What’s the Skinny on Limited Benefit Plans?

Dec 9, 2014 | Jill Brooking

The IRS recently issued guidance regarding limited benefit plans, popularly referred to as “skinny plans.” To fully understand the guidance, it’s important to take a step back and look at the history of limited benefit plans.

Prior to PPACA, there were limited benefit plans called “mini-meds.” They typically covered a limited number of services and had low annual/lifetime limits. Then, along came PPACA, which implemented two key requirements that greatly impacted limited medical plans.

First, PPACA eliminated annual and lifetime dollar limits on essential health benefits (EHB). This means limited benefit plans could no longer impose limits on EHB. But wait — large group health plans aren’t required to offer coverage for the 10 categories of EHB. If they do, however, they cannot impose dollar limits on those benefits. Mental health and substance use disorder coverage works in a similar way. Federal law does not require group health plans to provide such coverage. If they do, however, they must not impose dollar limits, and the benefits must be on par with medical benefits.

The only truly federally mandated benefit is related to preventive care services for non-grandfathered plans. Certain services must be provided to participants with no cost sharing. Due to the prohibition on annual and lifetime limits on EHB, limited benefit plans had to change their design or face elimination for no longer being compliant. We started to see limited benefit plans that did not include coverage on EHB such as prescription drugs, physician visits and hospitalization, but offered a full menu of preventive services.

The second PPACA requirement to impact limited benefit plans was the employer mandate. Prior to PPACA, an employer had much latitude in defining eligibility. It could offer a rich plan to certain classifications of employees and offer nothing to others. It may have even considered itself generous to offer a limited medical plan to part-timers. All of this changed with the employer mandate, which is effective in 2015 and applies to employers with 50 or more full-time equivalent employees. To avoid a penalty, an employer must offer all employees working 30 hours or more per week coverage that meets minimum value and is affordable.

There are three ways to meet minimum value: the MV calculator, safe harbor checklist and the actuarial method. Limited benefit plans cannot pass the safe harbor checklist method, because that method requires that the plan provide coverage for emergency services, specialist visits, generic drugs, inpatient hospital services and specialty high-cost drugs. Many limited plans claimed to have used the MV calculator and resulted in a valuation greater than 60 percent. Suspiciously, many of these products claimed to have a valuation of 60.1 percent. If an employer offered this plan to its full-time employees, it would avoid both Penalty A and Penalty B of the employer mandate.

And now we get to the recent guidance. On Nov. 4, 2014, the IRS published Notice 2014-69. Effective immediately, a plan that does not cover hospitalization or physician services will not be considered to meet minimum value. It should be noted, however, that there is a temporary exception for a plan that has a plan year that begins before March 1, 2015, and for which an agreement has already been signed.

What does this mean for skinny plans? If they do not meet minimum value, is there a market for them? The answer depends on the size of the employer and the employer’s risk tolerance.

A small employer that is not subject to the employer mandate could offer a limited medical plan. It would have to be self-insured, though, because small group fully insured policies are required to offer EHB.

In regards to a large employer, it is important to remember that there are two employer mandate penalties. Penalty A requires an employer to offer minimum essential coverage to substantially all full-time employees working 30 hours or more per week (70 percent of full-time employees in 2015; 95 percent in 2016). If an employer fails to do so, the penalty is $2,000 times each full-time employee (minus the first 80 employees in 2015; 30 in 2016). Any insured or self-insured group medical plan, even a skinny one, is considered minimum essential coverage. So, an employer could offer a limited benefit plan to its full-time employees and avoid Penalty A.

A limited benefit plan would not get the employer out of Penalty B. Penalty B requires an employer to offer coverage that meets minimum value and is affordable. If an employer fails to do so, the penalty is $3,000 for each full-time employee who qualified for a premium tax credit (based on household income). A key point is that a full-time employee who enrolled in the limited benefit plan would not be eligible for a premium tax credit. Thus, an employer who offered only a limited medical plan would be at risk for a $3,000 penalty for each full-time employee who did not enroll in the plan and who received a premium tax credit.

Some employers are considering offering a limited medical plan alongside a minimum value, affordable option. As long as the minimum value plan was offered to substantially all full-time employees, the employer would avoid both penalties. The reasoning behind this strategy is that both the employee and the employer could save money if some of the employees enroll in the limited benefit plan. The employee gets out of the individual mandate with the limited benefit plan, and the employer avoids both penalties.

If your client has already signed an agreement for a limited benefit plan for 2015 and was led to believe the plan met minimum value based on the MV calculator, the plan will be treated as meeting minimum value for the 2015 plan year. If your client has not yet entered into an agreement for 2015 and the plan does not offer coverage for hospitalization or physician services, the plan will not be considered minimum value. The employer will need to evaluate their needs and determine whether a limited benefit plan has a place in their employer mandate strategy.