Employers know ACA compliance is like balancing on a pinpoint; a slight movement to one side must be countered by a corrective movement the other way. It’s often necessary to weigh the cost of IRS penalties against the expense of providing coverage, and many small to midsize employers are striking the right balance with preventive minimum essential coverage plans, or PMECs.
For many, a PMEC is the first plan they’ve ever offered. These plans are relatively inexpensive for both employer and employee; however, they have some shortcomings as well. Let’s consider the pros and cons.
Employee: A PMEC or “skinny” plan is welcomed by employees who previously didn’t have coverage, though coverage is basic. Just as the name implies, it provides preventive minimum essential coverage and it’s an easy and fairly inexpensive way to get coverage and avoid paying the ACA penalty.
Should an employee find through preventive screening (e.g. colonoscopy, mammography) that they need further treatment that is not covered, they have the option of enrolling for a more robust qualified plan at the next open enrollment.
Employer: Offering a minimum essential coverage plan, a company avoids the IRS penalty of $2,000 per employee. PMECs are relatively inexpensive, available for about 25% of a comprehensive plan. For example, an individual qualified plan for the average 44 year old is about $400 per month, while a PMEC costs less than $100 per month. Employers should keep in mind that if they switch from a PMEC to a qualified plan the employee contribution must remain under 9.5% of their family income.
Important to consider: To avoid the IRS penalty (discussed below), an employer must offer a plan that meets standards for 1) affordability and 2) minimum value.
1. Affordability: Employee contribution must be 9.5% or less of household income
2. Minimum value: Plan must cover 60% of expected costs of benefits
If employer-sponsored coverage doesn’t pass the test, the employee can say “no thanks” and enroll in marketplace coverage during the open enrollment period with the possible benefit of premium tax credits.
Employers can also offer a qualified plan, but must structure the contribution so it's not discriminatory and let employees choose based on what they feel is more economically feasible for them. This is a more expensive route for the employer because some employees may choose to enroll in the more expensive qualified plans, which raises the employer contribution to a level that’s unsustainable.
Key takeaway: PMEC plans have no deductible; qualified plans all have very high deductibles. Employees on modest incomes would find a high deductible is like having no coverage at all, so this is a much more palatable feature for them. To some, having an insurance card to walk into a doctor's office and have coverage 'on the first dollar' is a comforting benefit.
Employee: PMEC plans are far from comprehensive. They leave employees on the hook for major bills such as hospitalization and surgery. So they’re not ideal for people with acute or chronic conditions who require examinations and treatment by a variety of specialists. It’s like dental coverage that pays for cleanings and exams but not for crowns or root canals.
Employer: Failing to offer minimum essential coverage plans draws a penalty flag. There are two levels of penalties. First called the 'sledgehammer' penalty, requires an employer offer a plan that meets the minimum essential coverage or pay $2,000 for each full-time employee, though there’s a waiver for the first 30 employees. Companies with fewer than 50 employees are exempt from the provisions.
The second penalty is called the "tack hammer" because it must meet the affordability test and minimum value test. If the employer fails to keep the employee contribution under 9.5% and just one employee enters the exchange and qualifies for a subsidy, it must pay a $3,000 penalty for that employee and the same amount for each subsequent employee who goes the same way. The rule of thumb is you need to offer employees enough to keep them from entering the exchange.
Important to consider: There’s an expectation down the road that the government may disallow PMEC plans as they don't fulfill the minimum value requirement. However, there’s no viable alternative at this time that is affordable and there does not appear to be any movement inside the Beltway to change. Perhaps it’s low on the priority list and if that’s the case employers will find a safe harbor in minimum essential plans.
So…what's the bottom line?
It appears PMECs are here to stay...at least for now. Employers are finding they’re a pretty good way to hold the line on expenses and offer coverage that’s compliant. The key to staying compliant (and avoiding penalties) is to always color inside the lines. In other words, keep a close eye on contribution levels and expected costs of benefits. A good sense of balance is imperative.
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