Now is the Time to “Play or Pay.”

The so-called play-or-pay mandate becomes effective January 1, 2014. For calendar year plans, 2014 open enrollment is fast approaching, so now is the time for employers to begin formulating play-or-pay mandate compliance plans. Union employers and employers that sponsor non-calendar year plans have unique issues that require evaluation. Employers may find the following checklist useful for this purpose.

Is the “employer” an “applicable large employer?”

To be exposed to play-or-pay penalties, an employer must have 50 or more full-time employees (30 or more hours on average per week, or 130 hours per month), including full-time equivalent employees. For this purpose, related employers (i.e., members of controlled groups and members of an affiliated service group) are treated as a single employer; therefore, the full-time employees of each member are aggregated for purposes of determining applicable large employer status. If the related group of employers has 50 or more full-time employees, each member of the group (i.e., each “applicable large employer member”) faces penalty exposure. As the guidance currently stands, independent contractors and full-time workers who are “leased” from PEOs and other employee leasing entities must be counted as employees of the worksite employer if they are employees of the worksite employer under the so-called common law standard. Employers should carefully review independent contractor and leased employee relationships to determine a worker’s status under this standard.

Threshold question: Should an employer play or pay?

This determination can be made only after carefully identifying all costs associated with each option. The “no coverage” option carries a number of potentially heavy costs: The $2,000 per employee, per year nondeductible “no coverage penalty,” the additional income tax liability the employer is likely to incur as a result of payment of the nondeductible penalty; and the “make whole” payment (in cash or benefits) the employer might need to provide to employees to compensate them for the loss of medical benefits. If the make-whole payment is in cash (i.e., additional taxable wages), the employer will need to consider the additional FICA tax payable on the make-whole payment. The impact on employee retention and recruitment needs to be considered in addition to the “hard” costs. This cost would then be compared to the cost of providing affordable coverage to substantially all full-time employees. As part of this analysis, employers must identify full-time employees, establish an affordability approach, and make certain assumptions about the percentage (or increased percentage) of employees who would elect coverage under a more affordable arrangement.

Does the applicable large employer member offer 95 percent of its full-time employees (and their dependents) the opportunity to enroll in an “eligible medical plan?”

If not, the applicable large employer member is exposed to the draconian “no coverage penalty” of up to $2,000 for each full-time employee if any full-time employee of the employer receives a subsidy for coverage purchased through the Exchange. The first 30 employees are not subject to the penalty. Employer members of a controlled or affiliated service group must share the 30-employee exclusion.

Eligible medical plans. Employer sponsored major medical plans, including self-insured and grandfathered plans, are eligible medical plans. Coverage under plans that provide excepted benefits, such as, for example, limited scope dental and vision benefits, “bona fide” hospital indemnity plans, and other arrangements that provide only ancillary medical benefits do not qualify as eligible medical coverage. Additional guidance on this issue may be forthcoming.

Identifying full-time employees. To avoid penalty assessments, employers must carefully identify their full-time employees, and must offer affordable, minimum value coverage to at least 95 percent of those employees. A full-time employee for a calendar month is any employee who is employed on average at least 30 hours of service per week (or 130 hours of service per month).

Employers should carefully review independent contractor and leased employee relationships to determine whether these workers should be treated as full-time employees. As previously noted, independent contractors and leased employees must be treated as employees of the worksite employer if they qualify as the worksite employer’s employees under the common law standard. Additional agency guidance on the treatment of leased employees is likely to be forthcoming.

In addition, employers with employees who do not work a regular schedule (so-called variable hour employees and seasonal employees) will need to establish measurement periods (and related administrative and stability periods) to ensure that any variable hour or seasonal employee who meets the full-time standard is offered coverage during the 2014 open enrollment period and related stability period.

Does the applicable large employer member’s plan provide “minimum value?”

Eligible medical plans that do not provide minimum value expose the employer to a penalty of up to $3,000 per year for each full-time employee who receives a subsidy for coverage purchased through the Exchange. To meet the minimum value requirement, the plan must have an actuarial value of at least 60 percent. Most fully insured plans will meet this requirement; however, employers should reach out to their insurer to determine who will bear the burden of proving minimum value. Employers that sponsor self-insured plans should begin a dialog with their TPAs, brokers, and attorneys for guidance on establishing minimum value.

Is the employer’s eligible medical plan “affordable?”

Eligible medical plans that are not affordable for a given full-time employee expose the employer to a penalty of up to $3,000 per year for that employee if he or she receives a subsidy for coverage purchased through the Exchange. Coverage is “affordable” if the employee is not required to pay more than 9.5 percent of pay toward premiums for self-only coverage under the employer’s lowest cost plan. To eliminate or reduce exposure to the penalties, employers should begin to review their premium cost-sharing arrangements to determine whether self-only coverage is affordable. What are the estimated penalties if the employer’s lowest cost, self-only coverage is not affordable? What would it cost the employer to ensure that the plan is affordable for all full-time employees? Which compensation safe harbor, if any, should the employer use to measure affordability?

Action Steps

Even though additional guidance is expected later this year, employers are well-advised to begin the planning process now.

These are just a few of the questions employers will need to address as part of the evaluation:

  • In calculating hours of service for purposes of determining full-time employee status, are employers required to convert workers compensation or state-mandated disability payments into hours worked? If so, how?
  • If an employer is a member of a related group of employers, does the employer have a procedure in place for tracking hours worked by an employee across the controlled group?
  • How do wellness incentives factor into the determination of affordability?
  • Is it clear that the definition of “dependent” includes only biological, adopted, and step children? What is the rule for dependents who are non-U.S. citizens residing outside of the United States?

There is no formal or informal public information indicating that the IRS (or Congress) is giving serious consideration to a delay in the effective date of the play-or-pay mandate or outright appeal of it. For some employers, the analysis outlined above is time-consuming, and with open enrollment around the corner, now is the time to build a compliance template. Building the compliance template now will enable employers to evaluate new legal developments and plan designs relatively quickly and efficiently.