Employers are scrambling to figure out the impact of the Patient Protection and Affordable Care Act (PPACA) on their business and whether it makes sense to “pay or play” when it comes to providing health insurance coverage for employees.
“Pay or play regulations were released Dec. 28, so we’re all trying to digest this. Employers want to know what the rules mean for them,” says Dwight Seeley, vice president of Employee Benefit Programs at Sequent. “I have several meetings scheduled to review the math of the penalty phase with companies so they know where they stand.”
Smart Business spoke with Seeley about the pay or play provisions under PPACA and what employers need to do in preparation for the Jan. 1, 2014, start of health care exchanges.
How do companies prepare?
They need to determine answers to these questions:
- Do they have a general understanding of pay or play?
- Are they considered a large employer?
- Will any employees receive federally subsidized exchange coverage?
- Does the company plan offer minimum essential coverage?
- Does the plan provide minimum value?
- Is the plan affordable?
- What penalties could apply and what is the potential cost?
First off, pay or play applies to employers with at least 50 full-time or full-time equivalent (FTE) employees, so you have to determine if that applies to you. PPACA rules are different from those of the IRS. Under PPACA, a full-time equivalent is considered 120 hours per month, 30 hours per week. There’s a fairly detailed structure for measuring FTEs based on employees with variable hours, seasonal employees, etc. Companies that have variable schedule employees, part-timers or a lot of seasonal employees are going to be challenged to determine how many FTEs they have.
If you have 50 or more FTEs, what do you need to do to avoid penalties?
Businesses can avoid penalties by providing minimum essential coverage with a plan that offers at least minimum value and is affordable. No guidance has been given on minimal essential coverage but there’s a general idea of what it’s going to look like based on industry standards.
Once you’ve established that a plan provides minimal essential coverage, you then look at whether it meets the minimum value requirement and if it’s affordable. It’s considered poor if it pays less than 60 percent of total benefits under the plan. To be affordable, it has to cost less than 9.5 percent of an employee’s household income.
What are the potential penalties?
If you do not offer coverage and at least one full-time employee receives a federal subsidy, the tax is $2,000 per the number of full-time employees minus the first 30. An employee can get a subsidy if their income is between 100 to 400 percent of the federal poverty level — about $92,000 for a family of four.
If you offer coverage that’s considered unaffordable and at least one full-time employee receives a federal subsidy, the annual tax is the lesser of $3,000 per subsidized full-time employee or $2,000 for all full-time employees.
Should some employers drop health care coverage and pay the penalties?
Studies corroborate the fact that a lot of employers feel they still need to offer health insurance as a differentiator and as a recruitment and retention strategy. What they want is to get the numbers straight in order to make an informed decision. That means going through the penalty scenarios and working out the math. Any penalties will not be deductible or tax favored, whereas the health insurance you’re providing is tax favored, so you have to calculate the impact from pre-tax and post-tax perspectives.
One other challenge that’s not being talked about is the cost companies are going to incur to implement the administrative changes required by the law. They’re going to have to put in new processes to allow easy access to data the way it is defined by the PPACA, such as an ongoing way to monitor the number of FTEs.
The published regulations contain many detailed examples so there has been an attempt to provide direction. Still, the sheer volume and complexity make it a lot to absorb.
Dwight Seeley is a vice president, Employee Benefit Programs, at Sequent. Reach him at (614) 839-4059 [email protected]
Save the date: Learn about the changing landscape of health care reform. Register for the March 19 Pay or Play Webinar at http://bit.ly/XFjwB3.
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