large employers offering only a skinny plan would be subject to the ACA’s penalties of up to $3,000 per employee.
No More Skinny Plans: In past articles, we’ve discussed so-called skinny plans, or medical plans that large employers have argued would fulfill their requirement to provide affordable medical coverage to employees. The ACA requires individual and small group health plans to cover certain preventive services and to cover a list of “essential health benefits.” Large employer plans don’t have this requirement. Instead, they must provide coverage that is affordable and meets minimum value standards, which means covering at least 60 percent of the total cost of medical services for a standard population.
Skinny plans cover the required preventive services, but do not provide hospitalization benefits, which is one of the most costly “essential benefits.” These plans save money…and some meet the minimum value standard.
In late February, the Department of Health and Human Services (HHS) finalized a proposed rule that requires employer-sponsored health plans to cover hospitalization benefits. It said a plan that does not offer hospital benefits “is not a health plan in any meaningful sense.” This means large employers offering only a skinny plan would be subject to the ACA’s penalties of up to $3,000 per employee.
Employees covered by these plans now officially lack qualifying coverage, which would make them subject to penalties. Many of these workers are in low-wage industries, such as restaurants and retail. HHS is granting them relief, allowing them to receive subsidies to buy comprehensive individual coverage.
HHS is allowing employers that signed contracts before November 4, 2014 to retain these plans for this year.
Health Reimbursement Arrangements Okay…for a Few More Months: Small employers with health reimbursement arrangements (HRAs) have gotten a temporary reprieve from the Obama administration. In late February, the Internal Revenue Service and Treasury Department announced that they will not levy penalties against small businesses that use standalone HRAs until July. This will give small employers more time to change their plans.
HRAs allow employers to reimburse employees for qualified healthcare costs with before-tax dollars, benefitting both employer and employee. Since the implementation of the Affordable Care Act (ACA), though, employers using standalone HRAs are subject to fines. HRAs have annual limits, which violates the ACA’s prohibition on health plans with annual limits.
The federal agencies overseeing the ACA—the Departments of Health and Human Services, Treasury and the IRS—determined that employers can offer an HRA to active employees if they are also covered by a group health plan that complies with ACA rules. Under the new rules, an HRA can reimburse non-essential health benefits, such as premium expenses. Employers can offer standalone HRAs to retirees.
IRS Begins Working on Details of “Cadillac Plan” Tax: To fund coverage subsidies, the ACA includes a tax on so-called “Cadillac” health plans. These high-cost health plans insulate individuals from the cost of their health care.
The ACA specifies the 40 percent excise tax will apply to plans that cost more than $10,200 for self-only coverage and $27,500 for family coverage. In insured plans, the health insurer will pay the tax; in self-insured plans, the plan sponsor, usually the employer, will pay. The IRS must create rules implementing the tax, which goes into effect in 2018, so many details remain unknown at this point.
In a notice issued on February 23, the IRS defined “applicable coverage” for purposes of the tax. The notice clarified that it does not matter whether the employer pays all, or any premiums, for the plan. Even if the employee pays for coverage with after-tax dollars, if the employer sponsors the plan, the tax will apply. Types of plans the Cadillac tax will apply to include:
- Health FSAs (flexible spending arrangements)
- Archer Medical Savings Accounts
- Health Savings Accounts (not including certain contributions by individuals)
- Government group health plans covering civilian employees. (This excludes military coverage.)
- Coverage for on-site medical clinics, except for clinics that provide only de minimis medical care
- Retiree coverage
- Multiemployer plans
- ndemnity plans, when payment for coverage is excluded from gross income or a deduction is allowed. This would include most critical illness coverage, dread disease insurance (such as cancer insurance), and hospital indemnity plans or other health plans that pay a specified amount per occurrence or claim.
The IRS also states that it expects that executive physical programs and health reimbursement arrangements (HRAs) will likely be included in the definition of applicable coverage.
The Department of the Treasury and IRS are inviting comments on this initial notice and will issue further notice on the calculation and assessment of the tax.
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