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February 1, 2013

Proposed Regulations Explain Minimum Essential Coverage for Purposes of Pay-or-Play Provisions

~ written by Charlene Bigelow, Client Advocate, Human Capital Practice, Willis of Ohio, Inc.

Earlier this week, the IRS issued proposed regulations interpreting the health care reform law’s definition of the term “minimum essential coverage” for purposes of the employer pay-or-play provisions. The possibility that the IRS would define minimum essential coverage in a way that imposed additional requirements on employer plans had been a major open issue under earlier IRS guidance on the employer pay-or-play provisions (including the proposed regulations that were published earlier this month). The latest proposed regulations confirm the definition set out in the health care reform law. Under that definition, virtually any employer-sponsored health coverage will qualify as minimum essential coverage, so long as it does not consist of excepted benefits. (The proposed regulations issued today cover much more than the definition of minimum essential coverage, as they are primarily related to the shared responsibility provisions for individuals under which individuals generally must have minimum essential coverage or pay a penalty. A fact sheet on the proposed regulations provides additional information.)

Willis’ National Legal & Research Group is working on an Alert that explains the proposed pay-or-play regulations published earlier this month. Because the information on minimum essential coverage in these latest proposed regulations is an important piece of the pay-or-play analysis, we will incorporate details on that information into the Alert.

Background

Starting in 2014, large employers – those with 50 or more full-time employees (generally counting part-time employees as fractions) – may incur a penalty tax unless they meet standards for offering health coverage to individuals who are full-time employees. Specifically, no employer will incur the penalty tax if it offers individuals who are its full-time employees and those employees’ dependents “minimum essential coverage” and, with respect to the full-time employees, the coverage is affordable and provides minimum value. Large employers that are not able to offer affordable, minimum-value coverage so that they avoid the penalty tax altogether, are strongly urged to offer less affordable or less valuable minimum essential coverage to full-time employees and their dependents. Failing to do so may result in a very high penalty tax. At the same time, offering minimum essential coverage should have minimal cost because minimum essential coverage, as defined in the health care reform law, is virtually any medical coverage an employer provides to its employees that does not consist of excepted benefits, even if the employer makes no contribution toward the cost of that coverage. (See Willis Human Capital Practice Alert, July 2011, “Looking Ahead – Compliance After 2011” for an explanation of affordable, minimum-value coverage, excepted benefits, and minimum essential coverage.)

Proposed Regulations Are Important for What They Do Not Say

Even though the minimum essential coverage definition in the health care reform law did not include any minimum standards for value, benefits or affordability (other than that coverage not consist of excepted benefits), there were concerns that the IRS would issue regulations redefining minimum essential coverage to incorporate such standards. If the IRS did that, an employer would need to meet any such standards in order to avoid the very high penalty tax described in the preceding paragraph. The newly issued proposed regulations define minimum essential coverage so that no such standards need be met in order to avoid the very high penalty tax (although a penalty tax that generally is much lower may apply if a large employer provides minimum essential coverage that is either unaffordable or does not provide minimum value).

A Note on Excepted Benefits

Since providing excepted benefits does not qualify as offering minimum essential coverage, the definition of excepted benefits is also important to the pay-or-play analysis, and informal guidance regarding one type of excepted benefits coverage – fixed indemnity insurance coverage – was issued last week. The agencies charged with implementation of the health care reform law reviewed the definition of fixed indemnity insurance coverage and concluded that many products advertised as such do not qualify. The products at issue are health insurance policies that provide a fixed dollar benefit for specific medical services (e.g., $50 for a doctor visit, $15 per prescription, etc.) with the dollar amount being paid each time the specified services are received regardless of the actual cost. The agencies concluded that such coverage does not qualify as fixed indemnity coverage because payment is not made as a fixed dollar amount per day (or other period) of hospitalization or illness. Instead, payment is based on the type of procedure or item, with the amount of payment varying widely based on the specific item. Since this type of coverage is not excepted benefits, it can qualify as minimum essential coverage for purposes of the pay-or-play provisions. At the same time, such coverage is subject to many of the coverage reform provisions, such as the requirement that non-grandfathered plans cover preventive services with no cost sharing and the prohibitions of lifetime and annual dollar limits on benefits.

It is likely that insurance carriers are considering their options for providing low-cost coverage for employer groups given the combination of this informal guidance and the confirmation that minimum essential coverage need not provide any particular level of value or benefits. Willis Human Capital Practice consultants are watching these developments closely so they can provide Willis clients with a full picture of the coverage options that are available and the impact of offering various options on an employer’s pay-or-play analysis.

The information in this article is not intended as legal or tax advice and has been prepared solely for informational purposes. You may wish to consult your attorney or tax adviser regarding issues raised in this publication.