The Affordable Care Act—Countdown to Compliance for Employers, Week 28: The Logic, Calculus, and Limits of “Skinny” Plans
Written by Alden J. Bianchi
It was just over a year ago that the Wall Street Journal published an article entitled, “Employers Eye Bare-Bones Health Plans Under New Law,” which highlighted a compliance strategy to minimize employer exposure for assessable payments under the employer shared responsibility provisions of the Affordable Care Act (the “Act”) using what has now come to be called either a “skinny” plan or an “MEC” plan. (For an explanation of the issues and the initial stir that the article created, you can read our June 18, 2013 client advisory.) Over the last year, skinny plans have gained some grudging acceptance. And a consensus appears to have emerged to the effect that, while a skinny plan might be limited to preventative services only, the skinny plans appearing in the marketplace generally include a handful of other features, e.g., wellness programs and perhaps an elective (i.e., “non-coordinated”) hospital or fixed indemnity feature.
Background
Generally, an applicable large employer (i.e., an employer with an average of 50 or more full-time and full-time equivalent employees during the previous calendar year) can avoid exposure for assessable payments under Code § 4980H(a) if the employer offers its full-time employees (and their dependents) the opportunity to enroll in “minimum essential coverage” under an “eligible employer-sponsored plan.” The term “minimum essential coverage” refers to the source of the coverage. Minimum essential coverage includes government sponsored programs, plans in the individual market, grandfathered group health plans, and other coverage as prescribed by regulation. It also includes coverage under an eligible employer-sponsored plan.
While an eligible employer-sponsored plan includes group health plans (whether or not self-funded), it does not include coverage that consists solely of certain HIPAA excepted benefits (e.g., limited scope dental and vision benefits, coverage for a disease or specified illness, hospital indemnity, or other fixed indemnity insurance).
The term “group health plan” is defined with reference to both ERISA and the Internal Revenue Code, but at bottom for large group fully insured plans and for all self-funded plans, the plan must simply provide “medical care” within the meaning of Code § 213(d), which provides, in relevant part:
The term “medical care” means amounts paid for —
A. the diagnosis, cure, mitigation, treatment, or prevention of disease, or amounts paid for the purpose of affecting any structure or function of the body,
B. amounts paid for transportation primarily for and essential to medical care referred to in subparagraph (A), and
C. amounts paid for insurance covering medical care referred to in subparagraphs (A) and (B) (Emphasis added).
A skinny plan that provides preventative care falls squarely under clause A above.
There is, of course, also the matter of assessable payments under Code § 4980H(b), which applies in instances where an employer does make an offer of coverage sufficient to satisfy Code § 4980H(a), but that offer is either unaffordable or fails to provide minimum value. While there was initially some confusion in the matter, it is now abundantly clear that skinny plans do not provide minimum value. As a consequence, an employer that offers only a skinny plan will be exposed to the latter penalty.
Some have claimed that skinny plans are somehow aggressive or abusive. But that is a claim that is difficult to support. Rather, skinny plans are contemplated by the express terms of the statute: a plan that fails to provide minimum value is subject to penalties under Code § 4980H(b); skinny plans fail to provide minimum value; therefore skinny plans are subject to penalties under Code § 4980H(b). Still others worry that skinny plans fly in the face of the Act’s purpose to make comprehensive coverage widely available. This charge may well be correct. In light of the clear text of the statute, however, this is a problem that only Congress can fix.
Uses for Skinny Plans
In some respects, skinny plans are the new “mini-med” plans. Limited benefit (or mini-med) plans were common among employers with large workforces of high-turnover, low wage employees. As the name suggests, benefit coverage was sparse, to say the least, principally due to the very low annual limits. Limited benefit plans have been phased out under the Act’s rules barring lifetime and annual limits. But limited benefit plans were never widespread in any meaningful sense, and one suspects that the same will be true with skinny plans, at least as the only available option.
Another, perhaps unforeseen use for skinny plans is as an insurance policy for an employer that chooses to apply the look-back measurement method for determining an employee’s status as “full-time,” but is worried that it may not be properly identifying variable hour employees in all cases. In this situation, the employer will offer a major medical (i.e., minimum value) plan to all or substantially all of the employees that it determines to be full-time and offer the skinny plan to all employees. That way, if an employee is determined to be variable hour he or she still has an offer of coverage under the skinny plan.
Still other employers appear to be leaning toward a strategy that calls for offering both a major medical plan and a skinny plan to all employees. This permits employees to purchase just the skinny plan in order to avoid the penalty under the individual mandate (i.e., the requirement that all U.S. citizens and green card holders either have minimum essential coverage or pay a tax). Variations on this latter strategy include offers of coverage that are affordable in some instances but not in others. There is little rhyme or reason to the design selection other than each employer’s assessment (read, guess) as to whether its exposure under Code § 4980H(b) exceeds the cost of making the major medical coverage affordable.
The Federal Regulators
To the consternation of some who would like to see skinny plans outlawed, the IRS has said little on the matter of skinny plans. And while the Departments of Labor and Health and Human Services are very much a part of the Act’s larger legislative scheme, “minimum essential coverage” is first and foremost a creature of the Internal Revenue Code (i.e., Code § 5000A).
This does not mean that the Service is powerless to affect an employer’s behavior vis-à-vis skinny plans. Most skinny plans are self-funded, which means that they, along with any major medical coverage that an employer might offer, must still pass muster under the Code § 105(h) rules governing non-discrimination. Here, the problem is not with the skinny plan, which is presumably offered to all employees or predominantly low-paid employees. It is, rather, a problem for the major medical plan. Thus, for example, it should not be possible for an employer to offer major medical coverage to its management team and a skinny plan to the rank-and-file. As a practical matter, however, these rules have been largely honored in the breach by employers and largely ignored by the regulators.
Similar issues will arise in instances in which the major medical plan is fully insured once the Service gets around to issuing rules imposing non-discrimination rules on fully insured arrangements. Thus, the regulators still have a good deal of leverage to encourage employers to make broad-based offers of major medical coverage. That such coverage is offered alongside a skinny plan should trouble no one.
The Role of State Insurance Departments
From time-to-time, rumors surface to the effect that the insurance commission of this state or that is planning to impose rules effectively shutting down skinny plans. And—who knows—they may. But because ERISA preempts state laws relating to employee benefit plans, any state-based action can only impact skinny plans that are fully-insured. As noted above, at least in our experience, the vast majority of skinny plans are self-funded, and therefore beyond the reach of the state regulators. Separately, rumors that first surfaced last summer to the effect that the Department of Health and Human Services was going to come out “any day” to shut down skinny plans seem to have faded.