IRS Closes Minimum Value Loophole and Kills Skinny Plans for Employers Subject to Play or Pay Mandate

On November 4, 2014, the Internal Revenue Service (IRS) and the Department of Health and Human Services (HHS) issued Notice 2014-69, disapproving employers’ use of “skinny” health plans that limit coverage for inpatient hospitalization services and/or physician services for the purpose of meeting the minimum value requirement of Internal Revenue Code (the “Code”) section 4980H (the “play or pay” mandate). Until the Departments publish further regulations regarding the “minimum value” requirement, the guidance states that a plan that fails to provide “substantial coverage” for inpatient hospitalization services and/or physician services will fail to meet that requirement.

While the guidance is effective immediately and shuts down the promotion of skinny plans to employers subject to the play or pay mandate, the Notice provides short-term relief for an employer that entered into a binding written commitment to adopt a skinny plan or had begun enrolling employees in such a plan prior to November 4, 2014. For these employers, the upcoming regulations will not apply until after the end of the plan year beginning before March 1, 2015. Such employers must also notify employees that such plan coverage will not affect employee eligibility for a possible premium tax credit under Code section 36B to purchase State or Federal Marketplace/Exchange coverage.

Minimum Value Requirement

Beginning in 2015, applicable large employers (as defined in Code section 4980H(c)(2), generally employers with 50 or full-time employees, taking into account full-time equivalent employees) must offer health plan coverage that provides minimum value to their full-time employees or be subject to an excise tax if a full-time employee obtains federally subsidized coverage offered through a federal or State Marketplace or Exchange. Under Code section 36B(c)(2)(C)(ii), “minimum value” is defined as a plan that pays at least 60% of covered claims.

Minimum Value Loophole

The agencies set forth the ways in which a plan could test its design to determine if it met the 60% threshold in 45 CFR 156.145. One methodology allows a plan to use the MV Calculator, an online calculator provided on the HHS website. Soon after its introduction, however, a flaw was discovered in the calculator, in that it did not require an employer to input of any plan benefit limits, allowing a plan that limited coverage for hospitalization services or physician services to still earn a score of 60%. These plans became known as “minimum value plans” or “skinny” plans, which were promoted to employers as a way to satisfy the ACA’s play or pay requirement at a low cost.

IRS Guidance

In the Notice, the IRS stated that such plans “do not provide the minimum value intended by the minimum value requirement.” Acknowledging the concern over the flaw in the MV Calculator, the Notice states that “the IRS, Treasury and HHS are considering whether the continuance tables underlying the Minimum Value Calculator produce valid actuarial results for plans with these designs.”

Plan Notice Requirement for Skinny Plans

Because an individual whose coverage does not provide minimum value can qualify for a premium tax credit to purchase State or Federal Marketplace/Exchange coverage, the Notice also requires employers that offer skinny plan coverage to provide a written disclosure to employees that the coverage will not preclude the employee from obtaining a premium tax credit. This notice requirement applies to any skinny plan sponsor, including those that qualify for the short-term relief, small employers (i.e., those not subject to Section 4980H) and employers that cover only part-time employees.