It took a while, but most employers and their advisors have finally gotten the hang of the Affordable Care Act’s employer shared responsibility rules. That is, they understand generally that:
- “Applicable Large Employer Members” (i.e., each separate legal entity within a controlled group that collectively comprises an Applicable Large Employer) must make an offer of “minimum essential coverage” to substantially all of their full-time employees or face the prospect of a potentially very big penalty;
- If coverage is offered, but it is unaffordable or fails to provide minimum value, then the employer faces the prospect of a potentially (hopefully, maybe) not very big penalty; and
- If coverage is offered that is both affordable and provides minimum value, then the employer has no penalty exposure, but this approach might be costly.
When it comes to telling the government about compliance, however, not everyone has gotten the proverbial “hang-of-it,” and many questions remain (at least enough to fill this blog from week-to-week). Most too have heard that the IRS has announced that it will be applying a “good faith” standard. While they get that this is a “good thing,” many are not sure why, exactly. (Trust me, it’s a good thing.) And there are of course a cohort of presumably small but indeterminate size employers that remain unaware of the rules or simply assume that their consultant or payroll service has it covered.
The lingering reporting-related questions appear to cluster around full-time employee determinations, offers of coverage, and eligibility, participation and coverage. This post examines issues relating to coverage, both under the rules governing the reporting of minimum essential coverage and under the employer shared responsibility rules, with a particular emphasis on “MEC plans.”
Minimum Essential Coverage
In the context of the ACA, the term “minimum essential coverage” has come to be used in four different ways:
- Under Code 5000A, U.S. taxpayers and green card holders must have minimum essential coverage or pay a tax penalty unless an exception applies;
- Under Code 36B, low- or moderate-income income individuals who might otherwise qualify for premium tax credits from a public insurance exchange are rendered ineligible for subsidies if they have other minimum essential coverage (or are eligible for minimum essential coverage under an employer-sponsored group health plan if the coverage provides minimum value and is affordable);
- Under Code 4980H, applicable large employers face exposure for assessable payments for failing to offer minimum essential coverage to substantially all of their full-time employees; and
- Vendors, promoters and some carriers have created and established for sale in the group market a preventive-services-only plan that has come to be known as a minimum essential coverage or MEC plan. Unlike the first three uses of the term MEC, this latter use is purely colloquial and market-driven. For the balance of this post, we will refer to preventive-services-only plans as “MEC plans.”
The term “minimum essential coverage” can be confusing, since it refers not to the content of the coverage but to its source. Individual and group market coverage can qualify as minimum essential coverage, as can coverage under a governmental program such as Medicare or Medicaid. There is an important distinction to be made here, however. When coverage is offered through a public insurance exchange, that coverage must include a list of 10 essential health benefits which result in an aggregate benefit that qualifies as “minimum value.” (For an explanation of minimum value, please see our previous post on the subject.)
In contrast, applicable large employers are not required to offer minimum value coverage, though there can be consequences for not doing so. As we noted above, an employer that offers minimum essential coverage that does not provide minimum value faces penalty exposure, though of a likely smaller magnitude than would otherwise be the case if the employer failed to offer any coverage. MEC plans do not provide minimum value.
The motives for choosing to offer MEC plans are two-fold:
There are instances in which the offer of MEC is simply the cheapest way to comply with the ACA’s employer shared responsibility rules. MEC coverage is less than desirable, since it only covers preventive services. Despite that serious drawback, however, certain employees may benefit from the MEC coverage, since it satisfies the ACA individual mandate. So an employee with MEC coverage is not subject to tax.
Minimum value coverage may be unavailable or available only at exorbitant rates. This is a not uncommon occurrence in industries with low-wage, high turnover employees, who before the ACA were either not offered coverage or were offered coverage under “mini-med” plans. While some express concern over the failure on the part of mainstream carriers to develop and make available affordable products for this market, it should come as no surprise. This market segment is rife with adverse selection, and carriers are only now getting reliable data on actual take-up rates and claims experience.
Because MEC plans are group health plans, they must satisfy the ACA insurance market reforms. As a practical matter this means that a MEC plan must:
- Not impose annual or lifetime limits on essential health benefits (i.e., the items and services within at least the following 10 categories: ambulatory patient services; emergency services; hospitalization; maternity and newborn care; mental health and substance use disorder services, including behavioral health treatment; prescription drugs; rehabilitative and habilitative services and devices; laboratory services; preventive and wellness services and chronic disease management; and pediatric services, including oral and vision care);
NOTE: Most MEC plans are self-funded. Self-funded and large group insured plans are permitted to impose dollar limits on benefits that are not essential health benefits, and they can also apply non-dollar limits on essential health benefits. These plans must use an authorized definition of essential health benefits to determine which of the benefits they provide can be made subject to annual or lifetime dollar limits. What constitutes essential health benefits is determined state-by-state based on a “benchmark” plan. The benchmark can be designated by the state or adopted under a default rule. Self-funded plans have some latitude on the selection of a benchmark plan.
- Cover children to age 26 where the MEC plan coverage includes dependents;
- Comply with the ACA bar on rescissions of coverage;
- Not exclude participants based on a pre-existing condition; and
- Cover preventive services. Preventive services for this purpose means coverage for a wide range of health preventive and screening services. There are some 63 distinct preventive services that must be covered without the enrollee having to pay a copayment or co-insurance or meet a deductible.
Though not required, MEC plans are often bundled and sold together with hospital or fixed indemnity coverage a/k/a “excepted benefits” in the parlance of the ACA and prior law.
Reporting MEC vs. Minimum Value coverage
- Code 6055: Reporting of Minimum Essential Coverage (Forms 1094-B/1095-B)
Every provider of Minimum Essential Coverage must report coverage information by filing an information return with the IRS on Form 1094-B and furnishing a statement to individuals on Form 1095-B. Where MEC plan coverage is fully-insured, the reporting obligation rests with the carrier. But where MEC plan coverage is self-funded—which is by far the most common approach—the coverage is reported by the employer on Part III of Form 1095-C if the employer is subject to the ACA employer shared responsibility rules, i.e., an applicable large employer member. Many employers offering MEC plan coverage are new to self-funding. This filing obligation could come as a surprise.
- Code 6056: Reporting by ALE Member (Forms 1094-C/1095-C)
Offers of coverage that qualify as minimum value are coded on Form 1095-C, Line 14 using Codes 1A through 1E. These codes variously identify the recipients of the offer of coverage between and among the employee, his or her spouse, and dependents. The significance of these codes is that the employer may avoid exposure under Code § 4980H(b) if the coverage is also affordable. That this is the case is reported on Lines 15 (which permits the IRS to verify whether the coverage is affordable) and 16 (which discloses that coverage was elected or points the IRS to the reason why the employer is not liable for an assessable payment under Code § 4980H(b) with respect to the particular employee).
Offers of MEC plan coverage have their own reporting Form 1095-C, Line 14 series-1 indicator code, Code 1F (Minimum essential coverage NOT providing minimum value offered to employee). Where Code 1F applies, Form 1095-C, line 15 would be left blank, thus signaling to the IRS that the employer may be liable for an assessable payment under Code § 4980H(b) (i.e., the “potentially (hopefully, maybe) not very big penalty”) with respect to the particular employee.
The benefit of a broad-based offer of MEC coverage appears on Form 1094-C, Part III, Lines 23 to 35, column (a), wherein the employer reports that it “offered minimum essential coverage to at least 95% of its full-time employees and their dependents.” As a consequence, the employer is not liable for penalties under Code § 4980H(a) (the “very big” penalty). Under a transition rule that applies in 2015, the 95% threshold is lowered to 70%. An employer indicates that it is taking advantage of this relief on Form 1094-C, Part III, in Lines 23 to 35, Column (e).