Health Care Reform for Employers: A Handy Summary of the “Pay or Play” Rules
Ever since the health care reform law – the Patient Protection and Affordable Care Act – was passed in 2010, we have been working overtime to meet with clients, publish alerts, and present seminars to help employers get themselves in compliance with this new law. Although our families are now feeling a bit neglected, hopefully our clients are better prepared to face this new statutory and regulatory burden.
To view this Alert in pdf, click here.
One of the more complicated components of PPACA is the requirement that certain employers either provide health care coverage to their full-time employees or pay a draconian penalty. This requirement is commonly referred to as the “pay or play” mandate. This mandate was originally slated to go into effect January 1, 2014. It requires that an employer with 50 or more full-time employees must offer affordable health insurance coverage to all of its full-time employees and their dependents or else potentially face significant penalties.
As many of you know, the IRS recently postponed enforcement of this mandate until January 1, 2015. This is great news for employers, who now have extra time to prepare for this complicated law. But the delay is not as helpful as many might think. Compliance preparation still needs to begin immediately.
Summarizing the “pay or play” mandate in a few short pages is a nearly impossible task to do adequately given its complexity. Nevertheless, we have attempted to do so in the attached Memorandum, and we strongly encourage you to give it a read. It is designed to present an explanation of the federal regulatory requirements in plain and understandable English. In other words, everything that the federal regulations are not.
For those who choose not to read the Memorandum, here, in very brief form, is our list of the Top 9 things employers need to know about the “pay or play” mandate.
- Applicable Large Employers. The “pay or play” mandate applies to employers that averaged 50 or more full-time employees during the preceding calendar year. These employers are referred to as “applicable large employers.”
- Full-Time Employees. A “full-time employee” is defined as an employee who averages at least 30 hours per week in a given
- Coverage Mandate. An applicable large employer is required to offer “minimum essential coverage” to all full-time employees and their dependents (surprisingly, this does not include spouses).
- Sledgehammer Penalty. If an applicable large employer fails to satisfy the mandate to offer coverage to all full-time employees and their dependents, it is subject to a penalty of $2,000 per full-time employee, per year, for all full-time
employees (even those that were offered coverage). This is known as the “sledgehammer” penalty.
- Variable-Hour and Seasonal Employees. For variable-hour and seasonal employees, the IRS has provided a complex method to determine whether they must be offered coverage as “full-time employees.” This method requires the employer to look back at the hours the employee worked in the preceding year to determine whether the employee is full-time.
- Minimum Essential Coverage. “Minimum essential coverage” is defined as coverage that is “affordable” and provides “minimum value.”
a. Affordable. Coverage is “affordable” if the employee portion of the premiums for self-only coverage is less than 9.5% of the employee’s household income. The IRS has provided several methods for employers to estimate “household income.”
b. Minimum Value. “Minimum value” is an actuarial concept. Plans that are fully insured through a reputable insurance company will almost certainly satisfy this requirement. A self-insured plan should work with its third-party administrator to ensure that the plan provides minimum value.
- Tackhammer Penalty. If an applicable large employer offers coverage, but that coverage is not “affordable” and/or does not provide “minimum value,” then the employer is subject to the so-called “tackhammer penalty,” which is $3,000 per full-time employee, per year. However, unlike the sledgehammer penalty, this penalty applies only to those full-time employees who receive a government subsidy to purchase coverage on a state health insurance exchange.
- Fiscal Year Plans. The IRS will begin enforcing the “pay or play” mandate on January 1, 2015. As a practical matter, this means that many employers with fiscal year plans will need to be in compliance with the mandate before that date. Otherwise, the employer could be required to allow mid-year enrollment in its plan.
- Beware of Excise Taxes! In addition to the “pay or play” mandates and penalties, all employer-sponsored group health plans (regardless of the size of the employer) are subject to a long list of mandates and restrictions that are enforced by an excise tax of $100 per affected individual, per day. This tax can quickly dwarf even the draconian “pay or play” penalties. Because of its importance, we will cover the excise tax separately in a future Alert and Memorandum.
Obviously, there is a lot more to the “pay or play” mandate than we can summarize in a short list. As noted above, a more detailed analysis of the “pay or play” rules may be found in the attached Memorandum. We hope it is helpful to you.