Alert - Employer Pay or Play Excise Taxes - Where are we now?
HUMAN CAPITAL PRACTICEALERT:HEALTH CARE REFORM BILLFebruary 2013 www.willis.comEMPLOYER PAY OR PLAY EXCISETAXES – WHERE ARE WE NOW?Starting in 2014, large employers may incur the so-called “pay or play” excise tax unless theymeet certain standards for offering health coverage to their full-time employees. An employercan control its exposure to the pay or play excise tax, but doing so generally requires measuringthe employer’s workforce and individual workers’ hours in various ways, as well as evaluating anyhealth coverage the employer offers against certain benchmarks. Recent proposed regulationsunder the pay or play provisions (along with a related set of questions and answers) provideimportant details on the measurements and evaluations that determine whether an employermight incur the excise tax.The rules governing the pay or play excise tax are complex. Even determining which employeesare considered full-time calls for detailed analysis. For larger employers with multiple plans andemployment arrangements, it is difficult to overstate how complex applying the pay or play rulescan become. For most employers, administering plans to avoid the pay or play excise tax will bemanageable, but the employer first needs to determine which of the many options for applyingthe rules are most advantageous.Willis’ National Legal & Research Group has prepared a comprehensive guide regarding the payor play excise tax for its clients. The guide explains our current understanding of how the pay orplay excise tax works and the options for applying the pay or play rules that employers might findmost advantageous. We provide a high-level summary of the guide here. Willis clients may accessthe guide –“Health Care Reform: Employer Pay or Play Excise Taxes Employer Guide” – onWillis Essentials (log-in credentials required) or may request a copy from their Willis HumanCapital Practice representative.PAY OR PLAY BASICSDespite the “pay or play” shorthand reference, these provisions are best thought of as includingtwo separate excise tax provisions. One excise tax (we call it the “cliff”) usually will be very largeif it applies, but it is readily avoidable. The other (which we call the “drop-off”) usually will besmall by comparison, but it is more difficult to avoid completely. These excise taxes apply only tolarge employers (50 or more full-time employees (or equivalents) in the last calendar year). Also,neither the cliff nor the drop-off applies unless the employer receives a certification that at leastone of its full-time employees has obtained coverage through an insurance exchange and hasqualified to receive premium assistance or cost-sharing reduction with respect to that coverage.Very generally, full-time employees are those employed for an average of at least 30 hours ofservice per week.
n The cliff may apply if an employer fails to offer minimum essential coverage (which includes almost any employer- ANALYZING AN EMPLOYER’S sponsored medical benefits, regardless of cost or value) to OPTIONS UNDER THE PAY OR substantially all of its full-time employees and their dependents. The cliff excise tax is $2,000 annually – $166.67 per month – for PLAY PROVISIONS every one of an employer’s full-time employees, (depending on The pay or play excise taxes require many corporate structure, up to 30 of the employer’s full-time employers that cannot avoid the taxes to employees are disregarded). evaluate trade-offs between cost and administrative complexity. To complicaten If an employer avoids the cliff, it may still incur the drop-off if it matters, the trade-offs are not the same for all does not offer each full-time employee minimum essential employers, varying based on the size and coverage that is both minimum value (at least 60% actuarial characteristics of the employer’s workforce, as value) and affordable (no more than 9.5% of the individual well as available coverage options. federal poverty level or the employee’s household income, W-2 pay or rate of pay). The drop-off excise tax is $3,000 annually – ONLY “LARGE EMPLOYERS” MAY $250 per month – for each full-time employee for whom the employer receives a certification of premium assistance or cost- INCUR THE PAY OR PLAY EXCISE TAX An employer is not subject to any pay or play sharing reduction, unless the cliff would be a lower amount. excise tax, regardless of what coverage it does (or does not) offer, unless the employerThe applicability and calculation of these excise taxes are explained (including certain affiliated companies) is ain our employer guide to the pay or play excise tax (see information large employer (50 or more full-timeon obtaining a copy above). employees [or equivalents] during the last calendar year). Because part-time employeesPAY OR PLAY EFFECTIVE DATE essentially count as fractions when making the large employer determination, a companyThe pay or play provisions generally are effective for all employers that has only a few employees working 30 orand plans on January 1, 2014, regardless of plan year, so a large more hours per week may be a large employer.employer may incur an excise tax for January 2014 and later months There is no exemption from the pay or playif coverage meeting the applicable standards is not offered for those provisions for tax-exempt, charitable,months. An employer that wishes to determine whether it is a large religious or governmental organizations – allemployer for 2014 or to identify its full-time employees using the may be large employers.look-back measurement method (as described below) must trackemployees’ hours of service during 2013 in order to implement on For many employers, it will be apparent thatJanuary 1, 2014. (A complex transition rule may allow some non- they had 50 or more full-time employeescalendar year plans to delay compliance until the beginning of their during the last calendar year. Other2014 plan year, but we do not recommend that employers rely on that employers may choose to presume that theyrule without obtaining a legal opinion on its applicability.) 2 Willis North America • 2/13
are large employers or may count their employees’ hours of service during the previouscalendar year to make the determination as explained in our employer guide to the pay orplay excise tax (see information on obtaining a copy above). Under a transition rule, thedetermination of whether a company is a large employer for 2014 may be made based on anyperiod of at least six consecutive calendar months during 2013.OFFERING ALL EMPLOYEES MINIMUM ESSENTIAL COVERAGE THAT ISAFFORDABLE AND MINIMUM VALUE ALWAYS WORKSAn employer will incur neither the cliff nor the drop-off if it offers all of its full-timeemployees minimum essential coverage that includes dependent coverage and, with respectto the employees’ coverage only, the minimum essential coverage is both affordable andminimum value. To limit such coverage to full-time employees, an employer must identifythose full-time employees, which may involve significant administrative difficulties (seediscussion below). For most employers, identifying full-time employees will be the mostdifficult task in connection with the pay or play provisions.An employer could avoid those difficulties, yet still foreclose the possibility of incurring apay or play penalty, if it offered minimum essential coverage that is both affordable andminimum value to all of its employees regardless of hours worked or full-time, part-time,seasonal, temporary or other status and offered minimum essential coverage to dependents.This approach may be more practical than many would anticipate, because it appears thatminimum essential coverage that just meets the affordability and minimum value standardsis less costly than most employer plans are currently. This “all in” approach is the only waywe have identified to avoid the difficulties of identifying full-time employees while ensuringthat the pay or play excise tax will not apply.As with many terms and phrases used in the pay or play provisions, full understanding of thephrase “offering full-time employees minimum essential coverage that is both affordableand minimum value” requires extensive explanation of detailed rules. Those rules areexplained in our employer guide to the pay or play excise tax (see information on obtaining acopy above).OFFERING COVERAGE TO FULL-TIME EMPLOYEES IS SUFFICIENT BUT MAYBE DIFFICULTOnly full-time employees’ coverage is considered when determining whether an employerhas incurred a pay or play excise tax. While part-time employees may be excluded, anemployer that wishes to exclude any of its employees (including part-time, seasonal,temporary, etc.) from coverage will need to be able to identify and document the excludedemployees’ part-time status in order to manage its exposure to the pay or play excise taxes.For each employee to whom the employer does not offer coverage, the reason should bedocumented.IDENTIFYING FULL-TIME EMPLOYEESA full-time employee generally is one who has an average of at least 30 hours of service perweek during a calendar month. The determination of hours of service and full-time or part-time status is made on an employee-by-employee basis, generally using actual hours ofservice. An employer’s classification of an individual employee as full-time, part-time,seasonal, temporary, etc., has almost no influence on whether the employee is a full-timeemployee for purposes of the pay or play excise tax. Because any employee may be a full-timeemployee based solely on hours of service, all employees’ hours of service must be measured 3 Willis North America • 2/13
to reliably identify all of an employer’s full-time employees. Therules regarding the hours of service that must be counted and thedefinition of full-time employee are explained in our employer guideto the pay or play excise tax (see information on obtaining a copyabove).MOST EMPLOYERS WILL USE THE LOOK-BACK MEASUREMENT METHODMost employers will need to use the look-back measurement methodfor identifying full-time employees (a less difficult measurementmethod may work for employers with very simple situations). Verygenerally, this method calls for an employer to measure eachemployee’s average hours of service over a look-back measurementperiod that is between three and 12 months long, assign eachemployee full-time or part-time status based on that measurement,and continue that status throughout a period that follows themeasurement period and is usually the same length (a stabilityperiod). Between the measurement period and the stability period,an employer may have an administration period of up to 90 days.Otherwise, the stability period must start immediately after themeasurement period.EMPLOYER CHOICES WHEN USING THE LOOK-BACK MEASUREMENT METHODUnder the look-back measurement method, the employer choosesthe length of the measurement, administration and stability periods,as well as the dates on which these periods begin and end, subject to anumber of restrictions. There are separate rules for applying thelook-back measurement method to ongoing employees and to newemployees, and an employer must use this method with respect toongoing employees in order to be able to use it for new employees.Both sets of rules contain a daunting number of special rules,exceptions and options. There are also restrictions on changes to themeasurement, administration and stability periods. For example, anemployer may not change a measurement period nor its associatedstability period once the measurement period has started.The best way to explain the look-back measurement method for bothnew employees and ongoing employees is by providing examples ofits operation. In our employer guide to the pay or play excise tax (seeinformation on obtaining a copy above), we provide multipleexamples, illustrating various permutations of the look-backmeasurement method as it applies to both new and ongoingemployees, as well as the many options and special rules that applywhen using the look-back measurement method. The guide alsoexplains a transition rule allowing an employer to delay the start ofits first look-back measurement period without shortening theassociated stability period, so long as the measurement period lastsat least six months and begins no later than July 1, 2013. 4 Willis North America • 2/13
Applying the Look-Back Measurement Method to New Employees May be Tricky STEP BACK FROM THE CLIFFWhen an employer can use the look-back measurement method for a Most employers have concluded that simplynew employee, coverage for that employee may be delayed for more offering no coverage (i.e., incurring the cliff )than 13 months while the employer measures the employee’s hours of is not viable because the cliff penalty is soservice, determines full-time or part-time status and offers coverage steep and the cost of offering minimumas appropriate. This delay will not result in a pay or play excise tax (or essential coverage that prevents it is soviolate the 90-day limit on waiting periods that is effective for plan minimal. Even an employer that prefers toyears starting on or after January 1, 2014) if it is applied to a variable- offer no coverage should strongly considerhour employee or a seasonal employee. For other employees – those offering minimum essential coverage, withwho are reasonably expected to work at least 30 hours per week on NO employer contributions, to all of itsaverage – coverage must be offered in a manner that complies with employees and their dependents just to keepthe 90-day limit on waiting periods. This means that identifying an open the possibility of minimizing the pay orindividual as a variable-hour or seasonal employee usually causes a play excise tax. This “failsafe” option issignificant delay in health coverage becoming effective. As a result, explained in our employer guide to the pay orwhenever an employer elects to treat an individual as a variable-hour play excise tax (see information on obtainingemployee or seasonal employee, a best practice is documenting the a copy above).circumstances that led to that conclusion. The circumstances inwhich a new employee may be treated as variable-hour or seasonal BE CAREFUL ABOUT THE DROP-OFFare explained in our employer guide to the pay or play excise tax (see Employers offering minimum essentialinformation on obtaining a copy above). coverage may still incur the drop-off, and most employers are planning to offerOFFERING DIFFERENT COVERAGE TO DIFFERENT GROUPS OF FULL- coverage that prevents both the cliff and theTIME EMPLOYEES drop-off from applying. As they work with theEmployers that must expand the group of employees eligible for various pay or play definitions and concepts,coverage in order to avoid the pay or play excise taxes may find that however, some employers are finding that itthey wish to offer different levels of coverage or contributions to may make sense financially to risk incurringdifferent groups of employees. Nothing in the pay or play provisions the drop-off with respect to some employeesrequires that similar levels of coverage or contributions be offered to (e.g., by offering minimum essential coverageall full-time employees. Employers that have self-insured plans are that meets the standards, except that it is notsubject to nondiscrimination rules, however, and those rules may affordable for some lower-paid employees).affect an employer’s ability to implement these types of An employer might encounter this situation ifarrangements. (Similar rules will become effective for insured health it wished to maintain uniform employeeplans after the relevant agencies issue implementing regulations.) contributions across its workforce but foundCafeteria plan nondiscrimination testing also may be affected if that the cost of making the coverage availablerequired contributions for health coverage are paid on a pre-tax basis. to every full-time employee at the cost that is affordable for its lowest-paid full-timePLAYING AND PAYING employee is prohibitive. An employer in this situation might choose higher requiredOffering coverage to employees still paying the pay or play excise tax employee contributions, so the coveragemay sound like the worst of all possible results, but many are offered would not be affordable for some ofconcluding that doing so makes sense financially. Various options for the employer’s lower-paid employees. In thatoffering coverage and their effect on the pay or play excise tax case, the employer may incur the drop-offcalculation are explained in our employer guide to the pay or play penalty ($250 per calendar month for eachexcise tax (see information on obtaining a copy above). full-time employee for whom the employer receives a certification of assistance) with respect to employees for whom the coverage is not affordable. 5 Willis North America • 2/13
BALANCING AFFORDABILITY AND MINIMUM VALUEAffordability is determined on an individual basis. Just because coverage is not affordablefor one full-time employee does not mean that it is unaffordable for all full-time employees.Minimum value is different. The actuarial value of coverage is the same for all individualswho are offered that coverage.This means that an employer offering coverage that does not provide minimum value mayincur the drop-off penalty with respect to every one of its full-time employees for which itreceives a certification of assistance, even if the cost of that coverage is very low. Therefore,when considering trade-offs between the value of the coverage offered and the cost of thatcoverage, an employer will generally minimize its chances of incurring the drop-off if it leanstoward higher premiums rather than lower value. At the same time, employers purchasinginsurance coverage may find that participation and contribution requirements imposed bycarriers put them in the position of offering minimum essential coverage that does notprovide minimum value, but doing so at very low cost to employees. Employers in thissituation may still benefit from offering minimum essential coverage that has low actuarialvalue because they will not incur a pay or play excise tax with respect to employees whoaccept and pay for coverage. The very low cost of minimum essential coverage that has lowactuarial value may make it appealing to many of an employer’s lowest-paid employees, andthose that accept the coverage will be ineligible for premium tax credits or cost-sharingreductions. That, in turn, will prevent the employer from incurring the drop-off with respectto those employees.The options available to employers and the trade-offs implicit in each are explained in ouremployer guide to the pay or play excise tax (see information on obtaining a copy above).WHAT COMES NEXT?While the new proposed regulations are a giant step forward in understanding exactly whatemployers must do to avoid the pay or play penalty, the preamble to the regulationsidentified a number of items to be addressed in future guidance. Those include –n Defining seasonal employees for purposes of the look-back measurement methodn Certain special issues in applying the rules to particular employers, such as churches, governmental entities and temporary staffing organizations, among othersn Additional rules on counting hours of service when employees have certain types of unpaid absences from employmentAs always, Willis’ National Legal & Research Group will monitor developments and provideinformation as they occur. 6 Willis North America • 2/13
KEY CONTACTSU.S. HUMAN CAPITAL PRACTICE OFFICE LOCATIONSNEW ENGLAND ATLANTIC Marietta, GA 770 425 6700Auburn, ME Baltimore, MD207 783 2211 410 584 7528 Miami, FL 305 421 6208Bangor, ME Knoxville, TN207 942 4671 865 588 8101 Mobile, AL 251 544 0212Boston, MA Memphis, TN617 437 6900 901 248 3103 Orlando, FL 407 562 2493Burlington, VT Metro DC802 264 9536 301 581 4262 Raleigh, NC 704 344 4856Hartford, CT Nashville, TN860 756 7365 615 872 3716 Savannah, GA 912 239 9047Manchester, NH Norfolk, VA603 627 9583 757 628 2303 Tallahassee, FL 850 385 3636Portland, ME Reston, VA207 553 2131 703 435 7078 Tampa, FL 813 490 6808Shelton, CT Richmond, VA 813 289 7996203 924 2994 804 527 2343 Vero Beach, FLNORTHEAST Rockville, MD 772 469 2842 301 692 3025Buffalo, NY MIDWEST716 856 1100 SOUTHEAST Appleton, WIMorristown, NJ Atlanta, GA 800 236 3311973 539 1923 404 224 5000 Chicago, ILMt. Laurel, NJ Birmingham, AL 312 288 7700856 914 4600 205 871 3300 312 348 7700New York, NY Charlotte, NC Cleveland, OH212 915 8802 704 344 4856 216 861 9100Norwalk, CT Gainesville, FL Columbus, OH203 523 0501 352 378 2511 614 326 4722Radnor, PA Greenville, SC Detroit, MI610 254 7289 704 344 4856 248 539 6600Wilmington, DE Jacksonville, FL Grand Rapids, MI302 397 0171 904 562 5552 616 957 2020 Willis North America • 02/13
Milwaukee, WI WESTERN262 780 3476 Fresno, CAMinneapolis, MN 559 256 6212763 302 7131763 302 7209 Irvine, CA 949 885 1200Moline, IL309 764 9666 Las Vegas, NV 602 787 6235Pittsburgh, PA 602 787 6078412 645 8506 Los Angeles, CASchaumburg, IL 213 607 6300847 517 3469 Phoenix, AZSOUTH CENTRAL 602 787 6235 602 787 6078Amarillo, TX806 376 4761 Portland, OR 503 274 6224Austin, TX512 651 1660 Rancho/Irvine, CA 562 435 2259Dallas, TX972 715 2194 San Diego, CA972 715 6272 858 678 2000 858 678 2132Denver, CO303 765 1564 San Francisco, CA303 773 1373 415 291 1567Houston, TX San Jose, CA713 625 1017 408 436 7000713 625 1082 Seattle, WAMcAllen, TX 800 456 1415956 682 9423Mills, WY The information contained in this publication is307 266 6568 not intended to represent legal or tax advice and has been prepared solely for educational purposes. You may wish to consult your attorneyNew Orleans, LA or tax adviser regarding issues raised in this504 581 6151 publication.Oklahoma City, OK405 232 0651Overland Park, KS913 339 0800San Antonio, TX210 979 7470Wichita, KS316 263 3211 Willis North America • 02/13