What Coverage Must Employers Offer to Avoid “Play or Pay” Liability?
Question: Our company recently grew to become an applicable large employer (ALE) under the Affordable Care Act (ACA). As the ACA remains in effect for the time being, could we get a refresher on what health care coverage must be offered to our employees?
Answer: Of course. There are two types of penalties under the employer shared responsibility provisions of Internal Revenue Code Section 4980H — also known as the ACA’s “play or pay” provision. What health coverage must be offered depends on the type of penalty.
Each penalty may be triggered if a full-time employee buys coverage on a Health Insurance Marketplace (also known as an “exchange”) and receives premium tax credits. And only an ALE may be subject to penalties. As you’re no doubt aware, an ALE is generally an employer that employed 50 or more full-time employees, including full-time equivalents, during the previous calendar year.
Distinguishing Between the Penalties
Under Sec. 4980H(a), an ALE may be subject to a monthly penalty for failure to offer enough (generally, at least 95%) of its full-time employees and their dependents the opportunity to enroll in minimum essential coverage (MEC). Such coverage includes most employer-sponsored group health plans, but not excepted benefits such as limited-scope dental and vision benefits. The play-or-pay penalty is assessed based on the number of full-time employees for the month — including those that received a MEC offer.
Under Sec. 4980H(b), an ALE may be subject to a monthly penalty if it offers MEC to the required number of full-time employees (and their dependents), but the coverage offered to full-time employees doesn’t provide “minimum value” or isn’t “affordable.” This penalty is assessed only with respect to full-time employees who actually receive a premium tax credit, so the ALE’s potential exposure is much less under the Sec. 4980H(b) penalty.
A plan provides minimum value if its share of the cost of benefits is at least 60% and provides substantial coverage of inpatient hospital services and physician services. Employer-sponsored coverage is considered affordable if the employee’s cost for self-only coverage doesn’t exceed 9.5% (indexed for inflation) of the employee’s household income for the taxable year.
Notably, for purposes of a potential penalty under Sec. 4980H(b), the offer of minimum value, affordable coverage is required to be made only to eligible full-time employees. Dependents need only be offered an opportunity to enroll in MEC for purposes of avoiding both play-or-pay penalties, and such coverage needn’t provide minimum value or be affordable.
For this purpose, “dependents” means an employee’s children, as defined under Internal Revenue Code Section 152(f)(1), who are under 26 years of age. (It doesn’t include stepchildren or foster children.) An ALE isn’t required to offer any coverage to an employee’s spouse in order to avoid play-or-pay penalties.
One interesting wrinkle to all of this is that, earlier in the year, President Donald Trump signed an Executive Order saying that the play-or-pay penalties may not be enforced. Nonetheless, as of this writing at least, these provisions remain in place and employers shouldn’t consider compliance optional.
If you have questions about ALE health care coverage, please contact Ron Present, Partner and Health Care Industry Group Leader, at firstname.lastname@example.org or 314.983.1358.