Prepare to ‘Pay or Play’ with Affordable Care Act

The health care reform law created a new “Pay or Play Rule,” which employers must address. The Pay or Play Rule generally requires that “large” employers (i.e., those with 50 or more full-time or full-time equivalent employees) offer health plan coverage to full-time employees or potentially pay a penalty to the federal government.

A persistent question for large employers has been how to define a “full-time” employee. The importance of “full-time” status cannot be overstated, because if an employer does not offer health plan coverage to just one full-time employee who then receives a federal subsidy to purchase health insurance at a Health Exchange, the employer could face a penalty of $2,000 per full-time employee per year. Also, if an employer offers health plan coverage to all full-time employees but the coverage does not offer “minimum value” or is not affordable for the employee, the employer could face a penalty of $3,000 per year for each full-time employee who receives a federal subsidy to purchase health insurance at a Health Exchange.

Fortunately, the Internal Revenue Service recently published guidance on this topic. Employers can rely on this guidance through at least December 31, 2014. This certainty will help employers design and model their health plans as they anticipate Health Exchanges and their upcoming 2013-2014 health plan changes.

The new guidance is incredibly detailed and applies various rules to different categories of employees (for example, “Variable Hour” employees, “New” employees and “Seasonal” employees). It also requires employers to classify all their employees into one of these different categories. This classification could be time-consuming and expensive.

In general, two rules apply for determining whether an employee is full-time and when he or she must be offered health plan coverage:

  • A new employee who is reasonably expected to work full-time (an average of 30 or more hours per week) as of his or her start date must be offered health plan coverage within, at most, three calendar months of employment.
  • For other employees, the employer will measure an employee’s hours during a “measurement period” not to exceed 12 months and offer health plan coverage during a “stability period” (also not to exceed 12 months) to those employees whose hours during the measurement period qualify them as full-time employees. At the expiration of the stability period, the employer may re-evaluate the employee’s part-time or full-time status for the next stability period. The new guidance generally provides employers with a small cushion of time called an “administrative period” between the measurement period and stability period. The administrative period is a period of a few weeks or months in which an employer calculates an employee’s hours, answers questions from employees, collects materials from employees and enrolls employees who elect coverage.

The following diagram illustrates the measurement period, administrative period and stability period:

Employers should not delay in taking action

The Pay or Play Rule becomes effective on Jan. 1, 2014. One common misconception is that employers need not consider the Rule until later in 2013. However, as noted in the illustration above, an employee’s hours in the fourth quarter of 2012 can affect his or her “full-time” status for all of 2014, although there may be some flexibility on this point under the federal guidance. In addition, some health plans renew on dates other than January 1 (such as February 1 or April 1). These plans will have a plan year which ends after January 1, 2014. For example, a plan year that starts on February 1, 2013 will end on January 31, 2014. Thus, for one month of the plan year, the plan must be compliant with the Pay or Play Rule or an employer will face a Pay or Play Rule penalty. Such an employer must either ensure that the plan is compliant by February 1, 2013 or be prepared to make any needed changes in the middle of the plan year (e.g., in December 2013).

Develop a strategy

Employers will likely need to consider potential strategies, plan design revisions and perhaps even changes to the composition of their workforce to prepare for the Pay or Play rule. Armed with information about the full-time status of employees, employers should:

  • Estimate Potential Penalties – Review the Pay or Play penalties and determine whether the workforce should be restructured to move more individuals from full-time to part-time status and/or if plan design and cost to employees should be modified. Consider whether such changes raise legal concerns.
  • Conduct an Analysis on Current Employee Population – Estimate how many full-time employees would likely qualify for the federal Exchange subsidy and potentially adjust health plan coverage, employee contributions for coverage and/or hours worked.
  • We expect that employers will work closely with their attorneys and benefit consultants to craft an appropriate strategy to address the Pay or Play Rule.

For more details about the Pay or Play Rule, see the Quarles & Brady LLP Pay or Play Guide (a 50-page overview of the rule for employers), available through John Barlament, a partner in the Employee Benefits group at Quarles & Brady LLP, can be reached at (414) 277- 5727 or Sarah Fowles, an associate in the Employee Benefits group at Quarles & Brady LLP, can be reached at (414) 277-5287 or

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