The Internal Revenue Service (IRS) has revisited its fascination with so-called Minimum Value (MV) Lite plans that, as originally designed, claimed to satisfy the Affordable Care Act’s (ACA’s) minimum value health plan standard without covering inpatient hospitalization or physician services. The IRS condemned these plans in Nov. 2014, providing a narrow transition window for plans that were, essentially, already in effect for 2015. Under new proposed rulemaking, plans that relied on transition relief for 2015 won’t meet the minimum value standard for 2016 unless the coverage is “substantial” for both inpatient hospitalization and physician services. The IRS has yet to define “substantial,” but has asked for comments on this issue.
Background
The ACA requires larger employers to satisfy a two-pronged employer mandate, or risk penalties. The first prong requires the employer to offer at least bare bones “minimum essential coverage” (MEC) to 70 percent or more (95 percent or more after 2015) of its full-time employees and their children. An employee that enrolls in this coverage, even though it might be so skimpy as to offer only preventive care, satisfies the ACA’s individual mandate.
The second prong of the employer mandate requires the employer to up the ante a bit, and ensure its coverage offer to full-time employees – never mind the children at this stage – has at least a 60 percent actuarial value (known as minimum value, or MV for short) and doesn’t cost the employee more than 9.56 percent of his or her household income, for employee-only coverage. If the employer offers MV/affordable coverage, the employee is frozen out of subsidies in the exchanges, even if he or she declines the employer’s offer.
To help employers and insurers determine whether a coverage offering meets the MV standard, the U.S. Department of Health and Human Services (HHS) released an actuarial value calculator. Employers and insurers could plug their plan design details into the Excel-based calculator, and the calculator generated a government-approved actuarial value reading. A glitch in the data underlying the calculations allowed health plans to attain a 60 percent (or better) actuarial value reading without offering inpatient hospitalization benefits
2014 IRS Guidance and Transition Relief
Last year the IRS indicated that programs must provide “substantial coverage” for inpatient hospitalization services and physician services to meet the ACA’s minimum value criteria. (For a refresher, see our Alert on this topic.) Thankfully, the 2014 guidance provided transition relief for employers who, as of Nov. 3, 2014, either:
1. Had already enrolled or had begun enrolling their employees in an MV Lite plan, or
2. Had entered into a binding written commitment to adopt one.
In the 2014 guidance, the IRS allowed MV Lite offerings meeting these conditions to insulate the employer from penalties under the second prong of the employer mandate, through the end of a plan year beginning on or before March 1, 2015. For example, an employer with a calendar year plan was insulated through the end of its 2015 plan year (Dec. 31, 2015). In addition, the IRS didn’t view the employer’s offer of MV Lite coverage as disqualifying the employee from subsidies in a public health insurance exchange.
Lockton Comment: The draft instructions to the 2015 IRS Forms 1094-C and 1095-C make no mention of this MV Lite transition relief. We hope the final version of the instructions will contain a special code that affected employers can enter on line 16 to demonstrate they qualify for this transition relief.
New IRS Rulemaking
The new proposed rulemaking largely reiterates IRS’s transition relief discussed in the 2014 guidance, but adds a couple clarifications:
• The 2014 IRS transition insulates the employer from penalties under the second prong of the employer mandate, through the plan year that begins on or before March 1, 2015. For this purpose, the plan year is the plan year in effect under the terms of the plan on November 3, 2014.
• For purposes of determining if a binding written contract is in place (#2 above), 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. In this respect, the IRS proposed rulemaking matches a passage from the preamble to HHS proposed regulations issued in Nov. 2014 (see our Alert).
The HHS Excel-based calculator and accompanying methodology discussion have not been updated to discuss this topic.
What’s Next?
The IRS has solicited comments on when coverage is “substantial” for both inpatient hospitalization and physician services. The guidance’s conspicuous absence of any definition of substantial and the lack of any further transition relief – or safe harbor – appears to indicate that employers will need to proceed at their own risk when designing MV Lite coverage.