Health Care Reform: Preparations For 2014 Pay Or Play Rules Should Begin Now

by Franczek Radelet P.C.

By far the most important issue for employers to consider under the Affordable Care Act (ACA) is the employer “free rider penalty,” often referred to as “pay or play.” Instead of forcing employers to provide group health insurance to employees, ACA imposes a tax on employers if they don’t offer coverage to all or substantially all of their full-time employees (and their dependents), or if that coverage fails to meet certain conditions. This “pay or play” tax is memorialized in Section 4980H of the Internal Revenue Code.  The IRS recently issued comprehensive proposed regulations on pay or play, which summarize and synthesize previous IRS notices and sub-regulatory guidance. 

The pay or play rules will be in effect for large employers beginning on January 1, 2014 (though transitional relief applies to employers with non-calendar year plan years, pursuant to the IRS proposed regulations). Large employers for this purpose include employers which have, on average, at least 50 full-time employees on business days during the preceding calendar year (part-time employees are included in this determination, counting each employee’s full-time equivalency). Employers within the same controlled group are considered the same employer and must be aggregated for this determination. Employers subject to the pay or play rules should begin to look at how they structure their health insurance coverage for employees, well in advance of 2014.

The amount of the tax depends both on whether the employer offers coverage to all or substantially all of its full-time employees, as well as the value and affordability of that coverage. Specifically, Section 4980H imposes one of two potential taxes:

A.   Tax on Employers Not Offering Minimum Essential Coverage

If an employer does not offer health coverage to all or substantially all of its full-time employees who work at least 30 hours per week (and their dependents), it will be subject to a tax of $2,000 per year for each of its full-time employees.  Under the IRS proposed regulations, the term “substantially all” allows employers to satisfy the rules by offering coverage to at least 95% of the employer’s full-time employees (and their dependents). The first 30 full-time employees are not counted for purposes of the tax. Stated simply, the failure to offer coverage to substantially all full-time employees and their dependents results in a “headcount tax,” calculated based on the number of full-time employees (but the first 30 full-time employees are “free”). The headcount tax amount will be adjusted for inflation after 2014.

B.  Tax on Employers Offering Minimum Essential Coverage Which is Unaffordable or Fails to Provide Minimum Value

If the Company offers coverage to all of its full-time employees, but this coverage is either (a) “unaffordable” (i.e., the premium to be paid by the employee is more than 9.5 percent of the employee’s income); or (b) fails to provide “minimum value” (i.e. covers less than 60% of the total allowed costs of benefits), then the employer’s tax is calculated using a different method. In this case, the employer must pay an annualized tax of $3,000 each year (also adjusted for inflation) with respect to each full-time employee who opts out of the employer’s group health plan and receives subsidized coverage under a state health exchange instead. The annual penalty is capped at $2,000 times the total number of full-time employees in excess of 30 (also adjusted for inflation).

Key Decision Points

An exhaustive explanation of possible pay or play strategies is beyond the scope of this alert. There is no one-size-fits-all approach. However, employers should focus on the following key decision points as soon as possible:

Is An Exemption From Pay or Play Within Reach?

For employers who barely exceed the 50 full-time employee threshold, it may be possible to structure the work force or the controlled group so that the threshold is not exceeded. Some employers may consider mild downsizing to avoid pay or play rules entirely.  Further, under transitional relief in the IRS proposed regulations, employers may utilize a six-month period in 2013 (rather than the entire 2013 calendar year) to determine whether they exceeded the 50 full-time employee threshold, and are subject to pay or play rules in 2014.

Determine the Methodology for Counting “Full-Time Employees” Now

To effectively gauge risk and apply the rules, the employer must understand which of its employees are full-time employees. The answer will be clear for many employees, but is more complicated when dealing with variable hour or seasonal employees. The IRS established safe-harbor methods for counting FTEs (in IRS Notice 2012-58) by using a “standard measurement period,” and a “stability period.” The lengths of these periods and their starting and ending dates are set by each employer and may vary between different categories of employees. Employers should begin exploring which methodology they will choose now, because determinations about which employees are full-time employees would optimally be made in advance of the open enrollment period occurring before 2014.

In addition, as specified in the IRS proposed regulations, employers have different options for determining hours of service for non-hourly employees.  Further, the IRS proposed regulations provide specific rules for educational employers, to take into account the unique circumstances for certain school employees who only perform services while school is in session.

Employer Choice Remains

There is no mandate for employers to provide employee health coverage. Employers will remain free to either offer health coverage for their employees, or not, as well as determine which particular classes employees are eligible for coverage (subject to nondiscrimination rules). Therefore, the pay or play rules should not be understood as a mandate to sponsor a group health plan. Employers that don’t “play” will simply “pay” a tax instead. Depending on the taxes that employers are willing to bear, as well as the cost of insurance, some employers may decide to both play (for one group of employees) and pay (for a different group).

Flexibility With Respect to Part-Time Employees

It is important to note that the taxes under 4980H can only be imposed if the employer fails to offer coverage to all or substantially all of its full-time employees, or if a full-time employee opts out of the employer’s coverage due to its unaffordability or failure to provide minimum value. Part-time employees are thus not part of the tax equation. Employers could decide to restructure their workforce in some cases (by hiring more part-time employees), rather than making drastic benefits coverage changes. Employers should be careful to make sure that part-time employees do not exceed 30 hours per week during the relevant measurement period (if they average 30 hours per week or more, they are full-time employees under ACA regardless of the employer’s intent).

Dependent Coverage

The IRS proposed regulations clarify that coverage must only be offered to the employee and the employee’s dependent children to satisfy the pay or play rules.  Under the proposed regulations, coverage need not be offered to the employee’s spouse.  Therefore, employers may have some flexibility in how they structure dependent coverage, and spousal coverage in particular, to avoid a tax under Section 4980H. 

If the Plan Isn’t Broken, Don’t Fix It

If an employer is happy with its current group health arrangement, and offers it to all full-time employees and dependent children, and the plan is sufficient to attract and retain a high quality workforce, it is possible that no changes are necessary at all. The plan may provide minimum value already, and the level of employee premiums may make it “affordable” under ACA. Or, the number of employees for whom coverage is “unaffordable” may be insignificant and the resulting tax may be immaterial. Minimum value and affordability rules should be examined closely to determine whether the employer’s plan already passes muster.

Be Aware of Eligibility Gaps for Employees Working In Excess of 30 Hours

Some employer group health plans permit employees to participate only if they work at least 35 hours per week. Such an eligibility rule will likely result in the “headcount tax” under 4980H because employees working between 30 and 35 hours per week would not be eligible for coverage. Employers hoping to avoid the headcount tax should consider amending plan eligibility standards (by extending coverage to employees working 30 or more hours per week) to avoid this issue.

More Information

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.

© Franczek Radelet P.C. | Attorney Advertising

Written by:

Franczek Radelet P.C.

Franczek Radelet 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.
Custom Email Digest
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.