The Play or Pay Mandate

The Play or Pay Mandate

The purpose of this paper is to discuss the implications of the Affordable Care Act on businesses.  While the paper contains a complete discussion of the major tax issues relevant for a business, an attorney should be consulted when planning strategies for business implementation.

Initially the Affordable Care Act did not have a large impact on employers.  However, that will soon change.  In 2015 employers will need to begin to make strategic decisions as the Play or Pay Mandate (the Mandate) associated with the Affordable Care Act takes effect.

The Mandate only applies to Large Employers.  A Large Employer is defined as an employer who on average employed at least 50 full-time employees during the preceding calendar year.  A full-time employee is defined as an employee who works an average of 30 hours or more per week.  However, all the hours of the employees not covered by the full-time employee definition are aggregated together on a monthly basis and divided by 120 to give the employer a number to count as full-time equivalent employees. If the number of full-time employees plus the number of full-time equivalent employees is 50 or greater, the employer will be considered a Large Employer and the Mandate will apply.  It is important to understand that full-time equivalent employees are only relevant for determining if an employer is a Large Employer.  Full-time equivalent employees are not considered when calculating either of the taxes discussed below.

If an employer is a Large Employer, two taxes will need to be considered before making strategic decisions regarding healthcare plans for its workforce.   The first tax applies to Large Employers who fail to offer their full-time employees (and their dependents) the opportunity to enroll in an eligible employer plan that offers minimum essential coverage.  The proposed Treasury regulations, which employers may rely on pending the issuance of the final regulations, interpret the phrase, “and their dependents,” to require the employer to offer coverage to a full-time employee’s children who have not reached the age of 26.  Interestingly, the proposed regulations do not require the employer to offer coverage to a full-time employee’s spouse.  For the tax to apply one full-time employee or one of the full-time employee’s dependents must enroll in a health plan offered through an Exchange (which will be setup by the States or the Federal government if a State opts out) and also qualify for a premium tax credit or cost-sharing subsidy.  The premium tax credit and cost-sharing subsidy are available to individuals with a household income of at least 100 percent but not more than 400 percent of the federal poverty line.

In 2012 the federal poverty line for an individual living in the continental United States was approximately $11,170. Therefore, if an individual’s household income is between $11,170 and $44,680, the individual will be eligible for the premium tax credit and cost-sharing subsidy.  For a family of four living in the continental United States the federal poverty line in 2012 was approximately $23,050.  Therefore, if a family of four has a household income between $23,050 and $92,200 the family will be eligible for the premium tax credit and cost-sharing subsidy.

Even if an employer provides minimum essential coverage, an employer could still be subject to the second tax associated with the Mandate.  The tax applies to Large Employers who provide minimum essential coverage to their full-time employees (and their dependents), but the coverage provided is not “affordable” or does not provide “minimum value.”  The tax only applies to full-time employees eligible for a premium tax credit or cost-sharing subsidy.

To be considered affordable the cost of the insurance to the employee must not exceed 9.5 percent of the employee’s household income.  The proposed regulations provide three safe harbor methods to test the affordability of minimum essential coverage that will be discussed in a future publication.  However, it is beneficial for employers to know that only the self-only coverage is required to meet the 9.5 percent affordability test.  The proposed regulations make it clear coverage options that are not self-only coverage, such as family coverage, are not subject to the 9.5 percent affordability test.

For the coverage to provide minimum value the plan’s share of the total allowed costs of benefits provided under the plan must be greater than or equal to 60 percent of such cost.  Regulations are still forthcoming that will clarify the meaning of “minimum value.”  When the regulations are finalized or there is greater clarity on the subject, we will publish a paper explaining the nuances of the “minimum value” test.

If the coverage provided to employees eligible for a premium tax credit or cost-sharing subsidy is not “affordable” or does not provide “minimum value” and the employee enrolls in a health plan through an Exchange, an annual $3,000 tax would apply for each such employee.  The second tax is capped at the amount of a hypothetical first tax which is calculated by assuming the employer did not offer minimum essential coverage to its full-time employees.  The $3,000 annual tax will be adjusted in future years to mimic the rising price of health insurance premiums.  Unfortunately, and importantly, both taxes associated with the Mandate are not deductible for employers.

For additional details please contact an attorney at Health Care Attorneys P.C.  The firm will be happy to assist any employer in making the critical decisions necessary as a result of the Affordable Care Act.

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