By Martin Simon, JD, Senior Legal Editor
The IRS has issued the long awaited notice of proposed rulemaking on the employer shared responsibility for healthcare—better known as play or pay—that takes effect on January 1, 2014. The IRS has also issued questions and answers on the requirements of the proposed regulations.

In the case of most employers, these requirements will be simple to implement. But in the case of employers who are on the borderline of being covered or on the borderline of providing minimum essential and affordable healthcare coverage, the requirements can become very technical. A simple series of questions can determine if an employer will be subject to penalties and sort out the easy cases from the hard cases.

Play or Pay proposed regs: Questions and answers

Question 1. Does the employer have at least 50 fulltime employees? If the answer is no, the employer is not subject to play or pay. For determining if the 50 employee threshold is met, all companies under common control are treated as one employer. In addition, part-time employees are combined, and the number of fulltime equivalent employees is added to determine if the coverage threshold is met. In determining the number of employees, employees working outside the United States are not counted.

Question 2. If the employer is covered, does it offer coverage to at least than 95 percent of its employees? If the answer is no and at least one fulltime employee receives a premium tax credit, the employer owes an Employer Shared Responsibility payment equal to the number of fulltime employees the employer employed for the year (minus 30) multiplied by $2,000. Note that for purposes of this calculation, a fulltime employee does not include a fulltime equivalent. After 2014, these rules apply to employers that do not offer coverage or that offer coverage to less than 95 percent of their fulltime employees and the dependents of those employees.

Question 3. If the employer provides coverage to at least 95 percent of its employees, does the coverage provide minimum value by covering at least 60 percent of the total allowed cost of benefits that are expected to be incurred under the plan? A minimum value calculator will be made available by the IRS and the Department of Health and Human Services. Employers can input certain information about the plan, such as deductibles and co-pays, into the calculator and get a determination as to whether the plan provides minimum value.

If an employer does not provide coverage that meets the minimum value 60 percent threshold and has one or more fulltime employee who receives a premium tax credit, it is subject to a shared responsibility penalty computed separately for each month. The amount of the payment for the month equals the number of fulltime employees who receive a premium tax credit for that month multiplied by 1/12 of $3,000.

The amount of the payment for any calendar month is capped at the number of the employer’s fulltime employees for the month (minus up to 30) multiplied by 1/12 of $2,000 to ensure that the payment for an employer that offers coverage can never exceed the payment that employer would owe if it did not offer coverage.

Question 4. If the employer provides coverage to at least 95 percent of its employees that meets the minimum value coverage, is the coverage affordable? If at least one fulltime employee receives a premium tax credit to help pay for coverage on an Exchange because the employer did not offer coverage to that employee or because the coverage the employer offered that employee was unaffordable the same shared responsibility penalty described in Question 3 will apply.

Coverage is not affordable if an employee’s share of the premium for employer-provided coverage would cost an employee more than 9.5 percent of that employee’s annual household income. If an employer offers multiple healthcare coverage options, the affordability test applies to the lowest-cost option available to the employee that also meets the minimum value requirement.

Penalty assessment

The IRS will contact employers to inform them of their potential liability for shared responsibility payments and provide them an opportunity to respond before any liability is assessed or notice and demand for payment is made. The contact for a given calendar year will not occur until after employees’ individual tax returns are due for that year claiming premium tax credits and after the due date for employers that meet the 50 fulltime employee (plus fulltime equivalents) threshold to file the information returns identifying their fulltime employees and describing the coverage (if any) that was offered.

If it is determined that an employer is liable for an Employer Shared Responsibility payment after the employer has responded to the initial IRS contact, the IRS will send a notice and demand for payment. That notice will instruct the employer on how to make the payment. Employers will not be required to include the Employer Shared Responsibility payment on any tax return that they file.

Additional resource:

• IRS Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act

Martin Simon, J.D. is a Senior Legal Editor for BLR’s human resources and employment law publications. Mr. Simon has worked in legal publishing for over 20 years. He worked for 7 years as a legal editor for Prentice Hall, where he wrote and edited for the Pension and Profit Sharing and the Plan Administrators Compliance Manual looseleaf services. He has been a legal editor for BLR for more than 17 years. Mr. Simon has been on the Board of the Hartford Chapter of Working in Employee Benefits for 4 years. Mr. Simon has a B.A. degree with Honors from the University of Connecticut, where he was a member of the Honors Program and Phi Beta Kappa. He received his law degree from the University of Connecticut and is a member of the Connecticut Bar.