Skip to Main Content

“Pay or Play” Penalty – Coverage for Substantially All Full-time Employees and Dependents

Wednesday, February 12, 2014
Print

The Affordable Care Act (ACA) imposes a penalty on large employers that do not offer minimum essential coverage to full-time employees and their dependents. Large employers that offer this coverage may still be liable for a penalty if the coverage is unaffordable or does not provide minimum value. The ACA’s employer mandate provision is often referred to as “employer shared responsibility” or “pay or play” rules.

The employer mandate provisions were set to take effect on Jan. 1, 2014. However, on July 2, 2013, the Treasury announced the delay of the employer mandate penalties and related reporting requirements for one year, until 2015. Therefore, these payments will not apply for 2014. On July 9, 2013, the IRS issued Notice 2013-45 to provide more formal guidance on the delay. No other provisions of the ACA are affected by the delay

On Feb. 12, 2014, the IRS published long-awaited final regulations on the ACA’s employer shared responsibility rules. Under the final regulations, applicable large employers that have fewer than 100 full-time employees generally will have an additional year, until 2016, to comply with the pay or play rules . Applicable large employers with 100 or more full-time employees must comply starting in 2015.

In general, under the ACA, large employers must offer coverage to at least 95 percent of their full-time employees (and dependents) to avoid the most significant pay or play penalties. However, the final regulations provide transition relief that will phase in this requirement. Also, the final regulations identify the dependents who must be offered coverage to avoid an employer penalty.

EMPLOYER PENALTIES

The amount of the pay or play penalty generally depends on whether or not an employer offers coverage to substantially all full-time employees and their dependents.

Monthly Penalty Amounts

The monthly penalty assessed on employers that do not offer minimum essential coverage to substantially all full-time employees and their dependents is equal to the number of full-time employees (excluding 30 full-time employees) multiplied by 1/12 of $2,000. This penalty is called the 4980H(a) penalty. For 2015 (plus any calendar months of 2016 that fall within an employer’s 2015 plan year), the 4980H(a) penalty is calculated by reducing a large employer’s number of full-time employees by 80 rather than 30.

The monthly penalty assessed on employers that offer minimum essential health coverage to substantially all full-time employees and their dependents will be 1/12 of $3,000 for each full-time employee who receives a premium tax credit or cost-sharing reduction under an insurance exchange for any applicable month. However, the total penalty is limited to the total number of full-time employees (excluding 30 full-time employees—or 80 full-time employees for the 2015 plan year) multiplied by 1/12 of $2,000 for any applicable month. This penalty, which is called the 4980H(b) penalty, is triggered when a full-time employee is not offered coverage or when the coverage is unaffordable or does not provide minimum value.

“SUBSTANTIALLY ALL” REQUIREMENT

The 4980H(a) penalty will not apply to a large employer that intends to offer coverage to all of its full-time employees but fails to offer coverage to a few of these employees, regardless of whether the failure to offer coverage was inadvertent. The final regulations provide that an employer will satisfythe requirement to offer minimum essential coverage to “substantially all” of its full-time employees and their dependents if it offers coverage to at least 95 percent of its full-time employees and dependents.

Under the final regulations, an employer will not be liable for a 4980H(a) penalty for a calendar month if it offers coverage to all but 5 percent (or, if greater, five) of its full-time employees and dependents for that month. According to the IRS, the alternative margin of five full-time employees is designed to accommodate relatively small employers because a failure to offer coverage to a handful of full-time employees might exceed 5 percent of the employer’s full-time employees.

Transition Relief

For each calendar month during 2015 (and any calendar months during the 2015 plan year that fall in 2016), a large employer that offers coverage to at least 70 percent—or that fails to offer coverage to no more than 30 percent—of its full time employees and dependents will not be subject to a 4980H(a) penalty. The requirement to offer coverage to dependents for the 2015 plan year is also subject to transition relief, and this transition relief is described below.

Also, large employers that qualify for the transition relief from the 4980H(a) penalty for 2015 plan years are still subject to potential 4980H(b) penalties for that time period (for example, if the health plan coverage is unaffordable or does not provide minimum value).

DEPENDENT COVERAGE

The final regulations define “dependents” for purposes of the ACA’s employer penalty to include only an employee’s child under the age of 26. An employee’s child includes a biological child or an adopted child. The final regulations exclude stepchildren and foster children from the definition of dependent. Also, the final regulations clarify that a child is a dependent for purposes of the pay or play rules for the entire calendar month in which he or she attains age 26. Absent any knowledge to the contrary, employers may rely on employees’ representations regarding the identity and ages of their children.

Under the final regulations, “dependent” does not include an employee’s spouse. Thus, an employer is not required to offer minimum essential coverage to employees’ spouses in order to avoid a pay or play penalty.

Transition Relief

The IRS recognizes that a number of employers currently offer employee-only coverage, and that expanding their health plans to include dependent coverage will require substantial revisions to their plans. The final rules provide transition relief with respect to dependent coverage for plan years that begin in 2015. In general, an employer that does not offer coverage to dependents during the 2015 plan year will not be liable for a penalty for that plan year as long as it takes steps toward offering dependent coverage during the year.

This transition relief applies to employers for the 2015 plan year with respect to plans under which: (1) dependent coverage is not offered, (2) dependent coverage that does not constitute minimum essential coverage is offered, or (3) dependent coverage is offered to some, but not all, dependents.

Also, the transition relief is not available to the extent the employer offered dependent coverage during either the 2013 or 2014 plan year and then later dropped that offer of coverage. If the coverage was offered to some, but not all, dependents during the 2013 or 2014 plan year, the transition relief applies only with respect to dependents who were not offered coverage at any time during the 2013 or 2014 plan year.

In addition, the transition relief is only available if the employer takes steps during the 2014 or 2015 plan year (or both) to extend coverage under the plan to dependents not offered coverage during the 2013 or 2014 plan year (or both).

MORE INFORMATION

Please contact The Horton Group for more information on the ACA’s pay or play penalty.

Revised: 2.12.14

Material posted on this website is for informational purposes only and does not constitute a legal opinion or medical advice. Contact your legal representative or medical professional for information specific to your legal or medical needs.

Get Started

Let Your Aspirations Set the Agenda

Grow with who you know. Reach out to us today and start the conversation, so you’re better protected and prepared for what comes next.

Talk to an Advisor

man looking left