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Coming to Grips with the Health Benefits 'Pay or Play' Decision

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 The first question an employer needs to resolve is whether or not it has

enough employees to be subject to the pay-or-play requirement (also known as the employer "shared responsibility" requirement). The simple definition -- employers with 50 or more full-time equivalent workers -doesn't provide the full answer.

First, "full-time equivalent" (FTE) covers employees who average 30 (not

40) hours per week. The time period during which the employee count is determined is the prior year -- in other words, 2013, for purposes of whether you'll face the mandate in 2014.

Note: The IRS, recognizing that determining FTE status can become
complicated based on timing issues and seasonal work patterns, issued some "safe harbor" rules last year to help with the determination. (IRS Notice 2012-58)

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Attempting an End-Run?

Also, the law attempts to discourage employers near to that 50 FTE

threshold to drop below it by cutting back employees' hours to less than 30 so that they flunk the FTE test. It does so by requiring that you add up all of the hours worked by part-time workers over the course of a month, then dividing that number by 120. The number that results from that calculation is added to your FTE total to determine where you are in relation to the 50 FTE minimum.

Note: Even if the calculation

determines that you are subject to the pay-or-play requirement, you are not obligated to provide health benefits to part-time employees.

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 Some employers could, in theory, lay off a requisite number of employees

to fall below the 50 FTE threshold, and deal with them as independent contractors. But simply calling a worker an independent contractor doesn't necessarily make him so, of course. Independent contractor status is somewhat subjective and determined by a multi-pronged test.

Assuming you are subject to those "shared responsibility" provisions, and

even if you are already providing some level of health benefits, you'll need to determine whether your benefit package provides at least 95 percent of your employees a benefit package that meets "minimum essential coverage" standards (the fine points remain a work in progress). If the answer is no, and you don't beef up your benefits, the "pay" requirement kicks in. (This of course would also be true if you didn't offer any health plan.)

According to the law firm Lindquist Vennum, in simple terms, the penalty is
the annualized equivalent of $2,000 a year for each full-time employee, minus up to 30 employees, if at least one full-time employee signs up for health benefits through a health exchange "and receives a premium tax credit or cost-sharing reduction from the government." www.hrp.net

Passing the "Value" Test

But even if you are providing minimum essential coverage to enough

employees, another hurdle you have to clear is whether the employee receives a minimum value for that coverage.

That essentially requires that you are paying at least 60 percent of the
cost of the benefit. A parallel test is whether the employee cost is deemed "affordable" to the employee. A "safe harbor" standard is whether or not it exceeds 9.5 percent of the employee's household income.

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 If either the "value" test or the affordability test is not met, something
called a "Subsection (b) penalty" kicks in. It is calculated as $250 per month for each FTE employee who enrolls in a health exchange and is eligible, based on income, to receive federal tax credits.

Eligibility for tax credit and subsidies ends at 400 percent of the U.S.
official poverty level. Eligibility starts once an individual, who does not have access to a qualified affordable plan through employment, is deemed to be able to afford insurance with an exchange credit (approximately 100 percent of the poverty level).

If you determine that based on your current health benefits package you
won't meet the employer responsibility standards of the Affordable Care Act next year, the financial dimension of the decision you'll face is whether it's cheaper to drop benefits and pay the penalty, or improve benefits to meet the requirements. In many circumstances the penalty would be cheaper.
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Don't Neglect Human Resource Strategy But what about the human resource strategy considerations? Basic questions include the impact on employee morale, as well as how critical health benefits are to your ability to recruit strong talent. You may already be exceeding ACA's requirements -- and employees may consider it a fair substitute for higher wages.

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 Tax considerations also can play a role. If you were to drop health benefits
and simply pay employees more so they can go out and secure their own health benefits via a health care exchange, that added compensation is taxable to them, unlike the value employer provided health benefits (assuming it falls below so-called "Cadillac" benefit levels). Also the penalties you would pay, unlike the cost of providing health benefits, would not be tax deductible for your company.

Finally, a decision to maintain a health

benefit plan that's generous enough to satisfy the Affordable Care Act's standards isn't a permanent one. You may simply decide to meet the standards in 2014, and see how things play out with health exchanges and the actions of other employers who you compete with for employees.
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