The ACA offer of coverage part 1: Understanding minimum essential coverage

Question: What is minimum essential coverage (MEC), and what role does an employer’s offer of MEC play in avoiding potential Affordable Care Act (ACA) employer mandate penalties?

Short answer: Minimum essential coverage generally includes any employer-sponsored group health plan providing medical coverage other than excepted benefits. Applicable large employers must offer MEC to avoid the ACA employer mandate Section 4980H(a) A Penalty. Coverage intended to avoid only the A Penalty is often referred to as a MEC plan or a skinny plan.

Starting point: The ACA employer mandate

The ACA employer mandate (also referred to as employer shared responsibility or pay or play) rules apply to employers that are Applicable large employers, or ALEs. In general, an employer is an ALE if it (along with any members in its controlled group) employed an average of at least 50 full-time employees, including full-time equivalent employees, on business days during the preceding calendar year.

For more details: ACA Employer Mandate & ACA Reporting Guide

The ACA employer mandate offer of coverage requirements

An offer of coverage made by an ALE to a full-time employee must meet four requirements to avoid potential ACA employer mandate penalty liability:

1. The offer must be for minimum essential coverage (part i);
2. The offer must be affordable (part ii);
3. The plan must provide minimum value (part iii); and
4. The full-time employee must have an effective opportunity to enroll (part iv).

Why it matters: Potential ACA employer mandate penalties

The employer mandate creates two potential forms of tax penalty liability under §4980H for ALEs.

IRC §4980H(a)—The A Penalty for failure to offer MEC

The first is the §4980H(a) penalty — frequently referred to as the A Penalty. This penalty applies where the ALE fails to offer MEC to at least 95% of its full-time employees (and their children to age 26) in any given calendar month. Full-time status is defined by the ACA to include employees averaging at least 30 hours of service per week, as determined under either the monthly measurement method or the look-back measurement method.

The 2027 A Penalty is $315/month ($3,780 annualized) multiplied by all full-time employees (reduced by the first 30). It is triggered by at least one full-time employee enrolling in subsidized coverage on the Exchange.

IRC §4980H(b)—The B Penalty for failure to offer MEC meeting additional ACA standards

The second is the §4980H(b) penalty — frequently referred to as the B Penalty. This penalty applies where the ALE isn't subject to the A Penalty because it offers MEC to at least 95% of its full-time employees (and their children to age 26).

The B Penalty may apply for each full-time employee who is:

• Not offered MEC;
• Offered unaffordable coverage; or
• Offered coverage that doesn't provide minimum value.

The 2027 B Penalty is $472.50/month ($5,670 annualized) for each such full-time employee receiving subsidized coverage on the Exchange. Unlike the A Penalty, the B Penalty isn't multiplied by (nearly) all full-time employees.

What is MEC?

The ACA defines minimum essential coverage to include coverage under an eligible employer-sponsored plan. (IRC §5000A(f)(1)(B)). 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…any other plan or coverage offered in the small or large group market within a state. (IRC §5000A(f)(2)).

Treasury Regulations confirm that minimum essential coverage also includes a self-insured group health plan under which coverage is offered by or on behalf of an employer to the employee. (Treas. Reg. §1.5000A-2(c)(1)(ii)). However, minimum essential coverage doesn't include excepted benefits, such as most dental, vision, health FSA and EAP benefits. (Treas. Reg. §1.5000A-2(g)).

Summary: MEC is an eligible employer-sponsored plan, which generally includes any non-excepted medical plan offered by an employer. That includes fully insured (small group or large group) and self-insured (ASO or level-funded) medical plans.

What is minimum value?

The ACA defines an employer-sponsored plan to provide minimum value (MV) where the percentage of the total allowed costs of benefits provided under the plan is no less than 60 percent. The plan must also include substantial coverage of inpatient hospital services and physician services. (45 CFR §156.145(a)). The plan must have an actuarial value of at least 60% and cover inpatient hospital/physician services to meet the ACA standard of providing MV.

The skinny on MEC plans

Some ALEs offer their employees MEC that doesn't provide MV. These non-MV arrangements are commonly referred to by promoters in marketing materials as Minimum Essential Coverage Plans or MEC Plans. It's also common in the industry to refer to these arrangements as skinny plans to reflect the plan’s lower actuarial value and its limited coverage of inpatient hospital and physician services. Some MEC plans cover the required ACA preventive services and little else.

Note: As covered by NBC News and Covered California, employees may be confused as to the scope of a MEC plan. Employers should carefully communicate that the term MEC doesn't necessarily include essential health benefits and make clear that the skinny plan is more limited than comprehensive major medical coverage that provides MV.

The skinny advantage: MEC plans can avoid A Penalty liability

The most daunting liability imposed by the ACA employer mandate is the A Penalty. ALEs offering a MEC plan to at least 95% of full-time employees (and their children to age 26) avoid this exposure. Because skinny plans cost significantly less than comprehensive coverage, ALEs on a tight budget can rely on a skinny plan offering as a cost-effective way to avoid the very large potential A Penalty. Promoters of skinny plans often also represent their offering as satisfying applicable state individual mandates for employees who might otherwise have difficulty affording comprehensive coverage that provides MV.

The skinny disadvantage: MEC plans don't prevent B Penalty liability

A MEC-only plan doesn't provide MV. Where an employer offers a MEC-only skinny plan, the employee can choose to decline the skinny plan offer and instead enroll in subsidized (if eligible) coverage on the Exchange. Therefore, although the skinny plan is MEC that can avoid A Penalty liability, offering only a skinny plan exposes ALEs to B Penalty liability for failure to provide MV.

This ability to access the subsidies in the form of the Premium Tax Credit (PTC) on the Exchange is a key differentiator from comprehensive major medical coverage that provides MV. Where the employer’s offer of coverage is affordable and provides MV, the employee doesn't have access to the PTC — even if the employee chooses to decline the employer’s offer. On the other hand, an offer of MEC that doesn't provide MV (i.e., a skinny plan) allows the employee to choose between the employer’s non-MV plan and subsidized Exchange coverage with the PTC. Those choosing full major medical coverage (plus the PTC) from the Exchange trigger B Penalty liability to the employer.

Example 1:

• Coin Laundry, Inc. is an ALE with tight profit margins that make it difficult to support offering a comprehensive major medical plan that provides MV to its full-time employees.
• The company’s owners Evelyn and Waymond therefore decide to offer a medical plan (a skinny MEC plan that doesn't provide MV) to all 75 full-time employees (and their children to age 26).
• Forty of those full-time employees enroll in the skinny plan, 15 enroll in other employer coverage (through a spouse, domestic partner, or parent) and the remaining 20 full-time employees decline the skinny plan to instead enroll in subsidized coverage on the Exchange.

Result 1:

• There's no A Penalty liability for Coin Laundry because it offered MEC to all of its full-time employees.
• There's no B Penalty liability for the 40 full-time employees who enrolled in the skinny plan offering.
• There's no B Penalty liability for the 15 full-time employees who enrolled in another employer’s plan.
• Coin Laundry is subject to B Penalties ($472.50/month/employee in 2027) for the 20 full-time employees who declined the skinny plan and instead enrolled in subsidized Exchange coverage.

MEC plans also can't be used to pass affordability

The ACA affordability test is based on the monthly employee-share of the premium for employee-only coverage under the ALE’s lowest-cost plan option that provides MV in which the employee is eligible to enroll. It refers to the lowest possible monthly amount that an employee would pay to enroll in the employer’s non-skinny major medical plan (that provides MV), regardless of what plan option (if any) the employee elects.

Where an ALE offers both skinny and non-skinny plan options (i.e., at least one plan option that doesn't provide MV, and at least one plan option that does provide MV), the affordability analysis is based only upon those plan options that provide MV. The skinny plan options are disregarded in determining affordability.

Example 2:

• Coin Laundry, Inc. is an ALE with tight profit margins that make it difficult to support offering a comprehensive major medical plan that provides MV to its full-time employees.
• After determining that the design in Example 1 could expose the company to up to approximately $113,000 in B Penalty liability, the company’s owners Evelyn and Waymond decide to add a plan option that provides MV.
• The employee-share of the premium for the lowest-cost skinny MEC plan option is $100/month.
• The employee-share of the premium for the lowest-cost plan option providing MV is $265/month.

Result 2:

• There's no A Penalty liability for Coin Laundry because it offered MEC (both the skinny and MV plans) to all of its full-time employees.
• There's no B Penalty liability for any full-time employees who enroll in the skinny or MV plan option.
• Coin Laundry is subject to potential B Penalty liability for any full-time employees waiving the plan for whom the offer of coverage didn't meet an affordability safe harbor.
• The $100/month skinny plan contribution rate isn't included in the affordability analysis.
• The relevant plan option for affordability purposes is the $265/month cost for the plan that provides MV.
• Under the rate of pay affordability safe harbor, any full-time employee making less than roughly $20/hour who declines the Coin Laundry offering and enrolls in subsidized Exchange coverage can trigger the B Penalty ($472.50/month/employee in 2027).

Important notes:

• The B Penalty exposure in Example 2 for waiving full-time employees outside an affordability safe harbor is likely less than the potential B Penalty in Example 1 where the company didn't offer a plan providing MV.
• In Example 1, it's likely that more full-time employees can trigger a B Penalty because the company doesn't offer a plan option that can protect against B Penalty liability.
• In Example 2, it's likely that the new plan option providing MV will be affordable for at least some full-time employees, thereby reducing the B Penalty exposure.

The bottom line: Weighing the MEC trade-offs

MEC generally includes any non-excepted medical plan offered by the employer. ALEs offering MEC to at least 95% of full-time employees (and their children to age 26) avoid the harshest A Penalty liability under the ACA employer mandate, and enrolled employees may avoid potential state individual mandate penalties.

ALEs offering skinny MEC plans that don't provide MV should be aware that the plan may have meaningful coverage gaps, particularly in the key areas of cost-sharing responsibility and inpatient hospital and physician services. But more to the point for ALEs, MEC-only plans don't address the employer’s potential B Penalty liability, which can still be a high cost to employers depending on how many full-time employees enroll in subsidized Exchange coverage.

The key for employers exploring potential skinny plan options is to assess these trade-offs so they can make an informed decision as to whether to offer these types of non-MV MEC Plan arrangements to employees. Employers seeking to avoid all potential ACA employer mandate penalty liability should ensure their MEC offering meets all four of the required conditions outlined at the outset of this post.