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Minimum Essential Coverage plans (MEC Plans) are a hot topic among employers trying deal with the coming employer mandate (now delayed to 2015). What are MEC plans? You can go here for primer, but basically, an MEC plan is any health plan that meets the minimum threshold required by the employer mandate (which requires an employer to offer "minimum essential coverage" hence the name), but falls short of the "minimal value" or 60% requirement of the "affordability" mandate. This means that an MEC plan will cover less than (in many cases far less) than 60% of the average person's medical claims for a year.
But I Thought Flunking A Test Was A Bad Thing?
Why would an employer want to offer an MEC plan that passed the "play or pay" mandate but flunked the "affordable" mandate? Cost is a big reason. The coverage provided by MEC plans fall well short of major medical coverage. Accordingly, they are inexpensive from an administrative and claims standpoint. The other big reason is the difference in the way the mandate penalties apply. The "play or pay" is often called the "hard" penalty because it will apply to ALL your full-time employees even if only one of them obtains a premium credit. The "affordable" penalty is often called "soft" because it only applies one employee at a time. It is a bigger penalty ($3000 vs. $2000), but it applies one at a time. An employer adopting an MEC plan is betting that the number of employees that will eventually take a premium credit to purchase health insurance will be relatively small. Based on what we know now about the costs of the exchange plans even with premium credits, that looks like a pretty good bet.
To be sure, an employee currently on a major medical health insurance plan that covers 60% or more of his medical expenses in a year will not perceive an MEC plan as an adequate alternative from a coverage standpoint. We would not recommend that an employer cancel an existing major medical plan and replace it with an MEC plan unless it wants to unleash an Occupy Wall Street-like tirade on its HR department.
However, for an employer with a large number of employees currently without any health insurance, an MEC plan could provide a real benefit compared to major medical plan options.
The 9.5% Offer Option
Employers with large numbers of employees without health insurance are staring the mandate in the face. They have received a one year reprieve, but 2015 will be here before you know it. Let's assume that I have 500 employees. Come 2015, I will have to pay almost $1 Million in penalties for not offering health insurance. What are my options? Providing a major medical health insurance policy at no cost to my employees will solve my penalty problem but cost me more than $1 Million even after taxes. So, that does not help. There are other options.
I could still offer all of my employees a major medical plan, but NOT pay its full premium costs and make my employees share in the burden. As long as the cost my employees have to pay is less than 9.5% of their W-2 income, I will never be subject to the "play or pay" penalty or the "unaffordable" penalty.
Odds are that I have offered benefits in the past with some required cost share and very few of my employees decided to buy it. My agent told me that I failed the "participation rate" requirement and so my "plan" never went into effect. Well, the ACA may make those participation rate rules disappear as soon as next year. So, even though only 20% of my employees are willing to buy the insurance, I can still have a plan. Still, I need to make it as cheap as I can, so that means I will offer a high deductible plan to bring down the premium costs.
This is a viable option, at least initially. On an after-tax basis, it may actually cost much less than paying the penalty outright and avoid all "affordable" penalties. The 100 (out of 500) employees that were willing to pay for the major medical plan have "real insurance." At least the other 400 had an "affordable" offer. Everyone is better off, right? End of story, right?
What If Only The "Sick" Buy My Major Medical Health Plan?
Maybe not. Who are the 100 employees that purchased the insurance? They are the 20% of my workforce that needs it the most and the ones that will use it the most. In a very short amount of time, claims on the plan will be out of control because the only people paying the premiums are the ones having claims and those claims will vastly outweigh the premiums going into the plan. Most likely, this will not be a sustainable plan for a long period of time. Premiums will be skyrocketing in just a few years.
Locking My Employees Out of the Exchange
What about the 400 employees that declined to purchase the insurance? They can still go elsewhere to purchase insurance, but they WILL NOT be elgibie for a premium credit to buy it because they received an "offer" that was "affordable" (meaning it cost them less than 9.5% of their income). Moreover, they will not be able to obtain a premium credit to purchase family coverage either! In effect, the 9.5% offer by the employer, locks its employees out of the premium subsidy for their entire family. This is not an ideal outcome for any of the employees.
Is The MEC Plan Better?
What if the employer had offered an MEC plan instead? The MEC plan will cost far less (between $100 and $150 per month) so the employer can offer it to employees at a much lower cost. This means that more employees will purchase the coverage. What coverage is offered: full preventive coverage at no cost; a fixed number of doctor and clinic visits per year; generic drug coverage; and a few other bells and whistles. There is no coverage for hospitalization or medical treatments beyond what you would receive in a doctor's office or an urgent care center. There is also no deductible. This would not measure up for someone accustomed to a major medical plan, but for someone who has never had health insurance or been able to pay for it, this provides them some up front maintenance coverage that they will actually use to care for themselves and their family. It will count as health insurance to meet their mandate requirements. Most importantly it WILL NOT kick them out of eligibility for the premium subsidies on the exchange, either for themselves or their families. If the employee or anyone in their family has a medical crisis and needs a real health insurance plan, they will be eligible to obtain a premium subsidy and purchase health insurance through the exchange. So, who is better off? The employees offered the MEC or the employees offered the major medical plan at less than 9.5% of their income.
Surprise! You May Want to Pay the $3000 Penalty!
But, what about that affordable penalty? When the employee goes to the exchange and obtains a premium subsidy, will the employer have to pay a $3000 per year unaffordable penalty for that employee? What if two go? Three? Yes. The employer will have to pay those penalties. However, when you do the math and calculate the after tax cost of an MEC plan against a major medical plan, the employer will have a lot of room to spare to offset the costs of these penalties. The other thing to think about is the claims avoided. An employer with a self-funded plan will always pay $3000 to keep the claims costs of a major medical condition out of its plan. The impact of claims on a fully insured plan will not be as immediate, but over time it will add up.
The bottom line is that an MEC Plan, for certain employers and employees without any health insurance in the past may be the best fit.