An employer that offers minimum essential coverage to substantially all of its full-time employees may still owe penalties if the coverage it offers is inadequate because it is not “affordable” or it does not provide “minimum value.” It also may owe penalties on the employees it does not offer coverage to who receive a premium subsidy.more
Here we answer the top questions related to minimum value penalties based on the IRS’s final regulation.
Q1: What is “minimum value” coverage?
A1: Coverage is “minimum value” if the coverage is expected to pay at least 60 percent of covered claims costs. It must provide substantial coverage for inpatient hospital and physicians’ services.
Fully insured plans provided to small groups must provide coverage at bronze level, or better. Bronze level is an actuarial value of approximately 60 percent, and those plans are automatically considered to provide minimum value.
The government has provided a calculator and several safe harbor plan designs to assist large insured plans and self-funded plans with their minimum value determinations.
Q2: May an employer use wellness incentives when determining minimum value?
A2: The employer may use non-smoking incentives when determining minimum value if non-smoking incentives are used to reduce cost-sharing (deductibles, coinsurance, copays, or the out-of-pocket maximum). If non-smoking incentives are available to reduce cost-sharing, essentially the employer may assume that all employees qualify for the non-smoker incentive. All other wellness incentives must be disregarded.
Q3: May an employer use HRA contributions when determining minimum value?
A3: When determining minimum value, an employer may apply HRA contributions for the current year if those contributions may only be used by employees for cost-sharing. (Cost-sharing generally means deductibles, coinsurance, or copays.)
Q4: May an employer use HSA contributions when determining minimum value?
A4: When determining whether coverage is affordable, an employer’s contributions to an HSA may be considered as a first-dollar benefit.
Q5: What is the penalty for not offering affordable, minimum value coverage?
A5: The penalty is $250 per month ($3,000 per year, indexed) for each full-time employee who:
• Is not offered coverage that is both minimum value and affordable coverage, and
• Purchases coverage through a government Marketplace, and
• Is eligible for a premium tax credit/subsidy (so his household income must be below 400 percent of federal poverty level).
Q6: Does the employer owe a penalty if the employee declines affordable, minimum value coverage offered by the employer and buys coverage through the Marketplace instead?
A6: No. The employer simply has to offer affordable, minimum value coverage. (Specifically, the least expensive plan that provides minimum value coverage must be affordable based on the cost of self-only coverage.) If the employee chooses to obtain coverage through the Marketplace, he or she can, but the employee will not be eligible for a premium tax credit/subsidy and therefore the employer will not owe a penalty.
Q7: Does the employer owe a penalty if the employer offers minimum essential coverage that is not affordable and minimum value coverage to an employee who would be eligible for a premium tax credit/subsidy, but the employee chooses to enroll in the employer’s plan?
A7: No. If the employee chooses to obtain coverage through his or her employer instead of through the Marketplace, the employee can, but he or she will usually not be eligible for a premium tax credit/subsidy and therefore the employer will not owe a penalty.
Q8: Is it possible for an employee to qualify for a premium tax credit/subsidy even though his or her employer offers affordable coverage?
A8: Yes. If the cost of self-only coverage through the Marketplace is more than 9.5 percent (indexed to 9.56 percent in 2015, and 9.66 percent in 2016) of an employee’s actual household income, an employee could be eligible for the subsidy even though the coverage offered by his or her employer is affordable under one of the three safe harbors. This will be a fairly unusual occurrence, but could happen because certain deductions are allowed when determining household income.
Q9: Must all plan options provide affordable, minimum value coverage?
A9: No. Only the lowest cost option that provides minimum value coverage needs to be affordable to avoid the penalty. An employer is free to offer other options that do not meet affordability.
Q10: Are there special rules for multi-employer plans?
A10: Yes. If the employer is required to make a contribution to a multi-employer plan with respect to some or all of its employees under a collective bargaining agreement or related participation agreement and the multi-employer plan offers affordable, minimum value coverage to eligible employees, the employer will be considered to have offered affordable, minimum value coverage. In addition to the three affordability safe harbors, coverage under a multi-employer plan is considered affordable if the employee’s contribution toward self-only coverage does not exceed 9.5 percent (indexed to 9.56 percent in 2015, and 9.66 percent in 2016) of the wages reported to the multi-employer plan, based on either actual wages or an hourly wage rate under the bargaining agreement.
Therefore, determining how many employees you have under ACA is critical to avoiding penalties. Please contact our office with any particular questions or concerns.