Feds Tighten the Belt on “Skinny Plans” and Other ACA Workarounds

On January 1, 2015, employers with 100 or more “full-time equivalents” will be subject to the “Pay or Play” regulations under the Affordable Care Act (“ACA”). Over the past few years, many consultants have sought to identify loopholes in the law and lower-cost strategies for complying. Unfortunately for employers who were banking on these “workarounds,” the Internal Revenue Service and the U.S. Department of Labor both issued guidance this week dismissing several of the more aggressive strategies that have garnered attention in the press.

Skinny Plans Kaput? A 2013 article in the Wall Street Journal highlighted the possibility that employers might offer low-cost “skinny plans” to avoid some or all of the “pay or play” penalties under ACA. Skinny plans typically offer little or no hospitalization benefits or physician services and only minimal preventive services. The legitimacy of skinny plans under the ACA appeared to be secure when they were not expressly addressed in final regulations governing “minimum value.” In addition, many skinny plans appeared to pass muster under the “minimum value calculator” that was developed by the feds for use by employers and carriers. However, on November 4, 2014, the IRS issued Notice 2014-69 indicating that they will promptly be issuing proposed regulations stating that plans which do not offer hospitalization and/or physician service benefits do not constitute “minimum value” coverage under the ACA. The forthcoming proposed regulations will not apply to skinny plans that were in existence before November 4, 2014; however, such plans will lose their exempt status at the end of the plan year beginning no later than March 31, 2015.

The recent IRS guidance further states that employers may not issue any notices to employees suggesting that their skinny plan is considered “minimum value” under ACA or will otherwise affect an employee’s eligibility for a tax subsidy – and that any prior notices to this effect must be rescinded and clarified. The practical impact of this change is that employers who solely offer skinny plans that do not qualify as minimum value coverage may be subject to a penalty of $3000 for every full-time employee who qualifies for a tax subsidy to purchase coverage on the health insurance exchange. Notwithstanding this development, skinny plans will likely continue to qualify as “minimum essential coverage” and thereby prevent imposition of the “no coverage penalty” (i.e. $2000 for all but 30 full-time employees); however, it remains to be seen whether they will be adopted by many employers for this reason.

Reimbursing Employees For the Cost of Individual Plans. Some employers have considered dropping group coverage but reimbursing full-time employees for part or all of the premium for a policy purchased on the individual market. Doing so could constitute a valuable employee benefit and some believed it could minimize employer pay or play penalties under ACA. However, in guidance issued on November 6, 2014, the U.S. Department of Labor (“DOL”) indicated that such arrangements constitute “part of a plan, fund, or other arrangement established or maintained for the purpose of providing medical care to employees.” This being true, the DOL found that these payment arrangements must comply with ACA’s market reform provisions – including free preventive care requirements and no annual or lifetime limits. According to the DOL, payment arrangements of this nature cannot be “integrated” (i.e. combined) with individual market policies in order to comply with these requirements. Significantly, the DOL guidance applies to these arrangements regardless of whether the employee payments or reimbursements are handled on a pre-tax or after-tax basis.

What if an Employee is Reimbursed Via a Section 105 Plan Through a Broker or Agent? Some vendors have sought to avoid the status of “employer reimbursement plans” (discussed in the paragraph above) by setting up their own Section 105 plans through which client-employers can reimburse their employees for the cost of individual coverage. In their recent guidance, the DOL specifically pointed out that these arrangements are, in themselves, health plans and will disqualify participating employees from receiving tax subsidies on the exchange. In addition, as health plans, these arrangements will be subject to ACA requirements regarding free preventive care and annual and lifetime limits. This conclusion is consistent with prior guidance issued by the IRS. Employers that pursue such arrangements do so with substantial risk.

Paying Plan Participants with High Claims to Drop Coverage. ACA prohibits employers from discriminating against employees who qualify for a tax subsidy to purchase coverage on the exchange (which will often trigger an employer penalty). However, the Act says nothing about employers who offer cash incentives to employees to drop employer-provided coverage. Over the past year, a number of commentators argued that such employer “cash-outs” or “dumping” of high-risk or high-claim participants would save costs for employer group health plans and threaten the viability of exchange plans. Although the ACA is silent on this specific practice, the DOL’s November 6, 2014 guidance indicates that offering cash to such participants would violate HIPAA’s non-discrimination rules and may constitute a violation of Section 125 non-discrimination rules. Suffice it to say, the DOL’s reasoning is somewhat strained and does not bear repeating here; however, the guidance makes it clear that such “cash out” programs targeted at high-risk or high-claim participants are likely to be challenged by the Department.

The ACA provides ample room for employers to be creative in their compliance strategies. However, many of the “silver bullet” strategies that have been touted by some consultants over the past 18 months always seemed too good to be true and, it turns out, they are. Employers that have been considering these strategies will need to redirect their efforts or proceed with knowledge that they are likely to face a challenge if audited. Only time will tell whether the positions taken by the IRS and DOL in the recent guidance will hold up in court. Employers who prefer to stay out of court are well-advised to steer clear of these workarounds.