For Employers, Pay-or-Play Proposals Could Be Worse, Much Worse

by Ogletree, Deakins, Nash, Smoak & Stewart, P.C.

Could employee benefits regulatory activity under the Patient Protection and Affordable Care Act (Act) be taking a turn toward common sense?

Based on the new proposed rules on the “pay-or-play” provision under the Act—only those on the federal payroll still say “shared responsibility”—the answer may be a qualified “yes.” (The “pay-or-play” mandate refers to an employer’s option under the Act to provide the required coverage to all full-time employees (play) or pay penalty taxes for not offering coverage (pay).)

Published in the Federal Register on Jan. 2, the proposals represent the latest attempt by the Internal Revenue Service (IRS) to put into effect the requirements of Internal Revenue Code (Code) section 4980H. Code section 4980H was added by the Act and requires large employers to offer minimum essential coverage to “full-time employees” and their “dependents.” Failure to offer such coverage would trigger a penalty tax if any full-time employee is not offered such coverage, applies for coverage through one of the public insurance exchanges set to come online in 2014, and qualifies for federal financial aid for that coverage. Those penalty taxes differ depending on whether an employer failed to offer any minimum essential coverage or whether it failed to offer coverage that was “affordable” and provided “minimum value” under federal standards.

Here is a recap of some of the highlights of the proposed rules:

  • “Pay-or-play” penalties under Code section 4980H would be applied separately to each member of a controlled group, rather than on a controlled group-wide basis. This represents good news, for example, where some subsidiaries of a parent company may want to “play” (that is, provide coverage), while others “pay” the relevant penalty taxes. Note that these proposed rules would not affect other legal rules that may hinder employer plans to provide benefits for only certain subsidiaries.
  • For purposes of the pay-or-play requirements, “dependents” would be children as defined in Code section 152(f)(1). This definition includes step-children and foster children, but it does not include other dependents such as spouses or domestic partners. The proposed rules also contain a transition rule for employers that do not currently offer dependent coverage.
  • The “affordability” standards under Code section 4980H may in several ways be easier to meet than might have been expected. Consistent with prior IRS guidance, the proposed rules appear to let employers evaluate affordability on the basis of self-only coverage, even in cases where an employee covered his or her family. The proposed rules also contain three design-based safe harbors that would enable employers to meet the affordability standard by setting employee costs for self-only coverage based on W-2 wages, the federal poverty level, or an employee’s rate of pay.
  • Under the statute, if even one full-time employee of a large employer was not offered coverage, applied for coverage through a new insurance exchange, and qualified for federal aid for that coverage, an employer would face a penalty of $2,000 per full-time employee in its workforce (minus the first 30). This would be true even if every other full-time employee had properly been offered coverage. Under a de minimis standard in the proposed rules, no penalty would apply where an employer had properly offered coverage to at least 95 percent of its full-time employees. Here again, this standard typically would apply separately to each member of a controlled group, rather than on a controlled group-wide basis.
  • The safe harbor that the IRS has gradually developed for employers to evaluate full-time status across a workforce features “measurement” periods to gauge how many hours an employee works and then “stability” periods during which the employee would be characterized as full-time or not full-time. This approach is clearly ill-suited to educational institutions that run regularly on an academic year, and the new proposed rules contain special provisions designed to adapt the safe harbor to that industry.

All this is not to say that the proposed rules are ideal. The rules to evaluate which employees are full-time remain frustratingly complex. And the rules governing which employers are “large” employers will put a burden on small employers that often lack compliance resources.

Our Employee Benefits Practice Group will present an interactive webinar on January 16, 2013, focusing on strategic considerations for employers in these proposals and other recent health care reform developments.

Timothy J. Stanton is a shareholder in the Chicago office of Ogletree Deakins.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Ogletree, Deakins, Nash, Smoak & Stewart, P.C. | Attorney Advertising

Written by:

Ogletree, Deakins, Nash, Smoak & Stewart, P.C.

Ogletree, Deakins, Nash, Smoak & Stewart, P.C. on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.