May 30, 2013 – The Wall Street Journal on May 20th ran a news story describing a strategy that an increasing number of employers are reportedly examining – especially self-insured employers – that involves offering a low-cost health plan covering only preventive health services. As the article indicated, in essence, offering this type of low-cost – or “skinny” – plan does not violate the law. More specifically, employers subject to the so-called employer mandate would not be subject to the punitive first prong of the employer mandate penalty tax (often referred to as the “no-coverage” penalty). In other words, these employers would be found to be offering “minimum essential coverage,” and thus would avoid the penalty tax, provided the employer offered these low-cost, skinny plans to at least 95% of its full-time employees and their dependent children (under age 26).
This article has generated multiple inquiries, so SIIA has prepared the following analysis to make sure its members are fully-educated on this subject matter. Should you have additional questions, please contact SIIA Washington Counsel Chris Condeluci at 202/463-8161, or via e-mail at email@example.com.
So, how are “skinny” health plans permissible under the Patient Protection and Affordable Care Act (PPACA)? To understand how offering a low-cost, skinny plan does not violate the law, thereby allowing an employer otherwise subject to the employer mandate to avoid a penalty tax, we must piece together various aspects of PPACA, starting with the definition of “minimum essential coverage,” and explain why this definition is so important.
“Minimum Essential Coverage” and the Individual Mandate
PPACA generally requires all individuals (and their dependents) to maintain “minimum essential coverage” each year. “Minimum essential coverage” includes health insurance coverage provided under (1) a governmental program (e.g., Medicare, Medicaid, SCHIP, or TRICARE), (2) an employer-sponsored plan (i.e., a group health plan), (3) individual coverage offered by a health plan in the individual market, (4) “grandfathered” individual or group market coverage, and (5) any other coverage as specified by the Department of Health and Human Services (HHS). If an individual (and their dependents) fails to obtain “minimum essential coverage,” the individual will be subject to a penalty tax for himself/herself (and their dependents, if any), unless a specific exemption from the penalty tax applies.
Why Is This Important To Employers Interested In Offering Low-Cost, Skinny Plans?
Recently proposed regulations implementing the individual mandate penalty tax indicate that an employer-sponsored plan (i.e., “minimum essential coverage”) is a “group health plan” as defined under the Public Health Services Act (PHSA). The PHSA provides that a group health plan means an “employee welfare benefit plan” as defined under the Employee Retirement Income Security Act (ERISA). ERISA defines an employee welfare benefit plan as “any plan, fund, or program…established or maintained by an employer…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…”
A plan that covers preventive health services only would be considered a plan, fund, or program established and maintained by an employer that provides medical care or benefits through the purchase of health insurance or otherwise. As a result, a low-cost, skinny plan would be considered a group health plan under the PHSA, and thus, “minimum essential coverage” for purposes of PPACA. Therefore, an individual employee (and their dependents, if any) covered under this type of arrangement (i.e., a low-cost, skinny plan) would satisfy the individual mandate requirement and would not be required to pay a penalty for the year.
“Minimum Essential Coverage” and the Employer Mandate
Nothing under the PPACA requires an employer to offer health coverage to its employees. Providing an employee benefit (i.e., health insurance coverage) is still voluntary. But, an employer employing 50 or more “full-time equivalent employees” (FTEs) will be subject to a penalty tax if (1) it does not offer “minimum essential coverage” to at least 95% of its full-time employees and their dependent child(ren) under age 26 (known as the “first prong” of the employer mandate) or (2) the employer offers “minimum essential coverage,” but the coverage (a) is “unaffordable” (i.e., the employee contribution for the lowest cost self-only health plan exceeds 9.5% of the employee’s household income (or certain other “safe harbor” measures) or (b) does not provide “minimum value” (i.e., the plan fails to pay at least 60% of the cost of benefits under the plan) (known as the “second prong” of the employer mandate).
The employer mandate penalty tax is only triggered if a full-time employee purchases an individual market health plan through an Exchange created under PPACA and accesses the premium subsidy for health insurance now available under the law (provided the employee is eligible based on income). Importantly, the amount of the penalty tax depends on whether the employer is offering “minimum essential coverage” or not. For example, if an employer fails the first prong of the employer mandate, the penalty tax is equal to $2,000 times all of the employer’s full-time employees (minus 30). Under the second prong, the penalty tax is equal to $3,000 for every full-time employee that accesses the premium subsidy.
Why Is This Important To Employers Interested In Offering Low-Cost, Skinny Plans?
As the first prong of the employer mandate indicates, if an employer is not offering “minimum essential coverage” to at least 95% of its full-time employees and their child dependent(s), the employer may be subject to a penalty tax equal to $2,000 times all of the employer’s full-time employees (minus 30). For employers employing a significant number of full-time employees, this penalty tax could be substantial. However, if an employer offers a low-cost, skinny plan to at least 95% of its full-time employees and their child dependent(s), the employer can avoid substantial penalties because – as discussed – this type of arrangement would be considered a group health plan for purposes of the PHSA, and thus, “minimum essential coverage” for purposes of PPACA, including the employer mandate.
Would an Employer Offering a Low-Cost, Skinny Plan Avoid All Penalties Under the Employer Mandate?
No. As stated, under the second prong of the employer mandate, if an employer is offering “minimum essential coverage,” but the coverage is unaffordable or does not provide minimum value, the employer would be subject to a $3,000 penalty tax for every full-time employee that purchases an individual market health plan through an ACA-created Exchange and accesses a premium subsidy for health insurance. In the case of a low-cost, skinny plan, this arrangement would in most, if not all cases, be affordable. However, this type of arrangement would not satisfy the minimum value test.
According to regulations issued by HHS and the Department of Treasury (Treasury), while a self-insured plan is not required to provide coverage for the “essential health benefit” categories, the plan’s minimum value is measured with reference to benefits covered by the employer that also are covered in any one of the “essential health benefit”-benchmark plans adopted by a State. In other words, a plan’s anticipated spending for benefits provided under any particular “essential health benefit”-benchmark plan for any State counts towards the plan’s minimum value. An “essential health benefit”-benchmark plan covers more than just preventive health services. Therefore, a low-cost, skinny plan would not provide minimum value, thereby exposing the employer to a penalty tax in the event a full-time employee accesses the premium subsidy.
Will Federal Regulators Try to Restrict Skinny Health Plans Going Forward?
As the Wall Street Journal article indicates, Federal agency officials have stated that employers may offer a low-cost, skinny plan and at least avoid the first prong of the employer mandate. But, the Federal regulators are certainly not approving of this practice. Which begs the question, will the Federal regulators try to shut this practice down? If they do, how can they do it?
SIIA believes that the Federal agencies may conclude that this type of practice violates the new nondiscrimination rules that apply to fully-insured group health plans. To date, the Federal government has not issued regulations detailing these rules. In the case of self-insured plans, this practice may already violate the nondiscrimination rules applicable to self-insured arrangements under section 105(h) of the Internal Revenue Code (“Code”). If not, contemporaneous with the issuance of the new nondiscrimination rules for fully-insured plans, Treasury may add to the current regulations under Code section 105(h), providing that offering low-cost, skinny plans could be discriminatory in certain instances.
Only time will tell whether this Administration will attempt to use the nondiscrimination rules applicable to both fully-insured and self-insured group health plans to put a stop to this practice. Until then, it appears that offering a low-cost, skinny plan is a viable strategy when it comes to an employer’s overall approach to offering health insurance benefits to its employees and complying with the new requirements under PPACA, including the employer mandate.
That said, SIIA is not commenting on the relative merits of this approach at this time. The purpose of this communication is simply to educate its members in order that they understand what is happening in the marketplace and potential regulatory responses. Please watch for additional exclusive reporting as developments warrant.