The Affordable Care Act (“ACA”) is a large piece of legislation that has many moving parts and pieces. Every employer needs to decide how to deal with ACA Compliance / Health Care Reform for its employees based on the best outcome for his company and its employees. One of the important drivers of the legislation is an employer mandate known as “pay or play”. Deciding whether to “pay or play” is a threshold employer issue.
To review, ACA defines large employers as those with 100 or more employees. For these firms, the “pay or play” provision of ACA is effective in 2015. Smaller employers, defined as those with between 50-99 employees, must comply with ACA’s “pay or play” provision beginning in 2016.
And what does “pay or play” mean? This phrase is also called the employer mandate or the “Employer’s Responsibility Share”. It refers to the provision in the ACA that requires employers to provide health insurance (the “play” part of the rule) or pay a premium or tax to a public health system that provides health coverage to individuals who do not have insurance (the “pay” part of the rule).
The choice for larger employers actually has 3 parts: play, pay, or play with premium reimbursement.
- An employer who decides to play will provide essential health benefits to all employees at an affordable rate. The benefits provided must meet ACA standards.
- An employer who decides to pay chooses not to provide health coverage and pay the tax. The penalty is $2,000 for each full-time employee if the employer fails to offer coverage to 95% (70% under transitional relief for 2015) of his full-time employees and one employee buys subsidized coverage on the exchange. Generally, the employer can exclude the first 30 employees when counting full-time employees but transitional relief changed this to the first 80 employees for 2015. Again, in 2015, the penalty applies only to large employers with 100 or more employees.
- The third option is to not offer health insurance, pay the penalty, and instead offer a health benefit reimbursement allowance. The employees will then reimburse employees for the premiums they pay for health insurance up to the allowance amount. Employees will either buy coverage individually from insurance companies or from the government’s Health Insurance Exchange.
Employers who choose the premium reimbursement route do so for several reasons. By not providing a health insurance plan, the employees are free to go to the health insurance marketplace and choose the health coverage that best serves them and their families. This path provides more flexible options for employees. And, most importantly for the employees’ pocketbook and the employer’s annual expenses, the premium reimbursement option saves them, when combined, 50% of health coverage costs. In addition, the health insurance marketplaces provides guaranteed-issue coverage and tax subsidies for lower-income employees. Together, these features make insurance as valuable as a group plan at a lower cost to both employees and employers.
What goes into an employer’s decision whether to pay or play? It’s basically a cost analysis. The employer should compare the cost of (a) the group health insurance plan to (b) the cost of the premium reimbursement plan plus penalties to (c) penalties alone.
Employers have good reason to provide some kind of health benefits to employees. Providing a benefit that his employees find valuable helps employers recruit and retain top talent. The question is whether providing a full-blown health benefit plan or providing the premium reimbursement allowance gives the employer the best cost-benefit analysis.
If you would like to talk more about the “pay or play” provision or if you have any other questions about the ACA, please contact us. We look forward to helping you as you work your way through ACA compliance.