ACA News & Publications

The Pay-or-Play Provisions and Financial Analysis

April 2013

The "pay-or-play" provisions under Section 4980H of the Internal Revenue Code – as added by the Affordable Care Act (ACA), the law that introduces sweeping health care reform for the nation – become effective as early as January 1, 2014. Officially referred to as the "employer shared responsibility" provisions, they represent a cornerstone of the ACA and are among the provisions that have most concerned employers throughout the multi-year rollout of the health care reform law.

Burnham Benefits offers pay-or-play financial analysis to help clients across California and other states determine the best approach for compliance and cost control, while remaining consistent with their human capital management strategies.

With pay-or-play financial modeling, we can:

  • Perform affordability and minimum value tests
  • Project potential penalties and out of pocket costs for employers and employees
  • Implement strategies that will allow employers to continue business as usual
  • Recommend cost control strategies

Action Item: Request your pay-or-play analysis before your 2014 renewal

Pay-or-Play Overview

ACA's pay-or-play provisions require a large employer (those with more than 50 full-time equivalent employees as determined on a controlled group basis) to pay a penalty if one of its full-time employees receives a premium tax credit to use for purchasing coverage through a health insurance exchange ("Exchange") because either (1) or (2) occurs:

  1. If the employer fails to offer minimum essential health coverage on any day of a particular month to substantially all its full-time employees and their dependent children (coverage is not required for spouses), an annual penalty of $2,000 ($166.67/month) per every full-time employee in the organization will be assessed.
    "Substantially all" means that an employer must offer coverage to 95% of the employer's full-time employees, or five (5) full-time employees, whichever is greater. Employees of related employers are not counted. Coverage is also not considered to have been offered to an employee if the employee's eligible dependent children are not also offered coverage. There is some transition leeway in 2014 for employers that do not currently offer dependent coverage. There is also a deduction for the first 30 employees (if there are related employers, the 30-employee deduction is allocated among each related employer based on the number of full-time employees employed by each).
  2. If the employer offers minimum essential health coverage to substantially all its employees, but it is unaffordable and/or doesn't provide "minimum value", it will be subject to an annual penalty of $3,000 ($150.00/ month) for every full-time employee who obtains coverage from the Exchange with the help of a premium tax credit in lieu of enrolling in his or her employer-offered coverage. The maximum monthly penalty is capped at the number of the employer's full-time employees for the month (minus up to 30) multiplied by 1/12 of $2,000.

Additional Guidance

Proposed regulations on the pay or play provisions clarify a number of related requirements, which we have listed below.

When do the pay or play provisions go into effect?

The pay or play provisions generally go into effect on January 1, 2014. However, health plans with non-calendar year plan years may qualify for transitional relief until the first day of the first plan year starting in 2014.

Transitional relief is available with respect to those full-time employees (whenever hired) who would be eligible for coverage as of the first day of the 2014 plan year under the eligibility terms of the plan as in effect on December 27. 2012, as long as affordable coverage with minimum value is offered to them, beginning no later than the first day of the 2014 plan year.

In addition, transitional relief is available for an employer who has at least one quarter of its employees covered under one or more non-calendar year plans that have the same plan year as of December 27, 2012,  or who offered coverage under these plans to at least one-third of its employees during the most recent open enrollment period before December 27, 2012, provided (1) its full-time employees are offered coverage that is affordable and provides minimum value no later than the first day of the 2014 plan year; and (2) they would not have been eligible for coverage under any group health plan maintained by the employer as of December 27, 2012 that has a calendar-year plan year. For purposes of determining the percentage of employees covered under the plan, an employer may use the end of the most recent enrollment period, or any date between October 31, 2012 and December 27, 2012.

Who is a full-time employee for purposes of the pay or play penalty?

A full-time employee is defined as an employee who is employed for an average of at least 30 hours a week, or 130 hours in a calendar month.  The rules for determining whether variable hour and seasonal employees must be classified as full-time employees involve the use of a look-back measurement period to measure hours of service, which are complex. The details of calculating variable hour employees are further described in our informative webinarthat explores this topic.

What hours are counted towards determining whether an employee is a full-time employee?

Generally, every hour an employee is paid or entitled to payment for actual performance of duties plus hours for periods of time in which he or she is not working but is paid or entitled to payment are counted. This includes vacation time, sick time, holidays, disability, layoff, paid leaves of absence, Family and Medical Leave, military leave and time off for jury duty.

How are related employers treated under this provision?

Related employers are companies with 80% or more common ownership or control — or that are otherwise treated as a single employer according to Internal Revenue Code. These companies are combined together and deemed a "controlled group" for purposes of determining whether they employ at least 50 full- time equivalent employees (FTEs). If the controlled group totals at least 50 full-time employees, including FTEs, the employer is considered a large employer and each member of the controlled group is subject to the pay or play provisions. However, each employer within the controlled group is only liable for penalties pertaining to their own employees, not for the penalties of other members of the controlled group.

How do employers know if the health coverage they offer is considered "affordable" for employees?

If an employee's share of the premium for employer-provided coverage would cost the employee more than 9.5% of that employee's annual household income, the coverage is not considered affordable for that employee.  If an employer offers multiple healthcare coverage options, the affordability test applies to the lowest-cost option available to the employee that also meets the minimum value requirement.

Because employers generally will not know their employees' household incomes, employers can take advantage of one of the affordability safe harbors set forth in the proposed regulations.  Under the safe harbors, an employer can avoid a payment if the cost of the coverage to the employee would not exceed 9.5% of the wages the employer pays the employee that year, as reported in Box 1 of Form W-2, or if the coverage satisfies either of two other design-based affordability safe harbors, the rate of pay safe harbor, or the 100% of Federal poverty line safe harbor.

How do employers know if the health coverage they offer provides "minimum value" for its employees?

There are three permitted methodologies that can be used to determine if an employer's plan provides minimum value.

  1. A minimum value calculator has been made available by the Internal Revenue Service (IRS) and the Department of Health and Human Services (HHS). Employers can input certain information about the plan, such as deductibles and co-pays, into the calculator and get a determination as to whether the plan provides minimum value by covering at least 60 percent of the total allowed cost of benefits that are expected to be incurred under the plan.
  2. Design-based safe harbor checklists that describe the cost sharing attributes of a plan will also be available. The checklists will apply to four core categories of benefits and services: physician and mid-level practitioner care; hospital and emergency room services; pharmacy benefits; and laboratory and imaging services.
  3. A third alternative would be to obtain an actuarial certification should an employer not be able to use the minimum value calculator or design-based safe harbor checklist described above.

For a comprehensive listing of requirements and an assessment of whether your organization will be subject to the pay or play penalties, contact your consultant at Burnham Benefits.

For More Information
For more information about this ACA Pathways or about any other health care reform-related provisions, please contact your Burnham Benefits consultant or Burnham Benefits at:

Burnham Benefits

This ACA Pathways is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.

The information contained in this ACA Pathways includes emerging health care news from a limited perspective and does not encompass all views. The information was selected from a wide range of sources selected on the basis of their potential impact on employers and/or their employee benefit plans. For more information, please contact Burnham Benefits.

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