Managing the ACA Employer Pay or Play Penalties: The Best Path Forward
Managing the ACA Employer Pay or Play Penalties: The Best Path Forward

Managing the ACA Employer Pay or Play Penalties: The Best Path Forward

As we’ve mentioned before, the Affordable Care Act (ACA) introduces many new requirements for employers. One of the most significant requirements is the employer “pay or play” penalties, which went into effect January 1, 2015 (subject to some transitional rules). New reports—which the IRS will use to determine liability for penalties—must be distributed to employees in January 2016. As such, many companies are scrambling to keep up and striving to figure out what their obligations are. While understanding the various requirements is the first step to ACA compliance, it is only half the battle. To ensure success with the most complex requirements of the law, it is important to have the right plan in place and understand just how an ACA reporting software can help.

So, what can companies do to start on the right path toward ACA compliance? The journey begins with answering three crucial questions.

1. Is the company considered an applicable large employer under the ACA?

Application of the ACA employer pay or play penalties differ based on company size, so the first step is for the company to identify where it fits in. The government considers any company with 50 or more full-time equivalent (FTE) employees to be an applicable large employer (ALE) and thus subject to penalties if they fail to provide health coverage to their full-time employees. Yet, determining whether companies qualify as an applicable large employer can be more challenging that it would seem—a simple head count won’t do. The key distinction is the number of FTE employees, which is a combination of the number of regular full-time employees plus the number of hours worked per month by part-timers, divided by 120. Should that number be 50 or more, the company is considered an applicable large employer. If a company is part of a controlled group, employees of all members of the group count toward the threshold. See this IRS page for more details.

2. Are the health care benefit plans offered to employees considered affordable?

The main purpose of the ACA is to make health coverage more affordable, but this isn’t just a vague idea: the ACA states that “affordable” coverage is employee-only coverage for which the employee contribution does not exceed 9.5% of the employee’s household income. Still, this brings up another question: since an employer is unlikely to know the exact amount of an employee’s household income, how can the employer calculate whether the employer’s coverage is affordable? Fortunately, the IRS provides three safe harbors for determining whether health coverage is affordable. In lieu of household income, an employer may use: (1) Box 1 Form W-2 wages; (2) an employee’s rate of pay multiplied by 130 hours per month of employment; or (3) the federal poverty line.

Under the Form W-2 safe harbor, coverage is considered affordable if the contribution for employee-only coverage is less than or equal to 9.5% of the amount reported in Box 1 of the employee’s Form W-2 divided by the number of months that the employee was employed. The drawback of the Form W-2 safe harbor is that the Box 1 amount is not knowable until year-end.
Under the rate of pay safe harbor, coverage is considered affordable if the contribution for employee-only coverage is less than or equal to:

9.5% X (employee’s hourly rate of pay X 130 hours)

For example, let’s say the contribution for employee-only coverage under a company’s lowest value plan is $100 per month. The $100 contribution would not be affordable for an employee making $8.00 per hour (because $100 is more than $98.80) and would be affordable for an employee making $9.00 per hour (because $100 is less than $111.15).

9.5% X ($8.00 X 130) = $98.80
9.5% X ($9.00 X 130) = $111.15

There is still a third option for calculating affordability: the federal poverty line. If the monthly employee contribution for a company’s lowest cost, employee-only coverage is less than or equal to $92.38, the coverage is affordable under the federal poverty line safe harbor. To calculate this type of affordability for 2015, you would use $11,670, which is the 2014 federal poverty line for a single individual. Accordingly, a monthly contribution that did not exceed $92.38 in 2015 ($11,670/12 x 9.5% = $92.38) would be considered affordable.

3. Which employees are eligible for coverage?

The ACA imposes penalties on employers that don’t offer affordable, minimum value healthcare coverage to substantially all full-time employees. But again, figuring out which employees are full-time isn’t that simple. While “full-time” traditionally meant a threshold of 40 hours per week, the ACA lowers that threshold to include those working at least 30 hours per week, or those who work at least 130 hours per month. How is that determined? The IRS provides two options: (1) the monthly measurement method (analyzing the number of hours worked by each employee for each calendar month); or (2) look-back measurements (which give employers greater predictability in determining their full-time employee status).

By answering the above questions, it will be easier to determine your company’s obligations in these final months before you have to file information with the IRS. The companies that delay their ACA compliance strategy will be at a significant disadvantage and may incur significant penalties. However, by answering these three crucial questions, it will be easier to move forward with the most complex aspects of the ACA.

Related Resources and Articles:

Case Study: Paycor and Jungle Jim's Navigate the Complexities of the ACA

Blog Article: Preparing for the ACA: Are You Ready?


This content is intended for educational purposes only and should not be considered legal advice.

More to Discover

2019 Compliance Changes

2019 Compliance Changes

It’s critical that you’re aware of all the tax changes that could affect your organization in 2019. This session will include frequently asked questions, an overview of federal and state withholding updates and trends we are seeing in areas of Tax and ACA compliance. Speakers: Arlene Baker and James Schwantes Arlene Baker is a Senior Compliance Analyst with over 40 years of payroll and tax experience. She’s a member of the National Payroll Reporting Consortium focusing on IRS compliance, and she’s been a member of the national and local APA for 25 years. In 2003, Arlene was awarded the Ohio Payroll Professional of the Year award. James Schwantes is a Compliance Analyst with a legal and tax background. Prior to working at Paycor in the...

Proposed Department of Labor Rule to Update Regular Rate Requirements

Proposed Department of Labor Rule to Update Regular Rate Requirements

In late March, the Department of Labor (DOL) announced a proposed rule to clarify and update the regulations governing the regular rate requirements under the Fair Labor Standards Act (FLSA). Unless exempt, an employee’s regular rate of pay is used to determine how much he or she should be paid for working overtime. The FLSA generally requires overtime pay of at least 1.5 times the regular rate for hours worked past 40 hours per week. The proposed rule details what forms of payment employers can exclude when determining an employee’s regular rate of pay. The cost of the following items would no longer apply: Tuition programs Discretionary bonuses Payment for unused paid leave Wellness programs, fitness classes, gym access, onsite...

FLSA Law Update

FLSA Law Update

What new cases and issues are arising regarding FLSA? We’ll discuss the change from a narrow interpretation to a fair interpretation of exemptions by the U.S. Supreme Court and what other courts and the DOL think of it. We’ll also discuss the recently reintroduced opinion letters and the possible increase in the salary level threshold. Speaker: Brian Dershaw BRIAN G. DERSHAW is a partner in Taft Stettinius & Hollister’s Labor & Employment practice group. Brian has broad experience serving as counsel for companies of all sizes. He has appeared in state and federal trial and appellate courts in discrimination, harassment, retaliation, wrongful discharge, non-compete, trade secret and contract litigation. Brian works closely with...

Understanding FMLA Regulations

Understanding FMLA Regulations

What is the Family Medical Leave Act (FMLA?) The Family and Medical Leave Act (FMLA) is a federal law that allows eligible employees to take up to 12 weeks of unpaid leave in any given 12-month period for certain medical and family reasons without fear of losing their job. Signed into law in 1993, the FMLA is designed to help employees balance their work and family responsibilities while promoting equal employment opportunity for men and women. Who is Eligible for FMLA? An employee is eligible for FMLA leave if he or she has worked for a covered employer at least 12 months, completed at least 1,250 hours of work during the past 12 months and worked at a location within 75 miles of where the company employs 50 or more people. Keep in...