Affordable Care Act Issues for U.S. Expatriates
By now most employers are beginning to come to terms with the Affordable Care Act coverage mandates and reporting requirements that apply to the group health coverage of their U.S. workforce. For global businesses, though, the problems do not stop at the U.S. border. These companies must also determine how ACA affects U.S. citizens and lawful permanent residents working abroad.
Most companies face four major questions concerning health coverage for U.S. expatriates:
Must they provide group health coverage to employees working abroad in order to satisfy the employer mandate?
Must their employees working abroad maintain a minimum level of health coverage in order to satisfy the individual mandate?
If an individual is covered by a foreign group health plan or insurance policy, does that coverage qualify as minimum essential coverage that satisfies the employer and individual mandates?
If an employer provides group health coverage to U.S. citizens or residents working abroad, is that coverage subject to the same requirements that apply to employer health coverage in the U.S.?
When Are Expatriates Subject to the Employer Mandate?
An employer with at least 50 full-time employees must offer minimum essential health coverage to substantially all of its full-time employees (and their dependents) in order to avoid an excise tax. For 2015, “substantially all” means 70% of the employer’s full-time workforce; starting in 2016, it means 95% of the employer’s full-time workforce. An employee who works on average at least 30 hours a week is considered to be a full-time employee. (For more information on the employer mandate, see IRS Proposes Shared Responsibility Tax Rules for Employers and Top Ten Things to Know about the Final Shared Responsibility Regulations.)
Service Outside the U.S. When an employer determines which employees are “full-time employees” covered by the employer mandate, the employer disregards hours of service performed outside the U. S. to the extent that the related compensation is foreign-source income. The “source” of compensation ordinarily is the location where the work is performed. Accordingly, for example, if a U. S. company has a substantial foreign branch, the U. S. company generally is not required to offer health coverage to employees working at the foreign branch in order to satisfy the employer mandate. This rule applies regardless of whether the employees working outside the U.S. are U.S. citizens or foreign nationals.
International Transfers. Complications can arise when an employer transfers employees between U.S. and foreign positions. Many employers rely on a lookback rule to determine an employee’s status as a full-time employee: if the employee works full-time in the U. S. during a measurement period, the employee is considered to be a full-time employee throughout a subsequent stability period lasting up to 12 months. As a result, an employee who works full-time in the U. S. during the measurement period might retain his or her status as a full-time employee for up to 12 months after the employee is transferred to a foreign affiliate.
The regulations include special rules to address the problem of international transfers. The employer may treat an employee transferred abroad as having terminated employment (so that the employee is no longer a “full-time employee” covered by the employer mandate) if the transfer meets two conditions: the employee is expected to remain in the foreign position indefinitely or for at least 12 months, and substantially all of the employee’s compensation will be foreign-source income. (In the reverse situation, when an employee based outside the U.S. on an assignment expected to last indefinitely or for at least 12 months transfers back to the U.S., the employer generally may treat the employee as a new hire.)
When Are Expatriates Subject to the Individual Mandate?
U.S. citizens and U.S. residents generally must maintain minimum essential health coverage for themselves and their dependent children each month or pay an excise tax. U.S. citizens and residents working outside the U.S. are deemed to have the requisite health coverage for a given month, however, if the month falls in a period during which the individual meets one of three conditions:
The individual is a U.S. citizen whose tax home is a foreign country, and the individual has been a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire taxable year; or
The individual is a U.S. citizen or resident whose tax home is a foreign country, and the individual is present in a foreign country for at least 330 full days during a 12-month period; or
The individual is a bona fide resident of a U.S. possession (Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, or the Virgin Islands).
The exemption from the employer mandate and the exemption from the individual mandate do not completely overlap. As a result, the employer mandate might require an employer to offer minimum essential coverage to an expatriate employee who is already deemed to have minimum essential coverage for purposes of the individual mandate. Conversely, the employer mandate might not apply to an expatriate employee who is nevertheless required to maintain minimum essential coverage in order to satisfy the individual mandate. Employers will have to think through these issues carefully and communicate them accurately to their expatriate employees.
When Is Foreign Coverage Minimum Essential Coverage?
A U.S. citizen or resident working abroad often will be covered by a health insurance arrangement maintained by the foreign office where he or she works. To the extent that the employee is subject to the employer mandate or the individual mandate, the question will arise whether this coverage constitutes “minimum essential coverage” that satisfies the mandates.
Self-Insured Arrangements. A self-insured group health plan offered by an employer to an employee qualifies as minimum essential coverage regardless of where the plan is located. Accordingly, if an expatriate is covered by a self-insured group health arrangement maintained by a foreign employer, the arrangement will satisfy both the employer mandate and the individual mandate.
Insured Arrangements. An insured employer group health plan also qualifies as minimum essential coverage if the insurance is offered in the group insurance market within one of the 50 states or the District of Columbia, even if the policy covers U. S. expatriates. In contrast, however, an employer group health plan that is insured by a policy issued outside the U. S. market must meet a complicated set of requirements in order to qualify as minimum essential coverage.
HHS issued informal guidance in 2013 stating that foreign group health insurance would qualify as minimum essential coverage with respect to a covered individual for a given month as long as the insurer was regulated by a foreign government and the covered individual either (1) was physically absent from the U.S. for at least one day in the month, or (2) if physically present in the U. S. for the entire month, was covered while in expatriate status. In 2014 the agency proposed to modify this rule and apply it to foreign self-insured plans as well as foreign insured plans; but the proposal was not included in the final regulation.
The informal guidance states that the employer must notify all covered U.S. citizens and U.S. nationals that the plan constitutes minimum essential coverage, and must satisfy IRS reporting requirements under Internal Revenue Code section 6055 for those individuals, even if they are not subject to the individual mandate. (The term “U.S. nationals” includes, in addition to U.S. citizens, certain persons born in outlying possessions of the U.S. and their descendants.) The notice and reporting requirements are easily overlooked by a foreign employer that is not otherwise subject to the Affordable Care Act.
New Legislation. The Expatriate Health Coverage Clarification Act of 2014 (the “Act”), enacted in December 2014 as Division M of the Consolidated and Further Continuing Appropriations Act (H.R. 83), states that any plan that qualifies as an “expatriate health plan” is deemed to provide minimum essential coverage. Like HHS’s informal guidance, the Act requires the sponsor of an expatriate health plan to meet the IRS reporting requirements for minimum essential coverage under Internal Revenue Code section 6055, and it also requires a large employer to satisfy the reporting requirements under Internal Revenue Code section 6056. The Act permits expatriate health plan sponsors to furnish participants with electronic versions of the section 6055 and 6056 statements as long as a participant has not explicitly refused electronic delivery.
In most cases, an employer group health plan will qualify as an “expatriate health plan” for purposes of the Act only if substantially all of the covered employees are either (1) employees who work outside the U.S. for at least 180 days in a 12-month period that overlaps the plan year, or (2) employees who are temporarily assigned to the U.S. for job-related reasons and who receive other multinational benefits (such as tax equalization or moving allowances). Foreign nationals who reside in their home country are ignored for purposes of applying the “substantially all” test. Accordingly, for example, a foreign employer that maintains a group health plan in its home country cannot satisfy the test solely by reason of the fact that its entire local workforce meets the 180-day condition. Instead, substantially all of the expatriates covered by the plan must satisfy the test without taking local citizens into account. If the plan meets the “substantially all” test with respect to covered expatriates, however, it can qualify as an “expatriate health plan” even though it also covers a large proportion of local citizens.
In addition to covering eligible expatriates, a group health plan must meet a number of substantive requirements in order to qualify as an expatriate group health plan under the Act. For example, the plan must:
provide significant health coverage (hospitalization, outpatient facility, physician, and emergency services) that is not limited to excepted benefits such as dental and vision coverage;
satisfy the applicable pre-ACA requirements for health plans, such as HIPAA nondiscrimination, genetic nondiscrimination, minimum maternity stay, and mental health parity requirements;
cover at least 60% of the costs covered under a typical large group health plan;
cover dependent children until they turn age 26 if the plan provides dependent coverage; and
be insured, or if self-insured be administered, by an insurer or administrator that is licensed to sell insurance in more than two countries and has a global presence prescribed by the Act (such as maintaining network agreements with providers in eight or more countries).
Under the Act, the term “expatriate health plan” applies both to a group health plan and to health insurance coverage issued in connection with a group health plan. Accordingly, U. S.-insured, foreign-insured, and self-insured plans can qualify as expatriate health plans if they meet the Act’s requirements.
Effective Date. The Act applies only to expatriate health plans issued or renewed on or after July 1, 2015. When the Act becomes applicable, it is not clear how it will coordinate with existing guidance concerning expatriate health plans. It is likely that the regulatory agencies will address this point in the coming months.
At present, it appears that all U.S.-based self-insured employer group health plans and insured plans covered by insurance issued in the U.S. group market will continue to qualify as minimum essential coverage whether or not they meet the definition of “expatriate health plans” under the Act. As explained in the next section, the bigger question for these plans is whether they can avoid some of ACA’s substantive requirements and fees by qualifying as expatriate health plans.
Which ACA Provisions Apply to Expatriate Plans?
Employers often provide health coverage to U.S. expatriates under a foreign health plan maintained by the local business where they work, or under a special group health policy for expatriates and third-country nationals issued outside the U.S. insurance market by a U. S. or foreign issuer. In either case, the plan or policy must comply with local rules governing group health coverage. In some cases, these rules are incompatible with ACA’s mandates; and foreign insurers often are not equipped to comply with ACA’s intricate reporting and participant disclosure requirements.
A plan maintained outside the U.S. for employees substantially all of whom are nonresident aliens is exempt from ERISA’s substantive requirements, including the group health plan mandates added by the Affordable Care Act. Accordingly, an employer that includes a few U. S. expatriates in a foreign group health plan that predominantly covers local nationals generally does not have to worry about compliance with ERISA. Unfortunately, however, the parallel group health plan mandates in the Internal Revenue Code do not include a similar exemption for foreign plans. As a result, an employer that is subject to tax in the U. S. might incur substantial excise taxes if it fails to comply with applicable group health plan mandates.
The regulatory agencies issued temporary guidance in FAQs XIII and FAQs XVIII exempting some expatriate plans from most of ACA’s mandates through the end of 2016. The exemption applies only to insured plans with enrollment limited to primary insureds who live outside their home country or outside the United States for at least 6 months during a 12-month period and their dependents. The temporary guidance provides no relief for self-insured plans. In order to qualify for the exemption, an insured plan must comply with a number of pre-ACA mandates, such as the mental health parity provisions, the HIPAA nondiscrimination requirements, the ERISA claims procedures, and ERISA reporting and disclosure obligations.
The Act expanded the definition of “expatriate health plans” to include self-insured plans, and it made the temporary relief permanent. If an insured or self-insured plan qualifies for relief under the Act, it is broadly exempt from most ACA mandates and fees.
The Act also modified the requirements that an insured or self-insured group health plan must meet in order to qualify for the relief, as described in the preceding section. For example, unlike the temporary guidance, the Act requires a group health plan to comply with certain ACA requirements—such as the requirement to provide minimum-value coverage, the requirement to cover dependents until age 26, and the reporting and disclosure obligations in Internal Revenue Code sections 6055 and 6056—in order to qualify for the relief. In addition, the Act provides that expatriate plans will be subject to the so-called Cadillac tax on high-cost health coverage (effective in 2018) with respect to employees assigned to work in the U.S.
Multinational employers will wish to evaluate the requirements for relief under the Act between now and July 1 and to consider whether to revise and re-issue plans covering U.S. expatriates so that they will qualify for relief under the Act.