Skinny Plans – Good or Bad Idea?

Boy, brokers and employers have had their thinking caps on. And it’s working. As we continue to study the law, we continue to come up with ideas of ways to get around it. Of course, it seems that every time we think we have a good idea – something Congress overlooked when writing the law – the administration closes the loophole.

In the proposed large employer shared responsibility rules issued back in January, the IRS makes it clear that employers can’t split into two companies to get under the 50 FTE mark – the employees would have to be added together to determine whether or not it’s an applicable large employer. Nor can an employer fire a bunch of their employees and hire them back as temporary workers or even 1099 contractors – the IRS says the employer might still have to cover them. What about an applicable large employer moving their effective date to 12/1 to delay implementation? Not so fast – there is a transition rule, but only if the employer keeps its existing effective date.

The latest idea being tossed around is for an employer to offer a watered down plan to avoid the penalty on all full-time workers and instead pay only on those that access a subsidy. This strategy is discussed in May 20th Wall Street Journal article entitled Employers Eye Bare-Bones Health Plans Under New Law.

Here’s the idea: there are all sorts of requirements for individual and small group plans in the Affordable Care Act, including the requirement that they cover all “essential benefits” with no annual or lifetime dollar cap. Large employers and self-insured plans don’t have this same requirement. Instead, the rule is that if they cover an essential benefit there can’t be a dollar limit, but there is no requirement to cover the essential benefits at all. Hence, the skinny plan idea.

Employer coverage, even if it doesn’t meet the 60% “minimum value” requirement, is considered “minimum essential coverage” and would help an employee avoid paying a penalty. It would also move an employer out of the 4980H Cap A penalty, which would cost $2,000 per full-time employee with the first 30 excluded, and into the 4980H Cap B penalty, which could result in a $3,000 penalty but only on those employees who access a subsidized plan.

As the article explains, “Federal officials say this type of plan, in concept, would appear to qualify as acceptable minimum coverage under the law, and let most employers avoid an across-the-workforce” penalty that applies to companies that offer no coverage at all. However, it would likely not meet minimum value, so the company’s employees could still access a subsidy if their household income is less than 400% of the federal poverty level.

While innovative, this strategy is not without its problems:

  • First, it’s not likely to be a valued benefit by most of the employees. While a skinny plan does help save the employer money, it doesn’t protect workers in the event of a catastrophic event. If they think it will, they may be in for a rude surprise when they actually need care.
  • Second, it could backfire. While significantly less expensive than a traditional plan, a “skinny” plan – or a “band-aid plan” as the article calls it – does still come at a cost, and there will be a break-even point where, if enough employees access a subsidy and cost the employer $3,000 each, the combination of premium and penalties could exceed both the cost of penalties for not offering coverage at all and the cost of premiums for a good, comprehensive plan.
  • Finally – and this is the most dangerous – what if the plan somehow does meet the “minimum value” standards? Yes, it would likely eliminate any penalties for the employer, but it would also trap all of the employees in a bad plan and block them and their family members from accessing the generous government subsidies through the exchange. In that case, the benefits package would be a huge negative for a lot of employees and could become a reason not to work for the company.

If an employer sees that it won’t be able to offer a good health plan to its employees, a better strategy might be to just eat the penalty and, if there’s any money left in the budget, use it to buy other lines of coverage that the employees might value – things like group dental and life insurance which are relatively inexpensive and would be valued by the employees.

At the very least, the penalty is predictable and just going ahead and paying it would allow employees to access a subsidized plan for themselves and their family members. These subsidies will make health insurance possible for millions of Americans, so it’s important that employers don’t let their attempts to avoid a penalty block an employee’s ability to get an advance tax credit.

Insurance agents can help facilitate this process. Working with employers that haven’t historically offered benefits, the broker can set up a private exchange branded to the employer and send employees there to apply for a subsidy or purchase a non-exchange plan. This strategy will make the employer look like a hero and, even with no investment by the employer, it could become a valued employee benefit.

Soon enough, we’ll get some more guidance and we’ll know what will work and what won’t work. But one thing is clear: employers who are searching for ways not to cover their employees have, by definition, employees who are going to need some help. And this will create a huge opportunity for agents who are willing to help them and who have the technology and support to make it happen.

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