The Rise of Skinny Plans

As it became clear that the pay or play provisions and accompanying penalties under Code §4980H would not go away, the quest began for an option for low benefit plans that employers could offer to avoid the most extensive of these penalties.  Thus begat “skinny” or “bare bones” plans.  Skinny plans typically cover limited services, such as preventive care, but often do not cover other major medical benefits, such as hospitalization or physician services.

Skinny plans ostensibly were designed to provide some layer of protection to lower paid employees.  From a financing standpoint, skinny plans typically are self-funded to avoid state mandated benefits and the ACA essential coverage requirements.  Employers may offer skinny plans alongside other self-funded or fully insured options that meet the ACA essential coverage requirements, but do not meet the affordability requirements for some employees.

Employers and plan sponsors became attracted to skinny plans  due to the potential to avoid the sledgehammer “sub-section (a) penalty” under Code §4980H, which totals $2000 multiplied by the total number of full-time employees less the 80 employee reduction for 2015 (30 employee reduction for 2016 and beyond) .  The sledgehammer penalty is triggered when an employer fails to offer minimum essential coverage to full-time employees and their dependents.  Skinny plans were particularly appealing to employers in certain targeted industries with high turnover or lower wages, such as staffing firms, restaurants and hospitality.

Skinny plans, however, do not avoid the “subsection (b) penalty” that applies to employers who offer minimum essential coverage, but whose coverage does not meet the affordability or minimum value standards under §4980H.  The penalty under subsection (b) is $3000 multiplied by the total number of full-time employees who receive a subsidy on the exchange. For many employers, particularly those in the targeted industries, the subsection (b) penalty is much less than the subsection (a) penalty.

There are several ways to determine if a plan provides minimum value.  This alert will not discuss all those options, but one option involves utilization of the online minimum value calculator prepared by the IRS and HHS.  After its release online, it was discovered (and in fact heavily promoted by third party administrators marketing skinny plans) that some plans could satisfy the minimum value calculator, even though those plans did not provide hospitalization or physician services.  This presumed approval fueled the efforts for further expansion of skinny plans.

IRS Notice 2014-69

To forestall this expansion, the IRS issued Notice 2014-69.  This Notice acknowledged the flaw in the minimum value calculator and stated that, despite the utilization of the minimum value calculator, plan designs without hospitalization or physician services would not meet the minimum value standards.

In furtherance of this Notice, HHS then issued final regulations which provide that a plan will not meet minimum value if it excludes substantial coverage for inpatient hospitalization and or physician services, or both.  This new standard is effective immediately rather than being delayed until the end of 2015 or the 2015 plan year.

                  Thus, plan sponsors should not adopt plans excluding inpatient hospitalization or physician services for the 2015 plan year. 

The IRS Notice and final regulations, however, provide a special transition rule for plans entered into before November 4, 2014.  In such cases, the new rules do not apply until the end of the plan year, provided that the plan year begins no later than March 1, 2015.

                  The rules for plans entered into before November 4, 2014 would have been less forgiving except for the fact of the apparent glitch in the online minimum value calculator.

Furthermore, the Notice and the preamble to the final regulations clarify that an individual’s eligibility for a skinny plan excluding physician and hospitalization benefits will not preclude that individual from eligibility for exchange coverage or subsidies.  The Rules also provide that employers may not imply in any disclosure that such a plan will preclude eligibility or exchange coverage or subsidies, and must correct any prior disclosure that may so imply.  Employers, however, who offer another option that provides affordable/minimum value coverage may disclose that affordable/minimum value coverage will preclude exchange coverage or subsidies.

Planning for the Future

Employer decisions regarding the pay or play penalties require careful consideration and strategic planning.  ACA compliance requires that employers not only make appropriate plan design choices to avoid the pay or play penalties, but also prepare to meet the increased employer compliance obligations such as the Form 6056 reporting (applicable to large employers subject to the §4980H penalties).  We will continue to work with you to navigate through ACA compliance.

Please contact our office if you have any questions about the pay or play penalties, IRS Notice 2014-69, or the transition relief for skinny plans.

Dated:  April 29, 2015