Affordable Care Act: Determine Whether to “Pay or Play”
One of the most important decisions facing large employers under the Affordable Care Act (ACA) is how to respond to the employer shared responsibility provisions in the ACA, i.e., whether to “pay or play.” Essentially, these rules require such an employer to maintain a group health plan meeting the ACA’s standards for “Minimum Value” and “Affordability,” or pay penalties for failing to do so. The rules were set to become effective January 1, 2014, but in light of complexities involving reporting requirements, the Obama Administration has delayed the effective date to January 1, 2015.
For purposes of the pay or play rules, a large employer is one that employed at least 50 “full-time equivalent” (FTE) employees in the prior year. Generally, an employee is considered to be full-time if the employee works at least 30 hours per week or 130 hours per month. Under rules similar to those that apply for purposes of qualified retirement plans (e.g., pension and 401(k) plans), all employees in certain groups of related employers (controlled groups and affiliated service groups) must be counted.
The penalties imposed on employers who elect to “pay” are twofold. First, if the employer fails to offer health coverage meeting certain standards to every full-time employee, and if any one employee receives tax-subsidized coverage through an individual exchange, the employer must pay a $2,000 penalty for every full-time employee (excluding the first 30 employees).
Second, if the employer offers coverage but an employee obtains tax-subsidized coverage through an individual exchange, the employer must pay $3,000 for that employee. At first glance, it might appear that the application of this penalty is totally outside the employer’s control. However, while an employee is free to decline employer coverage and switch to the exchange, the tax credit is available to the employee only if the employee’s required contribution to the employer plan for single coverage exceeds 9.5% of the employee’s income or the plan pays less than 60% of the cost of covered services.
Many employers have already performed a quick analysis and determined that paying the ACA penalties will be less expensive than the cost of maintaining a group health plan meeting the required standards. However, the financial analysis is just one component of the pay or play decision. Many employers have expressed intent to continue to offer existing coverage because their plan is viewed as an essential part of their benefits package, which they need to compete in the labor market. Also, eliminating existing coverage and forcing employees into the exchange could adversely affect employee morale, wellness, and productivity. Finally, terminating coverage could result in lost tax advantages; while premiums for employee coverage are deductible business expenses, the ACA penalties will not be deductible.
On the other hand, employers that elect to forego employee coverage and pay the penalties could share the savings with employees, in the form of higher wages or other benefits. For many employers, the trade-offs of pay or play will substantially depend on their mix of higher and lower wage earners. For example, a professional firm with a high percentage of well-paid workers might elect to retain its plan, while a restaurant that has been covering management employees but not its kitchen and wait staff might elect to drop its plan.
Houston Harbaugh remains available to assist employers in determining whether they are subject to the pay or play mandate (counting of employees, controlled group analysis, etc.), and for those who are subject, calculation of penalties and assessment of options.