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 rises to 9.66 for 2016. For 2017, the percentage increases to 9.69 percent.

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 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.

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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. For the 2015 plan year, the OOP maximum is $6,600 for an individual and $13,200 for a family plan. For the 2016 plan year, the OOP limits are $6,850 for self-only coverage and $13,700 for family coverage.

However, effective for plan years beginning in 2016, nongrandfathered self-funded and large group 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 ($6,850 for 2016), as explained here.

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"Play or Pay" Penalties

Starting in 2015, employers with 100 or more full-time employees or equivalents (and, starting in 2016, employers with 50 or more full-time employees or 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 is of at least a minimum value (the plan’s share of total cost of benefits under the plan is less than 60 percent).

If employers subject to the coverage mandate do offer coverage to their full-time employees but the coverage is “unaffordable” (9.5 percent of income or higher) 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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