Now that the Supreme Court has handed down its decision regarding the PPACA, employers must move forward quickly to prepare for the employer mandate, which is the most significant PPACA provision to affect employers in 2014. Under the employer mandate, employers must answer a threshold question: pay or play? (or possibly something else -- stay tuned). Employers must decide whether to get out of the healthcare coverage arena and pay a flat, non-deductible penalty for all full-time employees, essentially those working 30 or more hours per week on average, or continue to offer healthcare coverage to employees and dependents. However, even if employers offer healthcare coverage they must be aware of all of the hurdles regarding potential penalties based on the type of coverage the employer provides and the financial demographic of the employee population.

In order to make an informed decision between "paying" and "playing" in 2014, each employer needs to take some preliminary steps -- now -- to conduct a proper self-evaluation. Some of the key steps an employer needs to take are:

  1. Assess One's Workforce. Employers need to carefully look at their employee populations, including their full-time and part-time employees and those workers who could be reclassified as employees for purposes of the mandate, and assess the financial demographics of the different employee and worker groups that make up that workforce.
  2. Look at One's Business Structure. Employers need to understand whether their current business structure/model will cause them to be subject to the employer mandate and whether there are circumstances under which they could re-structure and avoid the mandate.
  3. Learn About Health Insurance Exchanges. Employers need to examine, and understand, the relationship between the employer mandate and the individual mandate (which compels individuals without health insurance coverage to seek out such coverage) and how the health insurance Exchanges that will be put in place in 2014 will provide opportunities for some employers and many individuals to acquire such coverage.

Overall Goal of the Employer Mandate

The overall goal of the employer mandate is to force "applicable large employers" to provide affordable coverage to all their full-time employees (and their dependents), by penalizing them if they fail or refuse to do so. The penalty provisions are triggered if such an employer:

  • does not offer minimum essential coverage to all its full-time employees and their dependents;
  • offers such coverage, but the amount the employee must pay to obtain the coverage makes it unaffordable (coverage that exceeds 9.5 percent of an employee's household income is considered "unaffordable"); or
  • offers such coverage, but the coverage does not have minimum value (coverage is not considered to have minimum "value" if the plan fails to pick up at least 60 percent of the overall cost of the benefits being covered by the plan).

To Whom Does the Employer Mandate Apply?

As noted above, the employer mandate applies to "applicable large employers." Those are defined as employers which employ, on average, at least 50 full-time employees per business day in the preceding year. For this purpose, part-time employees count, but only to determine whether the 50 full-time employee threshold is met. (Part-time employees' hours are added together and used to determine the number of "full-time equivalent" employees the employer has, in addition to its full-time employees.) One of the penalties under the employer mandate is likely to apply if any of an applicable large employer's full-time employees enrolls in a qualified health plan and receives either a premium tax credit or a cost-sharing reduction from the federal government in the current year.

There are several special rules that employers must be aware of when determining whether the employer mandate applies to them. Among the more significant rules are the following:

  • Business aggregation rules under the Internal Revenue Code, which historically have been used to treat separate businesses with common ownership as a single "employer" for tax-qualified plan purposes, are used to determine the number of full-time employees the collective "employer" has. Because these aggregation rules even apply to unrelated businesses (if common ownership is present), those who own more than a single business and those who have set up multiple companies to run their business(es) need to carefully consider whether all of their employees, in all of their different businesses, will need to be added together when determining whether the employer mandate applies - and to which businesses that mandate may apply.
  • Certain employees can be excluded for purposes of determining whether the 50 full-time employee threshold is met. For example, seasonal employees who work for a short period of time -- 120 days or less -- can be excluded. Retail employees who work exclusively during holiday periods also can be excluded.

Primary Penalties Under the Employer Mandate

For purposes of penalties under the employer mandate, only full-time employees and their dependents must be offered coverage. And a "full-time" employee is one who typically is paid for 30 or more hours a week. While other penalties can come into play when an employer becomes subject to PPACA's new employer mandate rules, the primary penalties for employers are as follows:

  • If the employer does not offer minimum essential coverage to all its full-time employees and their dependents, the penalty is $2,000 x the number of full-time employees the employer has, in excess of 30.
  • If the employer does offer minimum essential coverage to all its full-time employees and their dependents, but the offered coverage is unaffordable or doesn't have sufficient value (the 60 percent cost-of-covered-benefits test described above), the penalty is the lesser of:
    • $3,000 x the number of full-time employees who receive a premium tax credit or cost-sharing reduction for purchasing coverage through the Exchanges; or
    • $2,000 x the number of full-time employees the employer has in excess of 30 - but taking into account all of the employer's full-time employees and not just those receiving tax credits and cost-sharing reductions).

OBSERVATION: The "pay or play" penalties actually are assessed on a monthly basis (i.e., 1/12 of $2,000/full-time employee/month, and 1/12 of $3,000/taxpayer-subsidized full-time employee/month). As such, an employer that discovers that it is out of compliance can limit its tax liability by rectifying its compliance problem during the year. Likewise, an employer that decides to eliminate its employer-offered coverage for economic reasons, during a temporary financial downturn, may well decide to do so because the month-to-month penalty may be acceptable.


With less than 18 months until PPACA's new employer mandate takes effect, employers need to make key decisions now regarding the offering of healthcare coverage in 2014. The employer mandate is just one part of PPACA, and employers must understand that even if they decide not to "play" and choose to pay the non-deductible $2,000 per employee annual penalty rather than offer coverage to all their full-time employees (and dependents), they will still have a number of reporting and other obligations under PPACA. Employers also must understand that if they do decide to "play" and offer coverage, the potential for penalties will remain.

Most notable is the $3,000 annual penalty, which applies on an employee-by-employee basis. Even if an employer offers coverage to all of its full-time employees, if that coverage either is unaffordable (based on what the employee is being charged for the coverage) or it fails to provide minimum value (where the coverage pays less than 60 percent of the cost of the covered benefits), the employer must pay a $3,000 annual penalty for each employee who actually turns down its offer and purchases taxpayer-subsidized coverage on an Exchange.