November 6, 2014

IRS Slams the Door on MV Plans Without

On November 4, 2014, the Departments of Health and Human Services, the Treasury, and Internal
Revenue Service (collectively, the Departments) announced their intent to issue regulations
clarifying that a group health plan will not provide minimum value (MV) if it excludes substantial
coverage for in-patient hospitalization services or physician services (or both).
Thus, subject to a narrow exception, such arrangements cannot be used to avoid penalty exposure
under Code 4980H (the employer mandate).

Beginning in 2015, a large employer may be subject to a penalty when group health plan coverage
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is offered to at least 95% (70% for 2015) of full-time employees (FTEs) and their dependent
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children but the coverage is not of a MV or affordable and one (or more) FTEs receives a subsidy
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to purchase health insurance coverage in the Marketplace (the B penalty).

Generally, an employer that had 50 or more FTEs (including full-time equivalent employees) in the preceding calendar year
is considered an applicable large employer. This status is determined on an annual basis and requires aggregating all
employees within a controlled group. For 2015, there is transition relief available to employers with fewer than 100 FTEs
that will delay the penalty provision until 2016.
A full-time employee (FTE) means, with respect to a calendar month, an employee who is employed an average of at
least 30 hours of service per week with an employer. An employer may use 130 hours of service in a calendar month as a
monthly equivalent.
Coverage is affordable if the cost for self-only coverage does not exceed 9.5% of household income for the lowest cost MV
plan. As employers generally will not know an employees household income, the regulations provide three safe harbors
that employers may rely upon to satisfy the affordability requirement (W-2, rate of pay, and federal poverty level safe
harbors).
The A penalty applies when a large employer does not offer at least 95% of FTEs (70% for 2015) and their dependent
children a group health plan and at least one FTE receives a subsidy in the Marketplace to purchase qualified health plan
coverage. The A penalty is $166.67/month (or $2,000/year) multiplied by the total number of FTEs - 30 (80 for 2015).

The penalty is $250/month (or $3,000 annually) multiplied by each FTE who receives a subsidy in
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the Marketplace to purchase health insurance coverage.
MV means a plan that covers at least 60% of the total allowed cost of benefits that are expected to
be incurred by the plan. The Departments provide several ways for a plan to determine MV
including:

MV calculator

Safe harbor designs

Actuarial certification

Some vendors used the MV Calculator to create arrangements that met MV (60%) but excluded
certain core benefits, notably in-patient hospitalization and/or physician services. If acceptable,
such a program could operate to insulate the employer from penalty exposure and preclude
otherwise eligible employees from accessing subsidies in the Marketplace. Given that certain core
benefits were excluded from coverage, concerns were raised whether this was an appropriate use
of the MV calculator consistent with the guidance.

In response to these arrangements, the Departments issued Notice 2014-69, which provides the
following guidance.

Non-Hospital/Non-Physician Services Plan are not MV. A group health plan that excludes
in-patient hospitalization services or physician services (or both) does not provide MV. These
arrangements are referred to as Non-Hospital/Non-Physician Services Plans.

Final regulations are expected by March 1, 2015 and will be effective as of that date. The
regulations are expected to be finalized on or around March 1, 2015, and apply as of that date.
Unless an exception applies, employers should not adopt a Non-Hospital/Non-Physician
Services Plan for the 2015 plan year.

A very limited exception is available to certain employers. If, and only if, an employer with
a plan year that begins on or before March 1, 2015 has entered into a binding written
commitment to adopt or has begun enrolling employees in a Non-Hospital/Non-Physician
Services Plan prior to November 4, 2014, will it not be subject to employer mandate penalties.
Employers qualifying for this relief have a Pre-November 4, 2014 Non-Hospital/Non-Physician
Services Plan.

Subsidies remain available to eligible individuals and employers have a duty to inform.
Employees offered coverage under a Non-Hospital/Non-Physician Services Plan remain eligible
for premium subsidies in the Marketplace (to the extent otherwise eligible). The employer must
not state or imply in any disclosure that the employees are precluded from obtaining subsidies
in the Marketplace based on this coverage and the employer must correct any communication
that states or implies that such a credit would not be available (e.g., the SBC). This includes a
Pre-November 4, 2014 Non-Hospital/Non-Physician Services Plan. 6

The maximum penalty is capped at the A penalty, the penalty that applies when the employer is considered to not offer
coverage.
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Without such a corrective disclosure, a statement (for example, in a summary of benefits and coverage (SBC)) that a NonHospital/Non-Physician Services Plan provides MV will be considered to imply that the offer of such a plan precludes
employees from obtaining a premium tax credit. However, an employer that also offers an employee another plan that is
not a Non-Hospital/Non-Physician Services Plan and that is affordable and provides MV is permitted to advise the
employee that the offer of this other plan will or may preclude the employee from obtaining a premium tax credit.

Non-Hospital/Non-Physician Services Plans should not be implemented for 2015 as a

mechanism to avoid penalties under the employer mandate

However, if prior to November 4, 2014 you were under a binding commitment and/or enrolling
participants in a Non-Hospital/Non-Physician Services Plan for a 2015 plan year that begins on
or before March 1, 2015, you may continue the arrangement for the 2015 plan year and will not
be subject to the B penalty for offering non-MV coverage. However, this relief is limited and
employers will need to comply with the final regulations for the next plan year.

If offering such coverage, employers should review any communications to ensure they
have not stated or implied that the offer of the Non-Hospital/Non-Physician Services
Plan would preclude an otherwise tax-credit-eligible employee from obtaining a
premium tax credit. Employers should correct any such statements or implications.

For the Notice, visit: http://www.irs.gov/pub/irs-drop/n-14-69.pdf.

*Note: All of this is subject to change based on government regulations.