Health insurance terms can often be confusing for both employers and individuals, leading many to feel stuck in their health benefits plans. Understanding these terms can help you develop cost-effective benefits strategies that guarantee quality care for your employees.
One term often mentioned in discussions around individual health insurance and employer health plans is minimum essential coverage (MEC). But what does MEC mean, and how does it connect to the increasingly popular individual coverage health reimbursement arrangement (ICHRA)?
In this article, we’ll cover what counts as MEC, why it matters for compliance, and how it relates to ICHRA.
In this blog post, you’ll learn:
- What qualifies as MEC.
- What doesn’t qualify as MEC.
- What health plans are compatible with ICHRA.
Questions about Open Enrollment? Learn everything you need to know in our guide.
What is minimum essential coverage?
Minimum essential coverage (MEC) refers to health insurance coverage that satisfies the Affordable Care Act’s (ACA) individual shared responsibility provision, commonly known as the individual mandate. The federal tax penalty for not maintaining MEC no longer applies to individuals (though some states, like California, have similar mandates), but MEC remains crucial for various employer-sponsored health benefits. That’s because employers with 50 or more full-time equivalent employees (FTEs) must offer health coverage with MEC.
To meet MEC standards, a health plan must:
- Provide basic health coverage (such as hospital and physician services).
- Offer health coverage to dependent children up to age 26 and meet the ACA’s preventive services standards.
This differs from ACA-compliant MEC coverage, such as a Marketplace plan.
What qualifies as minimum essential coverage?
Having MEC helps individuals in some states avoid tax penalties. It also ensures that employers subject to the employer mandate under the ACA are meeting their obligations. Most of all, having a health plan that meets MEC standards provides healthcare security and peace of mind.
The following plans qualify as MEC:
- Employer-sponsored health benefits (including “skinny” employer-sponsored plans that don’t provide minimum value)
- Individual major medical plans (including ACA-compliant plans, grandfathered health plans, and grandmothered health plans)
- ACA-qualified individual plans must provide substantial health coverage for hospital and physician services, cover the essential health benefits without annual or lifetime limits, and provide preventive care.
- TRICARE
- Medicare Parts A or C
- Medicaid plans
- Children’s Health Insurance Program (CHIP)
What doesn’t qualify as minimum essential coverage?
Although many plans provide MEC, there are just as many that don’t. Policies that aren’t considered major medical coverage and aren’t governed by ACA regulations typically don’t qualify as MEC.
This includes:
- Short-term health insurance
- Medical discount plans
- Limited-benefit plans
- Dental plans
- Vision plans
- Critical illness insurance
- Accident supplements
- Travel medical insurance
- Certain AmeriCorps coverage
- Indian Health Services plans
- Healthcare sharing ministries
What is ICHRA?
The ICHRA emerged in 2020 as an alternative to traditional group health insurance. It gives employers a cost-effective way to offer coverage to their employees.
Instead of purchasing a one-size-fits-all group health plan, employers offer their employees a defined contribution for the cost of their individual health plans. This approach can help them save money since individual health insurance premiums are often less expensive than group health insurance premiums.
How does MEC relate to ICHRA?
As the name implies, employees need individual health coverage to participate in the ICHRA. Their individual health plan must provide MEC and minimum value, but not all types of MEC will work with the ICHRA.
The following insurance types are compatible with ICHRA:
- Qualified individual health plans on the open market (off-exchange). They must also meet minimum value and have no annual or lifetime limits on MEC.
- ACA healthcare marketplace plans
- Medicare Part A and Medicare Part B together
- Medicare Part C
- Some student health plans
An ICHRA isn’t compatible with the following plans, even if they offer MEC:
- Group health plans, including those from a spouse or parent
- Association health plans
- COBRA
- Healthcare sharing ministries
- Self-insured student health plans
- Short-term limited duration insurance
- TRICARE
Why is MEC important for large employers?
The ACA has an employer mandate. Under this healthcare law, employers with more than 50 full-time equivalent employees, known as applicable large employers (ALEs), must offer affordable health insurance coverage to at least 95% of full-time employees. The coverage must meet minimum value (MV) and minimum essential coverage (MEC) standards. If not, employers could face penalties for noncompliance if at least one employee collects premium tax credits.
Here are the 2025 penalties1:
- Section 4980H(a) penalty: ALEs pay a monthly penalty of $241.67 or an annual penalty of $2,900 per employee (minus the first 30 employees). This penalty applies if they fail to offer MEC to 95% of their full-time employees and their dependents. At least one full-time employee must receive a premium tax credit as a result for this penalty to take effect.
- Section 4980H(b) penalty: ALEs pay a monthly penalty of $362.50 or an annual penalty of $4,350 per employee. The penalty applies if they fail to offer affordable or minimum value coverage. The IRS assesses this penalty for each full-time employee who receives a premium tax credit as a result.
While the ICHRA is a budget-friendly health benefit, it also meets the employer mandate for ALEs as long as you offer an affordable allowance.
Conclusion
Understanding what constitutes minimum essential coverage (MEC) is vital for anyone exploring their health insurance options. Whether you’re evaluating an employer-sponsored health benefit like the ICHRA, shopping on the Health Insurance Marketplace, or considering Medicaid coverage, knowing the essentials can save you from unexpected penalties or gaps in coverage.
If you’re looking to offer an ICHRA to your employees, Remodel Health’s ICHRA+ solution can help.
This article was originally published on June 16, 2020. It was last updated on July 30, 2025.
Are you an employer looking for an affordable health benefit? Learn how to offer an ICHRA with Remodel Health.