In Notice 2014-69,  the Treasury Department and the IRS clarified that a group health plan that fails to provide substantial coverage for in-patient hospitalization and physician services will not be treated as providing minimum value, despite that the plan might otherwise return a value of 60% from the Department of Health and Human Service’s (HHS) online minimum value calculator. These arrangements were sometimes referred to for marketing purposes as “MV-lite” or “MVP-lite” plans. By whatever name, they were particularly attractive to employers with large cohorts of low- and moderate-wage employees who were not previously offered coverage.

Notice 2014-69 provided a transition rule under which a plan that was adopted before November 4, 2014 and that had a plan year beginning no later than March 1, 2015 would not be subject to the new rules until the following plan year. Such a plan was treated for purposes of complying with the Affordable Care Act’s employer shared responsibility rules as providing minimum value. But employees covered under an affordable MV-lite plan were not barred from qualifying for premium subsidies from a public insurance exchange.

The 2015 Final Instructions for Forms 1094-C and 1095-C do not provide a way for employers to claim reliance on the Notice 2014-69 transition relief. Coverage under an MV-lite plan will be reported as not providing minimum value, thereby overstating penalties under Internal Revenue Code § 4980H(b) in many, if not most, instances. This will require sponsors of MV-lite plans to engage with the IRS in the assessment process in order to establish that they qualify for the relief.

Background

Under Code § 36B, low- and moderate-income individuals may qualify for a premium tax credit to assist with the purchase of a qualified health plan from a public exchange or marketplace. The credit is not available, however, to individuals who have other coverage that qualifies as “minimum essential coverage” or “MEC.” An employer-sponsored group health plan is MEC, but for purposes of the premium tax credit an employee is generally treated as not eligible for MEC under an employer-sponsored plan unless the plan is affordable and provides minimum value (MV). An employer-sponsored plan provides MV only if the plan’s “share of the total allowed costs of benefits provided under the plan is greater than or equal to 60 percent of the costs.” An employee who is eligible for coverage under an employer-sponsored plan that is both affordable and provides MV to the employee may not receive a premium tax credit. If the employer coverage does not provide MV, the employee may be entitled to a premium tax credit even if the coverage is affordable. Final HHS regulations and (originally) proposed Treasury regulations generally allowed plans to determine the MV percentage by using an on-line MV calculator.

MV-lite plans arrive at 60% or greater MV without covering inpatient hospital and physician services by offsetting the loss in actuarial value caused by the absence of inpatient hospital coverage by increased spending on other benefits.

For background on the emergence of MV-lite plans and the reaction of the regulators, please see our prior post on the subject.

Noting that MV-lite plans “fail to meet universally accepted minimum standards of value expected from, and inherent in the nature of, any arrangement that can reasonably be called a health plan intended to provide the primary health coverage for employees,” the regulators pledged to modify the MV regulations accordingly. This promise is reflected in recently issued amendments to the proposed regulations under Code § 36B that implement the changes adopted by Notice 2014-69. The preamble to the amended proposed regulations explains:

“[T]hese proposed regulations . . . provide that an eligible employer-sponsored plan provides minimum value only if the plan’s share of the total allowed costs of benefits provided to an employee is at least 60 percent and the plan provides substantial coverage of inpatient hospital and physician services.”

The preamble goes on to flesh out the transition rule:

These regulations are proposed to apply for plan years beginning after November 3, 2014. However, for purposes of section 4980H(b), the changes to the minimum value regulations (in § 1.36B–6(a)(2) of these proposed regulations) do not apply before the end of the plan year beginning no later than March 1, 2015 to a plan that fails to provide substantial coverage for in-patient hospitalization services or for physician services (or both), provided that the employer had entered into a binding written commitment to adopt the noncompliant plan terms, or had begun enrolling employees in the plan with noncompliant plan terms, before November 4, 2014. For this purpose, the plan year is the plan year in effect under the terms of the plan on November 3, 2014. Also for this purpose, a binding written commitment exists when an employer is contractually required to pay for an arrangement, and a plan begins enrolling employees when it begins accepting employee elections to participate in the plan. The relief provided in this section does not apply to an applicable large employer that would have been liable for a payment under section 4980H without regard to § 1.36B–6(a)(2) of these proposed regulations.

The Final Instructions

The “Definitions” section of the Final 2015 Final Instructions for Forms 1094-C and 1095-C defines “minimum value” as follows:

Minimum value.  A plan provides minimum value if the plan pays at least 60 percent of the costs of benefits for a standard population and provides substantial coverage of inpatient hospitalization services and physician services.  An offer of coverage under a plan that fails to provide substantial coverage of inpatient hospitalization and physician services should be reported on Form 1095-C as not providing minimum value, even if an employer qualifies for the section 4980H transition rule under Notice 2014-69 (emphasis added).

What this means, of course, is that series-1 Indicator Codes 1A through 1E for Form 1095-C, Part II, Line 14 are not available to an employer that offered MV-lite coverage but that is relying on the transition rule to escape exposure for assessable payments under Code § 4980H(b). Each of these Codes requires that the employer make an offer of minimum essential coverage that provides minimum value. Rather, the proper series-1 Indicator Code is 1F (“Minimum essential coverage NOT providing minimum value offered to employee; employee and spouse or dependent(s); or employee, spouse and dependents”)(emphasis in the original). Consequently, covered employers will be able to claim a premium tax credit in appropriate cases, but the employer will need to subsequently claim reliance on the transitional relief. That is, the employer will first receive an assessment—a “preliminary letter”—from the IRS that will require a response. While the particulars of how this will occur are as yet unknown, the process will in all likelihood be similar to any other appeal of an excise tax. Additionally, we expect that employers will be required to file a declaration confirming that:

  • As of November 4, 2014, the plan year of the MV-lite plan in question began no later than March 1, 2015;
  • The employer had entered into a binding written commitment (i.e., the employer was contractually required to pay for an arrangement) to adopt the noncompliant plan terms, or had begun enrolling employees in the plan (i.e., accepting employee elections to participate in the plan) with noncompliant plan terms, before November 4, 2014.

One wonders how stringent the IRS will be on this score.