Starting in 2014, provisions of the Patient Protection and Affordable Care Act become effective known as “Pay or Play” or “Employer Shared Responsibility.” Large employers will be faced with the decision whether to offer full-time employees affordable health coverage that provides “minimum value” or whether to pay a penalty. Employers need to start evaluating the potential costs to their organization now to determine whether they will “Pay” the penalty or “Play” by offering coverage to full-time employees and their children.
Which Employers Are Subject to the Employer Mandate?
Employers who employ an average of at least 50 full-time employees and full-time equivalent employees during the preceding calendar year are subject to the Pay or Play mandate. A full-time employee is an employee who is employed for an average of at least 30 hours of service per week. For purposes of determining whether they have 50 or more full-time employees, employers must also consider full-time equivalent employees, by adding the hours worked by non-full-time employees. Employees employed by members of a controlled group of corporations must be aggregated, but certain individuals, such as partners in a partnership, independent contractors and those individuals who are not considered common-law employees can be excluded. Employers who exceed 50 full-time employees for fewer than 120 days per year because of seasonal employment may be eligible for a special exception.
How are the Penalties Calculated and Assessed?
Applicable large employers may be subject to one of two different types of penalties under the Employer Mandate.
- Employer Doesn’t Provide Health Coverage to FTEs – “Subsection (a) Penalty”: The first type of penalty applies if an employer fails to provide minimum essential health coverage to substantially all full-time employees and their children, and one or more of those full-time employees obtains subsidized coverage under a healthcare Exchange. This penalty is calculated as follows:
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- $2,000 x (The number of full-time employees employed by the employer minus 30)
Employers are treated as having offered coverage to all full-time employees if coverage is offered to 95% of full-time employees. This provision may prevent an employer from being subject to the subsection (a) penalty for failure to provide coverage to a small group of full-time employees, but does not protect the employer from the subsection (b) penalty if the excluded employee receives a subsidy under a healthcare Exchange.
- Employer Offers Health Coverage, but it is Unaffordable – “Subsection (b) Penalty”: The second type of penalty applies if the employer provides minimum essential health coverage to full-time employees, but that coverage is either not affordable or does not provided minimum value, and one or more full-time employees obtains subsidized coverage under a health care Exchange. These penalties are capped at the value of the subsection (a) penalty described above. The subsection (b) penalty is calculated as follows:
- $3,000 x the number of full-time employees who are eligible for and actually receive subsidized health coverage on the Exchange.
The IRS will impose penalties by contacting the employer at the end of the year with an estimated penalty amount. Employers will have the opportunity to respond to and appeal the initial determination if they believe it is inaccurate.
What Kind of Health Coverage Must I Offer to Avoid the Penalty?
In order to avoid both the subsection (a) and (b) penalties, employers must offer “minimum essential coverage” to substantially all full-time employees and their children that is “affordable” and satisfies a “minimum value” requirement.
- Minimum Essential Coverage: Most employer-provided group health coverage will meet the very broad definition of “minimum essential coverage,” but the definition does not include excepted benefits such as flexible spending accounts, stand-alone dental or vision plans.
- Affordable Coverage: Coverage is considered “affordable” if employee-only coverage does not exceed 9.5% of the employee’s household income. Since employers are unlikely to know employee household income, the IRS has issued three safe-harbor methods for determining affordability based on information the employer has available, including the employee’s W-2 income, rate of pay and the federal poverty level.
- Minimum Value: Coverage provides “minimum value” if the plan’s share of the projected cost of covered benefits is at least 60%. This can be determined through the services of an actuary, by using the IRS’ minimum value calculator or by comparing the benefits offered under the plan to a checklist to be issued in the future by the IRS.
How do I Determine Who is a Full-Time Employee for Purposes of Offering Coverage and Calculating the Penalty?
IRS regulations provide detailed guidance on how to determine full-time employees for purposes of offering coverage and calculating penalties. An employee is considered full-time if he or she is employed, on average, at least 30 hours per week and is a common law employee. Leased employees, partners, sole proprietors and 2% or more owners of an S-corporation can be excluded. An employee must be credited for hours of service for each hour in which he or she is paid or entitled to be paid, including periods where no duties are performed, such as vacation time, holidays and sick time. Employers may choose to credit salaried employees with eight hours per day or 40 hours per week, unless such method would significantly understate the employee’s hours.
If an employer is uncertain at the time of hire whether an employee will be full-time or if the employee is a variable hour or seasonal employee, IRS guidance provides detailed rules regarding measurement periods and stability periods. We will address this topic in further detail in a future alert.
When do These Requirements Become Effective?
The Pay or Play requirements are effective for coverage periods beginning on or after January 1, 2014 but employers should act now to:
- Determine whether they are an applicable large employer subject to the Pay or Play mandate;
- Put policies and procedures in place to track the number of full-time and part-time employees and their hours of service;
- Determine whether substantially all full-time employees and their children are covered under the company’s group health plan;
- If the group health plan does not offer coverage to children, consider establishing such coverage for upcoming plan years;
- Determine whether the company’s existing health plan provides minimum essential coverage and minimum value;
- Determine whether self-only health plan coverage is affordable for full-time employees;
- Analyze whether it is preferable to offer health plan coverage to substantially all full-time employees or pay the subsection (a) penalty; and
- Analyze whether it is preferable to make self-only health plan coverage affordable or pay the subsection (b) penalty for full-time employees who qualify for an Exchange subsidy.
Keep in mind that these rules can be fact-specific and this article is just a summary. For more details, please contact any one of our Employee Benefits attorneys.
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