The Pay or Play Penalty Under the Affordable Care Act: Emerging Issues

• Publication year: 2022

47 Creighton L. Rev. 611. THE PAY OR PLAY PENALTY UNDER THE AFFORDABLE CARE ACT: EMERGING ISSUES

THE PAY OR PLAY PENALTY UNDER THE AFFORDABLE CARE ACT: EMERGING ISSUES

KATHRYN L. MOORE(fn*)

I. INTRODUCTION

The Affordable Care Act(fn1) does not require that employers provide employees with health care coverage. It does, however, impose an excise tax on large employers that fail to offer their employees affordable employer-sponsored health care coverage.(fn2) The excise tax, commonly referred to as a "pay-or-play penalty," was scheduled to go into effect beginning in 2014. The United States Treasury Department ("Treasury"), however, has delayed enforcement of the penalty until 2015 for employers with 100 or more full-time employees, and until 2016 for employers with 50 to 99 employees.(fn3)

Implementation of the pay-or-play penalty has given rise to a host of questions and a great deal of uncertainty and consternation among employers, particularly among small to medium-sized employers. Issues range from very narrow technical questions, such as how to calculate the hours of service of adjunct faculty and airline pilots,(fn4) to broad planning questions, such as how an employer might restructure its workforce to avoid the penalty. This Article focuses on emerging issues in two specific areas, (1) spousal and dependent coverage and (2) "workforce realignments," that is, employers' efforts to reduce the size of their workforce or employees' hours to avoid the pay-or-play penalty.

This Article begins by providing an overview of the pay-or-play penalty. It then discusses two issues with respect to spousal and dependent coverage: (1) determining the affordability of dependent coverage, and (2) employers' recent reductions in spousal coverage. It then analyzes whether employers' efforts to realign their workforces in order to avoid the pay-or-play penalty are likely to violate Section 510 of the Employee Retirement Income Security Act ("ERISA")(fn5) and/ or the Affordable Care Act's ("ACA") whistleblower provision. Included in this discussion is an analysis of whether an employer would violate the ACA whistleblower provision if it threatens to terminate the employee if the employee purchases subsidized health insurance on a health insurance exchange ("exchange").(fn6)

II. OVERVIEW OF THE PAY OR PLAY PENALTY

Section 4980H of the Internal Revenue Code imposes an excise tax on "applicable large employers" that fail to offer employees the opportunity to enroll in "minimum essential coverage"(fn7) under an eligible employer-sponsored health care plan.(fn8) The pay-or-play penalty only applies to "applicable large employers." For purposes of the penalty, an "applicable large employer" is generally defined as an employer(fn9) that employed an average of at least fifty full-time employees during the preceding calendar year.(fn10) Full-time employees are generally defined as employees who perform, on average, at least thirty hours of service per week.(fn11)

An employer may become subject to the pay-or-play penalty in one of two ways. First, under section 4980H(a) of the Internal Revenue Code, an employer will be subject to a "no-offer penalty" if (1) the employer does not offer its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored group health plan for a month, and (2) at least one full-time employee is certified to claim a premium assistance tax credit. Second, under section 4980H(b), an employer will be subject to an "unaffordable coverage penalty" if (1) the employer offers its fulltime employees(fn12) and their dependents the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored group health plan for a month, and (2) at least one full-time employee is certified to claim a premium assistance tax credit.

Generally, an employee will be eligible for a premium assistance tax credit(fn13) for health coverage purchased through a health insurance exchange if (1) the employee's household income is between 100% and 400% of the federal poverty level, and (2) either (a) the employee is not eligible to participate in an employer-sponsored group health plan or (b) the employee is eligible to participate in such a plan, but (i) coverage under the employer's plan is "unaffordable," that is, the premium required to be paid exceeds 9.5% of the employee's household in-come,(fn14) or (ii) the plan does not provide "minimum value," that is, the plan's share of the total allowed cost of benefits is less than 60%.(fn15)

The no-offer penalty under section 4980H(a) is $2,000 per year (or 1/12 of $2,000 per month)(fn16) per full-time employee employed by the employer,(fn17) although 30 full-time employees may be excluded in calculating the penalty.(fn18) The no-offer penalty is indexed to the rate of premium growth after 2014.(fn19) The unaffordable coverage penalty under section 4980H(b) is $3,000 per year (or 1/12 of $3,000 per month) for each full-time employee receiving a premium tax credit,(fn20) up to the maximum penalty that could be imposed under section 4980H(a)(fn21) (or $2,000 per year (or 1/12 of $2,000 per month) times the employer's entire full-time workforce minus 30 workers).(fn22) Like the no-offer penalty, the unaffordable coverage penalty is indexed to the rate of premium growth after 2014.(fn23)

To illustrate, suppose that an employer has 100 full-time employees and does not offer its full-time employees and their dependents coverage under an eligible employer-sponsored group health plan. If two employees are certified to claim a premium assistance tax credit, that is, they purchase subsidized health insurance on an exchange, the employer will be subject to a penalty of $140,000 that year.(fn24) In contrast, if the employer offers coverage, but the coverage is unafford-able for two employees and they purchase subsidized insurance on an exchange, the penalty would only be $6,000 that year.(fn25)

The following chart provides an overview of the section 4980H pay-or-play penalty.

III. SPOUSAL AND DEPENDENT COVERAGE

As noted above, section 4980H of the Internal Revenue Code provides that a large employer may be subject to an excise tax if it fails to offer affordable coverage to its employees and their dependents. Section 4980H, however, does not define the term "dependent." The Treasury regulations fill this gap by defining dependent as an employee's child (as defined in section 152(f)(1) of the Internal Revenue Code)(fn26)under the age of twenty-six and explicitly excluding spouses from the definition of dependent.(fn27) Thus, under the regulations, an employer will not be subject to a pay-or-play penalty for failure to offer coverage to its employees' spouses.

A. "AFFORDABILITY" OF DEPENDENT COVERAGE

At first blush, the pay-or-play regulations would seem to favor dependents over spouses by subjecting employers to a penalty for failure to offer dependents affordable coverage but not for failure to offer spouses affordable coverage. In some instances, however, the spouse may actually be better off than the dependents if the employer does not offer spousal coverage because the spouse, but not the dependents, may be eligible for subsidized coverage through an exchange if the spouse does not have access to "affordable" employer-sponsoredcoverage.(fn28)

Section 36B of the Internal Revenue Code provides a premium assistance tax credit for certain "applicable taxpayers" who purchase health insurance through an exchange. Applicable taxpayers are defined as taxpayers with annual household income between 100% and 400% of the federal poverty line based on the taxpayer's family size.(fn29) In order to be eligible for a premium tax credit, "applicable taxpayers" must not be eligible for government-sponsored health care coverage, such as Medicare or Medicaid, or affordable employer-sponsoredhealth insurance.(fn30)

Section 36B provides that employer-sponsored health insurance is considered to be affordable if the employee's share of the premium does not exceed 9.5% of the employee's household income.(fn31) The statute, however, is ambiguous as to whether the employee's share of the premium refers to the cost of employee-only coverage or familycoverage.(fn32)

Family coverage is typically much more expensive than individual coverage, and employers typically require employees to pay more for family coverage than for individual coverage. For example, in 2013, the average annual worker contribution to premiums for single coverage was $999 while the average annual worker contribution to premiums for family coverage was $4,565.(fn33)

After the Affordable Care Act was enacted, there was considerable debate as to whether the cost of employee-only or family coverage should be taken into account in determining whether employer-sponsored health insurance is affordable for dependents.(fn34)

In Notice 2011-73, the IRS clarified that for purposes of the section 4980H pay-or-play penalty, affordability is to be based on the employee's share of the premium for individual, or self-only, coverage and not family coverage.(fn35) When the Treasury Department issued the final section 36B premium tax regulations in May 2012,(fn36) it determined that affordability for purposes of employee's eligibility is based on the employee's share of the premium for employee-only coverage.(fn37) The...