When the Patient Protection and Affordable Care Act (PPACA) was passed on March 23, 2010 it included an employer shared responsibility provision. This has come to be known as the "Pay or Play" (or penalty vs. premium) decision or the "Employer Mandate". This provision is only applicable to larger employers (with 50+ full time equivalent employees) and goes into effect in 2015.
The decision to pay or play means the decision to either provide health coverage that meets the minimum essential coverage, minimum value, and affordability requirements ("play") or decide to pay a penalty ("pay"). A third option is to "play differently" with a pure defined contribution health benefits strategy. This third option allows employers to take advantage of the individual insurance premium tax subsidies and actually save money on health costs. All three of these strategies will be explained below.
When considering these play or pay (penalty vs. premium) options, there are two important things to keep in mind:
In July 2013 this provision, and the related penalties, were delayed from 2014 to 2015.
This provision only applies to larger employers with 50+ FTE employees. Small businesses are not impacted by this provision.
However, even with the provision delayed a year, many medium and large employers still have this looming deadline on their mind and are planning their 2015 health benefits now.
What does Pay or Play (Penalty vs. Premium) Mean?
To play means a company would offer employees health insurance that meets essential health benefits and is affordable to employees, by PPACA standards -- you'll pay the premiums.
To pay means a company would choose to not offer health insurance and instead pay a tax penalty -- you'll pay any applicable penalties.
A Third Option - Play Differently with Defined Contribution
A third option is to play differently. To play differently is the middle ground between paying premiums ("play") and paying the penalties ("pay").
It means the company chooses not to offer a traditional group health insurance plan, pays any applicable penalties, and instead offers employees a health insurance allowance (called “Pure Defined Contribution”).
With this option, employees purchase policies from an insurance agent, online, or through the new health insurance marketplaces. Then, the company reimburses employees for their policies up to the amount of their health insurance allowance.
Why Would an Employer Play Differently?
A company would consider playing differently because it will likely:
Save employees and employers a combined 50% on health insurance costs.
Allow employees a full choice of health insurance plans.
Provide employees with better, more flexible health insurance options.
With the new Individual Health Insurance Marketplaces (guaranteed-issue and affordable because of the insurance premium tax subsidies), defined contribution plans now have all the same benefits of a group health insurance plan at a lower cost for the employer and employees. This option does not satisfy the "play" option, but does offer a more affordable option for many companies -- even with penalties factored in.
Defined Contribution & Employee Health Insurance Cost Analysis
To decide whether to play, pay, or play differently with a defined contribution plan, an employer with over 50 employees should conduct a simple cost analysis. Compare the cost of the three options:
- Qualified, affordable group health insurance
- Defined Contribution Plan (health insurance allowances) + applicable penalties
- Penalties in 2015
No Pay or Play Decision for Small Businesses
There is no PPACA provision for small businesses (with fewer than 50 employees) to offer health insurance coverage. The decision to pay or play does not impact small businesses.
Because there are no tax penalties for small businesses, the prevailing trend for small businesses is to offer employee health benefits through a "pure" defined contribution health plan. Instead of offering a traditional group health insurance plan or getting coverage through the SHOP exchange, the business provides employees health insurance allowances. Employees use these allowances to be reimbursed for individual health insurance policies.
Because this provision has been pushed to 2015, many medium and large businesses are expected follow the trend of small businesses and offer defined contribution health benefits. As outlined above, the combination of defined contribution and the premium tax subsidies for employees enables a business to create better employee health benefits, at a lower cost to both the business and employees.
If you're looking for detailed worksheets on your requirements under the pay or play (penalty vs. premium) provision, and how to calculate your best health benefits strategy for 2015, see this pay or play guide.
What are your tips for businesses considering the pay or play (penalty vs premium) decision for 2015? Leave a comment below.