Massachusetts Creditable Coverage

What You Don’t Know Can Hurt Your Employees

In addition to completing federal personal income tax returns and indicating whether or not they maintained minimum essential coverage for 2018,[1] Massachusetts taxpayers must also indicate whether or not they maintained Massachusetts Creditable Coverage (“MCC”) as required by the Massachusetts Health Care Reform Law when completing their Massachusetts personal income tax returns using Schedule HC. Massachusetts taxpayers who do not maintain MCC for themselves and their dependents throughout the year and who do not qualify for an exception are subject to state income tax penalties.  MCC is the minimum level of health coverage that an individual must maintain in order to avoid a state tax penalty.  

Basic MCC Requirements

• Coverage for a comprehensive set of services (e.g. doctor visits, hospital admissions, day surgery, emergency services, mental health and substance abuse, and prescription drug coverage);
• Doctor visits for preventive care, without a deductible;
• Caps on annual in-network deductibles of $2,000 for an individual and $4,000 for a family;
• For plans with up-front deductibles or co-insurance on core services, an annual maximum on out-of-pocket spending of no more than the annual limit set by the IRS for high deductible health plans (for 2019, these are $6,750 for an individual and $13,500 for a family);
• No caps on total benefits for a particular illness or for a single year;
• No policy that covers only a fixed dollar amount per day or stay in the hospital, with the patient responsible for all other charges; and
• For policies with a separate prescription drug deductible, it cannot exceed $250 for an individual or $500 for a family

Some Alternative Solutions

Many common medical plan designs will not meet the Basic MCC Requirements described above, usually because the in-network deductibles are too high. The MCC rules provide some alternative solutions for a plan to qualify as MCC, but it’s not unusual for employers to be unaware of this because the alternatives have not been communicated to them.

1. High Deductible Health Plans (HDHPs) – A federally qualified HDHP is automatically deemed MCC, provided the HDHP is offered in conjunction with employer-facilitated health savings accounts or a health reimbursement arrangement (HRA).
   
   
2. HRA Buy-Down – If the medical plan is offered in conjunction with an HRA, the employer’s HRA contribution can be used to buy down the medical plan’s in-network deductibles to a level deemed to meet the Basic MCC Requirement deductible caps of $2,000 for an individual and $4,000 for a family.
   
   Example:  A medical plan’s in-network deductibles are $2,500 for an individual and $5,000 for all other tiers of coverage. The employer makes an HRA contribution of $500 for employees who enroll in employee-only coverage and $1,000 for employees who enroll in any other tier of coverage. For MCC purposes, the medical plan is treated as having an in-network deductible of $2,000/individual ($2,500 - $500) and $4,000/family ($5,000 - $1,000).
   
   
3. Actuarial Equivalence – An employer may file an MCC Certification Application attesting the plan is actuarially equivalent to a Bronze level plan available through the Massachusetts Health Connector (Massachusetts’ health insurance marketplace). If approved by the Health Connector, the medical plan will be deemed MCC for that plan year and for subsequent plan years so long as there are no material plan design changes and the MCC requirements do not change. The MCC Certification Application must be filed by or before November 1st of the year for which actuarial equivalence is claimed.

Note: Insurance carriers/TPAs will generally require the employer to pursue and confirm that one of these alternative solutions applies on behalf of the plan.

MA Form 1099-HC and an Ugly Surprise

Medical plans covering Massachusetts residents are generally required to provide those individuals with MA Form 1099-HC by January 31st of the following year indicating whether there coverage was or was not MCC. This is the insurance carrier’s responsibility for fully insured coverage and may be delegated to TPAs for self-insured coverage. A letter informing an employee that their employer medical coverage failed to satisfy the MCC requirements is usually a nasty shock. The employee’s first call will likely be to their human resources department asking, “Why did I get this letter? Why do I have a penalty? What are you going to do about it?”

Unfortunately, some health insurance carriers/TPAs have a spotty record of warning employers in advance that one or more medical plan options do not meet the Basic MCC Requirements. If the first warning is the delivery of MA Form 1099-HCs indicating the prior year’s coverage was not creditable, it may be too late to do anything about it. 

The liability for non-creditable coverage falls on the employees, and the 2019 penalties will be provided at the end of this article. Assuming the employer didn’t communicate at enrollment that one or more medical plan options were non-creditable and carried potential tax risk to employees who enrolled in them, it might feel some responsibility to engage in crisis management and make the affected employees whole. Assuming the coverage can’t be deemed MCC through one or more alternative solutions, this might involve making the affected employees “whole” by providing additional taxable compensation to compensate for the penalty amount. Depending on the facts and circumstances, the employer might consider requesting some sort of offset from an insurance carrier/TPA.

MCC Requirements and Certain Life Events

Certain life events impact how and/or when the MCC requirements affect individuals:

• Moving in – New residents have until the first day of the third full month following the month in which they become a Massachusetts resident to get creditable coverage.
• Moving out – The mandate applies until the last day of the last full month in which an individual claims residency in Massachusetts.
• Growing up – Once an individual turns 18 years old, they have a three-month grace period before the mandate applies. 
• Self-employed – Health care premiums are tax-deductible and reduce an individual’s taxable income.
• Living abroad during the golden years – Retired Massachusetts residents living abroad with foreign health insurance coverage should complete the Schedule HC by applying for a Certificate of Exemption or requesting an appeal on the Schedule HC.
• Death and taxes - The mandate applies until the last day of the last full month in which the individual was living.

State Tax Penalties for Failing to Maintain MCC

Failure to maintain MCC directly impacts the employee, not the employer. The penalties scale based on income and are indexed annually.