IRS Issues Guidance – Certain “Skinny” Health Plans Will Not Satisfy Affordable Care Act’s Minimum Value Requirement

The IRS issued a notice on November 4, 2014 concluding that a health plan that does not provide substantial coverage for inpatient hospitalization and/or physician services will not qualify as a “minimum value” plan under the Affordable Care Act.  Therefore, large employers that adopt such plans are subject to penalties under the Affordable Care Act for failure to offer a plan that provides minimum value.  The IRS expects to issue additional guidance on this issue next year.
 
Beginning in 2015, “large employers” are required to offer health coverage to their full-time employees, and dependents, or be subject to a penalty.  There are two potential penalties:
• First, a penalty applies if a large employer fails to offer “minimum essential coverage” and at least one employee purchases coverage through the exchange/marketplace and receives a premium tax credit.
• Second, a separate penalty applies if a large employer offers “minimum essential coverage,” but the coverage does not provide “minimum value” and/or is not “affordable,” and at least one employee purchases coverage through the exchange/marketplace and receives a premium tax credit.
 
The recent IRS guidance focuses on the “minimum value” requirement.  A plan provides “minimum value” if it is designed to pay at least 60% of the total cost of medical services under the plan.  The IRS has proposed four approaches for determining if a plan provides minimum value, including the use of a minimum value calculator or an actuarial certification.
 
Some employers have considered adopting a health plan that does not provide benefits for inpatient hospitalization and/or physician services.  These types of plans may technically satisfy the “minimum value” requirement by use of the calculator or actuarial certification.  The IRS announcement provides that even though these plans may pass the 60% test, they are not the type of coverage contemplated by the minimum value requirement.  Therefore, according to the IRS, a plan that does not provide substantial coverage for inpatient hospitalization and/or physician services will not be considered to provide minimum value.
 
Employers that adopt this type of plan will still be considered to provide minimum essential coverage, and will therefore avoid the first penalty for failure to offer coverage.  However, the employer will be subject to the second penalty for failure to provide coverage that provides minimum value.
 
Employers that have entered into a written contract to provide a non-inpatient hospital and/or physician services plan prior to November 4, 2014 will not be subject to penalty for failure to provide minimum value through the end of the plan year that begins on or before March 1, 2015.  However, such employers must be careful how they communicate the plan to employees.  Employee communications must advise employees that the plan does not preclude the employee from being eligible for a premium tax credit if the employee purchases health coverage through the exchange/marketplace, if otherwise eligible.
 
If you have any questions about the subject matter of this e-alert, please contact Nancy Farnam at nfarnam@clarkhill.com or (248) 530-6333; Doug Ellis at dellis@clarkhill.com or (412) 394-2367; Kristi Gauthier at kgauthier@clarkhill.com or (480) 684-1300; or Ed Hammond at ehammond@clarkhill.com or (248) 988-1821.