Task 4 – Determine Whether to Pay or Play

This topic explains how you can determine whether the company will “pay or play” according to the ACAClosed Affordable Care Act.

Meaning

This is the meaning of “Pay or Play”:

If you a large employer, you have an option to provide health care coverage to your full-time employees or pay your responsibility.

The Difference Between Paying and Playing

As a large employer (per ACA), you need to make a decision. Here are the difference between your choices:

Play

If you choose to “play,” you:

  • Must offer “affordable” health care coverage to 95% of your full-time employees.
  • Must offer a health care coverage plan for your employees and their dependents.
  • Are not required to offer to your part-time employees.
  • Do not have to offer health care coverage to spouses.

Pay

If you choose to “pay,” you:

  • Do not offer health care coverage or do not offer health care coverage that is considered “affordable” or provides minimum value, then you may have to pay.

There are 2 types of assessable payments that an employer may be subject to:

  • IRSClosed Internal Revenue Service Reg 4980H(a) for failing to offer coverage
  • IRS Reg 4980H(b) is for offering coverage that does not provide minimum value or is unaffordable
  • Assessable payments are not tax deductible

Figure 2-1: Will the employer pay a penalty?

Assessable Payments

The assessable payment is calculated on a monthly basis. Therefore, each month the employer must determine the total number of full-time employees who are eligible for medical coverage.

IRS Reg 4980H(a)

If you do not offer medical coverage to at least 95% of your full-time employees AND one employee receives a tax credit, then the assessable payment is equal to $2000 per FULL TIME employee (less first 30)

Payment is calculated by each month and is due the first quarter of the next year.

Note: If you do not offer insurance and none of your employee’s are eligible for a tax credit, then no assessable payment is due under 4980H(a). If all of your employees make more than 400 times the poverty level, then none of your employees are eligible for a tax credit.

IRS Reg 4980H(b)

If you do offer insurance to your full time employees, but one or more employees receives a premium tax credit, then your assessable payment is the lesser of:

  • $3000 for each employee receiving the tax credit, –or–
  • $2000 for each employee Full Time Employee

An employee is eligible to receive a premium tax credit or subsidy when the employee meets all three of the following requirements:

  • Between 100% and 400% of the federal poverty level and enroll in coverage through an Affordable Insurance Exchange, –and–
  • Not eligible for coverage through a government-sponsored program like Medicaid or CHIP, –and–
  • Not eligible for coverage offered by an employer or are eligible only for employer coverage that is unaffordable or that does not provide minimum value

In the next example in Figure 2, two employees were terminated during February and one was hired. The hired employee is not eligible until April. Figure 2 represents a different employer than previous examples.

Figure 2-2: Example of an employer who has a 90-day waiting period and does not offer health care coverage to their full-time employees

How Does MPAY Help You Determine Your Assessable Payments?

You can use the ACA Large Employer Estimate report (MPI_1403) to determine the number of full-time employees the employer has for each month.

Assessable payments are calculated on full-time employees only.

What Should Employers Do to Calculate Their Assessable Payments?

  1. Run MPI_1403 each month to track the number of full-time employees you have.
  2. Calculate your potential assessable payment.
  3. The Federal Government will bill you.

How Do I Apply the Assessable Payments for Controlled Groups?

In cases of a “controlled group” (parent/child enterprises), “assessable payments” are determined separately.

  • One member of the controlled group might choose to offer affordable coverage, therefore incurring no assessable payments.
  • Another might offer no coverage and elect to pay the Code 4980H(a) liability.
  • Another might offer coverage that is not affordable to all employees, therefore incurring code 4980H(b) liability.

For example:

  • A parent corporation owns 100 percent of all classes of stock of 20 subsidiary corporations, the controlled group is an applicable large employer. Each of the 21 members of this controlled group (the parent corporation plus 20 subsidiary corporations) is considered separately in computing and assessing liability.
  • When calculating Code §4980H(a) Liability, an employer is permitted one reduction of 30 full-time employees.
  • In the case of a controlled group, the reduction is allocated ratably based on each applicable large employer member’s number of full-time employees.
  • Fractional ratable allocations are rounded up (so the total could exceed 30 in the aggregate).

Affordable to Low Wage Employees vs. Unaffordable to the Company

What if by making the insurance plan “affordable” to my low wage employees, it is making it unaffordable to my company?

For example, a company decides to pay 80% of the premium (same as our example case). The company has three employees that make minimum wage, but only work 30 hours a week. None of these employees pass the “affordable” test. The company’s Rate of Pay Safe Harbor shows the cost to be greater than 9.5% (like our example case). What do they do?

  • Each company has to make its own decision, but should consider the following:
  • Sometimes it might be more of an advantage to the employer and the employee to have “unaffordable” insurance for some employees.
  • In the example above, the three employees may be eligible for a tax credit, because the plan offered by their company cost more then 9.5% of their income.
  • It might be better for the employee to go through the insurance exchange and receive a tax credit to help pay for the insurance.

If they elect the company plan, the employee will have to pay 9.5% of their pay towards the insurance, while the insurance provided through the exchange may be less than the 9.5%. (Expectation is that the premium thru the exchange would be based on 3% of the employee’s income.) Therefore, it might be cheaper for the employee to go through the exchange.

  • The company may be better off paying the assessable payment then paying for the medical premium.
  • Employer pays $3000 for each employee that receives a premium tax credit.
  • Remember, the assessable payments are not tax deductible, but the cost of the health care coverage may be tax deductible and small employers may be eligible for a tax credit.