ACA ““ What Must a Small Employer Do? Part 9 – Mandatory Health Insurance Coverage Under the ACA: Less Expensive Alternatives?

The January 1, 2015 pay-or-play deadline is looming. That is the date by which employers with 100 or more employees [50 or more employees for 2016 and later] must provide health coverage to full-time employees or pay the Affordable Care Act (“ACA”) penalties. There are two layers of penalties that employers must address.

A penalty of $2,000 per year times all employees (less 80 employees [less 30 employees for 2016 and later]) applies if the employer fails to offer affordable, minimum essential coverage to at least 70% of its full-time employees [95% of its full-time employees for 2016 and later]. This is the “a” penalty. For example, if an employer of 150 full-time employees offers coverage to only 60 of its employees in 2015, the penalty is 150 less 80 times $2,000 or $140,000.

If the employer offers minimum essential coverage that is not minimum value or not affordable and the employee obtains subsidized coverage on the exchange, then the employer is subject to a $3,000 per year penalty for such employees. This is the “b” penalty. For example, if the above employer offers affordable, minimum value coverage in 2015 to 105 (70%) or more of its employees, the employer avoids the “a” penalty. However, if 10 of those employees who are not offered such coverage purchase subsidized coverage on the exchange, the penalty is $30,000.

From the individual employee side, if the individual fails to obtain minimum essential coverage (or better coverage), the employee must pay the shared responsibility tax (for 2015, the greater of $325/person or 2% of taxable income).

The 2015 transition rule amounts are in brackets. Other transition rules, apply for non-calendar year plans. Some conditions apply for reliance on the transition rules, but they are too complex for this article.

Two types of lower cost coverages have been developed to help employers avoid these penalties. One is a product that provides only the minimum essential coverages. These are commonly called “MEC plans” or “Mini plans” or “Mini MEC plans.” What is minimum essential coverage? It is just about anything that the employer provides that includes the minimum listed coverages. These minimum listed coverages include only preventative care and clinical trial benefits. Mini MEC plans typically exclude visits to the doctor for non-preventative reasons, hospital expenses and everything else that is not preventative or clinical trial benefits. By enrolling in a mini MEC plan (or more generous plan), employees avoid the individual shared responsibility tax.

The second type of coverage provides the minimum essential coverages and meets the minimum value and affordability requirements. Minimum value means that for a standard population the plan will cover 60% of expected health care costs. The bronze level plans on the exchange must meet the 60% threshold. A plan is affordable if the employee share of the premium cost is 9.5% of their personal income or less. Some new products now being marketed do not provide coverage for hospitalization, the new designer drugs, rehabilitation services and many other services typically provided by the bronze coverage available on the exchange. After the required employee contribution, the employer cost is dramatically lower than conventional alternative plans. I call this product the “barely bronze” coverage. It is difficult to imagine that a plan restricted in this manner will satisfy the 60% affordability standard. How do they get away with it? They do so by designing the plan specifically to the actuarial standards designed by Department of Health and Human Services (“HHS”) for testing plans. Kaiser Health News and Washington Post have recently run a story “exposing” these plans and labeling the HHS actuarial standards as “flawed.”

If an employer offers a MEC plan, the employer avoids the “a” penalty of $2,000 times everyone. However, if the coverage is not minimum value and/or not affordable, the employee may go to the exchange and purchase subsidized coverage based on income level. Therefore, an employer offering a Mini MEC plan remains exposed to the $3,000 “b” penalty for employees that go to the exchange. If the employer offers a barely bronze plan, the employer avoids both the $2,000 per year times everyone “a” tax and the $3,000 per year “b” tax on employees enrolling for the exchange coverage. The offer of the barely bronze plan forecloses the employee from access to the subsidized exchange coverage and limits the employee to the barely bronze coverage subject to a premium cost of up to 9.5% of income, an unsubsidized exchange purchase or no plan at all.

Employers concerned about the cost of benefits (all employers?) should be aware of all alternatives on the market. They should assess the value and compare the value of the alternatives to the compensation goals they have for their employees. These are not employee-friendly responses. Wise employers will also be aware of the compensation packages being offered by their competitors.

Finally, the wise employer will also assess the continued viability of the product. The definition of the “minimum essential coverage” is embedded in the statute and requires congressional action to change (difficult in this environment). So the Mini MEC plan response may have a longer life. The barely bronze plan, however, is based on HHS rules. If the low bar of the 60% minimum value really is intended, then it may continue. If the low bar is a result of a flawed design of the actuarial standard, then it can easily be changed by HHS rule. The barely bronze plan may be appealing to some cost conscious employers, but contains viability and other risks.

ACA – What Must A Small Employer Do? Part 1: Issues Affecting Employers of All Sizes

ACA – What Must A Small Employer Do? Part 2: Mandatory Coverage

ACA – What Must A Small Employer Do? Part 3: How Do You Count To 50?

ACA – What Must A Small Employer Do? Part 4: Digging Deeper Into Pay-Or-Play Penalties

ACA – What Must A Small Employer Do? Part 5: A Closer Look at Penalties

ACA – What Must A Small Employer Do? Part 6: Account-based Plans (Medical FSAs and HRAs)

ACA – What Must A Small Employer Do? Part 7: IRS Wake-up Call on HRAs

ACA – What Must A Small Employer Do? Part 8: Who’s Keeping Score on ACA Coverage Penalties?

If you have questions about alternative forms of coverage and their impact on your exposure to penalties or the impact on your employees, contact any member of the Mika Meyers Labor and Employment Group.