Play or pay? Key questions about the health care act’s employer coverage penalties
The deadline is looming. In roughly six months, employers will be subject to the “play or pay” provisions of the Patient Protection and Affordable Care Act of 2010. Not every company will face a penalty for not providing health care coverage or for not providing sufficient coverage. But taking a wait-and-see approach is highly unadvisable. Let’s delve into some key questions about the health care act’s play or pay provisions.
Who will be affected?
Every employer will be affected in the sense that they’ll have to check annually to see whether their business and its health care benefits (or lack thereof) trigger consequences under the law. The key determinants are whether you:
- Employ a “large” number of employees, and
- If you do, whether you offer at least a “minimum value” of “affordable” health care coverage to full-time staff.
Meeting the standards of the former and coming up short on the latter could mean penalties if even just one full-time employee receives a premium tax credit for buying individual coverage through one of the new insurance exchanges to be established in accordance with the act.
How do you measure up?
So the two-part question becomes: 1) Is your company a large employer under the law’s definition, and, if so, 2) are you offering health care coverage that’s both of minimum value and affordable?
To determine whether you’re a large employer, you need to calculate your full-time equivalent employees (FTEs). Once you’ve counted your full-timers (defined as employees working 30 or more hours per week), you must total the service hours for all part-timers in the month, then divide by 120 and add the result to your total.
If you have hourly employees, base your calculations on records of hours worked and hours compensated (or due to be compensated) for time off because of vacations, illness, disability and other such circumstances.
There are three options for determining the hours of salaried part-timers: 1) using the same method as for hourly staff, 2) applying a days-worked equivalency method whereby each employee is credited with eight hours per day worked, or 3) using a weeks-worked equivalency method whereby each employee is credited with 40 hours per week worked.
If you have 50 or more FTEs, you’re considered to be a large employer. If you offer health care coverage, you next must assess whether that coverage provides minimum value and is affordable. Regarding minimum value, your plan must cover at least 60% of the total allowed costs of benefits provided.
The “affordability” test generally stipulates that, if your coverage includes an employee premium exceeding 9.5% of his or her annual household income, your benefits won’t be considered affordable. This test applies to the lowest-cost option available, which must meet the minimum value requirement.
(Important note: The IRS has proposed three safe harbors for meeting the affordability test. Explore these fully with your benefits advisor.)
Will you be penalized?
There are a couple of ways you could be penalized. Remember, penalties can be triggered if just one full-time employee of a larger employer receives a premium tax credit via an exchange. First, if you’re not providing health care coverage to at least 95% of your full-time employees, the penalty is $2,000 per full-time employee beyond 30 full-timers. (Penalties are based on actual full-time employees, not on FTEs.)
If you’re covering 95% of your full-time staff but not providing coverage that’s of minimum value or affordable, you’ll have to pay the lesser of $3,000 for each employee who receives a premium credit from an exchange or $2,000 for each full-time employee beyond your first 30 full-timers.
Managing the complications
Just when you thought providing your employees with health care coverage couldn’t get any more complicated, along comes another compliance issue. The play or pay provisions are, however, manageable if you draw the right balance of diligent oversight and close consultation with your benefits advisors.
| Sidebar: Points to ponder for companies on the bubble
Small businesses that don’t employ anywhere near the numbers of staff that define an employer as “large” according to the “play or pay” provisions have little to fear from the impending penalties under the Patient Protection and Affordable Care Act of 2010. On the flip side, businesses that are clearly big to begin with more than likely already know they may be subject to the penalties and are taking steps accordingly.
Companies that may be on the bubble of large-employer status, however, have some additional points to ponder. For example, if you have just enough employees to be defined as a “large employer” yet you don’t (or can’t afford to) provide coverage that’s of minimum value and affordable, you could reduce the size of your workforce. Independent contractors, interns or seasonal workers could enable you to pick up the production slack.
Of course, laying off employees has many downsides — bad press, decreased productivity, diminished morale. So you may need to perform a careful, point-by-point comparison of enhancing your health care coverage vs. paying the health care act’s penalties. One factor that could sway your decision: Many of the costs associated with providing health care coverage are tax deductible; the penalties are not.
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