The IRS began 2013 by
releasing proposed regulations that offer much needed guidance to
employers regarding their potential liability for the "pay-or-play"
penalties contained in the Patient Protection and Affordable Care Act
("PPACA"). Beginning in 2014, PPACA subjects large
employers (i.e., employers with 50 or more full-time
equivalent employees ("FTEs")) to two different pay-or-play
penalties if they fail to comply with PPACA's "employer shared
responsibility" provisions. The previous Alert
explained which employers will be subject to these pay-or-play
provisions and this Alert focuses on the penalties imposed
for violations of the pay-or-play rules.
Pay-or-Play Penalties. The first pay-or-play penalty applies if: (i)
an employer fails to offer minimum essential coverage to
"substantially all" of its full-time employees; and (ii) a
low-income, full-time employee receives a premium tax credit through
an Exchange. In those situations, the employer must pay an annual
penalty of $2,000 multiplied by: the number of full-time employees,
The other pay-or-play
penalty applies in situations where: (i) an employer offers minimum
essential coverage to its full-time employees that is either
"unaffordable" or does not provide "minimum
value;" and (ii) a low-income, full-time employee receives a premium
tax credit through an Exchange. In such situations, the employer must
pay an annual penalty of $3,000 for each full-time employee who
receives the premium tax credit. However, this penalty is capped at
$2,000 multiplied by: the number of full-time employees minus 30.
Full-time Employee vs.
FTEs. Although the hours of
part-time workers are aggregated into FTEs when determining if an
employer is a large employer subject to the penalties (see the
January 10, 2013 Alert), for purposes of determining penalty amounts,
only actual full-time employees are counted. Generally, a full-time
employee is an employee who is employed an average of at least 30
hours per week. Hours of service include not only hours when work is
performed but also hours for which an employee is paid or entitled to
payment, even when no work is performed (i.e., vacation, sick
All" Employees. An employer is consider to have offered
health care coverage to "substantially all" of its
employees if the offer is made to at least 95% of the full-time
employees. Therefore, an employer that offers health coverage to 97%
of its full-time employees is not subject to the $2,000 penalty.
However, that employer is still subject to the $3,000 penalty for
each low income full-time employee who receives a premium tax credit
through an Exchange, regardless of whether that employee is or is not
eligible to participate in the employer's plan.
Employees vs. Dependents. In 2014, with certain exceptions, large
employers must offer coverage to full-time employees' dependents in
order to avoid the penalty. For purposes of the pay-or-play penalty,
the term "dependent" means an employee's dependent children
up to age 26, but does not include the employee's spouse.
Determining if Coverage
Provides Minimum Value. In
general, an employer's health coverage provides "minimum
value" only if it covers at least 60% of the total allowed costs
of benefits that are expected to be incurred under the plan. The IRS,
DOL and HHS will make a minimum value calculator available to help
employers determine whether their coverage provides minimum value.
Employers will input certain information about their plan (e.g.,
deductibles and co-pays) into the calculator and get a determination
as to whether their coverage provides minimum value.
Harbors. Coverage is
"unaffordable" if the employee's share of the premium is
more than 9.5% of his or her annual household income. However,
employers generally do not know their employees' household incomes.
The proposed regulations provide the following affordability safe
harbors that employers may use to determine if their coverage is
- W-2 safe
harbor. If the employee's contribution for single coverage under
the employer's lowest cost medical option does not exceed 9.5%
of the employee's Box 1, W-2 pay for that year, the
affordability test is satisfied.
- Rate of pay
safe harbor.If the employee's contribution for single coverage
under the employer's lowest cost medical option does not exceed
9.5% of the employee's monthly wage amount, the affordability
test is satisfied.
poverty line safe harbor. If the employee's contribution for
single coverage under the employer's lowest cost medical option
does not exceed 9.5% of the federal poverty line for a single
individual, the affordability test is satisfied.
All large employers should
carefully consider the financial impact of the proposed regulations.
Even extremely large employers that offer minimum essential coverage
should consider the ramifications of the penalty when some of their
employees receive premium tax credits through Exchanges. This is
because employees may qualify for the premium tax credit with
household incomes as high as 400% of the federal poverty line, which,
for 2012, was $92,000 for a family of four. Therefore, more employees
may receive premium tax credits than would be anticipated by