Play or Pay With Obamacare: Employers Wonder Which Way to Go

Health care reform has been a key initiative of President Obama's administration.

Many of the nation’s employers are still on the fence concerning the “Play or Pay” question in health care reform.

Some are leaning toward “Play” (offering employees medical coverage that meets the requirements of the Patient Protection and Affordable Care Act [PPACA]), while others are favoring “Pay” (forking over penalties for not offering acceptable coverage to employees).

The law actually calls for two possible penalties for large employers with 50 or more employees: one for not offering “minimum essential” coverage, and the other for offering coverage that isn’t “affordable” and/or doesn’t provide “minimum value.”

First, make sure employees are counted correctly under the guidelines of PPACA. UBA has a guide available for reference.

Next, take a closer look at these penalties and some critical questions and answers that can help an organization answer the “Play or Pay” question.

Penalty 1: Minimum Essential Coverage

A large employer must offer minimum essential coverage to at least 95% of its full-time employees (and their dependents) or pay a $2,000 penalty on each of its full-time employees, if even one employee receives a premium tax credit. When applying this penalty, 30 employees may be excluded.

Question: Which full-time employees must be offered coverage to avoid this penalty?

Answer: Employees who average 30 or more hours per week are considered full-time under PPACA. When determining who needs to be offered coverage, employers may simply measure an employee’s hours on a current, month-by-month basis. Alternatively, employers have the option of using look back measurement periods to get smoother, more predictable results.

Q: What dependents must be offered coverage?

A: Coverage must be offered to the dependent children of full-time employees until the children reach age 26.

Q: Must spouses be offered coverage?

A: No. The IRS definition of “dependents” includes children but not spouses.

Q: How is the minimum essential coverage penalty calculated?

A: The penalty is calculated monthly at the rate of $166.67 for each full-time employee, less 30 “free employees.”

Penalty 2: Affordable, minimum value coverage

Employers who offer minimum essential coverage to substantially all of their full-time employees may still owe penalties if the coverage they offer is not deemed “affordable” and/or does not provide “minimum value.”

Q: What is “affordable” coverage?

A: Coverage is considered affordable if it costs less than 9.5 percent of the employee’s household income. Because employers rarely know an employee’s household income, employers may meet the affordability requirement through one of three safe harbor options: the W-2 safe harbor, the rate of pay safe harbor, or the Federal Poverty Level safe harbor.

Q: What is the W-2 safe harbor?

A: Under the W-2 safe harbor, coverage is affordable if the employee’s contribution for self-only coverage is less than 9.5 percent of her/his W-2 (Box 1) income for the current year.

Q: What is the rate of pay safe harbor?

A: Under the rate of pay safe harbor, coverage is affordable if the employee’s contribution for self-only coverage is less than 9.5% of her/his rate of pay at the start of the calendar year.

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Q: What is the Federal Poverty Level (FPL) safe harbor?

A: Under the Federal Poverty Level safe harbor, coverage is affordable if the employee’s contribution for self-only coverage is less than 9.5% of the FPL as of the start of the plan year. For 2013, the FPL for a single person in the 48 contiguous states and Washington, D.C., is $11,490, so the maximum employee contribution would be $90.96 per month.

Q: What is “minimum value” coverage?

A: Coverage is “minimum value” if it is expected to pay at least 60% of covered claims costs. To assist with this determination the government has provided calculators and has indicated it will provide safe harbor plan designs.

Q: What is the penalty for not offering affordable, minimum value coverage?

A: The penalty is $250 per month ($3,000 per year) for each full-time employee who:

  • Is not offered coverage that is considered both minimum value and affordable; and,
  • Purchases coverage through a government exchange; and,
  • Is eligible for a premium tax credit/subsidy (her/his household income must be below 400% of federal poverty level).

Paying the penalties

For employers who elect to pay the “Play or Pay” penalties, two basic questions arise:

Q: When are penalties due?

A: The penalties will be due after the end of each calendar year. Although penalties are calculated monthly, they are to be paid annually.

Q: How will the penalties be paid?

A: Employers will receive a special notice of assessment from the IRS.

(Note: The information provided here is for general purposes only, is subject to change, and is not intended to provide legal advice.)

The Bottom Line

The decisions around the “Play or Pay” question are complex, and they are actually just one aspect of the PPACA. There are obligations and implications attached to both sides of the question.

Employers are encouraged to consider all of their options and calculate the outcomes as accurately as possible.

Thomas Mangan is the CEO of United Benefit Advisors, one of the nation’s leading independent employee benefits advisory organizations twith more than 140 Partner Firms in more than 200 locations throughout the U.S., Canada and the U.K. .A 20-year veteran in the field of employee benefits, Mr. Mangan has been named one of the top 10 most influential individuals in the health care industry and is widely recognized as one of the industry’s most progressive thought leaders. His extensive background in employee benefits spans sales, services and operations. Contact him at bolson@ubabenefits.com.

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