['Employee Benefits']
['Patient Protection and Affordable Care Act']
11/21/2023
Copyright 2024 J. J. Keller & Associate, Inc. For re-use options please contact copyright@jjkeller.com or call 800-558-5011.
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Under the Affordable Care Act (ACA), beginning in 2014, certain large employers risk paying a penalty to the federal government if they do not provide appropriate health care coverage to their employees. This is generally referred to as the “pay or play” provision.
The law does not actually require any employer to provide health care coverage to its employees. Failing to do so, however, can have repercussions in the form of a possible penalty.
Scope
Only “large” employers are subject to this provision. “Large” employers are those with at least 50 full-time (including full-time equivalent) employees in the previous calendar year. All employees of an entity are to be counted.
Regulatory citations
- None
Key definitions
- None
Summary of requirements
For purposes of this provision, full-time employees are those who work an average of at least 30 hours per week. To determine who full-time equivalent (FTE) employees are, you will need to prorate the part-time employees. You need to calculate the aggregate number of hours the employees worked per month and divide that by 120: If you have employee counts that fluctuate over the year, more math is required. You would need to take an aggregate:
- For example, you have 45 full-time employees, and 10 employees who work 30 hours per month from September through December, and 10 employees who work 25 hours per month during those same months:
- 10 x 30 = 300, 10 x 15 = 150; 300 150 = 450; 450/120 = 3.75. 45 3.75 = 48.75
Now you need to calculate the average over the year. For January through August, you had the 45 full-time employees only, while from September through December you had 48.75 FTEs:
- 8 (months) x 45 = 360; 4 (months) x 48.75 = 195; 360 195 = 555; 555/12 (total months in the year) = 46.25. With 46.25 FTEs, you would not be subject to the pay or play provision.
Coverage. Once you have determined if you are a large employer, you need to determine whether you may be at risk of a penalty. This risk, and the amount of the penalty, depends upon if you offer any coverage to all full-time employees, or offer “minimum essential coverage,” and whether an employee obtains coverage in an exchange.
Employers need not extend coverage to part-time employees to avoid a penalty. These employees are included only in determining whether or not you are a “large” employee. If a part-time employee obtains a premium credit for coverage in an exchange, you won’t be subject to a penalty.
You could be subject to penalty if any full-time employee is certified to receive an applicable premium tax credit or cost-sharing reduction payment. Generally, this may occur where:
- You do not offer any coverage to your full-time employees (and their dependents).
- You offer coverage to your full-time employees (and their dependents), but it is not “minimum essential coverage.” Minimum essential coverage includes coverage under eligible employer-sponsored plans and grandfathered plans. Most major medical plans are expected to meet this requirement.
- You offer minimum essential coverage to your full-time employees (and their dependents), but it does not provide minimum value. Minimum value is an actuarial determination, but a plan generally provides minimum value if the plan’s share of the total allowed costs of benefits provided under the plan is at least 60 percent of those costs.
- You offer minimum essential coverage to your full-time employees (and their dependents) but it is not “affordable.” An employer-sponsored plan is not affordable if the employee’s required contribution with respect to the plan exceeds 9.5 percent of the applicable taxpayer’s household income for the taxable year. This may be calculated using the employee portion of the self-only premium for the employer’s lowest cost plan that provides minimum value does not exceed 9.5 percent of the employee’s current W-2 wages from the employer.
Penalties. If you do not offer minimum essential coverage, you would be assessed an annual penalty of $2,000 per full-time employee if at least one full-time employee obtains a premium tax credit to get coverage through a state exchange.
You would, however, subtract the first 30 full-time employees. For example, if you have 67 full-time employees, the penalty would be (67 – 30) x $2,000, or 37 x $2,000 = $74,000.
If you offer minimum essential coverage but at least one full-time employee obtains a premium tax credit to get coverage through a state exchange, you would be assessed the lesser of the following:
- $3,000 for each full-time employee who obtained a tax credit to get exchange coverage, or
- $2,000 for each full-time employee (minus the first 30 full-time employees).
Exchanges. Employers will be subject to a penalty only if an employee (or possibly a dependent) receives a premium tax credit for coverage in a state exchange. If no employees obtain coverage through an exchange, there will be no penalty.
Employees generally cannot obtain a premium tax credit for exchange coverage unless they meet certain criteria. The exchanges will assess individuals to determine whether they are eligible for premium tax credits. If none of your employees obtain such credit, you will not be subject to a penalty.
To be eligible for a premium tax credit, an employee’s household income for family size for the year is between 100-400 percent of federal poverty level (FPL).
An individual is not eligible for a premium tax credit during the time enrolled in an employer-sponsored plan, regardless of its affordability or whether it meets the minimum value standard.
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