• Employer Play Or Pay Penalty Is Almost In Effect. Are You Ready?
  • June 12, 2013 | Authors: Tina A. DeNapoli; Josh F. Norris
  • Law Firm: Troutman Sanders LLP - Atlanta Office
  • Beginning in 2014, if you are an "applicable large employer" you may be subject to a tax penalty under the Patient Protection and Affordable Care Act (the "ACA") if you do not offer group health care coverage to a sufficient number of your full-time employees (and their dependents) or if the coverage is not "affordable" or does not provide "minimum value." This tax penalty is commonly referred to as the "play or pay" penalty or the penalty under the "employer shared responsibility" provisions of the ACA.

    This article provides an overview of (i) the "play or pay" penalty, (ii) the key rules for determining whether you are an "applicable large employer" and (iii) if you are an "applicable large employer," which employees would be considered full-time employees to whom coverage must be offered to avoid the play or pay penalty.

    The Play or Pay Penalty

    No Coverage Offered

    If you are an applicable large employer, you would be subject to a non-deductible play or pay penalty if (a) you do not offer group health coverage to at least ninety-five percent of your full-time employees (and their dependents), (b) you have at least 30 full-time employees and (c) at least one of your full-time employees enrolls in coverage through a state or federal health exchange and qualifies for a subsidy or tax credit for coverage. This penalty is $166.67 per month ($2,000 per year) (as adjusted from time to time for inflation) for each full-time employee in excess of 30. For example, if you have 100 full-time employees and do not offer group health coverage to at least 95 of these full-time employees (and their dependents), the penalty would be $140,000 ((100 - 30) x $2,000).

    Coverage Offered But Not Affordable or Not Providing Minimum Value

    If you are an applicable large employer who offers group health coverage to a sufficient number of full-time employees (and their dependents), you may still be subject to a non-deductible play or pay penalty if (a) you fail to offer coverage that is "affordable" and that provides "minimum value" ("qualified health care coverage") and (b) at least one of your full-time employees enrolls in coverage through a state or federal health exchange and qualifies for a subsidy or tax credit for coverage. Generally, coverage will be affordable if the premium cost to the employee for employee-only coverage does not exceed 9.5% of the employee’s household income. The IRS has established various safe harbors for determining affordability. For example, coverage will be considered affordable if the employee portion of the premium does not exceed 9.5% of (i) the employee’s W-2 wages, (ii) the employee's salary rate if the employee is paid on a salaried basis, (iii) the employee's hourly rate multiplied by 130 hours if the employee is paid on an hourly basis or (iv) the federal poverty limit (currently $11,490). Generally, a group health plan will provide minimum value only if the plan pays at least sixty percent of the total cost of benefits, after taking into account benefits provided and deductibles, co-pays, co-insurance and out-of-pocket maximums.

    This penalty is $250 per month ($3,000 per year) (as adjusted from time to time for inflation) for each full-time employee who actually enrolls in coverage through the state or federal health exchange and qualifies for a subsidy or tax credit. For example, if you have 100 full-time employees to whom you offer coverage, and the coverage is not affordable for 40 of those employees, yet only 20 of them enroll in coverage through an exchange and qualify for a subsidy, the penalty would be $60,000 (20 x $3,000). However, this penalty can never exceed the penalty that would have applied if the employer offered no coverage as described in the preceding paragraph (i.e., $2,000 x (total full-time employees - 30)).

    Generally, an employee is eligible for a subsidy if his household income is between 100% and 400% of the federal poverty level. For 2013, the federal poverty limit is $11,490 for an individual and $23,550 for a family of four. Accordingly, the subsidy is available if household income is between $11,490 and $45,960 for an individual or between $23,550 and $94,200 for a family of four.

    Who Is an "Applicable Large Employer?"

    You are an "applicable large employer" if, after taking into account all of your employees (and the employees of any other entities that are in your controlled group, as determined under special Internal Revenue Code rules), you employed an average of at least 50 full-time employees (or full-time equivalent employees) on business days during the preceding calendar year. For purposes of the play or pay penalty, a full-time employee is an employee who works an average of at least 30 hours per week or 130 hours per month. Additionally, solely for purposes of determining whether you are an applicable large employer, employees who are not otherwise full-time are aggregated to determine their full-time equivalents based on the number of hours of service. Hours include each hour for which an employee is paid or entitled to be paid, including certain paid time off (such as paid vacation, holiday, illness, disability, layoff, jury duty, military leave or leave of absence). For employees who are not paid on an hourly basis, you may calculate the number of hours under any of the following methods so long as the method does not substantially understate the employee’s hours: (1) count actual hours from employment records and hours for which payment is made or due; (2) credit the employee with eight hours for each day the employee completes, or is entitled to payment for, one hour of service; or (3) credit the employee with 40 hours for each week the employee completes, or is entitled to payment for, one hour of service. Generally, to determine if you are an applicable large employer, you must take the following steps:

    1. Determine the number of hours worked by each employee in each calendar month in the prior calendar year.
    2. Determine the number of employees who averaged at least 30 hours per week (or 130 hours per month) in each such calendar month.
    3. Add up the employees who averaged at least 30 hours per week (or 130 hours per month) for all 12 months in the prior year. The result is the total number of full-time employees in the prior year.
    4. For the remaining employees, determine the sum of all hours they worked in each calendar month in the prior calendar year (counting no more than 120 hours per employee), then divide by 120. The result is the full-time equivalent employees for the month.
    5. Add up the total number of full-time equivalent employees for all twelve months in the prior calendar year.
    6. Combine the total full-time employees and full-time equivalent employees for the prior calendar year.
    7. Divide the grand total by 12.

    If the result is 50 or more for the prior calendar year, you will be considered an "applicable large employer" for the current calendar year. For purposes of determining your status as an applicable large employer for 2014, however, transitional guidance allows you to look back to any consecutive six-month period in 2013 (rather than the full calendar year) to determine if you employed 50 or more full-time/full-time equivalent employees. In that case, instead of dividing the grand total above by 12, you would divide by 6.

    Special rules apply for employers who did not exist in the prior calendar year and for employers with large numbers of seasonal employees.

    Which Employees are Full-Time Employees to Whom Coverage Must Be Offered?

    If you are an applicable large employer, you must determine the full-time employees to whom coverage must be offered in order to avoid the play or pay penalty. As full-time employee is an employee who is employed an average of at least 30 hours per week, or 130 hours in a calendar month.

    Given that the play or pay penalty is based on the number of full-time employees who do not receive qualified health care coverage during any given month, yet enrollment decisions generally are made prior to the beginning of the plan year, an employer may not know at the time of enrollment whether an employee will be a full-time employee during the applicable coverage year. The IRS has established optional planning tools that allow an employer to presume full-time status during a future period (a "stability period") based on an employee’s status during a prior look-back period (a "measurement period").

    Determining Full-Time Status for "Ongoing" Employees

    For employees who are current, ongoing employees, you may use the following rules to determine full-time status for purposes of avoiding the play or pay penalty:

    1. First determine a look-back period (referred to as a "standard measurement period"). This period is used to determine (i) which employees are "ongoing" employees and (ii) which of those "ongoing" employees may be considered full-time employees for a future period (referred to as a "stability period"). An "ongoing" employee is one who has been employed for at least one full "standard measurement period."
    2. The "standard measurement period" must be at least three but not more than 12 calendar months. You may determine the months in which the "standard measurement period" begins and ends, provided that the determination must be made on a uniform and consistent basis for all employees in the same category. Different measurement periods may be used for certain categories of employees, such as salaried versus hourly employees, collectively bargained employees or employees located in different states.
    3. Next, determine a "stability period," which is a defined period of time after the "standard measurement period" that is at least six months, but no shorter than the "standard measurement period."

    If an employee did not average 30 hours or more per week (or 130 hours per month) during the "standard measurement period," that employee does not have to be treated as a full-time employee during the following "stability period" for purposes of offering "qualified health care coverage" during that "stability period" to avoid the play or pay penalty regardless of whether the employee actually ends up working an average of 30 or more hours per week during that "stability period." In that case, the stability period cannot exceed the standard measurement period. If an employee averaged 30 hours or more per week (or 130 hours per month) during the "standard measurement period," that employee would be considered a full-time employee during the subsequent "stability period" for purposes of determining whether the play or pay penalty applies.

    Because employers may need time between the "standard measurement period" and its associated "stability period" to determine the employees who will be treated as full-time for purposes of offering qualified health care coverage to avoid the play or pay penalty (and to notify and enroll those employees), an employer may use an administrative period for this purpose beginning immediately after the "standard measurement period," lasting no more than 90 days and ending immediately before the associated "stability period" begins. To prevent any potential gaps in health care coverage, the administrative period must overlap with the end of the prior "stability period."

    Employers that intend to adopt a 12 month stability period for 2014 (i.e., January to December of 2014) generally would have been required to use a 12-month measurement period (such as January-December of 2013). However, the IRS has provided a transition rule that allows a measurement period of six to twelve months in 2013 for determining a stability period of up to 12 months in 2014. For example, you may elect to use a "standard measurement period" that runs from May 1 - October 31, 2013 to determine full-time status of ongoing employees that will apply for purposes of the play or pay rules for the entire 2014 calendar year (and an administrative period to enroll employees during November and December 2013).

    Determining Full-Time Status for New Employees

    New employees who are expected to work an average of 30 hours per week (130 hours per month) are considered full-time and "qualified health coverage" must be offered no later than three calendar months (but not more than 90 days) after their hire date in order to avoid potential play or pay penalties. The full-time status of all other new employees including those whose hours may vary ("variable hour employees") and those employed on a seasonal basis, may be determined as follows:

    1. First determine an "initial measurement period" of not less than three but not more than 12 consecutive calendar months during which the full-time or part-time status of the employee can be determined, which period begins on any date between the employee’s start date and the first day of the next calendar month;
    2. Next, determine a "stability period," which must be the same length as the "stability period" for ongoing employees.

    If, during the "initial measurement period," a new variable hour or seasonal employee did not average at least 30 hours per week, that employee need not be treated as a full-time employee during the associated "stability period." In that event, the stability period for such employee must not be more than one month longer than the "initial measurement period" and must not exceed the remainder of the "standard measurement period" that applies to ongoing employees (plus any administrative period).

    If, during the "initial measurement period," a new variable hour or seasonal employee averages at least 30 hours per week, that employee will be considered a full-time employee during the associated "stability period". In that event, the stability period for new variable hour employees must be at least six months and may not be shorter than the "initial measurement period." This means that in order to avoid potential penalties, the employer must offer "qualified health care coverage" to these employees (and their dependents) during the "stability period."

    The employer also may apply an administrative period of no more than 90 days following the "initial measurement period" and before the beginning of the "stability period" for new variable hour employees to allow the new variable or seasonal employees to enroll in "qualified health care coverage" for the "stability period." The "initial measurement period" and the administrative period combined may not extend beyond the last day of the first calendar month beginning on or after the one-year anniversary of the employee’s start date (totaling, at most, 13 months and a fraction of a month).

    Once a new employee who has been employed for an entire "initial measurement period" also works during an entire "standard measurement period," the employee then must be tested for full-time status beginning with that "standard measurement period," at the same time and under the same conditions as other "ongoing" employees to determine if coverage must be offered. An employee who is determined to be a full-time employee during either the "initial measurement period" or "standard measurement period" must be treated as a full-time employee for the entire associated "stability period."

    Under the play or pay penalty provisions, special rules apply in determining the full-time status of an employee to whom coverage must be offered for (i) employees who have a change in employment status during the year, (ii) rehired employees, (iii) employees on certain unpaid leaves of absence due to FMLA, military leave and/or jury duty and (iv) employees compensated on a commission basis, adjunct faculty, transportation employees or other employees where the use of the look-back period could be misused to treat employees historically considered to be full-time employees as now being less than full-time.

    In addition to the play or pay provisions, employers must carefully consider the other provisions of the ACA, which are beyond the scope of this article (including, for example, rules on the maximum waiting period that can be imposed on eligible employees and the interaction of the waiting period rules with the plan's eligibility provisions) and the play or pay penalty.

    Employers Should Be Acting Now

    It is no secret that this law is complex, and the time to act is quickly approaching as employers may become subject to the play or pay penalty as early as January 1, 2014. These rules require careful planning, detailed recordkeeping and coordination between employers and insurance providers or other health care vendors and administrators. This means that immediate attention is required to (i) determine if you may be an applicable large employer for 2014, (ii) if you are an applicable large employer, the employees to whom coverage must be offered and (iii) the type of coverage that must be offered. For further assistance in navigating these complex rules and determining how play or pay may affect your business, contact a member of Troutman Sanders’ Employee Benefits and Executive Compensation team.