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

How to Make Tax-Free Disaster Payments To Employees

How to Make Tax-Free Disaster Payments To Employees

The pandemic is putting a big strain on everyone, maybe most of all your team, and you want to do everything you can to help.In a national emergency, employers have the freedom to offer unlimited tax-free financial assistance to employees who need it, with minimal administrative burdens. These disaster payments will be exempt from both federal income and employment taxes. What Disaster Payments Cover Disaster payment to affected employees can cover a broad range of “personal, family, living or funeral expenses (not covered by insurance)”. These may include: Unreimbursed Medical Expenses This can range from vitamins and over-the-counter medications to co-pays. Cleaning Products Disinfectant and hand-sanitizer for employee’s homes can help...

Paycheck Protection Program (PPP): What You Need to Know About Payroll Protection

Paycheck Protection Program (PPP): What You Need to Know About Payroll Protection

You need payroll protection. The federal government wants to help. Here’s what you need to know. The Paycheck Protection Program (PPP) As part of the $2 trillion aid package unveiled in the Coronavirus Aid Relief & Economic Security (CARES) Act, $349 billion was dedicated to the Payment Protection Program (PPP). This offers federal guaranteed loans to businesses with fewer than 500 employees to cover payroll and other essential costs.The federal government is focused on releasing funds quickly and with as little red tape as possible, giving small businesses a big boost right when they need it. And here’s the best part—if you use the funds to retain (or rehire) your employees, the loans don’t need to be repaid.View Payroll Protection...

Paycor's COVID-19 Command Center

Paycor's COVID-19 Command Center

We're excited to announce the release of Paycor's COVID-19 Command Center, a new analytics solution that delivers instant insights for crisis management. With the COVID-19 Command Center, you'll be able to: Prepare with real time insights Plan with actionable data Respond with the help of HR experts Recover quickly by playing the long game now Discover how your organization can make the best possible decisions with real time data, actionable insights and expert HR counsel.

Families First Coronavirus Response Act: Tips to Manage Employee Leave Scenarios

Families First Coronavirus Response Act: Tips to Manage Employee Leave Scenarios

Coronavirus Response Act On March 18 the Families First Coronavirus Response Act was enacted to help individuals, families and businesses. The legislation requires employers with under 500 employees to give sick leave and paid family medical leave to eligible employees.Eligible businesses are now able to take advantage of new tax credits to offset the costs associated with paid emergency leave and sick leave benefits implemented under the bill, including credit for health plan expenses affiliated with the new leaves. Below is a list of scenarios your employees may experience during this time. Scenario 1 A full time employee is sick and believes they might have COVID-19. The employee is visiting a doctor to seek a medical diagnosis and...