Seven Steps to the Pay or Play Rule

Originally posted April 02, 2014 by Darla Dernovsek on

Avoiding any missteps in Affordable Care Act (ACA) "Employer Responsibility" compliance relies on checking your health benefit practices against a list of seven crucial steps. Fortunately, employers who have started preparing for this provision of the ACA can already cross some of these steps off their "to-do" list.

Step One: Understand General Rules. The first step is learning the general rules for employers. Beginning Jan. 1, 2015, employers with 100 or more employees who fail to offer coverage to employees and their dependents will trigger a penalty. Employers with 50 to 99 employees have until Jan. 1, 2016; employers with less than 50 employees are exempt.

Step Two: Is the Employer a Large Employer? Knowing when and how to count employee "hours of service" is essential for full-time workers, seasonal workers, part-time workers and other employees. An employee who works 30 hours or more per week - the Internal Revenue Service (IRS) definition of full-time - must be offered benefits to avoid ACA fines. Barlament described the rules as "very pro-employee" in determining what qualifies as an hour of service, including how to count hours for employees who are on-call or do not work on an hourly basis.

Step Three: Will Employees Receive Subsidized Exchange Coverage? Employers can design health plans that avoid ACA "Pay or Play" penalties by meeting three requirements:

  1. They offer "minimum essential coverage" (see below) to full-time employees and dependents who would otherwise be eligible for subsidized coverage from an exchange.
  2. The employer's plan provides "minimum value."
  3. The employee's share of premiums is "affordable" for self-only coverage for the employer's lowest-cost, minimum value plan.

"If you don't remember anything else, remember this," Barlament said about step three.

Step Four: Did the Employer Offer Minimum Essential Coverage? Barlament called this an "easy test" because employers who offer major medical benefits should meet the standard. There are still additional rules that require attention, such as the IRS requirement that employees have the opportunity to enroll once a year.

Step Five: Does the Plan Provide Minimum Value? The IRS has predicted that 98 percent of all employer-sponsored plans would satisfy this test, which requires plans to cover 60 percent of the cost of all benefits. An online calculator is available. Employers should be prepared to prove they met the requirement year after year by laminating or notarizing a copy of their plan and then storing it safely.

Step Six: Is Plan Coverage Affordable? The employee's share of cost for "self-only" coverage for the lowest-cost, minimum value plan cannot be more than 9.5 percent of the employee's household income. Barlament noted that employers are typically unaware of employees' household income, so many employers will instead rely on three "safe harbors" built into the ACA. One option is to set up your plan based on the federal poverty line guidelines that were in effect six months prior to the start of the plan year. Under current guidelines, that would limit the employee share for self-only health benefits to $92 a month.

Step Seven: Determine "Full-Time" Status. "It's the worst step," Barlament said. Three options are available. For example, employers can measure status on a monthly basis, with employees who work 130 hours or more gaining full-time status. However, this method may only be viable for employees that are clearly well above or well below the 30-hour mark with no chance for movement. There's also an option to utilize a measurement period over a block of time and then lock in or lock out the employee's status for a comparable block of time. Finally, the two methods can be combined. The recommended approach varies depending on whether the employee is ongoing; new; new and full-time; new and works variable hours; new and works seasonal hours; or part-time. Barlament said the first step for employers is to put every employee into one of those categories.


Final Employer Responsibility Regulations Released

Originally posted by Melissa Duffy on

The federal government has released final rules governing the Affordable Care Act's Employer Responsibility (aka Pay or Play) provisions that will take effect in 2015 for many Alliance members. Once in effect, the ACA will impose penalties on employers that do not offer "affordable" and "minimum value" coverage to certain full-time workers, currently defined as an average of 30 hours or more per week.

The IRS has posted Frequently Asked Questions to help employers understand the new guidelines and the safe harbors that were created to help employers avoid penalties. Penalties are triggered only when one or more of a company’s full-time workers accesses tax credits to purchase coverage on the public exchange.

The final regulations include some changes to the proposed regulation that were released more than a year ago. Key changes include:

  • An exemption from penalties for employers in 2015 that have 50-99 workers as long as they certify that they have not reduced their workforce to fall under the 100 employee threshold. Employers of this size would be subject to penalties in 2016 if their regulations are not changed once again.
  • More wiggle room for employers that do not offer all employees coverage. Under the new rules, an employer with 100 or more workers will not be subject to the "4980H(a)" penalty ($2,000 X all FT employees minus 30) as long as they offer coverage to at least 70 percent of employees in 2015. This threshold increases to 95 percent in 2016. However, employers will still be subject to "4980H(b)" penalties equaling $3,000 per year for any full-time employee that is able to access exchange tax credits or cost sharing reductions.
  • A new definition for "seasonal employees" to apply to those positions for which customary annual employment is six months or less. For these individuals, the offer of coverage can wait until the end of a measurement period. This is not to be confused with the term “seasonal worker” used for the purposes of determining whether an employer is large enough to be subject to penalties.

Congress Considers Changing the Definition of Full-Time

In a related note, a Congressional committee has approved one of several bills introduced this session to modify the Employer Responsibility provisions in the Affordable Care Act. The bill, which would define full-time as 40 hours for the purposes of the ACA, passed the House Ways and Means Committee on a party-line vote with Republicans on the committee supporting the measure and Democrats opposing it. Similar bills have gained bipartisan support but are stalled in the Senate.

Click here to view testimony from the public hearing held on this issue.


How the ACA affects annual enrollment

Originally published July 25, 2013 by Andrew Molloy on

Despite the one-year delay of the pay-or-play mandate, there are still several provisions employees need to know about.

With annual benefit enrollments on the horizon, employers need to be prepared now for the changes that health care reform is bringing. Hopefully, employees already know that as of Jan. 1, 2014, they must have health insurance coverage. Beyond this mandate, however, what are some of the other issues of which employers should be aware?

The Affordable Care Act requires employers to tell their employees in writing by Oct. 1 about the new public health care exchanges and how these relate to their workplace benefits. This requirement applies to all employers subject to the Fair Labor Standards Act.

Under the law, employees need to know that they may be eligible for a tax credit and cost-sharing reduction if their employer's plan does not meet certain coverage and affordability requirements and the employee purchases a qualified health plan through a public exchange. Employers must also inform workers that if they choose to purchase their coverage through an exchange, they may not receive any employer contribution toward their premium, nor any related tax advantage.

Employees may still be confused about the exchanges by the time of enrollment. For the most part, those who work for large employers will see little impact since the subsidies offered for a qualified employer-sponsored medical plan will make the choice moot. However, employees of small- to medium-sized companies where health insurance is not available, or isn't affordable, will have to make a decision about whether to go to a public exchange for their coverage. For these employers, it means telling their workers what their options are and are not.

Despite the recently announced one-year delay in the employer shared responsibility requirement, employers still have obligations for 2014 and they'll have to review their medical plans carefully to ensure they meet the essential health benefits mandated by the law. In addition, the plan cannot have any annual coverage limits; cannot exclude people with pre-existing health conditions; must extend coverage to children up to age 26; and must comply with limits on deductibles and out-of-pocket expenses, among other requirements. It is also important to note that the requirement for essential health benefits applies only to individual and small group plans; the requirement does not exist for self-insured plans.

With the pay-or-play delay, employers will not be penalized if their plans do not cover at least 60%, on average, of an employee's health care costs in a given year, or if an employee's premium costs exceed 9.5% of his or her income. Those employees may still be eligible for tax credits on the public exchange, but for 2014 employers will not be subject to penalties if employees receive those tax credits.

Financial responsibility

It's clear that shifts in financial responsibility will continue to affect today's benefits picture. As employers feel the pressure of rising costs and enrollments in their health plans, they are likely to further fuel the already rapid growth of consumer-directed health plans. In fact, 52% of employers surveyed recently anticipated introducing high deductible/consumer-driven health plans in the next three to five years.

Employers should be aware that employees will see any loss of medical coverage or increase in cost sharing as a reduction in compensation. Consequently, employers will need to pay more attention to their company's total benefits package and consider ways to preserve or increase its value.

Above all, during this transitional period of health care reform, employers must clearly communicate benefits options and their value to employees. Employees need to understand that in most cases, their health benefits will remain the same and they won't have to go to the public exchanges for their coverage. They should also be educated about the need for disability coverage and its value.

Using multiple enrollment methods and a variety of learning tools will help ensure a successful benefits enrollment. In fact, research shows that participation is highest when employees have at least three weeks to absorb their benefits-education information, with at least three different ways to learn about their choices.


Important Transition Relief for Non-Calendar Year Plans

Source: United Benefit Advisors

The January 1, 2014 effective date of the Pay-or-Play requirements under health care reform presents special issues for employers with non-calendar year plans.  Prior to the release of the proposed regulations under the shared responsibility rules, employers with non-calendar year plans would either need to comply with the Pay-or-Play requirements at the beginning of the 2013 plan year or change the terms and conditions of the plan mid-year in order to comply.  Recognizing that compliance as of January 1, 2014 caused a special hardship for non-calendar year plans, the proposed regulations, provide special transition relief.  Employers with non-calendar year plans in existence on December 27, 2012 can avoid the Pay-or-Play penalties for months preceding the first day of the 2014 plan year (the plan year beginning in 2014) for any employee who was eligible to participate in the non-calendar year plan as of December 27, 2012 (whether or not they actually enrolled).  Under this relief, the employer would not be subject to Pay-or-Play penalties for any such employees until the first day of the plan year beginning in 2014, provided they are offered coverage that is affordable and provides minimum value as of the first day of the 2014 plan year.

The relief also provides an employer maintaining a non-calendar year plan with additional time to expand the plan's eligibility provisions and offer coverage to employees who were not eligible to participate under the plan's terms as of December 27, 2012.  If the employer had at least one-quarter of its employees (full and part-time) covered under a non-calendar year plan, or offered coverage under a non-calendar year plan to one-third or more of its employees (full and part-time) during the most recent open enrollment period prior to December 27, 2012, it will not be subject to Pay-or-Play penalties for any of its employees until the first day of the plan year beginning in 2014.   For purposes of determining whether the plan covers at least one-third (or one-quarter) of the employer's employees, an employer can look at any day between October 31, 2012 and December 27, 2012.  Again, this transition relief is dependent upon the plan offering affordable, minimum value coverage to these employees no later than the first day of the 2014 plan year.
This important transition rule raises the question of what is considered to be a plan's plan year.  If a plan is not required to file an Annual Report, Form 5500, as is the case with a fully insured plan with fewer than 100 participants, or the plan has failed to prepare a summary plan description that designates a plan year, the plan year generally will be the policy year, presuming that the plan is administered based on that policy year.  If a policy renews on January 1 and any annual open enrollment changes take effect January 1, the plan year likely will be deemed to start January 1.  If the policy renews on July 1, however, and open enrollment changes become effective on January 1 of each year, the lack of a summary plan description leaves the plan year determination open to question.   The employer in this situation may want the plan year to start on July 1 in order to delay the date on which the plan has to comply with the requirements under health care reform.  If the plan is administered on a calendar-year basis, however, the government could reasonably argue that the plan year is the calendar year.  Employers should be taking steps now to identify the plan year for their group health plan(s) in order to ensure that they are timely complying with the applicable requirements under health care reform.
If the employer has prepared and distributed a summary plan description for its group health plan or the plan files an Annual Report, Form 5500, the plan year has already been identified.  If the employer has not complied with the ERISA disclosure and/or reporting requirements, then additional analysis of the 12-month period over which the plan is administered and operated is needed to identify the plan year.  That analysis should take place now and not when an auditor asks the question.
For employers in this situation, it would be advisable to adopt a plan document to address this issue.  Since insurance companies are not directly subject to ERISA, their policies may not contain all of the provisions necessary to meet ERISA's disclosure requirements.  An insurance policy typically does not contain certain desired provisions describing the relationship between the employer and plan participants.  Such provisions might include the employer's indemnification of its employees who perform plan functions, the employer's right to amend the plan, a description of the plan's enrollment process, and the allocation of the cost of coverage between the employer and participants.  A wrap plan can address these issues, as well as enable an employer to aggregate all its welfare benefits under a single plan so that a consolidated Annual Report, Form 5500 may be filed for all ERISA welfare benefit plans subject to annual reporting obligations.

Cheat Sheet: What employers need to know about the Affordable Care Act


By: Alanna Byrne, Mary Swanton

President Obama’s Election Day victory ends, or at least postpones, Republican promises to overhaul or repeal the Patient Protection and Affordable Care Act (PPACA), a hallmark piece of legislation from the president’s first term. This means that, starting on Jan. 1, 2014, employers with more than 50 full-time equivalent employees must either provide health care coverage for their workers or pay a penalty.

In the November feature “Pay or Play,” InsideCounsel provides a look at the key factors that companies should consider when deciding whether to comply with the law—or face a stiff fine for failing to do so.

Does the size of a business matter?

The PPACA applies to all companies with more than 50-full time employees. Employers can choose not to provide coverage, but will pay $2,000 for every worker they do not insure, excluding the first 30 employees.

A General Accounting Office review of several studies on the subject found that larger employers are less likely to drop health care coverage when the new reforms take effect, largely to remain competitive in attracting the best employees. Smaller companies with less than 100 workers, on the other hand, could face a disadvantage on the health care market, as they often can’t get the same deals on insurance as their larger counterparts, so paying the penalty may make sense to them.

How are part-time and full-time workers affected?

Currently, many employers offer benefits only to full-time employees, generally defined as those working 35 or more hours a week. The PPACA, however, has lowered the standard for full-time employment from 35 to 30 hours, leaving companies that rely on part-time employees with a difficult choice to make.

“The problem arises when you have a workforce where your criteria [for receiving health benefits] was 35 hours per week, and now the threshold is 30,” says Patricia Cain, a partner at Neal, Gerber & Eisenberg. “If you have a lot of employees working 30-plus hours but less than 35, your choices are to cut them back to under 30 hours, pay the penalty tax or offer coverage.”

What industries will be most affected by the new reforms?

Unsurprisingly, the hardest-hit industries are likely to be those that have not provided health coverage—or have provided very minimal insurance—to workers in the past, while offering insurance to executives. These include restaurant chains, retail outlets and other businesses in the service sector. A nondiscrimination clause in the PPACA now requires that companies provide the same coverage to all employees at all levels, or face a $3,000 per employee penalty.

Complicating matters for these businesses, the coverage they offer must be affordable, which is defined as coverage that does not cost more than 9.5 percent of an employee’s yearly W-2 wages.  “To get out of all penalties, you have to offer [coverage] at 9.5 percent of household income. That’s a pretty low threshold for servers or shift cooks,” says BakerHostetler Partner John McGowan. “The business will incur some meaningful costs it doesn’t have in the budget right now.”

Are there hidden costs?

Ideally, the health care reforms will reduce health care costs by providing affordable preventative care and putting new regulations on health care providers. But the future of health care costs remains murky, and if they continue to rise after 2014, employers may be more likely to drop coverage.

“[The PPACA] mandates certain types of coverage be provided and mandates preventative coverage be provided at no cost, all of which are good for employees. But it doesn’t appear to take an aggressive stand toward lowering costs, and that’s what troubles employers,” says Littler Mendelson Shareholder Steve Friedman.

What role will state-run health care exchanges play?

The PPACA requires everyone to have health insurance, meaning that those employees who don’t receive it from their companies likely will have to seek it on state-run health care exchanges. But officials in some states have signaled their unwillingness to establish and oversee these exchanges, leaving the task to the federal government. And even if states do implement exchanges, some employers, particularly those operating in multiple states, are concerned about the quality and consistency of the programs.

“The big unknown is whether the exchanges will be a viable alternative to employer coverage,” says Michael Tomasek, a partner at Freeborn & Peters. “How good will the quality be? Will they function well? Will they be administered well? We just don’t know that yet. Until we know what the alternative to employer coverage is, it’s impossible for employers to make a rational choice about pay or play.”


IRS Offers Some Help with 'Pay or Play' Proposal

The IRS kicked off 2013 with a little relief for some employers under the Patient Protection and Affordable Care Act (PPACA).

The proposed guidance, released Dec. 28, 2012, eases some of the penalties for larger employers who fail to provide adequate health care coverage for all their full-time employees. The PPACA "pay or play" penalty -- $2,000 per full-time employee for employers with at least 50 workers as of Jan. 1, 2014 -- will not apply as long as the employer covers at least 95 percent of their full-time employees and their dependents up to age 26, according to Littler Mendelson PC.

The proposed guidance clears up questions that have lingered since the inception of the law in 2010, according to a report in Business Insurance. As it was originally written, any employee with a large employer who opted to receive a premium subsidy under the PPACA-created health care exchanges instead of taking the employer-sponsored coverage might trigger the penalty for the employer. The 95 percent rule would give employers a little wiggle room in case a handful of employees decided to take the subsidy.

These proposed rules also would provide flexibility in the event that part-time employees who take the premium subsidy occasionally accrue hours that temporarily push them into full-time status, according to the Business Insurance report.

In addition to the 95 percent rule, the IRS handed out a few other surprises for employers, according to the law firm of Kilpatrick Townsend & Stockton LLP. For instance, the guidance would:

  • Require coverage of full-time employees and dependents under age 26, but not of spouses.
  • Aggregate employers in a controlled group (common ownership) to determine if an employer is subject to the penalty. However, if an employer is subject to the penalty, the calculation of the fine is applied to each employer separately in a controlled group -- meaning "one member's failure will not affect the other members of the group."


While the "pay or play" penalty doesn't go into effect until next year, employers need to start tracking their employees' status now, advises Kevin R. McMurdy, an attorney with Fox Rothschild.

"The release of this information continues to underline the importance of counting employees and measuring their hours to see if they are full- or part-time under the definitions provided in PPACA," McMurdy wrote in Employee Benefit News. "Employers should start counting now and avoid any last-minute confusion over their status or their obligations. As more guidance is issued, we can fine-tune these measurements, but don't get caught short at year-end having failed to manage your population."

The IRS currently is taking public comments on the rules through March 18 and plans to conduct a hearing in April to further explore these proposals.