What is a “minimum essential coverage” (MEC) plan? Can an applicable large employer offer an MEC plan to comply with the employer mandate?

Prior to January 1, 2019, all US taxpayers and dependents had to maintain a certain level of health insurance, minimum essential coverage (MEC), or pay a tax penalty. This was known as the "individual mandate" or "individual shared responsibility." There is no longer a penalty attached to the federal requirement for individuals to maintain MEC. However, several states have implemented a state version of the requirement.

An employer with 50 or more full-time employees, including equivalents (otherwise known as an “applicable large employer” or ALE), must comply with two conditions of an employer shared responsibility imposed by federal law. If an ALE fails to meet this "employer mandate," then it is at risk for two penalties. Each penalty corresponds with one of the two conditions of the employer mandate. Penalty A requires employers to offer MEC to at least 95% of full-time employees and their dependent children. This is one reason that it is important for employers to correctly identify employees versus independent contractors and full-time employees versus part-time employees. If they were to incorrectly classify more than 5% of their population and fail to offer coverage to those workers, the penalty is $2,700 (in 2021) times each full-time employee (minus the first 30 employees).

Penalty B requires employers to offer each full-time employee coverage meeting minimum value and affordability thresholds. Minimum value is a higher threshold than MEC. Minimum value must include hospitalization and prescription coverage. In contrast, MEC only needs to provide coverage for preventive care.

Affordability is measured by applying one of the three employer safe harbor tests to the employee's required monthly contribution for the lowest cost self-only coverage tier.

• Rate of Pay: The employee's required contribution is 9.83% (2021) or less of the employee's monthly salary. If the employee is hourly, the contribution is 9.83% or less of the employee’s hourly rate times 130 hours (regardless of the number of hours worked). Importantly, an employer cannot use this method for tipped or commissioned employees.
• Form W-2: The employee’s required contribution is 9.83% or less of the employee’s 2021 Box 1 earnings. Box 1 includes tips, wages, overtime, bonuses, commissions, etc., but does not include pre-tax retirement and health contributions.
• Federal Poverty Level: The employee’s required contribution is 9.83% or less of the federal poverty level. The 2021 contribution threshold would be $104.52 or less per month.

An ALE must meet both Penalty A and Penalty B conditions to comply with the employer mandate. If it only offers MEC, any full-time employee who waives that coverage in favor of purchasing individual coverage in the exchange with a premium tax credit would trigger a penalty for the employer. Alternatively, if an employer offers an MEC along with a minimum value/affordable plan, both requirements would be met regardless of whether the employees waive coverage, enroll in the MEC or enroll in the richer minimum value plan.