This is the first of four weekly Affordable Care Act ("ACA") Employer Mandate Alerts. Each Alert highlights a planning consideration related to the Affordable Care Act's requirement to provide coverage to full-time employees (and their dependents) or pay a penalty (the "Employer Mandate"). In addition, each Alert links to a summary, in a question & answer format, discussing the scope and implications to employers of the legal rules governing the Employer Mandate.
In this first Alert, we offer Q&As addressing the following topics: "What is the Employer Mandate?," "When is the Employer Mandate Effective?," "Who is Eligible for a Premium Tax Credit or Cost-Sharing Subsidy?," and "What Transition Rules Apply?" The Q&As can be found by clicking on this link or the link below. A separate link is provided for the overarching Affordable Care Act summary Jones Day published in August 2012.
Like many aspects of the Affordable Care Act, the statutory and regulatory rules governing the Employer Mandate contain many technicalities, and the extent to which it may be economical for an employer to "play" rather than "pay"—or even whether an employer will be required to "pay" if it chooses not to "play"—may vary depending upon, among other things, the amount of employee compensation and the number of full-time workers an employer chooses to employ. The Alerts are intended to guide employers respecting the scope and implications of the "play or pay" rules, so as to enable them to better determine their own appropriate course.
For example, beginning in January 2014, the Employer Mandate generally imposes an annual penalty on employers if they employ more than 50 full-time employees but choose not to provide affordable health coverage. What is less well known, however, is that the penalty applies only to an employer failing to offer health coverage if one or more of its full-time employees then enrolls for insurance coverage on a so-called Exchange and actually receives either a premium tax credit or a cost-sharing subsidy also offered under the ACA. Unless a full-time employee enrolls in an Exchange and obtains the tax credit or subsidy, the employer is off the hook. This can lead to some surprising exemptions from the penalty.
Assume Employer X is a software development company with 50 full-time employees—40 are software developers whose annual income exceeds $120,000, and 10 are administrative assistants with annual income, after overtime, of no more than $40,000. None of the 40 software developers will be eligible for a premium tax credit or cost-sharing subsidy under the ACA; they are too highly compensated. Thus, Employer X is in a position of being able to avoid the penalty merely by offering health coverage to 10 of its 50 employees, which it should be able to obtain on a small business (SHOP) Exchange. It may exclude its 40 highly compensated employees from eligibility for this coverage (or require them to pay the full cost of coverage) without being exposed to the Employer Mandate penalty. And by either narrowing the eligibility for health coverage to its 10 administrative assistants only, or passing on the full cost of coverage to its software developers, it considerably reduces the risk that employers will have to bear the inflation in health costs associated with providing health coverage to the entire workforce.
This method of avoiding the Employer Mandate penalty can also be used with employees of larger employers whose income is too high for them to qualify for a premium tax credit. It should be noted that it is possible to avoid the Employer Mandate penalty but, at the same time, incur liability under certain nondiscrimination rules. Therefore, any new structure should be reviewed for compliance under both sets of rules.
We hope you enjoy these Affordable Care Act Employer Mandate Alerts, and the practical observations contained within them, and find them useful to your health benefits planning.
Q&As on Deciding Whether to Play or Pay Under the Affordable Care Act
The Affordable Care Act at 2-1/2—What Employers Should Expect Now
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
