This is the thirty-eighth issue in our health care reform series of alerts for employers on selected topics in health care reform. (Our general summary of health care reform and other issues in this series can be accessed by clicking here.) This series of Health Care Reform Management Alerts is designed to provide a more in-depth analysis of certain aspects of health care reform and how it will impact your employer-sponsored plans.  

Recent IRS guidance proposes three ways for employers to determine whether their plans provide “minimum value,” as required under the Affordable Care Act. In essence, employers will only be considered to have provided minimum value health care coverage if they offer plans that cover 60% of the actuarial value of four “core” benefits: physician care, hospital and emergency room care, pharmacy benefits and lab/imaging services.  

[√] Applies to grandfathered plans

[√] Applies to new health plans and plans that lose grandfathered status

Background

The Affordable Care Act requires employers with more than 50 full-time equivalent employees to either provide employees with “minimum essential coverage” or pay a penalty. Moreover, the coverage must (a) be affordable (measured by employee premium costs), and (b) provide minimum value (measured by cost sharing and benefits offered). The Affordable Care Act defined minimum value as a plan that covers at least 60% of the actuarial value of health costs.  

Three Options for Measuring Minimum Value

IRS Notice 2012-31 proposed three alternative ways for employers to determine whether their group health plan provides minimum value:

  1. Calculator. Employers can use a calculator to determine whether their plan provides minimum value. The calculator will be made available by the Department of Health and Human Services and the Department of the Treasury. The calculator will allow employers to input information regarding the benefits offered under the plan and the corresponding cost-sharing levels. The calculator will then use claims data from self-funded and large group fully-insured plans to determine whether the plan does, in fact, provide minimum value. This option will only be available for plans that do not include what the IRS terms “non-standard features” (for example, visit limits that would impact the actuarial value of the benefits offered).
  2. Actuarial Certification. Employers sponsoring plans with non-standard features would be permitted to use a combination of the calculator and an actuarial certification to demonstrate that the plan provides minimum value. The employer would start by using the calculator, then an actuary would assess the impact of the non-standard features and adjust the plan’s actuarial value accordingly.
  3. Safe Harbor Checklist. Employers can avoid the calculator and/or actuarial certification list through the use of a safe harbor checklist. The checklist would list the four core benefits and the minimum permissible cost-sharing levels required to reach a 60% actuarial value. If the employer offers each of the benefits at a cost-sharing level not less than what is provided on the checklist, the employer’s plan will be deemed to satisfy the minimum value requirement. This option would not be available for plans with non-standard features, or plans that do not cover all of the core benefits.  

Strategies for Achieving Minimum Value

An employer who fears that its plan may not provide minimum value can take any of a number of steps to increase the plan’s actuarial value. At the outset, it is important to note that where an employer offers multiple plan options, only one of the available options has to provide minimum value to avoid a penalty. The easiest way to improve the plan’s value is to reduce participant cost-sharing (e.g., co-insurance levels). (Note that while participant premium costs do not appear to factor into the minimum value equation, employers can also be penalized if the employee premium cost for employee-only coverage exceeds 9.5% of any employee’s W-2 wages.)

An employer can also add benefits to the plan’s offerings. While employers are not technically required to offer all core benefits, the guidance indicates it would be difficult to provide minimum value without doing so. Employers may also consider adding non-core benefits (e.g., acupuncture, home health services, durable medical equipment), but the guidance indicates that these benefits do not add much value because they are utilized much less frequently by the average participant.  

Finally, employers can take other steps to reduce participant out-of-pocket costs. For instance, the guidance confirms that employer contributions to a health reimbursement account or health savings account will increase a plan’s actuarial value.  

Request for Comments on Minimum Value and 2014 Reporting Requirements

The IRS requested comments on its proposed method for calculating actuarial value. Specifically, the IRS requested comment on what other elements should be considered in the actuarial value determination, such as wellness programs/incentives. Comments must be submitted by June 11, 2012.  

The IRS simultaneously issued guidance on new Internal Revenue Code Sections 6055 and 6056.  These sections require employers to report to the government and employees information that will be used to determine (1) whether the employees obtained health coverage through their employer (which would satisfy their obligation under the individual mandate), and (2) whether the employer provided minimum essential coverage (which is required to avoid the play or pay penalty).  Notably, the request for comments asked how the agency can avoid duplicate reports for fully-insured plans, and whether a multiemployer plan or contributing employers should be required to issue the reports.