Written by Jennifer Knudson
To Pay or Play Under the Affordable Care Act (ACA) – That is the Question
The Patient Protection and Affordable Care Act (ACA), better known as “Obamacare,” was signed into law by President Obama on March 23, 2010. Perhaps one of the more controversial laws of our time, it implements comprehensive health care reform with health insurance and benefit reforms. Since the ACA was signed into law, there have been many changes to health insurance plan designs that have already been implemented. Many of these changes, however, are scheduled to be implemented in 2014 and later, including the Pay or Play Rule.
What is the Pay or Play Rule?
One of the most significant changes under the ACA, the Pay or Play Rule, was originally scheduled to be implemented in January of 2014. However, on July 2, 2013, much to many people’s surprise, the US Treasury Department and the White House announced that the Pay or Play Rule’s implementation would be delayed one year until January 1, 2015.
The Pay or Play Rule under the ACA requires large employers (those with 50 or more full time or full time equivalent employees) to provide affordable health insurance coverage (“Play”) to its full time employees and their dependents and/or face a penalty (“Pay”). Large employers will either:
- Pay. The Rule provides for each month that a large employer does not offer any health insurance coverage (or provide minimum essential coverage) to 95% of its full time employees and their dependents (children up to age 26 but not including a spouse), the employer will pay an annualized penalty of $2000 per full time employee, excluding the first 30 full time employees. This Pay penalty is computed on a monthly basis and only applies if at least one full time employee obtains insurance through a health insurance exchange and receives a premium credit or subsidiary for such coverage (See below). OR
- Play. The Rule provides for each month that a large employer does offer minimum essential coverage to 95% of its full time employees and their dependents but the coverage is not affordable or fails to provide minimum value (as defined under the regulations), the employer will pay an annualized penalty of $3000 per full time employee who purchases insurance on a health care exchange and receives a premium credit or subsidiary. This “Pay” penalty is computed on a monthly basis and only applies if at least one full time employee obtains insurance through a health insurance exchange and receives a premium credit or subsidiary for such coverage. In no event can the penalty for “Playing” exceed the “Pay” penalty if the “Pay” penalty had applied.
If no full time employee qualifies for a premium credit or subsidiary when purchasing on an exchange or if no full time employee purchases coverage on the exchange, the employer is not subject to the penalties. If the employer offers minimum value coverage that is affordable, no employee will qualify for a premium credit/subsidiary and thus, the employer does not incur a penalty.
Who is Eligible for a Premium Credits or Subsidiaries?
The purpose of the ACA’s Premium Credits and Subsidiaries are to make health insurance coverage affordable (less than 9.5% of an employee’s household income) through an exchange. An individual is eligible for premium credits or subsidiaries when purchasing the insurance on the health insurance exchange if: (a) the household income does not exceed 400% of the Federal Poverty Level (currently $11,490 for a single individual), (b) the employee is not eligible for Medicaid or certain other government programs, (c) the employee is enrolled for Exchange coverage and is not enrolled in employer coverage, and (d) the employer either does not offer coverage at all or does not offer coverage that is both affordable and provides minimum value.
Affordable coverage is affordable if the employee’s portion of the premiums do not exceed 9.5% of the employee’s household income. A plan provides minimum value if it does not cover at least 60% of cost of the medical care provided.
Each state had the option of choosing who would run the exchange in their state. The state of Wisconsin opted to have the federal government run its exchange, rather than running the exchange itself. The exchanges are scheduled to be launched by the federal government on October 1, 2013 for coverage beginning on January 1, 2014. Employers are also required to provide notices to their employees about the exchanges starting on October 1, 2013.
Are you a Large Employer?
A large employer is one who employed an average of 50 or more full time equivalent employees (FTE) in the previous calendar year. This calculation of FTEs is done on a monthly basis but the penalty, if any, is paid annually.
In calculating the number of FTEs, an employer needs to remember that full time work under the ACA is based on a scheduled workweek of 30 hours, not the typical 40 hours that has traditionally defined a full time status. To calculate the number of FTE employees, the employer must add the total number of full time employees for each calendar month (those scheduled to work 30+ hours per week) plus the sum of the total number of FTE employees for each calendar month, all divided by 12. These calculations must also include any seasonal part time or seasonal full time employees and include all hours worked or paid time off for vacation, holiday, disability leave, etc. The number of FTEs for each calendar quarter equals the aggregate number of hours of service for that month by the non-full-time employees (but not more than 120 hours for an employee) divided by 120.
Recently, the news media has reported that employers are limiting their hiring to remain below the 50 or more employee threshold under the ACA. However, employers need to keep in mind that under the ACA calculations, they may be considered a large employer without ever having employed a single full-time employee. Even if this is the case, however, the Pay or Play penalty does not consider FTEs and it will not be implicated unless the employer has a full time employee working for it.
What is a Controlled Group and Why does it Matter?
A Controlled Group is a concept that the IRS uses in many instances to group together several entities and treat them as one entity if there is sufficient ownership between the entities (a “Controlled Group”). Under the ACA, the concept of a Controlled Group applies when calculating whether the entities should be combined for purposes of determining if they constitute a large employer as a group. For purposes of determining a Controlled Group, the companies need not be integrated or be in similar industries. Rather, the emphasis is the common control or ownership of the entities.
Controlled Groups include entities under common control in a parent-subsidiary relationship, a brother-sister relationship, or a combined group relationship. A parent-subsidiary group under common control means one or more chains of organizations connected through ownership of a controlling interest (ownership of 80% or more) with a common parent organization if: a controlling interest in each of the organizations, except the common parent organization, is owned by 1 or more of its other organizations, and the common parent entity owns a controlling interest in at least 1 of the other organizations, excluding, in computing such controlling interest, any direct ownership interest in such other organizations. See Treas. Reg. §§1.414(c)-2(b). A brother-sister group under common control means 2 or more organizations if the same 5 or fewer persons who are individuals, estates or trust own a controlling interest (80% or more) in each organization and taking into account the ownership of each such person only to the extent such ownership is identical with respect to each such organization, such person are in effective control (over 50%) of each organization. See Treas. Reg. §§1.414(c)-2(b). Finally, a combined group under common control means any group of 3 or more organizations if (1) each such organization is a member of either a parent-subsidiary or brother-sister group under common control, and (2) at least one such organization is the common parent organization of a parent-subsidiary group under common control and is also a member of a brother-sister group under common control. See Treas. Reg. §§1.414(c)-2(b).
The concern under the ACA is whether multiple entities constitute a Controlled Group (whether in a parent-subsidiary, a brother-sister, or a combined group relationship) causing the group to be deemed a large employer by virtue of these relationships and subjecting the group to the ACA when the entity standing alone would not have this designation.
Do Children and Spouse’s Interest Count in Determining if I am a Large Employer?
Under the IRS rules, in certain circumstances, certain interests of various family members may be attributable to an individual for purposes of determining if an individual is considered a large employer. Under the IRS regulations, an individual shall be considered to own an interest owned, directly or indirectly, by or for the individual’s children who have not attained the age of 21 and if the individual has not attained the age of 21, an interest owned, directly or indirectly, by or for the individual’s parents. See Treas. Reg. §§1.414(c)-4(b)(6)(i). If an individual is in effective control (over 50%), both directly and with the application of the preceding sentence, of an organization, then such individual shall be considered to own an interest in such organization that is owned, directly or indirectly, by or for the individual’s parents, grandparents, grandchildren, and children who have attained the age of 21. See Treas. Reg. §§1.414(c)- 4(b)(6)(ii). Finally, generally speaking, an individual shall also be considered to own an interest owned, directly or indirectly, by or for his or her spouse, other than a spouse who is legally separated from the individual under a decree of divorce or a decree of separate maintenance. See Treas. Reg. §§1.414(c)-4(b)(5). In other words, an individual may need to count the interests of its spouse, children, grandchildren, parents, and grandparents with its own interests when determining if it is a large employer.
The following is an example of how the family rules can increase an individual’s actual ownership and subject him or her to qualify as a large employer. Assume Individual F owns directly 40 percent of the profits interest of the DEF Partnership. His son, M, 20 years of age, owns directly 30 percent of the profits interest of DEF, and his son, A, 30 years of age, owns directly 20 percent of the profits interest of DEF. The 10 percent remaining of the profits interest and 100 percent of the capital interest of DEF is owned by an unrelated person.
F owns 40 percent of the profits interest in DEF directly and is considered to own the 30 percent profits interest owned directly by M. Since, for purposes of the effective control test described in this section, F is treated as owning 70 percent of the profits interest of DEF, F is also considered as owning the 20 percent profits interest of DEF owned by his adult son, A. Accordingly, F is considered as owning a total of 90 percent of the profits interest in DEF.
Minor son, M. owns 30 percent of the profits interest in DEF directly, and is considered to own the 40 percent profits interest owned directly by his father, F. However, M is not considered to own the 20 percent profits interest of DEF owned directly by his brother, A, and constructively by F, because an interest constructively owned by F by reason of family attribution is not considered as owned by him for purposes of making another member of his family the constructive owner of such interest. Accordingly, M is considered as owning a total of 70 percent of the profits interest of the DEF Partnership.
Adult son, A, owns 20 percent of the profits interest in DEF directly. Since, for purposes of determining whether A effectively controls DEF, A is treated as owning only the percentage of profits interest he owns directly, he does not satisfy the condition precedent for the attribution of the DEF profits interest from his father. Accordingly, A is considered as owning only the 20 percent profits interest in DEF which he owns directly.
The Pay or Play Rule has not been repealed; it has only been delayed. This delay does not affect any other provision of the ACA or its implementation including but not limited to the individual mandate to obtain coverage. Employers need to comply with the provisions of the ACA already in effect and should prepare to comply with the provisions of the ACA set to take effect in the near future.