Affordable Care Act: Coverage Terms

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Affordability

Under the “affordability” safe harbor set forth in the final rule on the shared responsibility provisions, coverage is deemed affordable if the lowest-cost self-only coverage that provides minimum value does not exceed 9.5 percent of (i) W-2 wages, (ii) rate of pay or (iii) federal poverty level.

The affordability percentage is inflation-adjusted, and rose to 9.56 for 2015 and to 9.66 percent for 2016. For 2017, the percentage increased to 9.69 percent, but declines back to 9.56 percent for 2018.

While the controversy​ over the inflation-adjusted percentage used to determine affordable health coverage had divided benefits attorneys and confused businesses, clarity came on Dec. 16, 2015, by way of IRS Notice 2015-87. See the SHRM Online article IRS Pinpoints Affordability Percentage for Safe Harbor.

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Applicable Large Employers / Employee Threshold

The Affordable Care Act’s “shared responsibility” provisions (also referred to as the “employer mandate” or “play or pay”) generally require that “applicable large employers” or ALEs (those with 50 or more full-time employees working at least 30 hours per week or their equivalents when adding together part-time hours) offer insurance to full-time employees that meets the ACA's specifications or pay a fine. Beginning in 2016, employers with 50 or more full-time workers or equivalents must offer coverage to at least 95 percent of full-time employees.

Businesses with fewer than 50 workers are exempt from the employer mandate, but if they chose to offer health coverage it must meet certain ACA specifications.

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Essential Health Benefits

A final rule sets forth standards related to coverage of sets forth standards related to coverage of essential health benefits (EHB) and actuarial value. It defines a qualified health plan (QHP) as one that provides a benefits package that covers EHB, includes cost-sharing limits, and meets minimum value requirements.

As of January 2014, nongrandfathered, fully insured plans in the individual and small group markets and those in the exchanges were required to provide EHB coverage in 10 separate categories that reflect the scope of benefits covered by a typical employer plan.

The ACA, as amended, defines a small employer for this purpose as an employer having at least one but no more than 50 or 100 employees (states have the discretion to expand their small group markets to include employers with 51 to 100 employees). Generally, if you have fewer than 50 employees (including full-time equivalents) you will be purchasing coverage in the small group market.

Self-insured small group plans, as well as all large group plans and all grandfathered plans, are not required to offer essential health benefits. Again, this requirement applies only to fully insured small group plans.

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Grandfathered Plans

Grandfathered group health plans are those with unchanged major provisions since March 23, 2010, the date of the ACA's enactment, whether fully insured or self-funded, and regardless of size.

Grandfathered plans are exempted from many changes required under the Affordable Care Act. Group plans or individual policies may lose their grandfathered status if they make certain significant changes that reduce benefits or increase costs to consumers. A health plan must disclose in its plan materials whether it considers itself to be a grandfathered plan and must also advise consumers how to contact the U.S. Department of Labor or the U.S. Department of Health and Human Services with questions. For employees in a group health plan, the date they join is not what's relevant; instead, it's the date the plan was created. New employees and new family members may be added to grandfathered group plans after March 23, 2010.

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Measurement, Administrative, and Stability Periods

The Measurement Period is used to record the actual hours worked of a variable-hour employee, the Administrative Period is used to calculate the average hours worked over the Measurement Period, and the Stability Period is the time during which workers become and remain eligible for benefits.

As consultant Gary Kushner of Kushner & Co. describes these three periods, an employer will measure hours in one plan year (Measurement Period), calculate the hours (Administrative Period) to determine full-time eligibility during open enrollment, and then offer coverage during the next plan year (Stability Period).

New employees who work variable hours are also subject to a Measurement Period, Administrative Period, and Stability Period, but the initial periods are based on their date of hire before transitioning to the standard periods.

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Minimum Essential Coverage (MEC)

The type of coverage an individual needs to have to meet the individual responsibility requirement under the Affordable Care Act. This includes job-based medical coverage, individual market policies, Medicare, Medicaid, CHIP, TRICARE and certain other coverage (see plan types that count as coverage). Health plans that don't qualify as minimum essential coverage include coverage only for vision care or dental care, workers' compensation, coverage only for a specific disease or condition, and plans that offer only discounts on medical services.

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Minimum Value

A plan provides minimum value if it has an actuarial value of at least 60 percent, meaning the plan pays for at least 60 percent of covered benefits.

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Out-of-Pocket Maximums

Nongrandfathered group health plans must comply with an annual limit on cost sharing, known as an out-of-pocket (OOP) maximum, set by the department of Health and Human Services. For the 2017 plan year, the OOP maximum is $7,150 for an individual and $14,300 for a family plan. For the 2018 plan year, the OOP maximum will be $7,350 for self-only coverage and $14,700 for family coverage.

However, effective for plan years beginning in 2016, nongrandfathered health plans must apply an embedded self-only OOP maximum to each individual enrolled in family coverage if the plan’s family OOP maximum exceeds the ACA’s OOP limit for self-only coverage.

The IRS annually sets a separate, and lower, OOP maximum for high-deductible health plans that can be linked with health savings accounts.

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"Play or Pay" Penalties

Starting in 2016, employers with 50 or more full-time employees or part-time equivalents that do not offer coverage to their full-time employees face a penalty of $2,000 times the total number of full-time employees (minus 30) if at least one full-time employee receives a premium tax credit/subsidy to purchase coverage through a government-run (public) health insurance exchange established under the ACA.

Full-time employees are those who average 30 or more hours of work per week. The penalty is waived for the first 30 full-time employees. The penalty is 1/12 of $2,000 for any applicable month.

Employees with household income between 100 percent and 400 percent of the federal poverty level are eligible for tax credits for exchange coverage if they do not have access to affordable employer-sponsored coverage that provides at least minimum value (meaning the plan pays at least 60 percent of the cost of covered benefits).

If employers subject to the coverage mandate do offer coverage to their full-time employees but the coverage is “unaffordable” (9.69 percent of income or higher for 2017 plans) to certain employees or does not provide “minimum value,” the employers face a penalty of $3,000 times the number of full-time employees receiving a premium tax credit/subsidy for exchange coverage (not to exceed $2,000 times the total number of full-time employees minus 30).

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Small-Group Market Plans

State and federal insurance regulators separate small and large employers that purchase group insurance for their employees into separate markets. The states typical regulate a small-group market for employers with 50 or fewer employees and a large-group market for employers with more than 50 employees, although under the ACA states have the discretion to expand their small-group markets to include employers with 51 to 100 employees, and several have done so.

The ACA, as enacted in 2010, held that effective in 2016 the definition of a small-group employer would increase nationally to include organizations with one to 100 employees. But in 2015 President Barack Obama signed into law The Protecting Affordable Coverage for Employees (PACE) Act, a measure to rescind the ACA's expanded definition of a small employer subject to the rules of the small-group insured market in all 50 states.

The ACA and its implementing regulations require nongrandfathered, fully insured plans in the individual and small-group markets to provide essential health benefit coverage in 10 separate categories that reflect the scope of benefits covered by a typical employer plan. However, self-insured small-group plans, as well as all large-group plans and all grandfathered plans, are not required to offer essential health benefits.

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