Solving the Play-or-Pay Conundrum

How it might affect your business

Every employer will be affected in the sense that they’ll have to check annually to see whether their business and its health care benefits (or lack thereof) trigger consequences under the law. The key determinants are whether you employ a “large” number of employees, and if you do, whether you offer at least a “minimum value” of “affordable” health care coverage to full-time staff.

Meeting the standards of the former but coming up short on the latter could mean penalties if even just one full-time employee receives a premium tax credit for buying individual coverage through one of the new insurance exchanges established in accordance with the act. So the two-part question becomes:

To determine whether you’re a large employer, you need to calculate your full-time equivalent employees (FTEs). Once you’ve counted your full-timers (defined as employees working 30 or more hours per week), you must total the service hours for all part-timers, divide by 120 and add the result to your total.

If you have hourly employees, base your calculations on records of hours worked and hours compensated (or due to be compensated) for time off because of vacations, illness, disability and other such circumstances.

There are several options for determining the hours of salaried part-timers. You can use the same method as for hourly staff, apply a days-worked equivalency method whereby each employee is credited with eight hours per day worked, or use a weeks-worked equivalency method whereby each employee is credited with 40 hours per week worked.

If you have 50 or more FTEs, you’re considered to be a large employer. For 2015, however, only employers with 100 or more FTEs are fully subject to the rules. Employers with 50 to 99 FTEs have a one-year reprieve. If you offer health care coverage, you next must assess whether that coverage provides minimum value and is affordable. Regarding minimum value, your plan must cover at least 60% of the total allowed costs of benefits provided.

The “affordability” test generally stipulates that, if your coverage includes an employee premium exceeding, for 2015, 9.56% (the figure is adjusted annually for inflation) of his or her annual household income, your benefits won’t be considered affordable. This test applies to the lowest-cost option available, which must meet the minimum value requirement.

Important note: The IRS has proposed three safe harbors for meeting the affordability test. Explore these fully with your benefits advisor.

How you can avoid penalties

There are a couple of ways you could be penalized. Remember, penalties can be triggered if just one full-time employee of a large employer receives a premium tax credit via an exchange. First, if you’re not providing health care coverage to at least, for 2015, 70% (increasing to 95% next year) of your full-time employees, the penalty is $2,000 per full-time employee beyond 30 full-timers. (Penalties are based on actual full-time employees, not on FTEs.)

If you’re covering the required percentage of your full-time staff but not providing coverage that’s of minimum value or affordable, you’ll have to pay the lesser of the above penalty or $3,000 for each employee who receives a premium credit from an exchange.

On the bubble?

The play-or-pay penalties loom over many companies. Yes, this can be a burden, but it’s critical that employees receive the best health care possible. Work with your benefits advisor. He or she can help you navigate through the technicalities.

© 2015