A May 10 Wall Street Journal article, “Employers Eye Bare-Bones Health Plans Under New Law” (see the associated video on WSJ Live), highlighted a compliance strategy to minimize employer exposure for assessable payments under the employer shared responsibility provisions of the Affordable Care Act (the “Act”). The strategy calls for an employer to make an offer of health care coverage under a “low-cost” (or “skinny”) plan as a way to avoid the potentially very costly penalty for failing to make an offer of coverage to at least 95% of the employer’s full-time employees. As the name implies, a low-cost plan neither covers nor costs much. A low-cost plan might, for example, cover just first-dollar preventive care and provide a wellness benefit.
Although the low-cost plan concept is not new, the WSJ’s article has, for the first time, called widespread attention to it. In so doing, it has ignited a contentious debate. On one side are those who claim that low-cost plans are patently abusive and will shortly be banned altogether; on the other are those who claim that these plans are a panacea. Neither side is correct. Far from being abusive, low-cost plans fit squarely into the Act’s statutory scheme; and far from being a panacea, they leave adopting employers exposed to penalties that, while for the most part, are not as severe as those that apply where no coverage is offered, can still be significant.
The Act’s employer shared responsibility requirements apply to every employer that “employed at least 50 full-time employees, including full-time equivalent employees, on business days during the preceding calendar year” (“applicable large employers”). Beginning in 2014, each applicable large employer is subject to an assessable payment if any full-time employee is certified as eligible to receive an applicable premium tax credit or cost-sharing reduction from a public insurance marketplace exchange and either of the following:
Internal Revenue Code § 4980H(a) Liability
The employer fails to offer to all its full-time employees (and their dependents) the opportunity to enroll in “minimum essential coverage” under an “eligible employer-sponsored plan.” Under this prong, if an employer fails to make an offer of coverage to at least 95% of its full-time employees, an assessable payment is imposed monthly in an amount equal to $166.67 multiplied by the number of the employer’s full-time employees, excluding the first 30.
Internal Revenue Code § 4980H(b) Liability
The employer offers its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan that, with respect to a full-time employee who qualifies for a premium tax credit or cost-sharing reduction, either is (1) unaffordable or (2) does not provide minimum value. Under this prong, an assessable payment is imposed monthly in an amount equal to $250 multiplied by the number of employees who qualify for a premium tax credit or cost-sharing reduction through a public insurance marketplace.
Minimum value is a measure of a plan’s generosity. To provide minimum value, a plan must pay for at least 60% of plan costs. The remaining 40% are paid for by the covered individual in the form of co-pays, deductibles, co-insurance, and other cost sharing features.
Coverage is affordable for Code § 4980H purposes if the cost to the employee of self-only coverage does not exceed 9.5% of the employee’s “household income.” This is true irrespective of whether he or she qualifies for some other level of coverage (e.g., self plus dependents, family). Thus, although family coverage might require a larger employee premium, affordability for Code § 4980H purposes is determined based on the cost of self-only coverage. The Act defines “household income” to mean “modified adjusted gross income of the employee and any members of the employee’s family (including a spouse and dependents) who are required to file an income tax return.” Recognizing that employers would generally not know, or care to know, their employees’ household incomes, proposed regulations permit employers to instead use one of three safe harbors as proxies: W-2, rate-of-pay, or Federal Line.
Low-Cost (a/k/a Sub–Minimum Value) Plans
As indicated above, a low-cost plan might cover just first-dollar preventive care and provide a wellness benefit. These plans are usually offered alongside a voluntary, non-coordinated hospital or fixed indemnity feature, which is included as a revenue source for the issuer. In order to stay clear of state insurance mandates, and to avoid the need to offer any essential health benefits in the small group market, low-cost plans are generally self-funded arrangements.
Of course, low-cost plans must also navigate a host of federal standards that include the requirements enumerated in ERISA (Title I, Subtitle B, Part 7 to be precise), as well the Act’s insurance market reforms that were added to the Public Health Service Act (Part A of Title XXVII to be precise) and incorporated by reference into ERISA and the Code. The Part 7 requirements include portability, a ban on discrimination based on health status, group insurance market guaranteed issue and renewability, protections for mothers and newborns, mental health parity, and required coverage of reconstructive surgery following mastectomies. But none of the substantive benefit mandates apply to plans that don’t offer the particular benefit. Thus, for example, the protections for mothers and newborns do not apply where a plan does not offer maternity benefits.
In a similar fashion, many of the Act’s insurance market reforms are either simple to comply with (e.g., the bars on preexisting conditions and on discrimination based on health status), apply to plan operation (e.g., the ban on rescissions and the requirement to provide summaries of benefits and coverage), or don’t apply (e.g., the requirement to provide comprehensive health insurance coverage, which applies only to the individual and small group insurance markets; minimum loss ratios; etc.). Thus, it appears that the only remaining applicable insurance market reform of the Act is the requirement to provide preventative and wellness services and chronic disease management. (This view is consistent with the product offerings to date.)
Low-Cost Plans, Eligible Employer-Sponsored Plans, Minimum Essential Coverage, and Minimum Value
Many assume that the 4980H(a) penalty will far exceed the 4980H(b) penalty in the vast majority of cases. If so — and we accept this assumption for purposes of this advisory — it behooves an applicable large employer to make an offer of coverage that will ensure that the employer is subject to the 4980H(b) penalty (and not the presumably more onerous 4980H(a) penalty).
A low-cost plan will get an employer out from under the 4980H(a) penalty and under the 4980H(b) penalty only if the applicable large employer offers its full-time employees (and their dependents) the opportunity to enroll in “minimum essential coverage” under an “eligible employer-sponsored plan.” The term minimum essential coverage is sometimes misunderstood to refer to, or somehow prescribe, a particular level or amount of coverage. It does not. It instead refers to the source of the coverage. Minimum essential coverage includes government sponsored programs, plans in the individual market, grandfathered group health plans, and other coverage as prescribed by regulation. It also includes coverage under an eligible employer-sponsored plan.
The phrase “eligible employer-sponsored plan” is defined to mean:
“[A] group health plan or group health insurance coverage offered by an employer to the employee which is … offered in the small or large group market within a State.”
The plain language of the statute led some to question whether any self-funded plan could qualify as an eligible employer-sponsored plan. This issue was, however, settled in a proposed regulation implementing the minimum essential coverage provisions of the Act, which made clear that a self-funded plan can qualify as such. While an eligible employer-sponsored plan includes group health plans (whether or not self-funded), it does not include coverage that consists solely of certain HIPAA excepted benefits (e.g., limited scope dental and vision benefits, coverage for a disease or specified illness, hospital indemnity, or other fixed indemnity insurance).
Act section 1301(b)(3) provides that the term group health plan “has the meaning given such term by section 2791(a) of the Public Health Service Act.” Public Health Service Act section 2791(a) provides as follows:
DEFINITION. — The term ‘‘group health plan’’ means an employee welfare benefit plan (as defined in section 3(1) of the Employee Retirement Income Security Act of 1974) to the extent that the plan provides medical care (as defined in paragraph (2)) and including items and services paid for as medical care) to employees or their dependents (as defined under the terms of the plan) directly or through insurance, reimbursement, or otherwise.
MEDICAL CARE. — The term “medical care” means amounts paid for —
the diagnosis, cure, mitigation, treatment, or prevention of disease, or amounts paid for the purpose of affecting any structure or function of the body,
amounts paid for transportation primarily for and essential to medical care referred to in subparagraph (A), and
amounts paid for insurance covering medical care referred to in subparagraphs (A) and (B).
ERISA section 3(1) of the Employee Retirement Income Security Act of 1974 defines the term “employee welfare benefit plan” broadly to mean:
“[A]ny plan, fund, or program … established or [ ] maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, … medical, surgical, or hospital care or benefits, or benefits in the event of sickness, ….”
That a low-cost plan is an employee welfare benefit plan is undisputed. Such a plan also pretty clearly provides medical care — preventative care deals with, well, the prevention of disease. A low-cost plan is therefore a group health plan within the Public Health Service Act. And because it covers more than HIPAA excepted benefits, it qualifies as an eligible employer-sponsored plan for Code section 4980H(b) purposes.
A low-cost plan does not, however, provide minimum value. A recently issued proposed regulation provides that minimum value is tested against ten categories of essential health benefits, the particulars of which are determined state-by-state under designated “benchmark plans.” This likely requires that a plan cover at least physician and mid-level practitioner care, hospital and emergency room services, pharmacy benefits, and laboratory and imaging services. (For a discussion of minimum value proposed regulations, please see our advisory of May 16, 2013.)
As a consequence, an employer that offers (at least) a low-cost plan to at least 95% of its full-time employees is subject to the 4980H(b) penalty, not the 4980H(a) penalty. But this does not mean “no penalty.” Each low-income employee who qualifies for advance premium tax credits and/or cost sharing reductions through a public marketplace will trigger a nondeductible excise tax in the annual amount of $3,000.
But what if the detractors are correct? What if the regulators adopted an interpretation of the minimum value or other rules that resulted in low-cost plans being disregarded for 4980H purposes? Do employers have any other options? They do.
Recall that the purpose of maintaining a low-cost plan is to avoid exposure under Code section 4980H(a) and instead qualify under Code section 4980H(b). But an employer can get to this result by offering an eligible employer-sponsored plan that is unaffordable. For example, the plan could be offered on a fully contributory (i.e., employee-pay-all) basis. Code section 4980H simply requires that an employer make an offer of coverage; it says nothing about who pays for it. The question of “who pays” implicates affordability. It is material to a determination of penalties under Code section 4980H(b) and not 4980H(a).
The structure of the Code section 4980H(b) provides applicable large employers with a choice. If the employer is willing to accept the 4980H(b) penalties, it is free to offer coverage under an eligible employer-sponsored plan that is either unaffordable or fails to provide minimum value. That low-cost plans can rise to the level of eligible employer-sponsored plans is provided by the express terms of the statute. Other than in the case of the small group market, a “group health plan” must simply provide “medical care” that is not an excepted benefit. Low-cost plans appear to satisfy this standard with little difficulty. And, as the Wall Street Journal article noted, the regulators, while surprised that these low-cost plans would find a market, nevertheless conceded that they work as advertised.