It’s no surprise that a law as complex as the ACA would come with some unintended consequences and perverse incentives. The so-called skinny plan strategy is one of those consequences. It’s hard to understand, regulators hate it, and you might find it a tad unsavory. But a good number of employers are considering it nonetheless, so it’s not a bad idea to understand how it works.
Say you own a large business--a restaurant, retailer, or manufacturer--with lots of low-wage workers. Starting in 2015, if you don’t offer them “minimum essential” health coverage and any employee gets a subsidy on a public exchange, you’ll be hit with a penalty: $2,000 times your number of full-time equivalent employees, minus 30. If the coverage you provide is unaffordable or doesn’t meet the ACA’s minimum-value test, the penalty seems higher: $3,000 times the number of employees who get subsidized coverage through a public exchange.
The skinny plan strategy works like this: An employer offers employees health coverage, but in a really watered-down, really cheap version that flunks the ACA’s minimum-value test. As a result, the employer faces the $3,000 per-employee penalty. But here’s the catch: The total penalty depends on the number of employees who actually claim subsidies and purchase coverage on an exchange. Those using the skinny strategy, essentially, are betting that offering lousy coverage will result in a lower total penalty than not offering coverage at all. “It’s an unintended consequence of the law,” says Blumling. “Regulators really don’t like it. But they don’t seem to have a way to stop it.”
A skinny strategy will not earn you any PR points. And, Blumling warns, “you’ve got to make sure it’s executed properly to weave through competing regulatory guidance.” But some employees, especially those who are not currently insured through work, may actually appreciate skinny plans.
That’s because low-wage workers are highly likely to forgo health care coverage altogether--just 37 percent of single employees earning $15,000 to $20,000 per year participate in employer-sponsored health plans, according to a 2013 survey by benefits consulting firm ADP.
And even with federal subsidies, a single person making $20,000 a year would still have to pay an average of at least $587 a year in premiums for an exchange-based plan. A more limited, even lower-cost option might be attractive to that worker; it also would let him avoid the individual mandate penalty--$95, or 1 percent of taxable income, in 2014. And if this employee decides he wants more robust coverage, he can get it through an exchange--and qualify for subsidies, to boot.