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Updated 2/9/2016 – Play or Pay Mandate Penalties

Employers who fail to comply with the Play or Pay Mandate may be subject to IRS penalties.  Per IRS Notice 2015-87, the penalty has increased each year from 2014.  The table below summarizes the applicable penalties for each year since 2014.

 

Penalty Description 2014 2015 2016
Section 4980H(a) – Failure to offer coverage to at least 70% of full-time employees in 2014 and 2015, and 95% of full-time employees in 2016 $2,000/year
for each full-time employee
$2,080/year
for each full-time employee
$2,160/year
for each full-time employee
Section 4980H(b) – Failure to offer coverage that is affordable and provides minimum value $3,000/year
for each full-time employee who received a premium tax credit
$3,120/year
for each full-time employee who received a premium tax credit
$3,240/year
for each full-time employee who received a premium tax credit

 

Increase to the Affordability Safe Harbors

One requirement of the Play or Pay Mandate is for employers to offer “affordable” health coverage to their full-time employees.  Coverage is deemed affordable if the employer offers a plan that costs the employees no more than 9.5% of their household income.  However, since it is difficult for an employer to determine their employees’ household income, the IRS has provided three safe harbors for employers to determine affordability: (1) the federal poverty level safe harbor; (2) the rate of pay safe harbor; and (3) the Form W-2 safe harbor.  If an employer meets the requirements of any of the three safe harbors, the offer of coverage is deemed affordable.

The 9.5% figure is indexed for inflation and has increased to 9.56% for 2015 and 9.66% in 2016.  Prior IRS guidance stated that if an employer uses one of the three safe harbors, affordability would be based on the 9.5% index regardless of the increase.  However, IRS Notice 2015-87 confirms that the increased limits of 9.56% and 9.66% apply to 2015 and 2016 respectively and the three affordability safe harbors are retroactively adjusted to match these increased limits.

 

Resources:

For more information on the IRS affordability safe harbors, please refer to the IRS Q&A on Employer Shared Responsibility Provisions Under the Affordable Care Act.

 

2016 Federal Poverty Level

One permissible IRS safe harbor for determining affordability is the federal poverty level (FPL) safe harbor.  The FPL is a measure of income issued annually by the Department of Health and Human Services.  For the 2016 year, the FPL for individuals has increased to $11,880 (from $11,770 in 2015).  Therefore, for the 2016 calendar year, if an employer offers a plan that costs their employees no more than $94.05 per month, then the plan will be considered affordable under the FPL safe harbor.  (Calculation: $11,880 / 12 months x 9.5% = $94.05/month.)

 


 

 

Updated 2/10/2015

 

What is the Play or Pay Mandate?  The Play or Pay Mandate, which became effective this year on 1/1/2015, requires all Applicable Large Employers (ALEs) to offer health insurance coverage to full-time employees and their dependents or pay a penalty.

Are there requirements for what kinds of health care coverage I must offer?  Yes.  Coverage offered to your employees must be affordable, meaning the employee’s contribution to the premium may not exceed 9.56% of the employee’s income.  Also, the plans offered must cover at least 60% of the total allowed cost of benefits.

When do I have to comply?  This mandate went into effect on 1/1/2015, so you must comply immediately, if you have not already.  However, some transition relief is available to certain employers, which may delay when they are subject to this mandate.  See below for more information on the two types of transition relief available.

What do I need to do? Assess your organization’s classification to see if it qualifies as an ALE.  If so, you must offer health care coverage to your full-time employees, or determine if you qualify for transition relief, which is explained below.

 


 

More Information

2015 will be the first year in which Applicable Large Employers (ALE) will need to comply under the Play or Pay Mandate. Effective 1/1/2015, ALEs are required to offer health insurance coverage to full-time employees and their dependents or pay a penalty.

Generally, ALEs are those with 50 or more full-time equivalent employees in the prior calendar year, unless they qualify for transition relief (see below). When calculating full-time equivalent employees, each employee with 30+ hours of service per week is counted as 1 full-time employee. Related employers in a controlled group must be counted together to determine whether the employer is an ALE. This means that employees of parent-subsidiary groups, brother-sister groups, and other affiliated service groups are combined in the employee count. However, each entity is individually responsible for the Play or Pay coverage requirements and penalties are assessed against each entity separately.

The coverage provided by the employer must be affordable, meaning that the employee’s contribution may not exceed 9.56% of the employee’s income. Additionally, the plan must provide minimum value by covering at least 60% of the total allowed cost of benefits.

Please note: employers with less than 50 full-time employees are exempt from the Play or Pay Mandate.

 

Transition Relief:
There are 2 types of transition relief afforded to employers that may delay when they are subject to the Play or Pay Mandate.

  • The first type of transition relief applies to employers who have 50-99 employees (if they meet certain conditions), in which case, they are not subject to the Play or Pay Mandate until 1/1/2016.
  • The second type of transition relief applies to employers who have non-calendar year plans (if they meet certain conditions), in which case they and are not subject to the Play or Pay Mandate until the start of their 2015 plan year.
  • If the employer qualifies for both types of transition relief, then they are not required to offer health coverage to their full-time employees and their dependents until the start of their 2016 plan year.

Please note: employers that qualify for transition relief are still subject to the IRC Section 6056 reporting requirement (see our post dedicated to this reporting requirement).

If you have not yet assessed whether your organization is an ALE subject to the Play or Pay mandate, please do this assessment immediately to determine if you must offer health insurance coverage to your full-time employees. Your Sequoia Client Service Manager can offer additional information on this topic, including a white paper on the ACA’s Employer Shared Responsibility Provision through our partnership with ThinkHR.

 

Resources:

The IRS has issued a helpful Q&A that serves as further guidance on the Play or Pay Mandate. Questions 29 to 39 provide guidance on determining when an employer qualifies for transition relief.

 

The information and materials on this blog are provided for informational purposes only and are not intended to constitute legal or tax advice. Information provided in this blog may not reflect the most current legal developments and may vary by jurisdiction. The content on this blog is for general informational purposes only and does not apply to any particular facts or circumstances. The use of this blog does not in any way establish an attorney-client relationship, nor should any such relationship be implied, and the contents do not constitute legal or tax advice. If you require legal or tax advice, please consult with a licensed attorney or tax professional in your jurisdiction. The contributing authors expressly disclaim all liability to any persons or entities with respect to any action or inaction based on the contents of this blog.

Bonnie Mangels – Bonnie is the Corporate Counsel and Senior Compliance Manager for Sequoia. When not inundated in paperwork and legal briefs, her interests include arts and crafts, bunnies, and the Bay Area.