The Affordable Care Act (“ACA”) is the landmark healthcare reform law enacted by Congress in 2010. Beginning in 2014, the ACA will require certain employers to pay penalties if they do not offer health plan coverage to substantially all of their full-time employees. The penalty structure is commonly referred to as “play or pay” (“POP”).
There are two POP penalties, one for not offering “minimum essential coverage” (the “no-offer penalty”) and one for not offering coverage that is “affordable” and provides “minimum value” (the “unaffordable coverage penalty”).
The following FAQs provide basic information about POP. Attached is a flow chart for determining an employer’s POP liability.
———————————————EMPLOYERS SUBJECT TO POP—————————————
Q-1 Which employers are subject to the POP rules?
A-1 The POP rules apply to an employer for a calendar year in 2014 or thereafter if it had on the average 50 or more full-time employees for the preceding calendar year.
Q-2 How are related employers treated in determining the POP threshold of 50 full-time employees?
A-2 All related employers are treated as if they were a single employer in determining whether the POP threshold has been met. Here are some examples of related employers:
- Companies A and B, where B is a wholly-owned subsidiary of A.
- Companies C, D and E, where four individuals each own 25% of each company.
- Companies F and G, where the principal business of F is providing management functions for G.
Example: Assume that Company A above has 40 full-time employees and Company B above has 20 full-time employees. Because the companies are related, they are treated as a single employer for determining whether the POP threshold has been met. As there are 60 full-time employees between the two companies, both companies are subject to the POP rules, even though, when considered separately, neither company has 50 full-time employees.
——DETERMINING WHETHER THE POP THRESHOLD OF 50 FULL-TIME EMPLOYEES IS MET——
Q-3 Who is a “full-time employee”?
A-3 For POP purposes, a “full-time employee” is one who, as of a calendar month, is employed an average of at least 30 hours of service per week.
Q-4 Can part-time employees be ignored in determining whether the threshold of 50 full-time employees?
A-4 Part-time employees cannot be ignored, because the proposed POP regulations (“Regulations”) issued by the Internal Revenue Service (“IRS”) require that “full-time equivalent” employees (“FTEs”) of the employer in the preceding calendar year be included in determining whether the threshold of 50 full-time employees is reached.
Q-5 How are an employer’s FTEs for the preceding calendar year determined?
A-5 The following process is used to calculate an employer’s FTEs for each month in the preceding calendar year:
- First, determine the total number of hours of all employees of the employer (and related employers), including seasonal employees, who were not full-time employees during that month. However, if any such employee has more than 120 hours for that month, exclude any hours over 120.
- Second, divide the total hours by 120.
The result, including any fractions, is the FTEs for that month.
Q-6 How does an employer determine if it meets the POP threshold for the current calendar year?
A-6 The following process is used to determine whether an employer (including related employers described in A-2 above) has met the POP threshold for the current calendar year:
- First, determine the total number of full-time employees, including seasonal employees, and FTEs for each calendar month in the preceding calendar year.
- Second, divide the total full-time employees and FTEs by 12.
- Third, round the result to the next lowest whole number.
If the result is less than 50, then the POP rules don’t apply to the employer (and related employers) for the current calendar year. If the result is 50 or more, then the POP rules apply to the employer (and related employers) for the current calendar year, although there is a seasonal worker exception that applies in some cases.
A special transition rule applies for 2014. An employer may determine whether it will be subject to POP for 2014 by reference to a period of at least six consecutive calendar months (as it may choose) in the 2013 calendar year, rather than the entire 2013 calendar year. Therefore, an employer may determine whether it is subject to POP for 2014 by determining whether it employed an average of at least 50 full-time employees during any consecutive six-month period in 2013.
—————————————NO-OFFER PENALTY UNDER POP—————————————
Q-7 When does the no-offer POP penalty apply?
A-7 The no-offer penalty applies if:
- The employer does not offer “minimum essential coverage” (see A-11 below) to at least 95% of its full-time employees (or if greater, five employees) and their dependents; and
- At least one full-time employee obtains federally-subsidized coverage (see A-12 below) through a health insurance exchange established under the ACA.
Q-8 How much is the no-offer penalty?
A-8 The no-offer penalty for each calendar month in 2014 is $166.67 times the number of the full-time employees (not including FTEs) for such month, reduced by the first 30 full-time employees. On an annual basis, therefore, the no-offer penalty for 2014 is $2,000 for each person who is a full-time employee during each month of the year. The penalty applies regardless of whether any full-time employees have health coverage. In years after 2014, the penalty may be higher due to increases in the cost of living.
If two or more related employers are subject to the no-offer penalty, the 30-employee reduction is allocated ratably among them according to the number of full-time employees of each.
Q-9 What does it mean for an employer to “offer” coverage to a full-time employee?
A-9 In order for an employer to be considered as having offered coverage to a full-time employee for a plan year, that employee must have an effective opportunity to elect to enroll (or decline to enroll) in coverage no less than once during the plan year.
Whether the employee has an effective enrollment opportunity is determined based on all relevant facts and circumstances, including the adequacy of notice of the availability of the offer of coverage, the period of time during which an offer of coverage may be accepted and any other conditions on the offer. There are no black-and-white rules in this area.
Q-10 How does an employer keep track of who are full-time employees for purposes of offering coverage and determining penalties?
A-10 There will not be an issue as to the full-time status of many employees, either because their work weeks are always at least 30 hours or because their employer has designated them as being full-time on account of having a scheduled work week of 30 or more hours. Where it is necessary to track employees, however, the Regulations provide a “safe harbor” in the form of a “look-back/stability period.” The safe harbor allows that full-time status may be determined over a “measurement period” of up to 12 months. The measurement period is followed by a “stability period” of the same duration. To avoid POP penalties, coverage must be offered for the duration of that stability period as long as the individual remains employed by the employer.
The Regulations address measurement for full-time status for the following categories of variable-hour employees: ongoing employees; new employees hired as full-time; seasonal employees; and rehires and those with employment status changes.
Generally, the measurement and stability periods used by the employer must apply to all employees. However, employers may use different measurement periods and stability periods for the following categories of employees: (i) each group of collectively bargained employees covered by a collective bargaining agreement (“CBA”); (ii) collectively bargained employees and non-collectively bargained employees; (iii) salaried employees and hourly employees; and (iv) employees located in different states.
Q-11 What is “minimum essential coverage”?
A-11 “Minimum essential coverage” is defined in the ACA and the Regulations to include coverage under an employer-sponsored group health plan, whether fully-insured or self-funded by the employer. Significantly, there are no requirements as to what types of benefits that an employer group health plan must provide in order for the plan to be considered as offering minimum essential coverage.
However, if a plan’s coverage consists only of certain “excepted benefits,” then it is not considered minimum essential coverage. Examples of excepted benefits are limited-scope dental or vision benefits; benefits for long-term care, nursing home care, home health care, community-based care, or any combination thereof; coverage only for a specified disease or illness; and hospital indemnity or other fixed-indemnity insurance.
Q-12 What is federally-subsidized coverage?
A-12 The ACA provides subsidies, known as premium tax credits, to help certain persons pay premiums for health coverage purchased through health insurance exchanges. There are also subsidies to help certain persons reduce health plan costs, known as cost-sharing reductions.
Premium tax credits apply to persons whose “household income” is 100% to 400% of the federal poverty line. The poverty depends upon the size of the family/household. For example, the 2013 federal poverty guideline for a family/household of four is annual income of $23,550.
The premium tax credit applies to a “coverage month.” A coverage month for an individual does not include a month in which he or she is eligible for minimum essential coverage, other than coverage offered in the individual market. In general, an individual is eligible for employer-sponsored minimum essential coverage only if the employee’s share of the premiums is “affordable” and the coverage provides “minimum value.” However, an individual is treated as eligible for employer-sponsored minimum essential coverage if he or she actually enrolls in an eligible employer-sponsored plan, even if the coverage does not meet the affordability and minimum value requirements. Affordability and minimum value are discussed in A-14 below. Therefore, persons eligible for employer-sponsored group health coverage that satisfies all ACA requirements for any month will not be eligible for a premium tax credit as to that month.
An employer should receive notice from Department of Health and Human Services (“HHS”) that an employee has received a subsidy.
—————————UNAFFORDABLE COVERAGE PENALTY UNDER POP—————————
Q-13 When does the unaffordable coverage POP penalty apply?
A-13 The unaffordable coverage penalty applies if:
- The employer does offer minimum essential coverage to at least 95% of its full-time employees (or if greater, five employees) and their dependents; and
- At least one full-time employee obtains federally-subsidized coverage through a health insurance exchange.
Q-14 How much is the unaffordable coverage penalty?
A-14 The unaffordable coverage penalty for each calendar month in 2014 is $250 times the number of full-time employees who receive federally-subsidized coverage. On an annual basis, therefore, the penalty for 2014 is $3,000 for each full-time employee who receives federally-subsidized coverage during each month in 2014. In years after 2014, the penalty may be higher due to increases in the cost of living.
Employees are not counted in determining this penalty if they were offered the opportunity to enroll in minimum essential coverage that provided minimum value and was affordable.
A plan is treated as providing “minimum value” if its share of total allowed costs of benefits is at least 60% of such costs. There are various ways that minimum value can be determined, including the following:
- By actuarial certification.
- By using the “MV Calculator,” made available online by the HHS and the IRS. The first version of the MV Calculator can be found at http://www.cms.gov/cciio/resources/regulations-and-guidance/index.html#pmBy
- By using one of the “safe-harbor” plan designs to be established by the IRS and the HHS. An example of a safe harbor design would be a $3,500 integrated medical and drug deductible, 80% plan cost-sharing, and a $6,000 maximum out-of-pocket limit for employee cost-sharing, if the plans cover all of the benefits included in the MV Calculator
- In order for a plan to be “affordable,” the employee’s share of the premium for self-only coverage must not exceed 9.5% of his or her “household income” (adjusted gross income, with certain modifications) for the taxable year. As employers will not know employees’ household incomes, the Regulations allow various safe harbors to be used instead, such as the employee’s Form W–2, Box 1 wages from the employer for the calendar year, determined after the end of the calendar year. Box 1 wages excludes such pre-tax contributions as the employee may make to Section 401(k) plans, cafeteria plans (health insurance premiums and medical reimbursement accounts) and transit reimbursement plans
Q-15 How does the unaffordable coverage penalty relate to the no-offer penalty?
A-15 The no-offer penalty acts as a cap on the unaffordable coverage penalty. More specifically, the total unaffordable coverage penalty as to employees of an employer for any calendar month may not exceed the product of the no-offer penalty amount for that calendar month and the number of full-time employees of that employer during that month (reduced by the employer’s share of the 30-employee reduction referenced in A-8 above).
Q-16 How do the POP rules apply to an employer who contributes to a “Taft-Hartley” multiemployer health plan for its union employees?
A-16 Multiemployer health plans present many complex issues as to POP compliance. The IRS is trying to resolve these issues and in the interim, it has provided a transition rule for employers required to contribute to multiemployer health plans. Under this rule, for 2014, an employer who meets the POP threshold will not be treated as being subject to the no-offer penalty or the unaffordable coverage penalty as to employees for whom the employer is required by a CBA to make contributions to the multiemployer plan, if:
- The employer is required is required by the CBA to make contributions to the multiemployer plan as to some or all of its employees;
- Coverage under the multiemployer plan is offered to employees (and their dependents) who satisfy the plan’s eligibility conditions; and
- The coverage that is offered is affordable and provides minimum value.
Affordability may be determined in the same way as if the employer had provided the multiemployer plan’s coverage to the employee under a plan sponsored by the employer. In addition, however, coverage under a multiemployer plan will also be considered affordable as to a full-time employee if his or her required contribution, if any, toward self-only health coverage under the plan does not exceed 9.5% of the wages reported to the multiemployer plan, which may be determined based on actual wages or an hourly wage rate under the applicable CBA.
————— POSSIBLE STRATEGIES FOR AVOIDING OR MINIMIZING POP PENALTIES ——————
Q-17 What strategies might an employer consider to avoid or minimize POP penalties?
A-17 An employer might consider, in consultation with counsel, the following strategies to avoid or minimize POP penalties in particular situations:
- An employer that is a single entity operating different businesses could establish subsidiaries to operate some or all of these businesses.
As a single entity, the no-offer penalty applies to all of the employer’s full-time employees (subject to the 30-employee reduction), even though the employer may offer health coverage to a significant percentage, but under 95%, of its full-time employees. If subsidiaries are created, the 95% coverage requirement applies separately to each subsidiary (although, as indicated in A-8 above, the 30-employee reduction would be prorated among the subsidiaries). For any subsidiary that meets the 95% requirement, there will not be a POP no-offer penalty.
Example: An employer operates Division 1 and Division 2. Neither division is separately incorporated. Division 1 has 100 full-time employees, all of whom are offered health coverage that complies with all ACA requirements. Division 2 has 25 full-time employees, none of whom are offered health coverage. The employer will be subject to a no-offer penalty calculated by reference to all 125 full-time employees in both divisions, because less than 95% of all full-time employees are offered health coverage.
What if the employer creates separate wholly-owned subsidiaries, one for Division 1 and one for Division 2? The 95% requirement would now be separately applied to each subsidiary. As a result, only the Division 2 subsidiary would be liable for the no-offer penalty, and that penalty would be calculated by reference only to its 25 full-time employees, and not as to the full-time employees of the Division 1 subsidiary.
- Ownership might be restructured to avoid related-employer status.
As indicated in A-8 above, related employers must share the 30-employee reduction in determining the no-offer penalty. Therefore, if the ownership of these employers were changed so that they were not considered as related for POP purposes, then:
- One or more of the companies may fall below the POP threshold once they are no longer related.
- A separate 30-employee reduction would apply to each unrelated employer.
Example: Companies X, Y and Z are related. Each has enough full-time employees to meet the POP threshold even if they were not related. They must therefore share a single 30-employee exclusion for purposes of determining the no-offer penalty.
If, as the result of an ownership change, Z were no longer related to X and Y, then X and Y would share a single 30-employee reduction and Z would have its own 30-employee reduction.
Some ownership changes will not be recognized for this purpose, such as a transfer of stock from a person to his or her spouse.
- The employer could take advantage of the transition rule for determining full-time employees for 2014 (see A-6 above).
Example: An employer significantly increases its workforce in the second half of 2013. It would meet the POP threshold of an average of having least 50 full-time employees during 2013 if it takes into account all 12 months of 2013, and would thus be subject to POP in 2014. If it were to use the transition rule and determine whether the threshold were met by taking into account only the first six months of 2013, when its workforce was smaller, it might be able to avoid POP liability for 2014, at least.
- Coverage that is not “affordable” (such as where employees pay the full premiums for coverage) could be offered to full-time employees that the employer would not otherwise cover.
Although the unaffordable coverage penalty for offering such coverage is higher than the no-offer penalty, the unaffordable coverage penalty is assessed only on full-time employees who are enrolled in a health plan purchased through a health insurance exchange as to whom a federal subsidy is provided. The number of employees as to whom the employer must pay unaffordable coverage penalty should be smaller than the number of employees as to whom the employer would have to pay the no-offer penalty. Therefore, the total unaffordable coverage penalty is very likely to be lower than the total no-offer penalty.
It is important to assure that all full-time employees receive proper notification as to any offer of coverage.
This strategy presents the following concerns:
- The IRS has taken the position that an employer would not be treated as having made an offer of coverage under an arrangement whereby employees are required, as a condition of employment or otherwise, to be enrolled in an employer-sponsored plan that does not provide minimum value or is unaffordable, and that does not give the employees an effective opportunity to terminate or decline the coverage.
- There are nondiscrimination and minimum coverage requirements in the Internal Revenue Code of 1986 (the “Code”) as to self-funded plans, and parallel requirements of the ACA applicable to insured plans. These requirements are designed to avoid discrimination against employees who are not considered “highly compensated.” Further regulatory guidance on these requirements has not yet been issued. If this strategy causes a self-funded plan to violate the Code requirements, benefits payable to highly compensated individuals would be taxable. By contrast, if an insured plan violates the ACA requirements, the employer could be subject to an excise tax of $100 per day per individual discriminated against for each day that the plan does not comply with ACA requirements. Also, the employer could be sued under the Employee Retirement Income Security Act of 1974 (“ERISA”) to enjoin the noncompliant act.
- Hours for full-time employees could be reduced to below 30 to avoid POP penalties if health coverage is not offered to them.
Nothing in the ACA, or in any regulatory guidance thereunder, prohibits an employer from managing workers’ hours to avoid having to offer health coverage or be subject to penalties. However, the following issues should be considered in connection with this strategy:
- There may be operational and morale concerns with reducing employees’ hours.
- If employees are covered by a CBA, the employer may not be able to reduce employees’ hours without union approval.
- A lawsuit against an employer might be filed by an employee under Section 510 of ERISA if his hours are reduced to avoid having to offer health coverage to him. Section 510 makes it unlawful for any person to discharge, fine, suspend, expel, discipline or discriminate against a participant for the purpose of interfering with the attainment of any right to which such participant may become entitled under an employee benefit plan or under Title I of ERISA. ERISA defines “participant” as including any employee of an employer who is or may become eligible to receive a benefit of any type from an employee benefit plan which covers employees of such employer.
It is not clear whether the reduction of an employee’s hours is a form of “discrimination” against him that would support a lawsuit under Section 510. Because Section 510 claims are fact-specific, it is possible that the Department of Labor, which administers Title I of ERISA, may decline to issue guidance and will instead leave these claims to the courts to resolve.
Section 510 liability is not an issue as to newly-hired employees who are not able to enroll in employer health coverage because they will not be working the required minimum number of hours per week or other measurement period.
- Even if excluding employees from health plan coverage by reducing their hours may enable the employee to avoid POP liability, it might cause the health plan to violate the nondiscrimination and minimum coverage and requirements of the Code as to self-funded plans, and the parallel requirements of the ACA applicable to insured plans, referred to above in this A-17.
- The employer could offer coverage to full-time employees that is ACA-compliant but does not provide comprehensive benefits.
This strategy seeks to exploit the definition of “minimum essential coverage” in the ACA and the Regulations. As indicated in A-11 above, “minimum essential coverage” is defined to include coverage under an employer-sponsored group health plan. This definition does not prescribe any particular benefits that must be provided, although plans that provide certain “excepted benefits” will not be treated as offering minimum essential coverage.
However, other provisions of the ACA impose the following requirements on group health plans:
- Group health plans not impose lifetime limits on “essential health benefits” and, beginning in 2014, such plans may not impose annual limits on essential health benefits. “Essential health benefits” include the following types of coverage: ambulatory patient services; emergency services; hospitalization; maternity and newborn care; mental health and substance use disorder services, prescription drugs; rehabilitative services and devices; laboratory services; preventive and wellness services and chronic disease management; and pediatric services, including oral and vision care.
The ACA’s mandate to actually provide essential health benefits applies only to health insurers offering health insurance coverage in the individual or “small-group market.” The latter term means health insurance market under which individuals obtain health insurance coverage through a group health plan maintained by an employer who employed an average of at least one but not more than 100 employees on business days during the preceding calendar year and who employs at least one employee on the first day of the plan year of the plan. Therefore, health plans that are self-funded, or that are insured but not part of the small-group market, need not provide essential health benefits.
- All non-“grandfathered” health plans, whether insured or self-funded, must provide certain types of “preventive health services” without co-payments, co-insurance or deductibles. These services include (i) certain evidence-based preventive services such as breast and colon cancer screenings; (ii) certain routine immunizations for children, adolescents and adults; (iii) certain evidence-informed preventive care and screenings for infants, children and adolescents, such as regular pediatrician visits, vision and hearing screening; (iv) evidence-informed preventive care and screenings for women.
- To be ACA-compliant, coverage would have to provide “minimum value” and be “affordable,” as explained in A-14 above.
Additionally, insured coverage would have to comply with the mandates of the group health insurance law of the state in which the group policy is issued as to types of benefits that must be provided. Examples would be mammography, colorectal screening and treatment of alcoholism.
Accordingly, it may be possible for some employers to avoid POP penalties by offering to all full-time employees (including full-time employees of related employers) group health coverage that satisfies the ACA but lacks many benefits that employees would expect their health coverage to provide, such as major medical benefits, including hospitalization and surgery. In this regard:
- If some employees enroll in minimally-compliant coverage, the cost to the employer of providing this coverage should be less than if it provided more comprehensive coverage to a larger group of employees.
- The cost to the employer of providing minimally-compliant coverage to some employees might also be less than the POP penalty that the employer would have to pay if no coverage were offered.
Several issues must be noted in connection with offering minimally-compliant coverage to avoid POP penalties:
- The IRS may try to eliminate this apparent “loophole” by amending the definition of “minimum essential coverage” in the Regulations to require an employer-sponsored group health plan to provide some level of comprehensive coverage in order to be considered as offering “minimum essential coverage.” However, such a regulatory fix may be difficult because the present regulatory definition is based upon the ACA definition, and the latter does not confer authority on the IRS to develop a more-detailed definition. Given the highly-partisan nature of the current Congress, the chances for passing any amendments to the ACA are slim to none.
- If an employer offered minimally-compliant coverage only to certain groups of lower-paid full-time employees, with other full-time employees being offered more comprehensive coverage, such an arrangement may violate the nondiscrimination and minimum coverage requirements referred to above in this A-17.
Depending on upcoming regulatory guidance, it may be possible to satisfy the nondiscrimination and minimum coverage requirements if a single minimally-compliant plan were offered to all full-time employees (including full-time employees of related employers). For those employees whom the employer wishes to provide more comprehensive benefits, cash payments could be provided, which the employees could use to purchase coverage through a health insurance exchange. The cash payments could not be made through a health savings account, health reimbursement account or a health flexible spending account. The cash payments would be taxable compensation. By contrast, the value of employer-sponsored group coverage complying with the Code and the ACA is not currently taxable, but Congress is expected to consider limiting or ending this tax benefit.
An employer offering a plan providing only minimally-compliant coverage to employees should provide adequate disclosure to each such employee, including that:
- The plan provides only limited benefits. An explanation should be given as to the types of benefits not provided.
- Because the plan complies with ACA requirements, even though benefits are limited, enrolling in the plan should enable the employee to avoid the ACA’s penalties beginning in 2014 for not having health insurance coverage.
- The employee may instead choose to obtain coverage under a health insurance exchange, but because he or she was offered the opportunity to enroll in employer-sponsored ACA-compliant coverage, federal subsidies may or may not be available for coverage purchased through such exchange.
Entitlement to such federal subsidies depends in part on whether the employer-offered self-only coverage for an employee would cost the employee more than 9.5% of his or her household income. As indicated in A-14 above, an employer may determine affordability for POP purposes by using the safe harbor based on employees’ W-2 wages, rather than trying to determine employees’ household incomes. If the cost of an employee’s self-only coverage under such an employer’s health plan is not more than 9.5% of his or her W-2 wages, then it is “affordable” for POP purposes. However, if such employee applies for coverage through an exchange, he or she may be entitled to a federal subsidy if the cost of self-only coverage offered by the employer is more than 9.5% of his or her household income. Household income may be more or less than W-2 wages.
Example 1: George’s W-2 wages are $50,000. Because he had some losses on investments, his household income is only $45,000. His employer would charge him $4,500 annually for self-only health coverage. The cost of employer coverage thus represents 9% of his W-2 wages but 10% of his household income. The employer coverage would be “affordable” for POP purposes but not affordable for purposes of entitlement to federal subsidies, thus making him eligible for such subsidies if he buys coverage through an exchange and otherwise qualifies for such subsidies.
Example 2: Same as Example 1, except that George’s household income is $75,000. The cost of employer coverage thus represents 9% of his W-2 wages but only 6% of his household income. The employer coverage would be “affordable” for POP purposes and also affordable for purposes of entitlement to federal subsidies, thus making him ineligible for federal subsidies if he buys coverage through an exchange.
Click here to view flowchart.