Play-or-Pay Fully Effective in 2016

The Affordable Care Act (ACA) requires applicable large employers (ALEs) with 50 or more full-time employees (including full-time equivalent employees) to offer minimum-value, affordable health coverage to full-time employees and their children or pay a penalty. Although this play-or-pay mandate was initially to become effective in 2014, the IRS delayed it until January 1, 2015 for employers with 100 or more full-time employees and until 2016 for employers with between 50 and 99 full-time employees. But these transitional rules have expired, and in 2016, ALEs above the 99 full-time-employee threshold will face the full implementation of the employer mandate, and employers with between 50 and 99 full-time employees will face implementation of the employer mandate for the first time.

ALEs must offer minimum essential coverage to at least 95% (as compared to 70% in 2015) of full-time employees and their dependent children or pay a penalty of $2,160 per full-time employee, minus the first 30 employees (as compared to 80 in 2015). This sledgehammer penalty is triggered if at least one full-time employee who was not offered coverage enrolls in subsidized exchange coverage.

If ALEs offer coverage that does not meet ACA standards for affordability (premium less than 9.5% of employee’s household income) and minimum value (plan pays at least 60% of all benefits without regard to co-payments, deductibles, coinsurance, and employee premiums), they must pay a penalty of $3,240 per full-time employee who enrolls in subsidized exchange coverage (tack-hammer penalty).

Exploring options to avoid or minimize penalties while containing health coverage costs will be more difficult for employers in 2016. The risk of failing to properly count employees’ hours increases in 2016, as no more than 5% of full-time employees can be ineligible for minimum essential health coverage to avoid the sledgehammer penalty. Some employers have offered “skinny” plans to full-time employees in the past to avoid paying the sledgehammer penalty, although such plans could still subject the employer to the tack-hammer penalty if they fail to provide minimum value. Employers considering skinny plans should also be aware that IRS Notice 2014-69 expanded minimum value beyond a 60% actuarial value to also include substantial inpatient hospital services and physician services.

The penalties apply only with respect to full-time employees, so the determination of full-time employee status is critical for compliance with the employer play-or-pay mandate. The ACA defines a full-time employee as one working 30 or more hours per week, or a monthly equivalent of 130 hours. The IRS final rule allows employers to use the look-back measurement method as an alternative to a strict monthly measurement of hours of service for determining the full-time status of ongoing as well as new variable hour, part-time, and seasonal employees. However, employers must offer coverage to new employees who are reasonably expected to work a full-time schedule by the first day of the fourth calendar month after the date of hire to avoid a potential penalty.

If you have questions about the play-or-pay mandate, call ASR Health Benefits at (616) 957-1751 or (800) 968-2449.