Deciding Whether To Play Or Pay Under The Affordable Care Act—2014 Updates

The Patient Protection and Affordable Care Act (the "ACA") added a new Section 4980H to the Internal Revenue Code of 1986, as amended, which generally requires employers to offer health coverage to their employees or face a penalty (the "Employer Mandate"). Following are Q&As discussing this provision. These Q&As are designed to address some of the more commonly asked questions, including which employers are subject to the mandate, who must be offered coverage to avoid a penalty, the type of coverage that must be offered to avoid that penalty, and the penalties that apply for not offering coverage. These Q&As were initially prepared based on proposed regulations but have been updated to reflect the final regulations issued on February 12, 2014.

What is the Employer Mandate? Who is Eligible for a Premium Tax Credit or Cost-Sharing Reduction? When is the Employer Mandate Effective, and What Transition Rules Apply? Which Employers are Subject to the Employer Mandate? Who Must Be Offered Coverage? What are the Methods for Determining "Full-Time" Status? What Health Coverage Satisfies the Employer Mandate? What is the Penalty for Noncompliance and How is it Collected? Q&A 1: What Is the Employer Mandate?

On January 1, 2015, the Employer Mandate will change the landscape of health care in the U.S. by requiring large employers to offer health coverage to full-time employees and their natural and adopted children up to age 26 or risk paying a penalty. Large employers will be forced to make a choice: to either "play" by offering affordable health coverage that provides minimum value or "pay" by potentially owing a penalty to the Internal Revenue Service if they fail to offer such coverage. This "play or pay" scheme, called "shared responsibility" in the statute, has become known as the Employer Mandate. Although the effective date of the Employer Mandate has generally been deferred until January 1, 2015, the effective date is further deferred for employers with non-calendar year plans that meet certain requirements, as well as for certain smaller employers. Only "large employers" are required to comply with the Employer Mandate. Generally speaking, "large employers" are employers that had an average of 50 or more full-time and full-time equivalent employees on business days during the preceding year. However, this threshold is 100 full-time and full-time equivalent employees for the 2015 calendar year only. "Full-time employees" include all employees who work at least 30 hours on average each week. The number of "full-time equivalent employees" is determined by aggregating the hours worked by all non-full-time employees. In determining large employer status, certain related employers under common control are considered to be a single employer. (However, as discussed below, while large employer status is determined based on counting the full-time employees and full-time equivalents of all members of a group of related employers under common control, whether any penalty is owed and the amount of such penalty is calculated separately for each related employer.) To "play" under the Employer Mandate, a large employer must offer health coverage that is "minimum essential coverage," is "affordable," and satisfies a "minimum value" requirement to its full-time employees and their children. "Minimum essential coverage" includes coverage under an employer-sponsored group health plan, whether it be fully insured or self-insured, but does not include stand-alone dental or vision coverage, employee assistance plans, or flexible spending accounts. For this purpose, employer-sponsored group health coverage may include coverage offered on behalf of an employer by a multiemployer plan, Multiple Employer Welfare Arrangement ("MEWA"), or staffing organization (provided certain requirements are satisfied). Coverage is "affordable" if an employee's required contribution for the lowest-cost self-only coverage option offered by the employer does not exceed 9.5 percent of the employee's household income. Coverage provides "minimum value" if the plan's share of the actuarially projected cost of covered benefits is at least 60 percent. More detail about these requirements is included in later Q&As. If a large employer does not "play" for some or all of its full-time employees, the employer will have to pay a penalty in two scenarios. The first scenario occurs when an employer does not offer health coverage to "substantially all" of its full-time employees and any one of its full-time employees both enrolls in health coverage offered through a state insurance exchange, which is also called a marketplace (an "Exchange"), and receives a premium tax credit or a cost-sharing reduction (an "Exchange subsidy"). In this scenario, the employer will owe a "no coverage penalty." The no coverage penalty is $2,000 per year (adjusted for inflation after 2014) for each of the employer's full-time employees, excluding the first 80 employees for the 2015 calendar year and the first 30 for years thereafter. This is the penalty that an employer should be prepared to pay if contemplating not offering group health coverage to its employees. The second scenario occurs when an employer does provide health coverage to its employees, but that coverage is deemed inadequate for Employer Mandate purposes, either because it is not "affordable," it does not provide at least "minimum value," or the employer offers coverage to substantially all (but not all) of its full-time employees, and one or more of its full-time employees both enrolls in Exchange coverage and receives an Exchange subsidy. In this second scenario, the employer will owe an "inadequate coverage penalty." The inadequate coverage penalty is $3,000 per year (also adjusted for inflation after 2014) and is calculated based not on the employer's total number of full-time employees (as is the case for the no coverage penalty) but only on each full-time employee who receives an Exchange subsidy. Furthermore, the penalty is capped by the maximum potential "no coverage penalty" discussed above. Because Exchange subsidies are available only to individuals with household incomes of at least 100 percent and up to 400 percent of the federal poverty line (in 2015, a maximum of $46,680 for an individual and $95,400 for a family of four), employers that pay relatively high wages may not be at risk for the penalty, even if they fail to provide coverage that satisfies the affordability and minimum value requirements. Likewise, because Exchange subsidies are not available to individuals who are eligible for Medicaid, employers may be partially immune to the penalty with respect to their low-wage employees, particularly in states that elect the Medicaid expansion. To be sure, Medicaid eligibility is based on household income. Because an employee's household may have more income than the wages he or she receives from the employer, the employee might not be Medicaid eligible, even though the employer pays a very low wage. Thus, it may be difficult for an employer to assume its low-paid employees will be eligible for Medicaid and not eligible for Exchange subsidies. But for employers with low-wage workforces, examination of the extent to which the workforce is Medicaid-eligible may be worth exploring. In addition, Exchange subsidies will not be available to any employee whose employer offers the employee affordable coverage that provides minimum value. Thus, by "playing" for employees who would otherwise be eligible for an Exchange subsidy, employers can ensure that they are not subject to any penalty, even if they don't "play" for all employees.

Q&A 2: Who Is Eligible for a Premium Tax Credit or Cost-Sharing Reduction?

As noted in Q&A 1, merely failing to offer full-time employees minimum essential coverage, or coverage that meets the affordability or minimum value requirements, is not enough to trigger liability under the Employer Mandate. Two additional things must occur before any penalty will be assessed. First, one of the employer's full-time employees must enroll in health coverage offered through an Exchange. Second, that full-time employee must receive an Exchange subsidy (a premium tax credit or cost-sharing reduction). Thus, an employer should consider which of its employees are potentially eligible for an Exchange subsidy when deciding how to comply with the Employer Mandate. Premium tax credits are claimed on a single Form 1040 for the taxpayer and all tax dependents; receipt of an Exchange subsidy by an employee's dependent who is not a tax dependent of the employee will not give rise to an Employer Mandate penalty. Coverage Through an Exchange In order to be eligible to receive an Exchange subsidy, an individual must enroll in health coverage offered through an Exchange. Under the ACA, an Exchange has been established in each state, either by the state or by the federal government (or a combination of the two). An Exchange is a governmental entity or nonprofit organization that serves as a marketplace for health insurance for individuals and small employers. Health insurance offered through the Exchanges must cover a minimum set of specified benefits and must be issued by an insurer that has complied with certain licensing and regulatory requirements. Eligibility for an Exchange Subsidy There are two Exchange subsidies available: the premium tax credit and the cost-sharing reduction. The premium tax credit is intended to help individuals and families purchase health coverage through an Exchange. The credit is available only to legal U.S. residents whose household income is 100 percent to 400 percent of the federal poverty line ("FPL"). Legal resident aliens also qualify for the credit if their household income is below 100 percent of the federal poverty line and they are not eligible for Medicaid because they are aliens. Individuals who are eligible for Medicaid or Medicare, or certain other...