Pay Or Play? Which Decision is right for you?

Diane Glover

Feb 22, 2013

The first question employers need to resolve is whether or not it has enough employees to be subject to the pay-or-play requirement (also known as the employer “shared responsibility” requirement). The simple definition — employers with 50 or more full-time equivalent workers — doesn’t provide the full answer.

First, “full-time equivalent” (FTE) covers employees who average 30 (not 40) hours per week. The time period during which the employee count is determined is the prior year — in other words, 2013, for purposes of whether you’ll face the mandate in 2014.

Note: The IRS, recognizing that determining FTE status can become complicated based on timing issues and seasonal work patterns, issued some “safe harbor” rules last year to help with the determination. (IRS Notice 2012-58)

lores_sign_question_mark_bzAttempting an End-Run?

The law also attempts to discourage employers near the 50 FTE threshold to drop below it by cutting back employees’ hours to less than 30 so that they flunk the FTE test. It does so by requiring that an employer add up all of the hours worked by part-time workers over the course of a month, then divide that number by 120. The number that results from that calculation is added to an employer’s FTE total to determine where it is in relation to the 50 FTE minimum.

Note: Even if the calculation determines that an employer is subject to the pay-or-play requirement, it is not obligated to provide health benefits to part-time employees.

Some employers could, in theory, lay off a requisite number of employees to fall below the 50 FTE threshold, and deal with them as independent contractors. Of course, simply calling a worker an independent contractor doesn’t make it so. Independent contractor status is determined by a multi-pronged test.

Assuming you are subject to the “shared responsibility” provisions, and even if you are already providing some level of health benefits, you’ll need to determine whether your benefit package provides at least 95 percent of your employees a benefit package that meets “minimum essential coverage” standards. (The fine points of this remain a work in progress).

If the answer is no, and you don’t beef up your benefits, the “pay” requirement kicks in. (This would also be true if you didn’t offer any health plan.)

The penalty is the annualized equivalent of $2,000 a year for each full-time employee, minus up to 30 employees, if at least one full-time employee signs up for health benefits through a health exchange “and receives a premium tax credit or cost-sharing reduction from the government.” Therefore, the penalty for an employer with 70 FTEs would be 70 minus 30 equals 40 times $2,000 equals $80,000.

Passing the “Value” Test

But even if an employer provides minimum essential coverage to enough employees, another hurdle it has to clear is whether the employees receive a minimum value for the coverage. That essentially requires that the employer is paying at least 60 percent of the cost of the benefit. A parallel test is whether the employee cost is deemed “affordable” to the employee.

A “safe harbor” standard is whether or not it exceeds 9.5 percent of an employee’s household income.

If either the “value” test or the affordability test is not met, something called a “Subsection (b) penalty” kicks in. It is calculated as $250 per month for each FTE employee who enrolls in a health exchange and is eligible, based on income, to receive federal tax credits.

Eligibility for tax credit and subsidies ends at 400 percent of the U.S. official poverty level. Eligibility starts once an individual, who does not have access to a qualified affordable plan through employment, is deemed to be able to afford insurance with an exchange credit (approximately 100 percent of the poverty level).

If you determine that, based on your current health benefits package, you won’t meet the employer responsibility standards of the Affordable Care Act next year, the financial dimension of the decision you’ll face is whether it’s cheaper to drop benefits and pay the penalty, or improve benefits to meet the requirements. In some circumstances, the penalty would be cheaper.

Don’t Neglect Human Resource Strategy

But what about the human resource strategy considerations? Basic issues include the impact on employee morale, as well as how critical health benefits are to your ability to recruit strong talent. You may already be exceeding the Affordable Care Act’s requirements — and employees may consider it a fair substitute for higher wages.
Tax considerations also can play a role. If you were to drop health benefits and simply pay employees more so they can go out and secure their own health benefits via a health care exchange, the added compensation is taxable to them, unlike the value employer provided health benefits (assuming it falls below so-called “Cadillac” benefit levels). Also, the penalties you would pay, unlike the cost of providing health benefits, would not be tax deductible for your company.

Finally, a decision to maintain a health benefit plan that’s generous enough to satisfy the Affordable Care Act’s standards isn’t a permanent one. An employer may simply decide to meet the standards in 2014, and see how things play out with health exchanges and the actions of other employers who it competes with for employees.

About The Author

As the Manager of Practice Growth, Diane focuses on the market awareness and growth of Kirsch CPA Group…

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