Top 10 Questions about the Minimum Value Penalty
By Danielle Capilla
Chief Compliance Officer for United Benefit Advisors
An employer that offers minimum essential coverage to substantially all of its full-time employees may still owe penalties if the coverage it offers is inadequate because it is not "affordable" or it does not provide "minimum value." It also may owe penalties on the employees it does not offer coverage to who receive a premium subsidy.
Here we answer the top 10 questions related to minimum value penalties based on the IRS's final regulation. More on minimum value can be found in our blogs on ACA Penalties, Taxes and Fees and on Minimum Value. Comprehensive answers to 120 questions related to the play-or-pay penalty and counting employees under ACA can be found in our ACA Advisor on Play or Pay and Counting Employees.
Q1: What is "minimum value" coverage?
A1: Coverage is "minimum value" if the coverage is expected to pay at least 60 percent of covered claims costs. It must provide substantial coverage for inpatient hospital and physicians' services.
Fully insured plans provided to small groups must provide coverage at bronze level, or better. Bronze level is an actuarial value of approximately 60 percent, and those plans are automatically considered to provide minimum value.
The government has provided a calculator and several safe harbor plan designs to assist large insured plans and self-funded plans with their minimum value determinations.
Q2: May an employer use wellness incentives when determining minimum value?
A2: The employer may use non-smoking incentives when determining minimum value if non-smoking incentives are used to reduce cost-sharing (deductibles, coinsurance, copays, or the out-of-pocket maximum). If non-smoking incentives are available to reduce cost-sharing, essentially the employer may assume that all employees qualify for the non-smoker incentive. All other wellness incentives must be disregarded.
Q3: May an employer use HRA contributions when determining minimum value?
A3: When determining minimum value, an employer may apply HRA contributions for the current year if those contributions may only be used by employees for cost-sharing. (Cost-sharing generally means deductibles, coinsurance, or copays.)
Q4: May an employer use HSA contributions when determining minimum value?
A4: When determining whether coverage is affordable, an employer's contributions to an HSA may be considered as a first-dollar benefit.
Q5: What is the penalty for not offering affordable, minimum value coverage?
A5: The penalty is $250 per month ($3,000 per year, indexed) for each full-time employee who:
- Is not offered coverage that is both minimum value and affordable coverage, and
- Purchases coverage through a government Marketplace, and
- Is eligible for a premium tax credit/subsidy (so his household income must be below 400 percent of federal poverty level).
Example: Jones, Inc. has 55 full-time employees and eight part-time employees. Jones offers coverage that is minimum value for all employees, but which is not affordable for 10 of the full-time employees (nine of whom buy coverage through the Marketplace) and all of the part-time employees (all eight buy through the Marketplace). Seven of the nine full-time employees and six of the eight part-time employees who buy through the Marketplace qualify for a premium tax credit.
Jones owes a penalty on each full-time employee who enrolls in a Marketplace plan and receives a premium tax credit, so Jones owes $21,000 ($250 per month for each of the seven full-time employees who receive a premium credit; the part-time employees are not counted).
Note that the first 30 (or 80) employees do count under this "inadequate coverage" penalty. Also, if the "no offer" penalty would be less expensive than the "inadequate coverage" penalty, the employer would pay the "no offer" penalty.
Q6: Does the employer owe a penalty if the employee declines affordable, minimum value coverage offered by the employer and buys coverage through the Marketplace instead?
A6: No. The employer simply has to offer affordable, minimum value coverage. (Specifically, the least expensive plan that provides minimum value coverage must be affordable based on the cost of self-only coverage.) If the employee chooses to obtain coverage through the Marketplace, he or she can, but the employee will not be eligible for a premium tax credit/subsidy and therefore the employer will not owe a penalty.
Q7: Does the employer owe a penalty if the employer offers minimum essential coverage that is not affordable and minimum value coverage to an employee who would be eligible for a premium tax credit/subsidy, but the employee chooses to enroll in the employer's plan?
A7: No. If the employee chooses to obtain coverage through his or her employer instead of through the Marketplace, the employee can, but he or she will usually not be eligible for a premium tax credit/subsidy and therefore the employer will not owe a penalty.
Q8: Is it possible for an employee to qualify for a premium tax credit/subsidy even though his or her employer offers affordable coverage?
A8: Yes. If the cost of self-only coverage through the Marketplace is more than 9.5 percent (indexed to 9.56 percent in 2015, and 9.66 percent in 2016) of an employee's actual household income, an employee could be eligible for the subsidy even though the coverage offered by his or her employer is affordable under one of the three safe harbors. This will be a fairly unusual occurrence, but could happen because certain deductions are allowed when determining household income.
Q9: Must all plan options provide affordable, minimum value coverage?
A9: No. Only the lowest cost option that provides minimum value coverage needs to be affordable to avoid the penalty. An employer is free to offer other options that do not meet affordability.
Q10: Are there special rules for multiemployer plans?
A10: Yes. If the employer is required to make a contribution to a multiemployer plan with respect to some or all of its employees under a collective bargaining agreement or related participation agreement and the multiemployer plan offers affordable, minimum value coverage to eligible employees, the employer will be considered to have offered affordable, minimum value coverage. In addition to the three affordability safe harbors, coverage under a multiemployer plan is considered affordable if the employee's contribution toward self-only coverage does not exceed 9.5 percent (indexed to 9.56 percent in 2015, and 9.66 percent in 2016) of the wages reported to the multiemployer plan, based on either actual wages or an hourly wage rate under the bargaining agreement.
Determining how many employees you have under ACA is critical to avoiding penalties. Request UBA's comprehensive ACA Advisor that answers over 120 questions related to the play or pay penalty and counting employees under ACA, including:
- The definitions of full time employees
- How to count part-time employees on a pro-rata basis
- How to treat seasonal employees
- Who the law considers an "employee"
- Counting hours correctly
- Determining average hours worked
- Penalties that result if a "large employer" doesn't offer coverage