analyzed the levels of income, the hourly wages that we pay, and what an affordability test would look like for a premium share, albeit based on self-only coverage, but based on current wages.
However, our ability to estimate and predict that is inextricably linked on this definition of minimum value and what minimum value is. Because under the law, an employer may be on the hook for a tax penalty -- and, again, I emphasize this is a tax penalty -- if an employer does not provide affordable coverage and of minimum value. That 60 percent test and what that 60 percent test under the law is not clearly defined. Many people interpret it to be an actuarial value test.
But let me say what it is not. It has been made very clear and the administration has emphasized in their NPRM that the essential health benefits package written into the law does not apply to large employers, whether fully insured or self-insured. It did not dictate a prescribed benefit package or a rigid cost-sharing structure, and we think that is very important. However, what is important to us is that we are able to have flexible benefit designs because every one of our employers and every employee is not the same, and our employers tailor their benefits to these employees.
So what we are asking for is not a single standard. That would not work. What we're asking for is some leeway to look at a variety of methodologies to calculate minimum value.
Now, these two tests are just part of what we're looking at to see what it's going to look like as we sit here in 2011. What are employer packages going to look like in 2014 based on wages, contributions, definitions under the law, and a myriad of economic and wage factors? So what we are asking for is a transition relief. We very much appreciate the department's recognition that a transition may be needed in 2014 or a grace period, so to speak, before penalties are imposed on employers to see how does all this work together? What does a package look like? We may not know that until 2014.
We're working very hard to make sure that employers do not reactively drop coverage in 2014, or as many tell us, because it may be easier to pay that penalty. We're working very hard with the regulators to develop rules that don't allow -- that don't have that happen.
Finally, I would be remiss if I was here in front of the IRS and the Treasury Department if I just didn't say a quick word about the employer reporting requirements and the verification of income and the appeals process for tax penalties before they're imposed on employers. We spent a lot of time in our letter looking at the administrative processes for reporting in terms of the code, Section 6056, for both prospective and retrospective reporting, so that we can provide information to Exchanges and to the federal agencies. We also feel very strongly that the determination of individual eligibility for a premium assistance tax credit by an Exchange is a separate and distinct process by which the IRS will need to come in and verify household income and a determination of employer penalty before it's imposed on an employer.
Finally, I'll close quickly by saying we, again, reemphasize the importance that we place on the definition of 'full-time employee' because it's so central and a paramount issue to our workers and employers. We strongly support the look-back safe harbor method, so we can determine who is full-time. And we believe these safe harbors can be coordinated and we made comments to that in our letters.
Most importantly, the hallmark of this coalition is that we are working very hard to provide stable, affordable coverage to our employees to reduce churn between employer coverage and Exchange coverage and the disruption of employee benefits.
Thank you very much and I will turn it over to Neil.
MR. TRAUTWEIN: Thank you, Anne, and I appreciate your time and attention. I appreciate the opportunity to testify.
The National Retail Federation represents all facets of the retail and chain restaurant industries. Literally we're the canaries in a coal mine. None of this is easy and we recognize and want to recognize how hard the department and the IRS have worked to make this possible. We urge you to create workable rules that help preserve employer-based coverage in the marketplace, not coerce it, but preserve it. These regulatory provisions have to be considered in concert and we urge -- we think it's an imperative that they be taken in concert.
As Mr. Grafmeyer mentioned earlier, and I'll close up in one second, it's difficult to meld social policy and tax policy. The instruments don't flow naturally. So we urge you to continue to work to provide that transition relief, to provide workable rules. And we look forward to working with you toward that end.
Thank you very much.
MS. LIVINGSTON: Thank you. At this time we'll ask if there's anybody who hasn't spoken who would like to speak, if you have already made that known to our folks outside. Is there anyone present who would like to speak who is not on the schedule?
Seeing no one asking for that opportunity, we thank all of our speakers and everyone who participated today. And that concludes our hearing.
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