Affordable Care Act: Coverage Terms

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Affordability

The ACA's affordability requirement is the highest percentage of household income an employee can be required to pay for monthly health insurance plan premiums, based on the least expensive employer-sponsored plan offered that meets the ACA's minimum essential coverage requirements.

Originally set at 9.5 of an employee's household income, the IRS adjusts the premium affordability threshold annually for inflation. For 2022, it was adjusted to 9.61 percent of an employee's household income. For 2023, the premium affordability threshold falls to 9.12 percent of an employee's income. 

Applicable large employers (ALEs) should be aware of annual adjustments in the premium affordability threshold, as these changes will affect how much they can charge employees for health coverage and still avoid an employer shared responsibility penalty.

Because employers don't know their employees' household incomes, there are three affordability safe harbors that ALEs can use to determine if the annual affordability threshold is being met:

• W-2 safe harbor is based on the wages an employer reports in Box 1 of an employee's Form W-2.
  

• Rate of Pay safe harbor is based on an employee's rate of pay at the beginning of the coverage period, with adjustments permitted for an hourly employee only if the rate of pay is decreased during the period.
  

• Federal Poverty Line safe harbor deems coverage affordable if the required monthly contribution does not exceed 9.5 percent (adjusted annually) of the federal poverty line (FPL) for a single individual for the applicable calendar year, divided by 12. As the government typically releases the FPL table after the calendar year starts, employers (including any that sponsor a calendar-year plan) may use the FPL table published within the six months prior to the start of the plan year. 
  

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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 and to plans sold in the individual market, on or off the public ACA Marketplace exchange. However, a large group or self-funded plan cannot impose annual or lifetime dollar limits on EHBs.

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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.

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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 (MV)

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 2022 plan year, the OOP maximum is $8,750 for an individual and $17,400 for a family plan. For the 2023 plan year, the OOP maximum will be $9,100 for self-only coverage and $18,200 for family coverage.

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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Employer Shared Responsiblity Penalties

ALEs are required to provide full-time workers with minimum essential coverage that meets affordability and minimum value thresholds, and they face penalties for failing to do so. These penalties are referred to by several names, but most commonly as the employer shared responsibility penalties, the play or pay rules, or the employer coverage mandate.

The Section 4980H(a) penalty—the A penalty—applies when the ALE does not offer minimum essential coverage to at least 95 percent of its full-time employees in any given calendar month and at least one full-time employee receives a premium tax credit to help pay for coverage through an ACA marketplace exchange. 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. 

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).

• The A penalty in 2022 is $229.17 per month ($2,750 annualized), multiplied by all full-time employees (minus the first 30). For 2023, the A penalty rises to $240 per month ($2,880 annualized).

The Section 4980H(b) penalty—the B penalty—applies when the ALE does offer coverage to at least 95 percent of full-time employees, but each full-time employee was not offered an option of "minimum essential coverage" that was "affordable" and provided "minimum value." The penalty is triggered when a full-time employee of an ALE declines an offer of noncompliant coverage and instead enrolls in subsidized coverage on the ACA marketplace exchange.

• The B penalty in 2022 is $343.33 per month ($4,120 annualized) per full-time employee receiving subsidized coverage on the ACA marketplace exchange. For 2023, the B penalty rises to $360 per month ($4,320 annualized).
  

The IRS sends Letter 226J to inform ALEs of their potential liability for an employer shared-responsibility payment.

The rising cost of noncompliance should serve as an incentive for employers to examine their group health plan offerings to ensure broad enough coverage to full-time employees with at least one self-only option that is affordable and provides minimum value benefits.

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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.