ACA 2015: “Play or pay” on the way … and more

This year has been a trial run for the shared responsibility — or “play or pay” — provision of the Affordable Care Act (ACA). Large employers (as defined under the act) were supposed to have been at risk for financial penalties under the provision this year. But, with the penalties temporarily deferred, that risk was effectively eliminated.

Barring any forthcoming legislative, regulatory or judicial action to the contrary, the play-or-pay provision essentially takes effect Jan. 1, 2015. Although the incoming Republican majority in the U.S. Senate increases the prospect of significant changes to the ACA, employers must nonetheless approach next year as if play-or-pay is on the way. Let’s look at this important development as well as some other forthcoming new rules and issues.

New rules

For large employers, play-or-pay is by far the most significant impending 2015 ACA development. Not to be lost in its shadow, however, are a few other provisions kicking in next year, including:

Information reporting rules. For 2015 plan years, large employers must complete IRS Form 1094-C and Form 1095-C, describing who’s covered by their health care plan. These forms won’t be filed until 2016, but employers will need to track information for them throughout the year.

Temporary reinsurance program fees. By Jan. 15, self-insured employers must pay the first installment of their fee under the “temporary reinsurance program” for 2014. The fee is $63 per covered life for 2014. The $63 amount is expected to drop to an estimated $44 for 2015, payable in 2016.

The ACA stipulated that, via this fee, self-insured plans will collect an aggregated dollar amount. So the actual 2015 per-participant fee will be calculated when the government has enough data to estimate the number of covered employees in 2015. Also, for 2015, self-insured plans that are also self-administered, rather than users of third-party administrators, will be exempt from the fee.

Physicians and quality of care. This provision doesn’t affect employers directly, but it may influence the way physician services are priced in the future. That is, the government will begin linking physician payments (such as Medicare) to the quality of care provided.

Individual impact

The ACA, of course, incentivizes large employers to offer health care coverage. Under the “individual mandate,” it seeks to drive uninsured people to procure coverage for themselves.

Tax penalties for lacking coverage in 2015 — payable by individuals in 2016 when they file their 2015 tax returns — will jump dramatically from those applicable to 2014, the first year the individual mandate went into effect. Specifically, for 2014, the penalty is the greater of $95 ($47.50 for children under 18) up to a maximum of $285 per family or 1% of income above the tax filing threshold (around $10,000). The penalty applicable to 2015, in contrast, will be the higher of:

  • $325 per person ($162.50 for children under 18) up to a maximum of $975 per family, or
  • 2% of household taxable income above the filing threshold.

In 2016, it will jump again, to the greater of $695 per person ($347.50 for children under 18) up to a maximum of $2,085 or 2.5% of household income above the filing threshold.

How does all of this relate to employers? Well, the goal of the individual mandate is to drive more healthy people into the national risk pool, ultimately bringing down insurance costs for everyone — including employers investing in health care coverage for their workforces.

The individual mandate, however, has been politically controversial. And with full Republican control of Congress, it could be subject to legislative challenge in 2015.

Subject or exempt

Getting back to play-or-pay, how do you determine whether you’re subject to the provision and its potential penalties? Doing so begins with calculating the applicable size of your organization — namely, your 2014 employee census.

Under the ACA, a full-time employee generally is someone employed on average at least 30 hours a week, or 130 hours in a calendar month. (Note: One potential change to the ACA proposed by congressional Republicans is raising this standard to 40 hours a week.) An employer is deemed “large” under the ACA if it has at least 50 such full-time employees or a combination of full-time and part-time employees that’s equivalent to at least 50 full-time employees.

Determining whether your organization can be defined as “large” entails totaling your part-time employees’ monthly hours and dividing that figure by 120 to calculate full-time equivalent employees (FTEs). Then, you must add that figure to the total number of actual full-time employees.

However, for 2015, “midsize” employers with, on average, at least 50 but fewer than 100 full-time employees or the equivalent during 2014 can apply for a one-year exemption from play-or-pay.

To qualify, you need to have maintained the size and aggregate hours of service of your workforce. That is, you cannot have reduced your workforce or overall hours of employee service to qualify for the exemption. You also must officially certify that you’ve met these requirements.

Bear in mind that this transitional relief doesn’t apply to the new information reporting rules mentioned above. Those take effect without exception in 2015.

Rules and requirements

If you’re subject to the play-or-pay provision and can’t claim the midsize-employer exemption described above, you’ll incur a financial penalty next year if:

  • You don’t offer at least 70% of your full-time employees “minimum essential” health coverage that is “affordable” and provides at least “minimum value,” and
  • One or more of your full-time employees buys coverage from a Health Insurance Marketplace and receives a premium tax credit.

Note that the 70% minimum is another form of transitional relief. This minimum was originally set to be 95%, and it’s scheduled to go up to that level for 2016.

“Minimum essential” coverage is provided by “eligible employer-sponsored plans.” These include plans offered in a state’s small- or large-group market and self-funded plans, but not certain limited-coverage plans, such as dental-only plans.

Keep in mind that, since the ACA was signed into law in 2010, various additional requirements have gone into effect for health plans, unless they’re grandfathered. Examples include:

  • Free preventive care (including birth control services, with exceptions for certain employers),
  • Coverage of children up to age 26,
  • No annual limits,
  • No lifetime limits, and
  • No exclusion from coverage for pre-existing conditions.

For coverage to be deemed “affordable,” the employee’s share of its cost must be 9.5% or less of his or her annual household income. (The IRS offers “safe harbor” formulas for satisfying the affordability test if you’re unsure of whether you meet the 9.5% test.)

The standard measure of “minimum value” is that the plan must cover at least 60% “of the total allowed cost of benefits that are expected to be incurred under the plan,” according to the IRS. Final IRS regulations define alternative minimum value tests by incorporating definitions previously issued in proposed regulations.

If your plan satisfies the affordability and minimum value tests, employees are ineligible to receive tax credits for buying a health plan via a public Health Insurance Marketplace. In that scenario, you wouldn’t be penalized if one or more employees were to do so.

Penalty in play

And that financial penalty we mentioned? The “pay” consequence of failing to meet the “play” standards is $2,000 per actual full-time employee in excess of 30 full-timers. FTEs aren’t included for purposes of the penalty calculation.

The penalty is calculated on a monthly basis, so violating the play-or-pay provision for less than a year may result in being liable for a lesser amount. The penalty likely will be lower if you do offer minimum essential coverage but that coverage doesn’t meet the affordable and/or minimum value criteria.

Expanded reach

In 2015, employers will witness an expansion in the reach of the ACA — particularly those with at least 100 full-time employees or the equivalent that either don’t offer health care benefits that satisfy the act’s standards or don’t offer coverage at all. A year of operating experience subject to a very real penalty will give affected employers time to evaluate the decision of whether to play or pay.

Yet hard costs won’t be the only variable in that decision. Also important will be an evolving labor market in which skilled workers may become harder to find as more and more employers offer inviting health care coverage because of the ACA.