The Affordable Care Act and Play or Pay
April 15, 2013
Are You Ready for 2014?
Beginning January 1, 2014, the much-anticipated “play or pay” or “shared responsibility” provisions of the Patient Protection and Affordable Care Act (PPACA) come into effect. Employers that are considered to be “large” must offer qualifying health insurance coverage to their “full-time” employees, or pay a non-deductible penalty. There is a great deal of complexity associated with the PPACA rules relating to “play or pay,” and this bulletin does not delve into all of the complexities. However, set forth below is a discussion of some of the most significant considerations which you need to take into account now in addressing the implications of the “play or pay” rules on your business and your health plan.
Keep in mind – January 1, 2014 will be upon us before we know it!
1. Am I a large employer?
Generally, employers with at least 50 full-time common law employees, or the equivalent, are subject to the penalties under PPACA. For this purpose, part-time employees (less than 30 hours of service per week) are essentially taken into account as a fraction of a full-time employee in determining large employer status. Reference is made to the preceding calendar year; in other words, if the 50 full-time employee threshold is met in 2013, you are subject to the rules for 2014. For 2013 only, a transition rule permits use of a consecutive six month period during 2013 in making this determination, rather than the entire 2013 calendar year.
Another complicating factor is that the “controlled group” rules apply in making this determination. For example, if your business includes a parent corporation that employs 40 full-time employees, and that corporation has a wholly owned subsidiary with 20 full-time employees, the employees are added together and both entities are considered large employers. Therefore, you may need to determine if your company needs to be aggregated with any other entity. The rules are not always easy to apply.
2. Will my plan meet the PPACA “play or pay” standards?
The coverage that is offered must be “minimum essential coverage” that meets “minimum value” requirements, and is also considered to be “affordable.”
The minimum essential coverage requirement should rarely be a difficult test to meet. Most private health insurance plans offering comprehensive coverage should meet this requirement. Plans offering only limited benefits, such as limited scope vision or dental plans, do not qualify.
To meet the minimum value requirement, the plan must pay at least 60% of the expected health care costs. The other unreimbursed costs would be paid through co-payments, deductibles, and co-insurance. Determination of whether this requirement is met may be done using a minimum value calculator published earlier this year by the IRS and HHS; fitting within yet-to-be published regulatory safe harbors; or through actuarial certification.
Although the coverage that is offered must cover dependents, “affordability” is based upon the employee’s share of the premium for the lowest-cost plan’s self-only coverage, which cannot exceed 9.5% of the employee’s income. Safe harbors allow that income to be determined based upon the employee’s W-2 wages (Box 1); utilizing the employee’s rate of pay; or utilizing the Federal poverty level.
You will need to determine if your plan meets the minimum essential coverage, minimum value and affordability requirements; and if not, what steps would need to be taken to meet such requirements and the anticipated additional costs associated with those steps.
3. Who do I need to cover?
To avoid penalties, substantially all full-time employees (30 hours per week) and their dependents need to be covered. Generally, this means covering at least 95% of all full-time employees and their dependents; an employer is permitted not to cover up to 5% of its full-time employees or, if greater, five full-time employees. Interestingly enough, employers are looked at separately and the controlled group rules, which apply in determining large employer status, do not apply for this purpose.
Dependents who must be covered include step-children, adopted and foster children; it is important that plan terms be reviewed to be sure that such persons are covered. Another potential concern relates to persons who are treated as independent contractors but who may in fact be common law employees; in a given case, this alone could cause a violation of the 95% coverage requirement.
One of the most difficult aspects of the play or pay feature of PPACA is dealing with “variable hour employees”, whose hours vary from week to week or month to month. Such persons may work more than 30 hours some weeks, and less than 30 hours other weeks. This is of particular concern in certain industries such as retail, restaurant/hospitality, and health care. The IRS has prescribed optional safe harbors for making determinations in this regard. These rules are potentially very useful, but provide for rather complex measurement periods, administrative periods, and stability periods during which such employee will or will not be considered full-time. Note that if this methodology is to be followed, measurement periods will take place in advance of the January 1, 2014 effective date; in other words, current employment status will be relevant in assessing full-time status for 2014. There are options available with respect to establishing such periods, and those options should be considered if this approach is to be followed.
4. What action steps should I take?
Even if your company is a large employer, you are not required to offer coverage; however, you will face non-deductible penalties if you do not offer minimum essential coverage to substantially all of your full-time employees and dependents, or if you provide such coverage but it does not meet requirements for minimum value or affordability. The penalties (and methodology for applying them) differ depending upon whether coverage is not offered to substantially all full-time employees; whether such coverage is offered, but it is unaffordable and/or does not meet minimum value; and whether full-time employees obtain premium tax credits to purchase coverage through an exchange.
You will need to consider whether you should begin to offer or continue offering a health plan to your full-time employees, or pay the non-deductible penalty. In that regard, you should determine:
- Whether or not you are a large employer, with reference to the controlled group rules.
- Do you cover substantially all of your full-time employees, or do additional employees need to be included?
- Do you utilize independent contractors and, if so, are they properly classified as such?
- Should work force restructuring be considered?
- Should changes to your corporate structure be considered?
- How to handle variable hour employees, including application of the IRS safe harbors. Measurement, stability and administrative periods, and recordkeeping systems, would need to be established now.
- Are dependents covered, and is your “dependent” definition satisfactory?
- Does your plan meet the affordability and minimum value requirements? What approaches will be followed to test affordability and minimum value? If your plan does not meet such requirements, what steps can be taken to meet those requirements?
- Ultimately, what makes the most economic sense to your company, taking into consideration that maintaining a group health plan may be necessary in order to attract and retain employees.
Please contact Bill Keenan at (860) 240-6028 or email@example.com or Lissa Paris at (860)240-6032 or firstname.lastname@example.org if we can assist you in dealing with the “play or pay” rules or other aspects of the PPACA.