Play or Pay: Are You Ready for the New Health Care Rules?

Beginning on Jan. 1, 2015, the Health Care Act requires “large” employers to either: 1) provide “minimum essential” health care coverage to full-time employees that is “affordable” and of at least “minimum value,” or 2) risk substantial penalties. The “play or pay” provision had been scheduled to go into effect a year earlier, but in July the IRS issued guidance pushing out the effective date. This is good news if you could be considered a large employer, because you have more time to prepare.

Here is an overview of the play or pay rules, but keep in mind that more IRS guidance is expected, so some of these rules might change.

Are You Subject to the Rules?

You will be considered a large employer and thus be subject to the rules if your company had at least 50 full-time employees, including full-time equivalents (FTEs), during the preceding calendar year (excluding leased employees and employees working outside the United States). Special rules apply to controlled groups of companies, educational organizations and businesses that employ seasonal workers.

Full-time employees are those who work 30 hours or more per week. Part-time employees are converted into FTEs by dividing their total monthly hours by 120.

What are the Penalties?

Large employers that do not “play” are not automatically subject to penalties. Rather, penalties are triggered only if at least one full-time employee receives a premium tax credit for purchasing individual coverage through a Health Insurance Marketplace (originally referred to as a “health insurance exchange”).

If you are a large employer, you face two possible types of penalties:

1. If you fail to provide minimum essential coverage to substantially all full-time employees (and, beginning in 2015, their dependents), the penalty is $2,000 per year for each full-time employee in excess of 30 employees. For example, if you have 80 full-time employees, the penalty would be $100,000 per year [$2,000 × (80-30)].
2. Even if you provide minimum essential coverage, you may still be subject to penalties if the coverage fails to provide “minimum value” or is not “affordable.” (See the Sidebar, “Determining Minimum Value and Affordability” for definitions.) Then, the penalty is the lesser of the penalty above or $3,000 for each employee receiving the credit.

Note that, for purposes of penalty calculations, full-time employees do not include FTEs.

Employers must calculate the penalties monthly. For example, if you have 80 full-time employees in a given month, the penalty for that month would be $8,333.33 [1/12 × $2,000 × (80-30)]. If the number of full-time employees drops to 75 the following month, the penalty for that month would be $7,500 [1/12 × $2,000 × (75-30)].

Proposed regulations include an optional look-back method that allows you to treat each employee who averages at least 30 hours per week during the look-back period (six months, for example) as full-time employees during the next six-month period. Similarly, you would treat employees who work part-time during the look-back period as part-time during the subsequent period, even if their average hours climb above 30 hours per week.

What is Minimum Essential Coverage?

Under the proposed regulations, minimum essential coverage can be provided by “eligible employer-sponsored plans.” These plans are broadly defined to include any plan offered in the small or large group market in the state, as well as self-funded plans — except for certain limited-coverage plans, including dental-only and vision-only plans.

For some employers, a bare-bones health plan may be a viable option for avoiding the $2,000-per-full-time-employee penalty. Of course, if the plan fails to provide minimum value, or is not affordable, they would still be subject to the $3,000 penalty, but only for employees who receive premium credits.

What Steps Should You Take?

If you are a large employer and already provide health coverage, analyze your current coverage to determine if it meets minimum value and affordability requirements under the new regulations. If you do not offer coverage, review the cost of providing coverage to all full-time employees and their dependents.

To decide whether you should “play” (provide or increase coverage) or “pay” (incur penalties), compare the costs and benefits of each option. Keep in mind that insurance costs are deductible, but penalties are not. And consider the impact of your decision on your ability to attract and retain quality employees.

Sidebar: Determining Minimum Value and Affordability

A health plan provides “minimum value” if the employer’s share of total allowed benefit costs is at least 60%. Proposed regulations provide several methods for determining minimum value, including using a minimum value calculator, obtaining an actuarial certification, or relying on one of several safe harbors.

Coverage is “affordable” if an employee’s required contribution is no more than 9.5% of his or her household income for the year. Because it may be difficult for employers to determine household incomes, the proposed regulations offer three safe harbors they can use as a substitute:

1. An employee’s W-2 wages (excluding 401(k) or cafeteria plan contributions);
2. An employee’s hourly pay rate multiplied by 130 hours per month; or
3. The federal poverty line for a single individual.

So long as an employee’s required contribution is 9.5% or less of one of these amounts, coverage is deemed to be affordable.

If you have additional questions about the new health care rules, contact Rob Swenson at 312.670.7444 or [email protected].