Healthcare Reform – Should you Pay or Play?

One of the provisions within the Patient Protection Affordable Care Act (PPACA) getting the most coverage and generating the most confusion amongst employers is the so-called Pay or Play rule. In general, the law applies to employer groups with 50 or more employees who do not offer health coverage to “essential all” full time employees and dependents. The law goes into effect with the first plan year starting on or after January 1st, 2014.

Are you subject to the law?

If you have over 50 full time employees (FT) or 50 full time equivalents (FTE), you are subject to the law and will face penalties if at least one of your full-time employees receives a premium credit through the exchange. In terms of Healthcare Reform, employees who work at least 30 hour per week or 130 hours per month are considered full-time.

To determine the number of FTE’s the government provided the following guidance in IRS Notice 2012-58:

“Under the look-back/stability period safe harbor method, an employer would determine each employee’s full-time status by looking back at a defined period of not less than three but not more than 12 consecutive calendar months, as chosen by the employer (the measurement period), to determine whether during the measurement period the employee averaged at least 30 hours of service per week. If the employee were determined to be a full-time employee during the measurement period, then the employee would be treated as a full-time employee during a subsequent “stability period,” regardless of the employee’s number of hours of service during the stability period, so long as he or she remained an employee. For an employee determined to be a full-time employee during the measurement period, the stability period would be a period of at least six consecutive calendar months that follows the measurement period and is no shorter in duration than the measurement period. If the employee were determined not to be a full-time employee during the measurement period, the employer would be permitted to treat the employee as not a full-time employee during a stability period that followed the measurement period, but the stability period could not exceed the measurement period.”

What happens if you drop your plan?

Large employers who do not offer minimum essential health coverage to “substantially all” (95% or more of FTE’s) or who drop their plans will face a penalty of $2,000 for each of their full time employees minus the first 30. This penalty will be assessed monthly. For example, an employer who has 200 full time employees will face a monthly penalty of $28,333.

200 Full Time Employees – 30 (First Thirty) X ($2,000 / 12) = $28,333

It’s also important to note these penalties will be levied as an excise tax rather than operating expenses. Therefore the financial burden will likely exceed that of a normal operating expense for most employers.

Is my plan affordable?

In addition to offering coverage, employers must ensure their plans are affordable. The affordability test is based on percentage of income. Employers cannot charge employees more than 9.5% of the employee’s income for the cost of employee only-coverage (even if enrolled as a family) for the least expensive plan offered by the employer. For example, if an employer offers two plans with one being a low deductible PPO with a monthly premium of $400 and the other being a high deductible HSA with a monthly premium of $300, the employer cannot charge employees more than 9.5% of their income for the employee-only rate on the HSA plan.

Does my plan provide minimum value?

The health plan must also provide minimum value. Employees must be offered a plan that covers at least 60% of the total annual costs for services within 10 categories of medical care including hospital stays, emergency services, prescription drugs, and maternity care.

What happens if one of your employees goes to the exchange and is eligible for a federal subsidy?

The first penalty mentioned above is for employers who do not offer coverage to substantially all employees. In these cases a monthly penalty of $167 ($2,000/12) for each full time employee less the first 30 will be assessed.

The second penalty is for employers who do not offer affordable coverage to substantially all employees. For each employee who is not offered affordable coverage and who obtains a subsidy through the exchange, the employer will assessed a penalty of the lesser of $3,000 for each employee who received subsidized Exchange coverage or $2,000 times the total number of employees minus 30. For example, if an employer has 100 FTE’s and the plan is unaffordable for only ten and three obtain subsidies, the employer will be subject to a fine of $9,000.

Undoubtedly, Health Care reform is adding administrative and cost burdens to employer groups nationwide. That said, from our experience a vast majority of employers who offer coverage to all full time employees will be unaffected by Pay or Play. Whereas in limited cases lower wage employer groups may actually benefit from dropping coverage and allowing employees to purchase insurance through an exchange with the help of a subsidy.

About the Author
Brett Webster is Vice President of employee benefits for AH&T Insurance. He specializes in helping clients align the employee benefits program with the long term business strategy of the company or organization.

AH&T is a full-service insurance brokerage and consulting firm with nationally recognized practices in areas including technology, manufacturing, government contracting and nonprofits. The firm was founded in 1921 in Leesburg, Virginia. Visit their web site at Brett Webster is Vice President of employee benefits for AH&T Insurance. He specializes in helping clients align the employee benefits program with the long term business strategy of the company or organization. Visit their web site at https://www.ahtins.com/

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2 Comments on "Healthcare Reform – Should you Pay or Play?"

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Marie Glancy
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The single largest question we receive on a day to day basis in the health care industry is how health care reform will change current Medicare services.

While in many cases it is too early to tell until reforms are completely implemented, the reform laws as they stand today do have one major boon… the closing of the doughnut holes.

Many on Medicare fall into a coverage cap, or “doughnut hole”, which will slowly be removed under the new law. The gap will garduallly narrow until it disappears in 2020 allowing for greatly reduced out of pocket drug costs.

Marie Glancy

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