The Internal Revenue Service, in Notice 2014-69, has concluded that certain unconventional group health plan designs that offer limited or no coverage for in-patient hospitalization services and/or physician services will not provide “minimum value.” Consequently, this may expose large employers to financial penalties under the Affordable Care Act’s (ACA's) “pay-or-play” employer mandate. These plans, sometimes referred to as “skinny” plans, have been promoted as a means for employers to control costs while still satisfying the ACA employer mandate.
The IRS guidance, which is expected to be followed by proposed regulations, will allow employees who are offered “skinny” plans to reject them and receive a subsidy (premium tax credit) for the purchase of individual coverage from an ACA Marketplace if they meet the income requirements. For each full-time employee who obtains a Marketplace subsidy, a large employer (50 or more full-time employees) will be liable for a tax at the annual rate of $3,120 (for 2015).
Promoters seeking to help employers address these taxes have been offering group insurance products that satisfy the core requirements for minimum essential coverage—such as no-cost annual checkups and vaccinations—but which are inexpensive because they provide little or no coverage for in-patient hospitalization services or physician services.
The IRS is concerned that such plans fail to offer fundamental benefits that have been typically provided by group health plans and that historically have been considered integral to coverage. Without substantial coverage for in-patient hospitalization and/or physician services, an individual can face financial ruin if a catastrophic medical event occurs, notwithstanding his or her coverage by an ACA-compliant group health plan. Moreover, such an individual could not qualify for a subsidy if he or she rejects the inadequate employer coverage in favor of ACA Marketplace coverage.
According to the IRS guidance, soon-to-be issued proposed regulations conclude that a group health plan that fails to provide substantial coverage for in-patient hospitalization or for physician services (or both) will lack “minimum value.” The IRS refers to such plans as “Non-Hospital/Non-Physician Services Plans.” This will permit employees offered “skinny” coverage to obtain subsidized individual coverage through the ACA Marketplace.
Employers that have entered into a binding contract to adopt or have begun enrolling employees in a Non-Hospital/Non-Physician Services Plan prior to November 4, 2014, based on the employer’s good faith reliance that the plan provides minimum value, will not, for the 2015 plan year only, be subject to the final regulation’s conclusion that such a plan does not provide minimum value. This relief is limited to plan years that begin no later than March 1, 2015. A Non-Hospital/Non-Physician Services Plan should not be adopted for 2015 or any subsequent plan year by a large employer subject to the pay-or-play penalties, because it will expose the employer to the penalty tax for a plan lacking minimum value.
The IRS also will require any employer that adopts a Non-Hospital/Non-Physician Services Plan (including a grandfathered plan) to not mislead its employees regarding their ability to obtain subsidized coverage through an ACA Marketplace. The employer must not state or imply in any disclosure that its offer of coverage under such a plan will preclude the employee from obtaining an ACA subsidy, and to correct any such statement previously made.
