As discussed in our March 20, 2013 Legal Alert – Health Care Reform’s Large Employer Play or Pay Penalties: A Checklist for Employers, large employers will be subject to a penalty tax if they either: (1) fail to offer “minimum essential coverage” to all full-time employees (and their dependents); or (2) offer employer-sponsored coverage to all full-time employees, but the coverage is either not “affordable” or does not provide “minimum value.” These penalties, commonly referred to as the “large employer play or pay penalties,” were originally scheduled to take effect on January 1, 2014. However, as discussed in our July 3, 2013 Legal Alert – Treasury Announces Large Employer Play or Pay Penalties Will Be Delayed For One Year, on July 2, 2013, the Treasury Department announced that large employers will have an additional year to comply with the employer shared responsibility penalty provisions.
Although the effective date of the large employer play or pay penalties has been extended to January 1, 2015, the “minimum essential coverage,” “minimum value,” and “affordability” determinations are still relevant for 2014. Employees may be eligible for premium tax credits on the Health Benefit Exchange (“Exchange”) in 2014 if their employer coverage is not affordable or does not provide minimum value.
Additionally, employers must provide employees with a Health Benefit Exchange Notice which must disclose whether employer-sponsored coverage is intended to be minimum value and affordable, based on employee wages. This notice must be provided to all current employees by October 1, 2013, and thereafter to each new employee at the time of hiring (see our June 25, 2013 Legal Alert – Department of Labor Sets October 1 Deadline for Employers to Send Health Benefit Exchange Notices; COBRA Election Notices Must Also be Updated).
Finally, employers will also need to know whether their health plans provide minimum value as well as minimum essential coverage in order to comply with certain reporting requirements, including new statements that must be included in the Summary of Benefits and Coverage (“SBC”) for group health plans that begin coverage on or after January 1, 2014. It is important to note that the following rules apply for all employers, not just those that are classified as large employers.
Minimum Essential Coverage
On July 1, 2013, the Department of Health and Human Services (“HHS”) released its final rule regarding “minimum essential coverage” (“MEC”). The final rule sets forth the types of coverage that will be considered to provide MEC as well as requirements for coverage to be considered MEC where the coverage is not specifically designated as such. The following types of coverage are considered to be MEC:
- Eligible employer-sponsored plans;
- Government sponsored programs, including Medicare, Medicare Advantage, Medicaid and CHIP;
- Plans in the individual market;
- Grandfathered health plans;
- Self-funded student health coverage; and
- State high risk pool coverage.
If the health coverage is not a type of coverage that is specifically designated as MEC, the coverage sponsor may apply to HHS to have the coverage recognized as providing MEC. First, the coverage must substantially comply with the requirements of Title I of the Affordable Care Act (“ACA”) pertaining to non-grandfathered, individual health insurance coverage. The coverage sponsor must then provide HHS with basic information about the plan including the eligibility criteria, cost sharing requirements and the essential health benefits covered.
Most employers will satisfy MEC by providing an “eligible employer-sponsored plan.” An “eligible employer-sponsored plan” is defined as a group health plan or group health insurance coverage offered by an employer to the employee which is a governmental plan or any other plan or coverage offered in the small or large group market within a state. “Eligible employer-sponsored plan” also includes a grandfathered plan offered in a group market.
The definitions of MEC and “eligible employer-sponsored plan” do not prescribe any minimum standards that the coverage must provide. Under the available guidance, it is unclear whether an employer can offer low-value coverage and still satisfy the MEC requirement. Without further guidance, it appears that the quality of coverage offered by employers will be governed by the minimum value standard as discussed below.
Minimum Value and Affordability
On April 30, 2013, the Treasury Department and the Internal Revenue Service (“IRS”) issued proposed regulations that will help employers determine whether their health plans provide minimum value to participants. As explained above, employees may be eligible for premium tax credits on an Exchange if their employer coverage does not provide minimum value or if their employer coverage is not affordable. Additionally, effective January 1, 2015, employers offering health coverage that is not affordable or does not provide minimum value could be subject to penalty taxes if even one full-time employee obtains premium tax credits to buy insurance on an Exchange.
Eligible employer-sponsored coverage is affordable for an employee and related individuals if the portion of the annual premium the employee must pay for self-only coverage does not exceed the required contribution percentage (9.5% for taxable years beginning before January 1, 2015). An eligible employer-sponsored plan provides minimum value (“MV”) only if the plan’s share of the total allowed costs of benefits provided to an employee (the “MV percentage”) is at least 60%. These requirements are discussed in more detail below.
For insured plans, we expect insurers to make the determination as to whether MV requirements are being met, and for self-funded plans, we expect third-party administrators to assist with the determination. Nevertheless, it is helpful to understand how MV is calculated.
The proposed regulations provide that the MV percentage is determined by dividing the cost of certain benefits the plan would pay for a standard population by the total cost of certain benefits for the standard population, taking into account amounts the plan pays and amounts the employee pays through cost-sharing, and then converting the result to a percentage. The MV standard population is developed by HHS and is based on the population covered by typical self-insured group health plans.
Health Benefits Measured in Determining Minimum Value
With respect to the health benefits considered in determining the share of benefit costs paid by a plan, the regulations provide that MV is based on the plan’s anticipated spending for benefits provided under any particular essential health benefits benchmark plan for any state based on the plan’s cost-sharing provisions. Accordingly, MV percentage is based on the plan’s share of the costs of only those categories of essential health benefits the plan covers. The regulations do not require employer-sponsored self-insured and insured large group plans to cover every essential health benefits category or conform their plans to an essential health benefits benchmark that applies to qualified health plans.
Treatment of an Employer’s Health Savings Account (“HSA”) or Health Reimbursement Arrangement (“HRA”) Contributions
Employer contributions for the current plan year to HSAs that are offered with an eligible employer-sponsored plan are taken into account for that plan year towards the plan’s MV percentage. Likewise, amounts newly made available for the current plan year under an HRA that is integrated with an eligible employer-sponsored plan are taken into account for that plan year towards the plan’s MV percentage if the amounts can only be used to reduce cost-sharing for covered medical expenses, and may not be used to pay insurance premiums. The preamble to the proposed regulations indicates that amounts that may be used for paying premiums would be taken into account in determining a plan’s affordability but not for determining MV.
Methods for Determining Minimum Value
An eligible employer-sponsored plan may use one of the following methods to determine whether the plan provides MV.
- MV Calculator – Plans must use the MV Calculator, made available by HHS and the IRS, to measure standard plan features (unless a safe harbor applies), but the percentage may be adjusted based on an actuarial analysis of plan features that are outside the parameters of the calculator.
- Safe Harbor – The proposed regulations indicate that certain safe harbor plan designs that satisfy MV will be specified in additional guidance. The safe harbors are intended to provide an easy way for sponsors of typical employer-sponsored group health plans to determine whether a plan meets the MV threshold without having to use the MV calculator. The preamble proposed the following three safe harbor plan designs: (1) a plan with a $3,500 integrated medical and drug deductible, 80% plan cost-sharing and a $6,000 maximum out-of-pocket limit for employee cost-sharing; (2) a plan with a $4,500 integrated medical and drug deductible, 70% plan cost-sharing, a $6,400 maximum out-of-pocket limit and a $500 employer contribution to an HSA; and (3) a plan with a $3,500 medical deductible, $0 drug deductible, 60% plan medical expense cost-sharing, 75% plan drug cost-sharing, a $6,400 maximum out-of-pocket limit and drug co-pays of $10/$20/$50 for the first, second and third prescription drug tiers, with 75% coinsurance for specialty drugs.
- Actuarial Certification – Plans with nonstandard features that cannot determine MV using the MV Calculator or a safe harbor must use the actuarial certification method.
- Metal Coverage – Plans in the small group market may comply by using one of the previous methods or by providing coverage that conforms with the requirements for a level of metal coverage (bronze, silver, gold or platinum).
Generally, if an employee’s share of the premium for employer-provided self-only coverage would cost the employee more than 9.5% of that employee’s annual household income, the coverage is not considered affordable for that employee. Because household income is nearly impossible for an employer to determine, the agencies have proposed three safe harbors that will make it easier for an employer to determine whether coverage is affordable. Use of the safe harbors is optional and an employer may choose to apply the safe harbors for any reasonable category of employees, provided it does so on a uniform and consistent basis for all employees in the category. Use of the safe harbors is also contingent on the employer meeting certain requirements that are set forth in the regulations.
Generally, health coverage is affordable if the employee’s required contribution for the employer’s lowest cost employee-only coverage that provides MV meets one of the following affordability safe harbors:
- W-2 Safe Harbor – The annual cost of health coverage must not exceed 9.5% of the Box 1 amount on the employee’s W-2 for the year in which the coverage is offered. This proposed rule does not allow Section 401(k), 403(b) or 125 deferrals to be added back into the Box 1 amount for safe harbor purposes. Additionally, the employee’s contribution must remain a consistent amount or percentage during the calendar year, so that an employer is not permitted to make discretionary adjustments to the required employee contribution for a pay period. Note that this method may result in fluctuations in employee contributions due to changes in Section 401(k) deferrals, unpaid leaves of absence, etc.
- Rate of Pay Safe Harbor – For hourly employees, the monthly cost of health coverage must not exceed 9.5% of that employee’s hourly wage as of the first day of the coverage period multiplied by 130 hours (regardless of how many hours the employee worked). For salaried employees, the monthly cost of health coverage must not exceed 9.5% of that employee’s monthly salary. Note that Section 401(k), 403(b) and 125 deferrals do not reduce the employee’s rate of pay. An employer may only use this safe harbor if the employer does not reduce the hourly wages of the hourly employees or the monthly wages of the salaried employees during the year. This may be a more stable method of calculating affordable coverage than the W-2 safe harbor.
- Federal Poverty Line (“FPL”) Safe Harbor – The monthly cost of health coverage cannot exceed 9.5% of the annual FPL for the state in which the employee is employed, divided by 12. The employer is permitted to use the most recently published FPL as of the first day of the plan year. The FPL is regularly published in late January, so for 2014, calendar year plans would use the FPL published in January 2013, which is $11,490 for the 48 contiguous states. This may be the easiest method for calculating affordable coverage.
Proposed regulations issued on January 2, 2013, clarified that an employee’s total household income is used to measure premium tax credits for individuals who apply for coverage through an Exchange. Accordingly, in some cases, an employer will use one of the affordability safe harbors to calculate premium affordability, but in light of full household income, some employees could still potentially qualify for tax credit assistance. The employer will not be subject to a penalty because the employer acted in good faith using one of the safe harbors, yet the individual might still be entitled to federal assistance to pay for Exchange health coverage.
Premium for Tobacco Use
The proposed regulations provide that the affordability of an employer-sponsored plan is determined by assuming that each employee fails to satisfy the requirements of a wellness program, except the requirements of a nondiscriminatory wellness program related to tobacco use. Accordingly, the affordability of a plan that charges a higher initial premium for tobacco users will be determined based on the premium that is charged to non-tobacco users, or tobacco users who complete the related wellness program, such as attending smoking cessation classes. Accordingly, as long as a wellness program related to tobacco use is nondiscriminatory (see our July 17, 2013 Legal Alert – Final Wellness Rules May Require Review of Existing Wellness Programs), the employer can ignore the additional premium that is charged to tobacco users in determining whether coverage is affordable. However, the ability to ignore premium surcharges only applies to tobacco use wellness programs, not other wellness programs.
Summary of Benefits and Coverage
As reported in our July 19, 2012 Navigating Health Care Reform Alert, Summary of Benefits and Coverage for Group Health Plans, employers offering group health plan coverage are now required to provide their employees with an SBC. In addition to the summary plan description, the SBC summarizes the health plan or coverage offered by the employer and is intended to make it easier for employers to compare different plans and coverage.
In February 2012, the Department of Labor (“DOL”) published templates to be used for SBCs for health coverage beginning before January 1, 2014. When these templates were issued, the DOL indicated that it would update the SBC materials for subsequent years. Recently, the DOL released updated guidance in the form of Frequently Asked Questions and issued a new SBC template.
The new SBC template adds two important statements. The employer must include in the SBC (1) a statement as to whether the health plan provides minimum essential coverage, and (2) a statement as to whether the health plan meets the minimum value requirements. The updated template is authorized for use for coverage beginning on or after January 1, 2014 and before January 1, 2015.
The DOL has provided some transition relief for those employers that have already begun to prepare their SBCs for the 2014 plan year using the old template. If an employer is already in the process of preparing its SBC and the addition of the two statements regarding minimum essential coverage and minimum value would be an administrative burden, the employer does not have to include the statements in the SBC. However, in order to qualify for this relief, the employer must provide a cover letter or similar disclosure with its SBC indicating whether the plan provides minimum essential coverage and whether the plan meets the minimum value requirements. The Frequently Asked Questions guidance provides specific language to be included in the cover letter.
As a result of this new guidance, employers must update their SBCs with statements regarding minimum essential coverage and minimum value for coverage beginning on or after January 1, 2014. Most employers will have to update their SBCs to include the additional information for open enrollment in the fall of 2013, for the 2014 plan year. These statements can be provided by using the updated SBC template or as a disclosure provided in connection with the old SBC template.
Although the large employer penalties have been delayed until 2015, employers still need to know whether their plans provide minimum essential coverage, are affordable and provide minimum value for purposes of satisfying other requirements of ACA that take effect in late 2013 and 2014.