Under certain provisions of the Affordable Care Act (ACA), the Internal Revenue Service (IRS) has the authority to level penalties against companies required to provide workers with a qualified health plan but do not. If you own a company and you’re thinking about scrapping cost prohibitive health insurance, here is the #1 reason to consider an MEC instead: IRS penalties.
As you may know, the ACA originally included penalties for both employers and employees. Most employers will be required by law to offer some sort of health plan. Most employees were required by law to purchase a health plan. Things have changed since.
The penalty against individuals was reduced to zero in late 2017, thereby effectively eliminating the individual mandate. However, the employer mandate and its penalties are still in force.
Most Employers Qualify
The ACA requires that employers meeting certain criteria offer eligible full-time workers some sort of health plan. Exceptions to the rules are very narrow. As a result, the vast majority of employers are under the mandate. However, health insurance continues getting more expensive by the year. Some employers have chosen to not offer health insurance and pay the penalties instead.
Uncle Sam is not stupid. Lawmakers knew that some employers would take this route. If it is cheaper to pay the penalties, they would rather do so. Lawmakers countered with a graduated penalty system. This is to say that the penalties get more expensive every year.
Here is an easy example: an employer with 500 workers not offering the required 95% a qualified health plan. Instead, only 400 workers are offered the plan. The company would be forced to pay a $2,880 penalty on each eligible employee not offered the plan, minus an initial 30. The employer is looking at a penalty for 70 employees or a total of $201,600.
The MEC Option
This brings us to the MEC health plan. ‘MEC’ Is an acronym that stands for ‘minimum essential coverage’. According to the letter of the law, all ACA compliant health plans offer minimum essential coverage. A plan that does not offer MEC does not qualify under the ACA.
However, according to Las Vegas-based StarMed (website here), most health plans advertised as MECs are not traditional health insurance plans. Instead, they are self-funded health plans administered by third-party organizations like StarMed.
An MEC only has to offer coverage for 10 specific items as outlined in the ACA. Anything and everything else is optional. By sticking with just those 10, plan sponsors can save employers and employees a lot of money.
More About Self-Funding
Insurance companies are not all that fond of MEC plans which is why most of them don’t offer them. On the other hand, MEC plans and self-funding are like baseball and hot dogs.
Self-funding is a scenario under which an employer establishes a separate financial fund to cover healthcare claims. The fund is supported by a combination of employer payments and employee payroll deductions. In that sense, it is remarkably like a traditional health insurance plan. The significant difference is that the employer pays all healthcare claims out of the established fund.
MEC plans are ideal for self-funding because they provide coverage that is ACA compliant at a lower cost. Employees are only paying for essential basic coverage and nothing else.
It is Worth Looking Into
Any employer forced to choose between expensive health insurance and punitive IRS penalties for noncompliance has a third option: the MEC self-funded plan. Self-funded MEC plans are definitely worth looking into for any company that struggles to provide traditional health insurance for its employees.