By George Cicotte and William Martin
Employers have less than a year to decide whether they will comply with the employer-mandate provisions of the Affordable Care Act and offer employees affordable employer sponsored health care or pay a penalty. Although the ACA, also known as Obamacare, does not specifically require employers to provide health insurance for employees, the failure to do so may result in an excise tax penalty imposed under the Internal Revenue Code. These provisions go into effect in just under a year, on January 1, 2014.
The play or pay provisions of Obamacare generally provide that an applicable large employer is subject to an assessable payment or excise tax if it (1) fails to offer coverage; or (2) offers inadequate coverage. Only applicable large employers may be liable for an assessable payment. An applicable large employer for a calendar year is an employer who employed an average of at least 50 full-time employees working at least 30 hours per week during the previous calendar year, or a combination of full-time, part-time and seasonal employees that equals at least 50. For example, if an employer had 40 full-time employees working at least 30 or more hours per week, and 20 half-time employees, this would be the equivalent of 50 full-time employees for the purposes of Obamacare.
The penalty for failure to offer health care coverage will apply if a large employer fails to provide full-time employees and dependents the opportunity to enroll in an eligible employer-sponsored health plan.
The separate, “inadequate coverage” tax penalty may be imposed on a large employer that offers full-time employees and dependents the opportunity to enroll in an eligible employer-sponsored plan, if one or more full-time employees is certified to the employer as having received a federal premium tax credit or cost-sharing reduction. Employees who earn up to 400 percent of the federal poverty level are eligible to receive a premium credit. For 2013, 400 percent of the federal poverty level is $92,200 for a family of four.
The inadequate coverage penalty will not apply if the employer-sponsored plan provides “adequate” coverage. Coverage is considered adequate when it is affordable (an employee’s required contribution for self-only coverage does not exceed 9.5 percent of the employee’s household income); and provides minimum value (pays at least 60 percent of the cost of covered services).
Under the ACA, the assessable payment for failure to offer coverage is based on all full-time employees of an employer, excluding the first 30. The assessable payment amount is generally $2,000 per full-time employee per year, and it accrues monthly. For example, an employer with 75 full-time employees that fails to offer coverage to its employees would be liable for yearly penalties totaling $90,000 (75 FTE – 30 = 45 FTE, times $2,000 for each FTE = $90,000). The penalty would be payable in monthly installments of $7,500.
The second potential penalty — the one for inadequate coverage — is based on the number of full-time employees who are certified to the employer as having received a premium tax credit or cost-sharing reduction with respect to the employee’s purchase of health insurance for himself or herself on a (soon-to-be established) health care exchange. This penalty amount is generally $3,000 multiplied by the number of full-time employees who receive credits for exchange coverage, and it also accrues monthly. However, if the basic penalty for not providing any coverage would be smaller, then it applies instead.
Notably, employers will not be subject to a penalty as a result of an employee’s receipt of a premium tax credit or cost sharing reduction with respect to coverage for a dependent. Furthermore, employers may not deduct the cost of any assessable payment amount due under the play or pay mandate.
The factors employers must consider when deciding whether to play or pay will vary extensively depending on each employer’s circumstances and line of work. Employers should begin now to evaluate their business goals and implement an appropriate strategy to manage requirements relating to Obamacare. For a fact specific analysis and recommendation relating to the employer mandate or other matters relating to health care reform employers should consult with legal counsel that is familiar with the ACA and related guidance from the applicable governmental agencies.
George F. Cicotte founded the Cicotte Law Firm, LLC in 2002. He has practiced law as an ERISA attorney since 1995, serving clients throughout the U.S. The Firm’s practice involves health and retirement plan design, health reform planning and compliance, labor relations, federal taxation, and advising on a myriad of employment and fiduciary responsibility issues. William L. Martin, III graduated from Gonzaga University School of Law in 2007, then completed a legal masters degree in tax at the University of Washington in 2008. He has practiced with the Cicotte Law Firm since 2009, focusing on ERISA and tax matters.