Employee Benefits: Skinny Plans and Other Low-Cost Coverage Strategies Under the ACA

by Bond Schoeneck & King PLLC
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Beginning in 2015, an employer that employed at least 100 full-time employees (or full-time equivalents) during 2014 will become subject to the shared responsibility (employer mandate) provisions of the Patient Protection and Affordable Care Act, as amended (ACA). The employer mandate generally imposes penalties on such a "large" employer if the employer fails to offer affordable, minimum-value group health plan coverage to its "full-time employees," generally defined under the ACA as employees working 30 hours or more per week.

Due to the rising cost of employer-sponsored health plans, this mandate could be particularly burdensome for employers not currently offering coverage to all such full-time employees. For example, the mandate may require some employers to offer coverage to employees who were historically ineligible for coverage, such as temporary or seasonal employees, or pay a penalty (see the February 2014 Bond Information Memo for a discussion of the final regulations implementing the employer mandate). As a result, many budget-conscious employers are exploring low-cost coverage alternatives, including sub-minimum-value health plans (called skinny plans) and employee-pay-all health plans, which could be offered to all full-time employees or just to those full-time employees who were historically ineligible for coverage. However, these strategies carry some risk, as discussed below.

Employer Mandate Penalties

To understand the low-cost coverage strategies, a brief overview of the employer mandate penalties is required. A penalty under the employer mandate is triggered if at least one full-time employee receives a premium tax credit or cost-sharing reduction to purchase coverage on the Health Insurance Marketplace (colloquially called the health insurance exchanges), and:

1. The employer fails to offer health coverage to substantially all of its full-time employees and their dependents (no-offer penalty); or

2. The employer offers health coverage to its full-time employees (and their dependents), but the coverage is either unaffordable or does not provide minimum value (deficient-coverage penalty).

The no-offer penalty is $2,000 per year times all of the employer’s full-time employees (disregarding the first 30 employees). The deficient-coverage penalty is $3,000 per year times each full-time employee who receives a premium tax credit or cost-sharing reduction to purchase coverage on a health insurance exchange.

In most cases, the no-offer penalty will vastly exceed the deficient-coverage penalty because, despite the deficient-coverage penalty being a greater dollar amount, the deficient-coverage penalty applies only to each full-time employee who receives a subsidy to purchase coverage on a health insurance exchange. On the other hand, the no-offer penalty is multiplied by the number of all of the employer’s full-time employees (disregarding the first 30 employees).

Low-Cost Coverage Strategies

To avoid the potentially hefty no-offer penalty, some employers are considering a low-cost health coverage compliance strategy. Subject to satisfaction of any applicable non-discrimination requirements, this strategy could be applied to all full-time employees or just to those full-time employees who were historically ineligible for coverage. There are two main ways to implement this strategy, both of which involve intentional exposure to the deficient-coverage penalty.

1. Sub-Minimum-Value Coverage (Skinny Plan) Strategy

Generally, a group health plan provides minimum value if it is designed to pay for at least 60% of the cost of claims for a standard population. Some employers are considering offering low-cost coverage that would intentionally fail the minimum value test. These so-called "skinny" plans are low cost because they exclude large categories of care. For example, they may only cover preventive care, like vaccines and cancer screenings, without employee cost-sharing (as required by the ACA), but not hospitalization, surgery, x-ray, or prenatal care.

An employer offering a skinny plan would be exposed (intentionally) to the deficient-coverage penalty. Because the skinny plan fails the minimum value test, each full-time employee who purchases subsidized coverage on a health insurance exchange would trigger the deficient-coverage penalty. Employers electing this strategy project that the premium/cost savings from offering the skinny plan will exceed the deficient-coverage penalties triggered.

2. Unaffordable Coverage Strategy

Generally, a group health plan is unaffordable for ACA purposes if the employee’s required contribution for self-only coverage exceeds 9.5% of the employee’s household income for the taxable year. Because an employer typically will not know an employee’s household income, recently-issued final regulations offer safe harbors that employers can use to determine affordability (see the March 2014 Bond Information Memo for a detailed discussion of the affordability safe harbors).

Some employers are considering offering coverage that, in most cases, would intentionally fail the affordability test. These unaffordable plans are low-cost because employees would be required to pay most or all of the premiums. In a plan that is designed to be unaffordable, the required employee premium would be set at a level that is projected to readily exceed 9.5% of household income for most employees.

As with skinny plans, an employer offering unaffordable coverage would be exposed to the deficient-coverage penalty. Each full-time employee for whom the coverage is unaffordable, and who purchases subsidized coverage on a health insurance exchange, would trigger the deficient-coverage penalty. However, as with skinny plans, employers pursuing this compliance strategy project that the cost savings from offering unaffordable coverage will exceed the deficient-coverage penalties triggered.

Conclusion

These low-cost coverage compliance strategies have immediate appeal to budget-conscious employers that face new health plan and penalty costs under the looming employer mandate. However, these strategies carry some risk. For example, although Federal officials have informally indicated that skinny plans currently meet the ACA’s broad definition of "minimum essential coverage" – which generally means medical coverage that includes more than HIPAA-excepted benefits (e.g., more than limited-scope dental and vision benefits) – that definition could be amended to require more robust coverage.

These are only some of the ACA compliance strategies that an employer might consider.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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