Play or Pay: The Facts about Paying the Penalties

PPACA penaltiesWith every day that goes by, the nation’s employers move a step closer to having to make “play or pay” decisions. Many employers have less than a year to prepare for the arrival of this core provision of the Patient Protection and Affordable Care Act (PPACA). Their decisions are far from easy… the ensuing financial, legal, and competitive implications are profound… and the clock is ticking.

Some employers believe that the play or pay mandate will raise their costs and force them to make workforce cutbacks. As a result, they’re considering the “pay” option—i.e., eliminating their health care coverage altogether and paying the penalty on their full-time employees. Other employers are leaning toward “play,” which means they’ll offer employees medical coverage that meets the requirements of PPACA. While employers should look carefully at both options and do their best to calculate the outcomes of each, the actual solutions implemented by many likely will be creative combinations of approaches (making some reductions to benefits while enhancing others). After all, as with many other workforce-related decisions employers make, their main objective will be to remain financially competitive while still being able to attract and retain the employees they require.

When considering the financial implications of play or pay decisions, keep in mind the fact that PPACA actually calls for two potential penalties for large employers: One penalty for not offering “minimum essential” coverage, and the other penalty for offering coverage that’s considered inadequate because it isn’t “affordable” and/or doesn’t provide “minimum value.” Which employers are considered “large” is different for 2015 and later years.  Under the law, an employer is considered “large” if it has 50 or more full-time or full-time equivalent (FTE) employees in its controlled group.  However, employers with 50 to 99 full-time and full-time equivalent employees in their controlled group will not need to comply until 2016 if they meet certain requirements.

The minimum essential coverage penalty is calculated monthly at the rate of $166.67 for each full-time employee, less  a set number of “free employees.” (Although the penalty is calculated monthly, it will be paid annually.) EXAMPLE: In 2016, Dave’s Donuts does not offer medical coverage to its employees. Dave has 60 full-time employees and 12 part-time employees. Two employees purchase coverage through an exchange. Dave’s Donuts will owe a penalty of $5000.10/month: 60 full-time employees, minus “30 free employees,” multiplied by $166.67 (part-time employees are not counted for purposes of this penalty).

In 2015, employers that owe penalties may subtract 80 “free employees.”  For later years, that number will reduce to 30 “free employees.”

The penalty for not offering affordable minimum coverage is $250 per month ($3,000 per year) for each full-time employee who:

  • Is not offered coverage that is considered both minimum value and affordable;
  • and purchases coverage through a government exchange;
  • and is eligible for a premium tax credit/subsidy (her/his household income must be below 400% of the federal poverty level).

EXAMPLE: In 2016, Jones, Inc. has 55 full-time employees and eight part-time employees. Jones offers coverage that is minimum value, but which is not affordable for 10 of the full-time employees (nine of whom buy coverage through an exchange) and all of the part-time employees (who all buy coverage through an exchange). Seven of the nine full-time employees and six of the eight part-time employees who buy through an exchange qualify for a premium tax credit.

Jones, Inc. owes a penalty on each full-time employee who enrolls in an exchange plan and receives a premium tax credit, so the company owes $1,750 (seven regular full-time employees who receive a premium credit multiplied by $250; the part-time employees are not counted). The first 30 (or 80) employees do count under this “inadequate coverage” penalty. Also, if the “no offer” penalty would be less expensive than the “inadequate coverage” penalty, the employer would pay the “no offer” penalty. the “no offer” penalty.

For a closer look at these penalties and other key issues impacting play or pay decisions, download UBA’s white paper, “The Employer’s Guide to ‘Play or Pay’”